Good day, and welcome to the Fourth Quarter 2018 Career Education Earnings Conference Call and Webcast. 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 Chris Donovan with the Alpha IR Group. Please go ahead.

Thank you, Andrea. Good afternoon, everyone, and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; and Ashish Ghia, Senior Vice President and Chief Financial Officer. This conference call is being webcast live within the Investor Relations section at careered.com. A webcast replay will also be available on our site, and you can always contact the Alpha IR Group for Investor Relations support. Let me remind you that this afternoon’s earnings release and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on assumptions made by and 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, 2018, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes 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, the most directly comparable GAAP measures. The earnings 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 GAAP to non-GAAP measures are available within the Investor Relations page of the company’s website at careered.com. With that, I’d like to turn the call over to Todd Nelson. Todd?

Thank you, Chris. Good afternoon, everyone, and thank you for joining us on today’s call. We are pleased to end 2018 on a strong note. Some key highlights for the year are: fourth quarter and full-year operating income almost doubled and adjusted operating income came in at the high-end of our outlook range. We ended the year with a strong balance sheet and our full-year cash flow from operations is as strong as it’s been in seven years. Momentum within our key operating metrics and processes remain strong and we expect both universities to continue growing in 2019. Ongoing investments in technology and student-serving processes remain key initiatives to enhance student retention and academic outcomes and drive sustainable and responsible growth into 2019 and beyond. I’ll further expand on some of the successes from the year, and Ashish will then take and make a few more interesting – more information on details around the financials and 2019 outlook, before I provide some closing thoughts at the end of the call. For the year ended 2018, we reported net income of $55.2 million, or $0.77 per diluted share, while adjusted earnings per diluted share, which excludes certain significant items were $1.05. Full-year adjusted operating income was $105.2 million, as compared to $66.8 million in the prior year, with the improvement primarily driven by the completion of our teach-out strategy and strong operating performance within the University Group. Student retention experiences – retention and experiences and academic outcomes remain a primary focus across all of our operating and support teams. And I believe that we are well-positioned, both from a competitive and operating standpoint to serve and educate current and prospective students who are primarily adult learners.. Enrollment trends at CTU and AIU continue to experience growth, primarily driven by the incremental…

Thank you, Todd. I will start with a review of our full-year and fourth quarter results, then discuss our balance sheet and 2019 outlook before handing the call back to Todd for his closing remarks. All comparisons are versus the comparative prior year period unless otherwise stated. For the full-year 2018, total company operating income was $71.3 million, an improvement of approximately 109%, as compared to $34.1 million. Adjusted operating income, which excludes certain significant and non-cash items is more indicative of the underlying core operating performance. This measure came in at $105.2 million for the year, which was at the high-end of our outlook range of $101 million to $106 million and grew approximately 57% versus the prior year. Net income for the year was $55.2 million and diluted EPS was $0.77, while adjusted diluted EPS, which again is more indicative of underlying operating performance was $1.05. This improvement in operating performance versus the prior year was primarily driven by the completion of the teach-out strategy and growth within our University Group. Offsetting these were costs for ongoing investments in technology and student-serving processes and initiatives. Overall, we ended the year on a strong note, with fourth quarter adjusted operating income of $29.7 million and cash flow from operations of $38.7 million. Before I go into the segment details, let me quickly review two of the adjusting items for the fourth quarter. First, we recorded a $5 million settlement charge as part of the agreements with the attorney generals from 48 states and the District of Columbia. This concludes the previously disclosed multi-state inquiries ongoing since Jan of 2014. Second is a $2.6 million non-cash charge to adjust sublease and other occupancy cost assumptions made in conjunction with previously recorded unused space charges related to closed campuses. Please note…

