Perdoceo Education Corp (PRDO) 2015 Q1 法說會逐字稿

Hello, welcome to the Career Education Corporation first quarter 2015 earnings conference call. My name is Joe and I will be your operator for today's call.

(Operator Instructions)

Please note this conference is also being recorded. I would now like to turn the call over to Director of Corporation Communications, Mark Spencer. Mr. Spencer, you may begin.

Thank you, Joe. Good afternoon everyone, I'm Mark Spencer Director of Corporate Communications. Thank you for joining us on our first quarter 2015 earnings call. With me on the call this afternoon is Ron McCray, our interim President and Chief Executive Officer; and Dave Rawden, our interim Chief Financial Officer. Also joining us on the call this afternoon is Lysa Clemens, Senior Vice President, Transitional Operations and Chief Transformation Officer; and Jason Friesen, Senior Vice President and Chief University Education Officer.

Following our remarks, the call will be open for analysts' 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 support team at the Alpha IR Group at 312-445-2870.

Let me remind you that this afternoon's press release and remarks made today include forward-looking statements as defined in section 21E 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, 2014, and in our other filings with the Securities & 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 change circumstances or for any other reasons.

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 discusses today, as well as the reconciliation of GAAP to non-GAAP measures, are available within the investor relations section of our website at careered.com. So, with that, I'd like to turn the call over to Ron McCray. Ron?

Thanks, Mark. And thanks to all of you for joining us on this call. When I first stepped into this role as interim CEO, we were very clear that the Company has a strategic path and was in the process of executing the plan that we have previously shared with you. Our team has Career Education on course. I want to thank all of our employees for pulling together and continuing to execute our plan.

In terms of today's agenda I will walk you through the strategic decision that we have made to teach up or divest the rest of our Career Colleges. Then we'll take a look at the Company's transformation strategy which is focussed around our two universities. Dave will then walk you through the details of our first quarter results which were in line with our expectations.

We have some details around the financial implications of our restructuring plan to share today. I do want to caution, however, that the specifics of our plan are still being refined and remain a work in progress. In the near future, we expect to be in a position to cover many of these specifics more fully.

As you have seen in the two press releases today, Career Education has made the strategic decision to exist the Career Colleges, to right side our corporate overhead, to streamline our university operations and to focus our resources and attention on Colorado Technical University and American intercontinental University, where we have significant opportunities to continue to provide quality higher education to the adult, student market. We believe these actions will accelerate the Company's path to profitability.

Our Company's mission has always been to enable students seeking a non-traditional career or job path to obtain a quality education that allows them to achieve their goals. Over the years, our Career Colleges have graduated hundreds of thousands of students who, without our programs, may not have pursued higher education of any type.

Market demand and changing attitudes about post-high school education and level of student debt contributed to an increasingly difficult competitive environment. Since 2010 the entire education industry has been impacted by a number of factors, like prolonged recession with depressed hiring and increased cost of education and corresponding debt levels of students have been most impactful.

Over the last five years, these factors, along with increasing legal and regulatory requirements aimed at private sector higher education such as the so-called gainful employment regulations, have made it difficult to operate career oriented schools profitably. These regulations are particularly challenging for several of the programs of study including many large and popular programs offered at a number of our career college locations. As a result Career Education is either selling or teaching out all of its Career Colleges.

Slide 5 reviews the plan actions for the remaining Career Colleges and also provides a summary of some of the more recent actions we have already announced over the course of the past several months. With the previously announced plan to sell Le Cordon Bleu, this means we will no longer have a career schools education group.

This difficult decision was made after several years at working to improve declining enrollment trends at our Career Colleges campuses. We sincerely appreciate the efforts of our many faculty and staff at our campuses and in support roles who have displayed great dedication to helping our students achieve their education goals.

We believe the losses that would be incurred in any attempt to broaden the education scope of Sanford-Brown and the time required to make that happen, could not be sustained without putting our entire organization at risk. The Career Colleges that will be taught out include all 15 campuses of Sanford-Brown colleges and institutes including Sanford-Brown on-line.

Let's be clear what a teach-out entails. A teach-out is a gradual discontinuation of operations that affords students a reasonable opportunity to complete their programs of study before a campus ultimately closes. While a school is completing the teach-out process we focus on providing our students with a quality education and career placement services so they can complete the education and help secure the employment they came to us to achieve.

