Career Education Corp. Q2 2008 Earnings Call Transcript

| About: Career Education (CECO)

Career Education Corp. (NASDAQ:CECO)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET


Michael Graham – Chief Financial Officer and Executive Vice President

Gary McCullough – President and Chief Executive Officer

John Springer – Vice President of Investor Relations


Brandon Dobell - William Blair

Kelly Flynn - Credit Suisse

Mark Marostica - Piper Jaffray

Corey Greendale - First Analysis Securities

Sara Gubins - Merrill Lynch

Trace Urdan - Signal Hill Group

Robert Craig - Stifel Nicolaus

Kevin Doherty - Banc of America Securities

Gary Bisbee - Lehman Brothers

Jeffrey Silber - BMO Capital Markets

Amy Junker - Robert W. Baird


Good day, ladies and gentlemen. Welcome to the second quarter 2008 Career Education earnings conference call. My name is Jasmine and I’ll be your operator for today. (Operator Instructions) I would like to turn the presentation over to your host for today’s call, Mr. Mike Graham, Chief Financial Officer.

Michael Graham

Thank you. Good morning, everyone and thank you for joining us today for our second quarter earnings call. Joining me today on the call are Gary McCullough, our President and Chief Executive Officer, and John Springer, our new Vice President of Investor Relations.

John joined us on Monday. His background includes leading the Investor Relations and the Financial Planning and Analysis functions at Tellabs and SIRVA, two publicly-traded companies here in the Chicago area.

John can be reached via the main investor relations line, and we look forward to having John work with you, our investors and our analysts, closely, as we go forward. I’ll now turn it over to John.

John Springer

Thank you, Mike. It is good to be here, and I look forward to meeting all of you on the call today over the coming weeks.

Now in terms of format for today’s call, I will start by quickly addressing a couple introductory items, after which I will turn the call over to Gary McCullough. Gary and Mike will discuss the second quarter results, and we will then open the call for analyst and investor questions.

First, this conference call is being webcast live on the Investor Relations section of our website at The replay will also be available on our site. If we are unable to answer your question during the call, please call our Investor Relations Department at 847-585-3899.

Second, let me remind you that yesterday’s press release and the presentations made by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual 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 second quarter earnings release and in our Annual Report on Form 10-K for the year ended December 31, 2007 and from time to time in other filings with the Securities and Exchange Commission.

Except as expressly required by securities laws, we undertake no obligation to update such 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 Gary McCullough.

Gary McCullough

Thanks, John, and welcome aboard. We’re pleased to have you with us.

Good morning. Once again, thank you all for joining us on our second quarter 2008 earnings call. As John indicated, Mike Graham and I will provide details of our operating results for the quarter. We’ll also, provide an update on progress we’ve made in addressing certain challenges we outlined in our March Investor meeting and during our first quarter call in May.

I’ll begin by briefly recapping the quarter. Overall, I was pleased that our operating income in the quarter met our internal expectations, but I am not pleased with our new start performance, particularly in our University Online businesses.

On a consolidated basis, second quarter 2008 revenue was down 2.2% from the second quarter of 2007. Excluding the Transitional Schools segment, revenue was up roughly 1%. Again, excluding Transitional Schools, student population was up 3%.

With the exception of our Health SBU, which continued to experience strong growth, starts for the quarter were down 3%, excluding the Transitional Schools segment.

During the first half of 2008, we communicated detailed information on our challenges, opportunities, and milestones over the next three years within our strategic plan. We also acknowledged significant structural and operational issues that needed to be addressed. Accordingly, our focus has been on reducing costs and improving a number of internal processes.

We have asked our organization to do a lot, and over the first half of this year, we’ve done a number of things, including:

Eliminating organizational redundancies;

Reducing our relatively high and inefficient cost structure;

Working to improve or eliminate underperforming campuses;

And better understanding the strengths and equities of our brands to either better differentiate them or to determine their long-term fit in our portfolio.

Against this background, we also took steps to mitigate challenges presented by the credit crisis and we provided funding opportunities to many qualified students. We said on our February and May calls and at our analyst day that we were confident our actions would turn around the performance of the organization.

We also said that there would be bumps along the way. The second quarter was a challenge on a number of fronts, but we remain confident that we are taking the right steps to lay a strong foundation for long-term success. We remain on track to deliver the milestones we established for 2010.

In the first quarter, we met our internal milestones and delivered starts and operating income consistent with the plan we communicated to you in March. In the second quarter, we again met our internal operating income targets, as the initiatives I described and structural changes we’ve made, generated cost savings.

However, new student start performance was below our plan. This was due in part to the lending environment, but it was also due in part to temporary internal issues in our online businesses that are being corrected.

Now I’ll speak more specifically to some of the challenges we faced this quarter and how we’re addressing them. First I’ll start with student lending. We expected second quarter starts in our Culinary and Art & Design SBUs to be below 2007 levels due to the credit crisis and reduced third-party financing alternatives for students with subprime credit profiles.

However, the impact of these issues was greater than we estimated, and as a result, the Culinary and Art & Design segments delivered starts at the lower end of our expectations.

Another factor impacting the business was the credit standards that we adhere to within our own student funding programs versus standards previously set by former recourse product providers.

We’re providing student financing programs from our balance sheet, and the process is working smoothly. As we’ve previously communicated and committed to, our objective is to provide financing to those students without access to third-party private loans who will be able to complete their program of study and meet their financial commitments.

We’ve continued to refine the program based on our experience to date, and we expect more students to take advantage of it in the coming quarters.

Like others in the industry, we’re pleased that the Higher Education Act was passed by Congress last week and we’re optimistic the President will act on it quickly. This is a positive move for our students and for the industry as a whole.

Now on to University. During the second quarter, we accelerated the rollout of the peer qualifier model in the University SBU. As a reminder, the peer model is a two-step process where a representative screens and qualifies leads who are contacted using a predictive dialer technology, and then passes the highest potential leads to a more experienced admissions representative.

We rolled this model out at CTU in the fourth quarter of 2007 and during the first quarter of 2008. The model worked well and CTU’s results benefited from using the approach. In the second quarter, we expanded the peer model across AIU.

Using the peer model in the University segment, we continue to see positive results. In the first half of 2008, we achieved a 12% reduction in cost per start while at the same time delivering 3% start growth.

In the second quarter, the peer model also enabled us to reduce admissions costs by 11% versus 2007. And we handled the same level of lead volume with approximately 400 fewer representatives on staff versus 2007. At the same time conversions have been solid, and admissions representative turnover has improved.

