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Kevin M. Modany - Chairman and Chief Executive Officer


Kelly A. Flynn - Crédit Suisse AG, Research Division

ITT Educational Services Inc. (ESI) Credit Suisse 15th Annual Global Services Conference March 11, 2013 3:30 PM ET

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay. We're going to get started with the second half of the day. We're pleased to have Kevin Modany, the CEO of ITT, presenting today. And we'll follow this session with a breakout in the P&L room. I'll it turn over to Kevin. Thanks.

Kevin M. Modany

Thanks, Kelly. Let's get started with the forward-looking statement relative to any projections or estimates we may be talking about today. A quick outline for our conversation today, just a couple of things we want to talk about. We'll start briefly with an organizational overview and then talk about some focus areas for 2013 for the organization, touch on our strategic growth initiatives, a couple of curriculum things that we're doing that we'd like to talk to you a little bit about, and then close with a review of our internal goals for 2013.

Just for those of you that may not know the organization, over 40 years of success in the postsecondary environment, the company ITT Educational Services Inc. was formed in 1969, we did our IPO in 1994. We've got 149 locations currently, we are operating in 39 different states with about 61,000 students currently. We are degree-granting only and principally-associated degrees, with about 82% of our student population pursuing a 2-year degree in 1 of our 6 schools of study. We do have 2 brands currently, but principally, all of our students are at ITT Technical Institute. Daniel Webster College is an institution we purchased back in June of 2009 that has about 600 students in a resident campus up in Nashua, New Hampshire. But again, principal majority of our students currently are in ITT Technical Institute. And this just gives an outline of the different demographics that are the focus for each of the institutions, programmatic concentrations and whatnot. Again, current portfolio today.

These are the programs, again, I mentioned the 6 schools of study, and the fact that 82% of the census is pursuing an associate degree. You'll see our focus today is in STEM programs, Science, Technology, Engineering, the science principally being Health Sciences, and the degree level, again, currently concentrated in the associate area. I'd say, we're educating people who will ultimately be technicians at an entry-level. Daniel Webster College programs, you can see there hasn't been much change here, except recently, we received approval to begin offering programs online for Daniel Webster College, and we have approvals for the business management degree in the Masters of Business Administration.

This is a little overview of the programmatic focus, again we're talking about STEM disciplines at the technician level. We've got a couple of new programs that are either in development or we'll be rolling out, we expect these to be coming out in 2013. Software development technology is a new program we'll be rolling out, as well as industrial engineering technology. And again, these are the technician level. You can see our programmatic focus in the science technology and engineering levels and down below that, the corresponding employment opportunities. For us, as we've talked about extensively, our focus is on offering programs where there are jobs, where there is projected job growth, where there are good salaries and it presents a student with a good prospect for a solid return on their investment. This is something I think a lot of institutions are talking about today, but it's something that has been a core foundational focus for our organization for 40 years.

Recently Georgetown University put out a study that focused on different career opportunities in post-secondary education. Basically, the crux of their study was that at the 2-year level, there's a lot of demand for middle skills or technician skills and a lot of the areas that they highlighted in their report are areas that we're focused on. And again, there's no coincidence here. The programmatic selection process that we utilize focuses on areas where there are jobs, where there is job growth, where there are good salaries, where there's a good prospect for a solid return on investment. And a 2-year degree level at the technician level, again, presents a very good opportunity for people to see a good return on their educational investment. And again, that's the focus for a lot of people today.

One of the points we want to make today as well, something I may not be as well understood about ITT Technical Institute is the differentiator for our organizational. A lot of people ask us what is the single largest differentiator, and we think it's our employer network. We have an extremely strong employer network and, again, a lot of institutions are talking about this today. But it's something that you just don't build over a year or 2 period of time. This something that we've been working on for, again, over 40 years. And just some data points that I think are somewhat interesting that our program advisory committees at every school, every school of study, we have a program advisory committee made up of local employers, that advise us on our curriculum, advise us our employment opportunities, advise us on the different instructional methodologies that we use that lead to employer demand skills. And we had 2,600 employer representatives participating in the program advisory committee meeting just this past quarter.

