Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Education Management (NASDAQ:EDMC)

Q4 2013 Earnings Call

August 08, 2013 9:00 am ET

Executives

John Iannone

Edward H. West - Chief Executive Officer, President and Director

Mick J. Beekhuizen - Chief Financial Officer, Executive Vice President and Director

Analysts

Corey Greendale - First Analysis Securities Corporation, Research Division

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

David Chu - BofA Merrill Lynch, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Education Management Fiscal 2013 Fourth Quarter Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Iannone, Director of Investor Relations. Please go ahead, sir.

John Iannone

Thank you, Denise. Welcome to Education Management Corporation's Fiscal 2013 Fourth Quarter Earnings Conference Call. With me on the call are Todd Nelson, Chairman; Ed West, President and Chief Executive Officer; and Mick Beekhuizen, Executive Vice President and Chief Financial Officer.

Following our opening remarks, we will begin a question-and-answer session. Before turning the call over to Ed for his opening comments, I would like to remind you that information presented on this call contains forward-looking statements. And we undertake no duty to update such statements except as required by U.S. securities laws. These forward-looking statements include, but not limited to, statements about our future plans, outlook and future financial and operating performance. Actual results may differ materially from those contained in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are set forth in the cautionary statement included in last night's earnings release.

Lastly, EBITDA, which we use to measure operating performance and management uses to facilitate period-to-period comparisons and assists in clarifying operating results in a non-GAAP financial measure. And a reconciliation to report net income is included in last night's quarterly earnings release. Ed?

Edward H. West

Thanks, John. Good morning, everyone, and thank you for joining us. On today's call, we will cover several operational topics, review our fiscal 2013 fourth quarter financial results and provide our outlook for fiscal 2014 and discuss our quality measures.

There are 3 important takeaways from this morning's call. First, we met our expectations for the fiscal fourth quarter, and the financial performance was driven by solid operational execution. Second, we are encouraged by the continued positive improvement in student retention, as well as improving new student enrollment trends. We believe these trends are the beginning of the stabilization necessary for sustained performance. And third, we continue with our transformation to position both EDMC and our students for success. We continue to focus on student achievement and providing an excellent, affordable, educational experience that prepares them for employment opportunities in the marketplace.

For the fourth quarter of fiscal 2013, we reported net revenues of $595 million, down 7% from the prior year, with EBITDA of $68 million after excluding the restructuring charge and the impact of an asset disposal, as described in our earnings release. As a reminder, due to the seasonal nature of our business, our fiscal fourth quarter is historically our lowest student enrollment period of the year. New students for the 3-month period ended June 30, were down approximately 6% versus the prior year period. However, when excluding South University's fully online programs, new student growth was slightly positive for the quarter, marking the second quarter in a row of favorable comparisons. We are very encouraged by this trend. This increase was driven by continued campus-based, new student enrollment growth at South University, as well as -- and fully online programs at The Art Institute of Pittsburgh and Argosy University. As I stated on our earnings call last quarter, while we expect to see new student improvement in fiscal 2014, the trend will be choppy, primarily resulting from the timing of starts.

While macroeconomic conditions and declining student enrollment continue to pose challenges to the overall industry, we continue to execute on our plans to transform the company in an effort to drive future enrollment growth. We're also maintaining the relentless focus on affordability. We believe we have the right course offerings and support services to help our students achieve their educational and career aspirations. And we're optimistic this combination will ultimately lead to rising enrollments and improving financial performance.

Now let me take a few minutes -- moments to provide some additional color about what we're doing to position the company for growth. I'm pleased to say that the recent July class started, The Art Institutes, met our expectations. And we are tracking our application plan for the October class start. Further, we expect the Art Institutes to experience improving new student growth trends in fiscal 2014, but they will vary by quarter.

As I've talked about previously, we have launched a number of initiatives at the Art Institutes to improve the affordability of the education we provide. Through the combination of no tuition increases for the campuses based -- for the campus-based students at The Art Institutes, increased use of scholarships and optimizing our course offerings, we have been able to lower a campus-based student's cost of education for a Bachelor's degree by nearly 10% and the cost of an Associate's degree by nearly 20% over the last couple of years. As a result, the average student debt incurred by Art Institute graduates have decreased by over 15% since 2010.

