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Career Education Corp. (NASDAQ:CECO)

Q3 2012 Earnings Call

November 9, 2012 10:00 am ET

Executives

Matt Tschanz - Director, Corporate Finance

Steve Lesnik - President and Chief Executive Officer

Colleen O'Sullivan - Senior Vice President and Chief Financial Officer

Analysts

Gary Bisbee - Barclays

Jason Anderson - Stifel Nicolaus

Corey Greendale - First Analysis

Brandon Dobell from William Blair

Jeff Silber - BMO Capital Markets

Trace Urdan - Wells Fargo

David Chu - Merrill Lynch

Jeff Meuler - Baird

Operator

Welcome to the Career Education Corporation's Third Quarter 2012 Earnings Conference Call. My name is John, and I'll be your operator for today's 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. Matthew Tschanz. Mr. Tschanz, you may begin.

Matt Tschanz

Thank you, John. Good morning, everyone, and thank you for joining us on our third quarter 2012 earnings call.

With me on the call this morning are Steve Lesnik, our President and Chief Executive Officer and Mike Graham, our Senior Vice President and Chief Financial Officer.

Following remarks made by management, the call will be opened for analysts and investor questions. This conference call is being webcast live within the Investor Relations section of our website at careered.com. A replay of this call will also be available on our site. You can also contact our Investor Relations department at 847-585-3899.

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 Section 21E of the Securities Exchange Act.

These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, 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 identified in our annual report on Form 10-K for the year ended December 31, 2011 and our quarterly filings with the Securities and Exchange Commission.

Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly 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.

Steve Lesnik

Thanks, Matt. Thanks very much. Good morning everyone. We appreciate all of you joining us today. I am going to apologize in advance. I have a little raspy throat with cold, so please bare with me.

I'd like to begin by introducing Colleen O'Sullivan, who joins us today on her first earnings call in her new role as Chief Financial Officer. Colleen, who previously served as our Chief Accounting Officer for four-and-a-half years, is a key member of our senior management team.

We have a great combination of new and old faces and our newly established executive committee is a mix of fresh perspectives and approaches with existing deep knowledge of post-secondary education as well as in the intricacies of this particular organization. We are all very pleased to have Colleen on the team, and I'll turn the call over to her in few minutes to talk about the results of the third quarter.

I have been here almost exactly a year. You may recall that when I arrived at the end of 2012, I said this year would be a year of transition for both, the sector and for Career Education. That turned out to be an understatement. In fact, the year wasn't just transitional, it was transformational.

In our judgment, those companies and institutions that haven't or don't transform will see the shrinkage of the past two years continue, if not accelerate well into the future. At Career Ed, we believe we are in the process of making the changes necessary to be a sustainable educational organization providing post-secondary, academic and vocational education where it's needed most here in America as well as in Europe to our premier institutions there.

When I arrived last year, I said to you that Career Ed needed to immediately address three critical areas. First, we needed to rectify the placement and related issues that arose last year and the year before. Secondly, we needed to strengthen the breadth and depth of our operations and staff leaders. And, third, we needed to adopt a long range strategy. We've done all three, which I'll talk about it in a moment and there is no question at this time that we are on a right long-term path in my judgment.

However, the deterioration in operating results in 2011 and 2012 has raised the stakes on achieving improved financial results. Even as we pursue our long range strategy, we need to adjust to the current environment and make [adjustments] right now.

You all saw the operating results we reported last night. They reflect the fact that the inflection we all expected in the second half of the year has not and will not occur. So, let me first turn to the present and the immediate future and then talk about the longer term.

To addressing the herein now, we are doing the following: While we are already down approximately 1,300 positions year-over-year as we sit here today, we've made a difficult decision to eliminate approximately 900 or so more positions between now and January. They will be across our domestic campuses as well as the campus support center, the word we use for our corporate headquarters.

This action is a result of further simplifying the organization through the implementation of standardized operating structures, increased efficiencies and student support services are provided and eliminating some remaining redundancies across the organization. This workforce reduction is not only focused on ensuring our cost structure aligns with the current levels of student population, but also represents a change to the underlying operating structure of our ground campuses, most notably within our career schools. The eliminating positions will affect current employees as well as unfilled positions.

In addition, we made equally difficult decision to teach-out meaning gradually close 23 of our domestic campuses. This decision furthers the company's strategic imperative of investing in a smaller number of ground based campuses and focusing on those locations that have the strongest likelihood of delivering strong student outcomes, operational efficiency and strength in the market.

Consistent with our commitment to students, we will work with each of the campuses affected to assure that existing students are afforded the ability to complete their courses' study without any interruption. We believe that executing against these strategic imperatives will provide the platform for which to return our business to sustainable growth over the long-term.

Now, let's turn to the three priorities we established when I came, improving compliance, improving organization and leadership and adopting a long-term strategy.

First, compliance. Today, I believe, we made tremendous progress in creating a culture of integrity and compliance. We're now having a former system secretary that Department of Education heading regulatory and accreditation affairs. We recently added a Senior Attorney, from another very highly regulated company, Eli Lilly to leading our ethics and compliance department and to serve on our executive management team.

We've also several issues that emerged earlier in the year, such as the VA administration audit involving housing allowances for online students. As we've discussed previously, we had satisfied reserves for this matter, protecting our students' interest and ensuring that they face no financial obligation. Importantly, both CTU and the VA through this process an ongoing dialogue have recently agreed up on framework for moving forward. I think that reflects our new found attitude about partnering with external regulators and accreditors. Also, a reversal of our OPEID consolidation initiative has resulted in better dialogue with the department of education as well as allowing for some program and other approvals by accreditors. Those are just a couple of initial examples of progress with regulators.

