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Corinthian Colleges, Inc. (NASDAQ:COCO)

Credit Suisse 15th Annual Global Services Conference

March 11, 2013 1:00 pm ET

Executives

Jack D. Massimino - Chairman of the Board and Chief Executive Officer

Robert C. Owen - Chief Financial Officer and Executive Vice President

Analysts

Kelly A. Flynn - Crédit Suisse AG, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

Next up, we have Corinthian. Presenting from the company, we have Jack Massimino, the CEO. And he'll be followed by CFO, Bob Owens. Thanks.

Jack D. Massimino

Thanks, Kelly. Let's say not exactly a crowd, just for the record. Okay. I don't think that's what we wanted. Are we working? Okay, thank you.

So I'm Jack Massimino. I'm the Chairman and CEO of Corinthian. Bob Owen is with me today, our Chief Financial Officer. I've got Ken Ord, our Chief Administrative Officer; and Anna Marie Dunlap. We've all been together for more years than we can count, and we're happy to answer any questions you have as we go through the process.

There we go. The Safe Harbor statement, you've all seen them before. It's all about would, should, could, believe, things of that sort. So I should read, and we pay attention to it.

I think really quickly on the investment side for our organization, we're obviously a diversified post-secondary education company. We focus really at the career and entry-level for our students. We've got an attractive student value proposition. I'm going to take you through that, give you some information about how we're doing with accreditation and performance in all those areas.

We've been talking for quite a while about a lot of initiatives around improving efficiency and restoring growth in our organization. A lot of work in regulatory compliance. We've been doing it for 8 years. We think we have a pretty good handle on it, and we've been doing it for 8 years. We have a pretty experienced management team in this space.

We're a leading diversified post-secondary education program. We've got, as I said earlier, entry-level students. We've got about 90,000 students in our organization. 32,000 of them are fully online. A lot of our students do both, take ground courses as well as online courses. And I'm going to give you a split out in just a few minutes about the relationship between degrees, diplomas, health care, give you all those breaks in just a minute. We've got about 113 campuses across the country. We've got 17 schools up in Canada as well.

Three major brands: Everest, Heald and WyoTech. Everest is our entry-level program. Lots of diploma programs there, lots of health care taking place in that particular vertical.

WyoTech is our automotive vertical. We do everything in there from teaching students how to repair transmissions to big diesel engine truck repairs.

And then Heald College is a transaction we did several years ago, fundamentally in the degree business, most recently approved by WASC to go from WASC Junior, which is a separate accrediting agency, to WASC Senior, allowing them to provide the bachelors level programs.

Last 12 months' adjusted EBITDA and revenue for the company, $1.6 billion, and almost $140 million in adjusted EBITDA.

A quick picture of the layout of the organization. You know that Corinthian, I think, for the most part was pulled together acquisitively. We've opened a lot of schools over the last 7 or 8 years in the organizations with their concentration -- Florida, California, up in the Northwest, down in Texas, not a whole heck of a lot along the Northern Eastern seaboard. An opportunity for us in the Mid-West, just not enough population to support the programs that we offer.

The breakdowns of the chart on the left lays out the programs that we offer. Health care is a big part of what we do. Mechanical and trades, that's automotive. But it also includes everything we do in heating and air conditioning. We train electricians. We train plumbers. A lot of that trade area, a big program for us, lots of new programs being rolled out in that arena. On the degree side: business and criminal justice, our 2 biggest programs.

And then the breakout. We've got about almost 55%, 56% of our students are in the associates program, and then almost 40% in the diploma program. That's a flip for us over the course of the last several years. When we did the Heald transaction, that really made a substantial change for us. We were just the other way. We were about 60% diploma, about 40% degrees. When we did the Heald transaction, that really changed us. And then all of our online growth really has been obviously in the new degree arena.

It's hard for me to see these charts, but it -- we've got -- if you think about it, we really spend a lot of time and energy around those areas where we're talking about opportunity in the economy, new programs, new jobs, new opportunities. Our students and our programs really fall right in the sweet spot for that. We're in health care. We're at the entry-level associates and diploma level programs. That's 90-plus percent of our students fall into those categories. Lots of studies out there. We're putting a couple here that lay out just exactly how many job opportunities are available in those degree opportunities over the course of next 5 to 10 years.

