Welcome to the Career Education Corporation's Third Quarter 2012 Earnings Conference Call. My name is John, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Matthew Tschanz. Mr. Tschanz, you may begin.

Thank you, John. Good morning, everyone, and thank you for joining us on our third quarter 2012 earnings call. With me on the call this morning are Steve Lesnik, our President and Chief Executive Officer and Mike Graham, our Senior Vice President and Chief Financial Officer. Following remarks made by management, the call will be opened for analysts and investor 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 also be available on our site. You can also contact our Investor Relations department at 847-585-3899. Before I turn the call over to Steve, let me remind you that yesterday's press release and remarks made today by our executives may 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, 2011 and our quarterly filings with the Securities and Exchange Commission. Except as expressly required by the 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. Now, let me turn the call over to Steve Lesnik.

Thanks, Matt. Thanks very much. Good morning everyone. We appreciate all of you joining us today. I am going to apologize in advance. I have a little raspy throat with cold, so please bare with me. I'd like to begin by introducing Colleen O'Sullivan, who joins us today on her first earnings call in her new role as Chief Financial Officer. Colleen, who previously served as our Chief Accounting Officer for four-and-a-half years, is a key member of our senior management team. We have a great combination of new and old faces and our newly established executive committee is a mix of fresh perspectives and approaches with existing deep knowledge of post-secondary education as well as in the intricacies of this particular organization. We are all very pleased to have Colleen on the team, and I'll turn the call over to her in few minutes to talk about the results of the third quarter. I have been here almost exactly a year. You may recall that when I arrived at the end of 2012, I said this year would be a year of transition for both, the sector and for Career Education. That turned out to be an understatement. In fact, the year wasn't just transitional, it was transformational. In our judgment, those companies and institutions that haven't or don't transform will see the shrinkage of the past two years continue, if not accelerate well into the future. At Career Ed, we believe we are in the process of making the changes necessary to be a sustainable educational organization providing post-secondary, academic and vocational education where it's needed most here in America as well as in Europe to our premier institutions there. When I arrived last year, I said to you that Career Ed needed to immediately address three critical…

Thanks, Steve. Let me first start by saying that I am happy to be speaking with you today. As the remark made by Steve convey, we are at a critical point in the company's history and I look forward to working with the leadership team as we execute against our strategic vision. Now, let me provide some additional comments from financial perspective. The third quarter continued to present challenges for the entire secondary education sector with weak new student demand, lengthening student decision making process and further operating deleverage impact operating results. Further, Career Ed's matrix operating structure presents additional operating complexity that has put additional pressure on our margins. Before speaking further on our strategic path forward, I would like to recap the quarterly results. During the third quarter, the company generated revenue of $333 million, a decrease of 22% versus the third quarter of 2011. Operating loss was $48 million in the quarter, driven primarily by declining enrollments within our career school group of campuses. Overall, student population was approximately 82,000 students, down 22% from the third quarter of 2011, and our new student starts for the third quarter of 2012 were down 23% versus last year. While we have now fully anniversaries the introduction of our student orientation and readiness program known as SOR, let me remind you that the year-over-year start comparison is impacted by a timing shift that occurred in our culinary and health institutions. On a comparable basis, new student starts would have been down 30%. Also, pre-enrollment testing accounted for approximately 480 basis points of this decline. Let me spend a few minutes on each of our operating business segments. First, the university group which includes our predominantly online institutions Colorado Technical University and American InterContinental University. For the first quarter, CTU revenue…

Thank you. (Operator Instructions). Our first question comes from Gary Bisbee from Barclays. Please go ahead.

Hi. Can you give us any color or commentary to help us think about what the magnitude of the costs related to the teach-outs are? I don't so much care about goodwill or intangible, or write-downs or that kind of thing, but the value of the excess lease commitments once you close them, how much they could lose in the period between today in getting them closed and any commentary to help with that thing.