There's another example of our progress. As you know, in 2011, six of our OPEIDs did not pass the 90-10 test. As a result of a wide array of initiatives this year, we expect all of our schools will pass in 2012.

Last update on our progress in resolving regulatory and accreditor affairs involves our placement issues. As you know, we discovered and reported there were problems with our placement determinations in 2011 and dating back earlier. We have previously explained the remedial actions that we have taken, some of which I am proud to say are industry standard setting.

We believe that we have addressed this issue comprehensively. As you know, the show-cause or replaced upon the company by ACICS, as a result of those earlier placement determination issues was vacated earlier this year.

Our second issue was relatively low placement rates that some of our schools for the period of July 2010 through June 2011. This year's reporting period has just ended and we are submitting our placement rates for July 2011 through June 2012.

The data we are now recording reflects the overall impact of the measures we have taken in the past year. Prior to implementing changes to our placement practices and policies at the outset of this year, we saw a slower rate of placements in the second half of 2011. Once these measures were in place, our placements have showed market improvement for this year.

Turning to leadership, I can report that all senior management slots are filled. We have a senior management that as I mentioned is complementing backgrounds and talent and who have played a critical role in developing our new long-term strategy.

Let's talk about that strategy which has been approved by our board of directors a just a month or so ago. As I said, a number of times, one of our first orders of business is to simplify the organization. We simply have too many brands, too many schools, too many OPEIDs, too many programs, and not enough uniformity, scalability, singular student focus or efficiency. So, we've moved from six education groups to three. University education, career school education and international.

On the university side, our strategy calls for maintaining our two universities Colorado Tech and American InterContinental. We have addressed the trade-offs associated with consolidating into one university and we determine that the best approach was to continue to operate as two universities.

Going forward, AIU and CTU will focus on very different market segments. The understanding and needs of which are based on detailed and proprietary research we have completed. They will implement technology and process changes to personalize the student experience. They will both, utilize new tools such as adaptive learning which I will talk about in a moment or two to enhance the learning effectiveness for each and every student.

They will vary the level of service based upon what our student segments have told us they are each looking for. For CTU, it will be a higher level of service and support. For AIU, our focus will be on better enabling our students to efficiently and completely and effectively complete their degree. And importantly, each school have its own distinct pricing structure.

Now, let me spend a minute and talk about adaptive learning another area that we expect to have a positive impact on our university segment in 2013. On our last call, I mentioned that our investment in technology, which has kept Career Ed at the forefront of educational applications, was yielding another advancement.

While the term adaptive learning has been bandied about for some years, we are now well underway in a test of a digital teaching modality that can ascertain and adapt to individual learning needs. It can adapt lesson or teaching offerings to accommodate an individual's specific knowledge level as well as their unique strengths and development needs within a particular course of study.

This learning technology recognizes and addresses that any given student has his own or her home, individual strengths, knowledge and readiness and adjusts the content and timing on the fly to match these individual characteristics. In early pilot testing, the personalized learning technology has already shown its efficacy. Assuming the remaining pilot period is successful, we plan to introduce this new teaching technology into our university curricular in the second quarter of 2013.

If this approach proves its effectiveness and wide spread use, it has the potential to solve the dilemma that different people in the same course learn at different pace and at different levels of incoming knowledge. For example, a more proficient student will move further along in the curriculum bypassing lessons that covers areas already known to the student. Conversely, if a student demonstrates less proficiency, the learning technology will direct that student to place in the curriculum, where more basic areas are covered initially moving to more advanced areas as the student demonstrates greater and greater readiness and proficiency.

Our interdisciplinary team of educators and IT leaders are collaborating on this technology, which we refer to as personalized learning, because that is what it creates for each and every student. We believe it will give our students an edge. We believe more of them will be successful in school and better prepared for the employment in their field of interest upon program completion.

Now turning to international education, we expect to grow this business at a steady pace. We plan to continue operating in our current locations, but plan to expand to other geographic markets. Our primary brand abroad INSEEC remains a highly coveted, post secondary degree in Europe. The International University of Monaco, also looks to expand and also or the first time is leveraging online technology. This year, we introduced exchange programs with one of our American schools, which give both, our European and our American students a chance to respectively study abroad.

We now turn to our third business, our career schools, which were formally three independent education groups, culinary, health and art and design. As part of our strategy, we are more comprehensively addressing and integrating services across the entire student lifestyle from enrollment and orientation to job search and placement support. Our goal is to no longer put disproportionate emphasis on starts and population.

Our goal is not only to provide high quality career focused education, but to evaluate where there are identifiable employment needs that coincide with our program offerings and students education. In determining which schools would be the building block of our new strategy, we consider a number of factors, including geography, our facilities, quality of the faculty administration and sound accreditation. As a matter of fact, close to 50 criteria were used in evaluating which campuses to perpetuate.

Importantly, we have as a key criteria, our ability to match the career interest of our students with employer demands in the marketplace. We expect to build our career institutions around a more limited number of school brands like Le Cordon Bleu. In 2011, our culinary school discontinued its associate degree program, which ultimately led to fewer enrollments as part of our growth strategy for career schools, we have reinstituted the associates program at Le Cordon Bleu and have started those class already at several campuses, but we expect retention and graduation performance to remain at least steady and in time to improve with this longer, more comprehensive program.