At Argosy University, demand trends continue to be favorable with application volume and new students up versus the prior year. The positive growth was across most areas of study and degree levels. In addition, 180-day new student cohort retention improved several hundred basis points during the quarter versus the prior year quarter. I'm also pleased to announce that Argosy University has received approval from the Accrediting Commission for Senior Colleges and Universities of the Western Association of Schools and Colleges to offer its first competency-based program, the competency-based Master of Business Administration. This program is the first initiative being launched as part of the newly founded Argosy University Center for Learning Innovation. The Center for Learning Innovation will be dedicated to developing and introducing personalized and creative practices and higher education that meet changing student, employer and market needs. Launching the competency-based MBA program would be the first initiative of this center. This program represents a paradigm shift in terms of the way students learn and progress through the program. The competency-based program allows students to complete their MBA through a customized study plan on their own schedule, and would potentially large cost savings to them as compared to the traditional MBA program. I'm very proud of the team involved in this innovative offering, which clearly demonstrates our commitment to finding new ways to educate students in an affordable way.

At Brown Mackie Colleges, new student enrollment was slightly down during the fiscal fourth quarter. The team is making progress on transforming the classroom to the sole use of iPads and e-books and changing the learning model. Many student affordability and student experience efforts being implemented by Brown Mackie Colleges are being well received by their students. A recent Noel Levitz satisfaction survey showed student satisfaction improving in all categories, including financial aid, admissions and instructional effectiveness and more importantly, it scored better than the national average for a career in private colleges by 6%.

South University's total enrollment results continue to be impacted by the strategic changes we elected to make in regards to the fully online programs last summer. However, demand for its campus-based programs remains robust as both application volume and new student enrollment showed double-digit growth again this fiscal quarter. Further, 180-day new student cohort retention continues to be up several hundred basis points year-over-year for the quarter. As a result of these changes we implemented and the continued solid campus-based growth, fiscal year 2013 EBITDA improved to $45 million.

In summary, we are pleased with the improving overall demand and retention trends that occurred again during the quarter. We believe our continued focus on student affordability, combined with improving retention and new student trends, will translate into better student body enrollment and financial results, which generally lag new student trends by roughly 9 months.

I will now turn the call over to Mick Beekhuizen, our CFO, for an update on our fiscal 2013 financials and our fiscal 2014 outlook. Mick?

Mick J. Beekhuizen

Thanks, Ed. In my comments today, I will review EDMC's financial results for the fourth quarter of fiscal 2013, discuss our segment results, review some operational topics and discuss our outlook for fiscal 2014. Let me begin by saying that our results for the recent fiscal quarter reflected the continued execution of our strategy in a challenging environment as our initiatives to enhance student outcomes continue to gain traction as demonstrated by continued improvement in retention and new student enrollment trends. At the same time, we are focused on ensuring that our cost structure properly reflects the realities of the current environment, while still investing resources to its productivity improvement initiatives, focused on student affordability and success.

Now let me have a closer look at our fiscal fourth quarter results. Net revenues for the fourth quarter of fiscal 2013 were $595.2 million, down 6.9% versus the prior year quarter.

We recorded a net loss of $2 million and EBITDA of $63.3 million, reflecting restructuring and other charges of $4.8 million that were primarily related to staff reductions incurred at the end of the quarter, as well as $0.4 million from a loss on an asset disposal that was recorded in depreciation and amortization. Excluding these charges, net income for the quarter was $1.1 million or $0.01 per diluted share, and EBITDA was $68.1 million, slightly exceeding the high end of our previous guidance.

Please note that the remainder of my comments exclude certain expenses that were incurred during the fourth quarter of fiscal 2013 and fiscal 2012, which are detailed in our earnings release. During the fourth quarter of fiscal year 2013, revenue was down 6.9% year-over-year. A decline of our average quarterly enrolled student body of 9.4%, was partially offset by higher average revenue per student, which increased by 2.8% due to a greater mix of campus-based students.

Total operating expenses in the fourth quarter declined by 3.7% to $567.8 million.

Now let's look at more detail at our expenses. Educational services costs were down 4.2%, or approximately $16 million, to $353.5 million versus the prior year quarter, primarily due to lower staff levels related to lower enrollments. As a percentage of net revenues, educational services expenses increased by 164 basis points versus the prior year quarter. The largest driver of the increase was rent expense, which increased as a percent of net revenues by 136 basis points, resulting from the sale and leaseback transactions we entered into in the second quarter of fiscal 2013, the comparative leaseback of a favorable rent credit in the fourth quarter of fiscal 2012 and the loss of operating leverage.

Within educational service expenses, instructor costs as a percentage of net revenues was up 37 basis points compared to the prior year, primarily due to the decline in campus-based student instructor ratios.

Finally, our bad debt expense for the quarter was 7.1% of revenues, slightly down compared to Q4 FY '13.

General and administrative expenses were down 3.8% to $173.6 million versus the prior year quarter, reflecting a 93 basis points increase on the percentage of net revenue basis, primarily due to lower enrollment and increased cost for outside legal and consulting services.

The latter [ph] investment is important to support our future process optimization and centralization efforts to support student affordability.

Within G&A expense, marketing and admission costs were down 6.8% year-over-year and represented 23.5% of net revenues, which is flat versus the prior year period. Further, we are more efficient as marketing and admission costs for new student starts were down about 1%.

Overall, EBITDA decreased 24% to $68.1 million for the fourth quarter, while EBITDA margin was 11.4%, down to 157 basis points versus the prior year.

Depreciation and amortization was roughly flat year-over-year at $41 million. As a percentage of net revenues, D&A expenses increased 57 basis points versus the prior year quarter.

Net interest expense of $31.7 million was up $500,000 from the prior year and includes the full impact of the refinancing of our senior notes in the third quarter of fiscal 2013.

I'd like to now cover the results for The Art Institutes. The average enrolled student body for the 3-month period ended June 30, 2013, was 62,430 students, down 9.1% year-over-year with the majority of the decline from campus-based students.

Revenue declined 9.8% from the prior year quarter to $358.2 million, primarily driven by the year-over-year decline in the average enrolled student body.

Operating expenses, excluding depreciation and amortization, decreased 3.3% year-over-year.

EBITDA decreased 31.3% year-over-year to $63.2 million, with a segment EBITDA margin of 17.6%, reflecting negative operating leverage from lower student enrollments, as well as additional marketing scholarship investments. We believe these investments will help stabilize enrollments as we progress through FY '14.

Turning briefly to South University. I would like to highlight the continued significant year-over-year improvement in EBITDA, which during fiscal 2012 was negatively impacted by the performance of South University's fully online programs. For fiscal year 2013, EBITDA has improved from $5.9 million in the prior year period to $44.6 million. This improvement is a direct result of the continued demand we are seeing for campus-based programs and the success of the marketing strategy and operational changes we implemented related to South University's fully online programs.

Looking at our cash flow statement. Despite our lower EBITDA, cash flow from operations for the 12 months ended June 30, 2013, was $191.3 million compared to an outflow of $10.9 million for the 12 months ended June 2012. The prior year period results were an anomaly, primarily because of a transfer in March 2012 of $210 million to restricted cash in connection with the issuance of cash-secured letters of credit used to help satisfy our previously disclosed letter of credit requirements to the Department of Education. After adjusting for this, the prior year cash flow from operations would have been approximately $200 million, which is relatively flat compared to fiscal 2013, due primarily to improved cash collections year-over-year.

As a reminder, due to the timing of class starts, we typically use cash during our fiscal second and fourth quarters, and we expect the seasonality to continue going forward. Overall, we believe we will generate positive free cash flow for fiscal 2014.

During the 12 months ended June 30, 2013, we spent $83.2 million or 3.3% of net revenues on capital expenditures compared to $93.5 million or 3.4% of net revenues in the same time period last year. For fiscal 2014, we expect capital expenditures to be between $80 million and $90 million, which includes the anticipated opening of one additional school, depending on the timing of regulatory approvals. We believe this provides the right balance between maintenance and investments in the current operating environment. During the year, we committed to enhancing the strength of our balance sheet and we executed on that commitment.

Looking at the company's balance sheet as of June 30, 2013, the cash and cash equivalents balance was $130.7 million. Long-term debt was $1.3 billion, a decrease from the end of fiscal 2012 due to the retirement of the $375 million senior notes due 2014 and the issuance of the $203 million senior notes due 2018. The transaction not only reduced the total amount of debt outstanding, but also extended our debt maturities, providing us additional financial flexibility while we continue to execute on our strategy. We had $75 million in borrowings outstanding under our revolving credit facility compared to $11.3 million at June 30, 2012. We have paid down this balance subsequent to the end of the year, and currently have no borrowings on our revolver.

Now let us talk about 2014. We remain committed to repositioning Education Management's cost base to successfully operate in the current environment. For fiscal 2014, we're implementing productivity improvement initiatives, targeting an additional $75 million to $100 million of cost savings, which are reflected in our outlook. These initiatives demonstrate our commitment to student affordability while improving the experience for our students. Our productivity improvement initiatives continue to focus on 3 core areas. First of all, the integration of our online and campus-based offerings within each education systems, which we believe will optimize marketing and admissions and better resource utilization. Secondly, process optimization initiatives aimed at aligning our resources within each of our students and streamlining our processes. And thirdly, the centralization of nonstudent-facing activities through the center.

Now let's talk about our outlook for the business. Our first quarter and annual outlook for fiscal 2014 reflects our recent July start and our current view of student demand dynamics and broader market conditions. It also reflects our expectations for continued high legal expenses, cost savings from prior restructurings and anticipated productivity improvements initiatives. Rents from the fiscal 2013 sale leaseback transactions and slightly lower bad debt expense. As usual, our outlook excludes impairments, debt refinancing, employee severance, lease terminations and any other potential restructuring expenses which may be incurred.

For the 3 months ending September 30, 2013, we expect EBITDA to be between $46 million and $48 million. A net loss between $11 million and $12 million and a loss of $0.09 to $0.10 per diluted share.

For the 12 months ending June 30, 2014, we expect EBITDA to be between $325 million and $340 million. Net income to be between $27 million and $36 million, EPS to be between $0.21 and $0.28 per diluted share, and CapEx to be between $80 million and $90 million.

Ed, back to you.

Edward H. West

Thanks, Mick. I'd like to now provide an update on several of the quality measures that we employ to measure our performance against our long-term priorities. In addition to making college affordable, keeping students enrolled is critically important to achieving our graduate goal. One measure that we utilize is new student retention on a student cohort basis, 180 days after their initial start. For students that are enrolled during the quarter ended December 31, 2012, the 180-day cohort retention rate as of the quarter ended June 30, has shown an improvement of over 300 basis points or 3 percentage points from the prior year period, which is the fourth consecutive quarter in which we posted positive year-over-year retention improvement. Though the numbers were still preliminary, on an overall basis, our schools saw improvement in the annual ACICS persistence rate of approximately 300 basis points. This measures new students as well as continuing students during the past 12 months. However, while showing improvement from fiscal 2012, on an overall basis, some of our schools and programs accredited by ACICS, are currently challenged by the minimum ACICS client standard which was actually raised this past year. As I said, these numbers are preliminary and will not be finalized until the end of October.

Scholarships are also a key component of our efforts on affordability and retention. We continue to see a significant improvement in new student cohort retention between students who receive the scholarship versus those who do not. As a result, during fiscal 2013, we increased our scholarship programs to nearly $100 million. And we currently anticipate increasing the availability of scholarships under our programs again in fiscal 2014 by another 30% over fiscal 2013. During the 12 months of fiscal 2013, we had nearly 30,000 graduates, which brings our alumni network to over 370,000 graduates. Of our undergraduate students who completed their studies during the quarter ended December 31, 2012, from all of our colleges and universities and were available for employment, approximately 76% secured employment in their fields or related fields of study within 6 months of graduation, with an average starting salary of approximately $30,000.

At South University, the graduates of their Health Sciences programs are having great success passing their certification exams on the first attempt, ranging from 94% on the NCLEX nursing exam to 100% on the NCCAA anesthesiologist assistant exams.

