Perdoceo Education Corp (PRDO) 2014 Q3 法說會逐字稿

Welcome to the Career Education Corporation third-quarter 2014 earrings conference call. My name is Yolanda and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. It is now my pleasure to turn the call over to Mr. Mark Spencer. Mr. Spencer, you may begin.

Thank you Yolanda. Good morning everyone and I am a Mark Spencer, Director of Corporate Communications, thank you all for joining us on our third-quarter 2014 earnings call. With me on the call this morning is Scott Steffey, President and Chief Executive Officer; and Reid Simpson, our Senior Vice President and Chief Financial Officer. Following our remarks the call will be open for analyst questions.

This conference call is being webcast live within the investor relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our investor relations department at 847-585-3899.

Let me remind you that this morning's press release and remarks made today include forward-looking statements as defined in section 21 of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include but are not limited to those factors identified in our annual report on Form 10-K for the year ended December 31, 2013, and our other filings with the Securities and Exchange Commission.

Except as expressly required by the securities laws, we undertake no obligation to update those factors or any forward-looking statements to reflect future events, developments, or changed circumstances or for any other reason. In addition, the remarks today refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Our press release and slide presentation which accompany today's call and which contain financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures, is available within the investor relations section of our website at careered.com.

So with that I will like to turn the call over to Scott Steffey.

Thanks, Mark. And thanks to everyone for joining us on the call today. We appreciate your interest in Career Education.

The traditional back to school season proved to be both busy and productive for our schools as we generated strong new student enrollment growth within the University platform. As an organization, our focus continues to be to enroll, educate and place our students into a better position to succeed professionally and to close the gap between students and employers. In doing so, we created a winning formula for our students for employers that hire our graduates and for our shareholders.

Our agenda for this morning's call is as follows. I will first provide a progress report on the five main objectives of our turnaround strategy. Reid will then cover the third quarter financial results, before I conclude with additional business updates. At the conclusion of our prepared remarks, there will be time for an analyst questions.

The first objective I will cover this morning, as shown on slide three, is our ability to strengthen academic outcomes, enhance recovery compliance, and simplify our business model. As an education company, academic outcomes are the most relevant and critical measure of our success.

We have been focused on putting the right leaders in our institutions to make sure that strengthening our academic outcomes remains our number one priority. Many of you are familiar with our adaptive learning tool, Intellipath, which serves as a powerful platform to help our students learn. It identifies and gives more time in areas where students need more help, while moving past areas they already know. In many respects, adaptive learning serves as an excellent way to facilitate and demonstrate mastery in competency-based learning environment. Adaptive learning is changing the nature of higher education by measuring real-time knowledge growth minute by minute and understanding the material on a student by student basis.

The success of this personalized learning platform lies in the abundance of data it collects which in turn helps our instructors determine how to structure courses, deliver material to students, predict and mitigate students challenges and identified teaching practices that yield the strongest results. A major difference between our platform and others is that ours is outcome-based. It is not based on student satisfaction, or how fast it facilitates a student to complete assignments although its course very high in these categories. Ours is strengthening academic outcomes.

As of the end of the third quarter, more than 45,000 students at Career Education Institutions have taken at least one Intellipath adaptive learning course. In doing so, they collectively answered more than 83 million assignment questions and completed more than 8.5 million lessons since we introduced Intellipath two years ago. While the program is still reasonably new, we have seen many examples of how Intellipath has strengthened our academic outcomes.

For example, we found that a large number of our students elect to complete more practice exercises and develop a greater level of mastery than is necessary to simply complete a given learning mode. This implies that students be taught with Intellipath aspire to learn more and develop a greater knowledge of the course material. We've also found that Intellipath generated significant improvement in student pass rates.

For example, at AIU, the student pass rate went from 73% to 80% in 11 business classes that are utilizing the software. Likewise, at CTU, college algebra went from a student pass rate of 47% to 77% and student withdrawals went from 32% down to just 10%. Intellipath is driving competitive differentiation for our Universities and employers who are partnering with us are excited about the opportunities Intellipath creates for their employees who enroll with us.

The current regulatory environment is both complicated and uncertain. However, we have made excellent progress enhancing our regulatory compliance as evidenced by several events. For example, over the past two years the higher learning commission, one of our regional accreditors, has acted to can to continue the original accreditation of CTU and AIU and we were granted state approvals earlier this year to expand programs at many of our ground-based career Colleges.

We also expanding our University program offerings. CTU recently submitted application to HLC to add Masters of Nursing and Masters of Healthcare Management programs. In addition, our consolidated 2011 three-year cohort default rate improved 160 basis points compared to 2010. Just one of our campuses, Le Cordon Bleu in Austin showed a CDR of more than 30%, however, we believe that an administrative error is responsible for the 30% rate, and we expect that will be corrected as we work with the Department of Education to reconcile the data.

Our career schools also continue to show improve job placement outcome in the annual reports we submitted to a ACCSC the last month and ACICS this week. All of our 32 ACICS accredited campus, not in teach out, reported placement rates greater than ACICS is compliance threshold of 60%. 26 met or exceeded the higher benchmark rate of 70%. And our ACCSC culinary schools posted excellent results with the majority of their programs meeting or succeeding the 68% benchmark.

Placements are key indicator of the quality of our programs and serve as evidence that we are achieving our mission to enroll, educate and place our students into a better professional position than when they started with us. In terms of simplifying our business, late last year we sold our international campuses and earlier this year we consolidated three Career College school brands and streamlined our management structure to support the new operating model.

Career Education was built over time through series of acquisitions. The consolidation of several of our brands allows us to focus our attention and improve standardization where appropriate and create management efficiency. It also improves our opportunity to share best practices across the organization. We continue to explore additional options to simplify our organization and streamline our operations.

The second objective is to generate modest total enrollment growth within our University group. Before getting to total enrollments, both CTU and AIU, generate strong double-digit growth and new student enrollments in the third quarter, which marks the traditional back-to-school season.

This growth was a result of previous improvements we made to the student admissions process, in addition, to replacing our 21-day student orientation program with an online student orientation course, which affects how we calculate a new student enrollment and creates a positive impact on 2014 new student enrollments as compared to 2013, thereby, impacting comparability. Nonetheless, we have experienced solid fundamental new student enrollment growth during the year.

Further, this new process is proving more efficient at helping students, many of you have been away from the classroom for years, prepare for the rigor for post secondary education and understand that time and commitment they need to succeed. The early feedback on the new orientation program remains very positive and appears to be helping our new students get started on the right track.

Moving to total enrollments, slide 4, reports the progress we have made in lowering the decline in total enrollment and slide 5 reports total enrollments at CTU and AIU. Changes in a few of our ground-based university campuses have contributed to lower total enrollments. In CTU's case, we closed a campus in North Denver and offers students the opportunity to transition to our other Denver campus, but not all of the students were willing to commute the additional distance. By reducing from two campuses to one in Denver, we experienced a negative impact on comparisons.

To give you a better example, slide 6 excludes ground-based units and shows total enrollment for our online university programs, which comprises approximately 90% of our University total enrollment. It should also be noted, that total enrollments are measured at a point in time, so the timing of new academic terms and graduations attrition and other factors can impact that figure.

For example, in August, our online university population was year-over-year positive. Later in the quarter, this changed slightly due in part to a higher graduation rate than forecasted. We anticipated that by the end of this year, we will be total enrollment positive year-over-year within our online University group. Reid will discuss University earnings later, but it is worth noting that CTU continues to post strong financial results with 86 point -- $68.3 million of our operating income on a trailing 12-month basis.

Importantly, CTU posted year-over-year revenue growth for the quarter. The first quarter of year-over-year revenue growth since the first quarter of 2011, and while AIU has generated a loss this year, partly due to the now discontinued AIU milestone grant, and a temporary setback related to our expedited Intellipath rollout, both Universities have seen stabilization in total enrollments and are well-positioned to anchor our business and leverage their earnings potential as we move forward.

Moving on to our next objective, which is to stabilize our career school enrollments in the programs we intend to continue, as shown on slide 7, total enrollment trends were positive in the third quarter. As expected Culinary Arts generated a healthy 26.3% increase in total enrollments as a result of the Associate Degree program, which was reintroduced beginning late in 2012 in response to student and employer demand.

New student enrollments were up 14.5% higher within culinary arts in the third quarter compared to the same period last year, but this was mainly due to a difference in new term start dates this year compared to last year. We estimate the increase in new student enrollments shown in the third quarter at Culinary will be offset in the fourth quarter. With that said, the second half of 2014 should show a smaller reduction in new student enrollments than the first half as compared to the prior year.

Further, as one would expect within improving enrollment statistics, revenue grew year-over-year at culinary arts for the first time since 2010. Within Career Colleges, market disruptions related to our Sanford Brown brand consolidation and changes in our marketing strategy are still working themselves out. In addition, we are deemphasizing certain programs such as Art and Design, which have not produce positive operating results, and are not positioned well under the gainful employment regulations.

As shown on slide 7, in the third quarter Career Colleges had 1,200 fewer students than the prior-year quarter or a 10.7% decrease in total enrollments.

As I mentioned last quarter, we are in the process of adding new programs at some campuses to better serve our local market needs and to replace some of the programs we are deemphasizing. This is an initiative that will take some time as we work with regulators on approvals. Therefore, we anticipate there will be fluctuations within Career Colleges operating results in the future.

Slight 8 shows the progress we have made in expense management, our fourth objective. We lowered operating expenses including impairments, legal settlements, and insurance recoveries by nearly $21 million in the third quarter of this year, compared to the same period last year as we continued to remove costs from the organization. At the beginning, we estimated we would drive an additional $75 million of lower operating expenses in 2014 as compared to 2013.

Through the first nine months of this year, excluding impairments, legal settlements and insurance recoveries, we have already surpassed that goal as we generated nearly $80 million of lower operating expenses. As I have mentioned previously, there remains significant opportunities for us to remove costs from the organization.

Moving onto our fifth object within transitional schools, we completed successful teach outs of three additional campuses in the third quarter of 2014. So far this year we have successfully taught out 19 campuses and we have one additional campus that has already closed in the fourth quarter, which means we have achieved our objective to successfully teach out 20 campuses in 2014.

We also divested a transitional school campus earlier this year, so 21 campuses have been removed from operations. We also made a decision in the third quarter to add three additional schools to the transitional schools segment. These locations were former IADT campuses in Las Vegas Chicago, and Orlando. This decision was a result of low enrollment levels and is consistent with our strategic decision to deemphasize certain Art and Design programs.

Our work remains unfinished here as we continue to analyze the student outcome in financial performance and each of our programs and campuses. As you may recall, I stated many times in the past that, we attend to evaluate all of our assets and make the necessary decisions in the best interest of our students, as well as for long-term success and value creation of our organization.

Slide 9 shows the progress we have made in reducing the number of transitional schools and the anticipated teach out schedule of the remaining schools. Teach outs drive operating losses and cash consumption, so completing them is an important element of our turnaround strategy. However, we have taken a student centric approach to teaching out these campuses, providing every student with a reasonable opportunity to complete their program of study before the campus ultimately closes.

As I just described, we continue to make measurable progress against each of our stated objectives. Before I turn the call over to Reid, I would like to call attention to a few other important items. About five years ago, several former AIU employees sought a large payout through federal whistleblower laws; a judge recently granted us summary judgment.

From the onset, we felt strongly that this case lacked merit and the judge agreed. These cases can take time to work their way through the court system, but we stood up for what we believed until we reach a positive outcome. We continue to lower the number of legal challenges facing our Company thereby eliminating distractions from our strategic activities.

This was another significant step in the right direction. As a result of the reduction in legal activity, with have seen corresponding reductions in our legal expenditures for full year 2014 we expect our legal cost excluding settlements to be approximate $10 million lower as compared to the past couple of years.

In another legal matter, we recently reach an agreement with one of our insurance providers that resulted in a net recovery of $8.6 million reported during the current quarter. Reid will cover the accounting and greater detail, but we receive this cash in the month of October; therefore it is not reflected in our Q3 quarter end cash balance.

Lastly, we are being recognized again this year with another award related to the progress we made in executing our turnaround strategy. The large turnaround of the year award is given by the turnaround Management Association's Midwest Chapter is being awarded to Career Education and Alice Partners for the financial operational improvements that have been achieved as a result of work done in 2013.

On that note, I would now like to turn the call over to CFO, Reid Simpson, who will take you through additional details of our results for the third quarter.

Thanks, Scott. Good morning, everyone.

Let's get into the third-quarter financial results; all percentage variances I mention will be comparisons to the prior-year quarter unless otherwise noted. First let's discuss the consolidated results from our ongoing businesses. Revenue excluding that from transitional schools was $219.6 million for the quarter, down 3.9%, while total enrollments were only slightly lower than the previous year by 0.6%. Of note is the fact for the first time in over three years, both CTU and Culinary Arts showed year-over-year revenue growth for the quarter. Operating expenses for ongoing business decreased by $20.3 million, or 7.4%.

Educational services and facility expenses were down $6.2 million, or 7.9%; G&A expenses were down $14.9 million or 8.8%, driven largely by an $8.6 million insurance recovery and lower administrative expenses. Also of note, we incurred $14.4 million of impairment charges in the current quarter compared to $11.5 million of impairment charges last year in the third quarter. Overall, on the expense side, we continue to see the benefits from our rightsizing and reengineering efforts. Further, we continue to believe that there are additional opportunities to reduced costs in 2015.

Third-quarter operating losses from our ongoing businesses were $33.5 million and $11.3 million, or 25.2% improvement compared to the prior year. The improvement is due in part to the favorable impact of the insurance recovery, as well as reductions in virtually every other expense line, which more than offset the decline in revenue. Absent any impact from impairment charges insurance proceeds or legal settlements operating losses improved $5.3 million or 16.1%.

Third-quarter adjusted EBITDA from our ongoing business, which excludes transitional schools and all unique items was a negative $15 million, a $1.1 million or 6.8% improvement from the prior year as our cost saving efforts and operating efficiencies more than offset the $16.7 million decline in revenue for the quarter. Sequentially, compared to Q2, adjusted EBITDA was down as expected as we invested $13.7 million more in advertising expenses in Q3 related to our back-to-school season.

As shown on slide 10, the adjusted EBITDA loss for ongoing operations for the trailing 12 month periods has continue to decrease and we anticipate to be adjusted EBITDA positive for the fourth quarter of 2014 and for the full year 2015.

Let's turn to the financial results by operating segment. First our University Group, in the third quarter of 2014, CTU revenue was $82.4 million, slightly higher by 3/10 of a percent. Total enrollments decreased 3.4% compared to last year; however, online enrollments only decreased 1%.

Operating income was $10.7 million up 11.3% or $1.1 million from last year as operating margins expanded 130 basis points to 13%. Revenue at AIU of $51.9 million was 7.8% lower than the prior year, resulting primarily from a 4.2% reduction in total enrollments.

Online total enrollments were lowered by 1.9%. Operating losses for the quarter were $4.2 million compared to losses of $5.9 million in the prior year and improvement of 29.3% as lower expenses offset the decline in revenue.

Next, our Career Colleges Education Group: revenue for the quarter of $40.8 million decreased 11.1%, or $5.1 million compared to the prior-year due to a 10.7% decrease in total enrollments. Keep in mind, we have recasted revenue associated with the three schools that moved to our transitional schools group that has Scott mentioned earlier. The revenue associated with these three schools was $4.7 million for the current quarter.

Operating losses for the Career Colleges Education Group grew by $12.7 million to $29.9 million all due to $12.8 million of higher impairment charges. Absent the impairment charges, operating losses would have been flat versus the prior year on significantly lower revenue.

Culinary arts revenue of $4.5 million was up half a percent for the quarter, while total enrollments increased 26.3%, driven by a higher proportion of students entering into the Associate Degree program, which has a longer time to completion. Understand that total enrollments are calculated at a point in time at the very end of the quarter; therefore, we did not earn revenue on that larger base of students throughout the quarter. We also had a start date on September 29 of this year and last year the same start was on September 30. That extra day to post attendance resulted in a higher number of student enrollment and total enrollments being counted in the third quarter this year versus fourth quarter of last year.

We estimate that the third quarter will be the high water mark for total enrollments within culinary this year as we continue to fully annualized the benefit of the longer duration Associate program we resumed back in late 2012. Operating losses of $12.6 million improved by $11.1 million, or nearly 47% during the quarter compared to the prior year. However, $9.2 million of the improvement was due to a higher impairment charge number in the prior year quarter. Absent the impairment charges comparisons, under law -- underlying losses improved versus last year despite basically flat revenue.

Moving on to transitional and discontinued operations, three schools completed their teach out processes and closed during the quarter. As Scott mentioned, we also added three schools to the transitional group that were formally reported within Career Colleges. The year to date operating losses attributed to those three schools that move into transitional were $7.6 million and for all of 2013 their losses $10.9 million. Revenue for these schools was $14.1 million for the current year to date period, $4.7 million for the current quarter, and full year 2013 revenue was $22.2 million.

The decision to teach out three additional campuses was based on low enrollment levels and the deemphasis of certain Art and Design programs, and will be a creative to earnings in 2015 and 2016, excluding any unique charges. Adjusted EBITDA for transitional and discontinued operations improved by $8.8 million, or 36.4% compared to the prior year quarter.

This improvement is largely due to the fact that we have 22 fewer campuses that are operating today and then in the prior year. A favorable trend that should continue as transitional schools and discontinued operations become a smaller and smaller portion of our business and eventually go away.

As reported on slide 11, our trailing 12 month-negative EBITDA for transitional and discontinued operations as of Q3 2014 was $79.7 million, down from $88.6 million in Q2 and $92.5 million in Q1. We expect this favorable trend to continue in Q4 of this year and looking forward to 2015 we expect negative adjusted EBITDA for transitional and discontinued operations to drop further into the $62 million range, based on our current composition of transitional school segment, compared to a full-year 2014 projection of $71 million.

Lease obligations are a large component of our overall cost structure and cash usage. In addition to leases associated with ongoing operations, campuses that have completed their teach outs more often than not have ongoing lease obligations that continue for some time. In our efforts to add greater transparencies, slide 12 details future cash obligations for leases for both our ongoing operations and transitional and discontinued operations. The slide shows gross obligations, as well as contracted sublease amounts to arrive at annual net lease obligations. This information should help frame the cash burn related to these leases over the next several years.

During the past 12 months, we have entered into sublease arrangements at eight of our properties, valued at approximately $25 million over the life of the leases, net of commission paid. We also entered into early termination lease buyout arrangements, which required an initial cash outlay of approximately $11 million, but will result in lease cash savings of over $32 million over the life of the leases. We will continue to be opportunistic in this area with the ultimate goal of further reducing our lease obligations and corresponding cash burn.

Moving down the P&L, during the quarter we recorded tax expense of $1.1 million against our pretax loss of $44.8 million. This resulted from adjustments to various uncertain tax positions and the recording of discrete items related to the completion of a federal tax audit.

As we have discussed on prior calls, given that the Company remains in a three-year cumulative loss position, we are not in a position to benefit from our current year losses. As such, our tax rate in 2014 is expected to be close to 0%, and I would suggest using the same tax rate assumption for 2015. Any tax benefit associated with our losses in 2014 will be offset by a corresponding increase in our valuation allowance. As of the end of third quarter 2014, our valuation allowance was approximately $141 million.

Once we return to sustained profitability, we will be in a position where we would be able to begin to reverse these valuation allowances and recognize benefits associated with these deferred tax assets. Our loss per fully diluted share from continuing operations was $0.68, which included a loss of $0.22 from impairment charges and a benefit of $0.13 per share from insurance proceeds. This compared to a $0.52 loss per for fully diluted share in the third quarter of last year, which included impairment charges of $0.11 per share.

Losses per fully diluted share from discontinued operations were $0.03 from the quarter compared to a loss of $0.78 for the quarter compared to a loss of $0.78 per share last year. In the third quarter of 2013, we recorded a tax provision related to the sale of the international schools, which amounted to $0.60 per share of the loss.

Let's now discuss our financial position and liquidity. As of September 30, 2014, the company had cash, cash equivalents, and short-term investments, inclusive of discontinued operations of $250.9 million compared to $274.6 million at the end of second quarter and $363.1 million at the end of 2013. Slide 13 exhibits our cash position trends, which, despite decreasing, remain very strong. Net cash flow used in operating activities for the quarter was negative $19.9 million compared to $10.9 million last year. The $9 million of additional outflow in the quarter was attributable primarily to the prior-year comparison that included the seasonal impact of our international cash flow of approximately $27 million.

The third quarter typically contained a seasonal peak in cash collections for that business that is not reflected in our current year numbers as this business was sold in the fourth quarter of last year. For the year to date period ended September 30, 2014, operating cash flow use was $101.1 million compared to $77.8 million in the prior year.

The current year to date includes $21.6 million of cash paid to settle certain legal settlements, as well as $6.3 million of cash outlays related to the lease transactions I mentioned earlier. As Scott mentioned earlier, we received a $8.6 million in cash related to an insurance recovery in the month of October, so this is not reflected in our quarter in cash numbers.

Looking forward, in terms of cash, we expect continued improving cash trends in the business driven by one, continued reductions and cash burn related to our transitional and discontinued operations that I discussed earlier; number two, improved financial performance from our continuing operations, which as Scott mentioned, we expect to be adjusted EBITDA-positive in the fourth quarter of this year, and expect to be adjusted EBITDA-positive on a trailing 12-month basis by the end of 2015, and a meaningful year-over-year reduction in legal settlement and legal expenditures. Capital expenditures in the third quarter were $3.5 million as compared to $6.6 million last year and $3.6 million last quarter.

Before I turn the call back to Scott, a quick update on our bank revolver: our current bank recently increased the size of our revolver from $70 million to $120 million. The terms remain generally the same, but there is a new minimum cash covenant, which requires us to maintain a rolling three-month average cash balance of not less than $190 million, subject to certain adjustments for real estate buyout transactions we may opportunistically pursue. This $50 million increase provides us with added flexibility to support the continued turnaround of the Business.

I'd now like to turn the call back to Scott.

Thanks Reed.

I would like to take a couple of minutes to talk about a few other items. I would like to expand on something Reid just discussed. The increase in the borrowing capacity of our revolver is a sign of support by our lender, who has visibility into our business plans and strategy and is willing to partner with us to help us execute those plans. This is further evidence that we continue to make progress in our turnaround strategy.

We remain on track to be EBITDA positive within our ongoing operations in the fourth quarter of this year. From a seasonality perspective, the fourth quarter is often our best operating earnings quarter of the year, as we have an influx of students in the fall and we typically invest less in advertising around the holidays. Most important our plans call for us going for our ongoing operations to exit 2015 positive for adjusted EBITDA on a trailing 12-month basis. We will obviously the seasonality fluctuations during their year resulting from heavier advertising spend in quarters one and three. The fact that we are able to see such seasonality fluctuations in adjusted EBITDA is further evidence of stability, as in the recent past any seasonality was masked by heavy losses in our Business.

Since we now have greater visibility around gainful employment, I want to take a minute to discuss how we believe it will affect Career Education. The final rules have just been published and we are still analyzing all of the details. In general terms, the greatest risk is in the areas of Culinary and Art and Design.

The University group is largely unaffected by the regulations. The good news is that we have been proactive in our planning by developing options for the programs we fill were at risk. In addition, we have adequate time to make any program changes, and don't feel need to necessarily rush any decisions without first making sure they are the right decisions.

The gainful employment regulations should not impede our getting to EBITDA positive for our ongoing operations next year for our continued progress thereafter. Within Culinary, we have several options, including reverting back to the shorter and less certificate programs, pricing changes or organizational structural changes, such as moving to a nonprofit model.

Furthermore, we currently have a nonprofit entity that could be used in such a transaction involving Culinary, or for that matter, other assets. It is premature to discuss any details related to such changes and we plan to keep you informed of how this may develop over the next few quarters.

Within Career Colleges, we have already begun to deemphasize certain programs, a decision we made not as a result of the anticipated gainful employment regulation, but instead because there is less student interest in certain programs making reductions a good business decision. Where appropriate, we are also adding new programs that should fare better under gainful employment.

I received a call from a high ranking education department official as the regulations were being released last week. In line, with what the department stated in its press release, the official indicated that the department intent to work with us on improving new programs or other changes as needed to comply with the regulations. In order to remain in compliance with our FRR in 2014 and 2015, there are a variety of options that we are exploring, including additional cost saving opportunities, investing in new business technologies, long-term borrowing options, acquisitions or divestitures, modifying our capital structure, or other organizational changes.

Given our current performance and trends, I believe that we have the needed tools to meet our FRR goal for 2014 and 2015 and beyond without considering any dilutive event. We also have the option to divest certain assets. As CEO it is my responsibility to evaluate how our assets are deployed and make any necessary changes to maximize shareholder value. Any potential asset sale or acquisition for that matter will be done with the intention of improving profitability, accelerating growth, or better positioning our institutions and our shareholders for the long-term.

On that note, I would like to open the call for analyst questions.

Thank you. We will now begin the question-and-answer session.

Operator Instructions)

Our first question comes from Trace Urdan, your line is open.

Good morning. I wanted to ask a question about the Career Colleges segment. I understand that the results there are affected by the transition that is taking place.

I first wondered if you could just talk about that transition in a little bit more detail and describe sort of some of the positive results and some of the challenges that are resulting from that. And then I wondered more broadly if you could just address that particular segment in the market right now, what you are seeing, to what extent the Corinthian situation has affected student interest. And then finally, on that point, are there any program offerings that you don't currently offer in the Career Colleges segment that you think might be ones that you would like to get into given what you are seeing.

All right. If I don't hit all of those points, Trace, remind me that I missed one. From the standpoint of transitioning with the career schools, what we've done there obviously, as I stated in the script, is we've been deemphasizing for a few quarters now our Art and Design program that is also reflected in the additional schools that we are putting on the transitional list. Very comfortable with how the Culinary part of Career Schools is maturing. We're starting to have a Sanford-Brown division that is mostly Allied Health and that is focusing on programs within Allied Health that are best situated for gainful employment.

We felt comfortable about how we are emphasizing those programs and our ability to transition there. We have more than two dozen new program applications that we've submitted so far this year. We have seen good approval so far on both the accreditor and state approval levels. We have -- the majority of those programs have received at least one approval from either the state and/or the accrediting body. We've had several that have been approved by both, so we are making very good progress on that front.

They do include some programs that we don't currently offer. I'm not going to go into a huge amount of detail on that, but I would say a general category that we have in those programs to come include a variety of different business-related programs that, according to our research on a geographic basis, market by market, supplier by supplier, competitor of analysis, job analysis, in all of those locations, [bested those locations]. Those are working their way through the process.

We feel very comfortable in terms of our ability to start introducing those from the standpoint of [Coco], we have seen in a few locations an uptick of students that have come to us from Coco as well as a couple of other entities that have closed their doors. And so we remain diligent on that front where we see potential disruptions in the marketplace of making sure that we get our message known to potential students that will be as facilitory as we can in being able to accept transfer credits and being able to make a transition for them as seamless as possible. I guess I hit them all.

Our next question is from Jeff Silber; your line is open.

I appreciate your detailed remarks up front. I am just wondering, can you address the general pricing environment within your schools and what we should be expecting on a revenue-per-student basis going forward? Thanks.

I would say, in general, on the online side, we're not looking at any significant price adjustments on that side. Revenue per student on that side of the business has been relatively flat. I don't see anything there. On the Career School side of the business, certainly as it pertains to Sanford-Brown, I don't see any issues there. We are taking a look as to whether or not we have some pricing opportunity on the culinary side of the business.

Great. And can you talk about the advertising market? I realize this past quarter might have been a bit skewed because of the elections, but I'm wondering what your costs are running there, what you expect going forward?

We haven't -- our spend this quarter was flat to last year and that is what I forecasted. On an overall basis, our advertising spend for 2014 will be slightly lower than 2013. Our student acquisition costs are not going up. They are actually down slightly.

From a standpoint of price increases either from aggregators or for media sources that occurred in the third quarter, it did not translate through into a higher acquisition student cost for us. I think part of that is due to continued efficiencies that we are making on the marketing front, be it through search word optimization, be it through better management of our lead aggregator and a variety of other things that we are doing. We have not [had any student acquisition cost increases].

That is great to hear. Thanks so much.

Our next question is from Jason Anderson, your line is open.

Good morning, guys. I want to touch base on Culinary. Obviously seeing good growth there, but obviously due partially to the Associate program and also I think you mentioned the start timing. How should we think about that going forward? When would that lap the benefit you're getting from the shift into Associates? And then separately from that, could we talk about maybe a bit more on your thoughts that you touched on there with gainful employment. Should we be thinking about a big reversal potentially out of Associate back to certificate?

We have looked at that. We continue to look at that. I am not at this point -- that's an option that remains on the table. We have other options, but frankly don't disturb our model as I alluded to in my prepared remarks. We're looking at all of those eventualities.

In terms of the going forward nature of our Culinary, it is continuing to improve in terms of its enrollment as well as in terms of its financial performance. Losses that we have had associated with that unit in the past are diminishing significantly and we see that unit, especially in 2016, being a very different contributor to the organization. We think the population will continue to improve there and we have a number of initiatives that we have that some of which we're starting to execute on now and make some investment in now, that we hope will create some improvement on the new student enrollment side in the back half of 2015.

Great. Thanks. On the start numbers, you referenced the positive impact from the policy change, the terminology change, and that sort, could you quantify what that impact was?

We're not doing any recasting. What we're doing is simply showing what the actual results are. The difference is, obviously from the standpoint of when you start counting someone as an enrollment, we move the 21-day period from after the enrollment period and reversed it to a certain degree. We give a 7- to 10-day period after enrollment begins for purposes of students making a decision.

That's why we revamped the orientation program and put that week to two weeks in front of when the enrollment date starts and that's when we start opening that up so that students can start taking that program and work their way through that program and get a good understanding of what kind of time commitment they're going to have to make. That's what that change is. As I said earlier, we're seeing fundamental -- solid fundamental new student enrollment growth on our online side over and above whatever change 21 day has on our numbers.

Great. Thanks. And then regarding the transitional schools, you added three more. I'm sure you're thinking you added in everything you needed, but is there a certain set of schools that maybe there is a potential they could --more could continue to fall into the transitional bucket? And thank you for all the detail on some of the other costs, the lease costs and all that, but what kind of transitional losses should we expect in 2015 and how much of that would you say is cash?

This is Reid. I think I provided in my prepared comments a 2015 -- I think it's actually in the slides. A 2015 number off of the 2016 number.

In terms of how much of that is cash, a substantial portion of that is, in fact, cash because you are continuing to pay operating expenses during the wind-down of the campus, you are continuing to pay lease expenditures during that period of time, which is one of the reasons we are trying to tackle the ongoing lease obligations. That's on slide 11. The projected negative EBITDA from transitional and discontinued is $62 million in 2015 down from $71 million this year.

In terms of your question with regards to the transitional schools, I will just repeat what I have said in previous calls. I am not taking off the table that we'll add other schools to the transitional list, I'm not taking it off the table that we will open new campuses. I'm keeping all of my tools in the tool box and making sure we are making whatever are the best decisions for our students for the long-term interest of the business and for our shareholders.

Great. Thanks for the color.

Our next question is from Peter Appert, your line is open.

Yes, you've got John Crowther on for Peter. Hitting back on the advertising question earlier, appreciate that you guys are actually seeing some cost of acquisition down, but this is an area where I think some of your peers have seen some pretty significant leverage in terms of efficiency over there.

Wondering if you could quantify where you guys are in terms of your ability to drive more efficiency out of the advertising line going forward? And then just a follow-up question on expenses, you called out the legal expense as being about $10 million lower in 2015. Appreciate that color. I was just wondering if you are saying that year over year of the benefit starting to flow through in Q4 or is that really all in 2015? Thank you.

From the standpoint -- let me just hit the last one first. From the standpoint of the benefit legal costs, we're seeing that on a year-over-year basis. And my reference from the standpoint of $10 million to the better on the expense run rate was in comparison to the last few years, so that would be --

[14] off of prior periods.

Off of [13 and 12]. The first part of the question with regards to advertising, I am not going to, and haven't, quantified what additional efficiencies should result from additional changes that we're making on that side of the business.

We are doing more in the branding area. Specifically with our online units, we are making some good progress. We've still got a lot of good progress to make, but we have made some excellent progress on search word optimization. We're redoing a number of our websites and landing pages. We're simplifying the content in those areas.

We've done a lot of studying of the marketplace, and we are in the midst of making some significant improvements, I think, there. We have done a fair amount from the standpoint of just increasing capacity. Technology pipe capacity, if you will, at a lot of our campuses that are helping students to do some of their research on us when they come to visit and so forth and make that a more friendly process. We have done some additional work of additional lead generation outside of the lead aggregator channels.

We are continuing to look at all of those areas and how we can drive additional efficiencies. We are doing that (technical difficulties) I said we are doing more brand advertising on the onlines, but we're also doing more brand advertising on the Culinary side of the world. Some of those changes are new changes, some of them have been in place for a little while. I think that's why our advertising costs on a macro level are going to be slightly lower this year than they were last year. We believ, we have additional efficiencies to gain in that area.

Great. Thank you for the detail.

Our last question is a follow-up question from Trace Urdan. Your line is open.

Thanks. I fell off briefly before so I apologize for the abrupt end of my prior question. I just wanted to ask about the employer situation. I get why for historical reasons you might be reluctant to get into too much detail around placement rates, but I'm wondering if you could state qualitatively to what you're seeing out there in the employment market for your graduates. Thanks.

We're seeing a nice uptick. We had excellent across-the-board placement rate improvement on a year-over-year basis. And if you go back two years there has been very substantial improvement of our ongoing institutions in their ability to hit placement rates. We are seeing the Culinary side has done very well.

Where we're are also seeing an interesting uptick is on the Allied Health side. We are seeing some positive improvements in the placement environment there. I think that just bodes well for that set of program offerings. That's the most meaningful, I think, change in the marketplace from 2013 as we're seeing a little bit of an uptick on the Allied Health side.

Great. Thank you.

Thank you for your time today. As I look ahead to 2015, I feel that we are in a much stronger position than we were a year ago. We have one of the stronger balance sheets in our industry. Our University platform is a strong cash-generating anchor for our business moving forward.

Our Culinary unit is total enrollment positive. We are quickly fine-tuning our other Career Schools for future success and making tough decisions about markets where success is unlikely. When leaving markets, we do so in an efficient and positive manner. We continue to lower our legal liabilities of the Company and importantly, we have the right leaders in place to make Career Education a top performing Company, for our students, employers, and our shareholders.

While a lot of challenging work remains, we continue to make excellent progress in our turnaround plan and we are very excited about 2015. Enjoy the rest of your day and feel free to call to give us any follow-up questions. Thanks so much.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.