This is a study that was done by the Parthenon Group that lays out exactly who the students are in post-secondary education. You may have seen this information before, but we think this is pretty valuable information. If you take a look at the less than 2 years, you see that it's 45% of our students are 25 years or older. Less than 20,000 income. They're independent. They're minorities. What that means is our average student is a female, 25, 26 years old, 2 children. And by independent, we mean leaving on their own, trying to make it happen. And so the focus for us really is in that area, and you can see that we really match up very nicely for the less than 2-year program. That's where we are.

This is just a quick slide on information we've given you over the years around graduation and placement. And one of the things we're pretty proud of is in a pretty difficult time, we have done a pretty remarkable job in terms of placement. We have over 800 placement people in our organization today helping our students get jobs in the areas we trained them for. We're very tight on our definitions. And so if you're a medical assistant, for example, with us and you get a job at a doctor's or the hospital, those count. If you get a job as an aide in a nursing home, that does not count even though you're making $10 to $12 an hour. So we're very tight on our definitions around what is and what isn't included in our placements. We've been averaging over the course of this very difficult time up to around 68%, 69%, and we're about there again this year.

I mentioned earlier about the 800-plus placement people. We do a lot of work around completion. We have closed campuses over the years because they don't perform. We've close programs routinely because they don't perform, either with regard to completion or placement in a particular marketplace. And we've done a lot of work around tuition. I'll talk to you about that in just a minute.

Accreditation. These are some pretty important issues for us. I mean we pay a lot of attention to this area. You've heard a lot of noise around accreditation here recently. We're pretty proud of where we are. We've got the Higher Learning Commission reaccredited our programs in Arizona. WASC just approved, as I said earlier, Heald going from WASC Junior to WASC Senior. And on accreditation visits, as I said, we actually measure a number of incidences or issues that come out of every one of our visits. This last year, we had 9 out of 26 schools had 0 findings when the accreditors came to our schools. And the number of findings for us were reduced from 2.8 to 1.5 per visit. I'm just telling you those are really good numbers.

The student value proposition, we spent a lot of energy there. You heard us talk about tuition reductions. All of our new diploma programs that we're rolling out at the moment are at a 20% reduction in price over existing diploma programs. These are new verticals for the organization. We've given our full-time degree students, both in Heald and in online, a 20% discount if they go to school full time. If they transition from part time to full time, they can get an actual 20% reduction in the cost of their education. Good for them, good for us.

What happens for us, for example, as we shrink the amount of time they're in school, our revenue per student per month actually goes up. Our revenue student per term goes down, but our revenue per student per month goes up. So it's a better deal for the students and a better deal for us.

And our loan partner, who provides all of our gap funding, recently reduced the interest rates for our student loans. The in-school payments have dropped about 40%. Our rates now range from 2.9% all the way up to 9.9%. That's a substantial reduction and a real benefit to the students. So it's helping us in the marketplace be a little bit more competitive.

And we've done a lot of around operational efficiency. A lot of this, you heard me talk about before. We've pulled out the $150 million worth of cost. We've reengineered all of our financial aid processes. We've had very good success in default management. All of those things we've internalized part of controlling our own destiny, which is part of our long-term strategy.

And here are some of the results. If you take a look in 2009, on a 2-year cohort, our average rate we had 9 schools above 20% -- or above 25%, excuse me. And today, we have 0 schools above 25%. Our average for our organization on a 2-year measurement, 6.6%. We've told you this a number of times now, but we did not think the default are a risk for our organization on a go-forward basis.

With regard to 90/10, we had 2 schools that pierced last year, and we have resolved those issues for ourselves for our organization today. And so we're in a much better place on 90/10 this year than we were last year.

Gainful employment. I think you all know as much as I know about this. I mean, who knows what they're going to do? They have an opportunity to come back, and we can either see a revised regulation come our direction. They could have another process they could go through. We can have an appeal take place in the courts. I think it's the balls in the government's courts. There are some appeals that are taking place on certain segments of that at the moment, and that's what slowed this process down. Once those issues are resolved and this really deals with data, once those issues are resolved, then I think we'll see some activity take place on the gainful side again.

On our organization, I think, it's important to note we've got a little bit of heat because we announced that 93% of our programs made it, which meant 7% didn't. But of the 7%, about half of those we'd already taught out before this ever became an issue. And so remember this is a retrospective look, and those programs were not on our horizon. We don't offer them any longer. We've done a lot of work around that. We've reduced other programs, and pricing has made a big difference in the gainful environment. Remember that gainful employment is a relationship between the cost the student has to pay for their debt and the amount of money they make in the third year of their employment. The interesting thing about this is as we get measured on placement based on the actual training that they get, the gainful Employment doesn't care where their money comes from. It just determines whether or not they're getting any money. And that's the measurement period. But we'll see what happens with that. I think something will happen. I can't tell you when. I mean, maybe Kelly has a little more insight into that than we do, but there's a lot going on in the courts at the moment. Once that's resolved, we'll see some activity.

