Good day and welcome to the Q2 2015 Career Education Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sam Gibbons with Investor Relations. Please go ahead

Thank you, Chad. Good afternoon, everyone, and thank you for joining us. With me on the call today is Ron McCray, Interim President and Chief Executive Officer; and Dave Rawden our Interim Chief Financial Officer. Also joining us on the call are Jason Friesen, Senior Vice President and Chief University Education Officer and Ashish Ghia, Vice President Financial Planning and Analytics. Lastly we have Todd Nelson with us today who officially become the new company’s new President and CEO on August 12. Following today’s prepared remarks, the call will be open for analyst questions. This conference call is being webcast live within the Investor Relations section at careered.com and a webcast replay will also be available on the site. You can also always contact the Alpha IR Group for Investor Relations support at 312-445-2870. Let me remind you that today’s press release and remarks made include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to Career Education and involve risks and uncertainties that could cause 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 Career Education’s Annual Report on Form 10-K for the year ended December 31, 2014, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertake no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, today’s remarks refer to non-GAAP financial measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The earnings press release and slide presentation which accompany today's call and which contains financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures are available within the Investor Relations section at careered.com. So with that, I'd like to turn the call over to Ron McCray. Ron?

Thank you Sam and good morning everyone. And thanks everyone for joining us on this call. We have a full agenda for you today with the detail we promised you last quarter when we first announced our transformation plan. But before we get into that discussion I would like to introduce Todd Nelson who will become our next Chief Executive Officer. Todd was nice enough to join us today for the call even though he doesn’t officially start for another five days. When the Board and I set out on the search for a new CEO we believe that we needed a true industry veteran. Our industry is undergoing massive transformation right now and finding a leader who has deep knowledge, experience and a strong track record of leadership in navigating our business was important. Further, finding a leader who has dedicated a large majority of his life to the education of hardworking students like ours was equally important. So I am happy to introduce you to Todd Nelson who will officially become our President and CEO on August 12. Todd has been a leader in our industry for over 25 years and we are looking forward to seeing him execute the remaining steps on our transformation and then returning the company to growth in the future. Todd?

Thanks, Ron and good morning. I can’t tell you how excited I am to actually be here. As Ron mentioned, I’ve been a leader in the industry for over 25 years. I’ve been through good times and I’ve also seen some tough times. I don't think anyone truly becomes a leader until you live through those types of cycles. No matter what business you are in, the industry is under intense regulatory scrutiny right now. But the value of our industry and in particular Career Education provides to working, hard-working student adults, looking to better themselves as immeasurable. Many of our students have limited opportunities as they haven't followed their traditional path. But our programs provide them with an opportunity to expand their career paths and better provide to their families. As an industry and as an organization, this is what has to motivate us everyday. The transformation that our industry is undergoing right now will make as much stronger. And the platform that Career Education has two high profile brands like CTU and AIU as well as dedication to student retention and excellent outcomes makes me really excited about our role in the industries transformation process. With the balance sheet that will only get stronger as we work through this transformation and a highly respected educational platform. I'm really excited about what we can do here at Career Education in the future. So I’ll wrap up with saying I am looking forward to catching up with many of you and again as we progress through this 2015 and beyond. Thank you very much. Back to you Ron.

Thanks, Todd. And all of us here at Career Education want to welcome you to the team and we look forward to working with you. So let’s get back to today’s discussion. As many of you are aware the company announced its strategic transformation last quarter and we are now in the process of executing against that plan. Last time we spoke, we promised you that we would provide greater detail and an expected timeline for that process as soon as we had further developed our projections. Today's agenda includes the discussion of those details. But first, we’d like to review the highlights of our second quarter results, which was strong and in line with our expectations, we’ll then provide an update on our progress as it relates to executing our transformation strategy, which is focused on our University Group. Finally, Dave will conclude with a thorough financial review of our second quarter results as well as the details surrounding our restructuring plans. I’d ask you to turn to Slide 4, for review of our second quarter highlights. As I mentioned, results were strong and in line with our expectations that continue to underline the successful execution of our transformation strategy. Our University Group revenues of $138.2 million increased 2.6% compared to last year's second quarter driven by increased total enrollments. These results are indicative of the strong competitive position of our University Group especially during a period of significant uncertainty in our industry. We also continue to see ongoing success of our cost initiatives with strong operating income performance in our University Group which increased 50% year-over-year to $29.4 million during the second quarter. Adjusted EBITDA for our University Group and Corporate also continued to strengthen up $7.1 million or 36.3% to $26.6 million in the second quarter. This…

Thanks, Ron and good morning everyone. I will start first with the second quarter University results and then I will discuss the results for our Transitional Group and discontinued operations. After that, I will briefly review some of our consolidated results and provide an overview of our liquidity and balance sheet. And then finally I will conclude with a more detailed outline of the expected costs and timelines associated with the restructuring initiatives we disclosed in May. If you’ll please turn to Slide 7. All percentages [comparisons] I mention will be comparisons to the prior quarter unless otherwise noted. Now as Ron mentioned total revenue for the University Group was $138.2 million, which was up 2.6% year-over-year driven by increased total enrollment. Operating income was $29.4 million up 50% over the prior year period as operating margins expanded 670 basis points to 21.3%. This was driven by increased revenues and continued execution at both Universities of various cost control initiatives that were put in place late last year. Year-over-year operating margins improvement should continue for the remainder of the year although I remind you that quarterly margins are impacted by seasonality in marketing spending. Our first and third quarters tend to be our highest advertising expense quarters. In the second quarter advertising expenses were $34.3 million compared to $37.4 million in Q2 of last year. Adjusted EBITDA for the University Group and Corporate increased 36% to $26.6 million during the second quarter driven by increased revenue and continued cost reduction initiatives. If you please turn to Slide 8. You'll see that total student enrollment growth within our University Group increased 2.3% year-over-year to 31,300 students. Our new enrollment data continues to skewed by a methodology change we made to AIU last year, but excluding that new enrollments were up 2.4%…

Thanks, Dave. If everyone turns to Slide 11, you will see the summary of the guidance and projections related to our transformation. Our company has been forced to make some very difficult decisions over the past several quarters in order to secure our long-term future. I believe we are on the right path to stability and probability that will benefit our students, employees and the shareholders. I look forward to handing over the reins to Todd to guide our strong team and I will do all I can as the Chairman to support Todd and his leadership team. I am confident that I’ll be turning the leadership of the company over to confident capable hands and we are fortunate to be doing so with a clear path to a bright future. Career Education is approaching the return to sustain profitability and a competitive margin profile with leading university academic offerings and a strong balance sheet. I want to conclude by thanking the dedicated employees of the faculty that continue to support our mission amidst a challenging time in our history. I’d also like to express our gratitude to you and our shareholders for your continued trust and support through these past several quarters. We look the details we’ve disclosed today surrounding our long-term financial plans have strengthened your confidence in our ability to meet our goals. With that, I'll now turn the call over to the operator for your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes today from Jeff Silber with BMO Capital Markets.

Thank you so much. Really appreciate the details on the plans. I know there's a lot of moving parts here, but just stepping back and looking at recent trends where you have been able to grow enrollments. Can you give us a little bit more color how you think you have been able to do that while the rest of the industry still appears to be shrinking and what gives you confidence that you will be able to continue? Thanks.

Yes, thanks Jeff. Good to hear your voice and thank you for the note I read this last couple of days. Single factor expeditions really sufficed explain something is complicated enrollment, so I’m going to turn this over to Jason in a second, but so bear with us as we take you through that. Jason?

Sure, good morning Jeff. How are you doing?

Yes, fine.

I think as it relates to the quarter for university I think what you're saying is a reflection as we’ve talked about in past calls on executing the plans that we laid out and I think that has the couple of different elements. First, as Ron indicated and talked about more in the script, we continue to strengthen academic outcomes for our use of Intellipath and we are very optimistic clearly on that platform and what that can do overall to support our students. So I think the second element you heard a little bit in the script is how we are continuing to identify new programs with good strong outcomes that our students are interested. And in Q1 as we highlighted CTU that included the Masters of Healthcare Management and the Masters of Nursing and now in Q2 on AIU that’s our Masters in the Primary and Secondary education spaces. I think the third element there relates to how we are continuing to invest resources and grow our corporate partnerships as you heard over the last – in Q1 we grew about 40% year-over-year in terms of new student enrollments through those strategic accounts, Q2 about 55% and over the past year or plus we've added about nearly 100 strategic accounts that have an employee base of roughly 5 million employees. That continues to be a really important component and I think we are seeing some of the benefits of that investment. Now, and then we've also invested behind AIU and CTU brands, but we are back on TVs entering now all important back-to-school season as you reflect back on Q1 you'll recall that we talked a bit about how we are investing in some new creative for CTU as well as at AIU, how we were back on TV in the first quarter for the first time in many years and so I think we’re seeing some of that benefit. And then clearly we have had a dedicated effort around being more efficient and effective and how we are serving our students and how we are conducting activities to support those students and I think you are saying some of that benefit on some of our cost metrics. So I think in essence it comes back to executing the plan that we laid out and we’ve been very focused on doing that over recent weeks and months.

