Lincoln Educational Services Corp (LINC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2007 Lincoln Educational Services earnings conference call.

(OPERATOR INSTRUCTIONS)

Before we begin today's call, the company would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, competitive environment, regulations, and availability of resources.

Such forward-looking statements are based upon current expectations that involve risk and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of factors and other risks which are more specifically identified in Lincoln's filings with the SEC.

And now, I would like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, David.

Thanks very much. Good morning, everyone, and welcome to the Lincoln Educational Services first quarter 2007 earnings call.

Joining me today is Shaun McAlmont, our President and Chief Operating Officer, as well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer.

Following my remarks, Shaun will provide an update on our operating strategy, and Cesar will provide a detailed review of our first quarter 2007 financial results. And then, we will open the call for Q&A.

Now turning to our financial results, our first quarter revenue rose 3.5% to $78.1 million. Excluding the effect of our acquisition of New England Institute of Technology at Palm Beach, revenue would have declined by 2.2%.

The net loss for the quarter was $1.6 million, or $0.06 per share, compared to net income of $2.8 million, or $0.11 per share, for the same quarter a year ago.

Loss per share for the first quarter of 2007 included an impact of $0.01 per share, incurred in connection with higher-than-normal repairs and maintenance expenditures at one of our campuses.

In terms of average enrollment, first quarter 2007 enrollment was 17,411 students, a 1.5% decrease versus the same period last year. On a same-school basis, we were down 7.2%.

Starts for the first quarter of 5,360 were essentially flat with first quarter of 2006. And on a same-school basis, they were 5% below first quarter of 2006.

As we noted in our 2006 year-end call, 2007 will largely be a rebuilding year for Lincoln with all of our growth expected to occur in the second half of the year.

Our first quarter operating and financial results were in line with our guidance and we remain comfortable with second quarter and full year guidance we provided in our year-end release.

As I discussed on our last call, we began the year with 435 fewer students than a year ago. This was due to a decline in high school starts during the second half of 2006, increased competition in several of our markets for similar programs, and delays in our ability to fully benefit from several key strategic initiatives.

However, the strategic investments we made in our business during the past year should benefit our organization in the years ahead with visibility beginning to surface in the second part of 2007.

Most notably, we've expanded our program mix significantly, driven largely by our acquisitions, including the recent Florida and Euphoria acquisitions. The sampling of these growing programs includes collision repair, electrical, licensed practical nursing, cosmetology, and culinary.

Our new culinary program build out at our Columbia, Maryland campus is nearing completion, and we heard just yesterday that Maryland higher ed had approved the program. And we will expect to begin enrollment earlier in the third quarter.

Our new Euphoria program and our Lincoln Rhode Island campus will soon be completed with our first class start in the third quarter. The collision repair program we added to Grand Prairie campus as part of the expansion continues to grow nicely.

And finally, the electrical program is also currently scheduled for two additional campuses this year. We are also moving forward in expanding our associate degree programs primarily through our online division.

During the discussion of program development on our last call, I mentioned that we had just completed the acquisition of an LPN program from Harrison Career Institute in New Jersey that was closing their location.

You may recall that we assumed about 30 of their current students following the closing of its New Jersey location and that the purchase of the curriculum was expected to save us 18 to 24 months and being able to offer the LPN program at our other New Jersey campuses.

At the time of the acquisition, the curriculum had been provisionally accredited by the New Jersey Board of Nursing and the accrediting commission, ACCSCT.

Today, I'm pleased to report that we received full accreditation from the Board of Nursing, subject to their site visit next week, which means we can begin our growth plan of moving the program to select New Jersey campuses in the next few months, as well as increase enrollment in the acquired program.

This program will serve as a differentiating factor in our schools and will support our objective to grow our health services vertical with higher end programs.

As previously mentioned, according to the Department of Labor, there is twice as many LPNs employed as there are medical assistants.

We are pleased with our success to date with this program in our Connecticut school and now in New Jersey, and we expect to add the LPN program to other markets in the future.

I would also like to note that March marked the one-year anniversary of the opening of our Queens, New York automotive campus. The facility finished its first year of operation with approximately 370 students.

While the ramp up in student population was slower than we would have liked, 2007 is on track and we expect enrollment to continue to grow throughout the year and the campus to provide a meaningful year-over-year favorable swing in the revenue and net income.

And finally, this month will mark the one-year anniversary of our acquisition of the New England Institute of Technology at West Palm Beach.

As previously noted, in 2007, we were recognized the benefit of a full year of operation from this acquisition versus seven months in 2006. The transformation of this campus is truly taking hold in 2007. We've completed the re-branding of the school as Lincoln College of Technology.

In order to support the name change, we have created special marketing programs and materials. We are expanding and upgrading the school's cosmetology program by bringing in the Euphoria curriculum.

We are also expanding and upgrading the school's automotive facilities and programs to match Lincoln's. This facility and program will be available in the fourth quarter, in time for the 2008 high school recruiting period.

In the year ahead, our primary focus is on re-igniting our organic growth by unlocking the growth potential of these attractive programs plus the rollout of new programs being developed internally.

As Shaun will discuss in a moment, the recent realignment of our operations under two business units, the Lincoln Tech Group and the Lincoln Educational Group, is intended to create a structure where we can most effectively and efficiently replicate, build, and manage these programs.

In current, with our focus on realigning our organizations to drive integration of our stable of growing programs, we are also continuing to take steps to strengthen our high school recruiting and packaging programs, including addressing the financial aid process.

We are working to not increase our number of potential recruits but also to improve our ability to secure commitments from students at an earlier stage to the enrollment process. We are encouraged by the process and the progress that we're making in this area today.

Overall, we remain comfortable with our current guidance for 2007. And as discussed on our last call, we expect to see a return to organic growth in the second half of the year as our student starts improve and we begin to benefit from various strategic initiatives.

As we have stated previously, while the recruiting environment has been difficult, we believe our initiatives will enable us to successfully penetrate each of our markets.

We are continuing to see solid demand for our programs from potential employers, as well as healthy interest from potential students. Job orders from employers across virtually all of our verticals remain strong.

I believe the recent realignment made to our organization structure strengthened our team and our ability to effectively execute on the plan we have put in place to maximize the opportunities we have in front of us.

And with that said, let me turn the call over to Shaun for an update on our operating strategy. Shaun?

Thanks, Dave, and good morning, everyone. As you all know, we've made several acquisitions over the past five years that have effectively expanded our program offerings and have allowed us to build a solid presence in five key verticals.

As a result, we now cater to a more diverse pool of potential students who require different approaches to recruiting and educational services. As an example, automotive and HVAC versus culinary health and cosmetology.

As Dave mentioned, we've realigned the company's operations in order to assist with the execution of the strategies that we discussed on the last call. Our realignment will allow us to capitalize on our increased program diversity by ultimately improving the effectiveness of our sales and marketing organization.

We'll also have opportunities to improve our operating efficiencies across our organization as we grow our company. This is a necessary step for us to properly manage the number of programs we've added to our portfolio.

With this said, we've realigned our company into common areas of skill sets in order to make a more pronounced impact in our recruitment and operational approach. We'll focus our resources with the goal of promoting our unique strength and gaining market share in each area, thus we've established the two distinct units.

The Lincoln Tech Group, which is comprised of primarily automotive and skilled trades campuses, will be led by Debbie Ramentol as President and [Steve Bushnough] as Senior Vice President of Operations. These ten schools will gain greater prominence in the field of automotive training in their market with the added benefit of trade programs and forthcoming degree completion opportunities.

The Lincoln Education Group, comprised of non-automotive campuses and online and will be led by Ed Abrams as President along with three group vice presidents.

These 27 schools are smaller and offer a broad array of programs which have added diversification to Lincoln's offerings through acquisitions and multiple geographies. This unit will require a focus on program alignment, geographics, school cluster management, and efficient course delivery.

Ed and Debbie's collective industry experience totals more than 50 years, and we're extremely excited to move them into these new roles. The earlier move to Senior Vice President positions for Ed and Debbie was a precursor to this realignment, which has now given us an opportunity to advance our longer-term plans.

We'll manage these units with a constant eye on the environment in which they operate. Specifically, we'll consider our prospects' buying behaviors, the impact of unemployment rates in our local markets, and our competitors' positioning.

Additional realities that we're considering include the intricacies of re-branding and the strength of past brands, the strengths and complexities of diversified program offerings, and the overwhelming nature of the volume of information accessible via the web in student buying processes.

These realities really typify our changing environment and they're forcing us to constantly fine tune our approach in order to compete and operate more effectively than we have in the past.

We expect that these changes in our organizational structure and the alignment of school types will allow us to address the earlier mentioned realities and specifically address competitive positioning, advertising, and gaining market share.

In addition, our focus on positioning key personnel and utilizing internal expertise will add greater emphasis to the goal of promoting both unique institutions within our system.

Within our Lincoln Tech Group, Debbie's working to improve our resources and approach in the areas of marketing and recruiting, training, and operational efficiency.

With programs primarily in automotive and skilled trades, the Lincoln Tech Group operates in very competitive local markets and will now compete nationally as well.

With the major phase of our national re-branding complete, we're putting processes in place aimed at attracting students at the national level while also improving our ability to convert these leads that are at a distance.

This is a key step in expanding our inquiries and starts and better utilizing our capacity in these ten schools.

Lincoln Tech is a well-known and highly respected name in automotive training. We'll utilize the strength of this brand to propel these schools to higher levels of prominence in this field.

As mentioned earlier, we feel that these campuses will have an added dimension and differentiating factor against specific automotive training competition based on the existence of skilled trades programs and online degree completion, which will be available for enrollment later this quarter through our West Palm online programs.

I should also mention that as we continue to see increases in the volumes of inquiries from the Internet, we've structured our admissions approach in these schools to position our sales teams to effectively manage all lead types.

The Lincoln Education Group, which includes our services, health, and business campuses, as well as our online division, is also seeing increased competition in selected verticals. Some of these schools compete against multiple organizations and very fragmented markets.

To more effectively attract students, Ed Abrams is focusing on further improving how we market and deliver select programs with an eye on standardizing our approach, adding lower capital cost programs, and finding operational efficiencies.

As a result of our recent acquisitions, in some cases we have very similar program offerings at various schools but different delivery models for those programs.

Our realignment strategy will give us a more logical framework and standardize our curriculum and delivery methods for programs in these schools with a goal of increasing our capacity utilization and gaining efficiencies.

In addition, we'll look for alignment within the clusters of schools and seek operational efficiencies to more aggressively compete in these regions.

To summarize, we are very excited, we're optimistic, and we're also encouraged by the realignment of our leadership in these areas. Our staff and faculty are supportive and we see lots of motivation coming up from the schools as we clarify our vision for the two units and as we position ourselves to better compete in our markets.

On our last call, seven or so weeks ago, I discussed our four key priorities for 2007. And I just wanted to reiterate some of these priorities for you.

Enhancing our recruitment and organization process was one. Number two was redesigning our existing programs and adding new programs to our lineup. The third was taking advantage of our online infrastructure.

And fourth was improving our marketing and branding efforts. I would like to give you a brief update on each one of these priorities.

Regarding the first priority of enhancing our recruitment organization, we've taken a number of steps to address the priority.

First, we've assigned Jim Coons as Vice President of our admissions for the Lincoln Tech Group with specific focus on admissions representative training, Internet admissions, national admissions, and also high school admissions for the destination campuses.

He's done a good job of instituting change over the past eight weeks without upsetting the current admissions processes.

His experience in automotive operations over the past 14 years as a Director of Admissions, a campus director, and a group vice president will aid tremendously in our strength in automotive and skilled trades presence in both local and national markets.

We continue to manage this plan forward and we're encouraged for the second half of the year.

Second, we continue to advance various aspects of our financial aid packaging with the end goal of increasing students' comfort levels with their financing options. We're also taking steps to secure a commitment from students at an earlier stage.

We're encouraged by our high school enrollment volume, and we're tracking financial aid packaging and housing plans to ensure students are taking steps toward starting school in the third quarter.

As of March 31, financial aid packaging is well ahead of the same time last year, and housing deposits are also tracking ahead of last year as well.

These figures keep us optimistic for a good second half high school start. We feel that we are now in a stronger position than last year as we approach that all important third quarter high school season.

Third, we're managing our Internet business more closely. We're working with our ten Lincoln Tech campus operations and admissions managers to position their sales departments to better handle all leads and specifically Internet leads.

As these inquiries come into the campus, they will be managed by a combination of telesales and interview processes to best suit the campus and the volumes of Internet leads they're currently receiving and expected to receive in current months.

Fourth, our national recruitment effort continues and we're in the process of adding telesales reps to increase the volumes of outbound calls necessary to reach the high volumes of leads around the country from areas where we do not have a physical presence.

We also continue to manage our plans in the area of military recruitment, as mentioned in the last call.

We continue to build our military relationship with the Hire A Hero program and have begun enrolling veterans in both ground and online programs. We feel that this program will provide a reasonable flow of incoming students.

However, more importantly, it will position Lincoln as a trusted partner to all military branches for future partnership and recruitment opportunities.

Regarding our second priority of redesigning existing programs and adding programs to our lineup, we're continuing to build and replicate our programs according to our plan.

Our enhanced organizational structure gives us the right framework to integrate these programs. Some examples of the programs that we're in the process of developing and are replicating include a series of new IT programs.

Additionally, we're developing revised allied health programs for efficient delivery, an ADA standard dental program, baking and pastry programs for culinary, replicating cosmetology, adding advanced medical coding and billing, nursing, electrician, and welding programs, which will be added to our school.

We've launched an internal process and structure between our corporate education and regulatory teams to producer higher volumes of program applications. Last month, we completed and submitted over 80 program applications for various program versions, campuses, and states.

Regarding our third priority of advancing the online division, we continue to work on our long-range plan.

Online program delivery has been a learning and a developmental process for our organization that is really poised to pick up steam. As we mentioned on the last call, we'll begin to show advancements in the second half of the year.

We spent the past 18 months building an online platform that is fully web-based, which also has great administrative functionality, and is fully customizable. It is very user friendly and provides our students with interactive courses using audio, flash, and simulations to advance their learning.

We currently are tracking online students as an aggregate of full online and a [grade] completer which together amount to our online population.

We're tracking at equal numbers of each at this point at our program's launch. We anticipate meeting our expected online student goal at the end of 2007 and also anticipate being approximately halfway to the goal at the end of the second quarter.

We are limited in online programs available for recruitment at this time. However, additional fully online programs will be added this quarter following various delays of the accrediting commission.

In addition, we will have programs in the approved, the actual regulatory approval process that will be added in subsequent quarters, giving us the product lineup necessary to achieve our year-end goals.

Program approvals in coding and billing, advanced coding and billing, and business administration are expected in quarter two, as well as our degree completer programs for automotive and skilled trade programs.

In quarters three and four, we anticipate approvals for fully online graphic design, network communications, information systems, and construction management programs. Program development and approval delays have temporarily slowed some of our progress.

However, we're confident that we've built the right framework, and once our programs reach full approval, we'll see substantial and long-range online growth for Lincoln.

Regarding our fourth priority, which relates to improving our marketing and branding efforts, we're excited about the prospects of our approach considering the formation of our new operational units.

Piper Jameson, our Chief Marketing Officer, has divided her team by operational unit to focus on the needs of the specific disciplines.

We feel that the new units will allow us to design and promote creative campaigns to achieve our aforementioned goals, have better competitive positioning, advertising of our competitive advantage, and ultimately gaining market share on both sides of the business.

As mentioned, the main phase of our re-branding effort has been completed, and we've seen few interruptions. In most markets, the Lincoln school name has been readily accepted where introduced.

With this said, there is evidence of some brand confusion in our Philadelphia market. We've been offering automotive training there for 40 years under the Lincoln Tech brand, and that school is now joined in close proximity by three new Lincoln schools, offering non-automotive programs.

We feel that the process of re-branding the Lincoln name and reeducating the market to the variety of Lincoln school types will take a little longer in this region.

To quantify the impact that we felt, of the 5% company-wide same-school year-over-year shortfall and start that Dave mentioned earlier, 70% came from the three non-auto schools in this geographic cluster.

Consequently, we're launching additional re-branding efforts in the Philadelphia region and they'll continue until we feel the market is adequately educated about our schools and our offerings.

Also related to the marketing and branding priority is the development of our new Lincoln website.

We're encouraged by our partnership with iCrossing, a website development and search optimization company, to build a site which will include distinct behavioral profiles of our student demographics embedded in the functioning of the site.

Prototype pages will be developed in the next 60 days with the site scheduled to launch in late July.

As you can see from my comments, we've moved forward very aggressively in organizing our operations and implementing our priority initiatives, and I am pleased with the progress we're making. We're facilitating reasonable and sensible changes where necessary and we're very conscious of avoiding interruptions to our key sales and operational processes.

And now, I'd like to turn the call over to Cesar for the financial review.

Thank you, Shaun, and good morning, everyone. Revenue for the first quarter of 2007 increased by $2.6 million, or 3.5%, to $78.1 million in the first quarter of 2007 from $75.5 million from the comparable period in 2006.

Included in this increase is approximately $4.3 million from the acquisition of the New England Institute of Technology at Palm Beach.

On the same-school basis, our revenues declined 2.2% as compared to the quarter ended March 31, 2006.

The decrease in revenue for the quarter is attributable to a 7.2% decline in average student population, which decreased on a same-school basis to 16,409 students for the quarter ended March 31, 2007 from 17,676 students for the quarter ended March 31, 2006.

Including Florida, our average undergraduate student enrollment decreased by 1.5% to 17,411.

Our operating loss for the first quarter of 2007 was $2.4 million, which represented a $7.1 million decrease from operating income of $4.7 million for the first quarter of 2006.

The reduction in operating income is due to a lower student population on January 1, 2007 as compared to January 1, 2006, coupled with higher fixed costs.

As of January 1, 2007, our enrollment was 17,161 students as compared to 17,602 students on January 1, 2006. The January 1, 2007 population includes 845 students attributable to our acquisition in Florida.

Our educational services and facilities expenses for the quarter ended March 31, 2007 were $35.8 million, representing an increase of $3.7 million, or 11.2%, as compared to $32.1 million for the quarter ended March 31, 2006. The acquisition of Florida resulted in $1.9 million of this increase.

The remainder of the increase in educational service and facilities was due to one, instructional expenses which increased by $200,000 or 1.3%, as compared to the quarter ended March 31, 2006 due to yearly compensation increases, and two, facilities expenses which increased approximately $1.4 million over the same quarter in 2006.

Approximately $500,000 of the increase in facilities expenses is due to additional square footage of some of our facilities and higher utility, insurance, and property taxes. The remainder of the increase is attributable to repairs and maintenance expenses at one of our facilities.

For the quarter ended March 31, 2007, repairs and maintenance expenses increased $800,000 as compared to the quarter ended March 31, 2006, as I previously stated, primarily due to higher-than-normal repairs and maintenance expenses at one of our campuses.

Overall, educational service and facility expenses as a percentage of revenues increased to 45.7% for the first quarter of 2007 from 42.6% for the same period in 2006.

Our selling, general, and administrative expenses for the quarter ended March 31, 2007 were $44.7 million, representing an increase of $6 million, or 15.7%, as compared to $38.7 million for the quarter ended March 31, 2006. The acquisition of Florida resulted in $2 million of this increase.

The remainder of the increase in our selling, general, and administrative expenses was due to one, a $1.4-million, or 8.6%, increase in sales and marketing expenses, due to additional admissions representatives hired during the fourth quarter of 2006 and due to additional costs incurred in student recruiting and our re-branding initiative, and two, a $2.5-million, or 3.3%, increase in administrative expenses for the quarter ended March 31, 2007 from the quarter ended March 31, 2006.

This increase in administrative expenses, approximately $1.9 million is attributable to increases in compensation and benefits, and $500,000 is due to higher bad debt expense.

For the quarter ended March 31, 2007, our bad debt expense was 4.7% as compared to 4.2% for the same quarter in 2006. This increase is primarily due to higher accounts receivable balances at March 31, 2007 as compared to March 31, 2006.

Accounts receivable on March 31, 2007 includes five new campuses that did not exist in the prior period, our two Euphoria, our two Florida campuses, as well as our new Queens, New York campus.

As a percentage of revenue, sales and general and administrative expenses for the first quarter of 2007 increased to [67.3%] from 51.1% in 2006.

As a result of the above, our operating margin for the first quarter of 2007 decreased to a negative 3% from 6.3% in the first quarter of 2006.

Net loss for the first quarter of 2007 was $1.6 million, or $0.06 per share, as compared to net income of $2.8 million, or $0.11 per diluted share, for the comparable period in 2006.

Earnings per share includes a charge of $0.01 per share for the first quarter of 2007 and 2006, respectively, resulting from our use of the fair value method of accounting for stock-based compensation.

Loss per share for the three months ended March 31, 2007 also includes the impact of $0.01 per share incurred in connection with higher-than-normal repairs and maintenance expenses at one of our campuses.

Now turning to our balance sheet, at March 31, 2007, we had $4.7 million in cash and cash equivalents compared to $6.5 million at December 31, 2006. In order to meet our working capital needs, in March 2007, we borrowed $13 million under our credit facility at an interest rate of 6.32%.

At March 31, 2007, our stockholders equity was $155.5 million compared to $151.8 million at December 31, 2006 with a decrease resulting from the net loss for the period.

As far as enrollments and starts metrics, as Dave mentioned, average student enrollments for the three months ended March 31, 2007 were 17,411 students, representing a decrease of 1.5% from the three months ended March 31, 2006.

The acquisition of Florida accounted for 1,002 of the average student enrollment for the quarter ended March 31, 2007.

On a same-school basis, average student enrollment declined 7.2% for the three months ended March 31, 2007 from the same period in 2006.

Starts for the first quarter of 2007 of 5,360 were essentially flat with starts of 5,394 in the first quarter of 2006.

Starts for the first quarter of 2007 include 237 students from our acquisition of Florida. On a same-school basis, starts decreased by 5% from the same period last year.

And finally, with respect to guidance, with regard to guidance, as Dave stated, 2007 will be a rebuilding year for our company and we are confident that the initiatives that we have undertaken will produce positive results as we enter the second half of '07.

As a result, at this point in time, we are comfortable with our second quarter and full-year guidance we introduced during our 2006 fourth quarter call. We continue to expect the following -- for the second quarter of 2007, revenues of $76 million to $79 million and EPS to break even.

The balance of revenues and earnings will occur in the second half of the year.

For the full year 2007, revenue of $340 million to $350 million, or approximately 5.7% to 8.8% above 2006, with EPS of $0.62 to $0.68, representing diluted EPS growth of 3.3% to 13.3% over 2006.

And with that, I'll turn the call back over to Dave.

Okay. Thanks, Cesar. To sum up, while we continue to operate in a challenging environment, our first quarter results were in line with our expectations, and I'm encouraged by the high school buildup to date for enrollment in late second quarter and our prime start, which occurs the third quarter.

Finally, the recent organizational realignment that Shaun outlined gives us additional confidence in our overall outlook for the year.

And now, we'd be very happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Sara Gubins with Merrill Lynch. Please proceed.

Hi. Good morning. Could you talk a bit about the overall environment in terms of lead flow, perspective student interest, and any differences that you're seeing between automotive and the other programs like healthcare?

Sure. I'll start that one then I think Shaun could probably follow up. Overall, our lead flow has, for the first quarter, was higher than the same period last year. However, you know, that's largely driven by the increase in the mix change between TV and web.

As far as the, how it varies by program, I mean, we continue to be very encouraged by interest in LPN programs and culinary and the general skilled trades programs.

Depending on the particular markets, we've had some challenges, continue to see some challenges on the media side with automotive leads, although we're in the process of rolling out new creative and advertising.

So we're encouraged as we look forward to the second quarter and the balance of the year. I guess I'll pass it over to Shaun, if you want to add any comments?

I think you've got it. The environment, although we mention it challenging, it doesn't really preclude our growth.

I think it forces us to be smarter in how we approach students, knowing that they've got competing interests, one of them which is work. But we're confident. We're confident in our ability to generate leads.

You know, year over year, I think our lead flow is stable, our staffing is adequate, our management and the new structure, and we've been able to pinpoint some of those issues that I think are going to help us negotiate the environment. One is working with the Internet leads which have increased. And so, that, I think, really supports our confidence.

Great. And then, just as a follow up to that, I know that you're expecting significant improvement in terms of enrollments and starts in the second half. Given the seasonal trends of the business, is there really any reason to expect improved enrollment growth trends in the second quarter of this year?

I guess we're not expecting a huge increase in second quarter starts, year over year.

However, we do expect to see the benefit of an early high school start, particularly in the latter part of the second quarter. So I think that's what gives us confidence plus the fact that we're continuing to rollout new programs.

Criminal justice, for one, is rolling out across a number of campuses and is building, the enrollment starts building nicely.

We've got programs that we started, for example, in Grand Prairie, Texas in collision repair and other programs which continue to build up nicely even in the second quarter, if you will.

So I think we're, we feel pretty comfortable about the second quarter, particularly the benefit that we expect to see from the high school start in June.

Great, thanks. I'll get back into the queue.

Your next question comes from the line of Howard Block with Banc of America Securities. Please proceed.

Hi. This is Aramie Dimm in for Howard. Just a quick question on what you just mentioned on enrollments ramping nicely at the Grand Prairie location. Are you able to comment a little bit more or at all quantify those?

No, I'm not going to get into the particular numbers, but I will say, as you probably recall, we added 101,000 square feet there last summer.

And as the quarters then progressed since then and management has been much more focused on running the school and rolling out these new programs, we've seen very good progress, not only in skilled trades, but also in collision repair, and auto, for that matter.

Great. And just quickly, are you able to offer any comments on current capacity utilization and how this has trended over the past few quarters?

You know, overall, at the end of March, we're at, just in excess of 50% of the total company and that varies, obviously, depending on the particular schools.

But splitting that up between auto and -- I guess, just to tie them with what Shaun was talking about earlier in terms of the Lincoln Tech Group and the ten automotive schools, at this point, which is certainly a low point in the year because it's in advance of the high prime of the high school start this summer, we're at about 56%, 57% of capacity in those schools.

Great. And so, we might also expect excess capacity to cause an increase in educational services expense for the second quarter, as well?

I don't imagine that that would be any different in the second quarter. In fact, we should see some benefit, as I mentioned a couple of minutes ago, from the high school starts in some of the automotive schools at the end of the second quarter.

Great. Thank you.

You're welcome.

Your next question comes from the line of Gary Bisbee with Lehman Brothers. Please proceed.

Hi, guys. Good morning.

Good morning, Gary.

You know, I guess a couple questions, if I could. I'm trying to gauge where exactly the level of confidence in the second half term is coming from. And I heard a couple comments from you.

You said that deposits on housing and applications and a couple things for some of the kids out of high school were up, year over year. Are you willing to quantify that and/or just provide any other color in terms of where this confidence is, or what it's based on?

Yes, I'd be happy to. I don't think it's really all that helpful to give you percentages of housing deposits or whatever, but I will say that, and we mentioned this on the last call, as a result of our disappointing start last summer, the summer of '06, we did a number of things.

One, we beefed up our admissions staff so that even if the environment didn't change that we would see an improvement, year over year. So that was accomplished.

We have been packaging our students in advance of even April 15 this year, which in the past, you know, we would wait for tax returns.

Now, we're doing it based on estimates and we've seen a significant, based on how we look at it, a significant increase in those students that are packaged, year over year. And again, a leading indicator, certainly, are the housing deposits and just overall managing the process.

We've got a number of key people, some very senior people in the company, including Larry Brown, who's been championing this and working very close with the sales teams in the various schools, and just keeping everybody totally focused on. Not that they haven't been in prior years, but we're trying to remove any chance of a disappointment.

So overall, we feel very good about where we are right now, but I would say we're cautiously optimistic. I wouldn't want to, and of course, that ties in with the fact that we're maintaining the overall guidance for the year.

Yes, alright. And specific to the high schools, because it seems like you're not just, even in your curriculum areas, if you look across this whole industry, last fall was a really challenging time in terms of tracking the kids out of high school. Is there anything you attribute that to?

Or what are you doing in terms of how you're selling or pitching or presenting to high school students to try to get back to the trends there were a few years ago where you had a lot of them wanting to go into these auto programs?

Well, first of all, it's not -- obviously, auto is a big part of it, but I think when they have other options, you know, staying on a job or taking a job as opposed to recognizing the opportunity, the value proposition in starting school, what we're trying to do is remove any question.

And I think that's where getting to the student early and getting them enrolled and getting them packaged gives us, and others who are doing the same thing, a higher degree of confidence that they're going to come to school in the summer.

And again, so many of the students shopping the Internet and so on. It's not like, at least when I got into the business, if they came to your school, you made contact with them.

If you handled the rest of it right and they liked your school and everything else, they more than likely were going to come to, let's say, Lincoln, in this case. Now those other options are out there until they basically get in the car and come to your school.

So we're trying to not only get them packaged, get the enrollment, the whole process completed, but also conduct additional, as we call them, stitching events, and make sure that the buying committee and everyone comes to the campus and feels secure about it.

I think that's the biggest difference that we see, year over year, and I would assume that others, from what we could see, are doing the same thing.

Okay, thanks. And just one last clean up one. I don't know that I heard you give the percent of enrollments in associate programs this quarter.

I think it's 17.4%. Is that right, Cesar?

Yes, 17.4% versus 13.8% for the first quarter of '06.

And you know what? I just thought of one more. Can you give us a sense in terms of how early the high school -- I know a lot of the working results, they don't necessarily sign up that early.

But with the high school kids, historically and what you've seen this year or last year, how many months ahead of their start are they likely to enroll?

Is it early enough such that you've got a pretty good read into how the July start may work? Or is it still we need a couple more months to have a real good sense?

Well, they begin to enroll as early as October for the, let's say October of '06 for the earliest start dates that we have, which would be in June, but principally for the third quarter.

And those are the students that, obviously, as soon as we can, we get them financial aid packaged in the early spring. We begin to gain confidence.

But to be honest with you, I mean, the enrollment process will continue right on through into the third quarter.

But based on the buildup that we have right now and the trends that we're seeing, that gives us the confidence that if we continue to do what we're doing, we should be able to stay on plan and achieve the numbers that we have in our plan.

Great. Thanks for all the color.

You're welcome.

And your next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Thank you so much. My first question is focused on your balance sheet.

If you can give us, just to remind us what your debt capacity is and also what you're looking for in capital expenditures, and do you think the company will generate positive free cash flow this year, based on your guidance?

Our debt capacity is we have $100-million revolver. As of March 31, we had drawn down $13 million on that revolver, so we have plenty of capacity.

As far as capital expenditures, I think we provided the Street before -- we anticipate that we will spend between 10% to 13% of revenues this year on CapEx and that's usually broken out between 4% to 4.5% maintenance, with the rest growth. We do anticipate there will be free cash flow positive this year.

Okay, great. That's helpful. Moving back on to some of the newer programs you're going into, and the LPN program sounds really exciting, and I don't want to leap ahead of that, but would it be possible, or how difficult would it be to get RN programs on top of that?

Well, I'm certainly, Jeff, I'm certainly not an expert in this area but I do know that that's one of the objectives is really to, once we have this LPN program, to build a bridge program to the RN program. So that's something that our education people are working on as we speak. But unless, Shaun, you want to add anything to that?

No, I was just going to add that it probably wouldn't be a 2007 proposition. It's a longer-term objective for us, but we're definitely looking that way.

Okay. I realized that. I just wanted to see, again, in terms of the process, if there was anything out of the ordinary that has to be done.

Yes, it's more a function of time. But what really is exciting, which just to repeat some of what I said earlier, the fact that we now have this full accreditation from the Nursing Board.

We will be able to move a lot faster in New Jersey, plus buildup the enrollment in the program that we did acquire, which I didn't mention earlier. We will be relocating to our Mount Laurel campus, probably in the August timeframe.

So, typically, as you probably know, when you start one of these LPN programs up from scratch, you're only allowed, let's say, 24 slots or whatever the first year or so. And then, you kind of have to prove yourself.

Here, we have the ability to be able to move faster and we're going to hopefully use the same model to move into other states.

Right. That's great to hear. If I could sneak in one more, I think, Cesar, in your prepared remarks, you talked about some higher-than-normal repairs in maintenance expense at one of the schools. Can we get a little bit more color on that? And of all of that, is that all done already?

It's pretty much done. It happened to be our national campuses where we have some dorms. We had to do some repairs there. That's pretty much behind us. I mean, it might be a little drag, but that's pretty much behind us.

So there wasn't anything, you know, weather related with all the abnormal weather we had last quarter?

No, no.

Okay, great. Thanks, again.

Your next question comes from the line of Amy Junker with Robert W. Baird. Please proceed.

Good morning. Just a quick question about the impact of the new branding initiative versus the additional of reps that you added last quarter. You kind of grouped those together. Can you break that out and say what each of those impacted? Because I thought the branding initiative, we weren't going to see any impact in this quarter.

Well, when we're talking about the branding initiative, we're really talking about the marketing dollars that are part of our budget to continue to reintroduce the brand, not necessarily the costs that were associated with launching the brand.

So it's really, I mean, those will be, going forward, as we continue to build not only our local brand but our national brand presence, so those are just additional dollars in marketing, in other words, that we spend for brand awareness, which is distinct and apart from what we talked about last quarter, which is really more infrastructure and write-off costs of the old name and those types of things.

Okay, that's helpful. And how many admissions reps did you add in 4Q? And how many does that bring you up to at this point?

We added, for the high school admissions side, we added, as I recall, 18 additional high school reps. And that brings us up to 130, something like that. Yes, I'm going to say 130, Amy.

So are you pretty well set at this point? Or do you feel like you're at a good number? Are there more adds that are needed?

No, we feel pretty comfortable with that unless there's some turnover.

And then, last question for me is could you just give us an update on your search for a VP of Recruitment? You had talked about that last quarter.

Yes, that process continues, Amy. We, if you look at the division of our business, we did hire a VP of Admissions for the Lincoln Tech Group and we wanted somebody that had specific automotive experience. And so, we feel very comfortable there.

We continue to search for a VP of Admission and Sales for either the broader organization or the Lincoln Education side, as well, and that search will continue until we find the right person.

Okay, great. Thanks.

Your next question comes from the line of Trace Urdan with Signal Hill. Please proceed.

Hey, good morning. I wonder for starters if you all could comment on what sort of show rate you experienced for starts in the quarter?

Shaun?

The actual show rate, if you compare it to last year, we were pretty stable. We actually had a little better show rate from enrollment to start. I think where we struggled was in our lead to enrollment conversion. But as far as show rate, we did well compared to last year.

Okay. Any nuance there by program area? Is it relatively stronger or weaker for automotive, for instance?

No, you know, it was over in all areas and by lead type, as well.

Okay, great. And then, the bad debt has creeped up, not dramatically, but it's edged up over the last couple of years. I'm wondering to what extent that has to do with sort of a concentration in new program areas or perhaps some of the new schools that you've acquired, having a different profile.