Thanks, Gary. This is Colleen. At this point, we've disclosed in my remarks, we expect the losses for those campuses that are going to move into teach-out for 2012 to be roughly $62 million. Comprised in those campuses are to your point, remaining lease obligations. As we work through and continue to look at opportunities to exit those locations, we anticipate that we will do our best to limit the cost related to that. So, at this point, we are not going to provide specific information regarding our expected cost. We do anticipate as we move into the fourth quarter similar to what we've done historically, we will set these campuses into their own reporting segment. And as such, we'll be fully disclosing the operating results and related costs to the teach-outs at that time.

If I go back and look at 14 or 15 schools that the company thought-out between 2007 and 2009, the operating losses from the period of beginning that process were twice what the operating losses were in the year prior, so the year that the decision was made and the cost to exit real estate and other cash charges were more than the amount of operating losses. I mean, it would appear to me that your entire U.S. cash balance could be used up and maybe more in doing so if the cost were similar, so I appreciate that you don't want to say much, but can you say anything to help us understand if that's fairly recent experience that this company has had is a good rule of some to use? Should we be thinking about inability potentially to handle those costs or are there reasons to believe it could be much less than our prior experience. Thanks a lot.

This is Steve. Our calculus, we've seen your numbers and our calculus regarding the teach-outs of these schools is somewhat different than your calculus regarding the schools. Obviously, there are costs. We have already stated to you that the expected contribution of those schools are for the period of 2012. And as you know, at teach-out, there are certain costs that you can take out immediately and other are reduced as the teach-out progresses, so yes we have looked at it. Our calculus is somewhat different than yours. And as, Colleen has already stated, we fully expect to have sufficient cash for the next 12-month period.

Okay. And then just if I could sneak one last one in, is the operating loss similar to what you've seen on a cash flow basis from these, and so said differently, the schools that you are planning to continue, is it fair to say that those today are generating healthy amount of cash. If you look at them excluding the drag from these weaker performing schools.

I am not going to comment on that. Let's go onto the next questioner.

Our next question comes from Jerry Herman from Stifel Nicolaus. Please go ahead

Good morning. Jason Anderson in for Jerry. Regarding your commentary on the financial responsibility and also thinking about the issue Corinthian is having with the treatment of intangibles and their composite score, could you elaborate on how you are treating that in your projection of being compliant?

This is Colleen. I'll take that question. We have looked at the disclosure. I don't want to speak to the specifics related to what Corinthian is working through with the department. I can speak from our perspective and the calculations that we've done in our financial responsibility over the past years has been from our perspective on a consistent basis. As you know, we have taken impairment charges over the course of the past number of years and have treated those as normal operating expenses for purposes of the calculation, but I don't want to speculate on the outcome of Corinthian's discussions with the department.

Just one here a little bit more of a strategic question. Obviously you have a lot of things going on that you are, but you mentioned last quarter retracting the efforts to go to one OPEIDs, presumably, so you can open up programs. Can you comment on any of your new program expectations into '13?

If the question is, do we have plans for other types of consolidations of OPEIDs, if any of our plans are dependent on that, they are not. Did I understand your question correctly?

Well, I was just wondering presumably you are doing that, so you could rollout new programs to students and I am just wondering what your thoughts are on that into '13? Are you going to be able to expand open up new program offerings to students, I am just thinking in the growth and can you work on the growth side, while you are dealing with the restructuring side?

Jason this is Colleen and you are correct. Our previous commentary as we made the decision to remove request for the consolidation was most importantly around the inability during that time that it's with the department to rollout new program. The company had built up, so we did not stop developing new programs while we were going through or waiting for the approval on the consolidation. What we did do once we removed our application was very thoughtfully looked at those programs that we had been working on to determine and prioritize, which ones we wanted to move forward quickly with the department on and we have successfully submitted program applications and have had approval of subsequent to removing the consolidation request. So, as we move into '13, yes it is something that we are looking at, and we'll continue to focus on. I think Steve's remarks also covered the aspect from a strategic perspective of moving quickly into those programs that offer the best outcomes for students, so we are looking at that as we move into '13. Under the [auspice] of ensuring that, we are putting programs in place again that provide good outcomes, the best outcomes for our students.

One follow-up that. Is there any way you can, I mean, give us some color on impact of that like, how many new programs in '13 would be slated versus what we've seen while presumably maybe not hear in '12?

This is Steve. As I mentioned in my prepared remarks and as Colleen just alluded to, since resending the application for the OPEID consolidation, we have been doing this, and we are now on a continuous basis in the process not only with the Department of Education, but also with our accreditors seeking alterations for programs and approval for new programs and this will be a continuous process. I cannot give you a specific number of how many programs we are going to ask to be adapted or modified and how many programs we are going to ask for to be new, but I have tried to imply in remarks I made that we are going to be in the processes of adjusting with our historical program offerings to what we see as a median employment needs in the communities in which we operate. Can I put a number on those? No, I can't. I can only tell you it's going to be a continuous process and that we are looking to partner with both, our accreditors and the Department of Education in enabling us to adapt as quickly as we can.

Our next question comes from Corey Greendale from First Analysis. Please go ahead.

I have a couple of questions on the cost savings front. I was hoping you might be able to give us some sense of how much of $45 million to $55 million in cost savings might overlap with the campuses you are closing. In other words, whether that would be kind of incremental savings or whether that could be part of the savings in teaching-out those campuses?

Corey, thanks for your question. The reductions enforce that we are going through are across all of our institutions. Will they impact those campuses that has been identified for teach-out? Yes, but they are, I will say over and above the actions that we've decided to take from a teach-out closure perspective.

Okay. Then a question on kind of the AIU, CTU strategic plan, so I think Steve in your commentary you mentioned people finishing their degrees quickly and efficiently. The commentary in the queue talks about price being competitive in terms of pricing, so I was just hoping if you could say a little bit more about what you are thinking in terms of the differential tuition in CTU and AIU and how it compares with the current price levels?

I can't quantify it for you. It's a reasonable question and a good question, but I can't quantify it for you right now. Obviously, one is going to be a higher support system and the other is going to be a less of a support system and that should reflect itself in the necessary infrastructure to support the students and that should in turn reflect itself in pricing. We obviously have done some work to-date in terms of just what the pricing adjustment should be and what the differential should be and we continue to work on that. We expect to be able to give you probably some more color on that in the early part of next year.

Okay. Then one regulatory question you mentioned in your script about the placement rate. The things you have done to fix that. Those two are kind of a number of metrics in terms of recent data you reported to ACICS and ABHES. Can you give us a little bit on what the implications of that might be whether that triggers any sort of review or anything like that?

Well, those two are in a little different state, but I think that ACICS has adjusted its categories in the past year. They used to have just the one line that you either passed, or if you didn't pass, there were various actions that ACICS could possibly take with respect to being under the line which used to be I think 65%. Now they have a variety of categories and that has been instituted in the past year. Since it's also new, it is largely at the discretion in ACICS's case to determine what to do at each level of placement rates and I am sure that they will be responding to us and to all the schools in the near future. Now that we have all submitted, our rate so to speak as to what to do at each level of rate performance. Clearly, those schools that are at the bottom or below what they consider to be the lowest acceptable rate, which I believe is 47% now, we will await to see what actions ACICS takes at its discretion. It could range again certain restrictions on program approvals. It could range to a number of actions that it thinks it should take. I have tried to say to you today and we have said to everyone that the numbers that we submitted to ACICS, ABHES and ACCSC, all are a reflection of that year period ending June 30, 2012, where we did much, much better in the second half of that period than we did in the first half of that period, and I think we have demonstrated to everybody a great deal of improvement. Hopefully that will also influence the actions that each of the accreditors decides at its own discretion and under its own authority to take.

Our next question comes from Brandon Dobell from William Blair. Please go ahead.

Thanks. I was hoping to get maybe a little color in the career school's business about the pricing strategies. Looking to have program by program pricing, location based pricing a little bit sense of how you are approaching that and what we should think about from kind of revenue per student trend looking out a couple or three years? Thanks.

The answer to first part of your question is yes. You obviously have been thinking along the same lines that we have. We are not, I think it's fair to say cleanly jumping and comment after I do, but we are not going to have lateral pricing activity. I know that some others have stated that in various calls, but we are going to do it exactly as you suggested. We are going to do it geography-by-geography. We are going to do it demand-by-demand and going to react to the marketplace. Simply said, where we have programs that have been oversubscribed and in great demand and great needs. We will price accordingly and the opposite will be true as well. We believe that we are remaining in locations where in the longer term there is going to be demand for programs that we offer that is employer demand as well as student demand, so we are going to do a market-by-market, program-by-program pricing strategy, which we presume could go in both directions.

And then segment [schools] for a second. As we think about the schools that will keep going in operation, I would presume from a 9-10 and from placement rate point of view that the ones that we'll keep going within at the top of the list or are there ones that you felt the changes you've made set them up much better going forward, so there is underperforming schools on a historical basis that you think you can turn around effectively, just trying to get a feel for what you are looking out let's call it 18, 24 months as soon as those metrics like 90-10 or placement rates or things like that will start to look from the remaining group of schools.

Good question. I threw into my prepared statement that we had I think almost 50 criteria against which we measured each of the schools and are evaluating which ones to close right now and which ones to try to build on in the future. Obviously, the two metrics or the two criteria that you just mentioned were amongst those criteria. And, a lot of others that we think are important as well. I am not sure I can answer that question in a positive. I know I can answer it in a negative which is that those schools that we do not think we're a good bet to either past 90-10 or would be struggling for 90-10 or would have to manipulate OPEIDs or something for 90-10, those we eliminated and the same is true in placement rates.

Okay. Then final one for me. Between AIU and CTU, it sounds like there is going to be different price points based on service levels and infrastructure and things like that. How different should we expect the programmatic focus to be? Should the course catalog look very different or it's going to be similar program just look different and levels of interactions with the institution from the student perspective?

Well, I should probably have had Jason Friesen in the room to answer that question directly. I am not sure, again, Colleen maybe closer, but based upon what I heard there will be program differences between the two. At least in emphasis, at least in core programs, where they believe that they have embedded expertise faculty and student experience names that they really, really know. And, I think they do expect there to be difference. I think, there's probably more of a technology even on Colorado Tech side, there's certainly a security event we expect we are very, very strong for example in all sorts of security. Academic disciplines, including home van security, we expect to build on that. So, I think the answer is yes, there is going to be differences in program offerings as well as in the level of complete service support and infrastructure that's offered.

Okay. Thanks a lot. Appreciate it.

Our next question comes from Jeff Silber from BMO Capital Markets. Please go ahead.

Thanks so much. Just wanted to go back to the campus closures a bit. Colleen, you were kind enough to give us some detail regarding revenue and operating losses. Can you tell us what the impact on enrollments will be?

At this point, Jeff, I am not able to share that information with you, because we said in our prepared remarks, we have not yet notified the individual campuses, so I would like to hold that until we have that communication made.

Okay. I understand the sensitivity around that. In terms of the workforce reduction, and again this maybe a sensitive question. Can you roughly give us an estimate how much of that is going to impact corporate overhead versus the specific segments?

Again, I apologize for what may seem to be not responsive, but we are not intending to share sort of the breakdown. What I will say though is, similar to the criteria of that, we went through from a teach-out perspective, we took a very hard look at what the structure of the corporate center should be as it pertains to supporting the campuses from a fact that they have begun and have been declining over the past number of quarters, so there has been a very focused look not only the campus structure as we alluded to in their remarks corporate centers.

I want to punctuate that. Colleen is being modest, because this is her first call. She has done a very good job of doing a deep dive into analyzing our corporate cost structure and determining how it should be adapted as we adjust to this downsizing in the field and at the campus level and there is going to be at least a commensurate reduction at the corporate level to adjust to the field and she has done an excellent job at analyzing that.

I understand.

Come give her a little kudos.

All right. That's great. I think, also you mentioned in your prepared remarks that you had some cash put in restricted cash as of October 31st, can you tell us roughly what that amount was?

Yes. It was just under $8 million.

Great.

That would be, again just to clarify, that was in October upon the termination of the facility.

All right. And, do you know what in terms of replacing the size of the letter of credit, roughly how much in letter of credits have you been posting prior to this?

It's roughly about the same amount.

Okay. Good. I just wanted to clarify that. That's great. And, are there any other one-time items in the quarter whether calendar quotes for one-time issues both, in 3Q or 4Q that we need to be aware of?

No. I did mention, Jeff, in my remarks the shift in starts for health and culinary. To recall last quarter, we mentioned as well there was an additional start here in the third quarter for both of those education groups.

And, roughly, what was the impact of that?

I think it moved us about 10%.

All right. Great. And then finally, Steve, in your prepared remarks, I think you said that all senior managements slots are filled. Does that infer that there will not be a CEO search coming?

No. That did not imply that.

All right.

It didn't imply it. It just says that willingly or unwillingly I am still here. I am still enthusiastic and committed, but we do have a search underway actively to replace me.

All right. Thank you for clarifying that.

Our next question comes from Trace Urdan from Wells Fargo. Please go ahead.

Thanks very much. With respect to the changes that you are contemplating at CTU and AIU, I am wondering if you have begun the dialogue with HLC about prospective mission changes there.

We have been in dialogue with HLC on any number of issues and we know that at least some of the changes that we are talking about requires their approval. I don't think that we have brought specific changes yet to their attention, because we are still, as I mentioned just a moment ago, studying a variety of aspects to this. I think we said repeatedly over the past couple of calls and in conversations in one-on-ones with all of our accreditors that it is our intention to partner with them on all the changes that we make.

Okay. Then I believe in your prepared remarks you referred to multiple announcements regarding how the campus closures were going to take place in which segments and which schools. Can you give us a little bit more detail on when investors can expect to receive that information? Are we going to be sort of watching a series of 8-Ks. Is it going to happen all between now and January, or are we going to get it all at once? How is that going to work?

Trace, this is Colleen. What we've committed to as a leadership team and Steve spoke to it in his prepared remarks to your point, we have a process that we go through to ensure that we have appropriately notified constituencies, including the department, accreditors, the states in which campuses operate and not to forget the students that it will be impacted as well as our employees. So, having said that, our anticipation is that we would be notifying those campuses that will be impacted here early into December. Having said that, as far as our public disclosure around that, we do anticipate moving quickly, because we appreciate the anticipatory stress or what have you that this may cause on all of our constituents, so we are moving quickly as we can be. We will update appropriately as we execute through that. I would not anticipate a series of communications. We will make the appropriate disclosures as we deem necessary as we feel there's material information to share.

It seems in advance you are to be able to anticipate what might or might not be material, so I guess my question again is, would we expect to receive some communication from prior to the next earnings announcement or would we expect not to really get much detail from until that point?

We will. It will become apparent on websites on what schools we are closing. We are giving the overall numbers that are material now that we know of now. And, as other material requirements or financial disclosure requirements become necessary in the future, we will issue them. But, it's going to become, I think, pretty readily apparent over the next a couple of weeks and months which schools are closing and so forth.

Our next question comes from David Chu from Merrill Lynch. Please go ahead.

Hi. Thank you. How long has CECO been on heighten cash monitoring. I guess it's the one status?

One year.

Again, was this caused by the placement rate issue?

To the best of our knowledge, yes.

And, you guys talked about in the Q, potentially getting put on monitoring 2 status, just wanted to see if you can kind of explain what the differences are in the likelihood that that could happen?

I can't speak to the likelihood of it happening. We expect to be in the zone. I am not aware. I don't know if anyone's aware of anyone who has been in the zone ever being put on HCM2, so you can draw whatever conclusion you want from that. It would be completely unprecedented if it were to occur, so that's number one. I can only respond in that way. The difference between HCM and HCM2 is, you want to explain it? Go ahead. Either one of us can explain it to you. I'll have Colleen will do it.

So, HCM1, I think, as we have disclosed previously and to Steve's point we've been on that for now just over a year or so, really did not have a significant impact on our operating processes. So, as we move through the requirements of that we made some tweaks, but nothing significant from what was even before being on HCM1, our internal processes. As we move if in fact to Steve's point, there is an action that moves to HCM2. It greatly delays the timing of when our institutions that are placed on that would be able to draw Title IV funds and move more to something between 30 to 60 days of a delay from where we are today.

Okay. In the Q, it also states that you guys will be meeting that foundation for education success like the free trial period. I think it's 21 days. How does that impact the SOR program going forward?

It replaces the SOR program. The SOR program as you know only affected a certain students. This will affect all new students, and we think it will be equally if not more effective for students.

So, the difference is, A, it's all students versus I guess a certain select amount of students and it seems like is the program shorter? I think SOR was five weeks. This one is like three weeks. Is that correct?

Yes. It was five weeks, but it was not necessarily five weeks of classes depending upon how it was applied in various places throughout the company. As you know, I said innumerable times, this is pretty complex play, so it wasn't applied uniformly, but yes. It wasn't concept five weeks everywhere, but not necessarily five weeks of actual classes.

Got it. Okay. Thank you.

Our next question comes from Jeff Meuler from Baird. Please go ahead.

Yes. Thank you. Steve, at the beginning of the call, you talked about I guess the need for people and the industry to evolve or transform themselves or face perpetual decline, which seems to suggest that you think there are secular challenges facing the industry. It's not just transitory challenges, but you also talked about returning to I think you used the phrase sustainable growth. Just wanted to know how you were thinking about seek or returning or sustainable growth. In your view, is that completely under your control due to all the initiatives that you are rolling out or would that also require, I guess, some improvement in the overall environment.

Well, that's a wonderful, wonderful question. I am not sure however that Matt is going to allow us to expand the amount of time we have on this call, but to give an adequate response to a very deserving question. I would say this. You know, we'd all like to think that, we're driving our own bus and we are the determinants of our own destiny. But, in today's highly regulated world, there are a lot of forces outside your own bus that determine whether there are barriers, potholes, turns in the road and so forth. So, I think it's a combination of things. I really do believe that there is a great need for innovation and education in our society and I have embedded belief that there is a great need for a bit more application of technology to education to fill the education gap that exists in our country and that fundamental belief says that our sector and our schools are needed, and I also have a belief that there will be those institutions hopefully including ours that will have the intelligence, the strategy, the commitment, the resources to operate in such a way that we can provide the educational courses and programs of study and certificates and certifications that are necessary to place people in these jobs. And, if we are able to do that, if we are able to put as much emphasis on the backend of the business as has been on the front end of the business traditionally for the last decade or two that we are going to be a successful organization, and I don't think that anybody is going to be grudge an organization that can provide that kind of service an appropriate and adequate and reasonable even attractive return.

Okay. Then I guess just a quick follow-up on who that bus driver is going to be. I guess, I was under the understanding that you guys had suspended your CEO search for permanent CEO, I guess and definitely earlier in the year given the challenges that you've been working through. Was that the case or when did you reinitiate the search, or? I don't know if there's any sort of rough timeline you can provide, Steve.

Okay. I think, what I said. When I first came, we didn't think it was going to be that long, and then we said we would not undertake a search until we are going get our arms around the problem. We do think that we have our arms around the problems. We think we have everything identified and hopefully you will agree that we have a course to act on and that is now an appropriate time given the fact that we have a strategic course to work, given the fact that we have addressed some of the crises that the company was facing back in November, December, January that we can attract a creditable candidate to come in here and be the day-to-day leader of the company. And, within the past month or so, we have initiated an active search for a successor for me and hopefully we'll find somebody who has all of the characteristics that our employees can admire and that all of you can admire.

Okay. Thanks, Steve.

And, I'll turn it over to you, Steve, for closing remarks.

Okay. I think, we have just about used. No, we've gone over our time a little bit, so I want to thank Matt for that. Thank you for your questions. I hope that we have answered them and given you the color that you expected to get on this call. Once again, I want to thank Colleen for participating in the call and she did a great job this morning and we look forward to talking to you all down the line. And, if there is anything that any of you wanted to ask and didn't get around to asking, please feel free to call Matt, and if you need Colleen or I involved, I am sure we'll make ourselves available to you. Thanks again for your time this morning. We appreciate you being on. Bye, bye.

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