Finally, I would like to congratulate the faculty and staff at The Art Institute of Pittsburgh on their recent 10-year reaffirmation of accreditation from the Middle States Commission on Higher Education. 10 years is the maximum length of time awarded for reaffirmation and is a testament to our company-wide focus on integrity, student education and support, governance and fulfilling our mission of graduating students.

We're now ready to take some of your questions. Operator, could you please review the instructions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Corey Greendale of First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

I think last quarter, you were [indiscernible] a bunch of data on some forward-looking indicators that you're seeing going into the next quarter. I was wondering if you can do the same thing and just comment on what you'd expect on the new student trends going into Q1?

Edward H. West

Sure, sure. So as I talked through my comments, I did mention more results from the application that's for in this past quarter and then going into this next quarter. And as I mentioned on the new student start for The Art Institutes in the campus-based programs -- actually, we're very encouraged that we met our expectations for that start, which is a great way to start off the year. Now as we think about new students going for the year, as I mentioned, we would expect this to turn positive during fiscal 2014. The Q1 new students growth rate is likely to look similar to the growth rate that we experienced in Q4 due in part to the timing and the number of starts in Q1. That will have a -- that will impact -- kind of negatively impact Q1, but it will positively impact Q2 and that's really due to the timing of some of the starts across several of our education systems. In general, application flow like the South continues to be very positive, Argosy, as I mentioned, have seen the same and is stabilizing more at AI and Brown Mackie.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay, that's helpful. And my follow-up is on the cost side, Mick, you mentioned $75 million to $100 million in cost savings. Is that an annualized number? Or is that the actual amount you expect to get in fiscal '14? And tied to that, could you give us some sense of what the revenue assumption is baked into the fiscal 2014 full year EBITDA guidance?

Mick J. Beekhuizen

Yes, so to your first question. This is an amount that is fully reflected in our outlook for FY '14. And so that reflects the full $75 million to $100 million that I mentioned earlier. Then with regard to your earlier -- to your second question on revenues, we're not providing revenue guidance as such, but if you look at the flow-through of those cost savings, we expect to hit the majority of the quarters throughout FY '14.

Operator

The next question will come from Jason Anderson of Stifel.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Quickly, along with '14, there -- to follow the trend there, could you provide any color on total enrollment? Just some general thoughts, if you could or -- and with that, with persistence, you had several quarters of the new 180-day retention going up, is that -- should we model that from the persistence that we look at externally? Should we model some significant increases there starting in '14? Or could you help there?

Edward H. West

Sure. So going back again to your point there. Yes, we're very encouraged and pleased about the retention improvement we've been seeing on the 180-day new student for the last several quarters. And we do anticipate seeing some additional going to the year. Obviously, as you continue to raise the base, that makes it more and more challenging going forward. But there are numerous initiatives underway to having that improvement continue, just not sure what degree. From a new student standpoint, as I mentioned previously, we do expect in fiscal 2014 to turn positive. And basically kind of looking, historically speaking, usually it was about a 9-month lag of once you can solidly and consistently turn positive new students that we would see overall enrollment turn positive from there. Then obviously, once our ongoing enrollment turns positives, positive revenue, we'll follow up. Now that -- we can also benefit that by additional retention. All of that is reflected in the guidance that Mick outlined, and we feel good about where we stand today.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

And then also, would you able to comment on RPS for '14? Is there -- should we expect some decline with the additional scholarships you mentioned?

Edward H. West

Well, starting at the EDMC level and think about it overall. As Mick talked about earlier, there was an increase, primarily due to mix from online to on-ground students. Obviously, there's a higher course load that on campus-based students take, and we've seen that mix improved. So that's really offsetting, that scholarship, and we would expect to see a slight improvement in the revenue per student for the year, but it's nominal.

Operator

The next question will come from Jeff Silber of BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

Regarding your comments of expecting new enrollment growth in the current fiscal year. Is that something you expect across all 4 of your segments?

Edward H. West

The timing is mixed between those in terms of when, but we do expect to see that occur through the year in the quarter. It'll be mixed from education system to education system.