Could you comment on that?

Yes. The way our bad debt methodology works is basically on historical analysis of what our active students have done in the past, how many interrupted, how many bad debts, et cetera.

So to the extent that our receivables continue to grow because we add new campuses, and I think even though when I said in my prepared remarks that we had five new campuses including two new Euphorias, we really didn't get -- while we had Euphorias in March 31, '06, their receivables were limited because there was no [Title 4].

So as we continue to expand our receivables, our bad debt is basically a calculation based on total receivables. And as those numbers grow, so does our bad debt percentage.

Hopefully, though, our hope is to continue to keep it somewhere around the 4.7%, which is, I think, last year, if you recall, we were probably somewhere around the 5.7% range.

Okay. So just a follow up, then does that mean that the Euphoria additional actually helped the bad debt number slightly?

No. Euphoria would have --

Hurt it because there's not Title 4 there.

No. Actually, well -- by bringing Title 4, what we did is we opened up the school to new students.

However, now these students, wherein the past, would have paid, been on a payment plan or paid cash up front, are now utilizing Title 4 to finance more of their education which increases our receivables.

So because our receivables go up, we, on average, reserve, let's say, I'll fill out a number, but 25% or so our gross receivable filled because Euphoria now has more receivables than they had in the past. That actually hurts the bad debt.

Okay. Alright. Thanks, Cesar. The last question then, you talked a lot about the online plans, the plan approvals for the remaining quarters of the year.

I'm wondering to what extent you have online starts baked into your second half numbers and if you could just sort of comment on how much risk there is around those approvals coming in as planned and those programs starting up in the second half of the year.

Yes, there's always risks for those approvals. As I mentioned in my remarks, this has been a developmental process for us.

However, we have three approvals expected this quarter in addition to our West Palm degree completer programs for our automotive and skilled trade students which will put us on track for our year-end numbers.

In addition to that, we have IT and graphic design programs coming in the third and fourth quarter, which we've made significant progress on. So at this point and time, we feel confident with the numbers that are baked into our budget, that we will achieve them.

But fair to say that if for some reason an approval is delayed, that could cause you to need to adjust your numbers?

At this point, I would say no. With the approvals that we will have in the second quarter, I mean, we'll actually shift our effort. If the full online approval does not come through in the second or third quarter, I mean, we'll shift our effort to focus primarily on our degree completer, but we intend on having the approach to make the number by the end of the year.

Okay, that's helpful. Thank you.

(OPERATOR INSTRUCTIONS). Your next question is a follow up from the line of Sara Gubins with Merrill Lynch. Please proceed.

Hi, thank you. Revenue per student was more than, it looks like it was up about 5%, which was above what you were looking for.

And I'm wondering is that simply a function of increased tuition? Or was there any mix shift that would cause that to increase more?

Well, revenue per student, my numbers actually show that it declined in the fourth quarter. I do revenue per average student, and in the fourth quarter of 2006 was $4,571 per student compared to $4,488 per student in the first quarter of '07.

I'm sorry. I mean year-over-year growth was 5%.

Well, yes. That would be the impact of tuition increases.

Okay. I think you were doing a tuition increase in April of this year.

That's correct, April.

When did you do the one, last year?

Last year, they were staggered throughout the year. This year, we made them all pretty much, not all schools -- some schools did not get a tuition increase because we had increased tuition significantly the year before, but most schools this year got a tuition increase on April 1st.

Last year, it depended on the school, but they were staggered throughout the year. Sometimes, we did two increases per year. So instead of 3% at one time, it would have been 1.5% and 1.5% or 2% and 2%. But it was staggered by school. There was not a uniform increase.

Okay. So are you expecting 5% tuition, or average revenue per student increases, throughout the rest of the year?

I think 5% is probably a little aggressive. We, on average, increase from 3% to 5%, but I think closer to the 3%, that 3.5% would be the average versus the 5%.

Okay, great. And then, I just had a couple of clarification questions. I think on the last call, you had talked about online expecting 600 students by year-end. Is that what you're still expecting?

We are.

Yes.

Okay, great. And then, Dave, you mentioned that Queens had 370 students, and I didn't catch what that was at the end of the first quarter, or at the end of 2006.

That was the first one. That was the end of March. End of the first quarter, yes.

Okay, great. And then, last question, is there -- could you describe any seasonality to the Palm Beach enrollment or population? I'm wondering if that 1,000 number that you reported is, varies all that much for the rest of the year.

Palm Beach does not tend to be as seasonal as the rest of our businesses. I guess everybody likes the warm weather. It doesn't have the same, I mean, there's always a little bump in the third quarter because, traditionally, you have the high school market.

And the high school market is always a seasonal market. But it probably has less of a seasonality. While it does have some, it probably has less of a seasonality impact than some of our other schools.

Okay, great. Thank you very much.

You're welcome.

And at this time, there are no further questions in the queue. I would now like to turn the call over to management for closing remarks.

Okay, thank you very much. Thanks, everyone, for joining us today for the update on the first quarter, and we look forward to bringing you up to date on our progress on our next call in early August. Thanks, everyone. Good day.

Ladies and gentlemen, that concludes the presentation. You may now disconnect, and have a great day.