Covista Inc. (CVSA) Earnings Call Transcript & Summary

Well, good afternoon, gentlemen, and thank you so much for joining us. Very pleased to have Steve Beard, the President and CEO of Adtalem; and Bob Phelan, the Chief Financial Officer, with us today. I think this is your first time at our TMT conference, and we're delighted to be hosting you.

Pleasure to be here. Thanks for having us.

Great. So let's jump right in. Steve, perhaps you could talk a little bit about just the major transformation that Adtalem has undertaken over the course of the last many years. And just what was the impetus and goal behind repositioning the company as a global health care education platform?

Yes, happy to do so. So before 2018, Adtalem is really a conglomerate. We had over 11 different brands and businesses in the portfolio, and they ran the gamut from membership organizations to test prep organizations to traditional post-secondary institutions. We have a massive presence in Brazil. We were the fifth largest provider of proprietary higher ed down there. And it was a situation where those institutions didn't share much other than common ownership. And so we identified an opportunity to really redefine the core of the business, and we decided to do it around the health care assets. And once we defined that core, we then embarked on a series of strategic divestitures to rationalize the portfolio, add a significant asset in the form of Walden University. And those moves taken together got us down to the 5 institutions that we take to market today. All post-secondary higher education and all of which have a center of gravity in health care. We're excited about the exposure to that industry. We like the corporate identity it gives us. We're also excited about the opportunities that's provided us to run our business more efficiently and in a more integrated fashion.

So maybe let's drill down on that a little bit because it would be interesting to hear more about the capabilities that you're able to bring to market as a consequence of that platform of institutions that you just identified. So what are some of the synergies? And how do you think about having the largest nursing school coupled with these multiple medical schools and the veterinarian school and the online institution?

Sure. So as an initial matter, these are all lifetime institutions, all post-secondary higher ed, which means we can support them on similar platforms. We can eliminate a ton of redundancies in the way we support those institutions, and we're in a position where we can share best practices across those institutions. You've got 2 medical schools. We've got a veterinary medical school. You've got the country's largest nursing school. You've got one of the country's largest online graduate schools with which within it has the third largest nursing school in the country. So both the cost synergies and the revenue synergies in a model like that are really super attractive. It does also provide us the opportunity to credibly lay claim to the idea that we are the largest health care educator in the United States. And when we're talking about clinical relationships where we're talking about placement opportunities for our students, that scale in a clearly defined industry focus is a real advantage for us.

Bob, maybe you can talk a little bit about just in the current environment. I mean, Steve touched on some of the financial benefits of having the various institutions. But in the current environment, what have been some of the challenges and opportunities from a financial perspective in navigating this macroeconomic environment with more persistent inflation and that sort of thing?

Sure. What I would say is that we've had some issues in terms of things that we've had to navigate through, mostly pandemic related when we were coming through that part of our phase. And we've now kind of shifted to the point where we feel like we've got much better growth prospects. We've got a normalized demand environment at this point. But one of the things was COVID. And since we've come out from that, and we've initiated our growth with purpose program, we've moved in terms of revenue growth, and we've been able to start getting the top line going based on the fact that we've got a strategy for growth with a purpose that we laid out at our Investor Day last year.

So maybe let's drill down on the growth with a purpose strategy. You -- as you said, you outlined that at your Investor Day, talk about that vision for the company and what you see for the future of Adtalem.

Yes. It really is a strategy focused on operational excellence. Across that what we view as the 5 pillars of value creation, marketing, enrollment, persistence, new programs and cost efficiencies. It's really an opportunity for us to pull all of those levers at the same time to ensure that we're operating the business as efficiently and as effectively as we can. So we've made investments across all of those dimensions with the goal of really driving consistent organic revenue growth over time and taking advantage of what we think is durable operating leverage in the model. We're still early days, a little less than a year or so into it, but the early returns have been really encouraging. On what is now probably the most profitable base that this company has enjoyed in recent memory, we've got really consistent growth in the overall revenue line, great trends in total enrollment. Really, really positive return on some of the investments we've made in both brands on the marketing side and in driving improved persistence in our programs. And we believe that the current trajectory is one that we can maintain for the foreseeable future. And we're really excited about what that means for our fiscal '24, which we're halfway through. And our fiscal '25, which is -- which we're going to come into here soon this summer.

