Perdoceo Education Corporation (PRDO) Q2 2014 Earnings Report, Transcript and Summary

Welcome to the Career Education Corporation's Second Quarter 2014 Earnings Conference Call. My name is Dawn, and I will be the operator for today's call. [Operator Instructions] Please note that the conference is being recorded. I will now turn the call over to Doug Craney. Mr. Craney, you may begin.

Thank you, Dawn. Good morning, everyone, and thank you for joining us on our second quarter 2014 earnings call. With me on the call this morning are Scott Steffey, our President and Chief Executive Officer; and Reid Simpson, our Senior Vice President and Chief Financial Officer. Following remarks made by management, the call will be opened 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. Before I turn the call over to Scott, let me remind you that this morning's press release and remarks made today by our executives 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, 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 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. In addition, the remarks today may 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. Now let me turn the call over to Scott.

Thanks, Doug. Good morning, everyone, and thank you for your interest in Career Education. Before I get started, I want to introduce you to Reid Simpson, our new CFO, who joined us at the end of May. Reid brings with him an abundance of financial leadership experience in both the public and private sector, having led several organizations through successful turnaround strategies that ultimately created value for shareholders. I'm excited to have Reid join our team and continue to work to make Career Education a highly respected, financially sound educational provider that graduates students who achieve their goals and who meet or exceed employer expectations. I have said this many times, but it bears repeating. Our focus is to enroll, educate and place our students into a better position to succeed professionally and to close the gap between students and employers. Our discussion today reflects that focus. Our agenda for this morning's call is to provide a progress report on our operating segments, while at the same time, sharing some insights as to how each plays its part in our turnaround. Reid will then cover the second quarter financial results before I conclude with additional business updates. Throughout the call, we will share certain forward-looking information that we believe is important to further demonstrate the headway we are making in our turnaround strategy. This type of forward-looking information will not be provided indefinitely, but at this point in the turnaround, we believe it is relevant and appropriate. At the conclusion of our prepared remarks, there will be time for analyst questions. As I discussed on our last 2 calls, we are beginning to see sequential improvement within the University segment related to enrollments, both new and total enrollments. Our forecast is for this trend to continue and for our University segment to become year-over-year total enrollment positive during the second half of this year. While our long-term goals are set higher, our short-term objective is to generate modest total student enrollment growth within our University segment, and we continue to make progress on that path. To put some perspective on this, let's reflect back more than a year. At that time, we faced significant declines in the number of student applications we were receiving. While a portion of the decline was market-driven, there were things we needed to change internally within our student admissions process to address this negative trend. In order to increase interest in our universities and improve the process in which students receive information and support throughout the enrollment process, we refined our marketing strategy, increased advertising in certain markets and improved our student support teams. These changes primarily occurred in the second and third quarters of last year. This resulted in a significant increase in the volume of applications, which helped pave the way for the positive enrollment trend that we are experiencing today. Another dynamic from last year was the 21-day student orientation policy. This policy that was in place in 2013 resulted in the number of students enrolling, but never actively engaging in their education. We addressed the 21-day policy limitations by revamping our student orientation process to provide a better and more engaging experience for students, one that both guides students through the many opportunities and services we make available and provides academic testing and instruction to assess their college readiness. We also changed the educate part of the student equation, as we expanded our intellipath adaptive learning technology into more of a curriculum, adding new academic programs, including a bachelor's degree program in Healthcare Management at AIU that came online in July 2014 and provided better and more personalized student support services. These changes have served our students well, and it helped generate early -- higher early cohort retention rates, which I will share with you shortly. We have also done extensive work and made terrific progress on partnering with companies to form educational alliances. This was a goal of mine when I first started, and last year, we hired 2 leaders: one at AIU and one at CTU, who are solely focused on creating partnerships with companies, government entities and other education institutions to meet their needs for qualified graduates. In turn, we are attracting more students to our schools and ultimately providing an opportunity for these students to progress in their careers. So far, this year, we have signed contract and partnered with more than 40 companies. Our relationships include many highly respected and well-known businesses, more than 20 of them from the Fortune 100. CTU, for example, recently signed an agreement with McDonald's, one of the most recognized companies in the world. And we have already started to see benefits from this new educational partnership. We have an opportunity to further develop this channel and value proposition, effectively creating a win-win situation for Career Education and our business partners. Many of our partners are actively marketing our educational offering to their employees through webinars, employee events, e-mails and custom marketing pieces, thus reducing our direct marketing costs. In turn, we were able to offer tuition discounts to students who enroll through educational alliance partnerships. Also, many of our partners provide tuition assistance to their employees who enroll with us, which reduces the student's need to borrow and helps us with our 90-10 ratios and cohort default rates. Moreover, our partners provide us valuable feedback about our programs and serve as yet another indicator of our educational quality. In the future, we hope to expand these relationships to not only educate current employees of our business partners, but to identify new placement opportunities for our graduates, who may be looking for new career opportunities. As I explained, we've done a lot of work on the enroll and educate process within University, and these efforts are reflected in our enrollment numbers. Slide 3 shows that total student enrollments at CTU and AIU have stabilized. And while there were an equal number of starts in the first 6 months of this year as compared to last, there were 3 AIU starts in the first quarter of 2014 and 2 starts in the second quarter of 2014. That is why you see the spike in total enrollments at AIU in the first quarter and a dip in the second quarter. Slide 4 exhibits the continued sequential improvement in the rate of decline of total student enrollments and provides further evidence that we are getting close to turning the corner and being year-over-year total student enrollment positive within University. New student enrollments at CTU increased 20% in the second quarter, while AIU decreased 5%. However, in the quarter, we made an adjustment to the classification of cancels and drops at AIU related to students that did not produce proof of graduation documentation. The adjustment, which was for the first quarter enrollments, occurred in the second quarter and, therefore, impacted reported second quarter new student enrollments at AIU. In the end, this was a classification change between cancels and drops, and total enrollments were not impacted. For the first half of 2014, AIU new student enrollments increased 18%. While there are strong increases in new student enrollments within University from a year-to-date perspective, it should be noted that in addition to the modifications we made to the student admissions process, there are also differences in the way we calculate new student enrollments in 2014 as compared to 2013, the 21-day modification I mentioned earlier. This internal