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Edited Transcript of NAUH earnings conference call or presentation 6-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 National American University Holdings Inc Earnings Call

RAPID CITY May 29, 2017 (Thomson StreetEvents) -- Edited Transcript of National American University Holdings Inc earnings conference call or presentation Thursday, April 6, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Prior

The Equity Group, Inc. - SVP

* David K. Heflin

National American University Holdings, Inc. - CFO

* Lynn Priddy

National American University Holdings, Inc. - Chief Academic Officer and Provost

* Ronald L. Shape

National American University Holdings, Inc. - CEO, President and Director

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Presentation

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Operator [1]

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Greetings, and welcome to the National American University Holdings 2017 Third Quarter and 9 Months Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to Adam Prior, of The Equity Group. Thank you, please go ahead.

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Adam Prior, The Equity Group, Inc. - SVP [2]

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Thank you, and good morning, everyone. Thank for joining us. Yesterday's earnings release is available at the Investor Relations section of National American University's, or NAU's, website at www.national.edu. You're also welcome to contact our office at (212) 836-9600, and we would be happy to send you a copy.

In addition, a recording of this call will be made available at NAU's website for the next 32 days -- 30 days. National American University Holdings also has an accompanying slide presentation available on PDF format on the NAU website, which we will reference during this call.

Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve certain risks and uncertainties that may affect the business prospects and results of operations of National American University Holdings. Such risks are detailed in the company's filings with the Securities and Exchange Commission. Regarding the disclaimer language, I would also like to refer you to Slide 2 of the presentation for more information. Specifically, the company expects to file its fiscal 2017 third quarter and 9 months results on Form 10-Q tomorrow and encourages all investors to read the company's filings with the Securities and Exchange Commission for a thorough review of NAU's business and financial results.

Let me note a brief disclaimer that the company operates in 2 business segments: the academic segment, which consists of undergraduate, graduate and doctoral education programs; and ownership in and development of multiple apartment and condominium complexes from which it derives sales and rental revenue -- income, excuse me. The academic segment is where the company derives the largest portion of its business revenues.

For the company's fiscal 2017 third quarter, the academic segment generated revenue of $21.0 million, and the company's apartment and condominium segment generated $282,000 in revenue.

With that, I'd now like to turn the call over to Dr. Ronald Shape, CEO of National American University Holdings. Please go ahead, Dr. Shape.

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Ronald L. Shape, National American University Holdings, Inc. - CEO, President and Director [3]

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Thank you, Adam, and welcome, everyone. I would like to take a moment to recognize several of our executive leadership, many of who are on the call this morning: Dr. Lynn Priddy, Provost and Chief Academic Officer; Dr. David Heflin, Chief Finance Officer; Dr. Bob Paxton, President of Strategic Initiatives and External Relations; Mr. Anthony De Angelis, Chief Information Officer; Mr. Joe Sallustio, Vice President of Marketing and Enrollment Management; Mr. Paul Sedlacek, Chief Compliance Officer and General Counsel; Mr. John Woolsey, Vice President of Human Resources and Development; and Mr. Michael Johnson, Director of Military Support Services. In addition, we have several other leadership individuals across our system.

During this morning's call, I will discuss our investor highlights and provide an update on our key business strategies. Dr. Priddy will provide an update on our academic initiatives. And then Dr. Heflin will provide an update on our financial performance and focus. We will then conclude with a question-and-answer session.

We achieved several -- we achieved incremental gains during the quarter, including continued positive financial trends, driven by consolidating operations where appropriate and possible; improving our marketing and enrollment efforts; growing our Canada operation; and serving students displaced by closing institutions. In addition, for the spring term, we launched a new tuition pricing model called the NAU Tuition Advantage. We believe these efforts will continue to enhance the performance of the University and ensure that students recognize and understand the value proposition that NAU provides. with the end result being that we see favorable trends in successful student outcomes, whether that be course completion, term-to-term persistence or graduation.

For those of you following along on the accompanying slide, presentation will begin on Slide 3, where we highlight the continued strategic focus for fiscal year 2017 and beyond, including our recent announcement of the NAU Tuition Advantage, an update on our Canadian initiative, work supporting displaced students, consolidated operations, and our marketing and enrollment concentration. One of the key initiatives that we recently launched is the NAU Tuition Advantage. As noted on Slides 4, 5 and 6, we have significantly simplified our tuition pricing model while simultaneously providing an option for students to reduce the total cost of their degree by over 25%. We feel the simplified model will allow our enrollment counselors and financial support specialists to quickly and easily inform students of what it costs to attend NAU.