So enrollment is such an important driver of the business and enrollment growth is such an important indicator of the health of the business, talk a little bit about in the various institutions, how the enrollment has been trending. And what has been the sort of key factors to help enrollment growth in the recent past because we have seen some positive trends in that regard?

Absolutely. So as Bob mentioned, the pandemic had a dampening effect on enrollment, broadly defined across the entire higher education sector. Our exposure is such that the recovery in enrollments happens in a phased sequence. First, with the medical institutions, which were the first to recover, then undergraduate enrollments, particularly at Chamberlain, which has the largest undergraduate portion of our portfolio with the graduate and post-licensure programs we're covering last. We're now in the enviable situation of actually growing enrollments across all 5 institutions, and that really is a function of some of the investments we've made in marketing. Historically, we have focused our marketing efforts down at the bottom of the funnel, performance marketing intended to drive conversion. We've taken a much more balanced approach of late. We've made some major investments in brand. Those take a longer period of time to pay off, but they also have a longer tail. And so we're enjoying really great renewed visibility for our brands and programs in the market, and that's flowing through the enrollment numbers that we see. The other thing we focused a lot on is persistence because even though new enrollments and new starts is something lots of folks pay a lot of attention to in our space. We actually think the total enrollment number, which is a combination of new starts and persistent is a much better way to think about the overall health of the business. And we've been able to grow persistence across all of our institutions over the last year. And in the case of Walden, we're enjoying some of the highest persistence that we've ever had. The other good thing about persistence as a measure of institutional health over new enrollment is persistence ensures that students matriculate through our programs to graduation. So we're getting the lifetime value of the student, which is important. But the student is getting the full benefit of their bargain. They're matriculating through, they're graduating and then they're off to their careers. So it's a multifaceted measure of value for us. So we're really excited about what we've been able to do.

And just given the competitive landscape, talk a little bit about just the environment and what you're seeing from a competitive standpoint and all the different institutions, but particularly in the medical institution, where there have been some developments with new entrants and some of the not-for-profit educational institutions, basically making major inroads in terms of tuition reimbursement for students. So how are you thinking about the competitive landscape?

Yes. So we operate 2 medical schools, both of which are in the Caribbean. There are 4 Caribbean medical schools that are set up to be able to spend their graduates and residents to the United States. We operate 2 of them. There have been lots of new entrants into medical education. We've seen a growth in [ DO ] programs across the United States. We've even seen new entrants into the Caribbean medical school market. But the important thing to know about those new entrants is that even as they have come online, the demand for seats and medical schools has grown at a greater rate. So the new seats haven't kept up with the increased demand for spots in medical school. And so while it's a bit more competitive because of the number of market participants, the opportunity to address hasn't diminished at all. So we're committed to medical education. We believe we have a right to win there and we are determined to ensure that we have the leading Caribbean medical school franchise serving the U.S. market. And we had -- as we've reported publicly, we had a bit of a stumble at our medical schools in our May enrollment cycle. We initiated a series of remediation efforts around that. They were all execution driven. We're very satisfied with how those remediation efforts have played out. And what we expect to see going forward is sequential improvement in the total enrollment story at our medical schools over the balance of our fiscal year. And then we expect them to return to year-over-year total enrollment growth sometime early in our fiscal '25. So we're committed to medical education. We think it's a great area in which to operate and compete. The demand for physicians is growing, and that growth is going to be durable, given the demographics of that profession. And we think it's a bright spot for our portfolio.

So on the health care education front just in terms of having the unified health care offerings that you have across your platform. Can you talk a little bit about how that helps you with the providers and the hospital systems that you're serving? And what kind of a competitive advantage that offer you?

Sure. So you mentioned providers. Many of these programs require clinical rotations during the academic cycle, in the case of medical schools, their residencies. Our scale really allows us to have enviable relationships with provider networks across the United States and ensure that our students have access to attractive clinical rotations and that we're participating in those at scale. In addition, having the largest nursing franchise in the United States between Chamberlain and Walden, means that we don't run into some of the challenges that smaller nursing schools have around preceptors for sort of the last mile of that educational journey. We've got an expansive network of opportunities for our students to do their clinical rotations before they move into practice. The other thing that's really exciting about that is it's really an opportunity for us to be able to deliver workforce to the providers at a scale that's really unmatched by anyone else in the space. And as we think about the workforce solutions component of what we do, whether it's on the nursing side or the physician side, we're able to face off to those providers in a much more comprehensive, much more mutually advantageous way. So scale in this regard really aids us.

