Perdoceo Education Corp (PRDO) 2012 Q2 法說會逐字稿

Welcome to the Career Education Corporation second quarter 2012 earnings conference call. My name is Christine and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, today's conference is being recorded.

I will now turn the call over to Mike Graham, Executive Vice President and Chief Financial Officer. Sir you may begin.

Thank you, Christine. Good morning, everyone.

And thank you for joining us on our second quarter 2012 earnings call. Also with me on the call this morning is Steve Lesnik, our President and Chief Executive Officer. Following the remarks made by Steve and I, the call will be open for analyst and investor questions. This conference is being webcast live within our Investor Relations section of our website at careered.com. A replay of this call will also be available on our site. If we don't get to your question during the call, please call our Investor Relations department at 847-585-3899.

As part of recently announced changes in leadership, John Springer, formally Vice President of Strategy and Investor Relations, has joined our senior leadership team at AIU, American InterContinental University. He serves as Vice President of finance, strategy, and university operations for AIU, reporting to the university President, Dr. George Miller. I'm pleased to announce that Matthew Tschanz, our Director of Corporate Finance, has worked with John and I in Investor Relations over the past year, who will now partner directly with me in leading our IR efforts.

Before I turn the call over to Steve, let me remind you that yesterday's press release and remarks made today by Steve and I may include forward-looking statements, as defined in section 21-E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual results, our actual future results, performance, and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties include, but are not limited to, those factors identified in our annual report on Form 10-K for the year ended December 31, 2011, and subsequent filings with the Securities and Exchange Commission. Except as expressly required by securities laws, we undertake no obligation to update those risk factors, or to publicly announce the results of any of these forward-looking statements to reflect future events, developments, or changed circumstances, or for any other reason.

With that, now let me turn the call over to Steve.

Thanks, Mike. Good morning, everyone.

Thank you very much for joining the discussion this morning of our second quarter year-to-date financial results. Last February, during our call with you, I said that 2012 would be a year of transition. I also suggested that it would be a year of results erosion. Both of those predictions have certainly turned out to be true.

It is a year of transition, as we and others in the private sector education deal with public criticism, as well as regulatory initiatives aimed at limiting the sector's growth in providing post secondary education in America. Those and a number of other factors, including the weak economy, uncertainty about employment, negative publicity regarding student loans, and in our case, some missteps last year, have meant an erosion in student enrollment in our schools, leading to declining revenues to extent greater than costs can be correspondingly controlled.

I also said at the time that long-range prospects for our universities and career schools were strong as we had and continue to have an array of advantages from technology to academics that benefits our students and enables them to realize aspirations and improve their lives. I remain optimistic about the long-term.

Why? It is simple. Our nation needs more people with post-secondary education. As the former Chairman of one of the nation's largest public education agencies, overseeing all of the colleges and universities here in Illinois, I know our public institutions across the nation are terribly starved for funding, and will remain that way for the foreseeable future. I also believe these institutions consume more public funds than their private sector counterparts do. So the private sector must be part of the solution to produce better educated, more career ready citizens.

Now, let me tell you what we are doing currently at Career Ed through the second quarter. As you know, when I assumed this role last November, Career Ed was being buffeted by regulatory and accreditor issues. Many have been resolved. As a result of efforts throughout the Company, much progress has been made. Yet challenges remain stemming from those same issues. On the whole, however, I am satisfied with the progress we have made in dealing with the challenges we faced at that time.

I'm satisfied from the standpoint of changes we have made internally, to be a consistently compliant company, with a goal of zero defects if you will, and also from the standpoint of getting on a fresh, more trusting and transparent footing with our many regulators and accreditors. I hope everyone, both inside and outside this company, knows that we are committed to putting our best foot forward to making the right decisions on behalf of our students and to communicate openly and thoroughly about our policies and procedures, the impact of those on our students, and about our students' academic progress and employment prospects.

With this progress, much of it being led by new leaders in the Company, is coming amid a trying economic period, and as I've said, considerable external headwinds. Specifically, these external factors have dramatically lowered our overall perspective student inquiry starts and enrollments, lowered revenue projections well below our expectations, at the beginning of the fiscal year, particularly among our career institutions, and underscored the need to improve significantly our methods and channels for identifying and attracting qualified prospective students. In short, we stand with all higher education institutions, amid a difficult economic environment and resulting declining trends across many key metrics.

Not surprisingly, the slow growth economy and related factors I mentioned have had a deleterious impact on students' ability to find jobs upon graduation. Despite the progress we at Career Ed have made in enhancing our student placement policies and practices, and our increased investments in career services personnel and resources, we know that reaping the benefit of these changes will not be as evident in the near term. Meeting multiple accreditor placement standards will remain a challenge in this academic year. More on that later.

The difficulty graduates are encountering in finding employment, however, is not limited to just the private sector. As some of you may have seen, an article by economist and Bloomberg columnist Gary Shilling, that appeared just last week, highlighted some striking statistics for graduates across all higher education institutions. Specifically, the report noted only 49% of graduates from the classes of 2009 to 2011 found jobs within their first year out of school, compared with 73% of those who graduated three years earlier. And only about 54% of bachelor degrees holders under 25, or about 1.5 million people, were jobless or unemployed last year.

While our bachelor's graduates tend to be older, and more at risk, and many already hold jobs, these stark statistics point to the difficulty facing student placements across all higher education institutions, well beyond just our sector. The difficulty graduates are having in finding employment is among the factors prompting students to think twice about committing to higher education and we believe has slowed their decision making cycles noticeably.