We believe this offers greater choice and flexibility for students and already see that it is in some demand. It also further prepares them for a more progressive career in the culinary arts. As part of our strategy, we also have plans to grow Le Cordon Bleu through other initiatives such as enthusiast and serving more international students.

Our art and design group comprise of Harrington College IADC Collins College and Brooks Institute, will expand beyond its roots in art and design. We will build on the existing infrastructure of staff and facilities. Over the coming years, our strategy calls for consolidating these institutions and brands where it is appropriate to do so. As these plans evolve, we will reach out to all of our key stakeholders from students in alumni to accreditors, and importantly to employers to ensure our decision making is sound.

Lastly we turn to our health unit, primarily our Sanford-Brown locations. This was an area of huge growth for us few years ago. However, many of our health programs were hit hard by the economic by the economic downturn and by changing employer demands, diminishing a placement opportunity and placement rates.

Further, students today are more very of taking on debt, concerned about job prospects and confused about wholesale changes in the medical field and have been hesitant to commit to health education programs which has hurt our health schools.

Despite these challenges, we have the assets, we have the experience, we have substantial labs and facilities, teachers, technology and employer relationships within many of our health institutions and they represent a foundation we believe we can rebuild up to better serve our students. We expect the turnaround in our career schools to take some time. I guess, we are putting everybody on notice of that, although we expect a relatively faster rebound at Le Cordon Bleu.

Going to close by reiterating a belief I have shared before. Private post-secondary institutions are essential to closing the higher educations' close gap in America. The private sector has the capital even as budget pressures impact public sector education. Private sector is more technologically savvy. It is more create and innovative, savers competition. The bottom line is that we are needed to help educated and trained students to meet unfilled job opportunities. Some estimate as many as 3.75 million in the current environment, and the skills gap that will continue well into the future.

That's why I remain positive about this sector, the changes and strategies that I have described should assure that we will continue to be one of the institutions student look to joining the more than 500,000 graduates we have already served and are alumni, and we believe our gainful employed contributing citizens.

Thanks for your time listening to both, our short and long-term plans. I am now going to turn it over to Colleen, who is going to talk about the numbers of the past quarter and the past year add few other insights in her talk, then we'll take questions. Colleen?

Colleen O'Sullivan

Thanks, Steve. Let me first start by saying that I am happy to be speaking with you today. As the remark made by Steve convey, we are at a critical point in the company's history and I look forward to working with the leadership team as we execute against our strategic vision. Now, let me provide some additional comments from financial perspective.

The third quarter continued to present challenges for the entire secondary education sector with weak new student demand, lengthening student decision making process and further operating deleverage impact operating results. Further, Career Ed's matrix operating structure presents additional operating complexity that has put additional pressure on our margins.

Before speaking further on our strategic path forward, I would like to recap the quarterly results. During the third quarter, the company generated revenue of $333 million, a decrease of 22% versus the third quarter of 2011. Operating loss was $48 million in the quarter, driven primarily by declining enrollments within our career school group of campuses.

Overall, student population was approximately 82,000 students, down 22% from the third quarter of 2011, and our new student starts for the third quarter of 2012 were down 23% versus last year. While we have now fully anniversaries the introduction of our student orientation and readiness program known as SOR, let me remind you that the year-over-year start comparison is impacted by a timing shift that occurred in our culinary and health institutions. On a comparable basis, new student starts would have been down 30%. Also, pre-enrollment testing accounted for approximately 480 basis points of this decline.

Let me spend a few minutes on each of our operating business segments. First, the university group which includes our predominantly online institutions Colorado Technical University and American InterContinental University.

For the first quarter, CTU revenue of $89 million was down 11% versus the third quarter of 2011. New student starts during the quarter were down 19%, compared to last year and student population ended 10% lower.

AIU revenue was $17 million, down 17%, reflecting the impact of a 19% decrease in new student starts and a slight reduction in the average credit load per student. Despite this decline, we are pleased by the fact that both, CTU and AIU continue to experience improvements in levels of students' persistence.

Operating margins in CTU and AIU were 10.9% and 1.5%, respectively. These results are down from prior year level and reflect the impact of lower conversion rates and lower enrollments per admissions advisor. We are in the process of implementing improvements to the current business model including modifications to the way we interact with prospective students, changes to enrollment processes and enhancements to the educational experience for our students.

Turning to our international group. Revenue of $15 million was down 12% to prior year, due to unfavorable exchange rates and the impact of higher than normal graduation levels that occurred during the first quarter of this year. Excluding the impact of foreign exchange, revenue would have been flat for the third quarter of 2011. New student starts for the quarter increased 7%.

Operating loss for the quarter was $6 million and it's primarily related to the institution's traditional academic calendar in which students take no class during the summer month. Further, the school has also made several strategic investments in both programmatic accreditation and a new blended learning curriculum to be used at the International University of Monaco.

We continue to be very pleased with the success of our European institutions and view them as an important element of our future growth. Our career focused schools have been the subject of much change in the past 12 to 18 months. In the third quarter revenue of $185 million was down 30%, reflecting a 34% decline in new student starts and 34% lower student population level versus the prior year.

Operating losses during the quarter were $47 million, due to impart by the businesses' high fixed cost nature that has been especially impacted by the recent deleveraging. With the recent addition of Dan Hurdle as our Chief Career Education Officer, a considerable amount of effort has gone into the development of the strategic vision that Steve spoke to earlier with a long-term view towards optimizing these institutions and establishing a comprehensive career college strategy.

Now let me take a minute to provide additional color related to the actions we are taking to position the company for future growth. As Steve mentioned, we announced in the press release and the Form 10-Q, that we have made the difficult decision to teach-out 23 ground campuses. These campuses identified for teach-out are expected to contribute approximately $124 million in revenue and $62 million in operating loss for the 12 months ending December 31, 2012.

These 23 campuses were identified after careful analysis of a number of factors, including operating performance, student outcomes and strategic implication. We will be making specific campus closure announcements within the next 30 days.

Consistent with our commitment to students, we will work with each of the locations to ensure that existing students are afforded the ability to complete their course of study. We anticipate that the majority of these campus closures will be completed by the first quarter of 2014.

In addition to campus closures, we announced last night our intention to implement a restructuring plan, which will align the operating structure across our campuses as well as reduce cost within our campus support center to more closely align with current enrollment levels and to standardize operating structures across our institutions. As a result of the restructuring, we will eliminate approximately 900 positions this year.

Please keep in mind this includes both, effecting current employees as well as closing unfilled positions. These reductions will result in a fourth quarter's severance charge of approximately $7 million and are estimated to achieve between $45 million and $55 million in annual operating expense savings.

Before I open the call for questions, let me update you on our financial position, liquidity and expectation surrounding the Department of Education financial responsibility ratio.

As of September 30, 2012, the company had cash, cash equivalents and short-term investments of $373 million. Our cash flow from operations for the three months ended September 30, 2012, was approximately $33 million with capital expenditures in the quarter of $10 million, or 2.9% of revenue. Included in this quarter's cash flow from operations, is the impact of the delayed drawing down of approximately $20 million Title IV funds and $15 million tax refund receipt related to fiscal 2011.

As we execute in our strategic imperative, we expect that there will be continued pressure on our domestic operating cash flow in the short-term. However, we anticipate that we will be able to satisfy the cash requirements associated amongst other things, our working capital needs, capital expenditures and lease commitments through at least the next 12 months, primarily with cash generated by operations and existing cash balances.

Additionally, our U.S. credit agreement expired on October 31, 2012. Keep in mind, during the life of the facility, no borrowings were requested other than for the support of letters of credit. Discussion surrounding the level and terms of replacement credit facility are ongoing. Effective October 31, 2012, we have provided cash that will be restricted in use to provide securitization for the letters of credit previously covered under our U.S. credit agreement.

As you are aware, to participate in Title IV programs, our schools must either satisfy standards of financial responsibility prescribed by the Department of Education, or could be subject to additional oversight required to post a letter of credit in favor of that or placed on provisional certification.

Our composite score for the consolidated entity for the year ended December 31, 2011, was 2.3. Recent profitability declines have placed downward pressure on our financial responsibility composite scores. Our current projections show that on a consolidated basis, our composite score is expected to be in the zone of financial responsibility for our fiscal year ending December 31, 2012.

Finally, as matter of policy, we do not provide guidance. However, we do anticipate that the recent market trends impacting our domestic institutions will continue into the fourth quarter. We have also discussed there continues to be a great deal of change in our career schools. Previously, we projected approximately $100 million to $120 million in operating losses for the career schools as a group.

Based on the trajectory coming out of the third quarter, we now estimate that combined operating losses for career schools will be between $140 million and $160 million in 2012. This excludes the impact of impairment, legal settlements or any other one-time items.

And, so with that operator, let's open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Gary Bisbee from Barclays. Please go ahead.

Gary Bisbee - Barclays

Hi. Can you give us any color or commentary to help us think about what the magnitude of the costs related to the teach-outs are? I don't so much care about goodwill or intangible, or write-downs or that kind of thing, but the value of the excess lease commitments once you close them, how much they could lose in the period between today in getting them closed and any commentary to help with that thing.

Colleen O'Sullivan

Thanks, Gary. This is Colleen. At this point, we've disclosed in my remarks, we expect the losses for those campuses that are going to move into teach-out for 2012 to be roughly $62 million. Comprised in those campuses are to your point, remaining lease obligations. As we work through and continue to look at opportunities to exit those locations, we anticipate that we will do our best to limit the cost related to that.

So, at this point, we are not going to provide specific information regarding our expected cost. We do anticipate as we move into the fourth quarter similar to what we've done historically, we will set these campuses into their own reporting segment. And as such, we'll be fully disclosing the operating results and related costs to the teach-outs at that time.

Gary Bisbee - Barclays

If I go back and look at 14 or 15 schools that the company thought-out between 2007 and 2009, the operating losses from the period of beginning that process were twice what the operating losses were in the year prior, so the year that the decision was made and the cost to exit real estate and other cash charges were more than the amount of operating losses.

I mean, it would appear to me that your entire U.S. cash balance could be used up and maybe more in doing so if the cost were similar, so I appreciate that you don't want to say much, but can you say anything to help us understand if that's fairly recent experience that this company has had is a good rule of some to use? Should we be thinking about inability potentially to handle those costs or are there reasons to believe it could be much less than our prior experience. Thanks a lot.

Steve Lesnik

This is Steve. Our calculus, we've seen your numbers and our calculus regarding the teach-outs of these schools is somewhat different than your calculus regarding the schools. Obviously, there are costs. We have already stated to you that the expected contribution of those schools are for the period of 2012. And as you know, at teach-out, there are certain costs that you can take out immediately and other are reduced as the teach-out progresses, so yes we have looked at it. Our calculus is somewhat different than yours. And as, Colleen has already stated, we fully expect to have sufficient cash for the next 12-month period.

Gary Bisbee - Barclays

Okay. And then just if I could sneak one last one in, is the operating loss similar to what you've seen on a cash flow basis from these, and so said differently, the schools that you are planning to continue, is it fair to say that those today are generating healthy amount of cash. If you look at them excluding the drag from these weaker performing schools.

Steve Lesnik

I am not going to comment on that. Let's go onto the next questioner.

Operator

Our next question comes from Jerry Herman from Stifel Nicolaus. Please go ahead

Jason Anderson - Stifel Nicolaus

Good morning. Jason Anderson in for Jerry. Regarding your commentary on the financial responsibility and also thinking about the issue Corinthian is having with the treatment of intangibles and their composite score, could you elaborate on how you are treating that in your projection of being compliant?

Colleen O'Sullivan

This is Colleen. I'll take that question. We have looked at the disclosure. I don't want to speak to the specifics related to what Corinthian is working through with the department. I can speak from our perspective and the calculations that we've done in our financial responsibility over the past years has been from our perspective on a consistent basis.

As you know, we have taken impairment charges over the course of the past number of years and have treated those as normal operating expenses for purposes of the calculation, but I don't want to speculate on the outcome of Corinthian's discussions with the department.

Jason Anderson - Stifel Nicolaus

Just one here a little bit more of a strategic question. Obviously you have a lot of things going on that you are, but you mentioned last quarter retracting the efforts to go to one OPEIDs, presumably, so you can open up programs. Can you comment on any of your new program expectations into '13?

Steve Lesnik

If the question is, do we have plans for other types of consolidations of OPEIDs, if any of our plans are dependent on that, they are not. Did I understand your question correctly?

Jason Anderson - Stifel Nicolaus

Well, I was just wondering presumably you are doing that, so you could rollout new programs to students and I am just wondering what your thoughts are on that into '13? Are you going to be able to expand open up new program offerings to students, I am just thinking in the growth and can you work on the growth side, while you are dealing with the restructuring side?

Colleen O'Sullivan

Jason this is Colleen and you are correct. Our previous commentary as we made the decision to remove request for the consolidation was most importantly around the inability during that time that it's with the department to rollout new program. The company had built up, so we did not stop developing new programs while we were going through or waiting for the approval on the consolidation.

What we did do once we removed our application was very thoughtfully looked at those programs that we had been working on to determine and prioritize, which ones we wanted to move forward quickly with the department on and we have successfully submitted program applications and have had approval of subsequent to removing the consolidation request.

So, as we move into '13, yes it is something that we are looking at, and we'll continue to focus on. I think Steve's remarks also covered the aspect from a strategic perspective of moving quickly into those programs that offer the best outcomes for students, so we are looking at that as we move into '13. Under the [auspice] of ensuring that, we are putting programs in place again that provide good outcomes, the best outcomes for our students.

Jason Anderson - Stifel Nicolaus

One follow-up that. Is there any way you can, I mean, give us some color on impact of that like, how many new programs in '13 would be slated versus what we've seen while presumably maybe not hear in '12?

Steve Lesnik

This is Steve. As I mentioned in my prepared remarks and as Colleen just alluded to, since resending the application for the OPEID consolidation, we have been doing this, and we are now on a continuous basis in the process not only with the Department of Education, but also with our accreditors seeking alterations for programs and approval for new programs and this will be a continuous process. I cannot give you a specific number of how many programs we are going to ask to be adapted or modified and how many programs we are going to ask for to be new, but I have tried to imply in remarks I made that we are going to be in the processes of adjusting with our historical program offerings to what we see as a median employment needs in the communities in which we operate.

Can I put a number on those? No, I can't. I can only tell you it's going to be a continuous process and that we are looking to partner with both, our accreditors and the Department of Education in enabling us to adapt as quickly as we can.

Operator

Our next question comes from Corey Greendale from First Analysis. Please go ahead.

Corey Greendale - First Analysis

I have a couple of questions on the cost savings front. I was hoping you might be able to give us some sense of how much of $45 million to $55 million in cost savings might overlap with the campuses you are closing. In other words, whether that would be kind of incremental savings or whether that could be part of the savings in teaching-out those campuses?

Colleen O'Sullivan

Corey, thanks for your question. The reductions enforce that we are going through are across all of our institutions. Will they impact those campuses that has been identified for teach-out? Yes, but they are, I will say over and above the actions that we've decided to take from a teach-out closure perspective.

Corey Greendale - First Analysis

Okay. Then a question on kind of the AIU, CTU strategic plan, so I think Steve in your commentary you mentioned people finishing their degrees quickly and efficiently. The commentary in the queue talks about price being competitive in terms of pricing, so I was just hoping if you could say a little bit more about what you are thinking in terms of the differential tuition in CTU and AIU and how it compares with the current price levels?

Steve Lesnik

I can't quantify it for you. It's a reasonable question and a good question, but I can't quantify it for you right now. Obviously, one is going to be a higher support system and the other is going to be a less of a support system and that should reflect itself in the necessary infrastructure to support the students and that should in turn reflect itself in pricing.

We obviously have done some work to-date in terms of just what the pricing adjustment should be and what the differential should be and we continue to work on that. We expect to be able to give you probably some more color on that in the early part of next year.

Corey Greendale - First Analysis

Okay. Then one regulatory question you mentioned in your script about the placement rate. The things you have done to fix that. Those two are kind of a number of metrics in terms of recent data you reported to ACICS and ABHES. Can you give us a little bit on what the implications of that might be whether that triggers any sort of review or anything like that?

Steve Lesnik

Well, those two are in a little different state, but I think that ACICS has adjusted its categories in the past year. They used to have just the one line that you either passed, or if you didn't pass, there were various actions that ACICS could possibly take with respect to being under the line which used to be I think 65%.

Now they have a variety of categories and that has been instituted in the past year. Since it's also new, it is largely at the discretion in ACICS's case to determine what to do at each level of placement rates and I am sure that they will be responding to us and to all the schools in the near future. Now that we have all submitted, our rate so to speak as to what to do at each level of rate performance.

Clearly, those schools that are at the bottom or below what they consider to be the lowest acceptable rate, which I believe is 47% now, we will await to see what actions ACICS takes at its discretion. It could range again certain restrictions on program approvals. It could range to a number of actions that it thinks it should take.

I have tried to say to you today and we have said to everyone that the numbers that we submitted to ACICS, ABHES and ACCSC, all are a reflection of that year period ending June 30, 2012, where we did much, much better in the second half of that period than we did in the first half of that period, and I think we have demonstrated to everybody a great deal of improvement. Hopefully that will also influence the actions that each of the accreditors decides at its own discretion and under its own authority to take.

Operator

Our next question comes from Brandon Dobell from William Blair. Please go ahead.

Brandon Dobell - William Blair

Thanks. I was hoping to get maybe a little color in the career school's business about the pricing strategies. Looking to have program by program pricing, location based pricing a little bit sense of how you are approaching that and what we should think about from kind of revenue per student trend looking out a couple or three years? Thanks.

Steve Lesnik

The answer to first part of your question is yes. You obviously have been thinking along the same lines that we have. We are not, I think it's fair to say cleanly jumping and comment after I do, but we are not going to have lateral pricing activity. I know that some others have stated that in various calls, but we are going to do it exactly as you suggested.

We are going to do it geography-by-geography. We are going to do it demand-by-demand and going to react to the marketplace. Simply said, where we have programs that have been oversubscribed and in great demand and great needs. We will price accordingly and the opposite will be true as well. We believe that we are remaining in locations where in the longer term there is going to be demand for programs that we offer that is employer demand as well as student demand, so we are going to do a market-by-market, program-by-program pricing strategy, which we presume could go in both directions.

Brandon Dobell - William Blair

And then segment [schools] for a second. As we think about the schools that will keep going in operation, I would presume from a 9-10 and from placement rate point of view that the ones that we'll keep going within at the top of the list or are there ones that you felt the changes you've made set them up much better going forward, so there is underperforming schools on a historical basis that you think you can turn around effectively, just trying to get a feel for what you are looking out let's call it 18, 24 months as soon as those metrics like 90-10 or placement rates or things like that will start to look from the remaining group of schools.

Steve Lesnik

Good question. I threw into my prepared statement that we had I think almost 50 criteria against which we measured each of the schools and are evaluating which ones to close right now and which ones to try to build on in the future.

Obviously, the two metrics or the two criteria that you just mentioned were amongst those criteria. And, a lot of others that we think are important as well. I am not sure I can answer that question in a positive. I know I can answer it in a negative which is that those schools that we do not think we're a good bet to either past 90-10 or would be struggling for 90-10 or would have to manipulate OPEIDs or something for 90-10, those we eliminated and the same is true in placement rates.

Brandon Dobell - William Blair

Okay. Then final one for me. Between AIU and CTU, it sounds like there is going to be different price points based on service levels and infrastructure and things like that. How different should we expect the programmatic focus to be? Should the course catalog look very different or it's going to be similar program just look different and levels of interactions with the institution from the student perspective?

Steve Lesnik

Well, I should probably have had Jason Friesen in the room to answer that question directly. I am not sure, again, Colleen maybe closer, but based upon what I heard there will be program differences between the two. At least in emphasis, at least in core programs, where they believe that they have embedded expertise faculty and student experience names that they really, really know. And, I think they do expect there to be difference.

I think, there's probably more of a technology even on Colorado Tech side, there's certainly a security event we expect we are very, very strong for example in all sorts of security. Academic disciplines, including home van security, we expect to build on that. So, I think the answer is yes, there is going to be differences in program offerings as well as in the level of complete service support and infrastructure that's offered.

Brandon Dobell - William Blair

Okay. Thanks a lot. Appreciate it.

Operator

Our next question comes from Jeff Silber from BMO Capital Markets. Please go ahead.

Jeff Silber - BMO Capital Markets

Thanks so much. Just wanted to go back to the campus closures a bit. Colleen, you were kind enough to give us some detail regarding revenue and operating losses. Can you tell us what the impact on enrollments will be?

Colleen O'Sullivan

At this point, Jeff, I am not able to share that information with you, because we said in our prepared remarks, we have not yet notified the individual campuses, so I would like to hold that until we have that communication made.

Jeff Silber - BMO Capital Markets

Okay. I understand the sensitivity around that. In terms of the workforce reduction, and again this maybe a sensitive question. Can you roughly give us an estimate how much of that is going to impact corporate overhead versus the specific segments?

Colleen O'Sullivan

Again, I apologize for what may seem to be not responsive, but we are not intending to share sort of the breakdown. What I will say though is, similar to the criteria of that, we went through from a teach-out perspective, we took a very hard look at what the structure of the corporate center should be as it pertains to supporting the campuses from a fact that they have begun and have been declining over the past number of quarters, so there has been a very focused look not only the campus structure as we alluded to in their remarks corporate centers.

Steve Lesnik

I want to punctuate that. Colleen is being modest, because this is her first call. She has done a very good job of doing a deep dive into analyzing our corporate cost structure and determining how it should be adapted as we adjust to this downsizing in the field and at the campus level and there is going to be at least a commensurate reduction at the corporate level to adjust to the field and she has done an excellent job at analyzing that.

Jeff Silber - BMO Capital Markets

I understand.

Steve Lesnik

Come give her a little kudos.

Jeff Silber - BMO Capital Markets

All right. That's great. I think, also you mentioned in your prepared remarks that you had some cash put in restricted cash as of October 31st, can you tell us roughly what that amount was?

Colleen O'Sullivan

Yes. It was just under $8 million.

Jeff Silber - BMO Capital Markets

Great.

Colleen O'Sullivan

That would be, again just to clarify, that was in October upon the termination of the facility.

Jeff Silber - BMO Capital Markets

All right. And, do you know what in terms of replacing the size of the letter of credit, roughly how much in letter of credits have you been posting prior to this?

Colleen O'Sullivan

It's roughly about the same amount.

Jeff Silber - BMO Capital Markets

Okay. Good. I just wanted to clarify that. That's great. And, are there any other one-time items in the quarter whether calendar quotes for one-time issues both, in 3Q or 4Q that we need to be aware of?

Colleen O'Sullivan

No. I did mention, Jeff, in my remarks the shift in starts for health and culinary. To recall last quarter, we mentioned as well there was an additional start here in the third quarter for both of those education groups.

Jeff Silber - BMO Capital Markets

And, roughly, what was the impact of that?

Colleen O'Sullivan

I think it moved us about 10%.

Jeff Silber - BMO Capital Markets

All right. Great. And then finally, Steve, in your prepared remarks, I think you said that all senior managements slots are filled. Does that infer that there will not be a CEO search coming?

Steve Lesnik

No. That did not imply that.

Jeff Silber - BMO Capital Markets

All right.

Steve Lesnik

It didn't imply it. It just says that willingly or unwillingly I am still here. I am still enthusiastic and committed, but we do have a search underway actively to replace me.

Jeff Silber - BMO Capital Markets

All right. Thank you for clarifying that.

Operator

Our next question comes from Trace Urdan from Wells Fargo. Please go ahead.

Trace Urdan - Wells Fargo

Thanks very much. With respect to the changes that you are contemplating at CTU and AIU, I am wondering if you have begun the dialogue with HLC about prospective mission changes there.

Steve Lesnik

We have been in dialogue with HLC on any number of issues and we know that at least some of the changes that we are talking about requires their approval. I don't think that we have brought specific changes yet to their attention, because we are still, as I mentioned just a moment ago, studying a variety of aspects to this. I think we said repeatedly over the past couple of calls and in conversations in one-on-ones with all of our accreditors that it is our intention to partner with them on all the changes that we make.

Trace Urdan - Wells Fargo

Okay. Then I believe in your prepared remarks you referred to multiple announcements regarding how the campus closures were going to take place in which segments and which schools. Can you give us a little bit more detail on when investors can expect to receive that information? Are we going to be sort of watching a series of 8-Ks. Is it going to happen all between now and January, or are we going to get it all at once? How is that going to work?

Colleen O'Sullivan

Trace, this is Colleen. What we've committed to as a leadership team and Steve spoke to it in his prepared remarks to your point, we have a process that we go through to ensure that we have appropriately notified constituencies, including the department, accreditors, the states in which campuses operate and not to forget the students that it will be impacted as well as our employees.

So, having said that, our anticipation is that we would be notifying those campuses that will be impacted here early into December. Having said that, as far as our public disclosure around that, we do anticipate moving quickly, because we appreciate the anticipatory stress or what have you that this may cause on all of our constituents, so we are moving quickly as we can be.

We will update appropriately as we execute through that. I would not anticipate a series of communications. We will make the appropriate disclosures as we deem necessary as we feel there's material information to share.

Trace Urdan - Wells Fargo

It seems in advance you are to be able to anticipate what might or might not be material, so I guess my question again is, would we expect to receive some communication from prior to the next earnings announcement or would we expect not to really get much detail from until that point?

Steve Lesnik

We will. It will become apparent on websites on what schools we are closing. We are giving the overall numbers that are material now that we know of now. And, as other material requirements or financial disclosure requirements become necessary in the future, we will issue them. But, it's going to become, I think, pretty readily apparent over the next a couple of weeks and months which schools are closing and so forth.

Operator

Our next question comes from David Chu from Merrill Lynch. Please go ahead.

David Chu - Merrill Lynch

Hi. Thank you. How long has CECO been on heighten cash monitoring. I guess it's the one status?

Steve Lesnik

One year.

David Chu - Merrill Lynch

Again, was this caused by the placement rate issue?

Steve Lesnik

To the best of our knowledge, yes.

David Chu - Merrill Lynch

And, you guys talked about in the Q, potentially getting put on monitoring 2 status, just wanted to see if you can kind of explain what the differences are in the likelihood that that could happen?

Steve Lesnik

I can't speak to the likelihood of it happening. We expect to be in the zone. I am not aware. I don't know if anyone's aware of anyone who has been in the zone ever being put on HCM2, so you can draw whatever conclusion you want from that. It would be completely unprecedented if it were to occur, so that's number one. I can only respond in that way.

The difference between HCM and HCM2 is, you want to explain it? Go ahead. Either one of us can explain it to you. I'll have Colleen will do it.

Colleen O'Sullivan

So, HCM1, I think, as we have disclosed previously and to Steve's point we've been on that for now just over a year or so, really did not have a significant impact on our operating processes. So, as we move through the requirements of that we made some tweaks, but nothing significant from what was even before being on HCM1, our internal processes.

As we move if in fact to Steve's point, there is an action that moves to HCM2. It greatly delays the timing of when our institutions that are placed on that would be able to draw Title IV funds and move more to something between 30 to 60 days of a delay from where we are today.

David Chu - Merrill Lynch

Okay. In the Q, it also states that you guys will be meeting that foundation for education success like the free trial period. I think it's 21 days. How does that impact the SOR program going forward?

Steve Lesnik

It replaces the SOR program. The SOR program as you know only affected a certain students. This will affect all new students, and we think it will be equally if not more effective for students.

David Chu - Merrill Lynch

So, the difference is, A, it's all students versus I guess a certain select amount of students and it seems like is the program shorter? I think SOR was five weeks. This one is like three weeks. Is that correct?

Steve Lesnik

Yes. It was five weeks, but it was not necessarily five weeks of classes depending upon how it was applied in various places throughout the company. As you know, I said innumerable times, this is pretty complex play, so it wasn't applied uniformly, but yes. It wasn't concept five weeks everywhere, but not necessarily five weeks of actual classes.

David Chu - Merrill Lynch

Got it. Okay. Thank you.

Operator

Our next question comes from Jeff Meuler from Baird. Please go ahead.

Jeff Meuler - Baird

Yes. Thank you. Steve, at the beginning of the call, you talked about I guess the need for people and the industry to evolve or transform themselves or face perpetual decline, which seems to suggest that you think there are secular challenges facing the industry. It's not just transitory challenges, but you also talked about returning to I think you used the phrase sustainable growth. Just wanted to know how you were thinking about seek or returning or sustainable growth. In your view, is that completely under your control due to all the initiatives that you are rolling out or would that also require, I guess, some improvement in the overall environment.

Steve Lesnik

Well, that's a wonderful, wonderful question. I am not sure however that Matt is going to allow us to expand the amount of time we have on this call, but to give an adequate response to a very deserving question. I would say this.

You know, we'd all like to think that, we're driving our own bus and we are the determinants of our own destiny. But, in today's highly regulated world, there are a lot of forces outside your own bus that determine whether there are barriers, potholes, turns in the road and so forth. So, I think it's a combination of things.

I really do believe that there is a great need for innovation and education in our society and I have embedded belief that there is a great need for a bit more application of technology to education to fill the education gap that exists in our country and that fundamental belief says that our sector and our schools are needed, and I also have a belief that there will be those institutions hopefully including ours that will have the intelligence, the strategy, the commitment, the resources to operate in such a way that we can provide the educational courses and programs of study and certificates and certifications that are necessary to place people in these jobs.

And, if we are able to do that, if we are able to put as much emphasis on the backend of the business as has been on the front end of the business traditionally for the last decade or two that we are going to be a successful organization, and I don't think that anybody is going to be grudge an organization that can provide that kind of service an appropriate and adequate and reasonable even attractive return.

Jeff Meuler - Baird

Okay. Then I guess just a quick follow-up on who that bus driver is going to be. I guess, I was under the understanding that you guys had suspended your CEO search for permanent CEO, I guess and definitely earlier in the year given the challenges that you've been working through. Was that the case or when did you reinitiate the search, or? I don't know if there's any sort of rough timeline you can provide, Steve.

Steve Lesnik

Okay. I think, what I said. When I first came, we didn't think it was going to be that long, and then we said we would not undertake a search until we are going get our arms around the problem. We do think that we have our arms around the problems. We think we have everything identified and hopefully you will agree that we have a course to act on and that is now an appropriate time given the fact that we have a strategic course to work, given the fact that we have addressed some of the crises that the company was facing back in November, December, January that we can attract a creditable candidate to come in here and be the day-to-day leader of the company.

And, within the past month or so, we have initiated an active search for a successor for me and hopefully we'll find somebody who has all of the characteristics that our employees can admire and that all of you can admire.

Jeff Meuler - Baird

Okay. Thanks, Steve.

Operator

And, I'll turn it over to you, Steve, for closing remarks.

Steve Lesnik

Okay. I think, we have just about used. No, we've gone over our time a little bit, so I want to thank Matt for that. Thank you for your questions. I hope that we have answered them and given you the color that you expected to get on this call. Once again, I want to thank Colleen for participating in the call and she did a great job this morning and we look forward to talking to you all down the line. And, if there is anything that any of you wanted to ask and didn't get around to asking, please feel free to call Matt, and if you need Colleen or I involved, I am sure we'll make ourselves available to you.

Thanks again for your time this morning. We appreciate you being on. Bye, bye.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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