policy change had a positive impact on 2014 new student enrollments as compared to 2013. Due to this comparability noise and looking at the new student enrollments, which was also impacted by increases in application volumes, my focus remains on total student enrollments, which is a more important metric as we take the long-term view of lasting success at all of our institutions. There are multitude of metrics that we track related to student progress and outcomes in order to understand how to better serve our students and help them through critical points in their educational pathway. One of those measures is the advancement of students from their first to second course. This is the critical time in the students' life cycle as it relates to retention and long-term success. Therefore, it's an important measurement for us to track and understand. Before sharing the data, let me put some context around it. As we've stated for several quarters, the business has generated a significant increase in the number of applications, beginning mid 2013. With that increase in applications, as one would expect, show rate softened, meaning a lower percentage of students who initially applied ended up enrolling in our universities. Nonetheless, net enrollment improved. Moreover, of those students who did enroll, more of them are now advancing to their second course. In tracking data through May 2014 as compared to the same period in 2013, we saw a 100 basis point improvement in the rate of which a student continues onto their second class. We also have mixed shift improvement at CTU, as more students enrolled in bachelor degree programs in June and July, in other words, longer-lasting programs. This improvement corroborates the success we are seeing in changing the way we work with students. And most important, it allows students to further their education and continue to bridge the gap between themselves and employers. Before I move on to Career Schools, I want to also call attention to the fact that, in July, we received notification that the Higher Learning Commission, HLC, acted to continue their regional accreditation of AIU. The next reaffirmation of accreditation is scheduled for 2023 and 2024. AIU is accredited under the standard pathway. And as such, there will be a comprehensive evaluation in 2017, 2018. AIU will provide 2 interim monitoring reports to HLC, which will be completed by the end of January 2015. With CTU receiving HLC reaffirmation last year, our institutions remain in good standing and continue to demonstrate their commitment to the high standards set forth by our creditors. Moving on to our Career Schools segment. This segment has undergone significant changes, and while there is more work to be done, we are progressing towards stabilizing of these schools. On our May call, I spoke of possible market disruptions related to our Sanford-Brown brand consolidation and changes to our marketing strategy. You may recall that we recently merged Sanford-Brown with our former IADT institutions in Brown College to create a new Sanford-Brown group that has a comprehensive Career Schools scope rather than the more narrow allied health scope that are Sanford-Brown school had in the past. As expected, we experienced some disruptions in prospective student inquiry volumes, which translated to fewer applications and ultimately, fewer new student enrollments. This was not surprising, given the magnitude of the changes occurring at these campuses. For example, in some markets, we introduced a new brand that was unknown to prospective students, so it will take time to develop a reputation and build brand equity. Despite the near-term disruptions of brand consolidation, we believe that moving forward with the plan was the right long-term approach to better serve our students and gain market efficiencies. We are also furthering -- further along in adopting a more localized approach to advertising. For example, we have reduced our national television purchases for our Career Schools to increase focus on local television opportunities that better account for differences in our campuses and markets. We're also increasing our testing of local outdoor advertising to build better brand awareness and targeted direct mail and e-mail to improve prospective student inquiries. We have also made strides in reducing lead aggregator sources as a percentage of our marketing mix. Of course, it'll take time to rely less on lead aggregators and more on reputation building and traditional marketing to recruit new students. Within Culinary Arts, as I mentioned on the May call, we are beginning to do additional work with high schools in some of our markets. This is a long-term strategy since these relationships are built over time, but engaging graduates from those schools who have succeed at Le Cordon Bleu is an important part of our effort. As shown on Slide 5, in the second quarter, Career Schools had 1,000 fewer students than the period -- than the prior year quarter, or a 5% decrease in total enrollments. However, Culinary Arts had 300 more students this year compared to last, an increase of 4%. This total enrollment growth within Culinary Arts was driven by the associate degree program, which was reintroduced at some campuses beginning late in 2012 and, eventually, throughout all culinary campuses. The associate degree program is longer, so students remain in the program for more than a year. Higher total enrollments within Culinary Arts have also led to better operating performance, as 11 of the 17 campuses generated improvement in operating income. Slide 6 shows the progress made in the rate of decline of total students within culinary schools. And Slide 7 demonstrates new student enrollment volumes over the last 5 quarters. Efforts are underway to expand program offerings within our Sanford-Brown campuses. For example, applications are in process for a couple of dozen new programs at 10 campuses, that if approved on schedule, would allow new students to begin classes late this year or early next year. In addition, more applications are in process for 2015 launches. Furthermore, a portion of the reduction in enrollments has been intentional as we proactively deemphasized certain programs that aren't positioned well for potential gainful employment regulations. Finally, its normal to see fluctuations throughout the year, given our turnaround situation and the seasonality of new students. Within Transitional Schools, we completed successful teach-outs and closed 7 additional campuses in the second quarter of 2014 and divested 1 campus. So far, this year, we have successfully taught out 16 campuses, as well as 1 divestiture. We have 4 additional campuses that are scheduled to close in the second half of 2014, which means 21 campuses should be removed from Transitional Schools during 2014. Slide 8 shows the progress that we have made in reducing the number of Transitional Schools and the staging of the remaining schools. These campus operations drive operating losses and cash consumption. So phasing them out is an important aspect of our turnaround strategy. However, we have taken a student-centric approach to teaching out these campuses, making sure every student has a reasonable opportunity to complete their program of study before the campus ultimately closes. As it relates to expense management, we lowered operating expenses by nearly $47 million in the second quarter of this year compared to the same period last year, as we continue to remove costs from the organization. Reid will provide some additional comments on our efforts in this area. Each of our 4 areas that I just mentioned, modest total enrollment growth within University, stabilization of Career Schools, the completion of the teach-out at our Transitional Schools and lower expenses are the main components to our turnaround strategy. Our progress was recently recognized by the global M&A network. In June, Career Education received 3 separate awards related to the headway we have made in our turnaround. The awards were facilitated by the outcome of the consulting work that AlixPartners performed in 2013 to advise the company on operational and financial improvements that have since been implemented. Before turning the call over to Reid, a quick update on the Securities and Exchange Commission inquiry that had been ongoing since the second quarter of 2012. At that time, the company was advised by the Chicago Regional Office of the SEC that it was conducting an inquiry pertaining to our previously reported 2011 investigation and review of student placement rate determination practices and related matters. We cooperated fully with the inquiry. On June 26, 2014, the SEC notified the company that it had concluded its investigation and was not recommending any action against the company. On that note, I'd now like to turn the call over to our CFO, Reid Simpson, who will take you through the additional details of our results for the second quarter.

