Welcome to the Career Education Corporation Fourth Quarter 2013 Earnings Conference Call. My name is Vivian, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now like to turn the call over to Mr. Doug Craney. Mr. Craney, you may begin.

Thank you, Vivian. Good morning, everyone, and thank you for joining us on our fourth quarter 2013 earnings call. With me on the call this morning are Scott Steffey, our President and Chief Executive Officer; and Colleen O'Sullivan, our Senior Vice President and Chief Financial Officer. Following remarks made by management, the call will be open for analyst questions. This conference call is being webcast live within the Investor Relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our Investor Relations Department at (847) 585-3899. Before I turn the call over to Scott, let me remind you that this morning's press release and remarks made today by our executives may include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to those factors identified in our annual report on Form 10-K for the year ended December 31, 2013, and our other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update these risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, the remarks today may refer to non-GAAP financial measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. Our press release and slide presentation, which accompanies today's call which contain financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures, is available within the Investor Relations section of our website at careered.com. Now let me turn the call over to Scott.

Thanks, Doug. Good morning, everyone, and thank you for your interest in Career Education. We continue making significant progress in the turnaround of our organization. Our confidence grows with the operational results we're seeing from the changes we are making, with the success of our students always being at the forefront of our strategy. Our students successfully completing their programs and advancing themselves in rewarding careers is at the core of what we do and our efforts to return our organization to financial stability is aligned with student's success. On this morning's call, I plan to share some of the reasons for my confidence and the operations of the company and update you on some of the changes we've been making. I believe that we are seeing positive trends in our business and because of that, this morning, I plan to provide you with additional insights and information regarding 2014 and how we plan to become EBITDA positive in 2015. This is not something I plan to provide on an ongoing basis, but I felt it was important to help you better understand our business and offer you some realtime insights on what we are seeing as we begin 2014. But first, I'm going to begin by looking back at the year and at the fourth quarter. Then I'll hand things over to Colleen, who will go over to some of the key financials for the fourth quarter and the full year of 2013. I'll return to give you some additional perspective before opening the call up for questions. I understand private sector higher education can be complicated and the breadth of our education institutions can make our story more difficult to model than some. One of my goals continues to be to increase transparency with our investors, to help…

Thanks, Scott. Good morning, everyone. This morning I'll take you through our financial operating results and provide some insight into how best to interpret these results. In our filings this morning, we included a schedule that provides a non-GAAP reconciliation of our fourth quarter and full year operating loss. This schedule is helpful in that it excludes certain significant items that are not part of normal ongoing operations, including impairment charges, legal settlement charges, and insurance recovery and severance costs. My comments going forward will exclude these items. Both new student enrollments and total enrollments excluding our Transitional Schools, declined 9% compared to the prior year fourth quarter. The lower ongoing student base, coupled with the continued wind down of our Transitional Schools, accounted for the 18.5 percentage decline in revenue in the fourth quarter of 2013 as compared to the prior year quarter. Our fourth quarter consolidated operating results was $34.5 million compared to a loss of $37.6 million in the prior year quarter. Our Transitional Schools accounted for $19.5 million of losses in the fourth quarter of 2013 compared to a loss of $20.1 million in the prior year quarter. Therefore more than 1/2 of our overall operating loss in the fourth quarter of 2013 was attributable to Transitional Schools. As Scott previously discussed, over time these Transitional School losses will subside as we progress to 2014 and complete the teach-out process at approximately 20 of the remaining 30 campuses. In addition, the cost reduction actions taken by the organization throughout 2013 contributed to the $59 million of lower costs in the fourth quarter, which offset the revenue reduction. Furthermore, we've been active in identifying opportunities to reduce our remaining lease obligations for our Transitional Schools, and in doing so have lowered those obligations by approximately $10 million…

Thanks, Colleen. So now I'd like to turn a little to the year ahead to help you understand how we're seeing the future and some things to consider along the way. I mentioned on previous calls that AIU was exploring ways in which it could attract new student’s interest through price disruption. Those plans are beginning to roll out this year. New students beginning their studies at AIU last month became eligible for the AIU Milestone Grant, providing an important incentive to improve the persistence of students beyond their first term. According to the American Institutes for Research, nearly 1/3 of the students who start college do not return for the second year. Complete College America and the National Governors Association have also conducted -- concluded that success in the first year of college courses is strongly linked to the overall student success. The AIU Milestone Grant is a one-time grant equal to the cost of the student’s first class that rewards students for completing their first quarter and beginning their second, and shows our commitment to their success. The grant properly aligns our interest in rewarding and incentivizing our students to complete their studies. We will begin to see how this grant might affect student outcomes and behaviors as the year goes on. Further steps at AIU price disruption will commence later this year, including the introduction of an intellipath adaptive learning MBA program. As I've mentioned before, one of the benefits of having 2 universities within Career Education is the ability to test innovation with one university, and then consider implementing it or not depending on results across both institutions. As I mentioned on our earnings call in November, with the execution against our operating plan in 2014, the business is expected to be EBITDA positive in 2015.…

