Perdoceo Education Corp (PRDO) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Career Education third quarter 2008 earnings conference call. My name is Annika and I will be the coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards then of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the presentation over to your host for today's call, Mr. John Springer, Vice President of Investor Relations. Please proceed, sir.

Thank you, Annika. Good morning, everyone, and thank you for joining us on our third quarter 2008 earnings call. With me on this call this morning Gary McCullough, our President and Chief Executive Officer, and Mike Graham, our Chief Financial Officer. Following a presentation by management, the call will be open for analysts and investor questions.

This conference call is being webcast live on the investor relations section of our website at CareerEd.com. The replay will also be available on our site. If we are unable to answer your question during the call, please call our investor relations department at 847-585-3899. Now before I turn the call over to Gary, let me remind you that yesterday's press release, and the presentations made this morning by our executives, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on information currently available to us, and involve risks and uncertainties that could cause our actual 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 quarterly earnings release or annual report on Form 10-K for the year ended December 31, 2007, and our quarterly and other filings with the Securities & Exchange Commission. Except as expressly required by these security 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. Now let me turn the call over to Gary McCullough.

Thank you, John. And once again thank you for joining us today on our third quarter 2008 earnings call. Before you go into specifics about our quarterly results, I want to provide perspective on where we stand at this point in our corporate turnaround, a process we began just over a year ago. We came in to 2008 with a good plan and a solid understanding of the internal operational and cultural challenges facing us at the beginning of the year. Of course, shortly after the year began, we were confronted with the headwind of a significant contraction in the student lending environment.

So in 2008, we have worked to manage through substantial challenges and I am proud of what our team has done through the first nine months of the year. Our focus in 2008 has been on building a foundation for sustainable growth through improved organization effectiveness and efficiency. In doing this, we have been addressing structural issues in our company that impacted our short-term financial performance. For example, we are teaching out 14 unprofitable schools. The teach outs are progressing well, and we ahead of our original plan.

We have continued to taking a aggressive actions to rationalize the Company's real estate footprint. We have disposed of just over half a million scare feet of excess real estate capacity since 2007. We've also worked to create a more unified cultural performance to drive consistency in how we operate, and to allow us to create and leverage scale. This work is challenging, and I would be less than honest if I didn't say that at times, it seems we take two steps forward and one step back. However, these efforts have enabled us to keep accreditation and regulatory issues in check.

I give you this perspective because in March of this year, we outlined a turnaround plan with specific 2010 milestones. Despite the student lending issues, and despite internal operations issues related in our admission process in our university segment, our third quarter results continue to show signs of progress and we remain on track to meet those 2010 milestones we previously shared. A byproduct of some of these actions, all of which we believe are in the best long-term interest of our company, can be complex financial statements that make it somewhat difficult to track and understand the operational progress we have made.

Now let's talk about the third quarter performance. Overall, third quarter revenue for the Company was almost $406 million, down 5% from the third quarter of 2007. We recorded an operating loss of $8.8 million. Our results were negatively impacted by a variety of one-time charges which Mike Graham will detail in his remarks. Excluding one time charges, operating income in the quarter would have been $11.7 million. During the third quarter, we generated $105 million of operating cash flow.

Now I want to take a brief look at our business segment performance. Our international business continued to post strong results. Starts increased 21% in international, while revenue and population were up 16% and 11% respectively year-over-year.

The health ed had a very good quarter and is well-positioned for continued growth. Third quarter starts and population were up 18% year-over-year. Operating margins in health increased by 180 basis points.

Earlier this year we told you the two Gibbs campuses in Melville, New York and Vienna, Virginia and would be converted to Stanford ground schools. Those conversions are complete. Despite teaching at a number of non-health related programs, third quarter starts at those campuses up were 25% versus 2007. The population of both campuses is actually up year-over-year.

During the quarter, we continued to consolidate brands behind the Sanford Brown name. We changed the western schools of health in the Pittsburgh area to Sanford Brown Institute. And we have continued to position the health SBU for future growth with the launch of a new dental hygiene program.

We've also made progress in our university SBU. Our admissions process got back on track after being impacted by peer qualifier issues. As you may recall, Peer is a two-step process where the representatives screens and qualifies leads who are contacted using predicted [dio] technology, and then passes the highest potential leads to a more experienced admissions representatives. I'm pleased we have addressed the operational issues that impacted starts in both the second and third quarters, but I am not satisfied with our results relative to the competitive marketplace.

In university, starts up were up 8% in the quarter. In the university segment, excluding a calendar shift we previously discussed related to AIU, revenue was flat year-over-year. This marks the first name nine quarters that the revenue in university did not decline year-over-year.

At AIU, the starts were up 7% and population was up 1%. Revenue per student declines are moderating at AIU as a degree mix shift to associate degree students are stabilizing. And excluding the calendar shift, operating profit at AIU was up over 40%.

CTU also continued to perform well. Starts were up 11% in the quarter versus 2007, while year-over-year population growth increased 12%. After addressing our Peer qualifier issues, the last two starts at CTU have been the strongest in the school's history.

There are two other items worth mentioning in the university SBU at this point. In the first quarter of 2009, we'll take tuition increases ranging up to 10%. In addition, AIU announced earlier today that it's is filing an application to change the university's accreditation from the Southerland Association of Colleges and Schools to the Higher Learning Commission of the North Central Association. This move reflects the majority of AIU's, nearly 20,000 students, are served through the higher learning commission's region.

Our culinary arts and design segments were the hardest hit by the changes in the student lending market. Third quarter results in both continue to reflect thee new demand realities in both segments. During the third quarter, I named Brian Williams as the Senior Vice President of our culinary segment. Brian has been leading that unit on an interim basis. He is a nine-year veteran of our company, and has a deep experience across a range of our businesses. Further Brian is a graduate at both AIU and our culinary program.