Likewise, we realized that there is an incremental reduction in expenses when a student enrolls in additional courses. Therefore, we structured the pricing model to recognize the added costs associated with a student taking fewer courses, and then passing along the savings realized when a student takes additional courses.

As noted on Slide 5, this pricing model provides the added revenue needed to support a student who takes fewer courses and, likewise, provides the opportunity for students to reduce their program costs when taking additional courses. We introduced the new NAU Tuition pricing model in January, and since then have received significant positive feedback from both staff and students who appreciate the simplicity of the model and the opportunity for students to reduce their costs of education.

Next, we continue to develop the controlled expansion and growth of our international student population. In particular, we remain focused on our expansion into Canada and have provided some additional details as to the approvals, funding eligibility and student enrollment.

As noted on Slide 8, we continue to realize term-over-term growth in both the undergraduate and graduate student enrollments and anticipate through our efforts and the relationships we're building, we will be well-positioned to achieve our enrollment goals going forward. Through teach-outs and transfer agreements, we continue to provide degree completion opportunities to students of institutions that have closed or significantly reduced their number of campuses. As you can see on Slide 9, we continue to work with students from Westwood College, Wright Career College, ITT Tech, Brown Mackie College, Globe University, Minnesota School of Business, Career Point College, and Colorado Heights University. In connection with serving these students, NAU continues to enhance our processes and policies, as well as develop our staff to respond quickly to the transfer needs of students displaced by closing -- closed or closing institutions.

Next, we continue to monitor and analyze ongoing operations to ensure we provide excellent service and support to our students in an efficient and effective model. As part of this process, we consolidated 3 campus operations with existing operations within the same geographic market, making sure we continue to provide students with the service and support they need while eliminating annual expenses of approximately $2.7 million. While we will continue to experience some expense associated with discontinued operations resulting from facility lease expense, the overall savings will improve the company's financial strength. Furthermore, we have consolidated the management oversight of 4 campus locations that share the same geographic market to provide additional savings of approximately $300,000 without compromising student support services.

Finally, we continue to focus on our marketing and enrollment efforts while ensuring the performance and outcomes meet our expectations. In this regard, we have concentrated our marketing spend in targeted markets to support better lead generation and conversion goals. We continue to enhance our website and web-based presence to encourage organic search efforts. As noted with the chart on Slide 11, we continue to experience improved search visibility as measured by the MOZ visibility score, which is a combination of local search path -- position and organic position, as well as a gauge of the overall health of a business's search rankings.

We have improved our efforts to build local relationships to support student transfer and degree completion options through specialized articulation agreements, thereby resulting in lower student acquisition costs. And finally, we continued to improve overall enrollment counselor performance through a single systemwide enrollment process.

As noted on Slides 12 and 13, we continue to see positive trends in our year-over-year student enrollments. We are very pleased with the continued growth in our doctoral program, with an 11% increase over last year. Dr. Roueche and the team at the Roueche Graduate Center continue to work diligently to develop new cohorts across the country. Likewise, our Master's program continues to see excellent growth -- enrollment growth, with enrollments increasing 38% over the previous year. Dr. Paxton and his team have made several changes to improve student engagement and student retention. We are looking to replicate his efforts in the Master's program into our undergraduate operation.

Finally, our undergraduate enrollments, while we did see a decline over the previous year for the winter 2016-17 term, we are seeing a narrowing of these declines with each term, from a 15% decline in the fall term to a 7% year-over-year decrease for this winter term. This trend is also true of our overall student enrollments, which were down 4.4% over the previous year.

Slide 13 provides a historical student enrollment by credit-hour comparison as well as the current projected enrollments for spring 2017. For the winter term, students enrolled in 62,607 credit hours, which is up from the fall term, but down over the same term last year. We are anticipating 61,250 credit hours for the spring term, which would be roughly flat with the winter term and a 7% decrease over the same period last year. As noted earlier, we anticipate the implementation of the NAU Tuition Advantage to have a positive impact on revenue for the spring term.

Looking forward, we are pleased with the improvements we have achieved but also appreciate the continued work that is needed. We believe the new tuition pricing model, with its simplicity and cost savings potential for students, along with our continued marketing improvements, graduate enrollment growth, Canada enrollments and improved efficiencies through consolidations will position the University well. Next, I'm glad to report that Dr. Priddy is back from her vacation and will provide an update of our academic operations.