Against this backdrop in post secondary education, I have indicated that our Company will continue to focus on three strategic areas that I have outlined to you in our prior calls. First, addressing and resolving our legal and accreditation challenges. Second, establishing a well defined strategic path. And third, augmenting our Company leadership.

Let's talk about regulatory and legal affairs first. As evidence of our progress with regulators, it is worth noting that, during the second quarter, American InterContinental University received the Department of Education's final report from its program review launched in 2009. The final program review determination closed all previous findings without any further requirements based on AIU's response to the exploration. We are very pleased with that long awaited positive outcome from the United States Department of Education.

I'm also pleased that our processes and progress have resulted in several important instances in which CEC institutions have, following extensive accreditor reviews and within a period of heightened scrutiny and political pressures, been either re-accredited or completed the regulatory process with zero findings. Notably, Briarcliffe College received re-accreditation from its regional accreditor, the Middle States Commission on Higher Education.

We have also achieved re-accreditations, renewals and positive program reviews at several of our career institutions including, among others, International Academy of Design and Technology campuses in Detroit and Nashville, Le Cordon Bleu Institutions in Detroit and Austin and programmatic approvals at various health schools.

As you all know, the Accrediting Commission of Career Schools and Colleges, or ACCSC, recently issued a show cause directive on 10 of our institutions stemming from the well known placement determination issues dating back to the 2010-2011 time period. Since those issues have already been comprehensively reviewed and addressed by another of our accreditors, ACICS, a few months ago, we are hopeful that this new look by ACCSC will be as careful, thorough and declarative.

To that end, we are in ongoing dialogue with ACCSC to make sure we provide everything it requests and requires. Our formal response to ACCSC is due September 7, and we remain on course to meet that deadline.

While we cannot predict the outcome of the show cause action, we remain confident that the extensive and substantial steps we have taken with respect to placements, including the independent investigation commissioned by our Board of Directors, hiring more than 75 additional career services personnel, terminating individuals who compromised our placement standards, producing a more definitive policy manual, and submitting placements reported to accreditors for independent third party reverification, make a compelling case for continued accreditation of these 10 institutions.

Despite our clear progress, we do have new challenges regarding placement rates. As you know, placement rates in the past that did not meet accreditor requirements resulted in four of our career institutions being placed on probation by ACICS. This fall, we will report our school placement rates for the July 1, 2011 to June 30, 2012 period.

Because ACICS reporting requirements for placement rates are based not on a calendar year but on the July to June timetable, we know that placement rates we will have reported in September will not reflect the full impact of our process and personnel enhancements implemented at the outset of the current calendar year. However, we are seeing very substantial progress in our graduate placement trend since January, and we expect over the next full reporting period to realize the full benefit of these efforts.

Another vestige of the past we are dealing with involves the OPID consolidation we initiated early last year and for which we applied to the Department of Education shortly after we received all of the acquired accreditor approvals. After consultation with the department, we are now in the process of reversing that decision. The rationale for the consolidation made sense at the time, as the Company sought to simplify its maze of overlapping and sometimes conflicting regulatory requirements based on 26 different OPIDs under multiple accreditors.

However, while this stagnant application remains in place, we were impeded in our ability to seek new program approvals. We believe that introducing new programs is critical to better serving our students and our ongoing focused efforts to our line of course offerings with current employment demands. As a result, we are actively engaged in the regulatory steps to withdraw the consolidation application, which will free us to seek the program approvals that are essential to student service and outcomes, and to the Company's growth.

While withdrawal of the application slows regulatory simplification, as we implement our strategy, to streamline the Company operationally, we will seek whatever OPID consolidations naturally fall from that reorganization. The OPID consolidation also has the benefit of combining campuses for 90-10 impact. We are addressing 90-10 throughout the year, by utilizing external scholarships and grants, putting increased emphasis on programs supported under the Workforce Investment act, increasing the level of accredited and non-title IV programs, making pricing adjustments and delaying the disbursement and receipt of Title IV funds. With these actions, we are optimistic that the OPIDs that failed in 2011 will succeed in 2012.

Now let's turn briefly to our imperatives on leadership and strategy, which of course are intertwined. We have made significant strides in our commitment to augmenting the Company's leadership. During the quarter, we announced a number of executive moves to bolster the Company's management team, realign and simplify the organization structure, and help Career Ed navigate its regulatory, legal, and political environment, consistent with the strategies outlined to you and others earlier in the year.

I believe you all have had access to the statement we issued two weeks ago, detailing the executive changes we have made, so I will not repeat them all here. The configuration of our leadership team and the organization will be essential to embarking upon the strategic transformation of the Company.

As part of this transformation, the Company will reorganize its more than 90 campuses into University, Career and International education groups. The previously announced plan to establish these three education segments versus the current six will concentrate and enhance academic focus, consolidate and align similar institutions, and better position the Company in a competitive marketplace, through fewer, stronger international brands -- institutional brands.

To this end, we have internal studies under way by our new education group leaders to determine which brands are best positioned to serve students and employers. Those that are not well-positioned will either be folded into those that are, possibly sold to other entities, or where appropriate, be taught out.

Perhaps a word here about cost controls in view of declining revenues. Longer term, our simplification of institutions and brands will, of course, bring about permanent material institutional cost reduction. Meantime, we have a sharp focus on removing redundancies, eliminating excess cost, and creating greater efficiencies across the Company, as student population declines, while not hindering our ability to turn the corner and return to growth.

Now, let's turn to some additional strategy initiatives. Clearly, simplification and consolidation lie at the core of where we are headed. We intend to continue our efforts to turn around the business by coming -- by becoming a leaner, stronger organization, making us a more competitive player in the adult post-secondary education marketplace, with limited brands offering to differentiated value propositions.

As part of our strategy, we recognize that the Company must also improve its current model for identifying, attracting, and enrolling prospective students. We have a definitive focus on revamping our approach to this foundational activity. As a key step in that progress, management has engaged PricewaterhouseCoopers to come in and review our model and approach, from prospective student recruitment of more qualified candidates, and student inquiries, all the way through to enrollment starts and persistence.

Further, we, like others in the industry, are making progress in having students query and contact us through channels other than the current disproportionate reliance on lead aggregators, including improving our ability to identify prospective students who can succeed directly through our institution's websites. We want to accelerate that migration and are focusing heavily on this effort.

That is why we launched branding initiatives at AIU and CTU. Both initiatives are having strong impacts in the areas of improving brand awareness, and brand equity. Although with all of the headwinds and volatility, we are being cautious about concluding too much about direct impact on inquiry conversion rates and enrollment. Improving our ability to identify students who are likely to be interested in and qualify for our programs, and to increase subsequent enrollment of these students is at the heart of our ability to reverse current trends.

Moving to another key strategic front, we continue to leverage and build upon our core technology and academic strengths. The Company has long been at the vanguard of leveraging technology and innovation to enhance student learning, experience and outcomes.

We have invested in and deployed our award-winning virtual campuses, introduced state of the art experiential learning tools like Simpro Virtual Trainer, enhanced our e-books platform and library, and launched our leading flexible learning tool MUSE, or my student user experience. MUSE allows our students to receive content in a manner that best suits their learning style, whether they be visual or auditory learners, or desire course work delivered in a synchronous or asynchronous fashion.

We have observed with some intensity the wide array of interests who have begun work on what are commonly called adaptive learning models. Education innovators, private equity players, technology entrepreneurs, and others are currently claiming advancements in this area, with some regularity. We, too, have been purposely at work on this front.

We expect, consistent with our past technological successes in leadership, to begin testing a proprietary adaptive learning system by the end of the year. We will have more to report on this project when the efficiency -- the efficacy of our new system is further tested and proven. As I have said consistently, we will continue to invest in this area to further our technological leadership.

Finally, despite the substantial challenges facing our industry and this Company, I believe that we are putting in place the people and the plans to advance our business against the challenges in the higher education environment. We know today that this turn-around, however accelerated we can make it, will not be measured in terms of a period of weeks or the span of my short tenure, now spanning 9 months, but we will make steady measured progress over time to become a leaner, stronger, and more competitive enterprise built for the long haul.

Thank you for this opportunity to review our current position, progress, and prospects. I will now turn it over to Mike to discuss our second quarter financial results. And I look forward to addressing your questions and comments at the conclusion of Mike's remarks.

Thanks, Steve.

Let me just begin by sharing with you some details of the financial performance for the quarter. During the quarter, we generated $369 million of revenue, which is a decrease of 24% versus the second quarter of 2011. The operating loss was $108 million for the quarter. The second quarter results, as we outlined in yesterday's press release and in the Form 10-Q filed with the SEC, include non-cash goodwill and impairment charges of $85.6 million.

The $85.6 million has three elements. $83.4 million of goodwill impairment. $41.9 million on health. $41.5 million on art and design. $1.2 million of other asset impairment. $1.1 million in health. And $100,000 in AIU. And $1 million of trade name impairment for health education.

To arrive at a more comparable basis versus last year, please remember that the operating income for the second quarter of 2011 included a non-cash charge of $2.7 million for goodwill and other intangible asset impairment. If you exclude the impact of these charges, the operating loss for the second quarter of 2012 was $23 million. All the comments on the remainder of the call will be on this non-GAAP basis, which includes the charges I just discussed in both these years.

As Steve discussed in his remarks, 2012 will be a year of transition. We're taking the steps necessary to reposition the Company for the future. Simplification and consolidation are an important part of this strategy. Consistent with this approach for the Company, during the quarter, our operational teams made the decision to teach out three of our health campuses, SBI Landover, Maryland, SBC Milwaukee, Wisconsin, and SBC Collinsville, Illinois. Further, a similar decision to no longer enroll new students is made by the AIU team for its South Florida campus in Weston, Florida.

These decisions, which are very difficult, came after evaluating a number of factors. The overall performance of the campus including operating results, the new student starts, placement opportunities in the local market, degree of market competition from both private sector and public institutions, and the existing lease obligations of the campus. For the most part, the lease expirations are concurrent with the expected last date of attendance for current students, based on their matriculation paths.

Along with the asset impairment charge of $1.2 million I discussed, our second quarter results also include $1.5 million for severance and employee retention awards related to these actions. Of these charges, $2.7 million of charges, $2.3 million is in health and $400,000 is in AIU.

During the teach out periods, which have ending dates varying from June of 2013 to August of 2015, we again remain focused on fulfilling our educational and our post educational commitments to our students, consistent with our student first philosophy and practices of the teach outs of other schools over the past several years. Additionally, throughout the first half of 2012, we continue to use our SOAR program, for online students at AIU and CTU, and our pre-enrollment testing for our ground students.

Again, using our student first mandate to enroll students with the highest propensity to persist and to graduate. During the first half of this year approximately 4,700 new students did not join CEC institutions due to these programs, which in the short term has a very, very significant impact on our revenue.

Now, let me briefly turn to the financial results by segment. First for university group, which is AIU and CTU, in the second quarter new student starts declined 29% and 24% in AIU and CTU, respectively. Excluding the impact of the student orientation and readiness program SOAR, new student starts were down 15% and 17%, respectively.

Again, as we mentioned on previous calls, the goal of SOAR has been to identify students who are not prepared for the rigger of academic studies. Additionally, those students who withdraw or fail the five-week course are not charged tuition. We continue to enroll about a third of the new undergraduate starts into SOAR, with about 50% to 60% of the students receiving a passing grade and moving on.

Through the second quarter, AIU's revenue was $79 million, down 20% from the second quarter of 2011. Revenues impacted not only by lower student population, but also due to a slight reduction in the average credit load per student. Again, given the macro economic trends, including which we believe are the increased intensity of the competitive environment, lengthening decision cycles and aversion to taking on debt, it is challenging to provide more prospective start growth going forward for AIU and CTU in the near term.

Operating margins were 8.9% for AIU in the second quarter, versus 26.9% in the second quarter last year. As mentioned earlier, AIU south Florida campus will enter teach out and is expected to remain open until August 1 of 2015. For the first six months of 2012, the Western campus contributed $6 million of revenue and experienced an operating loss of $1 million.

Revenue for CTU was $95 million in the quarter, which is down 15% versus the second quarter of 2011, as a 16% reduction in student population offset modest increases in revenue per student. Operating profit for AIU was $12 million in the quarter with operating margin declining to 12.1%. While CTU's short term margins have been negatively impacted by the National Advertising Campaign, we remain committed to the initiative and as Steve stated, it has had several very, very promising results. In particular, we have been pleased to see an increase in brand awareness among prospective students, and growth in the quantity of internally developed leads and inquiries.

Now, moving to the career schools, as Steve said in his remarks, we have a lot of opportunity in front of us to simplify the career focused operations. Over the past year, our culinary, health and art design teams have spent considerable effort examining and modifying where necessary the business models.

With the recent hiring of Dan Hurdle as Chief Career Education Officer, it is our expectation that these activities will quickly evolve from brand and institutional center undertakings to one comprehensive strategy designed to optimize the ground schools' distinct brands and their operating scale, lowering cost and complexity, while improving marketing effectiveness.

Turning to culinary arts, revenue decreased 30% to $58 million on a 35% decrease in new student starts and an 8% reduction in student population. This reduction in revenue is primarily attributed to a business shift to certificate programs, and the corresponding reduction in tuition per credit hour. Let me remind you, as we noted in the press release, that the year-over-year start comparison is impacted by one less start in this quarter versus the previous year. So on a comparable basis, new student starts would have been down 21%.

In addition, the pre-enrollment testing that I spoke of also contributed to 410 basis points of decline. As you look forward, please note that for the third quarter of 2012, our start comparable with the September 2011 start will occur in October. So, another timing shift for the third quarter.

As discussed last quarter, culinary's model change to the shorter certificate programs has resulted in significantly more graduates, and thus lower student population levels versus the prior year. The operating loss for the quarter was $4 million.

We continue to be committed to culinary arts and believe that Cordon Bleu's high quality kitchen curriculum is the gold standard in US culinary education. Based on feedback from prospective students and our insight into varies local markets, the team is assessing the redesign and the relaunch of its associate degree program beyond the current Chicago and Los Angeles locations.

Now, into health, which continues to be our biggest challenge, one of which requires significant changes which we have discussed in previous calls, and that continues to pressure our operating results. Revenue for the quarter was $76 million, down 31% from the second quarter of 2011. Health new student starts decreased 69% over the second quarter last year, while student population decreased 41%.

Similar to culinary, health year-over-year start comparison was impacted by a calendar shift this year. The results in 2,540 fewer starts in 2012 second quarter. Excluding this timing impact, starts would have been down 53%. In last quarter's call, Steve discussed the introduction of pre-enrollment testing for health, as a means to better ensure the students have the skills to be successful. Again, this resulted in 738 fewer starts -- fewer new students starting, and a 950 basis point impact on new student starts for the quarter.

For the second quarter of 2012, health operating loss is $23 million, and that's exclusive of the non-cash goodwill and impairment charges. The institution continues its efforts to realign the cost structure by driving standardization throughout the school-based operations.

As I mentioned, the teach out at Landover, Milwaukee, and Collinsville, further demonstrates this organization's commitment to simplify the Company's operations and reduce complexity. Two of the campuses, Landover and Milwaukee, are amongst the four campuses on ACICS probation status due to the placement rates at or below 40% for the period July 31, 2010 to June 30, 2011. These three campuses now in teach out for the first six months of 2012 achieved $11 million of revenue, while experiencing a $4 million operating loss.

Now, into art and design, second quarter revenue for art and design was $40 million, down 29% from the prior year, reflecting a 31% decrease in new student starts and a 24% decrease in student population. The operating loss was $5 million, excluding the impairment and goodwill charges.

Finally, the international segment continues to perform well. Year-to-date revenue increased 3% from the prior year, as a result of higher revenue per student due to annual tuition increases implemented in the fourth quarter of 2011. Revenue was negatively impacted by $5 million of unfavorable foreign exchange rates with the Euro. Excluding the impact of unfavorable foreign exchange rate, revenue would have increased approximately $7 million, or 12% versus the prior year.

New student starts for the first six months increased 14%. And as we discussed in the last quarter's call, the international institutions experienced higher-than-normal graduation due to the timing of program completion, resulting in a 25% decline in year-over-year student population. Our expectation is that new student starts for the remainder of the year will continue to grow due to the high quality education and the strong business model. This year's student population will exceed and should exceed 2011's level.

Year-to-date operating income was $11 million, down 9% from the prior year. Operating income was negatively impacted by about $1 million in foreign exchange rate. Further, the international group incurred additional academic costs for the inset group, as it prepares to seek internationally recognized program accreditation, and we launched our first ever blended learning executive MBA program at the International University of Monaco.

Turning to an outlook, as you know, as a matter of policy, we do not provide annual guidance. As you can see from the difficult market conditions we faced, evidenced by our level of new student starts and the commentary of many other comparable for profit education firms in the last 10 days, inflection points we have assumed continue to move back, causing our anticipated 2012 results, as Steve said, excluding the non-cash impairment charges now to move into an operating loss level.

While visibility at the inflection point remains unclear, we do not, right now, anticipate a material trend in new student starts as compared to the prior year adjusted for the timing of calendar challenges in the third quarter 2012. Our financial results versus our previously communicated range of 2012 ground school operating losses will also be impacted by the lower level of new student starts. Accordingly, our expectations for the ground schools versus last quarter's earnings release and conference call have fallen, as well. Given the current market conditions, we will not provide any further milestones at this time.

Before we open the call for questions, let me quickly update you on the financial position. As of June 30, 2012, the Company had cash, cash equivalents and short-term investments of $370 million. Our cash flow for operations for the three months ended June 30, 2012 was approximately $1 million cash outflow, and capital expenditures were $8 million, or 2.1% of revenue.

With that, operator, let's open up the call for questions.

Thank you.

(Operator Instructions)

Jeff Silber, BMO Markets.

Thank you so much. I know you're not giving any specific guidance, but I wanted to look a little bit more longer term, specifically focused on the health education, culinary arts and art and design segments. What kind of revenue levels on an annual basis do you think you need before those segments become profitable again?

Again, Jeff, this is Mike. I can't give you guidance. You will have to do the models. As Steve said, looking closely at how to take out metrically driven costs, which we have done throughout the year, looking at the fixed cost levels and looking for Dan Hurdle as he joins the organization to streamline the three organizations. As you know as we go into 2013, the level of carry and student population leaving this year will dictate a good deal of the first half of next year. That will give you some idea about how to model next year's out. But a longer term basis, it is not our goal to become profitable in this organization. It is our goal to become profitable and meet different cost of capital and investor returns well above just becoming profitable.

Let me ask the question another way then. From an incremental basis, every time you lose a student, what is the impact on the bottom line, roughly, in terms of incremental operating margins?

Again, it is hard to tell, because of the step function of the class sizes, but traditionally some of the flow-through when you look at the models has been around 50% to 60% on lost students.

And that hasn't changed dramatically based on some of the changes you've made?

Hard to tell because of the changes that have been taking place and the changes are so numerous across the institution as we talked about last quarter, especially in health. The visibility right now is very, very difficult. The moving parts are a lot. The teach out, all the additional investments in career services, the different models on 90-10. The pre-enrollment testing. You can imagine, as we talked about last quarter with the different steps, the step plan that Jason Friesen put in place, it is very difficult to model each of the impacts but we know they're all in the right place in terms of student first and they're in the best interest of the Company long term.

I understand. Just a quick numbers question. What are you budgeting for capital spending for the remainder of the year?

Traditionally it would run around 3% of revenue. But I don't think the level would change dramatically from this quarter's $8 million level. So probably hard to say on a revenue basis, because revenue is changing, but $8 million to $10 million a quarter going forward.

Okay, great. I will jump back in the queue. Thanks so much.

Thank you, Jeff.

Sara Gubins, Banc of America.

Thank you. Good morning. Given that you're not looking to consolidate the OPID's, how should we think about where you will fall out on 90-10? And also, the Q -- your 10-Q mentioned that some schools might delay some federal financial aid until early 2013 to meet 90-10. I'm just wondering if that is something that is done as a standard.

This is Steve. Thank you for the question. I will answer it in two parts. One, as I said in my prepared remarks, we remain optimistic that the OPIDs that failed in the past will pass in 2012 based upon all of the steps that we have taken throughout the year in order to address 90-10 requirements. That's the first part of your question.

The second part of your question with respect to withholding funds, yes, that is something that is commonly done in the industry, has been done by a number of companies. In our particular case, we have also done it occasionally in the past, but we have a system for doing it, where by the stipend, the living stipend that the student receives, is not affected in any way. So I know there has recently been pointed out that withholding funds would in some cases affect the student living expenses, or stipend, and that is not the case with Career Ed.

Okay. And then could you give us updated thoughts on share repurchase? Are you holding off on this point given the fundamentals or for any regulatory reasons?

I think you can see in the quarter with the operating loss we're experiencing, the decrease in operating cash flow, we still have authorization available but we obviously look to the Department of Ed financial responsibility ratio at the end of the year. Historically, we've bought back shares right around the area of net earnings because that's the way the calculation works. With the operating loss that we experienced this year, share repurchases have become difficult under the calculation.

Okay. Thank you.

Gary Bisbee, Barclays.

Hi, it is Zach Fadem for Gary. Can you give us some color on how to think about new enrollment trends at AIU and CTU next quarter after you have lapped the SOAR impact?

Sure, I think the SOAR lapses in the quarter, so we should look to the level that I quoted in my prepared remarks of the 15% to 19% decline after the adjustment for SOAR. So we will anniversary out the -- call it roughly 500 to 1,000 point basis points adjustment. Our trend right now, as I stated, doesn't show a material change in our trajectories as we go in third quarter starts. So the modeling would be consistent with the adjusted basis after SOAR in the second quarter.

Okay. And just on your teach outs, what incremental costs do you see going forward as a result of those? And when further down the line do you see those costs starting to come out?

From the teach out model, because of the way we've done teach outs before and our discontinued operations, if you look to the past year, you can see the trend of costs. Early on in the teach out, there is a slight increase in the profitability of the school, because you no longer have admissions or marketing efforts around the school. Then over time, as the class sizes decline, but we keep career services people, we keep academic people, everyone else on the campus to serve the student until the last student graduates, we tend to run into operating losses. For the most part, the only obligation after the closure of the teach out is any lease obligation and for three of the four teach outs that we spoke of, the teach out is commensurate with the end of the lease. Only one of the leases will continue on in discontinued operations after the close of the teach out in August of 2015.

Okay. And the last question on your calendar shift, you mentioned, I think you've got another calendar shift next quarter, in culinary. So the start period will be in October?

Right.

And what about for any other segments? Is that the only calendar shift for next quarter?

That is the only calendar shift. Obviously, health because we had a calendar shift in the second quarter and that starts in the third quarter, which I spoke to in the remarks. And culinary is missing one start which trickles over from September to October. Those are the only non-comparables.

Got it. Thanks a lot.

Jerry Herman, Stifel Nicolaus.

Thanks, good morning, everybody. Guys, give me your commentary about simplification and consolidation in light of the deteriorating situation. Would you suspect the need for a more radical action plan, i.e. cost reduction or other, in some way, with again particular focus on the career schools?

I would say what we said in the past about reducing the number of institutions and brands we have from what is now the high teens to the mid to low single digits. If we can do that, we would consider that a reasonably radical transformation plan. The question is how fast we can achieve it. So we do think that, that is a rather aggressive plan for changing the way we conduct business. And as I said, in my prepared remarks, we fully expect that it will have the impact financially of reducing the costs of complexity and inefficiency that we now incur.

And Steve, just a follow-up, is there internally an expedited effort to do so, again, in light of the deterioration?

We are not oblivious to the impact and implications of the numbers that we have experienced in the last two to five months. We are very, very much aware of the implication of those numbers. And we recognize that the strategic plan, while everybody recognizes that it is a sound, logical, reasonable, and as you put it, radical plan, that we have to accelerate the implementation of it as much as we can.

Thank you. And just a question for Mike. Obviously, we're looking at your balance sheet, and it certainly shows a healthy amount of cash, but if you could just add some additional color on some qualitative statements on what you deem to be the most significant say calls on that cash, i.e., operating losses, lease obligations, the position of international cash and the like.

Sorry, Jerry, in terms of the cash requirements, if you look at the $370 million of cash, $250 million of which is domestic $120 million of which is international. As described in the 10-K, there is within the not-for-profit entities of international about $63 million of cash based in those entities. So that is the first call on cash. The second call on cash is obviously to make sure from a working capital standpoint, the balance sheet stand point, to fund the operations in terms of having an operating loss, that we're there and again we meet everything, the requirements of the DoE. And we're going to make sure there that on a capital expenditure basis as we go forward, continue to invest into the different facilities and campuses for the students.

Obviously, in terms of our operating cash flow, and our balance sheet, in terms of material acquisitions to this time, other things, we're not putting that as a high priority. And as you know, the business traditionally runs a negative working capital level, so as the business deleverages some of that negative working capital spins back out.

Great, Thanks, guys. I will turn it over.

Brandon Dobell, William Blair.

Thanks. Guys, what kind of time frame should we expect to hear back from you on some of these major or larger initiatives, the PricewaterhouseCoopers, kind of look at the business, or the processes, some of the decisions around the brand consolidation, or maybe a little more visibility on 90-10, are those a Q3 call kind of prospect or are we talking the fourth quarter call and early '13?

This is Steve. Thanks for the question.

Thanks, Steve.

Obviously, as I said, we're going to do as much of an accelerated basis as we possibly can. The only way I can really prospectively answer that question, however, is to say that as material things occur, we will release them publicly in a filing, and that as we have quarterly calls, for this -- to the extent that things have taken place in the quarter, we're happy to talk to you about them as fully as we can. But we're not going to be predictive in what we say.

All right. Fair enough. And then maybe remind us of what the process is with the schools that are on show cause with ACCSC? Is there like -- like it was with ACICS, a particular time around a meeting of their board that we should use this milepost for when there should be more information about those schools?

I believe that they are planning to me meet -- they don't meet every month, but my understanding is that there is a meeting in both September and October. The key date is that we are required to get our formal response to ACCSC by September 7. Obviously, they need it in time for their reviewers. And those that will be making -- adjudicating and judging the material, time to think about it and look at it. So I don't know whether they will get to it in their September meeting or their October meeting, but we hope that they would look at it rather -- sooner rather than later.

As I said in my prepared remarks, I do expect that they're going to be as thoughtful and careful in their examination as ACICS was. As you know, there is a lot of interest in how the accreditors do these sorts of things. I can only tell that you we have sent much of the same material that we have sent to ACICS. It is voluminous. It is transparent. And I would hope that eventually we would get the same outcome.

Okay. And final one for me. You mentioned being kind of held back on new programs given the application process for the OPID consolidation. Where should we expect or where are you guys planning on rolling out new programs? And is there a -- are we talking a backlog of a handful or programs or is it a much bigger pool of new opportunities for you guys to roll out?

We've been in the penalty box now for some time on these things due to the fact that we have had the consolidation application pending. So there has been -- there is a backlog. And it is very important that we get programs that today enable us to place our students reliably. So we are dealing with that backlog now. Obviously, we have to go through all of our accreditation processes, and we're trying to do that in a way that we can apply for new programs on an orderly basis, and we're prioritizing the ones that we think ought to go first, and we're sort of cueing them up in that way, with the strongest criteria being needs of employers, and employment needs in the marketplace.

Okay.

And Brandon, just to be clear, because of the consolidation with the national school, the ground schools only --

Right.

There's no constraints on AIU, CTU, international, so new program launches continue in those school, which are over half the Company.

Okay. Thanks, guys.

Susie Stein, Morgan Stanley.

Hi, guys. It is Thomas Allen filling in for Susie. Now that gainful employment appears to be off the table, at least for the time being, are you operating and planning as if it will come back or not? Thank you.

That is a very interesting question that is being asked repeatedly. I don't think that we can predict with certainty whether or not it will come back. I don't think anybody can. It will depend upon a great many factors, including political factors. What we are doing is assuming that we should look at what we think is in the best interest of our students. Gives us the opportunity to place them, to place them in a way that they are able to repay their loans, whether gainful employment exists or doesn't exist. That's the guiding principle that we have adopted at our school, at our institutions.

Can the student complete? Can we place the student? And can we place the student in a way that they can repay the loans that they incur? And that's the policy we will use, whether the Department of Education does or doesn't look to reinstitute gainful employment. Then as everybody knows, if the Department of Education does seek to do that, it is likely not to happen between -- before 2014 or 2015. The cost of the processes that need to be gone through.

Okay. Thank you. And then other schools that are similar orientation programs have discussed modifying them, so that -- because the programs are turning away some prepared potential students. You said that 4,700 potential starts have been turned away year-to-date. Any thoughts on modifying SOAR and other programs to get some of these students? Thanks.

Yes, as I mentioned in our last call, and I think Mike talked about it as well, we are looking at our SOAR program and alternatives to the SOAR program to make sure that on the one hand, we are putting our students through the right paces to give them the highest probability of persisting and completing the courses. And at the same time, not leaving on the editing room floor, so to speak students who do -- may not test well, or may not seem at first blush to be able to do it, but would have a chance to persist and complete. So we're trying to address both parts of the equation. There is no question that some qualified students, not only at Career Ed but at other schools, have been denied admission, despite the fact that they could possibly make it, but not probably make it.

And quickly, just a sizing, or the time frame of those changes, the size of potential students?

Mike could speak to the numbers, but in terms of making changes, we are looking at our SOAR program, and if we do make changes in SOAR program, modifications or changes, it will probably come before the end of the year, with the impact primarily falling in 2013.

I think from a sizing standpoint, if you look at the 4,700 starts I spoke of, about half of those are in university, half of those are in ground. It is too early to tell. I think as Steve said, there is various methods to allow a student access to the school and to assess the student over a broader period of time than just a test, whether they have the propensity to persist and graduate. And we continue to look at that. So it is too early to give you numbers on what any adjustments may be. But that will give you an idea about the current split.

Okay. Thank you.

Jeff Meuler, Baird and Company.

Thank you. Just wanted to ask about AIU and CTU inquiries. I caught the data point that the internal generated leads at CTU are up, but are total leads at those institutions still declining? And if so, I understand it is a tough market, but what would you attribute the continued declines to? Just the timing of when you rolled out the CTU branding campaign? Or are there other factors that would potentially concern you about their competitive position, or what alternative -- or what gives you confidence that they remained in a good competitive position?

We believe that the university side of our business, looked at together, remains a strong franchise, so let me say that first. Secondly, I think we and everybody has reported some resistance recently in getting applications, leads, inquiries, whatever term you want to use. And I think I discussed in my prepared remarks what we perceive to be some of the reasons that queries of the Company and leads through any channel are reduced. It is a negative publicity. It is all things that I mentioned. Also, students are being more cautious and therefore, it is taking more time for them to make a decision. And we're hearing more and more deferrals from people who seem to be deciding I'm going to put this off for awhile.

And because of that, because of the falling interest, you're finding the environment to be far more competitive than it has been in the past for a qualified student. Don't forget, also, it is a smaller pool of candidates when you're focusing more on those that can persist and complete, which is, of course, what we're doing. And I suspect others are doing as well. So the franchises themselves remain very strong. And are improving their ability to both reach out to and be receptive to new student applications, but the competition is fierce, and the pool is shrinking somewhat. Is that responsive?

It is. So the question is, in your view, are the declines either in starts or in inquiries due to that environment, or in this more competitive environment, is it your view that you may also be losing share, or if you think it is just the environment, the question is -- I'm just trying to figure out the competitive position versus the environment and how much of it is a tough environment versus potential share loss, if you can add anything to that.

I can understand. I think we would all like to be able to quantify if we could how much is due to the shrinking pool so to speak for the various reasons that I've mentioned and how much is due to the more intense competition. I don't think I can quantify which of those is the greater factor, or which among those is the greatest factor. What I have said is that we recognize, we think, what is going on out there in the marketplace. We're sensitive to the changes that are taking place in the marketplace, and we have internally and with the help of a new external consultant, are beginning to re-examine everything we do to make sure that we can be as competitive as anybody, and maintain or expand our market share in the new environment.

Okay. And then just a follow-up on the balance sheet, any update on the credit facility, Mike?

The credit facility matures on October 31, in the fourth quarter. We're in negotiations with our bank. We've got great bank partners that have helped us all along. They have expressed a willingness to discuss the facility.

Obviously, the facility we have, which was entered into in 2010, in a much different business environment, much different credit environment, it will be nowhere near the favorable terms we had there. There is no assurance we will have a facility given the operating losses. We're working hard with the banks. Too early to give you more details but in the next quarter call, we will be able to share more.

Thanks, Mike.

Corey Greendale, First analysis.

Thank you. Good morning. Just following up on the question about the competitive and the economic environment, given your responses, Steve, how are you thinking about tuition pricing? And I know you are potentially raising prices some places because of 90-10, but are you considering either discounting tuition, giving more scholarships to help yourself competitively?

Pricing has to be part of the equation. I think we all know that. And you're correct in that for 90-10 purposes, pricing will probably -- has to move in a particular direction. But the most compelling criteria is whether the prospective students, whether the consumers, will pay the price for the service that you are offering. And also, whether they will be able to repay any indebtedness they incur in wherever they're placed subsequent to the education.

We are looking at trying to adjust our pricing for the programs that we have in place to be both competitive and to enable the student to repay. And at the same time, be responsive to the 90-10 imperatives. It is sort of a simultaneous equation that we're dealing with.

Okay. And then I had a couple of regulatory questions. There was, I think, some new language in the Q about the Department of Education doing a inquiry about potential violations and misrepresentations. I know they requested information before. Can you just clarify is there something new or different in their communication to you about what they're doing?

Corey, that is continued disclosure. There is no news to report on that Department of Ed. As part of the consolidation process, as a part of other things that are going in the Company is asked over time, various parts of information and we participate very frequently and fully with them and give them anything they ask for and any dialogues we have are continuing and open.

There is also some language in the Q about some ongoing information requests from HLC in connection with the CTU re-accreditation, can you just put that in context? How common is it to have continuing information requests after a focus visit and some sense of what they might be looking for?

It is not -- I don't know whether it is common, but it is not uncommon to have what are called subsequent visits. And it often happens, and so I would say it is somewhere between not uncommon and routine. It is not anything that is that out of the ordinary in our judgment. And we believe that the revisits by the peer review team are going to be handled over the coming period with some facility.

And just one last one. The one piece of good news it sounds like, it sounds like you're making some progress on the placement front. Can you just comment on the kinds of feedback you're getting from employers and what I'm curious about is whether there is any impact of the negative publicity on employers willingness to hire graduates to your institution.

I'm happy to answer that question, the answer is no. There are -- we are seeing on the intake side, as I've said several times in the call already, with the reluctance of students to make the decision to attend post secondary education, which I consider to be very unfortunate for them, because they're going to need that education to get jobs in the long term, but we are not seeing any impact on the out-go side, that is on the outcome side, with employers.

I think that they are still doing what employers do, which is to evaluate the strength and qualifications of the individual candidate. And they are still accepting our graduates, both on the university side and the career side. Our market improvement in placements is in testimony to that. I think you know that we have redoubled our efforts to place the -- our graduates, and we're having really good results. So I would say that is evidence that we're not seeing resistance on the employer side.

Great, thank you.

There is time for one final question. James Samford, Citigroup.

Great. Thank you. I just wanted to touch on that placement issue as well. It sounds like you're still hiring more. Where are you in terms of your staffing levels on your placement staff at this point?

We have, as I said in my prepared remarks, we have hired at least 75 new people this year. You do have normal attrition during the year. So we're not 75 over where we are. But we watch very closely our ratio of placement advisors, guidance counselors to students, and our ratios are greatly improved over the past.

James, we have about 14% more career service advisors right now than we had this time last year.

And it sounds like a lot of the -- at least the OPID consolidation efforts, et cetera, is really a function of trying to offer new programs. How do you feel the programs that you have today are potentially oversaturated in some of your markets, given the macro factors that are taking place right now?

I'm not sure that it is so much that the programs are oversaturated. I think it is the fact that we offer some programs, where we -- where there is not great demand by employers right now. Employment needs do change from time to time. And you have to stay -- and you have to stay alert to the changes. So what we're more concerned about is, particularly in our ground schools, is the demand locally for jobs changing. We have to be alert and stay up to date on that, to make sure that what we are offering is what the employers want in that general locality.

Any regional differences that you're seeing that you could talk about on the local basis?

Again, if we had some of our local people in here, they could probably answer the question better than I. But what we do hear at our level is that on a regional basis, there are different employment needs. And we know that as we study MSIs, that in some MSIs, there is a demand for X, and in another MSI there is a demand for Y, but not X.

For example, we're in Sioux Falls, South Dakota. Sioux Falls, South Dakota is both a regional medical center, and it is also a credit card services processing center. So they have certain kinds of needs there. In another location in Pittsburgh, the needs are entirely different. And we have to be sensitive to that. And we are working very hard to make sure that we adapt as quickly as possible to the needs of the MSIs in which our schools are located.

Okay. Thank you.

Gentlemen, that was the last question for today. Please go ahead with any final remarks.

Thank you, everybody for being on, for various parts -- I know you're in various parts of the country. We appreciate your continued interest in our company and we will see you all down the line, and if there is anything that we didn't answer completely today, I know that Mike is always at your disposal. And Matt will be too. Thanks again.

Thank you for participating in the Career Education Corporation's second quarter 2012 earnings conference call. This concludes the conference for today. You may all disconnect at this time.