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

Career Education Corporation (NASDAQ:CECO)

Q4 2011 & Year End Earnings Call

February 28, 2011 10:00 am ET

Executives

John Springer – Vice President Strategy & Investor Relations

Steven H. Lesnik – Chairman of the Board, President & Chief Executive Officer

Michael J. Graham – Chief Financial Officer & Executive Vice President

Analyst

Gary Bisbee – Barclays Capital

Robert Craig – Stifel Nicolaus & Company, Inc.

Jeff Mueller – Robert W. Baird & Company

Suzanne Stein – Morgan Stanley

Jeff M. Silber – BMO Capital Markets

Corey Greendale – First Analysis

Trace Urdan – Wunderlich Securities, Inc.

James Samford – Citi

Patrick Elgrably – Credit Suisse

Analyst for Peter Appert – Piper Jaffray

Operator

Welcome to the fourth quarter and full year 2011 earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. John Springer.

John Springer

Thank you for joining us on our fourth quarter 2011 earnings call. With me on the call this morning are Steve Lesnik, President and Chief Executive Officer and Mike Graham our Executive Vice President and Chief Financial Officer. Following remarks made by management, the call will be opened for analyst and investor questions.

This conference call is being webcast live within our investor relations section of our website at www.CareerEd.com. A reply of this call will also be available on our site. If we do not get to your question during the call, please call our investor relations department at 847-585-3899. Now, before I turn the call over to Steve, let me remind you that yesterday’s press release and remarks made today by our executives may include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results and performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors described in our quarterly earnings release, our annual report on Form 10K for the year ended December 31, 2011 and our other filings with the Securities & Exchange Commission.

Except as expressly required by the Securities’ laws, we undertake no obligation to update those risk factors or to publically announce the results of any of these forward-looking statements to reflect future events, developments, or changed circumstances, or for any other reason.

Now, let me turn the call over to Steve Lesnik.

Steven H. Lesnik

It’s been an eventful four months since I arrived and I can assure you of that with some authority. 2011 was a challenging year for post secondary education, some might say a watershed year. I myself, have been heavily involved in higher education for more than 25 years and there are unprecedented challenges in front of both public non-profit and public sector institutions.

Today, we all to one degree or another, face a challenging landscape in post secondary education whether it be a shrinking of tax payer dollars available to public sector schools or regulatory change aimed at private sector schools. These restrictive developments are occurring even though the need for post secondary educated students in our country has never been higher and never been more out of reach for so many.

We are responding to these industry wide challenges. During the year we undertook initiatives across the company to adapt as did our peers. Nevertheless, the downward pressures on student population, revenues, and margins for everyone, was readily apparent and we were no exception. Our Career Ed institutions also faced some unique challenges in 2011 leading to my arrival here in November with a clear set of priorities to immediately address.

This morning I’d like to cover a few of those priorities with you. Then I’ll turn the call over to Mike Graham, who you all know, who will talk about our current business metrics, trends, and indicators. The priorities the board and I have adopted that I am going to provide you with an update of our progress on is as follows: first, ameliorate the current legal, accreditation, and regulatory issues facing us when I arrived; second, establish a clear strategic path for the company; and third, address where we are regarding leadership of the company and our institutions.

Even before we get to those priorities, let me share with you the core cultural value we have emphasized throughout the organization. It is a simple thought, students first. Every decision we make now goes through the filter of how it impacts our students from the moment they consider us for enrollment until the day they graduate and even beyond as they progress in their careers. That idea permeates every action we take.

Now, let’s talk about the external issues that we face today. You all know we, along with a number of other companies, received a subpoena from the New York Attorney General’s Office last year. Discussion between the AG’s office and ourselves are ongoing and we continue to cooperate in every way we can. Nevertheless, I don’t think anyone can determine when these discussions will conclude.

One consequence of the subpoena was that in preparing to respond, we discovered some anomalies in the determination of placement rates at our New York based health schools. We quickly informed the AG as well as the accreditors of these schools. Our board also mandated a review of placement determination and reporting practices in all our schools across the country.

Let me briefly review what has happened since. There are two issues, one has to do with the methodology of our determine placement rates we report to ACICS, the other has to do with the placement rates themselves. Regarding methodology which is the issue that led to our receiving a show cause order, there are two aspects we have addressed. First, we have sharpened what we define as a placement. Second, we are reverifying going forward. I want to stress emphatically that we did report to ACICS on time and in accordance with their requirements in 2011.

Regarding sharpening what we define as a placement, we have made a great many enhancements which I believe, propels Career Ed into an industry leadership position. We have written and adopted a new policy manual providing additional guidance on what constitutes a placement for various schools, which I understand some others have asked to emulate already. We have put in new training procedures, new processes, and added new people including designating one of our experienced compliance people to lead a career services compliant activity.

But the coup de gras is we have no committed to independent verification of 100% of placements going forward. There is no stronger assurance we can give accreditors about our placement reporting. Regarding placement rates themselves, there are various levels of placement rates that trigger various degrees of actions and reactions by our accreditors. For the 2011 period, a number of our ACICS schools were placed on reporting and/or were required to have the school’s personnel attend a placement workshop, or were required to consult with the ACICS as to the school’s placement plans.

We have done all that and we are working on improving our placement rates where they don’t meet our own high standards or our accreditors’ guidelines. Just where we will come out for 2012 I cannot predict and whether we will trigger any additional actions by our accreditors once we report this year, I cannot predict. But, we are doing everything we can to clear this up and have confidence about the future. One thing I can assure you, while I’m here we will on a program-by-program basis, by campus, either improve our placement rates, cap new enrollments into the programs, or teach them out. The current situation will not linger.

Let’s turn back to the companywide review of placement practices. As previously disclosed, the independent counsel Dewey & LeBoeuf, looked into all of our other domestic schools and campuses. I can tell you this morning, that the review is complete and it did not find instances of improper practices as were identified within some of our health schools. There were instances of errors and misjudgments in the internal data which were corrected before we reported in a timely way to our accreditors. We have reported what we should and it is done. I am very pleased that we can now put this chapter in our history behind us.

On a different regulatory front, the company has 90/10 issues to address. Mike will go into some detail regarding this problem. I will just comment that 2012 is a pivotal year for the company regarding 90/10 issues currently involving approximately 10% of our revenue.

I want to also comment briefly on the Coalition for Educational Success Pledge. We are only one of two publically held post secondary education companies that have signed up to adopt new standards for responsible conduct and transparency. As a result of these standards all CEC institutions participating in Title IV programs will offer new undergraduate students initially enrolling in a program of study an orientation or a readiness opportunity 21 days long during which time students can discontinue their studies without incurring tuition expenses.

We will put that into effect sometime in the second half of the year. The readiness opportunity compliments programs already in place across many of our institutions to expand the use of testing to access student readiness to engage in college level work, and this additional screening could impact enrollments. The important goal of these programs is to continue to improve students’ success and graduation rates, metrics which are critical to us.

Speaking of the years ahead, I want to talk a bit about our newly adopted long range strategic plan. I do not intend to share publically all of our competitive strategy but I know you will be interested in some of the broader contours of it. At the heart of the plan is a commitment to simplify the company. We are a very complicated organization. Our internal structure is highly matrixed.

Our [OPID] structure includes 26 separate [OPIDs] across multiple institutions. We have four domestic accreditors, we have 19 programmatic accreditors, we have 15 institutions and brands 13 domestic each with its own needs for marketing support and with largely independent operating processes. There are inconsistencies in student facing activities including the classroom. Seven of our institutions have their own board of trustees in addition with our corporate board.

All of this puts a large burden on our regulatory processes, affects our ability to focus on students, and limits our margin potential which has historically lagged. A couple of things are clear as we move forward, education needs and workforce demands will continue to change and we will continue to face an evolving regulatory landscape. Beginning last June we took an important step towards streamlining our regulatory complexity by initiating for our career schools the process of moving towards one national accreditor and one [OPID] which will go a long way in streamlining our regulatory processes.

But, we have a lot of opportunity in front of us to simplify our operations and we will start by creating a new leadership position in 2012 that will oversee all of our career focused institutions including health, culinary, and design education groups. This is the ideal time for this since the underlying business models of each of these groups are undergoing significant change. We are also looking at finding ways to simplify the university side of the company.

Reducing our organizational and operational complexity will enable us to focus on building select brands. This leads to another core strategy which is to establish a small number of small, recognizable brands like Le Cordon Bleu. We believe the best course to sustainably shift our relatively high reliance on aggregators is to focus on a fewer number of brands that can be supported and differentiated over a reasonable period.

We are not big enough to sustain 15 brands in the global educational marketplace we envision ahead, but we are big enough to establish elite brands in our three key adult educator marketplaces: US career oriented schools; US online universities; and prestigious Western European post secondary schools.

Since I arrived we have authorized several market initiatives that will enable us to strengthen our institution standing with perspective students beginning the essential process of reducing our reliance on aggregators and eventually becoming brand names. This of course, will take time to take hold as every marketer knows.

This brings us to a third element of our strategy which is the last one I intend to touch on today. We believe we have a strong core competency and perhaps a distinct competitive advantage in the application of technology to education. First, our fully integrated student platform is a model for the industry public or private sector. Equally important, we have historically been an innovator creating adaptable learning experiences that greatly benefit our students with applications like MUSE, My Unique Student Experience in our online institutions and SIMPRO virtual trainer in our health education schools.

Our virtual classroom experience is exemplary and we will continue to invest and extend its capabilities. We are only beginning to tap into the potential but we believe that over time we can differentiate our institutions by providing to our students enhanced learning outcomes through innovative technology driven education experiences. You will hear more from us on our technology initiatives over the coming quarter.

We have a lot of work facing us to address the regulatory challenges and operational complexity today that are barriers to us reaching our growth and efficiency in margin potential. In view of this, the board has determined that now is the time for consistency in leadership. It has therefore deferred initiating a search for a CEO. I’ve agreed to stay on as CEO through at least the end of 2012 and as Chairman thereafter. I’m confident that will give us ample time to address our external relations issues, replenish and reconstitute our senior management team and begin implementing key elements of our newly adopted strategic plan, part of which I’ve highlighted for you this morning.

Regarding our leadership team, we have already taken a number of steps to strengthen it. We have promoted Manoj Kulkarni to Chief IT and Innovation Officer reporting directly to me emphasizing the importance of technology and extending beyond technology the idea of infusion innovation in everything we do in Career Ed. We have elevated a veteran college president to lead our design group and we have bolstered our health leadership with one of our most seasoned leaders. We have also reorganized and upgraded our all important compliance capabilities and have asked former Assistant Secretary of Post Secondary Education for the Department of Education, Diane Auer Jones to step in and lead regulatory affairs.

In addition to the career focused schools chief officer I mentioned earlier, we also have initiated a search for a chief academic officer as well as for other operational leader to bolster the core team we have in place. I believe Career Ed has the opportunity and the capability to once again be a leader in post secondary education, where there has never been a greater or more urgent need in America or around the globe for education.

I told that to our entire employee population when I outlined our strategic priorities to them earlier this month. I think our people all across the company are enthusiastic about our strategic framework. We know that while the near term outlook is quite murky, 2012 will be a year of erosion and 2012 will be a year of transition. We think the outlook is crisp and clear for the longer range future and we are taking steps necessary to position the company for the future.

I want to emphasize again, I think the longer range prospects for Career Ed have never been clearer and we will emerge from what is going on today as a stronger company. Over the long term we can build on our quality teaching, our technological advantages, our student first operations, and our commitment to reducing corporate complexity, brand building, and academic leadership.

With that, I’ll turn the call over to Mike.

Michael J. Graham

Let me start by reminding you of a few items in the press release and Form 10K we issued last night. In the fourth quarter we recognized non-cash impairment charges totaling $188.8 million or $2.25 per share associated with our annual impairment testing. In the fourth quarter last year we booked impairment charges and a legal settlement totaling $68.6 million or $0.56 per share. All of my comments on the remainder of this call will be on a non-GAAP basis which excludes these charges.

In addition, in November we completed the sale of our European Istituto Marangoni schools which were determined not to be core to the long term European strategy. The results of operations from Marangoni are now reported in discontinued operations and all prior periods have been recast to reflect our reporting on a comparable basis. We have included recasted quarterly P&Ls for 2011 and 2010 in the press release and Form 10K so you can update your models accordingly.

Now, let me turn to a quick overview of our financial performance. Overall in the fourth quarter, our revenue declined 17% and operating margins came in at about 4.5% generally in line with last quarter’s results. Over the last couple quarter’s calls we’ve provided insight into the number of initiatives we’ve taken across the majority of the domestic institutions to forward student success and better position our institutions to navigate the changing regulatory landscape.

The impact of these changes, together with the macroeconomic trends in the industry, have had a significant impact on our financial performance in the second half of the year. Given the number of changes in the business model, the new strategic imperatives which we’ll execute against in 2012 as Steve just spoke to, and the final outcomes of solving the regulatory challenges, today we’ll continue our practice of not providing specific earnings guidance.

Due to the complexity of our reporting structure and business model, I thought it would be more informative to use my time today to qualitatively calibrate you to the major tends impacting each of our institutions and how these trends impact the trajectory of the business heading into 2012. First, for our predominately online institutions AIU and CTU; in general AIU and CTU are dealing with challenges similar to many in the industry. We’re experiencing lower conversion rates, lower enrollments per admission advisor which is leading to higher costs.

Our relatively high degree of alliance on a lead aggregator channel makes impacts to our institutions more pronounced to these changes than to most. These impacts have resulted in new student start declines throughout 2011 which accelerated following the third quarter implementation of SOAR, our Student Orientation and Academic Readiness course. In the fourth quarter new student starts declined 26% in AIU and 22% in CTU. Excluding the impact of SOAR, new student starts were down 17% and 15% respectively. Based on conversion rates exiting the year, we expect similar performance through the first half of 2012.

Turning to margins, throughout 2011 we kept the variable expense structure within these institutions in line with the declines in student population. However, as the rate of student population decline accelerated through the year, we experienced negative operating leverage from two primary factors. First, our advertising and marketing spend which is generally level loaded throughout the year, and second, the operations of our 10 ground campuses.

As a result, in the fourth quarter CTU’s operating margins were 25.4% down 670 basis points from last year’s fourth quarter reflecting a 19% decline in student population and an 18% decline in revenue. Within CTU we will be investing in brand initiatives in 2012 to begin shifting the lead mix more meaningfully away from the aggregator channel. We completed successful testing or our approaches in the back half of 2011 and we’re optimistic about the opportunity.

Turning now to AIU; in the fourth quarter AIU revenue declined 22% reflecting a 15% decrease in population and continued revenue per student pressure due to lower average credit loads. Operating margins in the fourth quarter were 8.2% as compared to 23.2% in the fourth quarter of 2010.

In our career focused institutions the changes have been more pronounced. Together, these institutions reported an operating loss of $13.5 million in the fourth quarter. Based upon this performance, as well as the additional challenges ahead, we would expect similar levels of quarterly operating loss throughout 2012. This would exclude impairment, legal settlements if any, and other unusual items.

In culinary, the levels of new student inquiries held up relatively well with new student starts down 4% in the fourth quarter. However, the business model shift towards the certificate programs which was completed heading into the third quarter, has resulted in revenue per student declines of over 25% in the back half of 2011. On the cost side, the new model has resulted in significantly lower bad debt expense offsetting approximately half of the revenue per student reduction and we continue to drive efficiencies across the controllable part of the cost structure.

Despite these efforts, the high fixed cost nature of culinary, particularly with occupancy costs, has resulted in significant negative operating leverage. In the fourth quarter, culinary operating margins were -2.5%, down 780 basis points from last year. Looking forward, we’ll anniversary the business model change in the second quarter 2012 and it will take time to build the student population enough to offset the decline in RPS so we expect to experience continued margin pressure in culinary throughout 2012.

In art and design, the 2011 challenge has been more about the overall new student interest. Volumes in new student inquiries and conversion rates were pressured throughout the year resulting in new student start declines of over 40% throughout the last three quarters of the year. As a result, fourth quarter revenue for art and design was down 19%. Operating expenses in this fourth quarter included a $6 million charge for an increase to litigation reserves. Excluding this charge, total operating expenses were down 10% from last year’s fourth quarter and operating income was slightly above breakeven.

As discussed on the third quarter earnings call, we are rolling out significant changes in the art and design business model which includes new curriculum, changes in term structure, and adjustments to tuition levels. Unlike culinary, these changes are not expected to lead to material reductions in revenue per student but 2012 will be a year of transition for art and design as we implement these changes.

Now, on to health which we believe will have the biggest incremental challenges heading into the year. As noted in the Form 10K filed last night, we notified the Department of Education in February that we believe six of our [OPIDs] have 90/10 rates above 90% for fiscal 2011. These six [OPIDs] are within our health education group and our Stanford run institutions in Atlanta, Boston, Farmington Connecticut, Fenton Missouri, McLean Virginia, as well as Missouri College in Brentwood Missouri.

These six [OPIDs] contributed approximately $180 million of revenue and $12 million of operating income for fiscal 2011. We have been implementing a number of measures including tuition changes and increases non Title IV revenues to work to align these institutions under the 90% level for 2012.

In addition, as we mentioned on last quarter’s call, as we move into 2012 we are undertaking a number of operational initiatives aimed at improving our placement rates at all our schools accredited by ACICS and other institutions. These include capping new enrollments of certain programs, teaching out certain programs, and increasing career services personnel staffing levels. We’ve also repositioned resources throughout the company to assist in addressing these challenges including moving Jason Friesen into the health education group as our business leader.

Additionally, the underlying business performance continued to weaken in the fourth quarter. Health new student starts were down 30% reflecting ongoing declines in both new student inquiries and conversion rates. At the end of the year health student population was 17% lower than last year resulting in a 16% decline of revenue and an operating loss of $6.3 million which reflect deleveraging across our legacy campuses as well as the slower than anticipated ramp up of our 15 start up campuses opened over the past four years.

We have a lot of work to do in health to navigate these current challenges, but as Steve mentioned, each of our career focused institutions is dealing with significant business model changes. We’ll be bringing them together under a single leadership structure to bring better scale and new growth opportunities to the operating models.

So before we open up the call to questions, let me quickly update you on the financial position. As of December 31, 2011 the company had cash, cash equivalents, and short term investments of $441 million. Our cash flow from operations for the three months ended December 31, 2011 was approximately $21 million. Capital expenditures in the year were $78.3 million or 4.1% of revenue. During the fourth quarter the company repurchase 1.8 million shares of our common stock for approximately $13.4 million. As of the end of December the company had remaining share repurchase authorization of $239.8 million.

With that, operator let’s open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Bisbee – Barclays Capital.

Gary Bisbee – Barclays Capital

Can you give us any color on the level of spend associated with the placement rate investigation and the effort to remediate those issues? Secondly, any sense how long that level of spend will continue or persist into 2012?

Michael J. Graham

I think it would be inappropriate to give a lot of detail, but let me give you a couple of pieces of color. We’ve dramatically increased the number of career services personnel. As of January 31st our career services personnel was about 10% higher than they were the year before. If you look back to December of 2009, we probably have 60 to 70 more career services personnel in the company.

During the quarter we did expend legal costs related to Dewey & LeBoeuf. Dewey & LeBoeuf expenses will continue obviously, as they help us with the New York Attorney General work in 2012, but beyond that in terms of cost, the remaining costs are part of the costs of doing business and of operating our model.

Gary Bisbee – Barclays Capital

Were there some other areas that standout within the G&A line? This quarter that line bumped up a lot, or is it safe to say a lot of that is this incremental stuff?

Michael J. Graham

I would also point you to two things in addition to what I spoke of. One, would be we do have $5 million of severance cost related to our change in our CEO and the retirement of another executive. Additionally, we did increase our litigation reserves about $6 million within art and design, so those two items about $11 million would also be something to analyze.

Gary Bisbee – Barclays Capital

Just the last quick one, your comment that the career school losses would remain similar throughout 2012, should we back out of that this $6 million litigation reserve or is there likely to be other one time stuff like that, that’s going to keep popping up this year?

Michael J. Graham

We don’t anticipate other costs in terms of litigation settlements or other things. That said, we can’t tell. I would anticipate operating losses someplace around the level of $15 million per quarter going forward.

Operator

Your next question comes from Robert Craig – Stifel Nicolaus & Company, Inc.

Robert Craig – Stifel Nicolaus & Company, Inc.

Regarding the long term strategic plan, thanks for some of the input there, I was wondering if maybe you could provide a little additional color in terms of number of brands? You said 15 potentially going to how many? Will that plan likely include further divestiture?

Steven H. Lesnik

Regarding how many we’ll go down to, we look at three sphere as I’ve mentioned, the university sphere, we’d like to go down to as few as possible there. Obviously, the ideal might be one but there might be more than one on that side of the business. The second sphere, our career oriented schools, we would envision certainly maintain Le Cordon Bleu and probably go down to as few as we could beyond that. Thirdly, we have our international schools that we look at a little bit separately, we are down to two over there. We’d like to get down to as few as practical so that we can support them in the marketplace.

Robert Craig – Stifel Nicolaus & Company, Inc.

And likely divestiture?

Steven H. Lesnik

We’re always considering acquisitions and divestitures, it’s just sort of a routine part of the business. We’re always doing that kind of analysis. We are however, thinking as much about consolidation and uniformity as we are perhaps divesting anything.

Robert Craig – Stifel Nicolaus & Company, Inc.

One more question, I noticed in the K that your rep force and faculty count were down about 3% year-over-year. I guess I would have expected that to be down a little more, and total employees down about 6%. I guess just a bigger picture question, have you sufficiently right sized the organization in terms of employee count or could we see further action there?

Steven H. Lesnik

We’re always looking at that as well but I would just remind you that that has to do with the complexity of our organization. Our ability to right size as quickly as we would like to or as one might expect, is hampered by the complexity of our business and how many moving parts we are dealing with and the metrics nature of some of the functions that we perform. We are of course, looking at that as we move ahead but it’s not as simple and straightforward as it might be for some others.

Michael J. Graham

The other thing I would point to you to is the rep force count is also a point in time. If you looked at the average rep force for the fourth quarter, we were down to an average of about 1,900 reps for the quarter, about 15% down.

Operator

Your next question comes from Jeff Mueller – Robert W. Baird & Company.

Jeff Mueller – Robert W. Baird & Company

I was just wondering if you guys would be willing to provide any order of magnitude of what the temporary relief in terms of the $2,000 from the Stafford Loans had on your consolidated 90/10 rate in fiscal 2011?

Michael J. Graham

A couple things, one from a consolidated rate with 26 [OPID] structures it’s not very meaningful as you go across the business units. We did talk during previous quarter’s calls that certain of our health units would be exposed to 90/10 as the $2,000 of Stafford kicked over from July 1st. From an overall company standpoint, our Title IV revenues for the year were approximately 83% so not near the 90/10 issue we spoke about was within these six [OPIDs]. As we go forward through 2012 for the ground schools we’ll have more pressure against the remainder of the ground schools, especially in health. But looking at the $2,000 across all 26 [OPIDs] would be more meaningful than consolidated.

Jeff Mueller – Robert W. Baird & Company

I guess this is a follow up on the last question about consolidating the brands, but you talked about investing in CTU in the 10K and then on the call again today you talked about the branding initiatives there. Any reason for the emphasis on CTU over AIU as you look to consolidate brands? I was just wondering how you think about that?

Steven H. Lesnik

I would read anything more into than it is. We did make a commitment to both schools to initiate branding activities. The CTU branding initiative is through a more conventional, what we normally think as conventional media, while the AIU initiative is more innovative and largely targeted at social media. So we are trying some different things in both of the schools to see how it works. We’ve tested both, we think both are likely to have legs for 2012 and I wouldn’t read anything more into one over the other as far as which way we’re going to go in terms of simplifying the university side of our business.

Jeff Mueller – Robert W. Baird & Company

Then just finally, you guys talked about discussion with your other accreditors other than ACICS in the 10K, I guess if you could just provide any color there? Did you approach them, did they approach and to the extent to which you’re willing to, how would you characterize the discussions?

Steven H. Lesnik

I would say both. I think in some cases, probably all cases, we initiated reporting. As I said in the last call, we are very transparent about what we are doing. As soon as we have found anything we have reported it and we have continued to do that into the year. The other accreditors obviously, are curious like everybody else about what is going on in the company and we think it’s in our best interest and their best interests for us to report as fully as we possibly can to them as to what’s going on in each circumstance so that nobody is caught by surprise. It’s in the interest of transparency and no surprises that we have maintained dialogs with all of our accreditors about the issues we’ve been facing here over the past several months.

Operator

Your next question comes from Suzanne Stein – Morgan Stanley.

Suzanne Stein – Morgan Stanley

Can you give us an update on what the two potential non-compliance issues are at CTU from the OIG report and how you plan to address them?

Michael J. Graham

There’s two issues, one is related to attendance taking the last date of attendance and the other one is a smaller issue related to certain financial aid elements. The financial aid elements are very small issues and we’ll take care of those in due course. On the OIG report, as you know this has been ongoing with the OIG for a matter of time. The OIG has asked us about how we calculate last day of attendance. We have responded, or we will respond back to the OIG by tomorrow with our response.

We responded back that the way we do it is exactly the way we understand most traditional institutes do it in an online setting as well as most of the four profit proprietary institutions and the way we do it is very much in line with the Department’s guidelines as of July 1st and what the Department mandates for the last day of attendance.

Suzanne Stein – Morgan Stanley

Separately, at the campuses that you’re facing 90/10 issues, how much more of a challenge will it be at these particular schools to comply with GE just given that one strategy is to raise tuition? Is that a viable long term strategy to address that issue?

Michael J. Graham

It’s always a pressure. You have the needle between 90/10 and gainful employment that you have to thread. Right now we have looked at tuition levels and raised tuition levels. More importantly, we’ve looked heavily at other sources of non Title IV revenue. Non Title IV programs, short programs, third party reimbursements for students including scholarships, grants, corporate reimbursement so it’s a comprehensive program to look at many things besides just the tuition level.

With that said, the government mandates creating gaps for the student. Not necessarily in the best interest of the student to raise tuition but we need to do that to follow regulations. We’ll work to work through 90/10 here and we’ll look at gainful employment next as we get through that.

Steven H. Lesnik

I’d just like to emphasize that the first hurdle here in this hurdle race will be the 90/10 and the second hurdle beyond that will be the gainful employment. We have obviously, begun to measure just how fine a line we’re going to have to walk in order to make sure that we meet both and in cases where one or the other have to give and we have to take actions to deal with the first hurdle, that’s what we’re going to do.

Suzanne Stein – Morgan Stanley

Then just a final question, have you seen any material change in competition from traditional schools over say the last two months or so?

Steven H. Lesnik

I would say that there has been a lot of discussion about that. There’s a lot of conventional wisdom out there about that, but we have not seen in any quantifiable way additional pressures from the traditional schools. However, there does seem to be a quicken of interest in online teaching in the traditional schools. When I was Chairman of the Illinois Board of Higher Education, there was a very substantial resistance to distant learning by a variety of interests on the public sector side. That resistance is beginning to dissipate some as the effectiveness of online learning is becoming more established and there’s more data on online learning and secondly as a student, particular adult students, find online learning conforms better with the modern lifestyle.

Operator

Your next question comes from Jeff M. Silber – BMO Capital Markets.

Jeff M. Silber – BMO Capital Markets

You talked a bit about the potential to consolidate some of your [OPID] numbers. Can you give us a little bit more color on the process, the milestones, and how easy and/or difficult that might be?

Steven H. Lesnik

I can’t give you much more insight into it. We have discussions going on with both the Department of Education and our accreditors. I think to the extent we have established, that simplifying our organization making it less complex more consistent, more consistent in student facing activities, everybody sees the rational for doing this. It is a matter of the Department of Education at this point reacting to this and taking the appropriate steps to confirming.

Jeff M. Silber – BMO Capital Markets

I know the discussions have been going on since last June. Have they given you any indication in terms of timing of a decision?

Steven H. Lesnik

They have not given us any indication of timing. Obviously, we would like to get it done sooner rather than later but the Department of Education is also a big complicated organization with lots of moving parts and hopefully we can get this done as expeditiously as possible.

Jeff M. Silber – BMO Capital Markets

Then moving on to the meetings with the ACICS, I know in your K you talked about how they had deferred their decision until their next meeting in April. Is that something that is going to be released publically? If you can give us some color in terms of the dialog going on there that would be great.

Steven H. Lesnik

I don’t know what you mean about release publically but they will certainly tell us at some point after the meeting in April whether the show cause will be modified in some way, continued, discontinued. They have a range of actions they could possibly take after the April meeting and I feel confident that either they or we will publically announce the outcome if there is one. If not, there could be just a continuance of what is going on as well.

Jeff M. Silber – BMO Capital Markets

Just a few numbers questions, Mike, can you tell us what we should be budgeting for capital spending in 2012?

Michael J. Graham

I would anticipate someplace around 4% of revenue. With the reduction in revenue that we’ll experience in the year based on the 2011 trend, we still want to invest into the students and into the campuses as well as technology so it will probably be 4% or so.

Jeff M. Silber – BMO Capital Markets

In terms of the current quarter, besides the extra day, is there anything unusual that we should be aware of including comparisons to last year?

Michael J. Graham

Nothing significant. Obviously, you do know that within our AIU institution we have some seasonality in the fourth quarter versus other quarters based on the number of days of attendance, but nothing else would stand out.

Operator

Your next question comes from Corey Greendale – First Analysis.Corey Greendale – First Analysis

A question about the placement rate issue, you talked earlier about some of the conversations you’ve had with other accreditors, can you also just comment on the nature of the discussion with the Department of Education? In your comments Steve, I think you said, something about it is good to put this chapter in the company’s history behind you. Can you just give us some sense as to what gives you the confidence that this book is closed, that there aren’t additional ramifications down the road from the Department of Education, or states, or anything?

Steven H. Lesnik

I can’t imagine that there’d be additional ramifications from anyone on this. We conducted an internal independent investigation of our placement practices. We found some things in some of our health schools that we announced publically and that we announced to regulators and others. The rest of the review didn’t turn up anything to report to anybody and there haven’t been and there won’t be any need for further conversations with anyone about it.

Corey Greendale – First Analysis

Secondly, I understand you’ve committed to being the CEO until the end of this year. Is there a scenario where you could be the CEO for five years or should we not be thinking about it that way?

Steven H. Lesnik

I’m not going to put any time limit on how long I stay. I think first of all it has to do with the board of directors and what the board of directors think is the best course for the company and they are watching very, very closely. I will stay until we get the three areas that I’ve described to you this morning on the right track and a lift and forward momentum going. That is getting these regulatory issues, accreditation issues, and other reputation issues that we inherited resolved, getting the leadership team in very strong position, and importantly, getting some momentum on these strategic plans which we have adopted this year.

Corey Greendale – First Analysis

Can you just give us your sense for CEC’s reputation within the industry at this point in terms of given where the company is at, are you finding it more challenging to attract good talent given the changes, is it getting easier, just what is the status on that?

Steven H. Lesnik

First of all, two questions, in the industry and generally with respect to talent. I think that we still have the respect of our peers. I think our peers recognize that there are a lot of good assets here, there is a lot of good institutions, good people. I think our technological advances are very well known. I think the strength of our financial organization and frankly, our teaching core is respected by our peers. So I think our standing in the industry continues to be very strong and I think personally there’s a lot to build on here.

With respect to a more general reputation, we like many of the other companies have taken a good many hits both in Washington and some of the general media over the past year, we’re certainly no exception and more recently we’ve been a little bit more in the limelight than we would like. We have a search firm on retainer that is looking for some of the people that I described to you and frankly, they’re having very good reception.

I think people recognize the importance of education, the opportunity for higher education, the need for higher education. I think it motivates and it is very attractive to some people to do this kind of stuff and we’re finding the caliber of candidates that are interested in the company to be pretty good.

Operator

Your next question comes from Trace Urdan – Wunderlich Securities, Inc.

Trace Urdan – Wunderlich Securities, Inc.

Given the revised downward placement rates at some of the healthcare schools I’m wondering if any of those you would consider potentially at risk for closure? Or, at this point are you comfortable that none of the schools need to be closed?

Steven H. Lesnik

As I said in my prepared remarks, we will either fix them, teach them out, or in some cases cap enrollment. If closure is another word for teaching them out, we’re not going to leave any students in the lurch here but as I said in my prepared remarks, we’re going to do one of the three things either fix them, cap them, or teach them out.

Trace Urdan – Wunderlich Securities, Inc.

With the Italian school can you tell us if that was sale process, did you put that school on the market or was the bid unsolicited? If it was unsolicited, have you received any other unsolicited bids for other assets in the company?

Steven H. Lesnik

All the time.

Michael J. Graham

We looked at the Marangoni asset as part of our portfolio well before the closure obviously last November. The Marangoni asset was not integrated into our European platform. The core curriculum of fashion design, the degrees offered were not towards our European work in business, and IT, and health and in publicity and the owner that came to us we believe was a much better owner longer term for the brand and for the students. We’re not going to comment on M&A activity but as Steve said we have a great collection of assets here at the company and it’s not lost on people that there’s a lot of value in this company right now.

Trace Urdan – Wunderlich Securities, Inc.

Last question, I’m assuming that the board – if you guys are buying $60 million of stock in a month that you must have already made some kind of assessment as to what your potential liability could be around settling with the New York AG and the other states in which you’re operating the healthcare schools. I’m wondering if you can share with us how you’re thinking about that potential liability?

Michael J. Graham

We think about the buy back as we always have which is first and foremost invest in the business which we’ve done. We said in the third quarter call that the repurchase we did was the returning of the proceeds of the Marangoni sale and the completion of the buy back from the year before versus anything incremental. So the shares that we bought back were the continuation of that process.

As we look forward, we always look at our shares as an opportunity to invest but first and foremost sound balance sheet, reinvest in the business and make sure we pass the DOE ratio. Remember, the DOE ratio as we deleverage and profitability falls will be important and international operations don’t count against the DOE ratio. So we’re very mindful in our buyback of the DOE ratio as well.

Trace Urdan – Wunderlich Securities, Inc.

But what about the New York AG? I presume you’re thinking there must be some kind of a financial settlement that you’re going to have to arrive at there given you guys have already acknowledge that the placement reporting was not accurate.

Steven H. Lesnik

We don’t know what the outcome of that will be and we’re certainly not going to speculate publically or in any other forum about what the outcome of that might be.

Operator

Your next question comes from James Samford – Citi.

James Samford – Citi

Just a couple questions, you commented that conversion rates and productivity were down and I think one of your competitors talked about an improving economy as one of the headwinds that are growing here. I was wondering if you’re seeing any kind of counter cyclicality components as a drag on growth?

Michael J. Graham

I think with the number of changes that we spoke to on the call between the model changes, the implementation of SOAR, the implementation of testing and entrance exams across almost all of our institutions domestically, to try to single out that as factor on conversion rate would be very, very difficult. I think we’re experiencing what everyone else is experiencing and if there’s some counter cyclicality, especially in the online businesses we would have our proportionate fair share if that exists.

James Samford – Citi

I was impressed with the international side, once you exclude the international piece what was the organic growth rate there maybe ex fx? Was there an acquisition component to that as well?

Michael J. Graham

What remains in the international piece is a great institution of INSEEC within Paris and the International University of Monaco, that is all organic growth there has been no acquisitions there and the start and population detail is laid out for the quarter and the year right in the K.

Operator

Your next question comes from Patrick Elgrably – Credit Suisse.

Patrick Elgrably – Credit Suisse

Can you share with us any color on the draft two year default rates you received yesterday and expectations for the three year rates, where those might come in?

Michael J. Graham

We received the data last night. We’re currently analyzing it. As you know, with 26 [OPIDs] we need to do the work. Our forecast said that our rates would be down probably about 200 basis points to closer to 14% and also that we would have no institutions from a forecast standpoints being over 25% so we’re in good shape there. We don’t expect that the details will be different but we’ll go through that and we’ll publish the rates as appropriate on an 8K later when we have the data done. It’s too early to comment on the three years right now in terms of the preliminary but the preliminary drafts that we shared before had no institutions at the 40% level.

Patrick Elgrably – Credit Suisse

Just a quick clarification, in the press release there was a new footnote under starts for AIU and CTU that a student isn’t counted as a start until they complete SOAR. Can you just clarify if that’s a change versus how those students were accounted for in Q2 and Q3?

Michael J. Graham

In Q2 the SOAR program didn’t exist we only had one small cohort in CTU. In the third quarter that’s how we accounted for them. Basically, we don’t know up on the start of the student whether they will complete or not complete so we basically internally record it as a start and then a negative start when they don’t complete the program. So it’s really a net start basis and it’s been comparable throughout the entire program.

Operator

Your last question comes from Analyst for Peter Appert – Piper Jaffray.

Analyst for Peter Appert – Piper Jaffray

You mentioned earlier that you’re not seeing additional pressures from traditional schools aside from a bigger interest in online offerings. Are you seeing heavier competition from for profit institutions? I just want to get a sense to whether that’s translating into longer decision cycles in house how CECO is working to differentiate itself?

Steven H. Lesnik

We are seeing a certain change in the decision cycle of applicants, people considering us for enrollment. We are seeing that and we are seeing people having more intentionality when they come into contact with us and consider us for enrollment. We are finding that people are more aware of certain brands than they were in the past and are quite as blank a slate as they were. We are doing a very considerable amount of research into what we call the purchase dynamic and are working on becoming more efficient in this area.

We are also, as you know, putting more money into branding so that the intentionality is intended for us, that there’s an intent to purchase from us, by a greater number of applicants. We are working very hard to differentiate ourselves in this area because of the changes that we’re seeing among prospective students.

Analyst for Peter Appert – Piper Jaffray

You had mentioned the new screening, the 21 day orientation program will have an impact on enrollments obviously, do you have more color on that and what the magnitude might be on impacting enrollments?

Michael J. Graham

It’s too early to tell. If we adopt it in the second half of the year and it’s only for new students you’ll see the impact not to the revenue side of the financial statements but probably from a start metric standpoint. We’ve got a lot of work to do to get our IT systems ready, our student disclosures ready, make sure the process of draw downs with the department and everything else are tied up so we won’t be doing this until the second half of the year.

To be seen, it will obviously affect reported starts but to the effect that those starts don’t persist through the class, or don’t persist through the second class the financial impact is muted. This is about getting quality students in and making sure we do the best thing for the student not about the financial metrics.

Analyst for Peter Appert – Piper Jaffray

Last question, I just want to sort of get comfort around impairments and whether we’ve seen all the major impairments behind us going forward and whether the abnormalities with the tax rate will persist?

Michael J. Graham

Two questions there, obviously impairment is an annual testing and more frequently is dictated by the accounting rules on a triggering event. One always has to look at that and there can always be more impairments depending on where the future cash flows of the business are forecasted and forecasting is a difficult process to do. So there could be impairments in 2012 or subsequent years.

Tax rate, most of the write off of the impairment was not deductable for tax purposes leading to a very strange tax rate. As you look forward for next year in 2012 I would think about our domestic tax rate being somewhere between 35% and 37% and our international tax rate being somewhere between 15% and 20% as you build the model into two separate businesses.

Steven H. Lesnik

I think we’re a couple minutes over here so I’d like to wrap this up. I think you’ve heard that the last few months have been pretty eventful but more importantly, I hope that we have conveyed to you today that 2012 is going to be a transitional and somewhat difficult year for us but, I am at least, confident that we are headed in the right direction for long term success and solidification of our business. Thanks so much for joining us today. We appreciate your continued interest in Career Education and we look forward to getting to know some of you better in the future. Thanks so much.

Operator

This concludes today’s presentation. Thank you for participating. You may now disconnect.

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: Career Education's CEO Discusses Q4 2011 Earnings Results - Earnings Call Transcript
This Transcript
All Transcripts