Welcome to the Career Education Corporation's Second Quarter 2014 Earnings Conference Call. My name is Dawn, and I will be the operator for today's call. [Operator Instructions] Please note that the conference is being recorded. I will now turn the call over to Doug Craney. Mr. Craney, you may begin.

Thank you, Dawn. Good morning, everyone, and thank you for joining us on our second quarter 2014 earnings call. With me on the call this morning are Scott Steffey, our President and Chief Executive Officer; and Reid Simpson, our Senior Vice President and Chief Financial Officer. Following remarks made by management, the call will be opened 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 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 those 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 accompany today's call and 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. Before I get started, I want to introduce you to Reid Simpson, our new CFO, who joined us at the end of May. Reid brings with him an abundance of financial leadership experience in both the public and private sector, having led several organizations through successful turnaround strategies that ultimately created value for shareholders. I'm excited to have Reid join our team and continue to work to make Career Education a highly respected, financially sound educational provider that graduates students who achieve their goals and who meet or exceed employer expectations. I have said this many times, but it bears repeating. Our focus is to enroll, educate and place our students into a better position to succeed professionally and to close the gap between students and employers. Our discussion today reflects that focus. Our agenda for this morning's call is to provide a progress report on our operating segments, while at the same time, sharing some insights as to how each plays its part in our turnaround. Reid will then cover the second quarter financial results before I conclude with additional business updates. Throughout the call, we will share certain forward-looking information that we believe is important to further demonstrate the headway we are making in our turnaround strategy. This type of forward-looking information will not be provided indefinitely, but at this point in the turnaround, we believe it is relevant and appropriate. At the conclusion of our prepared remarks, there will be time for analyst questions. As I discussed on our last 2 calls, we are beginning to see sequential improvement within the University segment related to enrollments, both new and total enrollments. Our forecast is for this trend to continue and for our University…

Thanks, Scott. Good morning, everyone. I'm thrilled to be here and to be part of the Career Education team. This is an exciting and challenging time for the company and the industry in general, but also a time of great opportunity. One of my objectives on this call and in further communication with investors is to attempt to reduce the complexity of our financial results, simplify the presentation of our numbers and provide increased transparency as to our progress. This is a process that will likely evolve over time, but hopefully, one that will better communicate our results and progress. As an example, we modified the earnings press release this quarter to better highlight key metrics and report how those metrics are trending. We also intend to make clear distinction between the results and economics of our ongoing business in the Transitional Schools and discontinued businesses that are being phased out. With that as a backdrop, I will now get into the second quarter financial results. All percentage variances I'd mention will be comparisons to the prior year quarter, unless otherwise noted. First of all, let's discuss the consolidated results of our ongoing businesses. Revenue, which excludes that from Transitional Schools, was $224.5 million for the quarter, down 8.5% as total student enrollments were lowered by 4.8%. Operating expenses for our ongoing business decreased by $36.2 million or 12.7%. Educational services and facility expenses were down $8.9 million or 10.8%. General and administrative costs were down $28.8 million or 15.6%, driven primarily by lower advertising expenses and reduced legal settlement charges. In the second quarter of last year, we had a legal settlement charge of $8.3 million related to the New York Attorney General matter. Also of note, we incurred $7.4 million of impairment charges related to our culinary tradename…

Thanks, Reid. I'd like to take a couple of minutes to talk about a few other items. I talked earlier about being total enrollment positive by the end of this fiscal year at University and Culinary Arts. This is an important measure since, together, these comprise approximately 75% of our total revenue base. To help put this into perspective, if you look back to January 2014, we had approximately 5,000 fewer students at our ongoing schools than we did when we began in 2013. With total enrollment growth expected in these segments by the end of this year, we should begin 2015 in a better position. I want to take a minute to discuss our financial responsibility ratio, or FRR. That calculation is somewhat complex and includes a number of variables such as equity, assets and income that's intended to measure financial strength. It's calculated once a year using data at the end of December, and the ratio is reported to the Department of Education the following June. The way the ratio is calculated and measured encourages companies in our industry to have a higher level of capitalization than in other nonregulated industries. The ratio of 1.5 or higher is considered sufficient, and we met the requirements at the end of 2013 with the ratio of 1.5. As we have explained on previous calls and in our SEC filings, our ratio was negatively impacted by the valuation allowance that we have recorded in December 2013 related to our deferred tax assets. Furthermore, our losses in 2014 are also expected to negatively impact the ratio. In order to remain in compliance with our FRR in 2014 and 2015, there are a variety of options that we are exploring, including additional cost saving opportunities, investing in new business technologies, long-term borrowing options,…

[Operator Instructions] Our first question comes from Trace Urdan from Wells Fargo.