We are entering these teach-outs instead of immediately closing these schools because we remain committed to the success of the students who have enrolled in our programs. These announcements are being made to faculty, staff and students at the affected campuses this afternoon.

We have taught-out other Career Colleges over the past few years. Based on the feedback we received from state regulators and accreditors, we have a strong track record of conducting teach-outs. We remain equally committed to providing the same level of quality and service to our students.

If I can refer you back to slide 5. Three other Career Institutions: Missouri College, Briarcliffe College and Brooks Institute, are being marketed for sale. We have signed a purchase agreement for Brooks Institute and are working with potential buyers for Missouri College and Briarcliffe College. We aim to reach agreements in the near future. While we're optimistic that we'll be able to find new ownership for these institutions, those that are not sold will also be taught-out.

The last school, Harrington College of Design, announced its teach-out on March 31, 2015. The higher learning commission is reviewing its plan with approval expected in June of this year. As a reminder, we previously announced the agreement we entered into with Columbia College of Chicago to facilitate the teach-out of Harrington a few weeks ago.

I'd also like to give you a quick update on the sale process for the Le Cordon Bleu colleges of culinary arts. Le Cordon Bleu remains held for sale and we continue to market the school to new owners that will be better positioned to invest in the Le Cordon Bleu programs.

(Inaudible) the programs, and the students, staff and facilities, in a way that will support the future growth of the schools. To be clear, Le Cordon Bleu is not a part of the schools being taught-out with the exception of our recently announced teach-out of Le Cordon Bleu, St. Louis. The marketing process is progressing and we're responding to numerous interested parties.

With these teach-outs, and these potential sales, as well as the future sale of Le Cordon Bleu, there will be head count reductions necessary in our centralized support staff. Some of these reductions will be more immediate than others and some functions will remain until the student population of a transitional schools wind down. All teach-out schools and Career Colleges will move from our Career Colleges group to our transitional group.

For reference please see slide 7 which walks you through the campuses and teach-outs as of this announcement and those in teached-outs based on previous decisions. While the schools that are beginning their teach-outs are starting that process now, it is important to know that the teach-out process varies by the length of the programs offered by each campus.

It takes at least a year and in some cases several years to complete this process. Career Education will continue to support the campuses and students through this process. We expect all campuses selected for teach-out to be closed, or taught-out, by 2018.

Moving on to the future of Career Education, as you will see in slide 8, our direction and core offering of the organization will be driven by degree-oriented, higher education, offered primarily on-line through regionally accredited institutions where the company maintains a competitive advantage in its on-line platform, brand awareness and Intellipath adaptive learning technology. We believe our universities have a bright future and are moving in the right direction. The entire team is focussed on being more efficient and effective as we continue to streamline operations to reduce our costs and improve our student outcomes.

Slide 9 details the priorities for the university business moving forward, which starts with streamlining its operations, investing in strengthening its academic outcomes for students through our Intellipath adaptive learning technology. We believe this powerful technology will sever the key differentiator for our Company and in the future.

The institutions also continue to invest in building the brand names of our Universities. For example, in the first quarter of 2015, AIU and CTU spent approximately $13 million on TV advertising, with AIU investing approximately $6 million in television advertising compared to no television advertisement in quarter one of 2014. Given the strategic transformation we are announcing today, we believe our balance sheet, combined with our future positive cash flows from the business, will enable us to invest more in CTU and AIU brands going forward.

Further, the University team is working to grow relevant new programs for our students. At CTU, for example, our accreditor recently approved the introduction of two new programs which will begin to roll out in May 2015, this month, and at AIU we're optimistic we'll be able to roll out new programs early in the third quarter.

We are also growing the number of corporations with whom we have relationships having signed over 60 new accounts last year, and nine additional accounts in the first quarter. Collectively these new accounts have more than four million employees who are possible future students. The number of students coming from these partners is up nearly 40% over last year in quarter one. These partnerships provide us opportunities to fill unmet employer needs and demonstrate the effectiveness of our programs by helping address the gap between the skills employees have and the skills the employers are seeking.

Lastly, we are also making other significant key investments to enrich our students' experience with us. For example, we will be rolling out later this year a new mobile application. If it is successful, as we anticipate, this can be scaled for AIU.

It is also important to point out that University group is also more profitable in quarter one 2015 than quarter one of 2014. This progress, and the investments we are making in University, continue to lay the foundation for a strong future for CTU and AIU. Through the changes announced today, Career Education expects to achieve profitability at a level competitive with industry leaders in private sector higher education.

