American Public Education, Inc. (APEI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the APEI Special Event Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chris Symanoskie, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to American Public Education's conference call to discuss the proposed acquisition of Rasmussen University. Materials that accompany today's conference call are available in the Events & Presentations section of our website. Please note that statements made in this conference call and in the accompanying materials regarding American Public Education and its subsidiaries or Rasmussen University that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual results, future results and results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, plan, should, will and would. Forward-looking statements include, without limitation, statements regarding benefits of the acquisition of Rasmussen University, the timing of the closing of the transaction, expected growth, expected registration and enrollments, expected revenues, earnings and expenses, expected financial results for Rasmussen University, ability to deliver a return on learners' educational investment and plans with respect to recent, current and future initiatives. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including risks related to the satisfaction of closing conditions, including with respect to obtaining required regulatory and accreditor approvals, the company's ability to obtain financing for the transaction, other events that could adversely impact the transaction and its closing and the risk factors described in the Risk Factors section and elsewhere in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC as well as the company's other SEC filings. The company undertakes no obligation to update publicly any forward-looking statements for any reason, unless required by law, even if new information becomes available or other events occur in the future. This presentation also contains non-GAAP financial measures. These measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. Information regarding the non-GAAP financial measures, including a reconciliation to the most comparable GAAP measures, can be found in the appendices to this presentation. In addition, this presentation contains certain forward-looking financial information for the year 2021. This information is presented on a pro forma basis, assuming the transaction closes on January 1, 2021. This morning, it's my pleasure to introduce Angela Selden, our Chief Executive Officer; and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Also available for questions today is Steve Somers, Senior Vice President, Strategy and Corporate Development. Now at this time, I'd like to turn the call over to Angela Selden. Angie?

Good morning, everyone. Thank you for joining us on what is a landmark day for APEI. I'm so pleased to announce that we have entered into a definitive agreement to acquire Rasmussen University, which is transformational for both APEI and Rasmussen. This combination dramatically increases our scale, and is expected to nearly double APEI's revenue to approximately $600 million in fiscal year 2021 on a pro forma basis. It is also highly strategic as APEI will become the #1 educator in the United States of pre-licensure nursing by conferring associates, nursing degrees and practical nursing degrees, which lead to registered nurses, RNs; and licensed practical nurses, LPNs, respectively, after students sit for and pass the national licensure examinations. Collectively, Rasmussen and Hondros will be a nursing education powerhouse, serving over 10,000 nursing students. This transaction creates scale and diversifies APEI's revenue, with a mix that will consist of approximately 1/3 military and veterans, 1/3 nursing and 1/3 online adult learners. Furthermore, it provides important scale benefits and helps establish APEI as a platform for additional transactions that can create meaningful synergy opportunities over time. We feel very fortunate to have found a partner in Rasmussen, whose mission and culture align so well with that of APEI. We both prioritize providing affordable, inclusive and high-quality education, and both have strong regulatory track records, which makes this an unparalleled combination in our industry. Simply put, the acquisition of Rasmussen University represents a significant step in the repositioning of APEI that began a year ago and has included a return to growth at APUS and a turnaround at Hondros, and it amplifies our brand promise to provide our students with a Higher Education Return on Investment, or HEROI. Now let's talk briefly about the transaction details. I'd like to turn the call over to our CFO, Rick Sunderland, to provide you with that overview.

Thank you, Angie. Going on to Slide 4. Through this transaction, APEI will acquire 100% ownership of Rasmussen University for $300 million in cash plus $29 million in non-voting, redeemable preferred stock, which represents the present value of the expected tax benefit of a step-up in assets. APEI at its election may substitute cash for the preferred shares at the time of closing. APEI expects to fund the cash consideration portion of the acquisition with $125 million of cash on hand, plus $175 million of committed debt financing provided by Macquarie Capital. The transaction is expected to close in the third quarter of 2021, subject to closing conditions that include review by the Department of Education, and approval by the Higher Learning Commission and other regulatory and accrediting bodies. Rasmussen will continue to operate as a separately accredited institution. In addition, APEI and Rasmussen will enter into a shared services arrangement for certain corporate, administrative and support activities upon closing. APEI expects annual synergies to be approximately $5 million in the first year after closing and to grow to more than $10 million in each of the following 2 years. On an annual pro forma basis, Rasmussen is expected to contribute $44 million of adjusted EBITDA in 2021. The acquisition is expected to be accretive to earnings per share for the full year 2021 on an annual pro forma basis. The actual accretion or dilution will depend on the timing of closing. We estimate the $300 million cash portion of the purchase price to be 6.8x expected annual adjusted 2021 EBITDA. The $29 million of additional consideration expected to be issued in preferred stock represents our estimate of the present value of the expected cash tax benefits of the transaction. Back to Angie, please. Thank you.