And the only thing that I would add Jeff, is Jason referred to the corporate partnerships, quality has been more of an emphasis for us than quantity. And so there's more stickiness to those relationships than might appear on the surface. So that is a sub point under the corporate partnerships that I thought I would share with you.

Okay I appreciate that. In your prepared remarks, when you talked about the longer-term plan, you used the words, you're going to hope to approach, I think it was comparative or competitive industry margins. Again, industry margins seem to be moving in the wrong direction, so maybe you could help us quantify where you think this business can get to from a margin perspective over the long-term? Thanks.

Yes. And I will turn it over to Dave, but we do think will be in the leading category, but fair point, margins are going in the direction that no one is interested in. But Dave?

As we took a look at this, we ask those very same questions. The way I would look at is the margins are we took a look at the where the margins are today. We also took a little bit at the trends, but more where they’re related to today and took among the best in that group. To see where we could end up with transformation and as we model all out, we ended up among the best in that group when we are all said and done. Granted, the trends could come down, but right now we are modeling to be where we think there will be.

One thing I add you know although we are not giving a point estimate I would add that we were looking we set this as a target when margin, before margin is began to deteriorate Jeff so we are talking about significant change here. Correct.

All right, fantastic. And Todd, just want to wish you best of luck.

Thanks, appreciate it. It would be good to catch up.

Okay we’ll do. Take care.

Thanks Jeff.

The question comes from Peter Appert with Piper Jaffray.

Thanks, good morning. I'm just wondering if the cash estimates that you have given, the $190 million for example, going forward, assumes any proceeds from Cordon Bleu or other asset sales?

Yes, that’s fair question. I’ll let Dave respond to that. Dave.

It does not include any expected proceeds from the sale of LCB or any other assets.

Okay, great. Then you've given us estimates around the EBITDA losses for the transitional schools and I'm wondering, Dave, is a possible to correlate that to actual cash losses?

It is directionally correct its not totally specific to it but directionally yes.

Okay. On an unrelated topic, on gainful employment, any commentary in terms of operational changes or implementation or how you see it impacting the business?

Hey, Peter this is Jason I think what we’ve said on past calls is you from a impact perspective that has would've had much more of an impact on our Career Schools and our Le Cordon Bleu schools from a University perspective we believe that has a much, much lesser impact we obviously have a very good handle on the debt side of the equation recently submitting six years worth of data to the department. I think as you know the bit of unknown variable there is been a little less transparency on and so hard to give highly precise answer is on the income side and that the last time the department release that information that that was a number of years ago of social security date, so where that has move is a little less clear I know there's an outstanding pending appeal that’s out there but I think we continue to move forward assuming that those regulations clearly are going to be fully implemented and that appeal wouldn't be successful but we believe on our core assets moving forward we don't think that will have a material impact on a go forward basis.

Got it. Understood. Thank you. Jason, any other - you called out a couple of new programmatic offerings - any others in the works that we should be keeping an eye on that could be meaningful?

It’s clearly an area focus for us is identifying those new programs that were continuing on both sides AIU and CTU to identify those new programs you know I don't want to get ahead at this point, because as you know there is a process there different approvals and different things you got to go through, but that will continue to be an area of focus for us on a go forward basis.

Got it. Great, thank you.

Thank you, Peter.

Thanks.

The next question comes from Corey Greendale with First Analysis.

Hey, good morning and congratulations on the continued progress.

Thank you, Corey. How are you doing?

Doing well. Long time no see. I just had a few questions. I hope you don't mind, I realize, Todd, you haven't even started yet, and ordinarily I would give you a free pass, but since I know you so well and since you know the industry so well, I just had a couple quick things I was hoping to hit. First and foremost, I was hoping you can just give some perspective on what attracted you to the CEC opportunity, kind of what do you see as the core opportunity there?

Sure. I mean it’s been interesting over the last couple of decades to look at the transformation where the demand is coming and if you look at the combined with the regulatory environment that we’re involving right now as well as the competitive landscape. I felt of all the companies with the transformation taking place here, this company is well-positioned to take advantage of the environment that we are in. And I think that combined with as I’ve spoken with members of management, the dedication to high-quality outcomes laser focused on building retention. Those are things I think we can build on and you look at the macroenvironment right now and the demand for education and the value of education regardless of all the – all the noise out there about cost and return which we understand. There is huge demand and the ability for traditional providers to meet that just not possible. So for a high-quality education company to be able to really support that demand I think that’s the best positioned company is Career Education so it was an easy decision for me.

Great. It is good to have the opportunity to talk with you again. More broadly and anyone who wants can answer this question, as you look at what's happening in the space overall, at a high level, investors have a sense of what's going on, but there is some variance that's challenging to explain among the various companies in this space. Can you just give at a high level your overview of what is that you think is resulting in your ability to grow the University segment at the moment as some others are still struggling more? And how sustainable it is and also how volatile it is, as we've seen some volatility at others, where things seem to be trending in the right direction and then there's an awful month, just what you are seeing on that consistency front?

Sure, Jason.

Yes, Corey I think I had shared a little bit earlier in Jeff's response kind of what we think relates to the key initiatives that are driving that, that being again, our focus on the academic outcome and in Intellipath, new programs, corporate partnerships investing behind AIU and CTU brands. Clearly we believe very strongly as both Ron and Todd have indicated. We have a very strong team that despite some of the changes and other things and dynamics that have been going on here has stayed very focused on our students and focused on executing our plan and I think the combined efforts of our team and that focus with the right plan and initiatives that we set in place I think is what you're seeing here in the second quarter. Obviously we’re optimistic building on that, momentum coming out of the second quarter as you know we are entering the important back-to-school season which will be important for how we end not only this year, but going to next year. But I think we’ve been pretty clear in some of the slides we shared with you, what the assumptions are on kind of what we use to build the information that we rolled out on a go forward basis. So hopefully that helps you.

It does, and actually, Jason, one follow-up on that, which is Intellipath, how aware are potential new students of the technology and is Intellipath more helpful for outcomes and retention or do you think it really does move the needle on new students, as well?

Yes, I think as a new student although we have dialogue with students about Intellipath and what that represents and how that can potentially help them be more efficient and effective in their learning and in their studies. As you know as a new student if you don't have necessarily a comparative base that may or may not go fully register what that benefit is, but we are clearly having that dialogue I think where you see even more benefit with our continuing students the ability for those students to move through material that they already know and spend more time on that material that they don't and how that's changing the information they we are able to provide to our faculty to enable a more specific coaching dialogue with those students. We feel very good about how that setting us up on a go forward bases to really support improvement in student outcomes and success of our students.

Got it. Just one quick bit of feedback. I understand there is a lot of moving pieces, but presumably you have models that are leading to your confidence in what the cash balance is going to be at the end of this year and then going forward. To the extent you would be willing to put together some high-level quarter-by -quarter indication of what you think, where the cash goes, that would be helpful for people getting confidence in cash being stable and ultimately growing?

That’s good input, Corey.

Great. Thanks for taking my question.

Okay, thank you. Have a good weekend.

[Operator Instructions] Our next question comes from Dan Kaplan with Akanthos Capital.

Hi, guys. Congrats on the quarter and welcome, Todd, to the Company. Quick question, the marketing expense that you guys have given out on the release, how much of that went for the University schools?

Okay, I’ve to say virtually all of that some we’ve spend on LCB and not much on the Career colleges obviously, but virtually all that we spent on the University.

And that's this quarter, but what about, say, the quarter year ago. Did that dynamic change?

It’s right, we still tend to spend a bulk of our spending on the university. It would have been a higher proportion, we would have spend some on Career and some on LCB as well last year, but for most part at least in this quarter was almost entirely LCB and University.

Got it. And also just digging a little bit more on the cash guidance, just looking at the current run rate in the University schools, let's say, around $70 million in EBITDA times 2 and then minus $180 million from the transitional schools, that's about negative $40 million, yet your cash guidance is unchanged, so does that mean additional an $40 million coming from additional savings on University schools?

What really gets into is the fact that you have a profitable University Group; we are making savings in the corporate going forward which we initiated starting in this second quarter I guess through the annualization of those savings going through the rest of this year. And then we will have to spend obviously some cash and closing down the Career Schools. So we are over the 190.

Got it. But looks like a good amount of savings is coming in addition to savings this quarter. That's great. Could you talk about your deferred tax allowance – valuation allowance? Where does it currently stand, and given your guidance, do you expect to reverse it in 2017, i.e., recognize the deferred tax assets?

You adjust that at the end of the year so it still stands at $150.4 million and we will take a look at that when we do our 10-K next year to see if we provided enough indications that we begin to reverse that, but as it stands right now we haven’t been able to – one we haven’t provided any guidance on that, but two we are still in a position where we have to fully reserve that deferred tax asset.

Got it. Thank you so much.

Okay. Thanks Dan. Happy weekend. End of Q&A

At this time, there are no further questions. So I'd like to turn the conference back over to Ron McCray for any closing remarks.

Okay. Thank you all again for your continued support of Career Education. We believe we are on a clear path toward long-term success for both our students and shareholders and hope the level of detail and the disclosures we provided to you today have brought you greater confidence in our ability to achieve our goals. Have a great day. Thank you for your support.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.