Sam Gibbons - Investor Relations Todd Nelson - Chief Executive Officer Andrew Cederoth - Chief Financial Officer Ashish Ghia - Vice President of Finance

Peter Appert - Piper Jaffray

Good afternoon and welcome to the Career Education First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instruction] Please note that this event is being recorded. I would now like to turn the conference over to Sam Gibbons. Please go ahead.

Thank you, Amy. 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 Exchange Act. These statements are based on assumptions made by and 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 identified in Career Education's Annual Report on Form 10-K for the year ended December 31, 2016, 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, everyone and thank you for joining us. I'll begin today's call by reviewing our first quarter highlights and then A.J. will take you through the financials before I provide some closing thoughts. First quarter consolidated operating results came in ahead of our expectations and I am pleased with the operating and academic improvements we've made within the University Group operations. Retention and total moments continue to grow while teach-out related expenses remain well optimized and are trending lower. We remain focused on further improving student retention, outcomes and experiences and then our transition to a period of sustainable and responsible growth. During the quarter we continue to refine our operational and academic processes, including our curriculum and mobile platform which we believe provide stronger engagement with our students. We refine various student serving initiatives that have been discussed in past quarters while also leveraging best practices across our institutions. We believe these types of changes along with our recent improvements in core sequencing and course design are promoting learning increasing faculty interaction of students and continuing to enhance overall student retention outcomes and experiences. University Group revenue increased 2.3% compared to the first quarter of last year. And I'm encouraged to see that our recent investments in students serving operations has had a positive impact in stabilizing and new enrollment trends. For the full-year 2017 we expect to see new enrollment growth within the University Group as we pursue sustainable and responsible growth. At CTU, total enrollments and revenue increase during the quarter while new student enrollments increase 5.6%. We are pleased to see that new enrollments turned positive in the quarter reversing four consecutive quarters of decline. At AIU, we continue to be pleased with the progress they're making. Revenue at AIU increased year-over-year. In the near-term we will experience some variability and AIUs quarterly performance as a result of the academic calendar redesign we discussed last quarter. This change is made for the benefit of students for the goal of improving student persistence and engagement. But it's also impact of that the timing of starts and number of earning days in any given quarter. For example the second quarter of 2017 will have seven last earning days as compared to second quarter of 2016. This will make quarterly comparisons in operating performance at AIU more challenging until some of those differences moderate beginning in Q4 this year. As a result, we believe a better way to measure AIUs normalized performance will be on a multi-quarter basis consistent with how we analyze this internally. For the six-month period ending March 31, 2017 as compared to the similar prior year period, new enrollment for AIU increased 2.5%. AIU operations continue to improve and we believe we will experience new student enrollment growth at AIU for the full-year. Overall, we are pleased with the enrollment growth within University Group that we've been experiencing over the past few quarters. We believe that the ongoing improvements and investments we are making in various student serving areas will further help us enhanced and retention outcomes and ultimately increase the academic value proposition of both universities. The overall progress we have made and the operating stability we have experienced had given as increased confidence. Last quarter we discussed the University Group committed to opening admission and advising centers in Phoenix. These facilities are part of the overall strategic efforts to transition to a period of sustainable and responsible growth. This enables us to serve the demand that we are experiencing and increase the long-term value of the university platforms. We are in the initial phases of opening this facility and expect them to be fully operational in the second half of this year. From an operating performance standpoint, the University Group generated operating income of $27.7 million for the quarter which represents growth of 30.9% year-over-year. Increased revenues contributed to this improvement in performance which was also helped by improved efficiencies across our operating expenses. Consolidating operating income increased by more than 40% year-over-year to $9.8 million from $7 million as we have right sized corporate expenses in line with the wind-down of teach-out. Retention at teach-out campuses continues to trend ahead of our expectations and we are delivering on the commitment to our students while still managing all teach-out related costs. We are optimizing our real estate obligations associated with these campuses and are on track to complete a majority of the teach-out later this year. Before I hand the call to A.J. to review our financials, I'd like to make a few more comments relating to our outlook. I remain confident in the full-year outlook we provided last quarter and then our ability to execute against those objectives. The implementation of and execution on our strategic initiatives has driven increased stability within the university operations. With that in mind, we are now providing a range for our full-year and second quarter adjusted operating income outlook for ongoing operations. A few things to note as shown on Slide 5, the full-year 2017 outlook range of $100 million to $105 million for ongoing operations is consistent with our previous provided outlook of growth as compared to 2016. Additionally, as you can see based on both the full-year and first half performance shown on the slide, we expect the second half of 2017 to show significant improvement as compared to the second half of 2016. Now I'll hand the call over to A.J. for a more thorough review of our financials and outlook. A.J.?