Jeffrey M. Silber - BMO Capital Markets U.S.

And any color on which one would come first?

Edward H. West

Well, like right now, obviously, South, when you exclude the online programs, is solidly positive. Argosy is positive as well as. It's just you're going to have some timing differences principally due to the start mix. We would expect The Art Institutes to be a little bit later through the year, and that also is due to some of the timing starts as well for the online programs here.

Jeffrey M. Silber - BMO Capital Markets U.S.

All right, great. And then on the cost savings that you mentioned, the $75 million to $100 million. I know you've done some prior restructurings as well. Can you just remind us what the total cost savings will be and what the base you're using, which year?

Mick J. Beekhuizen

Yes, yes. Let me give you a little bit of additional color on that, is that if you look at some of the cost savings that have previously been announced over the past, it's approximately 18 months. That led to about $100 million of cost savings, the majority of which have been reflected in the FY '13 numbers. Now if you look at the cost savings going forward, and to just give you a little bit of a better idea of how that impacts our cost structure and also how that impacts FY '14. If you focus on the total expenses for Q4, we expect the total expenses for the first quarter of FY '14 to be slightly high, which is largely driven by timing of expenses and also some of the seasonality of our business. Then for the remainder of the year, we expect that the overall expenses will be below the Q4 run rate.

Jeffrey M. Silber - BMO Capital Markets U.S.

All right, great. But you're just -- stick in a quick numbers question. I appreciate the disclosure of EBITDA by segment and you moving from, I guess, an ending enrollment number to an average enrollment number. Is it possible you'll be disclosing that data on a historical basis for the quarters for 2013 just to help us model?

Edward H. West

Yes. We will when we pull together our 10-K, we'll have -- the disclosures will be updated in the K.

Operator

The next question, and I apologize for any mispronunciation, will be from Jeff Volshteyn of JPMorgan.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

You mentioned that you're going to be opening one school. Can you specify which one it is and overall, what is the level of campus utilization that you see in your campuses?

Edward H. West

Well, the campus utilization, obviously, is a mix depending on brand location and varies based on seasonality. That said, obviously, you look at South where we continue to experience growth across the system. At each of the locations, we're actually been expanding locations and have very high utilizations. Some of the other campuses where we've had a -- been impacted by enrollment, we actually have been able to release some of the space, consolidate space and continue to drive more efficiencies, which Mick has outlined in some of his comments on the rents. From a new campus standpoint, always evaluating new locations. As I mentioned in previous calls, really concentrated on South locations, but also evaluating a couple of other locations for The Art Institutes. So it's largely dependent on regulatory approvals and timing about which and where that campus will be.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

As a follow-up on the new Argosy MBA competency-based program. I know it's early innings, but can you kind of frame for us what do you expect the average stay for a student in that program to be and what are the cost savings that you expect right now?

Edward H. West

Yes. Let me just say, we are really, really excited about the new program. I think it is a great achievement by Argosy University and the team there, and obviously being the first institution that received WASC approval on pioneering this program. It'll be rolling out later this summer and fall. It's getting out there so we don't want to precondition in terms of what the average we need to get in there. But it does have the potential [ph] to have a much lower cost for a student who's interested in MBA and be able to do the assessments and demonstrate their competencies to receiving credit for knowledge that they bring forth. So it's really an individualized basis, based on what they know and where they can demonstrate the competency about how fast they can achieve their MBA, which is -- this is why we also have launched and Argosy has launched the Center for Innovation, Educational Innovation, of being able to really tailor programs specific to the students and the student needs. So as opposed to just in the eyes of the institution, what's best for the student. Flexibility for the student, affordability, taking prior learnings and capabilities, transfer credits, all to try to optimize their education and allow them to get their degree as efficiently and effectively as possible. So we look forward to talking more about it in the future quarters and excited to getting it launched.

Operator

The next question will come from Trace Urdan of Wells Fargo Securities.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

I want to talk a little bit about pricing, if I could. The first question I had was with regard to The Art Institute and the affordability gains that you've made there. It's not clear to me how that's communicated to the student. And I wonder if you could talk about that a little bit. How obvious is it to a prospective student that the program is more affordable? Is that the kind of thing that they only learn about once you have them at the table and you're sort of talking about their specific financing, can you speak to that?

Edward H. West

Yes, it is in a conversation with the student going through the program planning, based on the program that they're interested, whether it's also a Bachelor's degree or an Associate's, what the cost of education is in discussing through there. Obviously, we have literature information, information on the websites of various scholarships, merit and need-based scholarships that are available out there, and that they have access to. But we find that what is most valuable is having that discussion going through, working with them and their family about how they make this important investment. And as a result of -- as you mentioned, the changes that we've implemented over the last couple of years. We've actually seen that benefit really in affordability for the students where the cost of a degree has come down in a significant way. And then also lowering the graduate debt once the students finish up and that's now down over 15% from the actions that have been implemented over the last couple of years. Now on overall tuition, this is a very key priority of ours, as we think about our priorities around access, affordability and student achievement. Affordability is a very key area for us in particular at AI, where we're now, for the campus based students, we're on our third year now of 0, having no tuition increase. And then also for students in a fully -- who enrolled by this fall and are full-time. They will -- we're committed to them they will not see a tuition increase through calendar 2015. So we think that's a big commitment and very meaningful. And I'll just finalize the last statement on there is well regarding affordability, also increasing scholarships to -- by another 30% and expect total scholarships to be approximately $130 million this coming year.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Okay. And then aligned with that, given also to South, I appreciate that the weakness there online, specifically as a result of the transition to borrower-based lending, but I can't help but notice that South, on a relative basis, rather online programs, is rather expensive. And I'm wondering if -- how do you parse the weakness there into the different causes? And is there anything else that you're looking at possibly doing? Or do you really feel like you need to sort of clear the decks on South before you put more energy into trying to grow the online brand there?

Edward H. West

That's a great point. As you mentioned, we're moving to the non-term. That's something we did a couple of years ago where we did that proactively and made the change from a term-base to a nonterm-base environment, which, obviously, had an impact for students who enrolled, who were actually looking for stipends and made us less attractive for students who are really looking more for stipends, for living expenses versus the education. We, obviously, wanted to be focused on retention and seeing academic progress. Really, what happened was last summer, we actually took the actions that you were just speaking to. And that's the reason why you see the enrollment so much lower this year over last year's because last summer, we stepped back. We were not seeing the type of progression that we wanted to see. We weren't seeing the academic progression, the retention in the programs. We made the decision last summer to step back and say, "Where are we seeing good academic progress? Where are we seeing good retention? Let's focus on those programs, those degrees by the regions in the country and certain sources and marketing programs where we were more attractive for students who are more likely to benefit from our programs and adjusted the organization and the infrastructure to that." And we did that last summer. So now, what's been the result of that? The results are, yes, enrollment is much lower and the year-over-year comparisons are not favorable from an enrollment and a new student standpoint, but now we have a base that we feel very good about. Trends are improving and retention and academic progression is much improved as is the profitability. So now we feel like where we are at that base, where we will start to see the growth, and actually, we believe that will turn positive for -- in addition to the campuses for online for 2014. So we feel very good about it in the programs, getting excited about what we have ahead of us this year.

Operator

The next question will come from David Chu of Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

So can you give us an update of how high school trends look at AI in July?

Edward H. West

Yes. As I mentioned earlier, the enrollment that we ended up for July has actually met expectations. It was a solid start and that was largely driven by high school. Our next start is in August, which what we saw, were actually some of the students who were slated for August are going to move forward into July. We expect that start to be a little bit lower. And then, based on the applications that we have on the books right now for October, which is our next largest start is for the fall start, is in line with expectations for which is largely high school driven, but it's in line for what we believe for expectations for October.

David Chu - BofA Merrill Lynch, Research Division

Okay. So on a comparable basis versus last year, are you seeing share rates improve for high school?

Edward H. West

The start rates are up a little bit. I mentioned previously that we had done a lot of work, working with families, earlier on in the process for -- with their applications on the financial packaging, having those conversations for enrolling and how they're going to make the investments. So a lot of those conversations have taken place earlier during the year. So again, we're encouraged by what we've seen and the fact that we met the expectations for July is a great marker.

David Chu - BofA Merrill Lynch, Research Division

Okay. And just as a follow-up, just trying to reconcile average versus total enrollment. So just for example at South, I think for the January and April quarter, starting enrollment was below -- both below the average. So how does the math work around that?

Edward H. West

So in terms of the average, you may have students who left during the quarter, during the period of time. And the averages, that monthly average for each of the particular months and is averaged out over the period versus the starting student bodies. If you think about at the beginning, you have your highest enrollment, in particular, for a traditional term base, on that first day, then that progresses throughout the quarter. Then when you look also at the average throughout the quarter, you can have new starts that are occurring during the period, in particular for online programs. Just like, say, for South or Argosy online, there are starts every couple of weeks. And you're enrolling students during that period, so that's why it's kind of hard to compare the 2.

Operator

The next question will be from Peter Appert of Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So, Ed, I was hoping you might give us a couple of words on how you think about the competitive dynamics facing your individual brands. And I ask this in the context trying to think about what the secular growth dynamics in terms of enrollments could look like over the next 2, 3 years after we're through with this current rough patch?

Edward H. West

That's a great question. This really steps back to one of the reasons why we've spoken over the last few years, why we're so enthusiastic about Education Management, and the fact that we have these 4 education systems and operate through those 4 and have a different diversification of the programmatic and degree mix and modality, both campuses online, as well as the demographics from a traditional age student or nontraditional. So we're able to segment the market quite effectively. It also allows, because you have this 4 education systems, to have a very clear basis of differentiation and value proposition for the students. For example, in the Applied Arts, very strong presence with The Art Institutes, for students who are pursuing that design, fashion, culinary. We are now the largest culinary educator in the country. Media arts programs. Very clear differentiation. I think going forward, that is a very strong positive asset as we see other traditional providers in the marketplace. I think the other key, which is why it's a key focus of ours, is around affordability and making sure how we can articulate that value proposition. And that leads to a very specific career and outcome and into a specific job. Many of our students we work with also having an internships while they're in school. So having that at the beginning to the end and ongoing the outcomes, focus as we believe, are key differentiator. Longer term, if I may, we do believe, obviously, we'll get back to the growth. We see a good trajectory into that now. I think for the entire industry, all of the post-secondary education, you're not going to see the kind of growth that the industry once enjoyed. But it will be, I think, an attractive growth rate as this stabilizes and then we'll be able to expand our presence with the strong education systems.

Peter P. Appert - Piper Jaffray Companies, Research Division

And not to try to pin you down, Ed, but I will try. So longer-term, a mid single-digit kind of enrollment growth. You think that's a reasonable expectation?

Edward H. West

I think that's reasonable and fair.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then on the pricing, just want to make sure I understand. The expectation is basically, the whole pricing stable on a go-forward basis, so look for revenue per student to be essentially static over the next couple of years. Is that reasonable?

Edward H. West

Well, I mean, again, going back to thinking about the number that you mentioned. That's looking at same schools. Obviously, we have the ability to continue to roll out new programs, new locations across our large footprint. One of the great things of having 110 locations, there's a lot of growth, there's opportunity there just from rolling out new programs. So we can see expansion from that new locations through those systems. From a revenue per student standpoint, again, as I mentioned earlier, with the mix in the campuses, in the short term, we would expect that to be slightly positive on a revenue per student because of the change in mix. But keeping a driving affordability as much as possible, keeping tuition increases as low as possible. How long we'd be able to do that? Is that the question? Ultimately inflation. And as the economy improves, you believe you'd see some inflationary environment over time.

Operator

And ladies and gentlemen, showing no additional questions, this will conclude the question-and-answer session. I would like to hand the conference back over to Ed West for his closing comments.

Edward H. West

Great. Well, thank you very much. Our commitment to student-centered excellence drives our 23,000 plus employees each and everyday. This commitment has allowed us to continue to better align our organization with the needs of our students while maintaining high standards. Combined with our focus on affordability and our programmatic offerings, we are optimistic about the future. Thank you for your time today and we look forward to speaking with you next quarter. Have a great day.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Education Management Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts