Sam Gibbons - Investor Relations Todd Nelson - President and Chief Executive Officer Andrew Cederoth - Senior Vice President and Chief Financial Officer.

Peter Appert - Piper Jaffray.

Good day, everyone, and welcome to the Q3 2016 Career Education Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Sam Gibbons, Investor Relations. Please go ahead..

Thank you, William. Good afternoon, everyone, and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; A.J. Cederoth, Chief Financial Officer; and Ashish Ghia, Vice President of Finance. This conference call is being webcast live within the Investor Relations section at careered.com.

A webcast replay will also be available on our site and you can always contact the Alpha IR Group for investor relations support. Let me remind you that this afternoon’s earnings release and remarks made today include forward-looking statements as defined in Section 21E of the Securities and Exchange Act.

These statements are based on assumptions made by an information currently available to Career Education and involve risks and uncertainties that could cause 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 in Career Education’s Annual Report on Form 10-K for the year ended December 31, 2015, and other filings with the Securities and Exchange Commission.

Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or change circumstances, or for any other reason.

In addition, today’s remarks refer to non-GAAP financial measures which are intended to supplement but not substitute for the most directly comparable GAAP measures.

The earnings 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 are available within the Investor Relations section at careered.com. So with that, I’d like to turn the call over to Todd Nelson.

Todd?.

Thank you, Sam. Good afternoon and thanks to everyone who’s joining us on the call today. During the third quarter, we continue to make progress against our strategic initiatives and delivered operating and financial results ahead of our expectations.

Total enrollments at the University Group showed modest growth, primarily driven by improved retention and are pleased to see that the investments we have made in enhancing student retention, outcomes and experiences are having a positive impact.

Our teams have been focused on refining and executing on various operational changes from prior quarters, while undertaking several new initiatives and investments, with the overall goal of improving student experiences, both before and after they are enrolled in one of our programs.

We continue to leverage technology and make progressive updates to our curriculum and core sequencing. We have further enhanced our mobile platform with added functionality that enables students to upload and send documents, as well as log in with touch ID.

At CTU, we have modified the application process for the first-time students to increase their opportunity for success and ensure they are better prepared for class. Through incremental investments in our financial aid team, we have increased our document collection and counseling efforts of students.

We have increased overall faculty student interaction by investing in lead faculty roles, enhancing our advising function, improving quality review, increasing professional development offerings, and leveraging our mobile platform and integrated technologies like Intellipath.

At AIU, we have redesigned and enhanced the first course that our undergraduate students take, by building workload levels slowly as students develop skills and motivation. We have reduced average class sizes to enhance the level of personalized support to our students.

Our new student advising model also promotes specific and deliberate collaboration between faculty and advisors, which we believe elevates the accountability and effectiveness of our attention efforts.

Additionally, we have started improving our discussions around financial aid and transfer of credit counseling with prospective students before they start classes, which should better prepare them to be successful in their studies.

All of these changes are intended to provide stronger engagement students, which we believe will enhance retention and outcomes and ultimately increase the long-term academic value of the university platforms. We saw the impact of these initiatives during the third quarter with total enrollment growth at CTU and new enrollment growth at AIU.

As the operating performance of the company improves, we will continue to analyze and evaluate these types of responsible and incremental growth investments for the benefits of our students. Now, I’ll provide a brief overview of some of the operating performance highlights during the third quarter.

As I mentioned, we experienced modest total enrollment growth of 1.6% for the quarter within our University Group, as compared to the prior-year quarter, primarily driven by improved student retention across both universities.

At CTU, we’re encouraged by the growth in total enrollment, which benefited from strong improvements in retention during the quarter. Optimization of the admissions model at AIU, as well as the enhanced onboarding and orientation process primarily drove positive new student enrollment growth at AIU.

We believe that the above results were an affirmation of our efforts of focus on student retention, outcomes and experiences.