This is a big issue for us. This is a very interesting issue. It's a technical issue. I think you all know that we as an industry and both traditional and for-profit education has responsibility. We have a financial responsibility test that we have to meet. There is a threshold in this test. It goes from 0 to 1.5. Above 1.5, you're in a great place. Between 1 and 1.5, you have some additional reporting. And below 1, you could be required to post a letter of credit to make the government feel good about the fact that you have a financial wherewithal to be able to provide services to your students.

So what happened to us, in December of 2010, because of the reduction in the stock price, we took a goodwill impairment charge. We wrote off about $203 million, and we did not run that through our income statement, and our financial responsibility because of noncash charge, our financial responsibility score was 2.1. The government ran it through, came up with a 0.9 level for us, started -- a number of things started to happen as a result of that. And we've reported all that to you. The bottom line is we're in reconsideration with the department right now. We believe very strongly that they're wrong on the accounting. This is a rule that was developed in 1996, when those of you that are as old as me remember that when you did an acquisition and had goodwill, you wrote it off over 40 years. And you had extra normal impairment, you could take it at the time and didn't impact your financial statement. That rule has subsequently changed. We now have goodwill impairment that we do every year. We impair our assets, where we review our assets every year for impairment. It's a totally different environment in the accounting arena, and we think they're wrong on the accounting.

And so as a result, we're going through the process. We have done a number of things. We gave them 3 options to consider. The first option was we revised our 2011 numbers, which put us in the zone above 1 because we had a number of schools that we put into discontinued operations in 2012. And when you do that, you revise your 2011 filings with the Securities and Exchange Commission. And as result, that improved our performance in 2011.

The other thing we did based on a request from the department is we accelerated our filing for 2012. We've submitted that back in December. We think we're in a very good place. We think we're above 1.5 for 2012, and we think we're going to be above 1.5 for 2013. And so those were 2 of the options.

And then the third option, obviously, was to get the accounting right. So that's where we are. We're in reconsideration on that. I'm in routine conversation with the department, the most recent was about 3 weeks ago, and they're just going through a process. So that's what's happening on ED.

Just a little background. This is our historical performance. You can see in 2011 the difference between we and they. So on the growth side for our organization, we talked a lot about program expansions. One of the things we've done over the course of this year is we've rolled out 6 new verticals into the marketplace. We've taken a number of our associates programs and brought them down into diploma level programs so we've reduced the amount of time of the students in the school. Instead of 2 years now, these are 9-month programs. we've reduced the pricing associated with those, and we're rolling those out. We think we'll have about 120 of those rolled out by the end of this fiscal year. And when I talked about 120, we have 88 schools, 6 programs. You could see that it could be close to 500 in total. So this is the process that's going to be running now for the next several years.

Online continues to grow. We think we're going to be flat to slightly up in this third quarter. I talked about price reductions already. They have helped in South Florida. For example, where we have -- where we do not have a 90/10 program, we were able to take a pricing reduction on our diploma programs down there. And as a result, we're seeing some very significant increase in enrollment in those schools.

We now have -- you've heard us talk about our GED advantage program. We've rolled that out in about 60 locations. We have over 1,000 students now in that program. We're beginning to get some data back on it, and the outcomes are looking pretty darn good. I mean, we're screening the students on the front end. Interestingly enough, about 60% of the students who take the screening test cannot get into the GED program. They cannot make it through. And so that is a commentary about high school and all the preparations these students have coming into this point. But we're very careful about how we do this. We're giving the students the opportunities in those markets. And we pay for that. We pay for all the training and we pay for the testing for them.

And then QuickStart. This is the transaction we did back -- I guess we closed it back in August of this year. These folks train about 20,000 individuals or corporate employees on Microsoft. Every time Microsoft makes a change to their software, training is required. They have relationships with employers. And as a result, they're continuing down that track. We intend to expand this program across the country. It's currently a Western -- actually a 3-Western-states program. Meaning, there's an opportunity to take this East. And there's a number of opportunities out there, we think, in terms of roll-up in this arena.