Thanks, Rick. We're moving to Slide 5. According to the Bureau of Labor Statistics, registered nursing is among the top occupations for job growth, and there will be approximately 175,000 annual job openings for RNs each year through 2029. According to a study published in the American Journal of Medical Quality, there will still be a shortage of over 500,000 nurses by 2030. We believe Rasmussen and Hondros can serve a meaningful role in addressing the nursing shortage. Rasmussen School of Nursing was launched in 2004 and quickly became one of the largest in the U.S., with over 8,200 nursing students. Today, nursing students represent approximately 45% of Rasmussen's total enrollment of 18,000 learners. Overall enrollment has grown at a 16% 5-year compound annual growth rate since 2016. Moving to Slide 6. Collectively, Rasmussen and Hondros will be a nursing education powerhouse, representing approximately $165 million in nursing revenue, serving nurses through 30 campuses across 8 states and online. This larger nursing education footprint will be a formidable force operating across markets to address large projected nursing shortages and high demand for nursing education. On Slide 7, Rasmussen also demonstrates non-nursing opportunities. Rasmussen is regionally accredited by the Higher Learning Commission, HLC, and offers a full complement of degree programs in health sciences, its second largest school, with almost 1/4 of the total revenue, as well as business, technology, design, education and justice studies. Rasmussen offers both traditional and competency-based programs online and through its on-ground campuses. While most of its non-nursing enrollment is entirely online, Rasmussen's campuses serve as an anchor point for many of these students and act as a strong local presence. Rasmussen aligns with APEI's brand promise of Higher Education Return on Investment, or HEROI. From generous transfer policies and credit for prior learning, to Rasmussen's ranking as the fifth largest provider of competency-based education, Rasmussen delivers reduced time to degree completion. Additionally, Rasmussen's tuition ranks among some of the most affordable in the industry, with general education undergraduate programs costing approximately $11,000 on average, and differentiated health-care-focused programs costing approximately $17,000 on average. On Slide 8, Rasmussen's strong financial performance has been largely driven by the growth in its nursing school and a focus on operating efficiency. Overall enrollment has grown at a 5.5% 3-year CAGR. Revenues have grown at an 8.0% 3-year CAGR and adjusted EBITDA has increased to an estimated $40 million on an adjusted EBITDA margin of 16% in 2020. Underpinning the strong growth story has been the mix shift towards nursing from just 25% of enrollment 4 years ago to approaching 50% today. Given the nature of the programs, nursing has a higher net revenue per student, which has helped drive total revenue. Rasmussen's strong financial and operating results should further accelerate APEI's growth story. On Slide 9, we're featuring the management team. The management team at Rasmussen has a strong track record for success, as evidenced by the university's quality outcomes and operating performance. From the first quarter of 2016 to the first quarter of 2020, this leadership team generated a 27% absolute increase in total enrollment and a 130% increase in nursing, while non-nursing enrollment held steady. At the same time, this veteran academic team added 20 new programs over the last 4 years. We have confidence in their ability to properly manage and grow this sound institution. On Slide 10, I'm so enthusiastic about the acquisition of Rasmussen, as it will add another #1 market position pre-licensure nursing to our current #1 market position with APUS in serving military and veteran students. The transaction creates scale and diversifies APEI's revenue with a mix that will consist of approximately 1/3 nursing, 1/3 military and 1/3 online adult learners. The combination is expected to nearly double APEI's revenue to $600 million on a fiscal year 2021 pro forma basis. The APEI platform can now be leveraged for shared capabilities and best practices across these institutions, like competency-based education tools and capabilities; academic programs in both nursing and non-nursing; and use of the on-ground campuses to accelerate new offerings, such as further serving veterans. Also, APEI has already invested in and built a shared services platform, which serves APUS and Hondros today. This shared services platform will be available for use by Rasmussen to create greater efficiency and new product offerings. In short, by putting our cash on the balance sheet to work in a more accretive way, APEI is expanding our capacity to offer even more affordable educational options for learners. On Slide 11, our scale platform continues to grow with a family of institutions that share common values and increasingly will leverage APEI's shared services to better fulfill their mission. Each university is uniquely positioned to address certain national needs, for example, the critical needs of skilled nurses for trained military professionals and for affordable access to higher education. We believe that we can amplify APEI's success by creating new synergies and developing new capabilities through the collaborative efforts of our institutions. On Page 12, we see strong alignment in culture and mission, between Rasmussen and APEI. We believe this transaction is unique because of this tremendous cultural and mission alignment between the 2 institutions. Like APEI, Rasmussen prioritize regulatory compliance, and as a result, either meets or exceeds regulatory standards for measures such as cohort default rates, the 90-10 ratio and accreditation. Additionally, Rasmussen offers high-quality educational outcomes, with overall student retention at 84.7%, 92.8% in nursing, and high placement rates for alums. On 13, significant growth opportunities already exist at Rasmussen University. The Rasmussen management team has already defined and is executing against the long-term revenue and margin expansion plan, which includes programmatic and geographic expansion, along with operating margin and value proposition enhancement. Rasmussen continues to strengthen programmatic offerings, with a focus on job-ready skills and the completion of the rollout of their nursing curriculum, including a newly approved DNP. Geographic expansion includes continued expansion in existing and new states, in particular, where there are health care labor shortages by utilizing their campus expansion playbook, a highly replicable approach to opening new campuses. Operating margin expansion includes leveraging existing and new technology capabilities, and to utilize APEI's shared services to improve student services and outcomes. And much like APEI's focus on HEROI, another part of Rasmussen's plan is to enhance the value of their programs by continuing their focus on affordability, strengthening student services and outcomes and achieving operational excellence. On Slide teen -- on Slide 14. In closing, I'm so pleased with the opportunities for value creation at APEI as a result of the transaction with Rasmussen University. Collectively, Rasmussen and Hondros equals a $165 million powerhouse in nursing education in a growing market. APEI's resulting revenue mix diversifies to 1/3 military and veterans, 1/3 nursing and health care and 1/3 online adult learners. APEI adds another #1 position as educator of RN and LPN through ADN and PN programs. Number four, Rasmussen brings new programs, competency-based education capabilities and new shared services to be considered at APUS and Hondros. Rasmussen's fully laddered pre- and post-licensure nursing curriculum offers opportunities to offer post-licensure laddered curriculum to Hondros students. And finally, Rasmussen's 24 on-ground locations can provide the basis for additional programmatic and other offerings across other APEI institutions. We are proud to welcome Rasmussen University to the APEI family. Now I'd like to turn the call back to Rick to discuss our capital structure after closing and a summary of our third quarter results.