Thanks, Scott. Good morning, everyone. I'm thrilled to be here and to be part of the Career Education team. This is an exciting and challenging time for the company and the industry in general, but also a time of great opportunity. One of my objectives on this call and in further communication with investors is to attempt to reduce the complexity of our financial results, simplify the presentation of our numbers and provide increased transparency as to our progress. This is a process that will likely evolve over time, but hopefully, one that will better communicate our results and progress. As an example, we modified the earnings press release this quarter to better highlight key metrics and report how those metrics are trending. We also intend to make clear distinction between the results and economics of our ongoing business in the Transitional Schools and discontinued businesses that are being phased out. With that as a backdrop, I will now get into the second quarter financial results. All percentage variances I'd mention will be comparisons to the prior year quarter, unless otherwise noted. First of all, let's discuss the consolidated results of our ongoing businesses. Revenue, which excludes that from Transitional Schools, was $224.5 million for the quarter, down 8.5% as total student enrollments were lowered by 4.8%. Operating expenses for our ongoing business decreased by $36.2 million or 12.7%. Educational services and facility expenses were down $8.9 million or 10.8%. General and administrative costs were down $28.8 million or 15.6%, driven primarily by lower advertising expenses and reduced legal settlement charges. In the second quarter of last year, we had a legal settlement charge of $8.3 million related to the New York Attorney General matter. Also of note, we incurred $7.4 million of impairment charges related to our culinary tradename in the current year quarter compared to a $4 million impairment charge last year in the second quarter. Overall, on the expense side, we continue to see the benefits from our rightsizing and reengineering efforts. Second quarter operating losses from our ongoing business were $24.5 million, a $15.4 million or 38.7% improvement compared to last year. The net impact of the previously mentioned lower legal settlement expenses and higher impairment charges in the current quarter contributed approximately $3.3 million of the improvement, while lower advertising and reductions in virtually every other expense line more than offset the decline in revenue to account for the remainder of the improvement. As shown on Slide 9 and in our press release, second quarter adjusted EBITDA from our ongoing business, which excludes all unique items, was a negative $3.1 million, an $8.7 million improvement from prior year. So despite the fact that revenue declined $20.8 million in the quarter through cost savings efforts and operating efficiencies, we generated meaningful improvement in ongoing adjusted EBITDA. We estimate that adjusted EBITDA from our ongoing business will be sequentially lower in the third quarter of 2014, as we invest more in advertising and marketing in connection with the back-to-school season. This is consistent with historical seasonality. Now let's turn to the financial results by operating segment. First, our University Group. In the second quarter of 2014, CTU revenue of $85 million was down 1.8%, as total student enrollments decreased 2.9% compared to last year. Operating income was $21 million, up 22.8% or nearly $3.9 million from last year, driven primarily by reduced advertising spend in the quarter. CTU continues to drive profitable results for the company. Trailing 12-month operating income for this business was $67.2 million, with operating margins of almost 20%. Revenue at AIU was $49.7 million and was 17.1% lower than prior year, resulting primarily from a 6.9% reduction in total student enrollments and lower revenue per student, partly due to the impact of the AIU milestone grant program. Operating losses for the quarter were $1.3 million compared to operating income of $1 million in the prior year, as lower expenses largely offset the decline in revenue. Next, our Career Colleges Education Group. Revenue for the quarter of $47.1 million decreased 13% or $7 million compared to the prior year due to a 12% decline in total student enrollments. Operating losses showed an $11 million -- $11.1 million improvement to a loss of $18.8 million, mainly due to $8.3 million and $1.7 million, respectively, of legal settlement costs and impairment charges in the prior year and lower expenses in the current year. Culinary Arts revenue of $42.6 million decreased 4.5% or $2 million for the quarter on a 3.9% increase in total student enrollments. Operating losses of $19.8 million worsened by $2.8 million during the quarter compared to the prior year, however, included in these results were 2 unique items in the current quarter: a tradename impairment charge of $7.4 million and a legal settlement charge of $2 million. The prior year quarter included an impairment charge of $2.3 million. So if you normalize for these items, operating loss has improved from prior year by about $4.4 million. Before I discuss second quarter results for the Transitional Schools segment, I thought it might be helpful to provide a quick overview of how these schools are treated within our financial statements. Campuses that are in the process of being taught out are segmented from ongoing operations and are reported within Transitional Schools on a separate line of our segment reporting schedules. During the teach-out process, new students are not enrolled, and we continue to provide academic and student support services to existing students. While we do our best to control costs, operating losses are incurred through the final teach-out date, as fewer students are enrolled, but many of our