And as you look out into the future, how do you see these relationships evolving with these providers? I mean do you see them changing in the near term or in the long term in terms of just being the one-stop shop for people's health care staffing needs?

Yes. If you look at any of the surveys that are done of hospital and health system CEOs, what you'll see consistently is that the #1 issue they're concerned about is workforce. Either workforce supply or workforce burnout. It is an extremely challenging issue for providers across the United States. As we think about the future of our business, one of the things we aspire to is greater proximity to those providers. How can we partner with them in more scaled, more impactful ways to really address those chronic workforce shortages? So we're having discussions with providers about any number of solutions we might develop together. Everything from white labeling nursing schools to creating sort of proprietary pipelines of talent into their systems, starting with training their existing population of employees and creating a stickier relationship between those employees and the systems they work for. If we can do that in a meaningful way for large providers, I think that elevates the value proposition of Adtalem in a way that has a whole host of benefits, not the least of which is financial benefits for how we think about growing our business.

So we're at a technology conference. We'd be remiss if we didn't talk about technology. Talk about the importance of the digital capability and the online modality in terms of the strategic vision of the company going forward and how you really leverage technology to drive value.

Sure. We think it's fair to think of us as an Ed tech player in many respects. More than 80% of our students received some portion of their educational experience in an online modality. We run one of the largest online graduate schools in the United States. And that school, Walden University was really a pioneer in distance learning and a pioneer in the online modality. We're deploying a number of tech-enabled innovations to support our students, everything from virtual simulation laboratories to AI, chatbots and tutors to adaptive learning platforms for test prep. So the role that technology plays in innovating around the student experience is really critical to our value proposition. And Bob can talk a little bit about just the level of CapEx we're deploying in service of that. The other thing to know about online education is relative to classroom-based instruction, is that when you're engaging students online, you get a tremendous amount of data about how they are engaging with the material what's required for them to master certain concepts, how to advise and intervene in ways that drive up student success and improve persistence. And it really allows our faculty and our student support people to be quicker to addressing the needs of our students because we've got real relative data on how they're engaging with content and the material. So it's a really important piece of what we do, and it's a really important differentiator for us relative to other players in the medical -- veterinary medical, nursing, behavioral science's space.

And as Steve mentioned, one of the things is we are putting money behind that. So we are investing behind that. We've invested substantially more in the first half of this year relative to where we were in the past year, again, on technology projects.

So Bob, just while we're talking about the financial, CapEx spend on technology. Talk a little bit about the capital allocation strategy. Adtalem generates a tremendous amount of free cash flow. Can you talk about how you think about capital allocation in the context of the broader business strategy?

Sure. And just to be clear, we -- on average, it's about $200 million a year in terms of operating cash flow for us. So you're right, substantial amount. We look at 4 different buckets really. We look at our business first and we look where we can invest in the business. So we've got a growth with purpose strategy that I mentioned. We fund that first. We look at opportunities to fund student support, technology projects, those sorts of things. We also look at another bucket is when you look at capital structure, you're looking at your debt. We've done quite a bit in terms of restructuring debt over the past couple of years. We've more recently paid down $50 million of our term loan debt, and we repriced it with the help from your team. But broadly speaking, we've taken $1 billion of debt out of our portfolio in the past couple of years. So when we first closed on the Walden acquisition, we were at about $1.650 billion and we're now just over $650 million of debt. So we have taken out a substantial amount of debt. Share repurchase is another place that we go as well. And over the past couple of years, we've also had a substantial amount of share repurchase. So we've bought back over 20% -- 23% of our shares over the past couple of years through open market purchases and through [ ASRs. ] So we've been very active in that market, and we also have an open $300 million authorization that we received in January from our board. And then the last place but I would just say is from an M&A perspective, on the Walden side, that was our last big deal that was done. I would say we're more focused right now on running the business and everything that Steve has talked about. But we wouldn't count out opportunistic smaller technology plays or things that might help the business going forward.

Steve, I want to come back to talking about technology investments and student persistence and ex-student experience. Talk a little bit about student outcomes. Because at the end of the day, students now become our key driver to business performance over time. How do you think about student outcomes? How do your student outcomes compare to other institutions?

Yes. The place I prefer to start in that discussion just to get everyone grounded and the fact that we are very intentional about serving the nontraditional student. Oftentimes the working adult. Oftentimes, a community of learners that has been ignored or left behind by traditional higher education. And that's a point of real pride for us. These are very often times first-generation college students, working adults with families, veterans, and rather than asking them to meet the needs or fit themselves within a rigid model of what higher ed ought to be, we tend to try to meet them where they are and give them the opportunity to have access to these very attractive professions and careers in ways that traditional higher ed just isn't -- to date isn't really interested in doing. Our outcomes, we're incredibly proud of them. Our medical schools last year enjoyed a 98% first-time residency match rate. We've got great outcomes on step 1 and step 2 USMLE, which are the 2 board exams required for students to become physicians. All of our nurses across the United States, particularly in our BSN programs and [indiscernible] programs have to pass the NCLEX exam. We've got great results on NCLEX across the 17 states in which we operate nursing programs. Our veterinarians take the [indiscernible] exam. We've got great pass rates on that as well. And prior to the -- to the Biden administration's pause on student loan repayments. Our students had the best cohort default rates in all of higher education, ranging from something as low as 0.5% to a high of 3.2%, which is far lower than what you would see at traditional colleges and universities. So we -- in each of those programs, particularly when you have that kind of objective third-party criteria in the form of licensure exams. We compare favorably with many, many not-for-profit state public or private universities, and we're really quite proud of that.

How do you think about just some of the secular trends that characterize the sector? I mean, how are you thinking about the impact long term on the changing demographics, the aging population, the continued supply-demand imbalance that you foresee? Like what's your thinking around how big a gap there is in the future to -- in that regard? Is that a gap that's growing? Is it closing? And where do you see yourselves kind of playing in that regard?

Well, we think it's a tremendous opportunity for us because the chronic workforce shortages in health care that exist today are only going to grow and grow more severely. There's a huge demographic cliff in both nursing and medicine. As a generation of physicians and [indiscernible] ready to retire, the shortages that we're experiencing in veterinary medicine, we expect to continue to grow. And given the -- what I think everyone agrees is a real mental health crisis in the United States, the need for trained clinical social workers, trained clinical counselors, is only expected to grow. So we think our exposure to these professions is a real source of competitive advantage for us because we think the demand for these professions is only going to grow. And even in those professions where there's been, I think, reluctance to raise salaries, we're seeing a real lift in compensation for veterinarians. We're seeing some lift in compensation for social workers. And in the case of nurses, I think lots of health systems have seen enough of the labor stripe here, potential collective bargaining dynamics that we're actually now seeing real movement in the wage for permanent nursing staff across integrated delivery networks. All of which bodes well for both the push and the pull around these programs, and we are best positioned at least in the U.S. market to take advantage of that with the only nationally scaled footprint in nursing.

Let me -- one more question, and then we'll take one from the audience. Just -- so speaking of nursing and just the huge success that you've had in nursing, why not just double down in nursing, how do you think about allocation of resources across the different institutions?

Yes. Look, we are the #1 and #3 nursing schools in the United States, taken together over 45,000 nursing students. We fully intend to both defend our leading position in nursing and to grow it. That is very, very important to us. Medical education, we get that question all the time, whether we think this is a long-term attractive place for us. And our response is consistent that we believe we have the right to win in medical education, and we intend to be in that space for a long time. Social and behavioral sciences, social work, in particular, is a very attractive area for us. The MSW credential is sort of the ticket derived, if you will, for being a clinical social worker, and we're the #1 conferrer of MSW in the United States. So we feel like we're in the sweet spot from a breadth and focus perspective across these domains. And so the big 4 nursing, medicine, veterinary medicine and social work. We are going to invest behind all 4 of those professions because we just think the growth prospects over time are just too compelling to ignore.

Just curious about pricing dynamics. So you mapped out some pretty interesting success rates you've had across the different verticals, the supply/demand imbalance in terms of the need for different vets, nurses, et cetera. but you also mentioned the increased competition in the Caribbean. So I'm curious how that's playing out in your pricing across different verticals. So any color you have there. And even since the Walden acquisition a few years ago, is it playing out in terms of premium pricing going forward?