[Operator Instructions] And our first question comes from Jerry from Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Just some basic questions here. Your Carrion [ph] population is down about 9% on a continuing basis. You talked about the likelihood or at least the expectation that new student volume would be modestly up for this year, which would suggest some lift to the carrion[ph] population over time. Can you -- does that sound right? Or is there something else going on with regard to graduation rates or timing issues? And then the other thing is with the new program, the new scholarship program. If you will, how should we think about revenue per student this year?

Well, let me talk to the first one, or the second one first. In terms of the way that we're timing that Milestone Grant is one where it would have the greatest potential impact on persistence. And so, on a revenue per student basis, we're really looking at it. We're going to offer it. We're not necessarily going to offer it constantly all the way around the year. We're going to look at what makes the most sense for incentivizing our students to persist. So our goal is that, that will have a positive impact on the business overall. With regards to the carrion [ph] rate of the continuing student population, you're right, there should be a further lift as we go loop around the year, because we are anticipating that our persistence rates do not deteriorate from where they are. All the evidence that we have is that they're actually improving. So we -- that should result in a greater overall student population that persists. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, so maybe some additional further lift to...

As I said in my comments, we've had a slight uptick in retention. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, great. And then with regard to the cost saves, I mean you guys have done -- did a lot last year. The $75 million this year, I mean, that should be fully realized this year. And likewise, is there any carry over savings from the initial $200 million, or should we just think about $75 million this year?

Well, no. The $75 million is what we have said to everyone that we'll be able to -- that you'll realize as we go through this year. We do have, as I said in the press release, we do believe that there are additional opportunities for savings, expense savings in the business that we can obtain without impacting the progress that we're making with our students and with our overall enrollment. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. And just a couple of cash flow questions. Can you guys talk about your expected D&A for this year? And also, Colleen, you're helpful with the expected operating losses of the Transitional Schools. Can you talk about the cash flow impact on those?

So D&A will be a little bit lower than 2013 given the fact that we've started probably in 2012 and '13, to have a few bit lower in capital expenditures, so we're still anticipating about $20 million of CapEx for 2014. But if you recall back to 2012, 2011, we are more in the $30 million range. As it pertains to the cash flow, I think as I shared in my remarks, we've got the majority of our Transitional Schools closing in the first half of 2014. And so as their enrollments decline, as you see, what they exited with, out of 2013 from an enrollment perspective, they have quite a significant cash burn here early on in 2014, which as those campuses cease operation, that drain will subside as well. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: So just one quick follow-up. So should the cash burn be, how much different should it be relative to the $70 million in operating losses?

Not significantly different, other than for those campuses that have some remaining lease obligations on them that go on after closure. But there's not a lot of D&A within the Transitional Schools segment.

And our next question comes from Jeff from BMO Capital Markets.

I'm sorry, I just wanted to go back to comment about starts growth. Are you expecting starts growth for the entire organization this year, excluding Transitional Schools, or was it just for the University segment?

What I've laid out is that we'll be able to -- our expectation is to be able to grow new starts at the online university segments modestly, and that we'll be able to arrest the decline of the Career Schools during the year. I think the evidence that I've shared with all of you, and the progress that we've made in the fourth quarter and the beginning of 2014, very much underscores the achievability of those goals. That's what we need to be able to achieve in order to get to EBITDA positive in 2015. We are setting our sights higher than that. And I think as is evidenced by what I released to you today, there is a potential upside in our ability to execute against the forward-looking guidance I've been giving you of which required to get this organization back into the realm of profitability.

Okay, great. And if we look at 2015, and I know you're not giving official guidance, but let's assume you're on that road to positive EBITDA, would that assume top line growth, or can you do it even if revenues are shrinking because of all the cost-cutting you've done?

Well, you're right, I'm not giving guidance for 2015. And I'm going to stick to my guns in terms of giving you quite a bit of guidance here. I'm going to stick to my guns as to how we do that. We believe we can modestly grow the online units. We can arrest the decline of the Career Schools, and we're seeing very strong performance in our new student enrollment, and very good signs in terms of our increases in conversion rates, and very good progress in retention rates.

Okay, fair enough. Colleen, you were very helpful giving us some data to try to model out the cash balance. But I'm just curious again, and at a high level. Do you think the company will be free cash flow positive in 2014?

Pulling a little bit from Scott, clearly we've got losses continuing in our Transitional Schools segment. We're giving specific data point guidance, but I think you need to factor that in along with the fact that we did exited 2013 with fewer students entering into '14 than we came in, in '13, so I think those 2 data points can help you think through free cash flow for 2014.

Okay, great. And then, just one other question, and I know you're not giving any quarterly kind of guidance. Are there any changes in start dates that we need to be aware of, just in terms of having some differentiation on a quarterly basis, relative to 2013?

No.

And our next question comes from Trace from Wells Fargo Securities.

I wanted to start by going back to Jerry's question about the grants at AIU, because I wasn't really sure, Scott, that I understood your answer. Are you suggesting that you're going to offer them sort of on a student by student basis as you see it fit? Or I didn't understand your response to this question. And I wondered if you could just, at least size the grant for us, if you can comment on revenue question specifically.

Yes, it's equivalent to the price of a class, it's what the grant is. And it wasn't...

That's 3 credit hours?

Yes, roughly yes. Yes. And several folks that are already offering various forms of grants might do it in one quarter and not do it in another quarter. We're looking at how best to complement and incentivize the success of our students, and that's what I was referring to. And it was nothing more than we may do similar types of offerings, we may not. It really depends on how we best are able to incentivize the persistence of our students in accomplishing their educational goals.

So. I still don't understand how this gets communicated to students. Have you just not decided what you're going to do yet? Or you're simply announcing a onetime preliminary program for students, and then you'll reevaluate it? I mean what's the message to the students here?

The message to the students is, as I've tried to articulate here, as they get through their first segment of work with us, if they commit to the next segment, they are able to qualify for a Milestone Grant. And that then is something that if they continue to persist in their studies, will be a great incentive for them and will be a positive for us if they're able to take that commitment and continue on in their studies.

And will this continue -- does this continue on for the duration of the program?

It's one time.

So just at the beginning, they get 3 credits. They get a discount for 3 credits in their first term?

Yes.

Okay. All right. And then I wondered if you could also elaborate a little bit. I didn't really understand the explanation that you offered about AIU, it sounded like, something like you made it too hard for the students and that affected persistence in the quarter, but you fixed it. Can you give us a little bit more...

Yes. It's with regards to our roll out of intellipath, what we did is we effectively, dramatically increased the seat time a student was, of what was required of a student on a homework basis for them to get through the course. And it had a slight negative impact. And that's something that we saw very quickly and did some work to understand it. And it was inconsistent with some trials that we ran, and it was inconsistent with what we were accomplishing over at CTU. And with all the different data points we were able to figure out that we just frankly, loaded. We had a faculty training issue on our hands for how we were loading work associated with that. And that caused a few more people than normal to say it's too much.

Okay. All right. And my last question is, it looks like that the operating margins at CTU were quite strong and I think you even alluded to that in your comments. I'm wondering if that level that we saw here is something that you feel is sustainable, going forward. Can you just comment on what the profitability of CTU, because that's the business that's not necessarily in transition, and I'm wondering if we can count on that level of operating margin going forward?

Yes, the operating margins at CTU were very strong. And I'm not going to comment forward-looking on anything. It is a mature business, and we're not doing anything there that I would anticipate as a major disruption to the consistency of that business.

And our next question comes from Corey from First Analysis.

This is David Warner for Corey. I just wanted to go back to the cost -- operating cost for 2014. It sounds like you expect to potentially get some additional cost savings. It looks like on Slide 13, your forecast for operating cost are pretty consistent with Q4 run rate. I'm just wondering is that -- is there any additional incremental cost in 2014 coming-out? Or is that Q4 cost run rate the baseline for what you're assuming?

We haven't set any targets. What I've said in the press release, and what I said on the call today is that I believe that there are more expenses that we can take out of the business that won't negatively impact the progress that we're making. So is there incremental progress on that? Yes.

Okay, that's great. And I jumped on a little late, so I may not have caught some of the color regarding some of the starts trends and the enrollment trends, but can you just give a little color on sort of the diverging trends between AIU and CTU regarding starts and what maybe you're doing differently as regarding maybe branding or marketing in those 2 institutions?

We do, do things differently on a branding basis. We have a branding spend at CTU which frankly far exceeds any branding spends that we do on the AIU side. And we do some things differently in terms of specific marketing activities. Although, again it's kind of valuable to have 2 of the units, because you get to see a lot of things that work and then do some copycatting, depending on what your progress you're making with lead aggregators and a variety of other different outlets that you're using. In terms of new student enrollment, AIU has had several months now of excellent new student enrollment. CTU has also had, beginning in November excellent new student enrollments, few months of really great progress. We had a little bit of a blip, as I told everybody on the phone, in January with CTU, we unfortunately we had an outage, that was power, weather and redundancy related, right at a critical moment on the enrollment cycle that had a negative impact on them. But we fixed all of that. There was also some marketing spend tweaking we needed to do and they -- that unit responded in stellar fashion for February. So we're very happy with how that unit, which is our biggest unit and our most profitable unit. We're very happy with how that's poised for the future, and we think it's clearly demonstrated that we have the ability for modest growth there, if not better.

Great. And just finally, can you remind us though how you're calculating new students under the old student rate as planned, and then how that's going to change going forward?

Yes, what we did is -- I mean it's a little complicated because we had a 21 day period versus the different drop period that we're having now, based on revamping an orientation and getting students more familiar early on and getting a commitment out of them as opposed to having a lot of students that never had any intention of our commitment. And so, what we're going to do in May when we have the first quarter call is we're going to give you a model for that. We didn't want to complicate the world here, because we're reporting on the fourth quarter. So we'll give you that model as we get to the first quarter, but all of the enrollment numbers that I've given you for January and February have already been recast. So it will be apples-to-apples as you get the model in May.

Our last question comes from Jerry at Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Just wanted to talk again about the starts thus far this year, Scott, I mean it looks like if you sort of add up the numbers here, you're flattish to maybe down very slightly. And I get 2 crosscurrents, if you will: one would be AIU students, potentially getting a positive lift from the incentive of the program, the grant program; and then likewise, the headwind of weather, as you described. I guess speaking to the second issue first, should that suggest there's some pent up demand in the March month?

Well, with regards to Health, they were a little disproportionately impacted by the weather at the end of January and in February. I feel very good about the outlook for them to perform according to our internal plans on a going-forward basis. I feel very good about that unit, the Career Schools unit overall. Of being able to hit what I've given as external guidance of arresting their decline. I think I've given you pretty strong evidence of trend reversal thus far. And for us to get cash flow positive doesn't necessarily have to be a reversal from the standpoint of just getting to flat time -- flatline. There is no -- just from the standpoint of looking, I'm not exactly sure what you're talking as pent-up demand, if it would be Health division or others. Design & Tech had an excellent February. There is no start for Culinary in March. They have a big start though in April. So I'm not exactly sure how -- what piece part to add, I may have answered that. From the standpoint of online, AIU has had now several months of just fantastic performance. We've got our arms around how we need to load those classes and get the benefits out of the adaptive learning that we want to get out of it which we think will have a very positive impact on a persistent side of the game at AIU. CTU is already there. If we didn't have that outage, I think we would have had a great January. But that's fine. Nothing, when you're taking these kind of piece parts and trying to get a turnaround going it doesn't always go in a immediately smooth path, because as I said in the outset, you're pushing a lot of levers at once, and trying to make a lot of improvements. And -- but we think we have a very good handle on how to steer that ship in a very positive way, and we've got some exciting plans and not just for the end of this year, but also for 2015 for that unit. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: And then just one last one if I can. A regulatory question, if I may. Can you talk about your positioning, relative to some of the new discussion about around gainful employment? And I guess, the area that I think about for you guys, at least is Culinary, especially as you shift back towards associates degrees, which tends to be higher price, relative to certificate and diploma programs. But generally, with regard to Career Schools.

Sure. We're following gainful employment very closely, obviously. And it's a regular part of my activities to spend some time with folks in DC. I kind of have 3 things that I say on the regulatory side. I'll give you probably a little longer than you want here, but I have 3 things that I tend to talk about on the regulatory side, what I say with regards to gainful employment is in one sense, I really don't care if you have single definition for all schools, gainful employment works itself out and because I think it just does what the overall policy intent of everyone is to have a common set of outcomes by which people are measured by. I also talk about the need for having some sort of a sliding scale with regards to default rates that takes into consideration the socioeconomic group that you're trying to serve, because we all know that, that fluctuates based on the socioeconomic group that you're trying to serve, and just decide how much of the social dollar you want to spend in which bucket, and I'll manage the institution to that. But that's part of what I think the consideration should be. And I also say in my visits that we should have the power to lower tuition, be it the way that the lending rules take place now, we don't have the real ability to lower tuition without increasing potentially risky borrowing on the part of students. And if you did those 3 things, I think you'd accomplish most of, if not all of the policy goals that I've already articulated with regards to the intent on this. Now with regards to gainful employment specifically, we got a timeline that we created for gainful employment. And one of the…

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.