Thank you, Angie. Going on to Slide 15. Post-acquisition, APEI expects to have approximately $600 million in revenue and approximately $100 million of adjusted EBITDA for 2021 on an annual pro forma basis. After closing, we expect to have approximately $80 million in cash and cash equivalents and $90 million or less in net debt. Going on to Slide 16. Before we take questions, I would like to provide preliminary APEI third quarter 2020 results, the highlight of which is continued registration growth at APUS and enrollment growth at Hondros. At APUS, net course registrations by new students increased 25% year-over-year, and total net course registrations increased 18% year-over-year, primarily driven by military and military-affiliated students. At Hondros, third quarter new student enrollment increased 88% year-over-year and total student enrollment increased 38% year-over-year. We are in the process of finalizing financial results for the 3 months ended September 30, 2020. Although complete details are not yet available, the company is able to provide the following. In the third quarter of 2020, APEI will report consolidated revenue of $79.1 million, an increase of 16.6%, and consolidated net income of $2.6 million or $0.18 per share compared to a net loss of $1.6 million in the prior year period. Complete third quarter 2020 financial results will be announced on Monday, November 9, as previously disclosed. Now we'd like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Jeff Silber of BMO.

Congratulations on what looks like a really interesting acquisition. You gave a little bit of color about historically how Rasmussen has done. Can we talk about the impact of the pandemic, how they've been able to kind of maneuver around it?

Thanks for the question. We're very pleased about the operating model that Rasmussen had in place prior to the pandemic. For the nursing education programs and, in particular, the pre-licensure nursing programs, the academic portion of those programs had already been in an online modality. So the campuses were being used predominantly for labs and in some cases, those clinicals that couldn't be conducted in a different environment. And so when the pandemic began, the campuses had a temporary shutdown, as was required by the states that they operated in, but then subsequently, in short order, opened again to be able to complete those labs and clinicals. But the online portion of the academic progression for not only the nursing students, but all students, was able to continue uninterrupted.

Okay. Great. That's helpful. And just looking again at some of the historical data you provided on Slide 8. Obviously, the nursing program has been stellar. But the non-nursing business looks like it's been flattish for the past 4 years. Can you just talk about what's going on there?

Absolutely. We see that there are significant opportunities for collaboration between APUS and the non-nursing part of Rasmussen to find ways to make sure that we can accelerate the momentum in those programs. There's been growth in a handful of areas like justice studies, for example, and some of the other areas have been flat. What I can tell you is that Rasmussen has introduced certificates and short-form degree programs recently and have also introduced an affordable, what I would call, 10,000 or 10K MBA, which is addressing the opportunity for momentum in these non-healthcare, non-nursing programs. And finally, their -- the Rasmussen team continues to invest in CBE as another way to give learners credit for past knowledge and help them finish faster. And so we see all of those levers as highly applicable to the non-nursing aspect of Rasmussen.

Okay. Great. That's helpful. And looking at the math that you provide on Slide 6, you talked about the 6 states where the company currently is, and a seventh state, I guess, in Texas, so for future Rasmussen campuses. Can you talk about that expansion? I know after you guys bought Hondros, it took a lot longer than expected to expand out of Ohio. Talk about what your plans are going forward.

You bet. We're pleased to report that the Dallas campus has been approved. And the location, obviously, has been secured, and the enrollment begins for that campus. So we believe that, that establishes a foothold in a very substantial market that has a significant nursing shortage and will be the anchor point for expansion inside the state. So the approval has been already acquired by Rasmussen to operate in the state of Texas.

All right. Great. Let me just squeeze in one more, then I'll jump back into the queue. I'm going to play devil's advocate here. We've obviously got the election coming up next week. And I know there's some concern that we might see some regulatory changes specifically focused on the for-profit sector, potential rollback of the 90-10 rule to 85-15. I know this school is well below that 85% level. But how do you address potential investor concerns that, I guess, you're doubling down on Title IV revenues heading into what could be a potentially tough administration on this sector?

Well, what I would say to investors is the following. This is a growth story. Nursing demonstrates one of the biggest supply-demand gaps in the national economy in the coming decade. And as a result, investors should see this enormous opportunity for us to -- as the #1 pre-licensure nursing institution, to be able to address that supply-demand gap and be able to create new nurses, which is essentially what pre-licensure nursing is. Second, we cannot underscore the importance that we place on the regulatory compliance that Rasmussen demonstrates and mirrors what APUS and APEI have amplified over many years. And as a result, we believe that even with enhanced scrutiny and new potential oversight that the well-run institution at Rasmussen, along with the well-run institutions at APUS and Hondros, will be able to pass that scrutiny. So we believe that investors should be looking at the long game and see this as a growth story and an opportunity to really dominate in a market where there's a significant supply-demand gap.

Your next question comes from the line of Greg Pendy of Sidoti.

Just the first, I know you talked about some of the background of the school, but can you give us any color on what the NCLEX pass rates have been at these programs?

Yes. Greg, this is Steve Somers. The NCLEX pass rates for Rasmussen are broadly in line with the national averages, right? There's obviously variation by campus and state, but in general, broadly in line with the national averages for pass rates.

Okay. Great. And then I believe, in the past, correct me if I'm wrong, but you've been transparent about having some banking fees. You've considered acquisitions over the years in the past, and they never materialized. Was there anything that kind of was unique about Rasmuss that we should -- that's notable?

Greg, it's Rick. The professional fees that we've been reporting in our public filings?

Yes.

Was there anything unique? It's a large scale, highly regulated business. And therefore, the diligence, I would say, bends towards the more expensive. So if you look across time, it's things we've been evaluating. Given the size, complexity and regulatory environment, this would bend to more expensive, if that answers your question.

Yes, I think so. Okay. Yes, I just wanted to know -- I mean, it seems like you've been selective over the years and this one kind of stuck out, I guess, maybe. And then just finally, I just -- go ahead.

Okay, so this is a high-quality asset, right? And we have been selective over the years looking for high-quality assets and regulatory profile is right up at the top of the list, quality of the management team, programmatic quality, quality of the outcomes. And Rasmussen exhibits -- it achieved high marks in every one of those, and therefore, it merited the effort that we gave it, and we're just so pleased that we're able to get to this point.

Great. And then maybe just one more. Could you kind of highlight what you think might -- we should be thinking about as possible integration risks, if any, that we should just kind of -- that are on topic?

Well, let me start, and Angie can add on. So we already operate in a shared service model, so we have -- we cleared that hurdle with the HLC a couple of years ago and have been operating in that form for -- since the beginning of 2019. So we know how to operate in that model. That's an important element of this acquisition. And so I think as it relates to our ability to plan and execute on that, the fact that we did that once with APUS is a good indicator of success, right? Not an absolute indicator, but I think a positive indicator that we will be able to accomplish that a second time. I'll let Angie add anything if she'd like.

Sure. One additional thing. One of the contributors to their operating margin expansion in the last few years is they're moving to what they would call almost a shared services model inside their own institution, removing duplicative functions that may have existed at the local campuses and instead moving those functions to a more centralized providing -- platform. And so they have a mindset that is all about shared services already, and I think will really complement the way in which we think about taking advantage of that shared service opportunity between Rasmussen and APEI in the future.

Greg, the only other thing I'd add here is while we do have a long runway because of the regulatory review process, that also does give us lot of time to do advanced planning so that once the deal closes, we'll be in a really strong position as it relates to integration and have our systems and our plans buttoned up.

[Operator Instructions] I'm showing no other questions at this time. I will turn the call back over to Chris Symanoskie.

Thank you, operator. That will conclude our call for today. We thank you for listening and for your continued interest in American Public Education. Good day, everyone.