Additionally, if we look at our 2002 employments, we had over 15,000 different unique organizations hire an ITT Technical Institute graduate. That's an extremely strong employer network and speaks to the differentiator for our organization and the career-based focus of our programs and the services that we provide. Additionally, a very strong group of career service professionals at all of our campuses, whose sole responsibility is to help students gain employment. So again, a lot of talk about outcomes and focus on outcomes. And I think this employer network is a differentiator for our organization that doesn't get talked about enough.

This is just a quick map of our location footprint right now. You can see we're located in the darker states, where the large populations are. No plans for 2013 to expand the footprint, the network at this point. For ITT Technical Institute right now, it's more about efficiencies and optimization of the current network and really a focus on utilizing capacity that we see that's available for us. Also, no plans for any large-scale pull back in the network at this point in time, continue to evaluate each of our locations and the performance of each location and the prospects for continuing to grow or maintain a solid return for each one of those locations. So again, no major plans for any changes there. And then Daniel Webster College, again, one location. I guess the point of this slide, at one point, was to demonstrate that there's a lot of run way for expanding the network, but that's something that hasn't materialized relative to some of the regulatory challenges we've experienced there. But for now, the focus for the college is on their online delivery and growing the campus to national.

Just shifting gears a little bit, talk about a couple of the focus areas for the organization. Some of the things that get a little bit of attention from the investment community. First and foremost, like a lot of post-secondary institutions, we're focused on stabilization of enrollment at ITT Technical Institute. We've experienced what we believe is some price elasticity and sensitivity to price. In response to that, we recently implemented an opportunity scholarship that provides reduction in tuition for students, it's a need-based, academic-based program, where a student can get up to $25,000 in scholarship funding to help them offset the cost of their education. We just started rolling it out, had about 24 of our schools implement it for the December 2012 intake period. And we saw some positive results there, albeit with a small set of data, only about 4 weeks of data, but we did see improvements in the conversion rate.

Currently, as we think about enrollment and the challenges on enrollment, we're seeing very solid demand in terms of inquiry flow. So the lead flow for our programs of study at ITT Technical Institute continues to remain strong. The challenges over the last couple of years has really been the conversion rate of that, and we think it relates to some of that price elasticity and sensitivity of the price, to a certain extent, some concerns about outcomes relative to education and the investment in education. Again, our response to that is the scholarship, and we're seeing that those test schools in December had about a 250 to 300 basis point improvement in their conversion rate or sure rate. And the sure rate being from application to start. So early but some encouraging signs, I guess, I would say.

Also, relative to seeing some stabilization of enrollment and potential increase in the throughput and the network we talked about and the capacity, expansion of programs and expanding into health sciences, technology and engineering-type programs. I talked a little bit about software development technology, industrial engineering technology are some of the new programs that we're looking to roll out. We are also doing some work in development and/or regulatory reviews of the possibility of expanding in the health sciences side. So nothing to announce immediately, but we've got 49 of our -- or 47, excuse me, of our schools offering nursing right now. That present us with a nice complement of schools to expand from a health sciences perspective, and we expect to do that probably later 2013.

An additional focus for us right now, is just maximizing liquidity and operational efficiencies. Just as we go through a little bit of a transition from an enrollment perspective, we're being mindful of that and focusing on operating our business as efficiently as we possibly can. We believe we have identified an opportunity to save about $50,000 or expenditure reduction of about $50 million for fiscal 2013. And we are well on pace with obtaining those savings, so we feel very good about that goal. And then, again, we just want to utilize our excess capacity, and I'll touch on that a little bit in an upcoming slide, but we've got a network that has excess capacity. There is a significant amount of leverage there available to us. The incremental margin on those additional volumes of throughput and the students gives us an attractive contribution to the margin, and so we want to find ways to do that whether it be programmatic expansion or otherwise.

