Welcome to the Career Education Corporation Third Quarter 2014 Earnings Conference Call. My name is Ms. Yolanda, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. It's now my pleasure to turn the call over to Mr. Mark Spencer. Mr. Spencer, you may begin.

Thank you, Yolanda. Good morning, everyone. I'm Mark Spencer, Director of Corporate Communications. Thank you, all, for joining us on our third quarter 2014 earnings call. With me on the call this morning is Scott Steffey, President and Chief Executive Officer; and Reid Simpson, our Senior Vice President and Chief Financial Officer. Following our remarks, the call will be open for analyst questions. This conference call is being webcast live within the Investor Relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our Investor Relations Department at (847) 585-3899. Let me remind you that morning'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, 2013, and our other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, the remarks today refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. Our press release and slide presentation which accompany today's call and which contains financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures is available within the Investor Relations section of our website at careered.com. So with that, I'd like to turn the call over to Scott Steffey.

Thanks, Mark, and thanks to everyone for joining us on the call today. We appreciate your interest in Career Education. The traditional back-to-school season proved to be both busy and productive for our schools as we generated strong new student enrollment growth within the university platform. As an organization, our focus continues to be to enroll, educate and place our students into a better position to succeed professionally and to close the GAAP between students and employers. In doing so, we create a winning formula for our students, for employers that hire our graduates, and for our shareholders. Our agenda for this morning's call is as follows: I'll first provide a progress report on the 5 main objectives of our turnaround strategy. Reid will then cover the third quarter financial results before I conclude with additional business updates. At the conclusion of our prepared remarks, there will be time for analyst questions. The first objective I will cover this morning, as shown on Slide 3, is our ability to strengthen academic outcomes, enhance regulatory compliance and simplify our business model. As an education company, academic outcomes are the most relevant and critical measure of our success. We've been focused on putting the right leaders in our institutions to make sure that strengthening our academic outcomes remains our #1 priority. Many of you are familiar with our adaptive learning tool, intellipath, which serves as a powerful platform to help our students learn. It identifies and gives more time in areas where students need more help, while moving past areas they already know. In many respects, adaptive learning serves as an excellent way to facilitate and demonstrate mastery in a competency-based learning environment. Adaptive learning is changing the nature of higher education by measuring real-time knowledge growth minute by minute and understanding…

Thanks, Scott. Good morning, everyone. Let's get into the third quarter financial results. All percentage variances I mention will be comparisons to the prior year quarter unless otherwise noted. First let's discuss the consolidated results from our ongoing businesses. Revenue excluding that from Transitional Schools was $219.6 million for the quarter, down 3.9%, while total enrollments were only slightly lower than previous year by 0.6%. Of note is the fact that for the first time in over 3 years, both CTU and Culinary Arts showed year-over-year revenue growth for the quarter. Operating expenses for our ongoing business decreased by $20.3 million or 7.4%. Educational services and facility expenses were down $6.2 million or 7.9%. G&A expenses were down $14.9 million or 8.8%, driven largely by an $8.6 million insurance recovery and lower administrative expenses. Also of note, we incurred $14.4 million of impairment charges in the current quarter compared to $11.5 million of impairment charges last year in the third quarter. Overall on the expense side, we continue to see the benefits from our rightsizing and reengineering efforts. Further, we continue to believe that there are additional opportunities to reduce cost in 2015. Third quarter operating losses from our ongoing businesses were $33.5 million and $11.3 million, or 25.2% improvement compared to the prior year. The improvement is due in part to the favorable impact of the insurance recovery, as well as reductions in virtually every other expense line which more than offset the decline in revenue. Absent any impacts from impairment charges, insurance proceeds or legal settlements, operating losses improved $5.3 million or 16.1%. Third quarter adjusted EBITDA from our ongoing business, which excludes transitional schools and all unique items, was a negative $15 million, a $1.1 million or 6.8% improvement from the prior year as our cost saving…

Thanks, Reid. I'd like to take a couple of minutes to talk about a few other items. I would like to expand on something Reid just discussed. The increase in the borrowing capacity of our revolver is a sign of support by our lender who has visibility into our business plans and strategy, and is willing to partner with us to help us execute those plans. This is further evidence that we continue to make progress in our turnaround strategy. We remain on track to be EBITDA positive within our ongoing operations in the fourth quarter of this year. From the seasonality perspective, the fourth quarter is often our best operating earnings quarter of the year as we have an influx of students in the fall and we typically invest less in advertising around the holidays. Most important, our plans call for us going up for our ongoing operations to exit 2015 positive for adjusted EBITDA on a trailing 12-month basis. We will obviously see seasonality fluctuations during the year resulting from heavier advertising spend in quarters 1 and 3. The fact that we are able to see such seasonality fluctuations and adjusted EBITDA is further evidence of stability, as in recent past any seasonality was masked by heavy losses in our business. Since we now have greater visibility around gainful employment, I want to take a minute to discuss how we believe it will affect Career Education. The final rules have just been published and we are still analyzing all the details. But in general terms, the greatest risk is in the areas of Culinary and Art & Design. The University group is largely unaffected by the regulations. The good news is that we have been proactive in our planning by developing options for the programs we feel were…

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

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

All right. If I don't hit all of those points, Trace, you remind me that I missed one. But from the standpoint of transitioning with the Career Schools, what we've done there, obviously as I stated in the script, is we've been deemphasizing for a few quarters now, Art & Design program that's also reflected in the additional schools that we're putting on a transitional list. And so very comfortable with how the Culinary part of Career schools is maturing. And we're starting to have a Sanford-Brown division that is mostly Allied Health and that is focusing on programs within Allied Health that are best situated for gainful employment. And we feel comfortable about how we're emphasizing those programs and our ability to transition there. We have more than 2 dozen new program applications that we submitted so far this year. And I'd say we've seen good approvals so far on both the accreditor and state approval levels. We have the -- majority of those programs have received at least one approval from either the state and/or the accrediting body. We had several that have been approved by both, so we're making very good progress on that front. They do include some programs that we don't currently offer. I'm not going to go into a huge amount of detail on that, but I would say a general category that we have in those programs to come include a variety of different business related programs, that according to our research on a geographic basis, market-by-market, supplier by supplier, competitor analysis, job analysis in all of those locations, best suit those locations. And so those are working their way through the process. We feel very comfortable in terms of our ability to start introducing those. From the standpoint of Coco, we have seen in a few locations an uptick of students that have come to us from Coco, as well as a couple of other entities that have closed their doors. And so we remain diligent on that front where we see potential disruptions in the marketplace, making sure that we make -- get our message known to potential students that will be as facilitory as we can in being able to accept transfer credits and being able to make a transition for them as seamless as possible. I guess I hit them all.

Our next question is from Jeff Silber.

I'm just wondering, can you address the general pricing environment within your schools, and what we should be expecting on a revenue per student basis, going forward?

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

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

We haven't -- our spend this quarter was flat to last year and that's what I forecasted. On an overall basis, our advertising spend for 2014 will be slightly lower than 2013. And our student acquisition costs are not going up, they're actually down slightly. So from a standpoint of price increases, either from aggregators or for media sources that occurred in the third quarter, it didn't translate through into a higher acquisition student cost for us. And I think part of that is due to continued efficiencies that we're making on the marketing front, be it through search word optimization, be it through better management of our lead aggregators and a variety of other things that we're doing. So we haven't had any student acquisition cost increases.

Our next question is from Jason Anderson. Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division: I just wanted to touch base on Culinary. Obviously, seeing good growth there, but obviously partially due to the associate program. And also I think you mentioned the start timing. How should we think about that going forward? When would that lap the benefits you're getting from kind of the shift into Associates? And then separately from that, could we talk about maybe a bit more on your thoughts, so you touched on there with gainful employment. And should we be thinking about a big reversal potentially for out of associate back to certificate?

We've looked at that. We continue to look at that. We're -- I'm not at this point that's an option that remains on the table. We have other options that frankly don't disturb our model as I alluded to in my prepared remarks. And so we're looking at all of those eventualities. In terms of the going forward nature of Culinary, it's continuing to improve in terms of its enrollment as well as in terms of its financial performance. And losses that we've had associated with that unit in the past are diminishing significantly, and it's -- we see that unit especially in 2016 being a very different contributor to the organization. So we think the population will continue to improve there and we have a number of initiatives that we have that some of which we're starting to execute on now and make some investment in now that we hope will create some improvement on the new student enrollment side in the back half of 2015. Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division: And then on the start numbers, you referenced the positive impacts from the -- just the policy change, like kind of the terminology change in that sort. What -- could you quantify what that impact was?

We're not doing any recasting. What we're doing is simply showing what the actual results are. And the difference is obviously from the standpoint of when you start counting someone as an enrollment. We sort of moved the 21-day period from after the enrollment period and kind of reversed it to a certain degree. We give a 7- to 10-day period after enrollment begins for purposes of students making a decision, but that's why we revamped the orientation program and put that 1 week to 2 weeks in front of when the enrollment date starts, and that's when we start opening that up, so that students can start taking that program and work their way through that program and get a good understanding of what kind of time commitment they're going to have to make. So that's what -- that's what the change is. As I said earlier, we're seeing fundamental, solid fundamental new student enrollment growth on our online side, over and above whatever change 21 day has on our numbers. Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. And then regarding the Transitional Schools, you added 3 more. I'm sure you're thinking you added in everything you needed, but is there a certain set of schools that maybe there's a potential they could -- more could continue to fall under the Transitional bucket? And thank you for all the detail on some of the other, the other cost and the lease cost and all that. But what kind of Transitional losses should we expect in '15, and how much of that would you say is cash?

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

From the standpoint of...

And in terms of how much of that is cash, a substantial portion of that is in fact cash because you're continuing to pay operating expenses during the wind down of the campus. You're continuing to pay lease expenditures during that period of time, which is one of the reasons we're trying to tackle the ongoing lease obligations. That's on Slide 11. So the projected negative EBITDA from Transitional and discontinued is $62 million in '15, down from $71 million this year.

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

Our next question is from Peter Appert.

You've got John Crowther on for Peter. Just hitting back on the advertising question earlier. I appreciate that you guys are actually seeing some cost of acquisition down, but this is an area where I think some of your peers have seen some pretty significant leverage in terms of efficiency over there. Wondering maybe if you could sort of quantify where you guys are in terms of your ability to drive more efficiency out of the advertising line, going forward. And then just a follow-up question on expenses. You called out the legal expenses being about $10 million lower in '15. I appreciate that color, just wondering if you're seeing any sort of that year-over-year -- of the benefits starting to flow-through in Q4, or is that really all in '15?

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

'14 off of prior period.

Off of '13 in '12. Your first part of the question with regards to advertising. I'm not going out -- and haven't quantified what additional efficiencies should result from additional changes that we're making on that side of the business. We are doing more in the branding area, specifically with our online units. We are doing -- making some good progress. We still got a lot of good progress to make me. But we've made some excellent progress on search word optimization, where we're doing a number of our websites and landing pages. We're simplifying the content in those areas. We've done a lot of studying of the marketplace. And we're in the midst of making some significant improvements I think there. We've done a fair amount from the standpoint of just increasing capacity, technology pipe capacity if you will at a lot of our campuses that are helping students to do some of their research on us when they come to visit and so forth and make that a more friendly process. And we've done some additional work of additional lead generation outside of the lead aggregator channel. And we're continuing to look at all of those areas and how we can drive additional efficiencies. We're doing that for instance, I said we're doing more brand advertising on the online. We're also doing more brand advertising on the Culinary side of the world. So some of those changes are new changes. Some of them have been in place for a little while. I think that's why our advertising costs, on a macro level, are going to be slightly lower this year than they were last year. But we believe we have additional efficiencies to gain in that area.

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

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

We're seeing a nice uptick. I mean, we've had excellent, across-the-board placement rate improvement on a year-over-year basis, and that's -- if you go back 2 years, there has been very substantial improvement of our ongoing institutions in their ability to hit placement rates. We're seeing -- the Culinary side have done very well. Where we're also seeing an interesting uptick is on the Allied health side. We're seeing some positive improvements in the placement environment there. And so, that I think that just bodes well for that set of program offerings. But that's the most meaningful I think change in the marketplace from '13 as we're seeing a little bit of an uptick on the Allied health side. All right, well, thank you for your time today. As I look ahead to 2015, I feel that we are in a much stronger position than we were a year ago. We have one of the stronger balance sheets in our industry. Our university platform is a strong cash generating anchor for our business, moving forward. Our Culinary unit is total enrollment positive. We're quickly fine-tuning our other Career Schools for future success and making tough decisions about markets where success is unlikely. When leaving markets, we do so in an efficient and positive manner. We continue to lower our legal liabilities of the company, and importantly we have the right leaders in place to make Career Education a top-performing company for our students, employers and our shareholders. While a lot of challenging work remains, we continue to make excellent progress in our turnaround plan and we are very excited about 2015. Enjoy the rest of your day, and feel free to call to give us any follow-up questions. Thanks so much.

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