Yes. Great question. So the pricing story varies a bit from program to program, but I'll try to run across a number of the biggest ones. So in medicine, we actually believe we have pricing power. We were priced beneath some of our primary competition, and we thought that we had some room to take price, and we've done a bit of that. We think there's more room there, potentially I had to take pricing up, but we're very thoughtful about how and when we do that, particularly in an environment like this where inflation has put a squeeze on the wallets of our students. If I move on to an institution like Chamberlain, which is a premium brand and has premium pricing power. There, we think we're priced competitively and we're comfortable with where we are. In Walden, we had sort of the opposite situation where the prior owner, I think had priced Walden out of some competitive situations. And there, we've actually taken price down in a number of our programs to get more competitive in exchange for better enrollments in those programs. And then finally, when I think about the vet school, there too, we think we have some pricing opportunity. But again, we want to be judicious about when and how to take advantage of that. As a general matter, we benchmark ourselves to our immediate peer set as well as prices paid for out-of-state students at flagship state universities. And with that as a sort of benchmark. We think we're priced attractively across all of our programs with some notable opportunities to potentially take price up, if necessary.

We haven't talked at all about relationships with the regulators and the accreditors. That's obviously important, constituent for you to manage in your stakeholder relationships. So can you talk a little bit about your relationship with the editors and..

Absolutely. So we enjoy what we think are constructive and attractive relationships with our creditors and regulators across all of our programs and institutions. Walden University, just received a new 10-year accreditation from HLC on the heels of their review of that institution and its programs. Chamberlain University is also accredited by HLC. We are in good standing with all of our creditors across our medical schools -- our veterinary medical school. And then with our federal regulators at the Department of Education, we believe we're in a fantastic position with those folks as well. I was just in Washington, maybe 2 weeks ago visiting with the department and just reminding them of what we believe as a systemically import the role we play in U.S. health care, educating 9% of all companion veterinarians, 10% of all MD residents who go to the U.S. every year, an outsized proportion of nurses and the quality of those programs and how critical they are to the industry they serve. So I think our scale and the quality of our outcomes puts us in an advantageous position with those stakeholders. And we believe we built a portfolio that can really thrive in any political or regulatory environment. There's always some threshold level of regulatory overhang in proprietary higher education. But we think we're about as well positioned as anyone in that regard because of what we've chosen to compete and because of the quality of our outcomes.

Interested to hear your response to what are the opportunities and challenges ahead, like what do you see as the biggest opportunities and the greatest challenges?

Well, we want to make the most of what we think is a singularly unique profile in higher education. We are the largest health care educator in the United States, and we are providing an overlook community of learners access to really attractive, really rewarding profession. How do we expand the competitive moat that provides us through a differentiated student experience? And more importantly, how do we serve our second order customer better, which is U.S. health care? How do we ensure that our practitioners are day 1 ready to serve them? And how do we help them grapple with what is the single most vexing challenge they have which is workforce supply and workforce engagement? And so that's the real opportunity for us. I think the risk is really execution risk. We have asked this organization to do things it hasn't had to do in the past and do it at a pace that it hasn't been a custom to doing things in the past. And so we're regularly monitoring the health of the organization, the engagement of our people because we're moving fast and we're committed to aggressively taking advantage of the opportunities we have in the market. So I think that's the biggest risk. The regulatory stuff, that sort of is what it is. And as I mentioned earlier, we feel like we're well positioned in that regard. The real challenge is ensuring that we can continue to move that pace to take advantage of these opportunities because our competitors, they're chasing some of these opportunities as well, and we intend to beat them to the finish line.

So for new investors in the audience, how do you articulate the investment thesis? What's the value proposition behind owning the Adtalem stock?

Sure. It's an opportunity to get exposure to a systemically important institution in U.S. health care, providing critical workforce supply to a large and dynamic industry. We've got really attractive durable demand trends in the markets in which we operate. We've got fantastic student outcomes. And we've figured out how to address those opportunities in a way that's both profitable and sustainable. We enjoy sort of the best profitability profile this company has had in the last 10 years. And we believe it is not unreasonable for us to be able to grow revenue on an annual basis in the mid-single digits and to incrementally expand margins as we go. So we think that represents a highly attractive investment proposition. And are always excited to get folks rooted in the story if that's an exposure that makes sense for their investment thesis.

Well, thank you, gentlemen, very much. Delightful to have you here. Appreciate all the insight.

Thank you.