fixed costs remain. Once the Transitional's campus graduates its last students, the campus is closed. And at that point, it becomes part of discontinued operations for all periods presented. In addition, a charge is taken to the P&L, reflective of any future real estate obligations, net of sublease assumptions and a time value of money factor. However, the cash outflow related to that charge occurs over the remaining term of the lease as we continue to make normal lease payments. For these reasons, I think it's helpful to think of Transitional Schools and discontinued operations together. The only difference is the timing of the campus closure. Transitional Schools are part of continuing operations until their teach-out is complete, while discontinued operations reflect campuses that have already completed their teach-out. The key point is that, eventually, the dilutive impact of all our Transitional Schools and discontinued operations go away, and what we are left with is our ongoing operations. Scott mentioned earlier that we closed 7 Transitional School campuses in the second quarter and also divested a Transitional campus that was scheduled to close in 2015. In addition, there was a ground-based CTU campus in North Kansas City, Missouri, that completed its teach-out and was closed in the second quarter. This campus was never included in the Transitional Schools segment, but similar to other closed campuses, it's now being reported within discontinued operations. As reported on Slide 9 and in our press release, adjusted EBITDA for transitional and discontinued operations are shown for the previous 5 quarters. While there will be fluctuations by quarter related to the timing of school closures and other adjustments, over time, they should move closer to neutral and eventually goes away altogether. A large component of our cost structure and cash usage is derived from lease obligations related to our ongoing operations and for those campuses that have already been taught out or in the process of being taught out. We are being proactive in our efforts to lower our real estate exposure, including buyout agreements and space consolidation. Furthermore, we've increased the amount of lease -- sublease income from approximately $10 million a year ago to approximately $30 million today. As we continue to work to reduce these obligations, we will provide updates on our progress. Moving down the P&L, during the quarter, we recorded tax expense of $1.9 million against our pretax loss of $33.7 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've discussed on prior calls, given that the company remains in a 3-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%. Any tax benefit associated with our losses in 2014 will be offset by a corresponding increase in our valuation allowance. However, it's important to remember that once we return to sustained profitability, we will be in a position where we will be able to reverse these valuation allowances and begin to recognize these tax benefits. Our loss per fully diluted share from continuing operations was $0.53, which included a loss of $0.11 from impairment charges and another $0.02 per share from legal settlement expenses. This compared to a $0.34 loss for fully diluted share in the second quarter of last year, which include legal settlement charges of $0.10 per share and impairment charges of $0.04 per share. Losses per fully diluted share from discontinued operations were $0.16 for the quarter compared to a loss of $0.13 last year. Let's now discuss our financial position and liquidity. As of June 30, 2014, the company had cash, cash equivalents and short-term investments, inclusive of discontinued operations, of $274.6 million compared to $315.7 million at the end of first quarter and $363.1 million at the end of 2013. Net cash flow used in operating activities for the quarter was $45.9 million compared to $52.8 million last year. As we've discussed on our first quarter call in early May, the current quarter included approximately $21.6 million of cash outflows related to the settlement of certain unique legal matters. Absent the cash outflows attributed to these legal matters, our cash flow used in operations would have improved more than 50% from Q2 of last year. For the year-to-date period, operating cash flow used was $81.3 million compared to $67 million in the prior year. We estimate that the second half of 2014 will have a smaller cash burn than the first half due in part to the unique legal settlements in the first half. In addition, the timing of other payments, including taxes and incentives, and improving business trends should be favorable to cash in the second half of the year. Slide 10 exhibits that despite cash outflows related to ongoing losses and the settlement of legal matters, we remain in a strong cash position. Capital expenditures in the second quarter were $3.6 million. This compares to $5.9 million of last year and $3.5 million last quarter. Before I turn the call back to Scott, I thought I would share with you what Scott and I have defined as my near-term priorities in my new role as CFO. Number one is to work on the cost structure of the business to be competitive, properly scaled and positioned to become profitable. Second is to work with Scott to address underperforming assets, make sure we have plans in place to help maximize shareholder value. Third is to work and help on effectively communicating our progress and our investors' story. And finally, to ensure that we have the proper capital structure in place to continue to execute the turnaround strategy that is in process. To that end, we feel our balance sheet is strong, we expect our liquidity will improve going forward and we currently see no need to raise cash by way of equity to fund the operations and our turnaround strategy. With that, I'd like to now turn the call back to Scott.

Thanks, Reid. I'd like to take a couple of minutes to talk about a few other items. I talked earlier about being total enrollment positive by the end of this fiscal year at University and Culinary Arts. This is an important measure since, together, these comprise approximately 75% of our total revenue base. To help put this into perspective, if you look back to January 2014, we had approximately 5,000 fewer students at our ongoing schools than we did when we began in 2013. With total enrollment growth expected in these segments by the end of this year, we should begin 2015 in a better position. I want to take a minute to discuss our financial responsibility ratio, or FRR. That calculation is somewhat complex and includes a number of variables such as equity, assets and income that's intended to measure financial strength. It's calculated once a year using data at the end of December, and the ratio is reported to the Department of Education the following June. The way the ratio is calculated and measured encourages companies in our industry to have a higher level of capitalization than in other nonregulated industries. The ratio of 1.5 or higher is considered sufficient, and we met the requirements at the end of 2013 with the ratio of 1.5. As we have explained on previous calls and in our SEC filings, our ratio was negatively impacted by the valuation allowance that we have recorded in December 2013 related to our deferred tax assets. Furthermore, our losses in 2014 are also expected to negatively impact the ratio. 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, we have the needed tools to meet our FRR goal for 2014 and 2015 and beyond without considering a dilutive event. As CEO, it's part of my responsibility to position Career Education in the best way possible and to do so with the understanding of what impact these decisions have on our FRR, gainful employment outlook or other regulatory constraints. Any potential change would be done with the intention of accelerating growth and better positioning our institutions and our shareholders for the long term. I have a few final comments prior to opening the call up for analyst questions. Our segment of the postsecondary education market remains challenging and fluid. For example, we are seeing schools being taught out, education assets being marketed for sale, market anticipation of the final gainful employment rules, heightened inquiries from various agencies and overall regulatory uncertainty. As an organization, we took action last year to recapitalize the business, which provided us with flexibility to execute our turnaround strategy. Today, Career Education is in a position to be part of the solution to the obstacles facing postsecondary education. I periodically speak with CEOs, regulators, politicians and other leaders in the industry and believe that, together, we can help solve some of the challenges that private sector postsecondary education is facing and do it in a manner that put students' interests first. We are here to enroll, educate and place students and close the gap between students and employers. It's understandable that given the nature of these calls, we talk a lot about operations and finances. But we never lose sight here that those things all support what happens in the classroom. In the end, we are focused on helping our students find success and meeting the needs of employers for talented employees. On that note, I would like to open the call for analyst questions.

[Operator Instructions] Our first question comes from Trace Urdan from Wells Fargo.

My first question, Scott, is if I'm not mistaken, you all had indicated that EBITDA from continuing operations, you expected to break even by the fourth quarter of this year. You seem to have made really strong progress towards that goal with the second quarter results, and I wondered if there's a possibility that you might actually get to that goal earlier than originally anticipated.

We're still trending for being EBITDA positive in the fourth quarter.

Okay. Fair enough. And then the other question I had was I wondered if you might be able to go into a little bit more detail in terms of the consolidation of IADT into Sanford-Brown. And my question, was it only those 2 institutions that were combined? Or did some of the other ancillary Career Schools brands also get folded into that Sanford-Brown's brand? And in terms of the progress of that transition, are you in a situation now where you have schools that are branded Sanford-Brown but are essentially still only teaching the IADT curriculum? Or are you making progress towards balancing the full range of offerings at every location? Can you just speak to that issue in a little bit more detail?

Sure, Trace. All of the above. From the standpoint -- the consolidation was primarily with Sanford-Brown and IADT. It also included Brown College. That was the only other name brand that was involved in the consolidation. We do have locations still that are only teaching the IADT course program mix. We -- the way that we brand that is IADT now a part of Sanford-Brown. So it's a little bit of a more gentle consolidation in those locations. As I said in the remarks, we have a couple of dozen courses, programs that are in the mix for being spread throughout 10 campuses that would turn them into more comprehensive career school campuses. We've done a lot of market research on that with regards to supply, demand, employer opportunities, et cetera. A lot of those courses are in the business and IT area. So from the standpoint of potential infrastructure changes at our campuses, it's not intensive, or it certainly isn't capital intensive. We have computer lab at all of our campuses. And so our research included very much what the capital side of the equation would be for being able to introduce those courses. We had initially mapped this out for the -- to the offerings that happened in 2015, as we physically started to diversify those campus offerings. We've accelerated that schedule a little bit just because the process is moving along very nicely. So we may be able to do some offerings in the very last part of 2014. But that is -- it's really focused on the old Sanford-Brown, IADT and Brown College.

So -- just so I understand, so when you -- when this sort of transitional process is complete, we would still expect to have sort of a range of offerings at each location based on sort of the needs of that individual market, is that correct?

Correct.

And when would you -- go ahead.

And we're tailoring the offering in locales to best meet the needs of students and employers in those locales.

Fair enough. And then relative to that plan then, Scott, when would you expect that transition to be fully completed?

It will go into 2015. And I -- fully completed is a tough word because we're going to continually evaluate what kind of program offering we need and how best to position ourselves. Part of this is, obviously, in a part of best positioning the company for gainful employment. If that comes about -- if and when that comes about, we're certainly seeing what the time frame is with regards to November. And so we're trying to best position ourselves for that potential eventuality. And the first slug of changes that we'll be able to make will certainly be seen as we go through 2015 advertising-wise and start to build enrollment in a diversified offering. But it's not going to stop there. We have continual plans for diversifying the offering at the campuses.

Okay. And the very last question, I apologize for not knowing this already, but are there any online components to the design curriculum that you guys offer now? And if not, is that something that you're thinking about? Do you think that, that makes sense for your offerings? Can you speak to that?

That exists now.

Our next question comes from Jeff Silber from BMO Capital Markets.

I believe, last quarter, you had only been expecting to see total student enrollment growth for the University segment in the second half of the year. Now you've added Culinary Arts. Can you just tell us what happened over the past 3 months to change that thinking?

Our results are improving. We're being very focused in making some of the changes that we wanted to make on the marketing side, as well as on the education side of the docket at University. And it's paying very strong dividends for us. I've mentioned early in the year, or at the last call, the bump in the road we had with enrolling out intellipath and some of the downward pressures that had on some of the continuing students at AIU. And I also briefed you all on how we've taken a lot of corrective actions on all of that. And we've had very good marketplace reaction to some of the new marketing things that we're doing at AIU. I think the students support things that we're doing in the student intake process, stitching a variety of other things that we're doing. The orientation that we're using, which is getting people very familiar with the kind of time that they're having to invest for understanding our intellipath platform, and what it's going to take to be successful at the schools is paying off. We had a change of leadership at CTU and brought in Adam Hurst, as you all know. He's made a very nice and important impact, especially in terms of improving how the institution is looking towards the total life cycle of the student. We're seeing dividends of that pay off as well. From the standpoint of the culinary side of the house, that population relative to the extended associates program matured faster than we had originally indicated in the K, and so was a positive for the quarter. And it's one of the reasons why we've been able to hold off on certain types of advertising expenses in that part of the portfolio for right now because we're seeing another part of the model mature that gives us a little bit more time before we make that kind of an investment, consistent with what we want to do with the high school market, which, as you well know, has a lot to do with timing and how you make those hires. So it was improved performance.