Thanks, Ashish. 2018 completed a multi-year transformation of our organization, as we successfully closed out several legacy legal matters, as well as responsibly completed our teach-out obligation to our students. We entered 2019 with strong momentum in our key operating metrics and with a clear vision and strategy to serve and educate our students and provide them with the necessary support and tools as they work towards graduation. Our balance sheet will grow stronger and we will allow – which will allow us to execute against our strategy to drive sustainable and responsible growth by making appropriate long-term investments in our universities. Demand across the industry remains encouraging, driving incremental investments throughout the year to support and serve that interest. Our teams continue to innovate and collaborate to adapt to the ever-evolving regulatory environment. Also please note that on April 11, our management team will be hosting an Investor Day in New York City. Institutional investors and analysts are encouraged to attend and we’ll webcast that event for the rest of our key stakeholders. We plan to provide a general overview of our business, as well as discuss the long-term operating strategies for both universities. We hope you’ll be able to join us. With that, I’d like to open up the call for any analyst questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Alex Paris of Barrington Research. Please go ahead.

Hi, guys, congratulations on a strong finish to 2018 and kind of closing the books on that multi-year reorganization.

Thank you.

I have a couple of questions, mostly related to guidance, I guess. First off, the calendar redesign, the AIU new student decline was expected. I think, you covered that pretty well on the call that 39% fewer enrollment days, and you’re forecasting 60% more enrollment days year-over-year in Q1. I’m curious about the cadence of the balance of the year. Can you kind of give us some color on which quarters are going to be the tough comps due to the calendar?

We haven’t really given an outlook on that. But we do, as we said, feel like that we are positioned well for growth for the year, obviously, some variability in quarters, but we’re continuing to work with the calendar to try to smooth that out. But obviously, Q1 will be – there will be a big positive variance there. But for the year, we feel given the outlook, it looks like it will be positive for 2019.

Okay. And then specifically for Q1, to the extent, you had a significant decline due to the calendar redesign. In the fourth quarter, you say that the increase in the first quarter is going to more than offset that. Does that mean it’s going to grow more than 30.8%, or new student shortfall will be more than made up for in units – in people or in students in the Q1?

So Alex, not necessarily on a percentage basis, but that is correct. The number of students will offset the decline from Q4.

Okay. Then your guidance on full-year adjusted operating income, $114 million to $119 million, does that contemplate margin expansion year-over-year?

Yes. I mean, it does contemplate some margin expansion. And as Todd mentioned, we always try to balance between investments and our commitments. And keep in mind also Alex that $114 million to $119 million also includes certain residual teach-out expenses that I referenced earlier.

Okay, I appreciate it. And then moving on the chargers for like unused space and severance and legal, which were substantial over the years, including 2018. I think you kind of touched on this, but we should assume those will be less going forward?

I mean, we can’t specifically comment on that. But as we have said, the significant legal settlements and charges – unused space charges, for sure, should be left going forward, because we have basically wound our teach-outs down. So, yes, those should be definitely less going forward.

Okay. And then just give us all for me, the continued invest – incremental investments in student-facing technology and that sort of thing. Does that come through the P&L or is that a capital expenditure?

Well, the technology, again, that’s capital expenditure. But the student-facing adding up people, whether it’s enrollment counselors, academic councils, financial councils, that type of investment that’s more on OpEx.

Okay. And then lastly and broadly on M&A, inorganic growth strategies. Can you give us some color on what you’re looking for there? I’m assuming it’s another regional university, maybe online focused. Maybe give us an idea and the size of something that you might be contemplating, or at least a target, what are the ranges that you’re interested in looking at? Would you lever up in that the far number with these would be more bud-sized transactions?

That’s a good question. I mean, with the financial performance of our company, as well as a lot of the services that – and processes that we’ve developed, they lend themselves very well to other educational institutions. And so, again, given our financial strength, I think, that is very wise usage of some of our cash to look for those. And you said part of it high-quality, regionally accredited institutions are the types that we would look to those that we feel like those services and expertise and the management team that we have assemble that we can enhance their ability to provide a quality education. And obviously, with the anticipation, we hope to be able to provide a growth opportunities for them as well, especially in the online delivery format, if there’s an opportunity to obviously enhance the breadth and depth of our programs, the degree levels, as well as the programmatic offerings, that would be a big priority of ours as well. And yes, and as we said before, we continue to be very active and looking at those types of opportunities, other than that we haven’t really given any other information.