Brian and his team have embraced building a culture of student success within culinary. They're put aggressive measures in place that enable them to detect and address student performance or attendance issues earlier than before. Culinary faculty advisory program and a new manager position focused solely on new student success, has enabled the culinary SBU to improve student retention in both the second and third quarters. Consistent with our strong student outcome, their approach has given us greater confidence in our ability to use our our balance sheet to provide funding to a greater number of students in culinary without impacting either student retention or loan default rates.

Culinary also continued to make progress in reducing costs. Excluding startups, in the third quarter, culinary operating expenses were down 10%year-over-year. We recorded a one-time charge in the third quarter related to the California Culinary Academy to better align the school's real estate footprint with student demand and population. Finally, culinary remains on track to roll out its 21-month program program option during the first quarter of 2009.

The art and design segment continues to be a challenge. They have engaged in the task of driving greater consistency across what have historically been very independent organizations. While this work is in progress, it has become more urgent.

During the quarter, starts in art and design were down 12% while student population was off 5%. I'm encouraged by the strong quarter-to-quarter and year-over-year increase in student retention. I'm further encouraged by the growth in our art and design online starts which doubled during the third quarter versus 2007. Our online population in art and design increased to 800 students during the quarter, and we believe there's more upside.

For the first nine months of the year, our company's performance remains in line with our projections, and I am confident we are taking the right steps and the right actions to lay a foundation for long-term success. With that, I'll turn it over the Mike.

Thanks, Gary. I would like to start by providing more information regarding non-comparable items during the third quarter. Following that, I'll discuss our quarterly results including financial highlights.

As you review our third quarter results, please note that a number of items impact year-over-year comparability which I highlighted in last night's press release. We have indicated a key initiative as part of the renewal of the Company as a reduction of our real estate footprint. This quarter, we were able to close on several opportunities with favorable economic outcomes to the Company.

We incurred $10.9 million in lease exit expenses and a $4.8 million charge non-cash asset impairment related to the rationalization of our real estate, primarily rated to the CCA San Francisco campus within culinary, and vacating a full floor in a Gibbs New York facility. These moves reduced the overall square feet of our CCA, California Culinary Academy campus, from 245,000 square feet to 104,000 square feet. While this campus is still larger than needed to serve the student population, we have reduced our annual culinary occupational expense beginning in 2009 by approximately $3 million.

Another non-comparable item was a $2 million non-cash impairment charge related to the write-off of trade names in the health SBU, related to removing the name of Western Schools of Health and Business Careers, and moving those to Stanford Brown. And finally, a $3.2 million one-time income tax benefit, related to the sale of the IADT Toronto school.

Now let me give you some more details around the third quarter results. Overall revenue was $405.6 million in the third quarter, down 5% from the third quarter last year. Excluding our schools within the transitional schools segment, which are currently being taught out, total revenues decreased 1%, primarily related to schools most heavily impacted by student lending markets. We reported third quarter earnings per share at breakeven in the third quarter, including the $0.09 of net non-comparable items recognized in the quarter.

For the university segment on a reported basis, third quarter 2008 revenue was $172.9 million and operating income was $27.3 million. As we mentioned in our first quarter call this year, the 2008 alignment of the AAU online, and the AIU on ground curriculum calendars resulted in a shift of earnings day for online from the first quarter to the third quarter, resulting in approximately $6 million of additional revenue and operating income in this year's third quarter. The financial results I'll be discussing from here forward for university and for AIU exclude the impact of this calendar shift on a comparable basis.

Revenue for the university for the quarter was $166.9 million, flat with last year's third quarter. Operating income was approximately $21.3 million, or growth of 26% versus the third quarter of 2007. Operating margin was 12.8% in the quarter, up 260 basis points from last year's third quarter, driven primarily by reductions in admissions expense.

Revenue per AIU was down 4% from the third quarter of last year, due to declines in revenue per student related to ongoing degree mix shifts, with population that was flat year-over-year. AAU operates profit in the year was approximately $10.2 million, up 41% from last year's third quarter. Total operating expenses were 8% lower, again, driven by lower admissions costs.

For CTU, revenue was up 6% from the third quarter in 2007, as a 12% population growth more than offset a decline in revenue per student related to changes in degree mix. CTU operating profit was $11.6 million in the third quarter, up 9% versus last year with an increase in operating margins from lower admissions expense and fixed-cost leverage. For culinary, third quarter 2008 revenue was $86 million, down 13% from third quarter 2007 revenue of $98.5 million, reflecting a 15% reduction in the population.

As noted in our press release, the 5% culinary starts that were reported in the quarter reflect a timing shift of our traditional fall starts. In 2007, the fall start was in the fourth quarter, and in 2008, the fall start was in the third quarter. This results in approximately 1100 additional starts in September. Excluding this timing impact, starts would have been down 19% and of course this impact will affect the comparability of our fourth quarter starts.

Culinary operating loss for the quarter was $10.4 million, including $14.5 million of real estate charges related to the CCA campus. Also impacting culinary operating income was a $4 million increase in our legal reserves within this quarter. Excluding the legal reserve increase, and the real estate charges, culinary operating income would have been $8.1 million, down from $15.6 million in the third quarter of last year.

For the health SBU, third quarter revenue was $58.1 million, up 12% from third quarter 2007 revenue of $51.9 million, driven by an 18% increase in both population and starts. Operating income was $3.3 million in the quarter, which includes the $2 million non-cash trade name impairment charge mentioned earlier, as well as a $1.3 million benefit from the settlement of an outstanding legal matter. Excluding these two items, operating income would be $4 million, up 55% from $2.6 million in third quarter 2007. Strong revenue growth drove fixed-cost leverage, resulting in a 190 basis point increase in operating margins to 6.9% after adjusting for the two items just mentioned. The Gibbs Vienna and the Gibbs Melville transition to help education continue to progress well. These schools combined experienced break even results in the third quarter, despite teaching of non-health programs.

Art and design revenue was $61.9 million in the third quarter, down 10% from third quarter 2007 revenue of $68.4 million. Population was down 5%, and starts were down 12% in the quarter, reflecting the impact of reduced financing options for students. Operating income was $3.8 million in the quarter, down from $8.3 million in the third quarter of 2007 as lower revenue more than offset a 4% reduction in operating expenses year-over-year.

Finally, for international, third quarter revenues were $12.6 million, up 16% from last year's third quarter of $10.9 million. Included in international revenue in the quarter, was the foreign currency benefit related to the dollar versus prior year of approximately $400,000. Starts were up 21%, contributing to a 13% increase in population versus third quarter 2007.

The international SBU operating loss was $5.2 million in the third quarter, or $2.1 million greater than the $3.1 million operating loss last year. Remember, the international business operates a more traditional academic calendar without summer sessions, thus has seasonally low summer student population in the third quarter. The year-over-year loss is the result of the seasonally low revenue against a higher fixed-cost base. That higher fixed-cost base supports the higher population in the schools, as well as $800,000 of unfavorable foreign currency impact.

Let me update you on student lending activities. We spent a great deal of time in the past quarters discussing our approach to student lending, including our focus on providing financing through our balance sheet to those students with the highest potential for successful outcomes. The third quarter we remain consistent with our underwriting criteria, and our processing efforts and experienced no disruption in providing our financing alternatives to student.

With programs with lower relative funding gaps, health and university, we're very pleased with our financing efforts, and have not experienced a material impact in population or starts due to changes in the student lending market. Additionally, our international segment has no impact from lending issues, as experienced in the domestic US markets. For the segments with higher overall funding gaps and with lending needs in a more concentrated group of students, primarily culinary and art and design segments, we are more measured in our approach.

The year-over-year changes in population continue to be within our plan levels that we estimated at the beginning of the year albeit at the lower end of the range. As Gary spoke to you earlier, we have invested additional resources to support students using our financing programs. These support resources provide counseling and other help to students to ensure the student is meeting the obligations of in-school payments, is continuing to meet satisfactory academic progress requirements, and can deal with any other challenges that might impair their ability to complete their program.

In the culinary segment with the addition of the student success manager, we have directly addressed the particular needs of this group of students. Utilizing these campus-based resources as well as the active monitoring by our student finance organization, we're confident that our process is accomplishing the objective. We will continue to monitor our student financing program over time, making changes where we feel appropriate.

As of September 30, 2008, we held approximately $16 million of gross outstanding balances under student financing agreements on our balance sheet. This includes new originations since April 1, as well as carry-over balances from programs we had in place before the contraction in the student loan markets and the exit of [Salinae] from [repurchased] products. And this excludes balances on our previous Stillwater arrangements. Our expectations for balances outstanding as of December 31, 2008, are in the range of $25 million to $35 million.

Despite the reduced revenue due to the student loan market contraction, and one-time costs we have experienced this year for organizational reductions and removal of excess real estate, our operating cash flow remains very strong. Through the first nine months of the year, operating cash flow was 158.9 million. Capital expenditures for the nine months ending September 30 were $39.9 million or 3.1% of revenue, as compared to $41.1 million last year and 3.4% of revenue for the comparable nine-month period.

Fee expenditures include capital expenditures related to our five start-up campuses open in the last 12 months or to be opened in early 2009. Free cash flow defined as cash flow from operations less capital expenditures was $119.1 million for the year through September, very strong relative to our approximately 90 million average common shares outstanding. DSO remained at 14 days.

The Company did not purchase any of its shares in the quarter at the direction of the Board of Directors consistent with our disclosure in last quarter's call. Cash and investments were $509 million as of September 30, an increase of $78.4 million since the same time one year ago. Our investment quality remains high. During the quarter, we moved investments in to US treasury and similar incidents, and our holdings of auction-rate securities are less than 3% of our total cash investments.

Before we turn the call over to your questions, let me quickly update you on our activities in teach out. As a reminder, we expect to complete teach outs at three additional schools, currently classified within our transitional segment, IAD Pittsburgh, Gibbs -- and Brooks College Long Beach. These schools will move in to discontinued operations in 2008 at which time we expect to record non-cash pretax charges of approximately 6$.8 million, representing the remaining real estate obligation leases of these three schools.

In addition, we have updated our estimates for the charges related to the remaining teach outs which we expect to be complete by the fourth quarter of 2009. In the March investor day presentations, we provided you with an estimate of $55 million to $75 million of related real estate charges to be recognized in 2009, based on our then estimates of discount rates and sublease income potential. As part of our 2009 business planning, we have refreshed both of these assumptions in consultation with outside real estate investors. Given current and anticipated real estate market conditions, we believe sublease rates will be lower than our previous estimate.

We also believe the discount rate that we will use in 2009 will be lower than what we previously anticipated due to the lower registration environment. These changes would result in a revised estimate of $90 million to $100 million of real estate-related charges to be recognized in 2009 for the completion of the teach outs. Let me remind you, these are non-cash charges to 2009 earnings, representing the recording of remaining obligations on our balance sheet, which are recognized on the closure of the school.

However, the annual cash obligation, net of any sublease income, will be paid out over a very extended period, as we continue to fund our obligation under leases to the remaining lease term; the longest of which runs through 2023. Again, this non-cash charge is subject to a high degree of estimation until the actual exit date. Additionally, as you would expect, we remain opportunistic in pursuing the exit of real estate to the extent that attractive deals become available us to earlier than the completion day of a teach out, the timing and magnitude of these charges will very. With that, let me open up the call to your questions.

(OPERATOR INSTRUCTIONS). Your first question is from the line of Bob Craig with Stifel Nicolaus. Please proceed.

Good morning, guys.

Good morning, Bob.

Couple of questions for you, first off regarding the peer issues. Where are you versus where you would like to be in terms of rep efficiency. And maybe if you can give us a before and after photo of that productivity since the implementation of the Peer process.