Okay. Great. Just shifting gears a bit, obviously, one of the larger public companies in the space, Corinthian Colleges is going through some issues. I'm assuming there may be some overlap with what they do and some of your Career Schools. Can you talk a little bit about that and what the impact might be?

There is some programmatic overlap on -- between Corinthian and us, both online and on certain ground geographies. We do have some overlap, but they have many more campuses than we do and their geographic footprint is much larger than ours. But there is some significant programmatic overlap between the 2 institutions. From the standpoint of what's going to happen, what I can see is that there's going to be some -- there's going to be a large competitor that either stays in the market with a different operator or a scaled-down competitor in some of those markets. And so we're very prepared from the standpoint of being able to work in the best interest of the students in those locations to make sure that they're not dislocated. And we've prepared outreach material and so forth to make sure that they know that there are options. We've already done a fair amount of homework from the standpoint of transferability and articulation, and so that -- if there are potential displacement situations, we have the ability to get the word out from the standpoint of being able to educate folks of how they can go ahead and take the progress that they have made and continue on the progress that they have made. And I've been in contact with both Corinthian and other stakeholders to let them know of where we have overlap and ability to help those students from being disruptive.

All right. Great. Just a quick numbers question for Reid. I know you talked about some of the, I guess, noise in trying to look at your starts trends. But what was the impact of that on AIU starts in the second quarter. I'm just trying to see what the "normalized starts" change was?

Yes. What we said -- what I said in my remarks, and I'll just jump in ahead of Reid because it was in my remarks. But what I said is that AIU had an 18% total -- new student enrollment growth for the combined 2 quarters. The right way to look at this, jeff, is that we had 21-day in place. We took 21-day out and put in what we believe is a better process. And if you look at the persistence of our students and how they're moving along, the proof is in the pudding there. I mean, it is happening. The absence of 21-day still leaves a 7- to 10-day period of time where students can do drops. And so the difference is those next, really, 10 days -- and it's really a smaller segment of that, where you have any kind of meaningful addition or subtraction of the overall number. There is no specific metric that ties one to the other. And that's why when I came here and we were doing some recasting, I was very -- it was not something that I was hugely excited about. And it's one of the reasons we want to stop that because the numbers are what the numbers are. And I think what our obligation is, is to tell you how we're making our adjustments.

Our next question comes from Jerry Herman from Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Scott, just wondering if you would -- follow-up to Trace's question earlier with regard to EBITDA expectations, I think you also have been targeting positive EBITDA in 2015, inclusive, in fact, of the Transitional School losses and cash flows, is that correct?

What we've said about 2015 is that we would see EBITDA positive results for the continuing operations. When I said that, frankly, we've outperformed that as we had squeaked in at EBITDA positive in the fourth quarter of last year. And again, we're over performing that from the standpoint of my statement saying that we're trending for EBITDA positive in the fourth quarter this year. So I see that all as improved results from when I made that forecast. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And Reid, one for you, if I can. The discussion has been around $70 million in Transitional School losses for this year, with about 80% of that being cash, which is sort of mid-50s. The way I look at that and an attempt to reconcile that with the disclosures today, you had $19 million in EBITDA losses in the first quarter, $16 million in the second quarter. Can you give us some color on how that would lay out in the second half of the year to sort of get to that mid-50 mark, and likewise, some reasonable expectation on Transitional School cash losses in '15?

So the Transitional School losses should feather down sequentially as we move into the second half of the year versus the first half of the year just by the numbers of schools in play. And so that burn will diminish in the second half compared to the first half. With regard to 2015, I'm not sure that we've provided any specific range of impact on that on a full year basis. Now I think as we progress over the remainder of this year and we get some further visibility, for example, on how we're tackling that lease project that I described in terms of trying to reduce some of the real estate burn, I think we may have some better perspective to lay out a bit later on in the year that would be more helpful.

The only change that we've made with regards to discussion is, we said we would have 10 campuses in earlier comments for 2015 and beyond to teach out, and it's going to be 9. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Right. That's okay. That's helpful. And is the 80% cash impact of the expected $70 million in operating losses, that's still a good range?

Yes, yes. Yes, I think it is. But then, again, the item that would help impact that, again, is whittling down some of the real estate obligations. So to the extent that we make some progress on that, I could probably update you guys and then say, "Well, maybe it's a bit lower than that because we've been able to whittle down some of the cash burn on the real estate." Because that becomes the most substantial part of your cash burn. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Right. Okay. Great. And then with regard to sort of framing the expectations, it appears that the fourth quarter or year-end cash balance should, in theory, be the low watermark, is that fair?

For this year? Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Well, for the low watermark period. And I guess, the variable there is, are the positive EBITDA numbers generated from the continuing businesses more than offset those in the transitional businesses?

We haven't given any guidance on what the timing of our low watermark on cash. What we have said is that -- what both Reid and I have said is that we feel very good about what our capital position is. We don't see any reasons to do anything. I think we have adequate cash to be able to meet our turnaround. What we haven't said at any one point is exactly what our low watermark is or the date thereof. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. Great. One last one if I can sneak it in before I turn it over. Sorry to ask so many. But the -- Scott, your color on FRR, on the financial responsibility ratio was very helpful. I think, I mean, if last year you were at 1.5, have you guys targeted what that might look like this year?

Sure. Yes, we do a lot of homework. And yes, yes, yes, I'm -- we're on top of that. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: And willing to share a reasonable range? I think you know I'm going to ask that next, right?

We haven't given any forward-looking information on that either from the standpoint of the detail other than to say that I think we have the tools necessary to meet our goals.

Our next question comes from Corey Greendale from First Analysis.

I apologize, I actually have to hop to another call, so I'll follow up with you offline. But congratulations on the progress, and I'll follow up shortly.

Our next question comes from Peter Appert from Piper Jaffray.

So Scott, I was hoping you could talk a bit about how you're thinking about pricing strategy broadly, and then, specifically, how we should think about the trend in revenue per students for the different brands over the course of the next few quarters.

That's a good question. From the standpoint of pricing, there's a few different -- I mean, because we've got so many different models, it's not one that I can answer in a generic way. We are looking at some -- a variety of different things in various pockets of the portfolio. We have no plans at the moment for price increases, I would say, on the online side. We are looking at -- we did just recently announce Fast Track and some other types of things. We are looking at some other ways in which students can help progress. That effectively lowers some of their costs. We are looking at some cash pay options that may be at a reduced rate from where they are today. And so what it's -- what I can say to you is we're looking at all of the options across the portfolio and there's nothing generic about that, that I can -- that I would say pertains to the entire portfolio. We are looking at doing some experimentation to see where we can help the affordability of reaching your goals academically.

So it sounds like -- I'm not putting words in your mouth here, but it sounds like the trend would be at least modestly lower revenue per student on a go-forward basis.

On a total -- well, that's not entirely accurate. Our cost per acquisition has been very good, especially from the standpoint of the online side. It's been a little choppy on the Career Schools side. It's been very good on the online side. And length of stay is improving in certain areas throughout the portfolio. So I wouldn't necessarily come to the conclusion that revenue per student is on a downward trend.

Okay. And then related to your comment about advertising spends being lower in the current quarter, is some of that just a timing issue? Or are you actually seeing some economies that continue going forward?

There's 2 or 3 things that are important to understand our advertising spend in this quarter being lower than the last quarter. We are seeing cost per new enrollments have a positive step for us, especially on the University side. Like I said, it's choppy on the Career Schools side. But on the University side, we've had some improvements there. So you can -- and so from the standpoint of going into this quarter, which is the softest marketing spend quarter, one of the other things that I did not want to do is to chase what we had last year. June and July is when we started to get a spike in interest at AIU and we had some -- lead up to that with some advertising costs. I didn't want to chase that, and that's why I keep telling everybody, watch the total enrollment number because the comp gets a little messy. We then did it for CTU in the latter part of the third quarter. And so that's -- I'm gauging my powder appropriately. As I said, I have resisted the temptation of accelerating some marketing expense -- spending on the LCB side because that business model was maturing faster and there was a timing to that. If you're going to time it for high school recruits, that makes a lot of sense. Not making that spend right now. So that's another reason, so improvement in costs, not running after a spike that occurred. We also have 6 less campuses that we're spending for because we moved 6 campuses into the Transitional Schools group at the end of last year. So you put all of those things together and you're seeing why I'm managing to a lower advertising spend in this quarter. I do expect in the third and fourth quarter -- I mean, in the first quarter, we were almost identical to last year. And when you think about where our student population number is, that starts to make a lot of sense because they're getting pretty darn close. And I do have very similar spends planned for the third and fourth quarters of this year.

Our last question comes from Trace Urdan from Wells Fargo.

Just one follow-up, kind of in response to Jeff's question about Corinthian. Yesterday, Lincoln told us that in markets where they operated near some Everest Colleges that the negative publicity surrounding that situation, they felt, was affecting them. And I just wondered if you could address that, whether you're having the same experience or not.

I don't know what locations, obviously, that they're...

In other words, people were sort of seeing all 4 profit locational schools in the same bucket and not making the distinction between the Corinthian brand and other brands in the market. Are you having that experience or you're not seeing that?

What I can tell you is that from the standpoint of our marketing spend and results from that and application flow and so forth, we're not seeing anything that suggests that there is a market correction going on.

Thank you. I will now turn the call over to Scott Steffey for closing remarks.

Thank you once again for your time today. We plan to be active with several investor-related events in the upcoming months. So I look forward to meeting with some of you. Enjoy the rest of your summer and feel free to give us a call with any follow-up questions. We'll speak again next quarter. Thank you.