And then lastly, just managing and containing some risk share contingencies that we have that gets a lot of attention with regard to some risk share agreements that we have in place. We had 3 programs in place where we were providing some risk share relative to private student loans, we've reached a settlement on one of those programs so that contingency obligation has been eliminated. There are 2 other programs remaining, and that's a focus area for us to get our arms around that, make sure we have a full understanding of that and try to mitigate those risks as much as possible.

Quick look at cash, just on the terms of focusing on liquidity and our cash availability and just kind of rolls you forward from year end to our projected cash balance at the end of the year. I guess just the nutshell point of this is a significant amount of liquidity and cash availability, so it's not an area of particular concern.

Strategic growth initiatives, just talking about, really, leveraging existing capacity. We talked about doing that in multiple ways and increasing access to post-secondary ed through our opportunity scholarship and hopefully taking advantage of that strong demand and inquiry flow that we're seeing and hopefully, we'll see improved conversion rates here. Again, test groups showed some positive results, probably too early to definitively conclude on the effectiveness of the program just yet, but early results were, again, somewhat encouraging. But I think we're going to need a little bit of extra time here to kind of see how this all plays out and collect some additional data.

Programmatic focus. We talked about expanding there, and then just facility capacity estimates. We estimate, right now, that we have 3 different shifts, if you will, where we can offer post-secondary programs, morning, afternoon and evening, based on our delivery methods. And right now, we use approximately 5% of that capacity during the morning, 25% in the afternoon, and 70% in the evening. Principally, our students are working adults, they work during the day, they come to school in the evening. Now this presents us with a terrific opportunity to really utilize that capacity and we think with some of our programmatic focus, it's geared towards utilization of that capacity. And again, just to remind you, a significant amount of leverage opportunity available to us with some incremental volume. So when I have programs that make sense, programs where there are jobs, programs where there are salaries, and also focusing on demographics that fit with our current network, and we think we've got great opportunity with those programs noted below.

Just touching on our opportunity scholarship, I mentioned the reasons for it. Basically, eliminates, we believe, our students' need for any private lending going forward. So take that financing need away for students, which is a good thing, we hope it increases access and increases conversions. Estimated to be, probably, somewhere around $100 million to $125 million worth of scholarships for 2013. So it's a significant investment on the part of the organization to, again, increase access for our students.

Lastly, this is a quick look, just from a portfolio perspective, at some of the opportunities that we're exploring, and it ties back to some of those areas I talked about. Across the top, you could see, really, what we will call business units or individual operating units that we're going to be focusing on going forward. Obviously, our ITT Technical Institute, we've Daniel Webster College, but additionally, we're going to have some additional focus on our Breckinridge School of Nursing and Health Sciences. This is really an area that we want to emphasize and again, health science is being an area of interest for us based on jobs and salaries. So you'll see and hear more about us focusing on that particular school. It is a school of ITT Technical Institute but again, you'll hear us talking a lot more about it as a separate business unit.

Likewise, I talked earlier about the opportunity to use capacity during the mornings and afternoons. And we are establishing the center for professional development at ITT Technical Institute. For lack of a better description, this is really corporate training for us, opportunity for us to offer products and programs that are pretty close to our niche around technology, around health sciences, in the STEM areas, offering, continuing education, certification preparation, things of that nature. More than likely, something we'll pursue organically, although there are some opportunities for us to consider some M&A, probably tuck-in type transactions that could help us really build a foundation. But again, we've got the footprint and the network, and for us to present ourselves as an entity in this industry that is -- it's a large industry, a fragmented industry, with 150 location points. So that's a very attractive resource and asset that we bring to this industry. And as we have our conversations with some of the vendors or OEMs, if you will, that provide some of this training, the curriculum for this training and certifications, they get very excited about the prospect of working with us and getting access to that distribution network. So again, we think this is an interesting opportunity for us.