Despite these positive gains in efficiency, we encountered executional issues in our expansion of peer during the second quarter, when our teams worked very hard to discover the root causes of the issues and they are being remedied.

As a we expanded and shifted personnel into the new model, we learned that our staffing levels were not in line with the predictive dialer programming. Put simply, there’s a peak time that prospective students are available and want to be contacted.

However, too often the peak time coincided with shift changes and maintenance downtime. We’ve adjusted staffing levels and altered the maintenance schedule as a result.

We also learned that the pace of the outbound dialer was mis-aligned with our phone capacity, and again, the availability of admission representatives. As a consequence, we did not contact leads in as timely a fashion as we have historically, and as a result of that, we failed to capitalize on student interest in our programs.

The issue wasn’t immediately apparent and there was a cumulative effect which led to some leads not being contacted at all. Since we identified the issues, we’ve made changes that have resulted in meaningful improvements.

The peer model is a significant change for the company, both in culture and process, and so I’m not surprised that we’ve had to address bugs in our system. Starts performance was directly impacted and available leads were not converted.

Again key issues were identified and the most significant ones have been resolved. But because third quarter starts are highly correlated with the late second quarter and early third quarter leads, we believe there still might be a lagging negative impact on the third quarter.

Despite these challenges, we believe the peer model will help us reduce costs per start while improving productivity. We’ve seen it work. As I’ve said, excluding the International and Transitional segments, our second quarter advertising and admissions cost was reduced by approximately $3 million, or 3%, while lead volume did not suffer.

This gain in efficiency is meaningful as we seek to improve our margins. Having identified the issues, we believe we’ll get starts back on track.

Continuing with our University business. We completed our AIU brand renewal campaign, spending $9 million of our $12 million budget in the first half of 2008. The goal of the media spending was to increase awareness of AIU in key markets.

Preliminary data from the brand campaign indicates awareness for AIU ground schools increase from 42% to 55%, and awareness for AIU online increase from 30% to 41%. We’re encouraged by this trend and continue to work hard at rebuilding AIU.

However, it’s clear we still have work to do, particularly at our ground campuses, where we’ve got to overcome the negative press that dogged AIU during its probation for two years.

As we expected, we’re seeing positive movement at CTU, with associate degree students matriculating into bachelors degree programs. While still early, approximately 1,800 students have already enrolled for the second part of the Two-Plus-Two program as of June 30, 2008.

This compares favorably with the historical conversion levels at AIU. The CTU Online program recently became one of the select few institutions in the world offering bachelors and masters degree programs in project management that are accredited by the Project Management Institute.

Moving on now to Health, we’re pleased with the performance of our Health SBU as it continues to grow. Starts in the quarter were up 13%; revenue was up 11% and operating profit dollars and margin both improved on a year-over-year basis.

We’re also pleased that three of our health campuses were named ACICS honor roll schools, while six schools received perfect visit commendations from their accreditor ABHES. This recognition is important as the Health SBU has worked to continuously improve their programs and student outcomes.

Health assumed responsibility for and began integrating the Vienna, Virginia and Melville, New York Gibbs campuses. The schools are being conformed to the Health SBU staffing, expense and academic delivery models, including the phase-out of most non-health programs.

Both schools will benefit from a more focused health curriculum, and they showed significant financial progress in the second quarter. Collectively the campuses are meeting planned income targets for the year and year-to-date their starts are up 12% versus 2007.

We’re also pleased to have renewed our agreement with Le Cordon Bleu International for an additional five years. The LCB renewal included no upfront cash or other consideration by CEC, and the economics are slightly better than our previous arrangement.

Development and approval of a 21-month program that we’ve previously discussed is underway, and we’re on track to offer this option to students in early 2009.

We’re also making good progress winding down our Transitional Schools. We were extremely pleased to have been able to sell the IADT – Toronto campus to a respected buyer at the end of the second quarter.

The sale was a 6% improvement versus the cost of teach-out. We completed the teach-out at Brooks College in Long Beach, California in June. The teach-outs at IADT – Pittsburgh and Gibbs Piscataway are on track, with both institutions scheduled to close in December of this year.

I’ll mention here that the closing Gibbs Piscataway closing in December will be ahead of the schedule we originally expected, as we thought it was going to close, before, in 2009.

Finally, I’m pleased that we continue to made good inroads in increasing employee engagement and reducing turnover. Our turnover rates have improved, with overall turnover reduced by 19% versus last year and admissions representative turnover down by 29%.

This is an important sign of the progress we’ve made on changing our culture to support the company’s long-term goals. With that overview, I’ll turn it over to Mike now for more details on the quarter.

Michael Graham

Thanks, Gary. I’d like to start by providing some information regarding non-comparable items during the second quarter and the treatment of discontinued operations. Following that I’ll discuss our quarterly results including financial highlights and provide an update on a somewhat improving student lending situation.

As you review our second quarter results, please note there are two items impacting year-over-year comparability: discontinued operations in 2008 and legal settlement costs in 2007.

Regarding discontinued operations, upon the sale of the school or the completion of a teach-out, all prior period financial results are reclassified into discontinued operations in the section within our income statement.

As Gary mentioned, in June 2008 we completed the sale of our IADT – Toronto school. Just to clarify, that was a $6 million cash benefit to the company versus our teach-out. In addition our Brooks College campus located in Sunnyvale completed its teach-out activities in June.

The results of these operations for the two campuses for all periods reported, including the prior year, have been reclassified and reported within discontinued operations.

Looking forward through the end of fiscal 2008, we expect to complete teach-outs at three additional schools that are currently classified in our Transitional Schools segment: our Art & Design IADT – Pittsburgh location, our Gibbs Piscataway location and Brooks College Long Beach campus.

For these three schools within the Transitional segment results, the forecasted 2008 revenue is estimated to be approximately $5.7 million and the 2008 operating loss is estimated to be $13.1 million. The results will be moved into discontinued operation in Q4 2008.

As Gary mentioned, we were able to accelerate the completion of the teach-out at Gibbs Piscataway into the fourth quarter of 2008 versus 2009. Upon ceasing operations at this school, we expect to record an additional pre-tax charge of approximately $5.6 million in the fourth quarter, which represents the remaining real estate operating lease obligation of the school.

This charge was part of the estimate that we provided you as the one-time 2009 charge in our March Investor Day presentation, so it’s an acceleration of $5.6 million of the charge.

