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Education Management (NASDAQ:EDMC)

Q1 2013 Earnings Call

November 01, 2012 9:00 am ET

Executives

James Sober - Vice President of Investor Relations

Edward H. West - Chief Executive Officer and President

Randall J. Killeen - Acting Chief Financial Officer, Principal Accounting Officer Vice President and Controller

Todd S. Nelson - Chairman

Analysts

Corey Greendale - First Analysis Securities Corporation, Research Division

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

Zachary Fadem - Barclays Capital, Research Division

Reza Vahabzadeh - Barclays Capital, Research Division

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

Kelly A. Flynn - Crédit Suisse AG, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Paul Condra

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

David Chu - BofA Merrill Lynch, Research Division

George K. Tong - Piper Jaffray Companies, Research Division

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, and welcome to the Education Management Corporation's Fiscal 2013 First Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jim Sober, Vice President of Finance. Please go ahead, sir.

James Sober

Thank you, operator. Welcome to Education Management's Fiscal 2013 First Quarter Earnings Call. With me on the call today are Todd Nelson, Chairman; Ed West, President and Chief Executive Officer; and Randy Killeen, acting Chief Financial Officer. [Operator Instructions]

I'd like to also remind you that -- everyone, that the information presented on the call contains forward-looking statements, and that these forward-looking statements include, but are not limited to, statements about our future plans and our future financial and operating performance. Actual results might differ materially from those contained in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are set forth in the cautionary statement included in the earnings release.

Before turning the call over to Ed for his opening comments, I wanted to mention that we've updated our annual student enrollment presentation, which is available on the Investor Relations page on our company's website. Ed?

Edward H. West

Thanks, Jim, and welcome to our fiscal 2013 first quarter earnings call. I'm pleased to be addressing you today in my new role as Chief Executive Officer. Of the many things that we will discuss today, what I would like for you to take away are these: our performance for the first quarter, while down as compared to last year, was in line with our expectations and, more recently, we are seeing some encouraging demand trends in our campus-based programs. We have great people. Since being named CEO in August, I've had the opportunity to visit and hold town hall meetings at some of our numerous locations and see firsthand the passion and dedication of our faculty and staff towards the education of our students. I'm impressed by their devotion and commitment to helping students improve their lives, which lends support to our long-term priorities. I will discuss this later on the call.

We are introducing some new metrics this quarter that we believe track our progress such as the 180-day new student cohort retention rate. Importantly, we're seeing some progress in select areas of improved student retention and using analytics to identify and support students who are more likely to achieve success in school. And based on what we know today, as well as our liquidity position, we believe we have sufficient cushion in our covenants to satisfy our debt covenant test.

With that, let's get on to today's discussion. Education Management has, at its foundation, 4 distinct and respected education systems: The Art Institutes, Argosy University, Brown Mackie Colleges and South University. Together, this unique collection of colleges and universities educates over 130,000 students at 110 locations throughout the United States and in Canada and across a broad array of programmatic and degree offerings. Our colleges and universities have provided access to quality education and boundless opportunities for career advancement to students for more than 100 years. We provide innovative and flexible academic programs in addition to the resources and preparation to successfully enter or advance in a workforce. We are proud of the accomplishments of more than 350,000 alumni who have graduated from one of our colleges and universities. And by graduating more students and delivering on promised outcomes, we are doing our part to prepare the workforce of tomorrow and concurrently close the skills gap in today's economy.

For the first quarter of fiscal 2013, we reported net revenues of $609.6 million, down 10.6% from the prior year, and had EBITDA of $62.9 million when excluding restructuring charges and an asset write-off. As expected, changes in the requirements for PLUS loan eligibility impacted enrollment at The Art Institutes in the summer and the current fall term. That said, more recently, we are seeing encouraging demand trends for our campus-based programs and we expect sequential improvement in new student growth trends in the back half of fiscal 2013. We continue to believe that a number of prospective students are delaying their decision to start school because of the uncertainty generated by the current stagnant economic conditions and the difficulty in finding sufficient sources of financial aid to fund their education. For our recent October start, we had enrollment of approximately 132,000 students, a decrease of 13% versus prior year.

Students enrolled in fully online programs at The Art Institutes of Pittsburgh, Argosy University and South University decreased 23% from last year to 30,300 students. Those fully online students represent about 23% of the total student population. Further, total new students for the 3-month period ended September 30, 2012, decreased by approximately 18% over the prior year period to 32,800 students.

Beginning this quarter, we are disclosing a new enrollment metric, which is the average enrolled student body. We believe this new metric will more closely measure students who contributed to our financial results during the quarter. For the first quarter of 2013, we had an average enrolled student body of 128,700 students, a decrease of 11.5% from last year.

Now during Q1, we rolled out over 70 programs across our colleges and universities where they were not currently offered, covering a wide range of programmatic areas and degree levels. For example, we rolled out 17 bachelor's and 15 associate's degree programs. We also developed a couple of new graduate level programs at Argosy University, a Masters in Science and Human Services and an Education Specialist in School Psychology. In addition, as part of our effort to bring our programs to new markets, I'm pleased to announce that during September, we opened a new South University campus in High Point, North Carolina.

Now moving on to the trends that we saw in the business during the first quarter. We continue to see more stability in campus-based versus fully online programs. Indeed, during the first quarter for campus-based programs, we're down slightly from prior year levels as compared to application volumes being of over 30% for fully online programs. This weakness in fully online program application volume is partly due to the structural changes that we've made over the last 2 years as well as increased competition.