Thank you, Todd. For the quarter consolidated revenue was $162.1 million which was down 18.5% year-over-year with the decline in revenue attributed to the teach-out strategy in Culinary Arts and our Transitional Group. Within our University Group, revenue increased 2.3% year-over-year. We posted consolidated operating income for the quarter of $9.8 million as compared to operating income of $7 million in the prior year quarter driven by improved operating income within our University Group. We ended the quarter with $166.6 million of cash, cash equivalents, restricted cash and available for sale short-term investments which will be referred to as cash balances for the remainder of today's discussion. Net cash used from operations was $39.1 million which includes $32 million paid to resolve the previously discussed legal settlements. Absent this event cash used in operations improved versus 2016 reflecting improved operating performance and slightly better working capital trends. Capital expenditures for the quarter were $0.7 million. Moving to the results of the University Group Incorporate, total enrollment within the University Group improved by 0.6% year-over-year. As previously mentioned, revenue increase 2.3% year-over-year in the first quarter which when combined with lower overall expenses led to adjust that operating income improving to $25.7 million or 29.7% versus the first quarter of 2016. In Culinary Arts and Transitional segments revenue continued to decline year-over-year in line with the progress of the teach-outs and the adjusted operating loss increased to $9.8 million from $2.9 million in 2016. This trend is consistent with our expectations and the teach-out operations are progressing better than anticipated. Recall Culinary Arts campuses will complete their teach-out in the third quarter of 2017. On Slides 3 to 5, we have provided additional clarity around our outlook for 2017. As Todd mentioned, given the increased stability of our operations, today we are providing a range for the full-year 2017 as well as additional information for the second quarter. On Slide 3, you will see that we are expecting adjusted operating income for the University Group incorporate for the full-year 2017 to range between $100 million to $105 million dollars, which is consistent with our previously provided expectation of growth versus prior year. Additionally toward the bottom of Slide 3, you will see the outlook for Culinary and Transitional segments. We continue to expect adjusted operating losses of $50 million to $60 million for 2017 and $10 million to $20 million for 2018. The LCB teach-outs are on track that will be completed in 2017, which significantly lowers the number of students involved in the teach-out strategy going forward. We continue to expect year in cash balances of approximately $150 million to $160 million for the year ending December 31, 2017 and with the anticipated improvements in adjusted operating income in 2018 cash balances will increase. Slide 4 provides further details related to our full-year outlook. On Slight 5, we have provided additional information regarding our outlook for the second quarter. As you can see, we expect adjusted operating income for the University Group Incorporated to be a range of $20 million to $22 million. This outlook includes the impact of timing related items including the impact of the academic calendar redesign at AIU as well as the timing of certain operating expenses in the second quarter versus the prior year quarter. Also impacting the quarter will be the investments in our admissions and advising centers in Phoenix, which were not present in 2016. The fluctuation in adjusted operating income for the second quarter is incorporated into our full-year outlook. Finally as we've done in the past, the last few slides of our presentation provide a summary of the key assumptions contained within our look as well as the 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, 2017 is off to a good start and we're on track to a period of sustainable and responsible growth. Our priorities for the future remain the same. Our outlook for University Group and Corporate adjusted operating income is that it will grow to approximately $100 million to $105 million, in 2017 and our long-term outlook continues to improve. And as I mentioned earlier, we expect the second half of 2017 to show significant improvement as compared to the second half of 2016. Overall the normal trends are positive for both universities and we expect enrollment growth for the University Group for the full-year of 2017. Lastly, our cash position continues to be solid and has enabled us to make investments in university operations for the benefit of our students and prospective students, such as our Phoenix admission and advising centers. We continue to make smart investments into student serving areas as well as in faculty and technology that we believe will enhance overall retention and outcomes for our students and as the operating performance of the company improves we will continue to analyze and evaluate growth investments for the benefit of our students. Thank you again for joining us this afternoon and we'll now open the call for any analyst questions.

[Operator Instructions] First question is from Peter Appert of Piper Jaffray.

Thank you. Good afternoon. So Todd, I assume that the retention numbers are probably being distorted a bit by these changes in the academic calendar, but could you just talk about the trends and retention is what I would calculate it. It looks like AIU in particular would be down pretty substantially year-to-year?

I'm not sure that that's accurate I mean as far as retention being down in fact what we're finding is that we're actually seeing good improvement from retention at AIU we have as you know with the timing of the calendar there's some fluctuation there as far as start numbers. But other than that now retention continues to make good progress of both CTU and AIU.

Okay. I'll take it offline and we can better understand the calculation. Todd can you also talk about this new Phoenix Sentry you know talked about it for the last quarter or so? What's the strategic thinking this combines the marketing efforts for both of the universities is that correct?

Yes, I mean it's a great question Peter. What we have found over the years is that with online enrollment is that the enrollment position - enrollment accounts are position as well as academic and financial counselors. It is typically those people who are recruited are around a particular geographic area. And one of the challenges that you face is that if you are too saturated in one particular market if you have difficulty you know hiring the level of the number and the quality that you would like. And so with Phoenix being a very good market, it gives us the opportunity to not only continue to invest here, but to base on the demand that we're experiencing an opportunity to add again enrollment staff as well as financial aid staff and the academic counseling staff to be able to support what we're saying is a strong demand. Helps being familiar with the area, but again given the amount of education companies that have had in online enrollment centers there and the fact that it's a much smaller number now there is a very good employment base there and so we're actually very excited about we're very much in line with what we thought we would be as far as the hiring process out there we've been very impressed with the people that we've hired. And they've already begun enrolling students which are also very excited about. And again, I think it gives us an opportunity to diversify geographically and again given the nature of the online enrollment process it's a very important I think part of your strategy make sure that you're doing that. And that's really what's behind it's a great opportunity for us and I would say out of the blocks right now we're pleased with the results.

And in terms of the expectation of lower earnings for the second quarter presumably some of that is startup costs related to this new center is not a significant factor.

There are multiple factors, but yes that's a big part of it.

Okay.

Peter just the other two pieces to that. The timing of some expenses that occurred in 2016 this quarter, excuse me in Q2 versus what will occur in 2017 as well as again there are –there is some effect as I said moving some of those revenue days AIU from Q2 into Q3 and Q4. So it's a combined effect of all, but yes, again we saw the opportunity in Arizona and Phoenix and it was again the right thing to do based on the demand that we're experiencing.

Understood. On the shifting of the day's Todd or A.J., can you be more specific in terms of how then it falls in the third and fourth quarter?

Well it's basically seven days, and again some of that is spread over - it spread over the two quarters, but the majority of that probably is I would say…

In Q3 into Q4.

Yes.

So just assume it's sort of even between three and four?

That's correct.

Okay. Thank you. Last quarter Todd you talked a little bit about the gainful employment stats and couple of problems or couple of areas where there might be issues, can you give us an update on where you are in terms of addressing any problematic programs at this point?

As you recall there was a small number of our programs, pleased to say we are unexpected and we continue to make progress. As you know criminal justice was an area in particular that was affected and so our ability to continue to develop new programs as well as making sure that if there's opportunity to offer specializations in some of the other programs that are in that area not only in criminal justice. But cybersecurity and other areas like that, we continue to feel confident in our ability to manage through that and not have it impact our renewal.

And Todd sort of a big picture question, you made great progress here obviously in improving Company's financial performance. Any thought to the possibility of combining the CTU and AIU brands and whether there might be some significant cost efficiencies rather than running two separate universities?

Good question, Peter. I think I mean it's something you should always be looking at, but from our point of view we have two high quality universities that each have again attributes that are very specific to each of them and the possibility of losing that by combining them. Although maybe there are some cost savings to be achieved, I think you negatively potentially impact your revenue, because again I think that you may lose some of the identity in the attributes that both of these very strong universities provide right now. So although, again it's very prudent to always be careful to assess that there is no plan at this point, again given we see good demand for both. And we also can learn from the two universities, can learn from each other, so when there's opportunity to have some synergy, certainly it's a very collegial friendly collaborative environment, but at the same time they have very strong - both of them have very strong independent academic functions as well as good leadership and very strong faculty. And we don't want to lose the momentum or the identity that each of them have right now. We think that's really - it overall is a more positive structure for CEC to have them separate.

Okay. And then last thing just in terms of the wind-down costs on Culinary and Transitional that the loss was up on a year-to-year basis as you pointed out. But I think it was actually down a bit sequentially and I think there were some special charges in 4Q. But I'm wondering based on the trajectory, it feels like the $60 million to $80 million might be a little bit on the high side, what do you think?

Well, we've actually got it listed as $50 million to $60 million and then dropping down to that $10 million to $20 million for 2018.

Okay. I thought I heard $60 million to $80 million. But again maybe I'm hallucinating.

Yes, if you look at the adjusted operating loss, which is the $50 million to $60 million, there's some unused space charges there that is not adjusted, but just the regular operating loss that's where it's $80 million to $90 million. But that's got that $25 million unused space charge.

Got it, okay. But even so I mean to the well I guess that would make sense, right if we just sort of annualized what you did in the first quarter that would get you towards the - that would get you into the range. So I guess it makes - certainly makes sense.

Peter by the way, I think it's a point that I hope doesn't get lost in the fact that the universities are doing well and that is that one is the teach-out is being executed at a high level of efficiency, but also the fact that again a large amount of expense to the organization leaves by the end of 2017.

Right, actually one more last thing, I think you said Todd something to the effect that the - you were fairly well along in the cost reduction efforts as it relates to the overhead expenses. Did I hear that correctly or is there more to come?

Yes, I mean the bottom line is that as you know been in a several year transformation process with a lot of cost, elimination from the organization. And obviously, the big bulk mostly at the beginning and then as the teach-out finishes you're also then have a significant amount raised in the overhead associated with again that larger structure now versus smaller. But yes, as it winds down that becomes a much smaller percent - a much smaller number.

Got it. Okay and I'm sorry one more one last question. Anything you would call out for us in terms of programmatic offerings areas where you're seeing particular interest or strength from an enrollment standpoint?

Great question, the good news is as we continue to see it both graduate and undergraduate level, strong demand across all of our programs and our view of that is I think it's a testimony of that the programs we do offer a good quality programs that are meeting a need out there, a demand that's out there. So I would say that the best answer is really across the board we're very experiencing solid demand.

Right. Thanks very much.

Thanks Peter.

[Operator Instructions] I did say it looks like we have no further time for question. Now I would like to turn the conference back over to Todd Nelson for closing remarks.

Well again we want to thank you again for joining us and we look forward to speaking with you again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.