These actions are expected to accelerate the Company's path to profitability and right size the Company's corporate overhead as well as University's group expenses, to be more in line with leading educational peers. Excluding restructuring charges the teach-out of these campuses is expected to be accretive to 2015 earnings. The goals that we reaffirmed last quarter included generating modest university total student enrollment growth and reducing career school losses, we believe these results and actions we are announcing today align with those goals.

Before I turn the call over to Dave I want to thank him for picking up the responsibilities of our CFO position so quickly. He is doing a great job for us. With that, I'll turn it over to Dave for a deeper dive into the financial implication of our transformation and to discuss the specific results of the first quarter. Dave?

Thanks, Ron, thanks for the kind words. Good afternoon, everyone. I would like to start with the first quarter results and then I'll provide a little more color around the financial details that we do have to share related to the new direction that we announced today. All percentage variances I mention will be comparisons to the prior year quarter unless otherwise noted.

Let's start with a glimpse into our future by first discussing the results of our University group on slide 10. Total revenue for the group of $138.2 million was down slightly, 0.9% year-over-year on total enrollments that were fairly flat. Operating income for the group was $11.7 million which is up 7.6% over the prior year period, as operating margins expanded 70 basis points to 8.5%. And this was driven by continued exclusion at both Universities of various cost control initiatives that were put in place late last year.

I want to remind all of our investors that the tables in our press release that outline new student enrollments are skewed by a change in methodology in the way AIU began accounting for cancelled student enrollments last year. If we were to exclude the impact of that accounting change, new student enrollments in the University group were down only 1.2% year-over-year. Slide 11 shows total student enrollment growth within our University group, remain relatively flat as compared to the prior year. Marking the first time this has occurred since 2010.

Additionally on slide 11, our online total enrollment growth increased 1.3% as compared to the prior year quarter. University group is profitable and generates significant positive cash flow. We expect the improvement in operating margins to continue in the full-year 2015 although, as usual, quarterly margins will be impacted by seasonal marketing spend.

Along those lines and this as a reminder, the first and third quarters tend to be our highest advertising expense quarters. In the first quarter advertising expenses were $51 million, compared to $47 million in the first quarter of 2014. And as Ron mentioned earlier we invested in television advertising to build the AIU brand in the first quarter of 2015.

In looking at each University segment's results, CTU's first quarter revenue decreased 2.1% to $85.1 million, as total enrollments decreased slightly to 20,300 students, a decline of 1.5% compared to prior year. However, operating income for the segment was $14.6 million which is up 0.9% from last year, as operating margins expanded 50 basis points to 17.2%.

First quarter revenue at AIU was $53.1 million up almost 1% over the prior year quarter and total enrollments also increased by 200 students to 13,500. This improvement enrollment corresponds with increased marketing spend for AIU in the first quarter. AIU's operating loss improved to $2.9 million from a loss of $3.6 million in the first quarter of 2014, even with an incremental $4 million advertising spend, as also again our team continued to execute against cost control initiatives that were put in place late last year.

Now given our announcements today to divest or teach-out all of our remaining Career Colleges, I'm not going to walk you through those specific results. I would ask you to please refer to our press release to see the performance of the Career Colleges in the first quarter. And as a reminder, Le Cordon Bleu was moved into discontinued operations for the full quarter, as we list it as an asset held for sale late last year.

Moving on to the EBITDA performance, or our transitional and discontinued operations on slide 13, you'll notice in our earnings release that we've combined all of our Career Colleges for assets held for sale and discontinued operations in our adjusted EBITDA table as moving forward we'll start to report in this manner. As it more clearly shows our operating performance going forward.

Adjusted EBITDA for Career Colleges, transitional and discontinued operations for Q1 was a negative $23.2 million, an improvement of almost $40 million or 46% compared to the prior-year quarter. The improvement was largely due to the completion of teach-outs during the previous year. While we're adding a number of new assets to this group, over time we expect to see the EBITDA burn from these schools to continue to decline.

Now turning to slide 14, as Ron talked about we still have some analyses to complete before we are able to provide more specific financial details. One of the guidance items we've talked about in the past was that in 2015 we expected negative adjusted EBITDA for transitional and discontinued operations to be in the $62 million range. Given our restructuring items I'd like to be clear that while we're on track with this specific guidance, we will need to redefine the amount as Career Colleges will now be added to this group.

As we work through the view of our last planning steps and finalize our decisions on the sales versus teach-out for each of our Career Colleges, we'll look to provide new direction on the impact that our transitional and discontinued operations will have on the business. We are estimating that restructuring charges will be from $40 million to $50 million with approximately $20 million to $25 million related to severance charges that were paid through 2018 and $20 million to $25 million related to lease obligations that we paid through 2023, which is when we will exit the last lease.

The estimate for a lease obligations includes an estimate for sublease income, which would offset our cash obligations. It's also important to reiterate that excluding restructuring charges, the teach-out of these campuses is expected to be accretive to 2015 earnings.

As we discussed in prior calls given that the Company remains in a three-year, cumulative loss position, we are not yet in a position to benefit from our current year losses. As such our tax rate in 2015 is again expected to be close to 0%.

Further, we continue to carry a significant valuation allowance. At the end of 2014 our valuation allowance was $150.4 million. Once we returned to sustained profitability we will be in a position where we will be able to begin to reverse these valuation allowances and recognize benefits associated with these deferred tax assets.

Capital expenditures in our first quarter were $3.4 million which is nearly flat compared to the $3.5 million through the same period last year. For the fourth quarter of 2014 this amount was $2.6 million.

Now let's discuss our financial position and liquidity on slide 15. As of March 31, 2015, the Company had cash, cash equivalence, restricted cash, short-term and long-term investments, inclusive of discontinued operations, of $213.7 million. This compares to $247 million at the end of the fourth quarter and $331.7 million in Q1 of 2014.

Now as a reminder we repaid $10 million during the first quarter which was borrowed under our credit agreement therefore reducing restricted cash during the quarter. Net cash flow used in operating activities for the quarter improved to $20.2 million compared to a use of $35.4 million last year. The primary driver of the cash usage in the current quarter was payments made to exit real estate lease obligations, legal settlement payments and the separation payment for the prior CEO. As it relates to exiting real estate lease obligations during the quarter, we spent $8.9 million to avoid $19.4 million of future lease payments.

We'll continue to monitor our cash balances closely, while opportunistically exiting leases and monetizing non-core assets when there are significant returns. I'd also like to point out that the cash savings we expect for exiting Career Colleges and downsizing our corporate overhead, will equal or slightly exceed the restructuring payments we expect to pay in 2015.

In other words, the restructuring will pay for itself in 2015. Therefore, we still expect to have cash, cash equivalence, restricted cash and investment balance that will exceed $190 million at the end of the year.

Outside of these restructuring charges, we expect continued, improving cash trends in the business driven by one: continued reductions in the cash burn related to our transitional and continued operations; two, improved financial performance from our University group; and three, reduced real estate cash requirements driven by organic reductions in our lease obligations coupled with the further reductions from transactions that we completed during 2015.

I'd now like to recap some of our historical guidance given this new shift in our direction and I'd ask you to turn to slide 16. We continue to expect positive adjusted EBITDA from our previously defined ongoing operations. This guidance will be updated to reflect our newly announced restructuring actions but is expected to be accretive to previous guidance.

We remain on track with our previous guidance of negative $62 million in adjusted EBITDA for transitional and discontinued operations as previously defined. This guidance will also be updated to reflect our newly announced restructuring actions to now include the impact of Career Colleges. We also continue to make progress towards our objective of modest growth and total student enrollments for the year within our University group.

On a real estate front, we will continue to be diligent and make additional progress on reductions of real estate obligations within our transitional and discontinued operations portfolio which is now expanding to include all of the Career Colleges. In terms of our focus on reducing our expense structure, we also continue to expect to generate $40 million in operating expense reductions in 2015 based on the initiatives we put in place last year. I do want to point out this number does not include any additional reductions we expect to occur as a result of our new strategy we announced today.

As previously mentioned we're maintaining our yearend cash, cash equivalents, restricted cash, and investment balance to exceed $190 million. We do not anticipate any impact on our credit agreement given the anticipated material improvements these actions are expected to have on our future operating performance.

Further, we have created a new fast-forward that will enhance profitability and liquidity profile, so we expect to be in a strong position to build an even better partnership with our banking partners. With that I'll now turn it back to Ron to offer some quick closing remarks.

Thanks, Dave. The decisions that we've made today were very difficult because in the cases where we are teaching-out campuses we know it will affect our students, our faculty, our support staff and the communities our campuses have been serving. And will be parting ways with many dedicated people who serve our campuses in centralized roles. However, these are steps we needed to take.

I do want to emphasize that we are approaching them in a way that places the highest priority on students' interests, gradually discontinuing operations through teach-outs, allowing the student reasonable opportunity to complete their programs of study. The actions we've implemented today will make up a stronger company with the competitive margin profile and a strong balance sheet. The organization will be rooted in two Universities that have a history of technological innovation and serving adults seeking to advance their careers and their lives.

I believe that, in time, Career Education will regain a leadership position in private sector higher education. These actions could not occur without our employees' dedication to our students and the organization. I want to thank all of them and all of you, our investors, for your ongoing support.

One final item I'd like to mention before we open it up to questions and answers, is the status of our search for a permanent CEO. In short, our search is ongoing. As we discussed last quarter, we have engaged a nationally recognized search firm to assist us in the process. We have been impressed with the caliber of the external and internal candidates that we've seen. We will provide relevant updates as appropriate.

In the meantime, we have a deep bench of talented executives in place and are well positioned to execute our strategic plan and meet our financial objectives. With that I'll now turn the call over to the operator for your questions.

(Operator Instructions)

We do have one question here from Mr. Jason Anderson from Stifel. Please go ahead, sir.

Good evening, guys.

Good evening.

I know you need to do more work on forecasting the cash flow of all of these changes, but I guess I'm trying to see if we could get some more directional commentary on that? I know you're committing to the $190 million and you feel you can stay above that, does that include the presumption of some of these sales happening, cash inflow from a sale?

I will let David respond, but thanks, Jason, for the question. The short answer is it does not include cash that might come in from any sales. Dave?

No, that is correct. We did not anticipate any cash from sales coming in. About the only material thing that we would expect is an income tax refund later on this year, but that's about it.

Okay. And then, I guess, the other thing I'm trying to think about, and this could be because it has been a moving target but it was either last quarter or last couple of quarters and, obviously, a lot has been happening over time here, but I thought there was a schedule, where maybe for the year in 2015, where $190 million was a seasonal low point. And you were showing you were going to stay above that, but I'm wondering if with this change would losses be generally -- I know you can't forecast them yet or you're working on that but wouldn't they generally be accelerated and does that put the $190 million at more risk?

Jason, good question. We believe that the transformation will pay for itself in 2015, and we expect to have at least $190 million at the end of the year.

Jason, one thing to keep in mind, because we announced the details today, we won't have any future starts as a result of that. We'll no longer have the marketing-related expenses.

So, as you move forward with the student populations that we have today, providing that reasonable opportunity for them to complete without those marketing expenses, it ends up being accretive earlier on in the teach-out process. That might help you [bridge] a little bit better.

Yes, that helpful, thanks for that. And then I just have an additional on here for the teach-out -- one, with Sanford-Brown, one, was there any attempt or thought process to sell that? And maybe there isn't a market for it, but I would appreciate your comments on that. And then also is there any potential for the teach-outs to find an arrangement like you had with the pathway arrangement where maybe you can find a way to transfer students out more quickly, maybe expedite the teach-out process?

I'll let Lysa expand on this shortly. But in terms of teach-outs we do have, with Harrington, an arrangement in Chicago where we will be effectively transferring in connection with the teach-out. In terms of considering a possible sale, we thought of all kinds of ways to optimize the performance and the disposition of Sanford-Brown, but I'll let Lysa take you through the particulars.

We did explore options to sell the Sanford-Brown campuses, and, quite frankly as you indicated, there is not much of a market out there for them. We did look at teach-out partnerships and trying to explore those for those campuses.

The teach-outs are relatively quick compared to the Harrington schools. And teaching them out was a better option for the students and it was also less complicated to try to find partners to teach-out that would have programs that matched. We would probably have needed to have gone to several partners to do that. So at the end the teach-out decision was expedient and economical.

Great. Thanks for that.

Thanks, Jason.

(Operator Instructions)

At this time I'm showing no further questions. I'd now like to turn the call back over to Ron for closing remarks.

Thank you very much. Well, I would like to thank you all for taking time out of your schedules to participate in the call. I would also like to thank you for your continued support of Career Education.

Today we announced an important new direction for the company. We believe this path will ultimately position the company and its shareholders for long-term success in the future. Have a great day. Thank you.

Thank you, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and you may now disconnect.