My first question, Scott, is if I'm not mistaken, you all had indicated that EBITDA from continuing operations, you expected to break even by the fourth quarter of this year. You seem to have made really strong progress towards that goal with the second quarter results, and I wondered if there's a possibility that you might actually get to that goal earlier than originally anticipated.

We're still trending for being EBITDA positive in the fourth quarter.

Okay. Fair enough. And then the other question I had was I wondered if you might be able to go into a little bit more detail in terms of the consolidation of IADT into Sanford-Brown. And my question, was it only those 2 institutions that were combined? Or did some of the other ancillary Career Schools brands also get folded into that Sanford-Brown's brand? And in terms of the progress of that transition, are you in a situation now where you have schools that are branded Sanford-Brown but are essentially still only teaching the IADT curriculum? Or are you making progress towards balancing the full range of offerings at every location? Can you just speak to that issue in a little bit more detail?

Sure, Trace. All of the above. From the standpoint -- the consolidation was primarily with Sanford-Brown and IADT. It also included Brown College. That was the only other name brand that was involved in the consolidation. We do have locations still that are only teaching the IADT course program mix. We -- the way that we brand that is IADT now a part of Sanford-Brown. So it's a little bit of a more gentle consolidation in those locations. As I said in the remarks, we have a couple of dozen courses, programs that are in the mix for being spread throughout 10 campuses that would turn them into more comprehensive career school campuses. We've done a lot of market research on that with regards to supply, demand, employer opportunities, et cetera. A lot of those courses are in the business and IT area. So from the standpoint of potential infrastructure changes at our campuses, it's not intensive, or it certainly isn't capital intensive. We have computer lab at all of our campuses. And so our research included very much what the capital side of the equation would be for being able to introduce those courses. We had initially mapped this out for the -- to the offerings that happened in 2015, as we physically started to diversify those campus offerings. We've accelerated that schedule a little bit just because the process is moving along very nicely. So we may be able to do some offerings in the very last part of 2014. But that is -- it's really focused on the old Sanford-Brown, IADT and Brown College.

So -- just so I understand, so when you -- when this sort of transitional process is complete, we would still expect to have sort of a range of offerings at each location based on sort of the needs of that individual market, is that correct?

Correct.

And when would you -- go ahead.

And we're tailoring the offering in locales to best meet the needs of students and employers in those locales.

Fair enough. And then relative to that plan then, Scott, when would you expect that transition to be fully completed?

It will go into 2015. And I -- fully completed is a tough word because we're going to continually evaluate what kind of program offering we need and how best to position ourselves. Part of this is, obviously, in a part of best positioning the company for gainful employment. If that comes about -- if and when that comes about, we're certainly seeing what the time frame is with regards to November. And so we're trying to best position ourselves for that potential eventuality. And the first slug of changes that we'll be able to make will certainly be seen as we go through 2015 advertising-wise and start to build enrollment in a diversified offering. But it's not going to stop there. We have continual plans for diversifying the offering at the campuses.

Okay. And the very last question, I apologize for not knowing this already, but are there any online components to the design curriculum that you guys offer now? And if not, is that something that you're thinking about? Do you think that, that makes sense for your offerings? Can you speak to that?

That exists now.

Our next question comes from Jeff Silber from BMO Capital Markets.

I believe, last quarter, you had only been expecting to see total student enrollment growth for the University segment in the second half of the year. Now you've added Culinary Arts. Can you just tell us what happened over the past 3 months to change that thinking?

Our results are improving. We're being very focused in making some of the changes that we wanted to make on the marketing side, as well as on the education side of the docket at University. And it's paying very strong dividends for us. I've mentioned early in the year, or at the last call, the bump in the road we had with enrolling out intellipath and some of the downward pressures that had on some of the continuing students at AIU. And I also briefed you all on how we've taken a lot of corrective actions on all of that. And we've had very good marketplace reaction to some of the new marketing things that we're doing at AIU. I think the students support things that we're doing in the student intake process, stitching a variety of other things that we're doing. The orientation that we're using, which is getting people very familiar with the kind of time that they're having to invest for understanding our intellipath platform, and what it's going to take to be successful at the schools is paying off. We had a change of leadership at CTU and brought in Adam Hurst, as you all know. He's made a very nice and important impact, especially in terms of improving how the institution is looking towards the total life cycle of the student. We're seeing dividends of that pay off as well. From the standpoint of the culinary side of the house, that population relative to the extended associates program matured faster than we had originally indicated in the K, and so was a positive for the quarter. And it's one of the reasons why we've been able to hold off on certain types of advertising expenses in that part of the portfolio for right now because we're seeing another part of the model mature that gives us a little bit more time before we make that kind of an investment, consistent with what we want to do with the high school market, which, as you well know, has a lot to do with timing and how you make those hires. So it was improved performance.

Okay. Great. Just shifting gears a bit, obviously, one of the larger public companies in the space, Corinthian Colleges is going through some issues. I'm assuming there may be some overlap with what they do and some of your Career Schools. Can you talk a little bit about that and what the impact might be?

There is some programmatic overlap on -- between Corinthian and us, both online and on certain ground geographies. We do have some overlap, but they have many more campuses than we do and their geographic footprint is much larger than ours. But there is some significant programmatic overlap between the 2 institutions. From the standpoint of what's going to happen, what I can see is that there's going to be some -- there's going to be a large competitor that either stays in the market with a different operator or a scaled-down competitor in some of those markets. And so we're very prepared from the standpoint of being able to work in the best interest of the students in those locations to make sure that they're not dislocated. And we've prepared outreach material and so forth to make sure that they know that there are options. We've already done a fair amount of homework from the standpoint of transferability and articulation, and so that -- if there are potential displacement situations, we have the ability to get the word out from the standpoint of being able to educate folks of how they can go ahead and take the progress that they have made and continue on the progress that they have made. And I've been in contact with both Corinthian and other stakeholders to let them know of where we have overlap and ability to help those students from being disruptive.

All right. Great. Just a quick numbers question for Reid. I know you talked about some of the, I guess, noise in trying to look at your starts trends. But what was the impact of that on AIU starts in the second quarter. I'm just trying to see what the "normalized starts" change was?

Yes. What we said -- what I said in my remarks, and I'll just jump in ahead of Reid because it was in my remarks. But what I said is that AIU had an 18% total -- new student enrollment growth for the combined 2 quarters. The right way to look at this, jeff, is that we had 21-day in place. We took 21-day out and put in what we believe is a better process. And if you look at the persistence of our students and how they're moving along, the proof is in the pudding there. I mean, it is happening. The absence of 21-day still leaves a 7- to 10-day period of time where students can do drops. And so the difference is those next, really, 10 days -- and it's really a smaller segment of that, where you have any kind of meaningful addition or subtraction of the overall number. There is no specific metric that ties one to the other. And that's why when I came here and we were doing some recasting, I was very -- it was not something that I was hugely excited about. And it's one of the reasons we want to stop that because the numbers are what the numbers are. And I think what our obligation is, is to tell you how we're making our adjustments.

Our next question comes from Jerry Herman from Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Scott, just wondering if you would -- follow-up to Trace's question earlier with regard to EBITDA expectations, I think you also have been targeting positive EBITDA in 2015, inclusive, in fact, of the Transitional School losses and cash flows, is that correct?

What we've said about 2015 is that we would see EBITDA positive results for the continuing operations. When I said that, frankly, we've outperformed that as we had squeaked in at EBITDA positive in the fourth quarter of last year. And again, we're over performing that from the standpoint of my statement saying that we're trending for EBITDA positive in the fourth quarter this year. So I see that all as improved results from when I made that forecast. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And Reid, one for you, if I can. The discussion has been around $70 million in Transitional School losses for this year, with about 80% of that being cash, which is sort of mid-50s. The way I look at that and an attempt to reconcile that with the disclosures today, you had $19 million in EBITDA losses in the first quarter, $16 million in the second quarter. Can you give us some color on how that would lay out in the second half of the year to sort of get to that mid-50 mark, and likewise, some reasonable expectation on Transitional School cash losses in '15?

So the Transitional School losses should feather down sequentially as we move into the second half of the year versus the first half of the year just by the numbers of schools in play. And so that burn will diminish in the second half compared to the first half. With regard to 2015, I'm not sure that we've provided any specific range of impact on that on a full year basis. Now I think as we progress over the remainder of this year and we get some further visibility, for example, on how we're tackling that lease project that I described in terms of trying to reduce some of the real estate burn, I think we may have some better perspective to lay out a bit later on in the year that would be more helpful.

The only change that we've made with regards to discussion is, we said we would have 10 campuses in earlier comments for 2015 and beyond to teach out, and it's going to be 9. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Right. That's okay. That's helpful. And is the 80% cash impact of the expected $70 million in operating losses, that's still a good range?

Yes, yes. Yes, I think it is. But then, again, the item that would help impact that, again, is whittling down some of the real estate obligations. So to the extent that we make some progress on that, I could probably update you guys and then say, "Well, maybe it's a bit lower than that because we've been able to whittle down some of the cash burn on the real estate." Because that becomes the most substantial part of your cash burn. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Right. Okay. Great. And then with regard to sort of framing the expectations, it appears that the fourth quarter or year-end cash balance should, in theory, be the low watermark, is that fair?

For this year? Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Well, for the low watermark period. And I guess, the variable there is, are the positive EBITDA numbers generated from the continuing businesses more than offset those in the transitional businesses?

We haven't given any guidance on what the timing of our low watermark on cash. What we have said is that -- what both Reid and I have said is that we feel very good about what our capital position is. We don't see any reasons to do anything. I think we have adequate cash to be able to meet our turnaround. What we haven't said at any one point is exactly what our low watermark is or the date thereof. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. Great. One last one if I can sneak it in before I turn it over. Sorry to ask so many. But the -- Scott, your color on FRR, on the financial responsibility ratio was very helpful. I think, I mean, if last year you were at 1.5, have you guys targeted what that might look like this year?

Sure. Yes, we do a lot of homework. And yes, yes, yes, I'm -- we're on top of that. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: And willing to share a reasonable range? I think you know I'm going to ask that next, right?

We haven't given any forward-looking information on that either from the standpoint of the detail other than to say that I think we have the tools necessary to meet our goals.

Our next question comes from Corey Greendale from First Analysis.

I apologize, I actually have to hop to another call, so I'll follow up with you offline. But congratulations on the progress, and I'll follow up shortly.

Our next question comes from Peter Appert from Piper Jaffray.

So Scott, I was hoping you could talk a bit about how you're thinking about pricing strategy broadly, and then, specifically, how we should think about the trend in revenue per students for the different brands over the course of the next few quarters.

That's a good question. From the standpoint of pricing, there's a few different -- I mean, because we've got so many different models, it's not one that I can answer in a generic way. We are looking at some -- a variety of different things in various pockets of the portfolio. We have no plans at the moment for price increases, I would say, on the online side. We are looking at -- we did just recently announce Fast Track and some other types of things. We are looking at some other ways in which students can help progress. That effectively lowers some of their costs. We are looking at some cash pay options that may be at a reduced rate from where they are today. And so what it's -- what I can say to you is we're looking at all of the options across the portfolio and there's nothing generic about that, that I can -- that I would say pertains to the entire portfolio. We are looking at doing some experimentation to see where we can help the affordability of reaching your goals academically.

So it sounds like -- I'm not putting words in your mouth here, but it sounds like the trend would be at least modestly lower revenue per student on a go-forward basis.

On a total -- well, that's not entirely accurate. Our cost per acquisition has been very good, especially from the standpoint of the online side. It's been a little choppy on the Career Schools side. It's been very good on the online side. And length of stay is improving in certain areas throughout the portfolio. So I wouldn't necessarily come to the conclusion that revenue per student is on a downward trend.

Okay. And then related to your comment about advertising spends being lower in the current quarter, is some of that just a timing issue? Or are you actually seeing some economies that continue going forward?

There's 2 or 3 things that are important to understand our advertising spend in this quarter being lower than the last quarter. We are seeing cost per new enrollments have a positive step for us, especially on the University side. Like I said, it's choppy on the Career Schools side. But on the University side, we've had some improvements there. So you can -- and so from the standpoint of going into this quarter, which is the softest marketing spend quarter, one of the other things that I did not want to do is to chase what we had last year. June and July is when we started to get a spike in interest at AIU and we had some -- lead up to that with some advertising costs. I didn't want to chase that, and that's why I keep telling everybody, watch the total enrollment number because the comp gets a little messy. We then did it for CTU in the latter part of the third quarter. And so that's -- I'm gauging my powder appropriately. As I said, I have resisted the temptation of accelerating some marketing expense -- spending on the LCB side because that business model was maturing faster and there was a timing to that. If you're going to time it for high school recruits, that makes a lot of sense. Not making that spend right now. So that's another reason, so improvement in costs, not running after a spike that occurred. We also have 6 less campuses that we're spending for because we moved 6 campuses into the Transitional Schools group at the end of last year. So you put all of those things together and you're seeing why I'm managing to a lower advertising spend in this quarter. I do expect in the third and fourth quarter -- I mean, in the first quarter, we were almost identical to last year. And when you think about where our student population number is, that starts to make a lot of sense because they're getting pretty darn close. And I do have very similar spends planned for the third and fourth quarters of this year.

Our last question comes from Trace Urdan from Wells Fargo.

Just one follow-up, kind of in response to Jeff's question about Corinthian. Yesterday, Lincoln told us that in markets where they operated near some Everest Colleges that the negative publicity surrounding that situation, they felt, was affecting them. And I just wondered if you could address that, whether you're having the same experience or not.

I don't know what locations, obviously, that they're...

In other words, people were sort of seeing all 4 profit locational schools in the same bucket and not making the distinction between the Corinthian brand and other brands in the market. Are you having that experience or you're not seeing that?

What I can tell you is that from the standpoint of our marketing spend and results from that and application flow and so forth, we're not seeing anything that suggests that there is a market correction going on.

Thank you. I will now turn the call over to Scott Steffey for closing remarks.

Thank you once again for your time today. We plan to be active with several investor-related events in the upcoming months. So I look forward to meeting with some of you. Enjoy the rest of your summer and feel free to give us a call with any follow-up questions. We'll speak again next quarter. Thank you.