In addition to shifting fully online programs at both South University and Argosy University to non-term academic structures, we have made changes in our marketing strategy which I will discuss shortly. These changes are most evident for our fully online programs at South University, which represented approximately 70% of the decrease in total, fully online applications during the first quarter.

In Q1, application growth for our campus-based Art Institute programs was down slightly as compared to the prior year period, and the number of applications for our fully online programs at The Art Institute of Pittsburgh remained down on a year-over-year basis as anticipated, start rates were down sharply at The Art Institutes during the first quarter. Many of our traditional aid students and families find it more difficult to finance their education due to the new eligibility requirements for the PLUS program. More recently, application volume has been trending positive year-over-year.

At Argosy University, we have recently begun to see improving application volume trends for both campus-based and fully online programs. In addition, start rates for both campus-based and fully online programs increased during the first quarter as compared to the prior year period.

At Brown Mackie Colleges, while application volume has continued to show improving trends over the last few years, with the year-over-year growth rates in the first quarter now down only slightly from prior year levels. Additionally, retention rates have improved sharply over the last few quarters, benefiting from a systematized process that allows campus leaders to monitor key controllable persistence factors as well as the implementation of a new 4-step student graduation plan which encourages students to define and focus on their personal goals and objectives. The 180-day new student cohort retention rate at Brown Mackie Colleges was up several hundred basis points during the first quarter of fiscal 2013.

At South University, benefiting from the new locations we opened over the last several years and a strong base of academic offerings, we have seen strong demand for campus-based programs as application volume has remained relatively consistent with previous growth levels and new students have continued to grow. However, we continue to see lower application volume for our fully online programs. As mentioned, the decline in volume for our fully online programs is being driven in part by changes we are implementing in our marketing efforts in order to more effectively attract students we believe are more likely to apply, start and persist towards completion of their academic program. We have been pleased with the early benefits of the changes as conversion rates have increased, operating expenses have been reduced and the overall financial performance of South University has improved, and we expect that trend to continue.

In addition, we are seeing encouraging signs in the academic progress of our fully online students at both Argosy University and South University, as retention rates have increased and a larger percentage of students are successfully completing their academic courses. Both of these metrics have improved by at least several hundred basis points year-over-year for fully online students at Argosy and South. We believe these trends highlight that the decision to move to a non-term academic structure is delivering the anticipated benefits.

Now as we mentioned on our last quarterly earnings call, changes made by the Department of Education to its underwriting standards under the PLUS program have negatively impacted both prospective and currently enrolled students attempting to finance their education. In fact, industry-wide impacts have been significant. For the first -- for the 3-month period ended June 30, 2012, PLUS loan originations fell 48% across all sectors of post-secondary education. At The Art Institutes, we have seen a similar decline in the percentage of dependent new students whose parents were awarded a PLUS loan. And as we've previously mentioned, we expect an increase in the number of students using internal payment plans, totaling an additional $65 million during the fiscal year 2013. It is important to note that approximately 70% of dependent students in campus-based programs at The Art Institutes typically start school between July through October. So the majority of the expected impact to fiscal 2013's new student enrollment has already occurred.

While we believe the Department's changes in eligibility requirements had a material impact on our results, we continue to identify ways to help mitigate at least a portion of the impact. As the Department of Education encouraged on their website, we sent out more than 3,000 letters to students and their parents who had recently been denied a PLUS loan to encourage them to consider reapplying. In certain cases, we are seeing some parents obtain approval when they reapply. We are also working with current and prospective students to leverage other financial aid options. Students whose parents are turned down for PLUS loans are able to qualify for additional financial aid if they apply as an independent student. In addition, we have increased funding available through the Perkins program to help students at certain Art Institute locations. We also continue to explore other opportunities to help students.

Now as Randy will discuss shortly, our cash flow from operations for the 3 months ended September 30 was $156 million. As I have mentioned before, our game plan related to our capital structure is to first stabilize enrollment and EBITDA; second, evaluate opportunities to free up cash; and third, address our near-term maturities by either repaying and/or refinancing.

As part of our plan to strengthen working capital, we have initiated a number of actions to help improve our liquidity position. Over the last several months, we have been exploring the opportunity to monetize several of the facilities that we own through sale-leaseback transactions. As of today, we have completed transactions for 2 school facilities and 1 housing building that we owned, with the net cash proceeds from these transactions totaling approximately $37 million.

Further, after careful review of the various capital projects planned for 2013, we have identified a number of areas where we can either delay or eliminate spending. Through purchasing efficiencies, re-prioritizing certain projects and the elimination of others, we believe we will able to reduce our planned CapEx during fiscal 2013 to between 3% and 3.5% of net revenues, a lower range than we had discussed last quarter.

Supporting our decision to reduce capital spending, we are reducing the number of new locations to be opened during fiscal 2013 to 2. Therefore we anticipate opening only 1 more additional new school during the remainder of the fiscal year depending on the timing of the regulatory approvals.

I will now turn the call over to Randy Killeen, our acting Chief Financial Officer, for an update on our financials and our fiscal 2013 guidance. Randy?

Randall J. Killeen

Thanks, Ed. In my comments today, I will review EDMC's financial results for the first quarter of fiscal 2013, discuss segment results at our AI segment and provide our guidance.

For the 3 months ended September 30, 2012, the company reported a net loss of $13.1 million or $0.11 per diluted share on net revenues of $609.6 million, down 10.6% versus the prior year quarter. EBITDA was $53.8 million.

During the quarter, we incurred restructuring charges of $9.1 million, which include an employee severance charge of $7.5 million or $4.5 million net of tax and a lease abandonment charge of $1.6 million or $1 million net of tax. We also had $4.6 million or $2.8 million net of tax in accelerated depreciation resulting from the write-off of a software asset. Excluding these items, we recorded a net loss of $4.9 million or $0.04 per diluted share with EBITDA of $62.9 million, which exceeded our previous expectations.

In response to the current operating environment, we took additional cost-saving actions across the company during the first quarter which, when combined with our prior actions, will result in annualized savings of $100 million. We expect to realize $70 million of savings in fiscal '13 which has been included in our guidance.

Please note that the following comments on the first quarter's income statement will exclude the restructuring charges and the software write-off I just mentioned. When comparing current results to the prior year, my comments also exclude a $5.2 million employee severance charge and a $1.5 million lease termination charge from the first quarter of fiscal 2012.

The 2013 first quarter revenue decrease of 10.6% was primarily driven by the year-over-year decrease in our average quarterly enrolled student body of 11.5%. Overall revenue per student was up 1% due to a greater mix of campus-based students. Average tuition levels across the system were up less than 1% year-over-year.

Total operating expenses for the first quarter were down 3% to $586.2 million versus the prior year quarter. Looking at expenses in more detail, educational services costs were $373.1 million, essentially flat with the prior year as lower employee and other costs were offset by a 40% increase in bad debt expense. Excluding the impact of bad debt, educational services expense was down 4% versus the prior year. As a percentage of net revenues, educational services expenses increased by 652 basis points versus the prior year quarter, primarily due to the decline in net revenues. Within educational services, instruction costs as a percent of revenue were up 40 basis points, primarily due to the drop in average class size. Bad debt expense represented 8% of net revenues for the quarter, up 288 basis points from the prior year quarter. The increase was largely due to more Art Institute students utilizing payment plans to finance their education due to lower PLUS loan approvals. We estimate that the change in PLUS loan underwriting criteria resulted in approximately 3/4 of the increase in bad debt expense.

General administrative expenses were down 9.9% to $173.6 million versus the prior year quarter, but increased 24 basis points on a percentage of net revenues basis. Within G&A, marketing and admissions costs were down 12.2% year-over-year and represented 23.8% of net revenues, an improvement of 43 basis points versus the prior year period. However, marketing admissions costs for new student start were up 7.4% due to lower start rates.

Depreciation and amortization increased 1.7% year-over-year to $39.6 million. As a percentage of net revenues, D&A expenses increased 79 basis points versus the prior year quarter.

EBITDA decreased 46% to $62.9 million for the first fiscal quarter. EBITDA margin was 10.3%. EBITDA, which we use to measure operating performance, is a non-GAAP financial measure, and a reconciliation to reported net income is included in the quarterly earnings press release.

Net interest expense was $31.5 million in the current quarter, an increase of $4.6 million from the prior year quarter due to higher rates on the portion of the term loan maturing in 2018.

Turning to the results for The Art Institutes, which represents over 60% of the company's revenues. Average enrolled student body for the 3-month period ended September 30, 2012, was 66,900, down 11.1% year-over-year. New students for the 3 months ended September 30, 2012, decreased 14.6% versus the prior year period. Lower new student enrollment in campus-based programs represented about 70% of the year-over-year decline in new students. As anticipated, the reduced availability of PLUS loans impacted the number of dependent students enrolled during first quarter as compared to the prior year.

Revenue declined 11.3% from the prior year quarter to $380.1 million, driven by the 11.1% year-over-year decline in average enrolled student body. Operating expenses, including -- excluding depreciation and amortization decreased 1.9% year-over-year, driven by reductions in staffing levels from our recent restructurings and lower advertising expenses, partially offset by an increase in bad debt associated with changes to the PLUS loan program. Excluding the impact of bad debt operating expenses would have declined 7%. EBITDA decreased 38.4% year-over-year to $67.9 million, with a segment EBITDA margin of 17.9%.

Looking at selected details from our statement of cash flow. Cash flow provided by operations for the 3 months ended September 30, 2012, was $156.6 million compared to $221.3 million in fiscal 2012. The decrease in operating cash flow was primarily due to reduced operating performance as compared to the prior year period. For fiscal 2013, we continue to believe that we will generate positive free cash flow for the year.

Cash paid for capital expenditures was $20.5 million or 3.4% of net revenues for the 3 months ended September 30, 2012, compared to $20.2 million or 3.0% of net revenues for the same time period last year.

Looking at the company's balance sheet as of September 30, 2012. The cash and cash equivalents were $212 million. Net student receivables, including the long-term portion, increased $39 million from the prior year period to $252.3 million. The increase was primarily due to increased usage of internal payment plans by Art Institute students due to the eligibility requirement change in the PLUS program.

We had no borrowings outstanding under our revolving credit facility. Long-term debt was $1.46 billion.

Our second quarter and annual guidance for fiscal 2013 reflects our recent October start, higher bad debt expense from increased usage of our internal payment plans related to the PLUS program eligibility changes, cost savings from the restructurings, anticipated rents from the sale-leaseback transactions and excludes to the impact of potential restructuring, employee severance, lease termination and other expenses which have been or may be incurred. For the 3 months ending December 31, 2012, we are expecting EBITDA to be between $107 million and $110 million, net income to be between $22 million and $24 million and earnings per share to be between $0.18 and $0.19 per diluted share. For the 12 months ending June 30, 2013, we are expecting EBITDA to be between $385 million and $400 million, net income to be between $62 million and $71 million, earnings per share to be between $0.50 and $0.57 per diluted share and CapEx to be between 3% and 3.5% of net revenues. Ed?

Edward H. West

Thanks, Randy. Now we know how valuable our colleges' and universities' contribution is to higher education and continue to recognize a critical role that we play in educating students across North America and in leading positive change. Therefore, while looking towards the future, we have launched a bold new goal of achieving 1 million graduates by the year 2020, which will be supported by 5 key priorities. First, increasing student retention and the number of graduating students with successful outcomes. Our goal is for each of our educational systems to attain graduation rates consistently in the top quartile as compared to similar institutions.

Second, improving access and affordability for all students. We will provide our students with an increased return on the educational investment by doing our best to offer affordable education with a high probability of graduating and securing jobs in their chosen fields.

Third, developing education-related products and services that are not dependent upon government funding. We will leverage the knowledge, skills and assets that we possess to deliver new academic products and services in order to provide solutions to the shortage of skilled employees.

Fourth, positively reinforce our image. Our colleges and universities have a rich history of education and have over 350,000 graduates who are our best spokespeople and a true testament to our success in educating students.

And fifth, foster a culture of engaged and motivated faculty and staff. Our employees believe in what we do and their commitment to ensuring our colleges and universities are the best is unsurpassed.

While these priorities will take time and effort to attain, we are fully committed to achieving them as well as sharing our progress by providing periodic updates to certain metrics. So in addition to our graduate employment statistics, there are several other metrics that we are focused on: student retention, the number of graduates and scholarships awarded. Student retention is a critical focus since the benefits are significant all around. And we have initiated a number of programs over the past year to help improve it, from tutoring services at Argosy University to new academic advising and support services at The Art Institutes and Brown Mackie Colleges to the creation of graduation-focused teams to support our fully online students. Since the majority of the students who withdraw from school typically do so within their first few academic terms, we view one of the best measures for retention is to look at cohort -- looking at a cohort of students 180 days after their initial start. For students that enrolled during the quarter ended March 31, 2012, the 180-day cohort retention rate for the quarter ended September 30 showed an improvement of more than 200 basis points from the prior-year period.

To support our students, our colleges and universities have long offered numerous need-, merit- and success-based scholarships for our students, which provide meaningful benefits to students as well as tangible benefits on retention. During our first fiscal quarter, we issued over $25 million in scholarships to our students. We view scholarships as a great opportunity to attract students and improve retention, and we will continue to look for ways to best utilize these programs.

We are very proud of our graduates and what they have achieved in both their academic and working careers, and are excited about their future opportunities. In fiscal 2012, approximately 29,000 students graduated from one of our colleges and universities, an increase of 11% from prior-year period. During our fiscal first quarter, we had approximately 7,500 students graduate, up 2% versus the prior year. We also view graduation rate trends on a cohort basis, based on 150% of normal time to completion. Across all of our colleges and universities, as well as all degree levels, including both first time, full time as well as students that transfer into one of our institutions with prior credits, the graduation rate for the period ended September 30, 2012, was 37%. Now we believe these results are comparable to other public and private not-for-profit post-secondary institutions that serve a similar student profile.

We are beginning to see slight improvements in both the average starting salaries and employment rate for the graduates of our undergraduate programs. Of our undergraduate students who graduated during the quarter ended March 31 from our colleges and universities, including Argosy University, and were available for employment, approximately 76% became employed in their fields or related fields of study within 6 months of graduation with an average starting salary of approximately $30,100.

Now with that said, we'd now like to turn the call over for questions. Operator?

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 would just like to dig into the guidance a little bit. So I understand there are some encouraging trends. Could you just speak to what specifically it is that went better than you expected that resulted in Q1 coming in better than your expectations? And then what, on the other hand, isn't going as you hoped and is resulting in lowering the guidance for the remaining 3 quarters of the year?

Edward H. West

All right. Okay. So regarding the first quarter, where the better expectations really result around expenses that we had through the quarter, as you saw coming in a little bit better from some of the actions that were taken in overall cost control. So that's really an expense-driven point there. Going forward, as we see we're going through the fall enrollment, and where we stood with enrollment coming into the period and the impact of the PLUS loan which is really impacting bad debt in a significant way, so as we look at the fall enrollment, in particular at AI from both the new and continuing students and the impact of the reserves that we have in place now for the accounts receivable, factoring that in results in the outlook. We've also included in the additional rents from the sale-leaseback facilities that we've incorporated there. The overall trends, as we mentioned, we see some encouraging signs in some of the future application flow on more recently. So I -- as you look at the last 5 or so weeks with applications coming in, in terms of the demand there, it shows some encouraging positive signs. And we believe, as I've put in my comments earlier, that the back half will show some sequential improvements in terms of new student trends.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. So as the -- as my follow-up, the lower guidance for the last 3 quarters of the year is driven, I guess, in large part by the bad debt? Can you just talk about how you're approaching internally the -- tackling the PLUS shortfall? Are you extending credit to really anybody who wanted -- who's rejected for a PLUS loan? Or as to what extent is that going to be a bad debt versus people aren't going to be admitted because they can't get a PLUS loans?

Edward H. West

Sure. Yes. The guidance reflects both the bad debt as well as enrollment of where we came in, in October, of our final enrollment period. So that reflects both of those points. And the students where we have had to -- where we stepped up more in terms of the receivables, and the student payment plans, reflects about an additional $65 million that we expect for the year, that we will have increased our student payment plans, working with students to help fund their investment in an education and working with them on monthly plans that allow for monthly payments throughout their term as well as extending that term beyond graduation. We continue to look at other sources, as I mentioned, being able to allocate hopefully more of the Perkins availability as well as we've sent out over 3,000 letters to parents and students who were previously denied a loan to encourage them to reapply based on guidance that was received and put out by the Department of Education, so -- and supporting them in best ways. Now obviously, we saw this -- as we mentioned on our last quarterly call, we saw some of this during the summer. And hearing various comments from the campuses and from parents and students, we saw this trend coming in. But obviously, the biggest impact, we experienced that in -- going into August and the October start. So we didn't fully know what all the impact would be, but now we have realized that. As I pointed out earlier, when you think about The Art Institutes and our dependent-aged students, roughly 70% of those starts in the months of July, August and October. So in a lot -- in many ways, the majority of that is behind us and has now impacted the enrollments. And as we look for new students that part's now behind us.

Operator

Our next question will come from Jeff Volshteyn from JPMorgan.

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

Could you talk a little bit about the impact of the hurricane on your Northeastern operations as far as cash costs as well as new enrollments?

Edward H. West

Yes. We -- I -- it has had an impact. And obviously, our support and hearts go out for all the families who have been impacted in the Northeast and the mid-Atlantic states as a result of the hurricane. And we've continued to see impacts from schools, in particular in areas that I just mentioned. We our focused right now, and has been, on the students, the families and the support there and the employees at those locations. We'll assess what the impact has been and update that later. But we'd anticipate there to be some impact, but right now our focus is on the safety of students and families and our employees.

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

Makes sense. Let me ask you about marketing costs. I think last quarter, you talked about a bit of a timing difference, where some costs were shifted from the fourth quarter into this quarter. And then yet, you had pretty impressive cost efficiencies in the marketing line. What is working better? What are some of those efficiencies that you can point out to us?

Edward H. West

Well part of that -- of the change there is also what we experienced in our online operations at South University, as I mentioned that we changed some of our efforts there in the marketing front. Saw more shifts in different channels there, focusing in on -- based on going through the kind of detailed analytics of looking where we have seen better signs of application trends, conversion rates, persistence and student outcomes, of channeling those dollars into areas and channels where we've seen the better results and focusing on that. That also has the added benefits we saw as a result of that. Seen improved conversion rates and also improved financial performance. And another encouraging sign is we've also seen, from students who even started in previous quarters, improved academic progress and retention. And that was really as a result of some of the changes that we made previously for non-term. So we'll continue on that. The signs, indicators are early, but we're continuing that focus and exploring other uses of what we learned there.

Operator

Our next question will be from Gary Bisbee of Barclays.

Zachary Fadem - Barclays Capital, Research Division

It's Zach Fadem for Gary. Your guidance seems to imply either significant cost cuts or a major enrollment improvement in the back half of the year or maybe both. Can you give us an color on where we may see some of those cost cuts?

Edward H. West

Well it does -- from a guidance standpoint, does incorporate in what we experienced here in the fall. The fall enrollment here in October, as Randy had outlined, as well as the actions that we've taken across the organization, which is a reflection of our anticipation of the fall enrollment. So when -- going forward, we do expect total expenses on a quarter-to-quarter basis sequentially, to decline quarter-to-quarter going into the rest of the year. And that's really as a result of the actions that have been taken to date throughout the company. And as I previously mentioned, we do anticipate that new student enrollment should show an improving trends in the back half of the year. Looking at where we are right now, obviously we've had a significant start in October, and new student trends this quarter will probably look similar to what we experienced this past quarter. But we do anticipate improvements in the back half of the year from a trend standpoint.

Zachary Fadem - Barclays Capital, Research Division

Okay. And have you guys given any consideration to repurchasing some of your bonds on the open market? Especially given that they're trading at a discount now versus waiting until they mature in June of '14?

Edward H. West

Yes, we have.

Zachary Fadem - Barclays Capital, Research Division

Can you provide any color on that?

Edward H. West

We have been evaluating that. We evaluate other actions as well. As I mentioned earlier, our focus has been multifaceted, focusing on stabilizing enrollment and EBITDA, continuing to free up liquidity across the organization, whether that's been monetization of certain long-term assets or freeing up other sources of liquidity, which we have other actions underway. And doing so will give us sufficient liquidity to deploy that capital in ways such as either open market repurchases, repayments or other transactions. So we'll continue to evaluate that, monitor that and move accordingly.

Operator

The next question will come from Reza Vahabzadeh of Barclays.

Reza Vahabzadeh - Barclays Capital, Research Division

You talk about the asset sales in the press release. Is there more to come on that front this fiscal year?

Edward H. West

Well we -- as we put in the press release and as I mentioned earlier, we did do sale-leaseback transactions on 2 school facilities as well as 1 housing location. We have a total of -- that we have owned, a total of 8 different facilities, really with any -- 6 of any meaning and substance. So we're evaluating others on that front. And to the extent that we have more there, we would -- we'll update accordingly.

Reza Vahabzadeh - Barclays Capital, Research Division

Right. You talked about the applications flow last 4 or 5 years weeks improving. But you've talked about that in the past, and it seems like start rates remain challenged. So what gives you confidence that there will be meaningful sequential improvements in enrollment trends in your back half? And then if I may just drop in one more question which is, cost savings. You talk about the quarter over decline in educational costs and total costs in the balance of the year. What is the rate of decline that we should expect? Is it the 4% of the first quarter or something more than that?

Edward H. West

Okay. So going back to the first point on terms of applications and start rates. In particular -- I mean obviously, half of the company is The Art Institutes. It's -- what we've seeing there has been kind of choppy, when we have periods where -- as I mentioned on the last call, application trends went up in the previous quarter. That moderated throughout the past quarter. We've seen a more recent trend where now that's moved back positive. I guess the real impact there was the start rate, where we had a lot of demand, interest in the programs. But start rate did go down materially, in particular going into the October start. And it really points right back to this PLUS loan issue. Clearly we're aware of that now. We're focused on it. And we're working on that class going into next summer. Because as you remember, who that really impacted were the dependent-aged students who had parental support were the majority, 77% of those student starts during the summer and fall. We're now working on that class for next summer. But now we know it. We know what's going on. And so we're working on the applications for next summer. We're having those conversations now. The campuses are having those conversations now on their -- the financial packaging as opposed to waiting right there at the start because we're aware of that situation. Separately, we're also pursuing other alternatives for those families and individuals to help support. Other trends, as I mentioned earlier, in terms of seeing encouraging trends like on Brown Mackie, where it has been negative, but it's been less negative in terms of the application flow. And we see and anticipate that, that will begin to turn positive there. And that's also been supported by increased retention rates, where those retention rates up over a couple of hundred basis points, which is also another very positive trend there. And finally, South has continued to be positive on ground from an application standpoint where we've had growth. That growth has continued and see that continuing on. And as I mentioned earlier, regarding the fully online programs, about the changes we've made there, and those signs are encouraging as well. So when we look at the back half of the year, obviously, the other difference are the comps from prior year, where we started seeing the significant declines going back 1 year ago. The comparable changes will -- now that will be in the base for the back half of the year. And we do anticipate to see an improving trend in the back half of the year.

Todd S. Nelson

And I would just add, Reza, that we don't want to lose sight of the fact that the overall demand continues to be strong. We're encouraged by that. The issues with enrollment, as Ed said, have really centered more around the funding for the students. But some of those were unexpected with the PLUS loan change, but we'll work through those. But again, we're encouraged by the overall demand, it continues to be positive.

Operator

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

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

You all are clearly focused on conserving cash. And I guess in that context, I was a little surprised that there would be new program and new campus openings at all. And I'm wondering if you could talk about in this environment, where the demand environment is rather soft, what are the economics behind those decisions? What kind of cash is involved in rolling out new programs and opening up new campuses? And then what sort of returns are you expecting from those investments on sort of a near-term basis?

Edward H. West

Sure, Trace. First, on the program rollouts that we've had. I mean this is for curriculum and content that's been developed a long time ago. It's been underway at other locations across our system. So that's a very low-cost effort of rolling out. Predominantly, we're talking about low capital-intensive programs and we see a very high return on that. And frankly, when you look at our growth over the last decade, the majority of that has been from program rollouts. So we will continue to do that and that's a very efficient use with high returns. With respect to that new location, South. I mean South, as I pointed out earlier, has been doing very well, each of the start-up locations, the progress we've been making there. And obviously this is one that was underway some time ago. But we feel very confident about the returns there and the investment and getting the return on that. And it's balanced. When we look at the cash flow that we do have, that we anticipate this year, the liquidity sources and the like, obviously we have pulled back CapEx in the investment. We also want to make sure we are also making investments of where we see attractive returns. And based on that balance, we feel confident with all the constituencies and return.

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

Okay. Can you quantify at all what the South campus will require in terms of upfront investment and when you expect it to break even?

Edward H. West

Usually these, on a break-even standpoint, occur within 2 years with that. So we would have negative cash flow for this year. That's in our forecast and outlook, between the CapEx and EBITDA losses that we expect the first year, again, factored in. It's negative and that's usually several million dollars before it begins to turn positive, which we would anticipate to happen within 8 quarters. And frankly we've seen better results than that as well, but that's what we usually incorporate into our plans. We feel like this is a very attractive market for us, in High Point, very attractive for the programs that South has to offer and the like there. And then it's actually, it was a fairly efficient one too from an investment standpoint, as well.

Operator

The next question will come from Kelly Flynn of Crédit Suisse.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Just a question and follow-up. The first one relates to what you said about the back half starts trends improving. I just want to clarify, does your guidance assume that starts growth year-over-year will turn positive at some point in fiscal '13?

Edward H. West

What we talked about was seeing improving trends for the back half of the year would largely be less negative. And we would anticipate that it could turn positive at the latter part of the year.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay, great. And then just a follow-up related to the affordability comments you made about your kind of 2020 goals. How are you planning to make it more affordable? And I guess specifically, are you contemplating any price reductions or increased discounting at this point?

Edward H. West

Yes, right. As we've pointed out there -- and you're right, Kelly, in terms of focusing on affordability, it's really more of what we have been doing. Let me give you an example. Like in the state of California, at The Art Institutes this fall now, this will be our third year where we've had no tuition increase. So we've kept tuition flat at The Art Institutes there in California. And frankly we've actually lowered the cost to obtain an associate's or a bachelor's degrees by changing the credit hour requirements without changing the incomes, and also have reduced and/or eliminated certain fees and other costs. So if you look at, actually, the investment to obtain an associate's or a bachelor's degree, it's actually down over 9% over the last 3 years. You contrast that with the state system of California, where actually the cost is up over 30% during that same period of time. So it's more efforts like that about how we can continue focusing in on the return on educational investment for the student. We will continue to evaluate scholarships. As we pointed out earlier, we had $25 million in various need-, merit- and success-based awards this quarter, we'll evaluate that. And other areas of ensuring that our students and prospective students see an attractive return on their investment. And frankly part of that also is strong support that we have while the student is enrolled, in terms of support to help probability of them graduating and moving on to their career of choice. That support comes in whether it's coaching servicing, academic advising, counseling, career counseling and career services to pursue the job. So it's multifaceted.

Operator

The next question will come from Jeff Meuler of Robert W. Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

As you guys look at other options to help the students with financing, is the possibility of a third-party student lending program on the table? Or is that something that, I guess, a road that you guys don't want to go down?

Edward H. West

No, that possibility is out there in terms of conversations with others who would be able to help support students on that and they're having discussions. But right now, we are pursuing various different alternatives and options out there and focusing on what's in the best interest. So we would evaluate that, yes.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then with South, is it just about a change in channel allocation with the marketing or is there a change in marketing message? Just if you could provide any additional detail there, just given the change in trend in South University starts this quarter.

Edward H. West

Well, it's largely -- what I was referring to there was really around the fully online programs at South versus South University in general across. Although we have had some -- continue and always looking at ways to refine and enhance messaging. This is -- what I was referring to is really on the fully online programs, which gets into the analytics and being decisive about -- of going through, looking where we have seen better application trends, conversion rates, persistence rates in the student body, and from what were the sources for where those students came and first acquired, where we saw better achievement. And now pursuing those channels in a more sort of way, in a much more focused way.

Operator

The next question will be from Paul Condra of BMO.

Paul Condra

I wanted to just follow up on the lease abandonment charge that you had disclosed. I wonder if you could talk about the circumstances behind that?

Edward H. West

Randy, want to go into that?

Randall J. Killeen

Sure, Ed. With some of our recent downsizing actions, we obviously have a lower total number of employees. And specifically in Phoenix, there was space that we weren't utilizing. So we went ahead and subleased that space and moved out of there, resulting in that charge.

Todd S. Nelson

And again, that was online not classroom space, for our on-ground [indiscernible] programs.

Edward H. West

Yes.

Paul Condra

Okay, great. And I wondered if you can just speak a little more broadly, when you look at your real estate portfolio, how much of it is owned versus leased?

Edward H. West

The vast majority is lease. As I mentioned earlier, we owned about 8 facilities, of which 6 have any substance. So the vast majority of all locations are under lease arrangements.

Operator

The next question will come from Alex Paris of Barrington Research.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

A question with regard to the PLUS loans, just a point of clarification. What do you read into, if anything, the Department of Education's encouragement for students, students' families, to reapply for the loans? Do you think it has something to do with the fact that they have much less disbursements than they thought?

Edward H. West

Yes. Alex, I don't want to read anything into it. I think the Department, obviously, put out on their website, encouraging in that they sent out letters, they're sending out letters as well to -- as best we understand, to families and parents encouraging them to reapply based on some of the changes that were implemented.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

Because I might read into that, that you have a -- you stand a better chance if you reapply.

Edward H. West

That's correct.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

And if that is the case, I know that these students start summer, fall. And you're working on it for next fall. But is there a chance that you'll get an unseasonal -- unseasonality sort of pickup in some of these students that were unable to start in the fall, and maybe instead start in the winter?

Edward H. West

There's a chance. That would be great if we saw that. We're not anticipating a high amount of that. But to your point, what the Department did was encourage those families to reapply after -- if they were previously denied. And then what it is -- then they look at the particular circumstances in which that loan was denied, and to see if parents or individuals can show that, that issue has been addressed or is being addressed and to where then they maybe affirmed and approved on that. But to your point, we -- that is probably for students and families who are currently enrolled. And if there are some that come back and then reapply, then that would be great.

Operator

The next question will be from David Chu of Bank of America Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

Is there any way to quantify the impact of PLUS on starts?

Edward H. West

Of the PLUS loan starts?

David Chu - BofA Merrill Lynch, Research Division

Essentially, the negative impact it is having on starts.

Edward H. West

Sure. So if you look at the new students that we saw going through the summer and the fall, the new students. As I've pointed out, if you look at the Department of Education's website during the June quarter it showed industry-wide -- so for all post-secondary education, whether it's public, private, not-for-profit and private sector, it was down 48% to 49% year-over-year for those new borrowers. We -- that's what we've experienced, it's basically a high 40% decline from the usage of PLUS loans. Now that's resulted in either, one, some of those students electing not to enroll at all. Two, it's impacted currently existing students who have elected to not return. And three, it's also students who actually did enroll and stayed enrolled and now we have been supporting through payment plans, which we talked about in our outlook from an AR standpoint.

David Chu - BofA Merrill Lynch, Research Division

Okay. And in terms of retention or persistence, you guys mentioned several, I guess, initiatives or sorry, measures, that showed improvement. But I guess the way we calculate it for the quarter, it was down year-over-year about -- what accounted for that?

Edward H. West

Well, I'm not sure how you're accounting for it year-over-year. But what we talked about was looking at new student cohort retention rate on a 180-day basis. So as we would look at a student that started, for example, back in the March quarter of last year, 6 months ago, what -- where they still enrolled in the September quarter, so 6 months later? And that point was up over 200 basis points when you look at the system. Obviously on -- as I pointed out earlier, for our fully online programs like at Argosy and South, we're seeing significant improvement year-over-year, largely as a result of the changes that were made in moving to a non-term basis. Unfortunately we were impacted at The Art Institutes, where actually we saw a decline in retention. And a lot of that, even though there's a lot of activity and efforts are going on across the system focusing on retention and student success, the impact on PLUS loans this summer and fall did take an impact as well as economic conditions.

Operator

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

George K. Tong - Piper Jaffray Companies, Research Division

This is George Tong for Peter Appert. Could you give us additional color on what you're seeing with online enrollments and how the dynamic there compares with campus-based enrollments?

Edward H. West

Sure. I just -- kind of going back to what we've seen there. Obviously, the enrollment is down and application level is down more so than what we're experiencing on the campus side. And that's driven from several different factors. But one, probably the most substantial one, is just really because of the actions that we've taken in the organization, in particular around our fully online programs. For example, we had implemented the move to a non-term academic structure, which we believe is the right thing long-term for really focusing in on student success and student achievement. And we're seeing the fruits of that now with better retention rates, better academic progress and the like. But unfortunately, it did probably make it -- our programs there at South and Argosy less attractive to certain students who have may have been looking for stipends -- to receive stipends and living expenses through financial aid. Our programs would now be less attractive to those. In addition, at South, as I mentioned, we also took other actions. We've lowered the level of infrastructure, focused the marketing efforts in on some core, specific areas. And that too has lowered the amount of opportunity and enrollment. But we're seeing the benefit of that as well through increased conversion rates, operational expenses and financial performance. So that's largely the contrast. And obviously online, I think across the industry, you're seeing more and more competition and more interest there, which obviously, we think competition is good long-term, more validation of the market and attracts focus. We're very fortunate we have very differentiated offerings, we have very differentiated brands with a line of history of education systems to offer there. And frankly, with a fair amount of flexibility. Moving to non-term allows students to start when -- on a more frequent basis. Offering that flexibility and as well as having 5-week programs. We're increasingly rolling out 5-week programs which allow for better student flexibility as well.

George K. Tong - Piper Jaffray Companies, Research Division

That's very helpful. To follow up on the competitive environment, could you tell us which verticals you're seeing the most pressure and where you might see the most opportunity?

Edward H. West

Well, I think, it's -- just from the reduction standpoint in terms of students, that's -- we've seen that across the board in -- from an enrollment standpoint and programs. So there really hasn't been anything really immune from that. Obviously online you see a lot of competition in the business programs, the largest programs that many institutions offer. So you really want to focus on where you really have programs like that but with a differentiated offering and the like. So we really focus in on that return on investment, the differentiated, the support and flexibility there.

Operator

The next question will come from Jerry Herman of Stifel Nicolaus.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

I'll try and be quick. Just with regard to the outlook, as you'd indicated that the second half should show sequential improvement. I interpreted that as meaning that the second quarter will actually be sequentially down. And I further understand that, that's mostly because of continued weakness in online and the PLUS loan phenomenon. Is that correct?

Edward H. West

Jerry, I think you're referring to the new students' side?

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Correct, correct.

Edward H. West

So we would see -- we would anticipate seeing trends similar to what we had this past quarter from a new student perspective. And obviously driven, as the points that you just made, based on the actions online and the PLUS impact.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

And then just one quick follow-up with regard to the scholarships. The $25 million in the first quarter, it that a reasonable run rate for the full year? And maybe some additional color on who specifically you are targeting? What students you're specifically targeting with those?

Edward H. West

Well, that -- the $25 million was up year-over-year. It's probably more weighted towards this period and also going into the fall of how that's utilized. And it's really not specific to 1. We have many different scholarship programs, whether they're merit-based, need-based, success-based, across -- and continue to explore other opportunities for that across the system. We have a long history of us using scholarships. We will continue to do that and try to tailor it and target it for the best opportunities and supporting students.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for their closing remarks.

Edward H. West

Great. Well, thank you, operator. And again, thank you for your time today. And again, I would like to reiterate that we're making progress in our results and some of our retention rate and how we identify and support students that will stay in school and have successful outcomes. And our faculty and staff are and remain committed to helping more students improve their lives through education and assisting them in finding jobs in their chosen fields. And I look forward to working with them in my new role. With that, I'm going to thank you very much and 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.

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