Sure, Bob. This is Gary. I will tell you that I -- we work diligently through the Peer issues. We believe those issues are behind us now.

We're very pleased with what we're doing with the headcount we have got. If you recall there was a question last quarter about whether -- because we had reduced headcount, we thought that might be the leading cause of the diminishment in our starts. The fact of the matter is from last year, we're down about 19% in terms of admissions representatives. Yet, you see the growth that we delivered in the university business on our -- on starts, and so we believe peer is behind us. We think we're getting good efficiency out of the reps that we had which is again, what we had modeled in the program.

Okay. University segment obviously helped in the quarter by the calendar shift. But I take it, and you mentioned in on the last call, that was there was some lingering impact from peer. I know you won't provide specific guidance, but could you give some indication directionally of what you'd expect in the fourth quarter from that division in terms of starts?

Sure. From a macro point of view, we think we'll see continued very healthy starts at CTU. We believe that while we have got the issues behind us, we'll see more variability at AIU,

Okay. But no percentage, I take it?

No. No, Bob.

Okay. The timing of the remaining teach outs in 2009, some of those have happened a little sooner than we expected. Would you anticipate those would be front loaded or fairly even throughout the year?

I would expected they would be more back loaded than front loaded. We're doing a very good job of teaching out the classes and reducing the population. To the extent we have a small population left in the school, we're looking for other arrangements with other schools to accelerate the teach out. Again, for the most part, because of the announcement of the teach out was at the beginning of this year, and given the curriculum length and traditionally two years in curriculum, most of the teach outs would be toward the end of the year. We did talk at one time that we -- for the AIU LA campus, we thought that teach out may go through 2010, and we're working hard to see if we can have that teach out complete by the end of 2009.

Last question. Can you tell us where you stand or the Board stands in terms of share repo. And if that's not going to be refired up, how would you return cash to your owners?

Bob, Gary again. We continue to the share repurchase authorization in place. We initial took a conservative view of conserving cash as we've come through some of the student loan financing issues. I expect that we'll have continued conversation with the Board around how to deal with the 20% trigger issue, but at this point we don't have a resolution of that.

Okay. Great. Thanks, guys.

Your next question comes from the line of Trace Urdan with Signal Hill. Please proceed.

Hi, guys. Sorry. I'm struck, really, by the different approach that you all seem to be taking with respect to student lending at the margin than some of the peer companies. I'm wondering if you talk about it -- maybe even specifically with respect to the art and design students.

How do you -- what is the process of identifying a student that you think is not going to be successful in the program? Because the prepared remarks imply that you were looking at the likelihood of their being able to prove academic success and employment success. I'm wondering if that is the case or if it really is about credit scores. Can you speak to that a little bit?

Sure. I think it is consistent with the messaging we have given in the last three quarters. As we look at the lending environment, remember the culinary and art design have some very large gaps and loan balances on a relative basis for the students. Based on knowing that Sallie Mae was anticipating a 44% discount rate -- they anticipate the defaults were going to be at 44%. And knowing that underneath Sallie Mae's level that we has a company had historically provided financing to -- that those students defaulting at someplace 50% or more from an educational standpoint, although they were graduating and getting placed, they weren't living up to their commitments of the loan.

We thought it was prudent and in the best interest of the Company and the students that we would take a more stringent approach to some lending. That said, what we have lent to is -- not students below the previous recourse level of Sallie Mae. We have lent to students in the highest part of the recourse level, and we have lent to every student available that Sallie Mae has left above the recourse level. We were probably to call it overindexed to some subprime students coming into this year.

We have made the decisions to move away from those students that would have a high likelihood of default. The students we now have more better FICO scores than even before. We hope they graduate and are placed even better and we hope their success will be very high in paying back their loans. That said, we had a huge improvement in our default rates in last year, down to 8.5%. We're seeing improvement in our portfolio.

This is Gary, I would say one additional thing. What we also did -- beginning in our culinary business, was put those resources in place that were necessary to ensure students that we might have expected to default or might have expected to not complete the program to ensure that we gave them the support that they needed. They have continued to improve.

We're building a database of what that looks like. As we continue to get comfortable with that, students to who might we not have given as much support in the past, will move through the program and are making their in-school payments. We will open up to more students, but we needed the assurance that was going to be the case. We look at that and the track record we have got right now going in our culinary business, we think we can reapply that model in our art and design business.

Okay. I'm still struck by the -- the culinary intuitively makes a lot of sense because we've all known for quite some time that the starting salary levels for students who graduate in the segment are very low and that there is this cost equation that doesn't work out on paper the way it does in some of the other segments. I'm more struck by what seems to be the of pullback in the art and design segment. I'm wondering if it doesn't beg the question about pricing in that -- in those program areas and whether there's not something else that needs to be examined in those program offerings, given that you guys are retreating so significantly from what had been the enrollment base before?

I think -- if you look at what we did going in to the year, we had a lot of momentum on culinary that we had in place moving from a 15-month program to a 21-month program. For art and design, that's the complexity of the business. It is a series of international academy design-technology schools. It is also schools from our previous college division, and it's an online component. Within those different business units combined -- we have not got as much traction as we did with our culinary business. I think we're hoping that we'll see the same type of traction now as we continue to work the programs there.

From a pricing standpoint, we have looked at grants and scholarships, our own scholarship money from our alumni. We look at different ways and we look at the program in terms of how it maximizes Title 4 funding. As you look at the three different businesses, if you want to call it that across the SBU, more work to do to get consistency. We have taken cost out of the business, which is good, probably not as quickly as we need to -- we're still working on that. Especially in the lending environment, both in culinary and art and design, as Gary said, when we see we have a chance to retain students better and increase success, we lower our FICO scores, we will allow less in-school payment and more loan deferral, we'll allow bigger loan balances as long as it's paired up with a great formula to help student success. Culinary has delivered on that. Art and design is working their plans and we're looking forward to them as a company here, linking that up and helping the funding issue more with programs that combine FICA scores with student success.

Okay. Just one more follow-up, and I'll let you move on.

Sure.

You make the comment about making that change when you see that potential for success. Are you talking institutionally there or is there some measure that you can see student by student as you're talking to those prospects and extending credit to them?

This is Gary. I think the answer is both. One of the things we want to see is our ability to remain students, our ability to eventually move them through the program -- and then should their outcomes at the other end where we can get them to get jobs and continue to pay. Frankly, we haven't always been that diligent across the Company. We will do that. We also look at each student on a case-by-case basis, and where we think there is merit, we'll fund the student.

I think on the enrollment process, I think as most -- a lot more people in the industry and private loan industry have asked for coborrowers, and we're required coborrowers in certain situations. It's different conversation with the student. The student that is willing to ask the spouse, the parent, someone else, the coborrower on the loan -- they are obviously very serious about their education. Our program does require coborrower denials. We do have a gate in for coborrowers. I think that process brings in higher quality students with better possibility of success.

Okay. I'll buy that. Thank you.

Thanks, Trace.

Your next question comes from the line of Brandon Dobell with William Blair and Company. Please proceed.

Thanks guys. Question first for Gary. As you look back, let's call it the last two or three quarters, how satisfied or dissatisfied with you are key employee retention? I know the headquarters management team has changed a lot. But as you look out across the different geographic locations, the schools, are you satisfied with how the retention has been? Are you satisfied with how -- with the compensation scheme -- just more of an HR perspective on some of those operations would be helpful. Thanks.

Sure, Brandon. Thanks for the question. Frankly, I'm pleased with the results we have had. Year-to-date, we're down 17% in volunteer turnover in the Company. That's across the board. I feel terrific about that.

That said, I still think our turnover rates are too high. As I told you and folks more than a year ago, when I came in I was alarmed by what I saw across each of the functions and each of the businesses. We have worked very hard and built in to the compensation programs at the school level and all the way up to my level. We have tied compensation to our ability to retain our employees, so we're down 17% through the first nine months of the quarter. That's good, but I still think we're too high if as a macro -- from a macro point of view.

Okay. Then switching gears over to the enrollment advisor -- a headcount perspective, roughly -- nice declines year on yea. And it sounds like good leverage on those people from a productivity perspective. At what point -- or how do you guys think about starting to grow that headcount number? At what level of starts or starts plus persistence, do you think we should expect the headcount, the enrollment accounts and peer qualifiers to stabilize or start to turn upwards? Do you think you're confident enough in the start the trajectory that you need to start bolstering that workforce a little bit?

From a headcount reduction standpoint, we're just about done from the large headcount reductions you have seen. Because that was all driven by the peer qualifier method -- the two-step method and by technology. That's in place across the online businesses. We probably have more work to done do on the on-ground businesses and define some productivity.

Additionally with the part-time workforce we have in the peer model, we'll continue -- as they get more experience in the model because remember, the model has just been rolled out in the last year and our turnover is drawn dramatically. We have more and more student representatives on hand. I think the productivity now comes less from headcount reduction than it does from conversion rates, it does from show rate, and from stitch-ins, because we'll have more experienced people, more dedicated people, and strong people on the second half of the peer model.

I don't think we'll see dramatic savings going forward through next year as we have seen this year. From a variable standpoint, it would be our goal to gain operating leverage that if starts increase, we would not increase the same rep level at the same rate. But the rep count level would grow more slowly than the overall start level, and you would continue to get some efficiencies.

Okay. Final question, as you think about the process of matriculating students from associates -- to bachelor's across your organization and within the university in particular. Any updated stats or commentary you can give us in terms of how those matriculation percentages are trending? Are you giving more discounts to students who make that transition from associates to bachelor's to keep them going -- just more of your strategic positioning around that opportunity would be great. Thanks.

Sure, Brandon. I think we mentioned previously that in AIU which has more experience in this two-plus-two program, their historic experience was about 50% matriculation from the associate degree into the bachelor's degree program. That remains about consistent at this point in time as we don't do anything significant from a pricing point of view to encourage that. We think that -- the data would suggest that people believe our program is strong, that the online experience in particular is a strong one. They move through to the bachelor's degree program.

At CTU, we're seeing a matriculation ran about 10 points higher than that, so approaching 60%. Again, we don't do anything significant to move them through, but that's our experience today. We feel good about where we are. One of the things that we do make sure that we do is in both cases as students are moving them through and finishing up their associate degree program, we certainly increase the volume to them to make sure that they understand that a bachelor's degree is available to them at both institutions. That's all we have done at this point in time.

Okay. Thanks, guys. Appreciate it.

Thank you.

Your next question comes from the line of Corey Greendale of First Analysis. Please proceed.

Good morning. Good morning.

On the culinary segment. First of all, how confident are you or to what degree do you think the decrease in starts is entirely due to the funding issue versus students becoming more sensitive to the value proposition in this environment.

I would say we would attribute almost all of it to the lending environment and the tightening we've had to do within the program. Interest in the program remains strong. Lead volume is much lower than the decline in starts. We have seen a decrease in lead volume related to primarily the funding level, but the starts with different. That would indicate the interest is there, but it's tougher for gating for the student to get through student financing issues.

I think the culinary program continues to be of interest. We had the highest placement rate in the Company in the culinary business. We know that the students are doing well. We had the lowest cohort default rate in the Company in the culinary segment. Students who graduate and are placed, do a very good job of living up to their obligations so the outcome is good based on culinary. It is driven more along the student financing on the upfront gating.

When you roll out the 21 week -- excuse me -- 21-month program, is the expectation that basically all of the students are going to go in to those longer programs or some smaller percentage or do you have a guess at this point?

We'll continue to keep the current program in place, the 15-month program versus the 21-month program. We're doing that because there are some students who do have a desire to get in and have the ability to get in and move through more quickly. The majority of the students we have seen at least at this point, do tend to take longer, so we'll be encouraging them to move to the 21-month program, but we'll continue to offer both.

Okay. If I could ask Mike one question about the profitability in culinary. As the 21-month program is rolled out, presumably that affects the revenue per student in any given quarter. It's not transparently obvious -- you're making some efforts to cut costs there. How profitable that business can be as that revenue per student in any given quarter comes down. Can you speak to the targets that you mentioned at the investor day for that segment, whether you are still confident in that and whether that business will still be profitable in '09 or whether it will take to 2010 to get that culinary segment profitable?

Sure. We have given the guidelines for 2010. I think we're still confident in the culinary guidelines we gave at the lower end of that range, based on the student loan contraction that we experienced. Through 2009, you will have -- call it the teach out of the 15-month program and the rolling in of the 21-month program which will drop the RPS. That will continue to put pressure on culinary through next year.

We anniversary out on April 1, the Sallie Mae recourse program. Once we get behind that, from a start stand point, we would hope in the second half of the year, you will see better trend versus the previous, because we'll get rid of the previous history. We don't give specific guidance for '09. I can't do that. I think 2009 will be a challenging year for culinary margin wise and we'll continue to take cost out. We have taken a lot of cost out of the business. We've taken a lot of headcount out of the business on a variable business.

Structurally, we're starting to take the real estate out of the business, including CCA. We have startups in place from Dallas, from Boston that are doing well, and Kitchen Academy. We're still confident in think business -- we also from an comparability standpoint -- we'll have those startups that will go through their ramp-up period and they typically will break even within 15 months. That should also help boost us as we go forward.

Okay. One last quick one, were there any unusual charges that ran through the corporate cost segment at that $16.9 million a good run rate to use?

There's nothing unusual -- the two influences are -- in the previously year at this point in time, the Company was over 40% off of its bonus target. This year as we talked about, we are on our plan. From a company standpoint, we have a higher bonus level.

Second is, we do charge out from the corporate level to the businesses within the segment allocation -- part of the corporate allocation. As revenues have fallen in some of those business units, corporate has more costs so it's an absorption issue versus and a bonus true-up issue versus last year. Last year's third quarter, we did true-up a bonus. As we discussed a year ago, we did reverse accruals at this time for the bonus plan in '07.

Okay. Thank you.

Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Thanks, so much. Just wanted to go back to your internal lending program. Given everything that you know now, do you expect that program to increase next year, stay the same, decrease? I'm just wondering what your current thoughts are? Thanks.

Sure. Current thoughts are it's going to increase. The private lending market as tightened up as everyone knows. The tightening up of students with very high FICO scores, it's our intention to lend those to those students off of our balance sheet. We would anticipate using our balance sheet for those.

Additionally, these balances will grow. We only had nine months in the program this year, and remember, that we did package up as many students as possible by April 1st under the former programs. Even your second quarter was dampened in terms of volume. Currently we have about $16 million. We'll have $25 million to $35 by the end of the year. I would think that the pace will increase as the students continue to come on the program. Also we are loosening up criteria as we have done in culinary, when we paired up with another program such as the student success manager. I think going in to next year, we will loosen up as we get more and more visibility on the success profile -- continue to loosen up our FICO scores and our underwriting to help students out.

In terms of the 44% discount rate, that is something we should be using going forward as well?

The 40 -- until further notice, the 44% bad debt is the former discount rate we used for Sallie Mae. Again, we don't have underwriting data for Sallie Mae loans -- performed in the past. Until we can get good good solid verifiable data that we're confident in and our auditors are confident in, we're going to stick with the 44%. I don't think we'll have more visibility until at least a year into the program, so I would an anticipate that it that rate would continue through next year. We'll -- as soon as we get better verifiable data on the patterns of payment, we'll be able to update that. We hope it is conservative because of the success factors and the high FICO scores and the the better students we're using, but we'll stay with 44% through next year.

Okay. That's helpful. Just in terms of the current environment, I know the starts data you gave us was through the end of September. The enrollment data was from the end of October. A lot has changed over the past month or so. Are you seeing any change, in terms of the mentality of your students, based on what has been happening over in the past few weeks in either their applying, enrolling, showing up, et cetera?

There's nothing concrete I can point to. We continue to see demand for our programs. Without sharing numbers, as I said in my prepared remarks, we move through our own internal issues. We have seen consecutively strongest starts in CTU history. We're seeing the demand, we're seeing the execution on our part. There's variability across the businesses as I use as an example, I'm seeing continued demand and our job is to execute against that demand.

I think also as we looked to the third quarter, across our business show rate was up and attrition rate was down. The value of education is and the softness of the economy show rate is higher after students are being packaged. Attrition is down. They want their education. Our october starts were not inconsistent with our expectations. We did not see in October anything that would suggest concern to us just based on one month.

Okay. Great. Thanks so much.

Thank you.

Your next question comes from the line of Amy Junker with Robert W. Baird. Please proceed.

Good morning. Thanks. I just have a couple of quick ones. First, Mike, can you just talk a little bit about the operating margins within AIU on the campuses? I'm wondering if it's possible to see that eventually turn positive at some point? If there's something structural that would prevent that from happening?

I think -- you have to look at it campus by campus. I think we had conversation around that last quarter. We do have a London campus. Given where the pound is and the affordability for the student against the US dollar and real estate issues in London that are historical for us -- difficult to see us making significant progress against the operating losses we have been experiencing. From other campuses, we did look at LA. We are teaching that one out. The remaining campuses, we're pleased with our performance. We do have some capacity issues in certain of our campuses (inaudible) standpoint that we're dealing with.

In the quarter, we had a little bit of a margin compression on the ground business, because our Houston campus was affected obviously by Hurricane Ike. We had somewhere between $0.25 million and $0.50 million profitability compression there on that business. Our plans for '09 are currently being developed. As we've now aligned the calendars, we have a better chance of success on those on-ground campuses. We're confident management is taking cost out in line with the population. The re-branding effort and the higher awareness effort gives us some confidence going in to '09 that those businesses will do better. It'a a matter of operating leverage on those campuses that we need to get the population back versus anymore cost efforts.

Just clarification on the LA campus, that's not in the transition segment? That's actually in AIU or the university segment?

no. that is transitional -- the year we made the decision to teach-out. it was the highest underperforming campus and the largest loss that we had. I think LA was accounted for about 50% of the ground loss in 2007 of our AIU campuses.

Okay. That's helpful. One other, the $90 million to $100 million charges you expect in '09. Can you give us a rough thought on how that will break down between quarters? It is going to mirror when the teach outs are going to happen? It should be more back-end loaded?

Yes. It's 100% aligned with the teach out. On the day of closure, you take the charge. I believe -- what we looking towards like give -- we were able to accelerate that and we took that in '08. From a calendar standpoint, the majority of those closures will be back half loaded. Hard to say right now because we're year out whether the student population drops enough between third quarter and fourth quarter. But most of those -- basement population we have will be back-half loaded.

Great. Thank you.

Your next question comes from the line of gar Gary Bisbee with Barclays Capital. Please proceed.

Hi, guys, good morning. Sorry to continue to pound on the culinary, but, had a question there. I'm wondering, would your willingness to lend to some these students potentially increase if the gap is such smaller under -- both with the recent loan limit increase and the new 21-month program? Is part of the issue just that the gap is so large and is relative to the total tuition costs that you are taking a lot more risk? And if it were much smaller you would be willing to take that risk?

That is a consideration, and as the funding limits have increased, it dropped the number the student needs from us. We capped off our loan balances at about $9,000 per year for the student to make sure they could afford the payments. To the extent that they are getting more Stafford loans or the additional Pell Grant that cuts their gap and it gives us a better economic model to lend to them. From a price standpoint, again, we look at students, we look scholarships, and we look at grant programs for them. To the extend that we can use that more to help certain students with FICO scores that are more challenged, we do that right now and we'll continue to expand that as we align the student for graduation and placement.

Gary, one additional thought. If you recall, we began the discussion of the move to a 21-month program before we realized even the full potential of -- full amount of the issue we had with regard to student lending. As we looked at where we were from a competitive point of view, we weren't satisfied that we had done our best with our more concentrated program by the student in terms of allowing them to access more funding. Therefore, reducing the out of school payment gap -- out of school payments because of the large gap. We began that move. Certainly the changes we have seen in student lending have accelerated what we are doing to make sure we were doing right by them. You're correct, with some of the changes we have seen with some of the increased loan limits and with he reduction in gap, we would feel more comfortable.

So is there -- given the loophole you're seeing -- obviously you have a sense as to what the gap will drop to when you go to the 21-month program. What is your confidence level -- I know you are going to have to work off and enjoy your 15-month students. But that you can have a reasonably positive ramp in enrollment in the 21-month program. Or is it early enough that it's just way too hard to tell at this point?

It's pretty early at this point in time. We'll probably have more we can talk about sometime into the second quarter of next year.

Okay.

21-month program goes live in the first quarter, so we just don't have the data at this point.

Okay You mentioned up to a 10% price increase somewhere at university. Did you say that was at CTU or can you clarify what that was and when that goes in to effect.

Sure, this is Gary again. It is at both universities, AIU and CTU. It varies -- the range varies. It's an associate's degree and bachelor's degree program. Again, what we have said is we don't take a one-size fits all approach to pricing. We have looked at where we think there's opportunity to do that at a local level. Programatically, and so I said ranges up to 10% because that's the top end of where we'll be.

The price increases are both effective across those two institutions on the first of January.

Is that likely to actually turn the revenue per student decline -- which actually moderated quite a bit this quarter. Is that likely to turn positive next year? Or do you still think the mix shift is going to keep that from really growing?

I think the mix shift is somewhat stabilized. If you look at the quarterly comparisons year-over-year, we're seeing now quarter-to-quarter, sequentially, first, second, third, quarter we're seeing a stabilization of the population. We're expecting the population -- associates versus bachelors to stabilize going in to next year. I think we'll get some benefit from CTU --, the two plus two students move up to bachelor helping the RPS next year. We'll get the price increases that should help the RPS going in to next year.

Is there any way to give us a sense of what the blended price could look like for all of university.

Not at this point. We can't tell right now.

Okay. One last one, I recent lily saw a couple of e-mails -- part of the marketing campaign for EIU that was talking about slower-paced program. Can you give us a sense if that has had any real success, relative to the more accelerated higher-cost program? Or is that still right now in its infancy? Thanks a lot.

It's still in its infancy. We -- again, stopping back, one of the things we noted is that all of our programs were accelerated and that frankly doesn't work for a number of our students. We have looked at what we do to better appeal to people who have interest in our programs and have found out that the demand in the student program is significantly faster and higher than that of other programs, opt out and may choose to go someplace else. We're looking at how to mitigate that in our programs. It's not right for everybody.

Thanks for all of the color.

No data at this point in time.

Your next question comes from the line of Sara Gubins with Merrill Lynch. Please proceed.

Thank you. Just following up on the price increases. Are you planning on any other price increases in the other divisions?

As we have spoke about in the past calls, pricing is an institution by institution decision. From a university standpoint, we have talked about what we have done there. Our health business continues to be in high demand. The outcomes are very good. The starts are very strong.

The 90/10 issues are limited versus some of the other health institutions throughout. Health has the opportunity obviously to make sure it has appropriate pricing. From a culinary and art and design standpoint with the gaps we are experiencing with declining starts, we would be very cautious about pricing in this environment. In international businesses -- take annual price increases -- again, traditional calender. As the new students arrive in the September term that we have traditional pricing within the international business.

About how much is it in international, typically?

We haven't disclosed that.

Okay. In terms of the availability of third-party private loans, just can you give any update on that. And whether or not you have seen any changes in either the last couple of months or the last few weeks?

We have seen no changes to the third quarter for availability -- the lender list we had remained consistent. We have seen no material changes in underwriting standards that we can discern and no announcements from the lenders, including the last several weeks. I think as every other institution around the country got -- there was a note from Sallie Mae to its institutions, to students just indicating they are reviewing their criteria. To the extent that Sallie Mae within the strong FICO bands that they are tightening up, we stand by with our balance sheet and our programs to lend to those students because they are very strong FICO score students.

Great. Last question. In terms of advertising costs, do you expect that you'll be able to get some declines in those on a year-over-year basis going forward?

Yes. We have just begin to see moderation in advertising. The vast majority of our marketing effort is online, so we differ to some degree from folks throughout who are benefiting from softness in the television media space. We are seeing moderation, both in the online piece and in our TV advertising space, particularly since the election is over. Hopefully we'll see that continue going forward.

Great. Thanks very much.

Your next question comes from the line of Kevin Doherty with Banc of America Securities. Please proceed.

Thanks. Just to follow up on that last question -- just given the pricing, would the economics look more favorable that you would actually shift some dollars back to the TV market? Or is your strategy just completely shifted away from the mix you used to have in the past?

We have always had a balance of both online and television media. We disproportionately have been developed or overdeveloped in the online space. That's just been a function of the way the Company has done things historically. We think there are opportunities to begin the shift that mix, but there's work to be done to make that mix shift happen. We are engaged in that work at this point in time, but we don't see a significant shift away from the online media at this point in time or in the near term. We're continuing to look at whether that's the best way for us to support our businesses going forward.

Okay. Just on a bright spot of your core operations, can you talk about the potential in the health education segment in this environment? Is this really an area where start growth can accelerate much further? Is there really anything keeping a lid on that growth rate. Maybe if you could just talk about how much capacity you picked up when you did convert some of the schools over?

Sure. From a macro point of view, I will tell you that we're obviously very pleased with what we see going on in health. We believe there is continued or will be more upside in health. I think our issue right now going forward -- we're not at capacity. But in certain of our campuses, we are approaching capacity, so we do have in some places waiting lists. As Mike mentioned, we do have adjust the price just to moderate that. We do have waiting lists in some places. Our challenge right now is to continue to invest in the business, to expand geographic expansion -- or to put more capacity in place. We're looking at in both of those opportunities as we go forward.

to your question about additional capacity, the two schools -- put that on a base of just over 20 schools in the health business. that will give you the capacity that had been added by Melville and Vienna. Obviously our start-up plans continue. We do have start-up plans in place for health that will help capacity next year.

Thanks, guys.

Thank you, Kevin.

Your next question comes from the line of Mark Marostica with Career Education. Please proceed.

It's with Piper Jaffray. Question for you on AIU. You mentioned, Gary, the future variability in AIU. I think you're speaking of online and fourth quarter, Can you give us a sense of what they may be attributed to? Is it media issue and reputation or is there something else we should be noting there?

I'm glad you clarified that, Mark. I was about to welcome you to the Company. We have just a number of things moving around. We talked about the days going from one to the other. We are still working through locally what had been reputational issues. I'm just not as confident in the AIU starts going forward as I am at this point from a consistency point of view as I am in CTU. We're seeing variability in demand and issues that we have to overcome on a case-by -case basis. That's why I say that -- I just want to make sure that I don't -- we don't build expectations that we can't live up to as we go forward.

Related to the art and design and culinary segments. You mentioned obviously your more stringent with regards to your FICO acceptance standards. When do you anniversary those more stringent standards?

The recourse program with in Sallie Mae ended April 1 of the this year, so next year we anniversary losing Sallie Mae and replacing it with our our balance sheet program.

Okay. Concerning private loans, where do you it is right now in terms of percentage of tuition revenue from private loans, in addition to the $25 million to $35 million you contemplate happening on the balance sheet by the end of the year.

Sure. In the -- through the nine months, our total domestic revenue on a cash basis from private loans was approximately 12%, down from 18% this time last year through nine months.

Okay. Do you expect that next year to be about the same?

I would expect that to decline because more of our balance sheet will be used for the private loans, plus in the nine months, you did have the one quarter of Sallie Mae in the first quarter this year which contributes to that 12% year-to-date. I think that number will track down to between 10% and 11% over time.

Two last questions here. You may have mentioned it, Mike, but I didn't catch it. Bad debt as a percentage of revenue in the quarter?

Just over 3%, I think. I don't have it -- it's 2.8% this year versus 2.6% last year.

One last question. As you look out to '09 quarterlies, are there any start periods out of alignment in '09 versus '08? Like you experienced with culinary, Q3 to Q4?

I don't know right now. We are doing our 2009 business plan. Give me the opportunity. we'll do the plan, and as we get into the first quarter call as we help people model the year, and as john springer helps you with your models from that standpoint, we'll try to anticipate that better and give out something in the first quarter guidance. That would be helpful for you.

Great. Thank you.

Thank you.

At this time, there are no additional questions. I would now like to turn the call back over to Gary McCullough for closing remarks.

Once again I want to thank you for your time and attention, and your great questions for our third quarter earnings call of 2008. We're working hard to position our Company to more effectively serve the needs of our current and prospective students and graduates, and to position the Company for long-term sustainable growth.

I'm very proud of what we have done so far this year, but we have got a lot of work to do. We see that and we'll remain on task. I'm as confident as I have ever been of our ability to continue to execute the plan and deliver the 2010 milestones that we previously shared with you. We recognize there are a number of moving parts which sometimes make it difficult to understand our results and accurately model what is coming. If you would like to discuss our results in more detail, please call John Springer in Investment Relations. His number is 847-585-3899. He'll stand by to help you.

We'll stand by to take any additional questions to help model what is coming and to clarify anything that wasn't clear as we move through this call. Thanks again for taking the time to listen and we appreciate your interest and your support of our company.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you, and have a good day.