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Lynn Priddy, National American University Holdings, Inc. - Chief Academic Officer and Provost [4]

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Thank you, Dr. Shape. Slides 15 and 16 build on Dr. Shape's comments on graduate and undergraduate education. The slides highlight key academic initiatives designed to target student learning, satisfaction, retention and completion. Over the past 2 years at both the graduate and undergraduate levels, academics have passed into emerging educational trends and the latest research from the Dana Project, Achieving the Dream, Gates Foundation and Lumina to redesign our programs, our courses and learning environments. In fact, due to these investments and new policies, processes in an academic culture that increasingly values agility and innovation, course retention rates have increased by 2% across all offerings since summer 2016, and nearly 4% year-over-year. DFW rates have decreased by just under 2%. Core to the NAU difference is the longstanding commitment to performance-based curricula, with a capacity to be unbundled into competencies that can be customized to businesses and personalized to students, all the while remaining within the traditional core structures of higher education. Using this curricular structure and revised policies, the university has re-envisioned the way its credentials, programs and courses can be aligned to streamline degree paths from diplomas to Master's degree, entering at any point along the current continuum. The redesign involves all undergraduate and Master's offerings, including Nursing, Legal Studies and Information Technology programs, which now include Embedded Certifications, new areas of emphasis such as cybersecurity and laddered or direct degrees. For example, NAU's baccalaureate programs now offer 13.5 graduate credits toward multiple-aligned Master's degrees.

Further, nursing students or nurses in the field who may bring an RN or an Associates Degree in Nursing can complete a direct pass through the Bachelors to the Master of Science in Nursing. Whereas many institutions evaluate how to limit and control transfer credits and prior learning assessment, NAU has developed a distinctive ability to apply transfer credits to degree programs, minimizing credit loss for students. Because more than 70% of all NAU students bring transfer credit and experience a learning that can be evaluated for credit, the University has now tested and will fully implement new processes for optimizing credit for prior learning, which will also be available at any point on the degree continuum. Supporting these processes are new transfer and residency requirement practices that maximize credit for previous college work, for relevant military and other training, for international transfer, for articulated credit and for prior learning from work experience.

In addition, NAU has streamlined entry testing, consolidated entry courses, and as a result of these new processes and policies, students particularly, the military have received an average of 30% more transfer credit toward degrees at NAU. As reported previously, the redesign of programs have included the integration of corequisite remedial and new quantitative reasoning math course sequences. Based on work from the Dana Project and Achieving the Dream. These entry process changes have reduced the high barrier rate of entry, have allowed students to be more successful academically in their third courses, including math, have promoted quicker entry into the field-focused courses most working adults seek. Accompanying these revisions are parallel efforts to expand student tutoring, mentoring, intrusive advising and career services as well as library, writing and math one-stop assistance, newly launched this past month. A full mobile-friendly application allows students to engage from anywhere via any smart device.

To ensure students attend, engage, learn and persist, the University has begun a comprehensive redesign of its online courses and learning environments. New technologies allow for significant improvements in the functionality and student experience in a typical distance education course room, including increased faculty to student, student-to-student and student-to-employer interaction. The mobile-first initiative that accompanies this redesign completes the focus to adapt traditional higher education offerings to the expectations of working adult students.

All undergraduate and Master's courses are scheduled to be updated by the end of fiscal year '19, with the next iteration of learning management tools, including the rollout of comprehensive mobile phone functionality. As indicated earlier, the course and program redesign has allowed NAU to provide students displaced by closing institutions, with curricular options that allow for minimal disruption to their ability to complete their education. NAU's curricula Sandbox team regularly customizes degree completion programs, courses and competencies to serve affiliate institutions and organizations.

Slide 17 details the impact the transfer and teach-out agreements have had on NAU's spring, summer, fall and winter terms. Working with state educational regulators, The U.S. Department of Education, and programmatic and regional accreditors, the University has now served more than 2,400 unduplicated headcount students of closed institutions. At the end of Winter quarter, 2017, these students enrolled in more than 36,300 credit hours. The evaluation of prior learning has further allowed the University to confirm that these incoming displaced students have achieved the necessary competencies and level of learning from the previous institutions to be able to complete their degrees at NAU.

Slide 18 will be familiar, as it provides the breakdown of the University students by academic area and by degree offerings for the Winter '16, '17 term. Academic offerings and degrees reflect a slight shift as the result of the recent teach-out for Career Point College in Texas.

Notably, the percentage of students in the academic area of nursing and the percentage of students in diploma programs have increases of 8% and 6%, respectively, and are directly attributable to the 500-plus students in the CPC Licensed Vocational Nursing Program and the Associate of Science Nursing Program.

Excluding these students returns to distribution of academic programming during this term and it shows solid signs of enrollment stabilization in undergraduate programs as well as steady increases in graduate programs.

On Slide 19, we outlined 2 benchmarks the University uses to track student progress and more broadly the value of our academic programs. Course completion and student persistence. At both the graduate and undergraduate levels, course completion is stronger than it has been in the previous 8 quarters, or 2 years. Year-over-year persistence is trending 10% higher than 2015 for early terms, and 2% higher than across 5 terms. The strong and improving course completion via students is attributable in part on the intrusive academic curricula, process and policy changes addressed earlier. In Winter quarter 2016-17 our undergraduate course completion percentage remained sustained above the 85% benchmark. Graduate numbers, as expected, show even results with both years meeting the plus 90% benchmark. Term-to-term student persistence rates are preliminary. Due to the influx of the 800-plus CPC students, 500 of which eventually enrolled, many of whom needed only to complete courses in Winter quarter to finish their degrees and diplomas. The final auditing of these graduates is not yet complete.

In addition, a significant percentage of CPC teach-out students did not recoup their full funding allowances until late February, many of them withdrew and are re-beginning their programs in spring quarter. Nonetheless, the undergraduate term-to-term persistence rate remained above the 80% benchmark. We continue to pay close attention to these metrics and, as evidenced in academic initiatives referenced earlier, multiple initiatives directly target course term and degree persistence.

In Spring and Summer 2016, the University completed 2 faculty-student mentoring pilot tests across Kansas City and Twin Cities campuses. The results from 2 quarters of data indicate that embedded faculty-student mentoring and targeted online courses decreased drop rates by more than 20% and decreased D and F grades by more than 10%. The pilot efforts are now being mainstreamed into the roles of all faculty and advisers. The mentoring strategies are also integrated into the work of librarians and career services personnel.

In addition, we are building technology-driven faculty-student mentoring and other engagement strategies into the online courses, as described above, in the learning management system redesign. The revisions to remedial entry courses and math offerings addressed above, have also impacted new and continuing students, significantly improving successful completion of college success, math and writing courses.

Finally, the work in the Commissions Academy continues to provide the data support for these and other engagement, persistence and learning efforts. Current assessment of student learning results indicates more than 80% of students are achieving key program learning outcomes, with significant improvement noted by the business and veterinary technology programmatic accreditors. The academy work is two-pronged; providing data that identifies which strategies are successful with which students and shifting the University students success data from static historical reports to predictive analytics that flag and report on 4 levels of student risk tied to 7 factors. The analytics and weekly data indicators are new, reentry and continuing student engagement, attendance, and academic success. Campus and central teams respond with interventions designed to impact student course, term and degree persistence, learning and completion.

Although we continue to focus on enrollments, we balance those efforts with an equally important focus on working with our current students and guiding them to ultimate completion. We will continue to collect and analyze relevant data to ensure that we are encouraging and assisting our students to persist in their program of study, which will ultimately allow them to achieve their educational goals. Now I'd like to turn it over to Dr. David Heflin, who will provide an overview of our financial performance.

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David K. Heflin, National American University Holdings, Inc. - CFO [5]

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Thank you, Dr. Priddy. Moving to financials, I would like to share highlights from third quarter and year-to-date results. I would encourage each of you to review our press release, the Form 10-Q and our investor deck for specific details, and of course I would be happy to take questions during Q&A. With that, our revenues decreased to $21.3 million in the fiscal year 2017 third quarter from $22.7 million for the same period last year, with our academic segment's total revenue decreasing to $21 million from $22.4 million in the prior year period. This decrease is primarily due to decreased credit hours and lower book sales due to lower enrollment. For the third quarter of fiscal year 2017, revenue from the Career Point College teach-out activities, totaled over $1.6 million, the expenses totaled $1.3 million, and net income totaled $300,000. I would note that the investment and expenses associated with various teach-out and transfer agreements offset some of the cost-reduction efforts during the third quarter. Additional academic salaries from these teach-out efforts reduced salary savings associated with closed campuses and regional management realignment during fiscal year 2016. As a result of these initiatives, cost of educational services increased from $6.3 million in the third quarter of fiscal year 2016 to $7.6 million in the third quarter of fiscal year 2017.

Also on Slide 21, you will note our cost-reduction efforts resulted in a year-over-year reduction in SG&A for the third quarter, from $17.7 million to $15.3 million. We continue to work on improving our operation -- operational efficiencies and making sure our costs align with our current enrollment numbers. As such, we have made additional expenditure reductions during this quarter to realize savings that are beginning to have an impact on our financial results.

In addition, campus closures in fiscal year 2016 have resulted in year-over-year expense reductions in the third quarter of $700,000. In the third quarter of fiscal year 2017, National American University consolidated 3 campus operations where the associated students were attending online courses. By consolidating campus operations, NAU is better able to utilize the excess capacity, both human and physical to ensure students experience excellent service and support.

In addition, NAU consolidated management oversight of 4 campus operations. The similarity in geographic proximity of these campuses provide for maintaining excellent student service while reducing staff expense. As a result of these changes, NAU will reduce ongoing operating expenditures by approximately $3 million on an annual basis.

Moving to Slide 22, net loss attributable to the company for the fiscal year 2017 third quarter was $2.5 million or $0.10 per diluted share, based on 24.2 million shares outstanding, compared to a net loss of $1.9 million or $0.08 per diluted share based on 24.2 million outstanding in the prior year period. The increase in net loss was primarily the result of a $1 million valuation allowance the company recorded against its deferred tax assets. This noncash charge reduced the benefit from income taxes and was a result of the company's assessment of the realizability of its deferred tax assets over a certain period of time. A primary factor in this assessment is that the company is in a cumulative loss position over a 3-year period ended February 28, 2017. This valuation allowance can be reduced or reversed in the future, as the company returns to profitability.

The company's loss before income taxes and depreciation and amortization for the third quarter of fiscal year 2017 was $900,000 compared to LBITDA of $1.4 million in the prior year period. A table reconciling LBITDA to net loss can be found in yesterday's press release.

Slides 23 and 24 show financial highlights from the first 9 months of fiscal year 2017 compared to the first 9 months of fiscal year 2016. The company's revenue for the 9 months ended February 28, 2017, decreased to $64.4 million from $73.1 million for the same period last year. Again, this increase was primarily driven by lower enrollment. SG&A expenses for the 9 months ended February 28, 2017, decreased to $47.7 million or 74.1% of total revenues from $55.5 million or 76% for the 9 months ended February 29, 2016.

During the first 9 months of fiscal year 2017, the company reported a net loss attributable to National American University Holdings of $5.3 million or $0.22 per diluted share based on 24.1 million shares outstanding compared to a net loss attributable to the company of $4.4 million or $0.18 per diluted share based on 24.8 million shares outstanding in the prior year period.

The company's LBITDA for the first 9 months of fiscal year 2017 was $2.1 million compared to LBITDA of $1.7 million in the prior year period. A table reconciling LBITDA to net loss can also be found in yesterday's press release.

Moving to the balance sheet highlights shown on Slide 25. As of February 28, 2017, the company had cash and cash equivalents and available-for-sale investment of $15.8 million, working capital of $13.9 million and stockholder's equity of $31.9 million compared to cash, cash equivalents and investments of $25.8 million, working capital of $22.2 million and stockholder's equity of $40.4 million at May 31, 2016.

During the first 3 quarters of fiscal year 2017, the company paid out $3.3 million in dividends. The company has no outstanding lending debt of any kind.

Slide 26 identifies the year-over-year change in cash balance and highlights the reasons behind the impact in the cash balance, included in the previously mentioned payment of dividends and the investment of $3.4 million in the Arrowhead View Apartment Complex, which is scheduled to be completed this coming June. We are excited about the initiatives we continue to work on in fiscal year 2017, and we believe these efforts will strengthen the foundation upon which NAU was built 75 years ago. With that, I will turn the call back to Dr. Shape.

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Ronald L. Shape, National American University Holdings, Inc. - CEO, President and Director [6]

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Thanks, Dr. Heflin and Dr. Priddy. Operator, we would be happy to take any questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) It appears that we have no questions at this time. I would like to turn the floor back over for any closing comments.

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Ronald L. Shape, National American University Holdings, Inc. - CEO, President and Director [2]

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We would like to thank everyone for joining us. We are available to answer any additional questions you may have. You are also welcome to contact our Investor Relations firm, The Equity Group. We look forward to speaking with you again during the fiscal 2017 fourth quarter and year-end results conference call. Thanks, everyone.

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Operator [3]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.