And then lastly, establishing what we're referring to as the early career academy at ITT Technical Institute. This is a little bit of a longer plot for us, quite frankly, and something that is in still the development -- research and development stages. But it's something that we'd like to explore, it's an opportunity, again, to increase access to STEM programs at that technician level where we would potentially offer a dual program for high school students in their 11th to 12th grade, where they complete their high school education and an associate degree at the same time, once they complete those last 2 years of schooling. We can focus on the STEM areas, focus -- focusing where there are jobs, and potentially providing that demographic with the access to post-secondary education at a very, very low price point, depending upon how this is built. Again, a longer plot for us. This is going to take some more time, but it's something that we're working on right now that we're excited about as a longer-term growth initiative for us.

I just wanted to touch on a couple things we're doing on the curriculum front, I think it's important and is part of and supports the theme that we're talking about today, which is outcomes and jobs and returns on investment. We have implemented what we refer to internally as a student professional experience into all of our programs, which is a -- it's a specific course, where we are incorporating a practicum or a -- in the health sciences areas, we'd say clinical, basically, a work experience where students will go into the field, work in a project, have a deliverable that will be geared towards the learning objectives for their particular program. These are resume-worthy type experiences, so students will be working with part of our employer network, some of those 15,000 employers that have hired our graduates or the 2,600 representatives on our program advisory committees or nonprofit organizations, where they go out, maybe set up a network, design something -- do some architectural work from the computer drafting and design program. Various type of initiatives that, again, will get our students in the workforce, working with employers as part of their program of study. We're pretty excited about this and it's something that we're just rolling out now that we think will deliver some dividends for us, longer-term, relative to the outcomes and the value proposition for our students.

Likewise, we have our capstone course that we've had as part of our programs, which is sort of a culmination of all the skills and learning objectives rolled into one particular project that a student completes. We've really started collecting some more structural data relative to the outcomes and the assessment there. And I think that's giving us a lot better information about the skills of our students after completing our program, where we have opportunities to enhance the curriculum, to ensure that when a student completes the program, they can represent, through their capstone, that they have obtained the requisite skills and the learning objectives, as defined and developed by our employer network. So it's very important to tie those together, that the curriculum actually demonstrates that those skills are obtained, and we can assess that and collect that data and then use that to continually improve our curriculum.

Last slide here, just a review of internal goals for 2013 for the organization. Our estimates for new student enrollment for the full year ranging from somewhere between down 5% to up 5% from the prior year, and again that's for the full year estimate. Some indications that we're seeing potential opportunity for some thawing and certainly, opportunity scholarship, hopefully, helping us again capitalize on what has continued to be a very strong demand for our programs of study.

EBITDA for the year, $165 million to $190 million. And I couldn't help myself to indicate that that's about 1.6x from current market cap in terms of the high end of that range. Revenue per student, we're projecting that to be down, and that really is reflective of the opportunity scholarship. So that's going to be sort of in business terms, a discounting that will show up in terms of reduced revenue per student. And lastly, EPS internal goal for the year between $3.50 and $4.

So with that, I don't, Kelly, are we doing any questions in here or do you want to...

Question-and-Answer Session

Kelly A. Flynn - Crédit Suisse AG, Research Division

Take a couple of questions in here. Kevin, can you address what is the big question today, the military announced on Friday that they're eliminating the tuition assistance benefit, at least, the Army. What portion of your revenue comes from active duty and how do you see that impacting the business in [indiscernible] in particular?

Kevin M. Modany

Sure. We don't see it as a large impact for the organization. Tuition assistance funding for us for 2013, I think was slightly less than $0.5 million. So it's a very small number for us. And again, we don't anticipate that to have any notable impact on the results.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay. We'll follow up with a breakout session in, again, the P&L room.

Kevin M. Modany

Okay. Thank you.

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