Okay. Well, I appreciate the additional color. Todd and Ashish, thanks very much for your time.

Thank you.

Thanks, Alex.

Our next question comes from Greg Pendy of Sidoti. Please go ahead.

Hey, guys, thanks for taking my question. I just had a brief one. I think you mentioned during the call intellipath the format there. Can you just – is there anyway you can give us how – what is the percent penetration that you are using intellipath? And I guess, since it is sort of an investment company that you guys have invested in, how does that work if you were to allocate more capital to build out that platform? How does that work, I guess, since you own a percentage of the company? Thanks.

Great. Well, a couple of things. One is, by the way, Greg, you or anyone else would like, we’d be happy to also do a demonstration for you. It’s a really impressive – we use the expression adaptive learning platform, others refer to it in different ways. But it really does help you fine-tune the education for the students and allows the faculty to better fine-tune their teaching towards those students. And it’s really an impressive technology and something that it does take time to integrate across all the programs. Every year, we budget to continue to spread that through more additional courses. And obviously, as far as our investment in the actual company itself, we haven’t invested in that and additionally for sometime. But that’s – that would not be necessary for us to do that to continue to expand that into more of our curriculum. Having said that, it’s a very impressive company.

Okay. That’s helpful. And then just, I guess, on the capital allocation, I know M&A on the forefront is always something that would make sense. But how are you thinking about, I mean, cash is growing. The legal overhang has been settled? And I guess, you have your teach-outs nearly complete. How are you thinking in terms of other forms of capital allocation in terms of a dividend or potentially a buyback?

Greg, I think, the three overarching strategies, we still want to continue the demand we’re experiencing. We want to continue to invest in that organic growth is our top priority. The next obviously would be, as you mentioned, which is really M&A area and we feel that there are some very appealing targets. And then, obviously, the third aspect or the third leg of that would be looking at, whether it’s buybacks or dividends that if we feel that is right at that right time, it would certainly be something we would consider.

Great. And then just one final one, you mentioned demand across the industry is healthy. Is there any particular programs that stand out you think more than others, or is that pretty broad-based?

Well, it’s interesting, because it does somewhat ebb and flow. I mean, you do see it in some areas, obviously, the health sciences area always seems to be positive. I think part of that is based on the shortage of quality programs that are available, but also you continue to see robust demand in our business and management programs. And I think the main thing there is to have a very effective product development process, because some of those programs come in and out of, I guess, popularity quite quickly. But the core programs that we continue to see pretty steady demand in those areas.

Great. Thanks a lot.

Thanks, Greg.

Thanks, Greg.

[Operator Instructions] And our next question will come from Peter Appert of Piper Jaffray. Please go ahead.

Hey, guys. This is actually Kevin Estok in for Peter Appert.

How are you?

So my – good. How you’re doing?

Good.

So my first question has to do with pricing strategies at both schools in 2019. I guess, I’m wondering – so between these two schools, I guess, how might the strategy differ and at CTU we’d be – see a little bit of contraction on a per student basis and maybe flat for AIU, or how should we think about that?

I mean, from a pricing perspective, as we said for CTU, you – I have made a comment around revenue per student, that is because of our growing corporate partnerships. So as that population continues to grow, you might see a little bit of RPS decline at CTU. But keep in mind that cohort of students have significantly higher persistence versus our general population. And…

Unless marketing expenses associated with the rest.

Correct. And then as far as AIU goes, I think, there should be – there is no – their progress is pretty stable and I don’t see any significant variances in terms of pricing for AIU.

Okay. Thank you. And second question actually, Ashish, you mentioned this, you said – so just correct me if I’m wrong. But you said that in 2019 basically, the cost associated with teach-outs would be about half the size in 2018?

Yes. So for 2018 on an adjusted basis, the teach-out losses were approximately $10 million, and in 2019, they will be half of that $10 million. That’s right.

Okay, great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Nelson for any closing remarks.

We thank you again for joining us, and we look forward to speaking with you again after next quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.