University Group revenue increased by 2.5% for the quarter, primarily driven by the improved student retention within CTU, while operating income increased by 7.2% to $21.8 million compared to $20.3 million in the prior-year quarter.

On a consolidated basis, we posted a net loss for the quarter of $0.7 million, as compared to a net loss of $45.2 million in the prior-year quarter for the consolidated company. We believe, adjusted EBITDA is a better way to view the business, because it eliminates items that we do not consider reflective of underlying operating performance.

For the quarter, consolidated adjusted EBITDA was $4.8 million during the quarter, compared to $2.7 million for the quarter – third quarter last year. This performance was primarily driven by increased revenue at CTU, as well as continued progress on our teach-out plans.

In our Transitional and Culinary segments, total enrollments and retention during the third quarter were trending ahead of our expectations. This has helped reduce operating losses by $31.4 million for Culinary Arts and $8 million for Transitional for the quarter.

As a result of the better than estimated total enrollment at our teach-out campuses and improved retention trends across most of our institutions, we believe our 2016 consolidated adjust EBITDA will be significantly higher than 2015. Additionally, we are raising our year-end 2016 cash outlook to be a range of $180 million to $190 million.

As we look to 2017, our priorities remain the same. We’re focused on continuing to improve the market position of our universities by strengthening the breadth of program offerings and leveraging faculty and technology with the goal of enhancing retention and outcomes for students. A.J.

will now walk you through with more color on the financials and our improved outlook.

A.J.?.

Thank you, Todd. As we’ve done in the past, we will start with the results for the consolidated company and then discuss our segment results. On Slide 4, we have summarized the consolidated results for Q3 and year-to-date. For the quarter, consolidated revenue was $167.6 million, which was down 17.6% year-over-year.

Year-to-date revenue was $549.1 million, a 15.2% decline year-over-year. The decline in revenue is attributed primarily to the teach-out strategy at our Culinary Arts and Transitional Group segments. On the next slide, you’ll see that University Group actually posted a 2.5% revenue increase for the quarter and a 3.5% increase year-to-date.

Operating loss for the quarter was $0.7 million compared to an operating loss of $44 million for the same period last year. Year-to-date operating income was $23.6 million versus prior year-to-date operating loss of $88.2 million.

The significant improvement in performance is primarily attributed to the non-recurrence of a prior year impairment charges, but also lower operating costs in the current year and increased revenue at the University Group. Consolidated adjusted EBITDA was $4.8 million for the quarter compared to $2.7 million last year.

Year-to-date consolidated adjusted EBITDA was $43.6 million, compared to negative $13.4 million for the prior year-to-date period. We have included a line that highlights adjusted EBITDA for our University Group plus corporate costs, because we believe it reflects our ongoing business, absent the effects of the teach-outs.

Adjusted EBITDA for the University Group and corporate improved by $3 million for the quarter to $19.3 million, and has improved by $19.7 million to $73.8 million year-to-date.

We ended the quarter with $217.8 million of cash, cash equivalents, restricted cash and available-for-sale short-term investments, net of borrowings, which I will refer to as ending cash balances for the remainder of my discussion.

For the quarter, cash flow generated from operations was $9.7 million, which compares favorably to cash flow generated from operations of $5.6 million for the third quarter of 2015. This improvement in cash flow is primarily attributed to lower operating costs year-over-year. Finally, capital expenditures for the quarter were $1.4 million.

Moving to Slide 5. Here, we highlight the results of the University Group. You can see the 2.5% and the 3.5% improvement in year-over-year in the quarter and year-to-date revenue, which is attributed to improved student retention at CTU. Operating income improved by 7.2% for the quarter versus prior year and 29.7% year-to-date versus prior year.

This is primarily attributed to improved revenue at CTU. Also, contributing to the improvement is a year-to-date reduction in advertising expenses of $9.2 million.

We continue to analyze and evaluate different marketing strategies in an effort to become more effective at enrolling and counseling students, so that they are better positioned to succeed and eventually graduate.