Quickly on population. I'm going to actually jump to the next slide. This will be a little easier to see it. One of the things we were concerned about obviously on a go-forward basis, Ability-to-Benefit students are no longer eligible for Title IV. You all know who they are. Those are the students that had a test in to prove that they had the ability to benefit from further education. As a result of the budget cuts, they were limit -- funding was eliminated in July of this year, this last year. And so we are now comparing ourselves. A lot of our comps include some Ability-to-Benefit students.

What I want to show you this morning is how we're looking at the future. These are non-Ability-to-Benefit. Our population, you can see has moved from about just a little bit south of 90,000 down to about 84,500 over the last 3 years, and our new student enrollments have been right around 100,000 -- between 100,000 and 105,000 enrollments. The point of this is we've guided you all that we're going to have increases in the Ability-to-Benefit students in this year and in this quarter. We think we're going to be up in the non-Ability-to-Benefit category, excuse me. So the point is we're comparing what our future looks like as opposed to what our past included. That population is out. And if you compare us, even if you leave the Ability-to-Benefit students in, a lot of our peers are seeing 20% and 30% reductions. We're just not seeing that. I mean, we're seeing 5% to 10% reductions. And then on the non-Ability-to-Benefit population, fairly flat, and we're actually forecasting that to go up. And Bob will talk a little bit more about that in a moment.

I told you earlier about the management team. We've all been together for a while. We think we have a pretty good handle on this space. It's been a tough 2 or 3 years. And holding the team together has been, I think, a job well done for everybody and gives us a leg up in the marketplace.

So with that, I'll turn it over to Bob.

Robert C. Owen

Thanks, Jack. Just going to take a few minutes and talk to you about our financials. I want to talk a little bit about the company's operating performance over the last 3 years, a little bit about our Q2 performance, and then remind everybody the guidance that we've issued for our fiscal Q3, which ends at the end of this month.

So this is a little bit of a busy slide. I want to talk just about a couple of decisions that we made as a management team, that the company made, that have impacted our performance over the last 3 years. The first one was the acquisition of Heald. And we completed the acquisition of Heald in January of 2010. And what that got us was a regionally accredited, primarily Northern California institution with about 13,000 students at the time of acquisition. From a financial perspective, the acquisition occurred in January of 2010. So when you look at our financials, you see Heald in for 6 months of fiscal '10 and then a full year for fiscal '11. So fiscal '11 has an incremental 6 months of Heald in it.

The other decision that we made in September of 2010, which negatively affected our performance, was the decision to stop enrolling ATB students. And ATB students, as Jack talked about, we had about 14,000 ATB students at the end of June of fiscal '10. And basically, those came out of our population largely over the next 12 months.

So let me just focus a little bit on our Q2 performance. You can see our fiscal second quarter that our revenue was up 4.5% over Q2 of fiscal '12, and that's largely a result of a shift in our degree students to full time. We did some pricing to incent them to go full time so we can get more revenue per student per month. So you see an increase in revenue largely because of that shift in mix.

Our operating margins are up 100 basis points. The only real negative thing in the quarter was that bad debt was a little higher than we expected largely because of a system conversion. We've got the final group of our schools onto campus view at the end our fiscal '11 -- fiscal '12, and that we had a little bit of slowdown and some -- our financial aid processing.

But that's Q2. The next set of slides will illustrate graphically the 2 things that I talked about, the acquisition of Heald and then the decision to stop enrolling ATB students. So if you look at 06/30/10, you see our student population was about 104,000 students. And then at 06/30/11 down to 89,000, so a decline of about 15,000 students. and again, that's largely the result of taking those 14,000 ATB students mostly out of the population. You can see from then on for the next 18 months the population is basically stable between 88,000 and 90,000 students, as Jack alluded to.

And then you can see the corresponding impact on revenue from those decisions. Again, fiscal '10 had 6 months of Heald. You see an increase in fiscal '11, that's largely an incremental 6 months of Heald plus about 7 schools that we opened in that time frame added to revenue. What you can't see there is the starting of the decline in enrollment in ATB students because it's masked by Heald and the new schools. But you see that further in fiscal '12 as again the ground schools become de-leveraged as we take those ATB students out of the population.

Turning to operating income. You see the same sorts of things again. Fiscal '10 was our peak, the 6 months of Heald and strong enrollment, 104,000 students. And then you start to see the de-leveraging on the ground schools as the ATB population goes away and then further in fiscal '12. Again, the last 12 months, you've seen an increase as the operations are stabilized.

During that period as we lost the ATB students, we took out about $150 million of costs on an annualized basis to adjust our operating expenses to reflect the new population. And you see on the last 12 months that our operating income has increased again partly -- mostly because of the shift in our degree mix towards full time students.

Moving on just briefly about the balance sheet now. For the first 6 months, so we've got June 30, 2012, on the one side of the page and then our most recent Q2 results on the middle column. You can see that in the first 6 months of the year, we generated about $102 million of operating cash flow. We used that largely to pay down debt, which if you go to the next to the bottom line, you can see debt went from $149 million down to $47 million. That's using our operating cash flow to pay debt back. At the end of the quarter, Q2, we had about $20 million outstanding on our credit facility. We also spent about $30 million, about $12 million to acquire QuickStart, which Jack talked about, and then about $18 million of maintenance CapEx, which is how you see the cash comes down about $30 million. So again, the balance sheet at the end of second quarter, stronger than it was at year end, with the operating cash flow performance that we had.

Lastly, I just want to talk briefly about the guidance that we issued at the end of our second quarter. This applies to our Q3 of '13, which ends again at the end of this month, the end of March. We guided revenue to between $400 million and $410 million; diluted EPS 4% to 6% (sic) [$0.04 to $0.06]. Overall, we expect new student growth to be down 4% to 6%. That includes ATB students, some ATB students in the prior year. On a non-ATB basis, we expect new student growth to be between 1% and 3%. For those of you have models, shares outstanding and tax rate are also on this slide.

Now just to wrap it up, from an investment perspective, again over the past several years, as Jack talked about, we've made significant investments to improve our operations and to improve student outcomes. we've worked on improving the student value proposition. We've also done a lot of work around regulatory compliance and strengthening our control environment, again, managing our business to reflect the loss of the ATB population. We've taken a lot of costs out of the business while still focusing on outcomes.

We've seen our population stabilized, again as Jack discussed. And we think we're poised for the future.

So with that, Kelly, I'll turn it back over to you.

Question-and-Answer Session

Kelly A. Flynn - Crédit Suisse AG, Research Division

Jack, I know you -- I'm sorry, but I guess on -- I know you said it's impossible to predict gainful employment, but I know you guys have a good Washington team at your company. So you mentioned some activity expected on gainful employment this year. Can you just elaborate on what you're hearing on that front? Are you saying it'll get reinstated after the lawsuit stuff was over? What do you mean by that?

Jack D. Massimino

You know, Kelly, I actually don't know. I mean, I'm speculating like everybody else. I think it could run the gamut from them doing nothing, leaving it alone and going on about their business to going through a new reauthorization process or appealing the judgment of the court. I really don't know what they're going to do. I think we'll see as the department starts to lay out its plans for the next 4 years, I think we'll get a better understanding where they're headed. But at the moment, this thing is a little bit tied up in the court. And it shouldn't be too much longer, quite frankly. I mean, I think that should be getting resolved within the next several months, I would expect. But at the end of the day, I don't think any of us really know what they're going to do. There's been a big change over in the department. I think if you've been following a lot of the personnel changes over there. And there'll be new people coming in and there's going to be a new agenda. And I just -- I don't know what it's going to do at this stage. We're doing what everybody else is doing, trying to pay attention and see what's happening, see who's doing what, who's going to get those new appointments, the people will make the difference. And it's just going to be a matter of who comes into some of those roles, I think.

Unknown Analyst

Could you walk us through the rationale behind the announcements last week of the cutback in the Heald workforce?

Jack D. Massimino

Sure. Yes, those are reported issues, and I guess, by Trace Urdan, which suggested a lot of stuff. The truth of the matter is we have been consolidating a lot of our services in the organization. Bob talked about financial aid processing as an example. We do all that on a centralized basis now. And as a result, we were duplicating services between the corporate headquarters and what was taking place in the Heald operations. And so what we did is we ultimately -- once we had both programs, we had it running like we wanted it to run because, you noticed in the numbers last quarter, we had a little bit of a hiccup in bad debt. Now that we've got that smoothed out, we were able to eliminate a number of positions out there. So effectively, what we've done is just consolidated duplication of positions in the Heald organization. And it's not surprising. This is a transaction we did a couple of years ago. You get your feet on the ground, figure out how it's going to work. You can start making determinations about what you need and don't need. And we have centralized a whole lot of processes within our organization. Default management, for example, is another one of those categories. Heald did its own default management. We've brought all of that in-house and centralized all that. So this is all part of an ongoing process for us. It's no big surprise.

Kelly A. Flynn - Crédit Suisse AG, Research Division

All right.

Jack D. Massimino

Thanks. Kelly.

Robert C. Owen

Thank you.

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