The second non-comparable item is the $13.1 million accrual in the second quarter of 2007 for expenses related to the settlement of certain legal matters.

Additionally, the District Court approved a settlement of our shareholder lawsuit. In this case the District Court ruled in the company’s favor; however, rather than spend money to continue the litigation, once the plaintiffs chose to appeal, the company chose to settle.

Approximately $4.5 million of the $4.9 million settlement was covered by insurance. The remaining amount was previously reserved by the company.

Let me provide you some more detail on the second quarter. Second quarter revenue was $418.8 million, down 2.2% from the second quarter revenue of 2007 of $428.2 million.

Excluding Transitional Schools, second quarter revenue of $398.3 million was roughly up 1% from second quarter 2007 revenue of $395 million. The increase was driven primarily by Health and International SBUs, and these SBUs continue to deliver solid students start and population growth and remain our strongest performers.

Second quarter 2008 revenue for the University segment was $175.3 million, down 1.8% from the second quarter 2007 revenue. Revenue for CTU was up 10.4% from second quarter 2007, while AIU was down 8.6%.

During the first half of the year, both AIU and CTU have experienced slight improvements in start totals as compared to a year ago. But Gary spoke of the challenges in our conversion to the University SBU peer model, and we also continue to experience mix shift into more associates degree-based programs.

In addition, as we discussed in the first quarter, our AIU ground business realigned its teaching calendar to be identical to the online calendar, allowing students to freely move between the schools.

AIU ground earned approximately $2 million less revenue in the second quarter 2008 versus the prior year due to this calendar alignment, as the equivalent of eight fewer days moved into Q1 2008.

Again with that alignment in Q3 2008, AIU online will see a benefit of the equivalent of six days moving from the first quarter of 2008 to the third quarter 2008.

AIU ground starts were 34% higher in the first quarter 2008 and 78% lower in the second quarter 2008, both versus prior year. For the six months of this year, AIU ground starts were down about 200 students. In total, excluding Transitional Schools and AIU ground, starts were flat versus last year second quarter.

While we experienced challenges on new starts in the quarter, given the lending environment and the peer model, we continue to work hard on reducing overhead costs and improving margins.

Gary outlined efficiencies in our advertising, including the renewal of the AIU brand. During the second quarter we continued to optimize advertising expenditures by ceasing any campaigns where the anticipated cost per start would exceed our investment criteria.

This included elimination of certain third-part aggregator campaigns via the Internet, as well as scrutiny of all off-line media spending.

In addition to the advertising and media savings, we’ve also taken steps in other areas, leading to better efficiencies. We executed several important programs in the second quarter in addition to our already tight cost controls.

We continued to reduce head count in line with the increased expectations. During the quarter we recorded approximately $1 million in severance expense, related to the elimination of over 275 positions, with an annualized savings of approximately $13 million, and these are primarily in the Culinary Arts segment.

These actions and future savings are incremental to the actions discussed in the first quarter and taken in the University and Corporate segments.

We also continued to renegotiate more cost efficient service and outsourcing arrangements, many of which are outdated. For example, we signed a renewal and expansion of our IT infrastructure outsourcing arrangement with Axiom. Over the five-year life, we anticipate saving over $8 million versus our current contract.

Regarding real estate efforts, we again continue to work hard. To date, in 2008, we have released or backfilled approximately 90,000 square feet of excess real estate, with an annualized savings of roughly $2 million.

As we discussed at Investor Day, we will continue to seek opportunities to exit unfavorable leases and Transitional segment real estate. We hope to be able to execute several more real estate deals in the second half of 2008 to remove the excess in Transitional School operating leases.

If we do find opportunities to exit real estate in 2008, this will again result in a portion of the charges forecasted in 2009 to move into 2008.

Finally, we improved our overall margin performance, even with the higher number of new school start-ups, which experienced an operating loss of approximately $1 million higher than the previous year’s second quarter.

Let me turn to lending. Gary discussed the lending environment and the impact on starts. Let me give you a little more clarity on the impacts to the quarter. Given our decreased number of starts in Culinary and in certain portions of the Art & Design segment, our student financing levels, using our balance sheet, were well below our anticipated levels.

We also helped students take advantage of the remaining Sallie Mae recourse funding through March 31, 2008, which moved anticipated student financing volume out of the second quarter and not to our balance sheet.

Additionally, remember for financing agreements with students, in the quarter they have not generated a full academic term yet of earned accounts receivable, as they just began school.

As a result, as of June 30, we held approximately $14.5 million of new student financing agreements on our balance sheet. This includes new originations since April 1, as well as carryover balances from programs we had in place before the credit crisis. This amount excludes balances remaining under the previous Stillwater agreements.

Let me make sure everyone is clear on our accounting for student financing programs. We recognize interest income on a cash basis for this program. Interest becomes payable once the student is out of school.

Interest received is recorded as a component of revenue on our income statement. Bad debt expense will be recorded within bad debt expense on the income statement and is being calculated in a similar fashion to the other receivable balances.

As we explained earlier this year, we are applying an approximate 44% bad debt expense rate to balances outstanding under our new program. And we’ll adjust that rate once we gain experience with default history of these cohorts.

Also recall that expense related to our previous recourse fees with Sallie Mae was recorded within educational expenses in our income statement, and that expense will dissipate as those students end their terms under the recourse program.

At our first quarter earnings call, I provided a forecast of balances outstanding as of December 31, 2008 to be in the range of $45 to $65 million. With lower than expected Q2 starts, increased Pell Grant levels, and increased Stafford loan levels, we believe we will no longer reach the low end of that range.

Given the fluid nature of the lending environment and the calculations to be done for Pell and Stafford as students join the institutions, we are not providing a new estimate at this time.

Again, we are encouraged by the new Higher Education Act provisions that remove institutional loans and increase Stafford loans from the 10% portion of 90/10, and we continue to believe that 90/10 will not be an issue at our schools.

As Gary mentioned, we commend this year’s actions taken by Congress and the White House, regarding increased levels of Stafford and full-year Pell Grants. The increases in Stafford and Pell have relieved some of the tuition and fee costs that would otherwise have been shifted into private loans.

This is a very positive development and has reduced our forecasted annual domestic cash revenues from private loans. Our 2007 10-K noted that the portion of cash receipts for the year ended December 31, 2007 was 16.1%, and our current forecast indicates this could be as low as 14% by the end of this year.

In general, we anticipate that these changes will increase the number of students interested in our programs, who will be able to meet their financial obligations with decreased borrowing and lower monthly payments on a per student basis.

For schools with relatively larger gaps in private lending, such as Culinary and Art/Design, the changes will shift the need for private funding from those of our internal programs and third-party programs into Federal loan sources, and the additional Pell Grants will reduce the need for loans.

For other segments, the changes will reduce the overall amount of Federal loans taken by students and make the programs more affordable.

Now let me wrap up with highlights of our balance sheet and an update on our share repurchase program. As of June 30, we had $421 million in cash and investments, and the quality of the investment portfolio remains strong.

At the end of the quarter, we only had $13.3 million invested in auction rate securities, reduced from $148 million as of December 31, 2007. Capital expenditures for the quarter were $7.7 million, or just under 2% of revenues, and our annualized DSO was 14 days, consistent with that at the end of the year.

The company did not purchase any of its shares in the quarter at the direction of the Board of Directors. For equity grants under our 1998 plan, if any entity owned 20% or more of the combined voting power of our common stock, a change in control provision would be triggered.

If triggered, as of June 30, 2008, we would have recognized additional share-based compensation expense of approximately $38 million during the second quarter of 2008.

Approximately $30 million of this expense relates to the acceleration of compensation expense that would be recognized in the future for GAAP, but triggered earlier by the change in control.

Under our 2008 plan, which was recently approved by our stockholders, the change in control provision was significantly altered and ownership levels were increased to 35%.

In light of the current change in control provisions in the plans at 20%, the company opted not to buy back shares in the second quarter, as that may have triggered the change in control provisions.

As we have one shareholder at approximately 19% ownership, the company could buy back up to 4 million shares without triggering the 20% change in control, assuming no other purchases by our largest shareholder.

The Board determined it was not in the company’s best interest to potentially trigger the change in control provisions through further buybacks in the second quarter.

To date, we have repurchased $604 million and still intend to execute the remainder of our $195 million authority once the Board resolves the issue.

With that, we’ll open up the line for questions.

Question-and-Answer Session


And your first question comes from the line of Amy Junker - Robert W. Baird.

Amy Junker - Robert W. Baird

I’m trying to understand, the reps that you cut or laid off, can you give us the confidence that this isn’t what’s impacting starts; that perhaps you cut too deeply there? Just to make us feel a little better about that.

Gary McCullough

Amy, that’s a good question. In fact, as we’ve gone through a lot of the data that’s been presented to us in digging into the issues, I’ve asked that very same question.

The fact is, as we looked across the organization, we had quite a number of reps that weren’t as productive as we felt they should be. One of the things that’s happened culturally is, given some of the challenges that we’ve had in the past, there has not been in some cases the proactivity or the aggressiveness that doesn’t cross the line with our representative force.

We had representatives that frankly were unproductive, and the reality is that the remaining representatives that we have, with the changes we’ve made, they’ve become much more productive. We’ve seen across-the-board, increases in their productivities.

But it’s a question that I’ve asked. It’s a question that we’re evaluating, but we don’t believe, given what we’re seeing, that that’s the case at this point in time. I wouldn’t hesitate to add back if we felt that was the right thing to do for the business.

You can’t cut your way to glory. That’s not what we’re trying to do here. We’re trying to make sure that we have processes that are smart processes, that are efficient processes, and we’ll build back from those. And again, if it’s necessary, we would add back, but we don’t see the need today.

Amy Junker - Robert W. Baird

Great, and then just one other question. Mike, on the bad debt, that was a good level this quarter. Are you anticipating that that’s going to go up? I know you’re going to be internally funding less than you’d originally previously anticipated, but should we expect that that level will probably drift back up through the remainder of the year?

Michael Graham

I would think so. Because the balances for the students, both the serial loans and the originated loans in the second quarter, students will continue to build a receivable balance on their ledgers as they take more courses. As we add those loans and they grow, we’ll be applying that 44%. So the rate will tick up as we go forward.

Amy Junker - Robert W. Baird

Great, thank you.


Your next question comes from the line of Jeffrey Silber - BMO Capital Markets.

Jeffrey Silber - BMO Capital Markets

Thanks so much. I wanted to get back to the discussion about the peer model that you were talking about. Just so I understand, is that something that you’ve only installed in the University segment? Is that something you’re thinking of installing at the other segments throughout the company as well?

Gary McCullough

Thank you, Jeff. The answer is we’ve only expanded this in the University segment. As I said, we began in the fall of 2007; experienced tremendous positive results at CTU. We continued that expansion at CTU in early 2008. Recognizing the strong performance there, we extended the model onto AIU, which was always the plan.

And again, we encountered some of those issues that I described. We’ve worked to fix them, and at this point, our plan is to expand it and make sure it’s fully operational at University before doing anything beyond that.

Jeffrey Silber - BMO Capital Markets

Okay, great. Then just a couple of quick numbers questions, your corporate and other costs were a little bit higher than what we thought. Was there any specific reason and, where do you think that’s going over time?

Michael Graham

Specific reasons, at this time last year, the company was well out of its target for bonus, and for this year, since our operating plan metrics are on plan, we’ve got full bonus accrued. That’s probably worth about $3 million of the $5 million lift.

I think the remainder is related to certain allocations, because revenues are down, less of the corporate are allocated to the other segments.

Again, the corporate numbers, we’ve gotten good savings year-over-year from a head count standpoint, masked with not only those two factors, but also, we’ve taken in more shared services, so our loan processing, our IT organizations are more centralized, shifting some costs outside of the business units and into corporate. We really don’t give guidance going forward on specific segment data.

Jeffrey Silber - BMO Capital Markets

Okay, but then just so I understand, should it be going down from here based on what you said?

Michael Graham

Let me follow-up with you. I’m not sure I want to; without the details available.

Jeffrey Silber - BMO Capital Markets

No worries. Then one more, you mentioned the real estate savings. What divisions were those in?

Michael Graham

Real estate savings, it’s across the board. The 90,000 of space that we took out was not one parcel. It was several parcels across the business units.

Jeffrey Silber - BMO Capital Markets

Okay. Great, I’ll jump back in the queue. Thanks.


Your next question comes from the line of Gary Bisbee - Lehman Brothers.

Gary Bisbee - Lehman Brothers

Good morning. Is there anything that can be done between now and next winter when you launch the longer duration Culinary program to try to maintain revenue base and profitability, or are the declines we saw this quarter likely to continue and accelerate in the second half?

Specifically, one thing I’m wondering is will the year-round Pell Grant aid your recruitment a bit, relative to the second quarter as we get into the second half? Thanks.

Michael Graham

A couple of thoughts for you there. We have looked closely at the underwriting criteria that we use for the Culinary students, and our focus has always been about completion and retention. We are looking at a lot of internal programs right now that stitch in the student better and keep the student through the process.

As we get systems in place and we work with our team in the Culinary group, we’ve had some very good experience with low drops from the loans we’ve given. If we continue to see positive results from keeping students in school with things such as credit counseling and other things that we can do to help the student complete, we may loosen up our FICO score bands and let more students in.

The year-round Pell will benefit students a lot in terms of their program. It will move money off of their loans into Federal funding. It will also help retention, because the students will be able to make their payments better.

Also remember, as you look at the press release, we’ve been dormant in our start-ups. And right now, we have four start-ups going: LCB Dallas, LCB Boston and two Kitchen Academy schools.

Those schools collectively were a $2.5 million operating loss in the quarter, which hurts the profitability of the business. Without that, we have about a 5% margin, and those schools, as they ramp up, should turn towards more profitability.

Gary Bisbee - Lehman Brothers

Okay. Thanks. The second question was on the CTU Online starts. I understand your explanation for AIU, but CTU decelerated quite a bit. Was there some lingering impact there, or is there something else going on this quarter that caused that?

Michael Graham

Remember, CTU and AIU are connected in terms of the peer model. So the dialer issues that we had and the peer rollout issues that affected AIU hurt the entire University group, because those systems are co-mingled. So just like AIU, CTU had the same issues.

Gary Bisbee - Lehman Brothers

Then just one clean-up one. CapEX was a lot lower. Is that likely a good trend number, or will that move back up as you continue to open some new campuses? Thanks a lot.

Michael Graham

We still look at CapEx to be someplace between the 3% to 3.5% level of revenue. It was just abnormally low this quarter.


Your next question comes from the line of Kelly Flynn - Credit Suisse.

Kelly Flynn - Credit Suisse

Thanks, a couple questions. First, just revisiting the Art & Design and Culinary starts, I know you mentioned the credit crisis as one of the issues there. Can you drill down on that a little bit more? Are you saying that students couldn’t get private loans and that hurt?

Or that they didn’t want to take on debt as it relates to the broader credit crisis and its impact on consumers’ credit profile? And then maybe tie that in with why you didn’t lend as much off your balance sheet? Was it that the students didn’t want the loans, or that you decided not to do it because you didn’t like the credit profile?

Michael Graham

Thanks. I think it’s more driven on the first part of the question than the latter, which is it was more about access. We don’t think it was about affordability. It was more about access.

Again, for those businesses, we did get as much volume as we could into the Sallie Mae program as of March 31. We did that. We have tighter underwriting standards than the recourse providers have previously done.

As we stated, our goal was to take the higher level bands of the Sallie Mae recourse funding and lend off our balance sheet, and the private lender market has contracted a little bit more in the quarter, making it harder for students to get access.

We thought our standards were fair, because they’re centered around outcomes and about graduating the students. And as I said in Culinary, we’re looking at expanding and going a little bit lower in FICO scores, because some of the programs we put in place for retention, credit counseling, and other things. As we look forward we’ll look at Art & Design, about putting those programs in place there as well.

Kelly Flynn - Credit Suisse

Okay, and then, Mike, that 14% you mentioned, you were talking about the private loan disclosure. You thought it could be as low as 14%. Is that comparable to the prior 18%? You think that could go down to 14%? And does that include your own lending program, or can you explain that number a little bit more?

Michael Graham

Sure. In our 10-Q and our 10-K, we have a disclosure table that shows the sources from Federal money, the sources from private loans and the sources from cash and other. Our loans themselves are in cash and other.

So we’re just saying that with the shift, that the higher Pell, the higher Stafford and the reduced access to some private loans and use of our balance sheet, we’re forecasting right now that we think we could be as low as 14% from private loan sources versus 16% at the end of last year.

You can see in this quarter’s Q that we released last night that our total blend is 14% right now. But obviously, as you go through a larger season and mix changes, it could tick up in the third quarter. But right now we’re looking at potentially being as low as 14%. Pretty fluid though to forecast what the balances are going to be at the end of the year.

Kelly Flynn - Credit Suisse

Okay. And then relative to the $2,000 loan limit increase, I know last quarter, you didn’t say this, but it was inferred that you had said you were only getting $300 to $400 of that $2,000.

It seems from what you’re saying today on private loans, that that’s going up. Can you give a little more detail on how much of that $2,000 do you think you can now benefit from, given the change in 90/10?

Michael Graham

90/10 has never been an issue for the company. As we said last quarter, the only place 90/10 was an issue was in certain of our healthcare schools, which has now gone away with the new legislation.

In terms of the inferred $300 to $400, that was not our number. What we did was we went profile by profile of students, segment by segment and tried to estimate how much of the $2,000 would help them, based on where their gap was. We came up with a reduction of our balance sheet that we disclosed in the first quarter press release.

Given the different portfolio we have, the different gaps and the different students, I don’t have a number that would say is it x-number or is it y-number of the $2,000 that benefits us, because you really have to go SBU by SBU, and we’re not prepared to disclose that.

Kelly Flynn - Credit Suisse

But it’s safe to say that the 90/10 change doesn’t change that figure. Is that right?

Michael Graham


Gary McCullough

The change in 90/10 doesn’t impact that at all.

Kelly Flynn - Credit Suisse

Okay. Thank you, very much.


Your next question comes from the line of Kevin Doherty - Banc of America Securities.

Kevin Doherty - Banc of America Securities

Thanks. Just to follow up on some of those questions, could you just talk about the outlook for starts, more in the context of lending. How much of the lending headwind you saw in Q2 essentially goes away, because the higher loan limits or some of the other changes you’re making, and how much of that headwind might still linger?

Michael Graham

Difficult question to answer. Again, we don’t give guidance. We’ve given some forecast of through 2010; our milestones are cumulative growth of 6% to 8%. We’ve given you some cautionary terms here on University that will take some time to come back from the issues that we experienced in the second quarter.

I’m not, again, prepared to talk about where we are segment by segment. Our Health business is doing very well. Our International business, as you know, is a very seasonal business, because in Europe the students do not attend a summer session. So we will have starts again in the third quarter for the International business, which we feel very strong about. It’s performing very well.

And Culinary, Art & Design continue to have issues as we talked about. We hope that the Pell Grants and the Stafford levels will help us. The Pell Grants, as you look at a calendar, the benefit of that with a full-year, given that a lot of students do start in September, the full-year impact on revenue would be next year.

But it could impact starts in the fourth quarter, as students look at their packaging levels and their affordability levels. But it’s hard for me to give any more clarity to some of the details on the question than that.

Gary McCullough

One of the things I’ll reiterate that Mike just mentioned is that third quarter starts are underway. That really is comprised of what we saw in the second quarter, beginning of the third quarter. While these changes will be beneficial, we expect they’ll take effect later in the year and benefit us more in 2009.

Kevin Doherty - Banc of America Securities

Okay. That’s fair. Could you just talk about exactly when you put in some of those fixes for the peer qualifier model?

Gary McCullough

The fixes have really been underway throughout the month of July. They continue as we speak to you this morning. We expect that they’ll be up and running, and we’ll begin to see benefit form those, and we’re seeing benefit from them right now. But, again, we’ll work our way through them over the next couple of weeks.

It has been something that as the second quarter unfolded, we began to penetrate. It took awhile to get to the root causes of the issues. Obviously, it takes awhile once you diagnose them to put the fixes in place, and those fixes are underway.

Kevin Doherty - Banc of America Securities

Could you maybe just drill down, why it was so successful initially at CTU, and then when it became a broader rollout, you ran into issues?

Michael Graham

I think when we rolled it out with CTU, it was a small segment of the population. As we then rolled it out to AIU with the total reps in terms of the organization, it gets more complicated on the call arrival patterns, and as the calls come in, to maximize and optimize your staff profiles.

Also, as we added more volume into the system and the dialers needed more phone capacity, we had to align the phone capacity and the technology with that.

I think organizationally as we ramped up quickly from a smaller test that was very successful, we were very bullish on the test and what we were doing, and just executionally, as Gary said, we expected bugs in the systems. These bugs were tougher than we thought. And we have taken a lot of actions to fix it.

Gary McCullough

I’d also add that AIU and CTU are different schools, and while behind the scenes we’re backing them with systems that are consistent, a rollout in one place doesn’t necessarily mean it’s going to be a one-to-one correlation in the other place.

They are different institutions with different governing Boards with different cultures. And that’s something we’ve had to account for as we’ve moved forward.

Kevin Doherty - Banc of America Securities

Okay, and I know in the past you’ve mentioned becoming more productive with your Internet lead buys, and maybe shifting a little away from TV, and you touched on that a little more on this call.

But could you just update us on those efforts, was there any disruption on the start side this quarter? Or when might you start seeing some benefits on the cost side there?

Michael Graham

I think we stated that we saw a $3 million benefit in the cost side this quarter and our cost per start for the year down 12%. So we’ve seen a lot of that. We’ve done our shifting from aggregators into different media buys.

Our team, led by Len Mariani, who joined us in October, are doing a really good job of understanding the system and understanding opportunities. I think we have more to come on that in the second quarter, consistent with Len’s presentation that he shared in March.

Gary McCullough

One of the things I’ll say is that, while we did go after what were clearly non-productive or unproductive leads, our total lead volume remained high. We feel good that the trade-offs that we’ve made from a quality point of view and from a cost point of view, the trade-off was a good trade-off.

Ultimately, we mishandled some of those leads that came to us. We’ve got to do a better job of that, but it was clear in doing the analyses that we had lead sources that were not as productive as others, and we took those out.

We’ll still look at what is the right mix of lead source, what is the right mix of media. Those are changes we’re making. There’s no one-size-fits-all answer, because of the differences that we see in the businesses; some of them being online business, some being more local, so we’re working through some of those things. But that’s just continuous improvement.

Kevin Doherty - Banc of America Securities



Your next question comes from the line of Robert Craig - Stifel Nicolaus.

Robert Craig - Stifel Nicolaus

I was wondering if there’s any way you can quantify or indicate the magnitude of the carryover impact on the starts in the University division in the third quarter. Is it reasonable to assume that we could be back to slight positive start growth year-over-year in 3Q?

Michael Graham

Again, the factors that are out there are you have the second quarter that you saw. You know that we do have some shifting on calendars; the AIU calendar shift is done. The online calendar brings in more earnings days into the quarter.

We have to work through these systems; we have to work through the problems, which is on the negative side. On the positive side, we do have some improved packaging and some affordability from a business standpoint.

Gary McCullough

Again as you look at the businesses, they are in slightly different places. CTU has been on a roll, and while it was impacted in this quarter by the issues as we expanded, we expect CTU to continue its strong performance. AIU, as we indicated, has more issues, and we’re working at, again, delivering those, so there will be some balance in there.

Robert Craig - Stifel Nicolaus

Okay, thank you.


Your next question comes from the line of Trace Urdan - Signal Hill Group.

Trace Urdan - Signal Hill Group

Performance of the Sanford-Brown business has been so consistently strong. I’m wondering, this may seem a little bit out there, and I apologize for that, but is there the potential for any capacity constraints as you look at that particular line of business going forward?

Gary McCullough

Define capacity constraint for me, Trace.

Trace Urdan - Signal Hill Group

Are you going fill up those schools and need to expand their physical plant, or start to open up new schools in order to accommodate demand?

Gary McCullough

I’ll start by saying that we’re obviously very pleased with what we’re seeing in our Health business. We think it’s a growth business, and as we look at how to grow business, there are a couple things.

First of all, new programs, and George Grayeb, who’s been leading that business, has done a terrific job, and his team, of identifying new programs and other programs we can expand too that are within their capability where there’s strong demand. He and the team there have done good job of making sure we grow in a controlled fashion.

The other piece is geographic expansion. As we look at the geographies we’re currently in, we think there are more opportunities in those geographies, and we’ve identified several other geographies that we would like to expand to. So you should expect us to be pursuing both those routes for growth.

Trace Urdan - Signal Hill Group

Okay, thanks.


Your next question comes from the line of Sara Gubins - Merrill Lynch.

Sara Gubins - Merrill Lynch

Could you talk about how you view underlying student demand in the Art & Design and Culinary programs? Maybe gauged by the need flow or other metrics. Also if you could discuss the reasons for the attrition in the Art & Design business unit during the quarter?

Gary McCullough

In terms of lead flow, we feel pretty good about the underlying demand. When you look at the sheer number of leads that we had in the second quarter of 2008 versus last year, our lead flow was up 13%.

We think that there is demand for the programs; our programs are quality programs. We’re continuing to work on those programs, and so no underlying issue with regard to lead flow. I’ll let Mike talk about the underlying other pieces.

Michael Graham

I think from a retention standpoint on Art & Design, specific to your question, I think some of the retention issues, we had slightly lower retention during the quarter than we did the previous year in the first quarter.

Some of that again relates to packaging and to financing for students, affordability, in terms of serial loans that for some reason were not renewed, or just affordability with a tightened loan environment.

I think the other thing that’s helping our businesses and will help our businesses going forward in terms of the underlying model, is our shift to more local markets, as we’ve talked about, that our Culinary schools were built on a national footprint, and drew a lot of students nationally, which comes with it tuition and housing costs.

There is some of that also for Art & Design, because we have certain institutions like Harrington and like Brooks that are great institutions with top quality programs that draw national students in and part of the challenge on Art & Design is to continue, especially with the academy schools, to stay more local than national to make the affordability better on a tuition standpoint.

But demand for Art & Design was very strong. We ramped up our online program, as you know. In the early parts of our online program, some of the same phenomenon happened with packaging, that certain students get into the online program and they do drop early on because of some of the packaging and costs needs, which as we rolled it out in the first half of the year, we’ve had a little bit higher attrition issues than we like in the online portion of the Art & Design business.

Gary McCullough

Sara, the only thing I would add is I looked at the attrition issues as well. One of the things that came to light that I pushed on was about 40% of the attrition we saw in the quarter was due to academic issues.

We’re going to continue to hold a high standard, but about 40% were academic issues, a lack of satisfactory academic progress and other issues that we drove and drove some of that attrition.

Because at the end of the day, we want to make sure that our programs are quality programs, and that we have students that should be there, so that they can interface with other students. While there were funding issues, we drove some of that attrition as well.

Sara Gubins - Merrill Lynch

Okay. Thanks very much.


Your next question comes from the line of Corey Greendale - First Analysis Securities.

Corey Greendale - First Analysis Securities

I just wanted to go back to the impact of lending for a minute. When you talk about the changes impacting more than you were anticipating, did you tighten your own internal credit standards more than you anticipated, or are you saying that you were figuring there would be lenders who would be willing to provide that gap financing for people who were not meeting your credit standards, and that that has dried up?

Michael Graham

I would say in the latter part of your question, we did anticipate a little more access in the private markets, especially some of the higher previous recourse FICO scores. I think that market, Wachovia and other people have left that market. So that has an impact. I know we haven’t tightened up our credit scores.

What we have done, as you recall, we’ve required in school payment of students between $50 and $150. We’ve also required co-borrower arrangements. We’ve pushed our students heavily on co-borrower requirements.

In the past we weren’t as diligent as it could’ve been getting co-borrowers. When you ask the student for a co-borrower, you naturally will have the potential of losing some starts.

In the end it’s better to have a co-borrower. There’s much better student success when they have a co-borrower. We may be able to loosen that up over time, our co-borrower requirements, but those factors probably drove us again towards the lower end of our range. We weren’t surprised by the decrease. It was just the lower end of our internal models.

Gary McCullough

Corey, as we were rolling out what is frankly for us a new process, because we’re doing some new things, our tack was to be a bit more conservative up front. Because if you do that and you learn, you can go back and loosen the reins some, if it’s warranted to do that. It’s more difficult to do it the other way.

We learned some things, particularly early on in the quarter, that will help us make some changes as we go along. But we’re not going to lend our money lightly. We will hold a high standard.

Corey Greendale - First Analysis Securities

Okay, thank you.


Your next question comes from the line of Brandon Dobell - William Blair.

Brandon Dobell - William Blair

Thanks. How should we think about where we see the impact of the CTU students going on to the second part of the Two-Plus-Two program? Is it going to be starts, continuing students? How should it play out from a reporting perspective?

Michael Graham

Let me defer that question. I’ll check again whether when you matriculate out of the Two-Plus-Two program, whether we consider that a new start or not. Obviously, you’re going to see the benefit, the population will not change, but you will see an up-tick in the revenue per student for those institutions, as the students go in to the second part of their program, which we’ve had a lot of success with 1,800 students to date.

You will also see a reduced cost per start so to speak, or reduced marketing cost, because these students are matriculating up versus being new student acquisitions.

Brandon Dobell - William Blair

Okay, and in line with that, as you think about the next two years, compound growth for the University division from an enrollment perspective, what assumptions are you making for the sustainability of that CTU matriculation into the bachelors programs?

Is it a significant part of that enrollment growth from a support perspective, or is it just a minor contributor, and it’s really about generating kind of organic bachelor students.

Michael Graham

We’ve assumed that, in our long-term models, that CTU will resemble AIU. AIU has had a historical 50% success rate of the associate degree population on their Two-Plus-Two program matriculating up to bachelors, so we’ve used that consistent in our model for CTU.

Brandon Dobell - William Blair

Okay. Anything within University this quarter from a retention perspective that was notable, either good or bad, as you think about both CTU or AIU, either online or offline for that matter?

Michael Graham

Again, nothing specific stands out. Across the company, the attrition levels have ticked up versus where we’ve been, some of that due to financing; some of it due to academic progress and standards we’ve had internally, but nothing stands out from anything different on the University group.

Brandon Dobell - William Blair

Okay, thanks.


Your next question comes from the line of Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

Thank you. Gary, I know you are not giving specific start growth guidance for AIU and CTU Online. But I’m curious, for the month of July, can you give us a sense of the relative performance for both units, CTU Online and AIU Online, in terms of start growth relative to the second quarter; was it up or down?

Gary McCullough

Mark, I won’t give you specifics, but we’re pleased with the progress we’re seeing.

Michael Graham

Also just to be clear, in our business, given calendar shifts and start dates and the amount of acquisition time for a student between starts, monthly starts can be pretty misleading versus looking at it quarterly, which has a more comparable basis than before, so month numbers by themselves are not all that informative at times.

Mark Marostica - Piper Jaffray

Okay, I was just trying to gauge the speed of improvement.

Gary McCullough

I know you’re looking for something that you can hang your hat on, and candidly, we’re early in this. We can tell you that at AIU we have seen improving show rates, we’ve seen improving conversion rates, we’ve seen improving referral rates; so all of the things that we would look for to demonstrate that we should expect improvement are beginning to line up.

Sequentially, start over start, we’re seeing those. July was a continuation of those things based upon the changes we’ve made, but a start’s only a start when it’s a start. What we have is we have enrollments; we have people that we’re working to package.

We’ve got to get them through the front door, but we’re seeing positives in all of those things, but we’ve got to make it happen for our starts throughout the balance of the fall. All of the underlying things, we’re seeing improvement.

Mark Marostica - Piper Jaffray

Great, thanks for the color on that, Gary. And then switching gears, outside of Culinary, where you’ve obviously been able to trim a good deal of head count, are there any other areas you’d point to where you think the cost structure is maybe more bloated or where you see opportunities to trim costs significantly?

Michael Graham

Again, from our standpoint we’ve done a very good on margins. We’ve done structural head count reduction programs at corporate, University and Culinary based on population. We continue to look at costs across the board.

I wouldn’t say any of our organizations are necessarily bloated. I believe that as you look at some of the historical investments the company has made, be it in real estate or be it in administration areas or other areas, it’s time for us to just look at every cost carefully and make sure it’s a necessary cost to educate the student.

As we look at outdated contracts; our IT outsourcing contract was five years old. We went back to market with that and saved $8 million. It’s more of that than a bloated organization. It’s more just being smart about our money and continue the tight cost controls we have.

Gary McCullough

The only thing I would add is that one of the things we’ve done is we’ve begun to ramp up accountability in the organization. Where we find that we have people who, for whatever reason, aren’t performing their jobs well, we want to do a better job of helping them to do a great job that they’ve been hired for, or we’ll counsel them out of the organization.

We have asked the organization to do a lot with regard to new processes. We did take out what we saw as head count that was unnecessary, but as I said earlier in the call, we don’t believe you can cut your way to glory.

At the end of the day, we need to grow, but the changes we’ve made were changes that were aimed at ultimately allowing us to grow, but grow in a way that’s responsible and that will deliver results over time. That’s what our focus has been.

We’ll continue to examine the organization where we think either the process or the structure’s not right. We’ll go in and deal with those. We’ll also take unnecessary costs out of the organization, but we’re beginning to shift out of that mode into how to grow.

Mark Marostica - Piper Jaffray

Great, thank you.


You have a follow-up question from the line of Kelly Flynn - Credit Suisse.

Kelly Flynn - Credit Suisse

Sorry to beat a dead horse on this balance sheet lending thing. But I don’t understand why you would lend less off your balance sheet if your credit standards haven’t changed a), and if b), the students that have gotten rejected from private loans at a greater pace than expected, weren’t students that you would have lent to in the first place.

Meaning, if they had gotten a private loan, they wouldn’t have been on your balance sheet. Is there another demand issue that you mentioned that’s contributing to this? I don’t know if there’s any more color you could give on that. Thanks.

Michael Graham

We gave a lot of color in the script that we went through; I’m not sure I can add much more. Again, we did package up students under Sallie Mae. The co-borrower issue, that we’re asking for co-borrowers, did turn into potentially a slower process, as the student goes and attains a co-borrower, versus in the past they did not need to have a co-borrower.

That may have slowed down things moving into the next quarter. That’s a couple of thoughts for you in addition to what we’ve said.

Gary McCullough

As Mike said in his script, we’ve said that we would lend at the high end of the range that some of the recourse lenders departed. We’ve stuck by that. We have gone to a FICO level that was higher than previous, and so there were a number of students who might have qualified previously that would no longer qualify.

Again, as we’ve gotten a history with some of those students, we’ve run the data, and it suggests that we might be able to be a little bit looser going forward; we’re still working that one through. But we aim to fill a void without extending credit to students who, it was clear in our data, would likely not graduate, and would likely not repay the loans.

Michael Graham

I think just to close that point, a little bit also, as we said, was it was more based on our estimate than necessarily any results. In March, as we went through a lot of the crisis and lenders moving out, and all the shifts that we had to do, we made some broad estimates, and without a lot of data, because Sallie Mae has a lot of the data, obviously, as the largest lender in the industry.

We made an estimate. We are at the low end of our estimate range, but we haven’t seen anything from a model standpoint that concerns us from changing our lending standards. It’s more driven by what our estimate was.

Kelly Flynn - Credit Suisse

Okay, I got you. Thanks a lot.


You have a follow-up question from the line of Brandon Dobell - William Blair.

Brandon Dobell - William Blair

You talked a little bit about credit standards in general, and the Stafford, and the Pell impact, is it fair to assume that within Culinary that the long-term guidance you gave for the revenue impact in that division will be less than that 50 to 65 or so that you’ve talked about historically, or is that still a good number to think about; it’s just more about the timing or the trajectory, how to get to that number, and maybe it’s off to a slower start towards that number that we may have expected?

Michael Graham

I think it’s more towards the latter. Again, with four start-ups right now in the pipeline, we’re changing the model from 16 or 15 months to 21 months. One quarter, as we just start the lending process, I don’t think it necessarily takes us off of our model.

It is a slower start than the trajectory, and we’ll continue to update our model through every year’s strategic plan cycle to tune it down, but I don’t think one quarter puts us off of our three year plan.

Brandon Dobell - William Blair

Okay. In the same vein, should we expect you to change credit standards outside of Culinary, or is that really just one business where the gap was sufficient enough that the standards could move around a little bit. Should we expect you to make that same movement over in University or Health or Art & Design or anything like that?

Michael Graham

We have credit standards that are built on each organization. I think what we were saying was that where an organization like Culinary has taken extra steps to put in place better retention tools than what we’ve had, better help to get the students through the process, we’re willing to take some more risk on a FICO score basis, because we have confidence that that student will be more likely to graduate.

I don’t think it’s changing FICO scores by division. On Culinary, it’s simply a matter of we’ve put resources into place that we’re seeing some very good progress with.

Brandon Dobell - William Blair

Okay, thanks.


There are no further questions at this time. I would like to turn the call back to Mr. Gary McCullough for closing remarks.

Gary McCullough

Once again, I want to thank you all for joining us on the call. As I noted, the turnaround of this organization won’t be easy and it won’t be fast, but we are confident that it will happen. We have both operational issues and cultural issues that we’re addressing here at the organization. We are on task; we are focused on what we’re doing and we’re meeting our plan.

We made progress making a number of the changes that needed to happen for the long term, and we are confident that, ultimately, those changes will result in strong financial results down the line.

For the last two quarters for this year, we’ll continue to reinvest in our core businesses; we’ll continue to execute on the items that we’ve talked about, and we are working to build a foundation for long term sustainable growth.

Again, thank you for your interest; thank you for your questions and we look forward to talking with you again soon. Thank you.


Thank you for attending today’s conference. This concludes your presentation. You may now disconnect. Good day ladies and gentlemen.

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