Overall, total enrollment within the University group improved by 1.6% year-over-year, driven by retention at CTU and new enrollment growth at AIU. Turning now to Slide 6. We highlight the results of our Culinary Arts and Transitional segments, which are in teach-out.

Revenue declined year-over-year in both segments, but the overall operating losses have decreased as a result of the effective management of our cost structure in response to the declining student enrollment and the reduction in admissions and marketing expenses.

The prior year quarter included a $33.4 million asset impairment charge related to our LCB campuses. Turning to Slide 7. As Todd mentioned, we are updating our outlook for ending cash balances and adjusted EBITDA.

Because of continued better than anticipated performance in total enrollments at our teach-outs, earlier than estimated realization of operating efficiencies, improved retention trends, and better than estimated working capital, we now project our ending cash balance for 2016 to range from $180 million to $190 million, an increase of $20 million from our previous outlook.

Most of this improvement will flow through, so we have also updated our ending cash balance outlook for 2017 to range from $160 million to $170 million. Slide 7, also reflects an update to our consolidated adjusted EBITDA outlook for 2016 and 2017. We expect consolidated adjusted EBITDA for 2016 to significantly improve as compared to 2015.

As discussed on previous calls, our operating costs for the second-half of 2016 are trending lower as compared to the first-half. But the year-over-year comparison has begun to normalize as we start to anniversary the impact of our strategic initiatives begun last year.

We are also effectively absorbing the decline in revenues across our Transitional and Culinary Arts segments, as they complete their teach-out plans. This decline in revenue will have an increasing impact on the overall results as we finish 2016 and move through 2017 and the ultimate completion of our teach-out strategy.

We expect 2017 to have positive consolidated adjusted EBITDA, driven primarily by modest improvements across both university segments. However, adjusted EBITDA will trend lower than 2016 due to the expenses associated with the completion of the teach-outs, as well as the impact of declining revenue in our Culinary and Transitional segments.

We believe our liquidity position is stable and we will continue to maintain our commitments to our students. As we transition into 2018, the teach-out strategy will conclude and this will have a positive impact on our profitability and ending cash. This concludes my presentation.

For additional information, I refer you to Slides 8 through 11 included in our presentation. There you will find an updated summary of the key assumptions contained within our outlook, as well as reconciliations of GAAP to non-GAAP items. With that, I’ll turn the call back over to Todd for closing remarks..

Thanks, A.J. In closing, we remain encouraged by the progress we’re making as an organization and remain committed to our overall strategy. This past month The Department of Education issued regulations around borrowed defense to repayment and provided draft rates under the Gainful Employment Regulation.

We continue to analyze and evaluate these regulations and all of the underlying data and will consider changes to our operation structure as appropriate. We’ll continue to focus on achieving responsible growth through making smart incremental investments in student-facing services that will continue to enhance overall retention outcomes.

We have a solid cash position with over $270 million in cash, cash equivalents, restricted cash, and short-term investments, which we believe will enable us to invest in our students, faculty, and technology, while maintaining the commitment to our students at our teach-out schools.

Our strategic initiatives and efforts are trending ahead of our expectation, which is largely a result of excellent leadership and an employee base that maintain some of the best talent in our industry.

We’re motivated and focused with a clear vision to serve and educate our students and the progress we’re achieving has enabled us to invest more time, intellectual capital, and dollars in various student serving areas of our University platforms.

There’s a lot of be done, but I want to thank all of our employees, students, and shareholders who has supported us, as we continue to execute on our plan. Thank you again for joining us this evening. And with that, I’ll now open it up for any analyst questions..

Thank you, sir. We’ll now begin the question-and-answer session [Operator Instructions] And the first question today comes from Peter Appert with Piper Jaffray. Please go ahead..

Thanks. Good afternoon.

So, Todd, is it possible to give us any specifics on the – on your initial take on the gainful employment data in terms of how many programs might be at risk in terms of either in the zone, or is there any selling programs?.

As we mentioned in our Q, there are couple of programs that are there for each of the school. And as you can refer back to our risk assessment in the last K, it’s pretty consistent with what we have thought. And again right now, we’re analyzing the data and feel comfortable that there’s the opportunity to where those programs are affected.

We have the time to be able to develop new programs and shift resources if need be..

Okay. And then, Todd, could you maybe compare and contrast a little bit the transit CTU versus AIU? We did this in some of the prepared remarks I know. But sort of interesting how just focusing on the starts, AIU was fairly meaningfully negative. It’s doing significant positive growth this year. CTU has slipped a little bit in terms of the start trends.

So what – what’s the differential?.

I think it’s mostly been focused on – what we’ve done is, as we’ve looked at CTU and as we said in the past, we continue to have strong lead flow.

But what we wanted to do was focus more on retention versus maybe additional ad spend too create more leads.And so this has been a year focus more on building total enrollment versus new students, not that we don’t continue to focus on that, but it’s just been a shift in focus.

Whereas at AIU, again, there has been, as you know, several years there were they just have not probably produced the new student levels that we had thought. And so it’s not that as difficult there to make incremental changes that would allow them to increase that number of new students.

So, as I said, it’s it really is a matter of focus of the two institutions. Going forward, we feel that there is the potential for both of them to have in the short run flat to modest new student growth. But in the long-term, we feel that there’s growth potential and new students for both.

But right now, I would just say again, we’re more focused on total enrollment that we’re new students..

Yes, understood. Thank you.

And then in terms of the revised thinking about the EBITDA over 2016, 2017, 2018 the down a little bit or maybe shouldn’t say a little bit, but lower in 2017 after significant improvements 2016 previously you’d been anticipating flat in 2017 versus 2016, I guess, part of this is just the base in 2016 it’s going to be that much higher.

Is that the main thing you’d call out in terms of the year-to-year comp going into 2017, or is it just something different from a cost perspective?.

No. You are spot on. What happened is, I think as we said, we exceeded our expectations for the 2016 EBITDA number over 2015. And the challenge that that creates, as you know, with the impact of the teach-out expenses through 2017, it’s impossible to hit that level. We’re going to certainly work towards that..

Yes, sure..

I think as we’ve tried to say in the past, let’s be careful on what we say, but in the end you’re spot on, where 2017 is kind of be ahead of where we thought it would be. As we were sitting here looking at this three, four quarters ago, but the bottom line is 2016 is coming significantly ahead of our expectations.

And again because of the drag from the teach-out expenses, it’s just, you can’t expect that to be maintained, at least, through 2017 until a lot of the lease expense is associated with the teach-out are finished out of the system..

Sure, understood..

Sure, understood. And then just one last thing the better enrollments versus expectations in the culinary and the transitional schools. I guess again, that’s just retention driven, but well obviously retention driven, because you’re not taking in new students.

But if anything you’d call out?.

No. Again I think retention and I think that it really we need to make sure that we really give credit to the fact that one we’ve been willing to invest the resources in those schools. So that it’s even though it’s a teach-out that there’s the quality education is still being provided with the facilities as well as faculty.

But frankly more importantly the staff that are involved in that as well as those faculty members who are teaching those students and their dedication. And but I just said it’s a bubble we thought it would be, but I think we really do need to give credit to those folks who are, who take pride in delivering quality education..

But there’s no expectation right that you would potentially be able to sell the culinary business that’s not being pursued correct?.

No. At this point it’s not..

Got it. Understood. Okay thanks so much and congratulations on the great progress you’re making..

Thank you, Peter..

Showing no further questions so this will conclude our question-and-answer session. I would like to turn the conference back over to Todd Nelson for any closing remarks..

Yes. Thank you again for joining in this evening and we look forward to speaking with you again next quarter..

The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines..