Lincoln Educational Services Corp (LINC) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the second quarter 2007 Lincoln Educational Services Earnings Conference Call.

At this time, all participants are in a listen-only mode. We will conduct a question and answer session later during the call. We ask that you please limit your questions to no more than one and one follow up.

This conference is being webcast. And an audio version of the call will be available on the Company's website for 90 days. As a reminder, this conference is being recorded for replay purposes.

Before we begin today's call, the Company would like to remind everyone that this conference may contain 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 risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements based upon 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, Angeline. Good morning, everyone. And welcome to the Lincoln Educational Services second quarter 2007 earnings conference 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 operations. And Cesar will provide a detailed review of our second quarter 2007 financial results. And then we'll open the call for the Q&A process.

Let me begin with our financial and operating results. As previously reported on August 2nd, 2007, our Board of Directors on July 31, 2007, approved a plan to cease operations at three of our non-auto campuses.

Our Lincoln Technical Institution location in Plymouth Meeting, PA, and our Lincoln College of Technology locations in Norcross, GA, and Henderson, NV.

As a result of this decision, during the quarter, the Company incurred a non-cash charge of $0.07 per share, or a pre-tax charge of $3 million, to write down the value of goodwill and other long-term assets associated with these campuses to their estimated fair value.

We believe that these campuses offered effective and valuable academic programs, however given the current adverse local market conditions and competitive environment, the campuses' financial results have not achieved our expectations.

While it's possible to improve the operations at these campuses with additional investments, we believe that this capital will yield better returns invested elsewhere. Accordingly, we have concluded that the continued operation of these campuses is inconsistent with our strategic goals.

We are in the process of evaluating what additional charges will be incurred due to the ceasing of operations at these campuses.

We expect to incur additional costs in the future, which have yet to be quantified, for example, retention benefits expected to be paid to employees, as well as other costs, including lease termination costs and early contracts termination costs.

We are currently evaluating the amount and timing of the charges that will be recorded. But at this time the Company cannot reasonably estimate the amount of such charges.

We expect to classify the operations of these campuses as discontinued operations in our consolidated financial statements once we no longer have any continuing involvement and all operations have ceased.

Now turning to our results, our second quarter revenue grossed 1.2% to $76.3 million. Our revenue growth in the quarter was negatively impacted by lower carrying population from the first quarter of this year.

Excluding the effect of our acquisition of New England Institute of Technology in Palm Beach in May of 2006, revenue declined by 1.6%.

While we incurred a net loss for the quarter of $0.07 per share on an adjusted basis, net income for the second quarter was breakeven, compared to net income of $966,000 or $0.04 per share for the same quarter a year ago.

In terms of average enrollment, second quarter 2007 enrollment was 16,905 students, a 2.7% decrease versus the same period last year. On a same-school basis, we were down 5.1%.

Starts for the second quarter of 4,907 were up 3.2% compared to the second quarter of 2006. On a same-school basis, starts were 1.8% below the second quarter of 2006.

However, I am pleased to report that the starts trended favorably in the second quarter. And in June, the first month of our important high school season, starts were up 14% over prior year.

This favorable trend has continued into July with total starts up approximately 23% over the same month a year ago.

While we don't expect this rate of increase to be sustained in future months, it does assure an overall successful high school start in 2007 and momentum as we begin the second half of the year.

Overall, our second quarter operating and financial results were in line with our guidance, even though there has been pressure on our revenues due to slower than anticipated growth during the first half of the year.

In light of the announcement we made on August 2, 2007, to cease operations at three of our schools, Cesar will provide additional color in his prepared remarks on how this decision will impact our yearly guidance.

As we discussed on our last conference 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.

The overall environment remains challenging as we continue to experience the impact of a strong labor market, a difficult recruiting environment, and increased competition.

However, despite these challenges, we are beginning to see the benefits of the various operational initiatives put in place over the past several quarters.

As we previously noted, we have taken a number of steps to improve the effectiveness of our marketing and recruiting processes.

In March, we realigned our corporate structure into two distinct business units, the Lincoln Tech Group and the Lincoln Education Group, in order to improve the efficiency of our internal operations and better manage our diverse program offerings.

We also adjusted components of our financial aid process toward a goal of increasing students' comfort with their financing and securing their commitment at an earlier stage. Our concerted plan to enhance operating execution has already begun to produce tangible results.

As I mentioned in my earlier remarks, as the second quarter progressed, our same-school starts steadily improved, culminating a 14% growth in year-over-year starts in June.

We are also encouraged by our third quarter starts to date, which as mentioned in earlier calls, represents 40% of our annual starts.

Based on our results to date in the quarter, many of the initiatives we implemented this year to increase our year-over-year high school starts have proven effective.

And while it is still early in the quarter, we are encouraged by the start growth we've experienced in the month of June and into July.

As a result of these early trends, we remain optimistic that we will return to organic growth during the second half of the year. Shaun will provide a further update on our operating progress during his prepared remarks.

On our second quarter conference call last year, we outlined a number of initiatives aimed at increasing the growth potential of our Company.

Today, I'd like to briefly update you on our progress on several of these initiatives. First, our Florida acquisition closed midway through the second quarter of last year.

We've since leveraged the expertise gained from our Euphoria acquisition to improve the cosmetology program in Florida. And we are upgrading and expanding the school's auto program.

In addition, as we have previously discussed, our Florida campus provides us with the ability to develop multiple associate and bachelors degree programs.

This morning, I'm pleased to announce that our bachelor program in culinary management at our Florida Culinary Institute has been granted unconditional five-year accreditation from the American Culinary Federation Foundation.

The foundation has spent four years expanding its scope of accreditation to the bachelor level. And our program is the first bachelor program to be recognized.

Last July, we also launched the initial phase of our rebranding campaign. As you recall, we completed our rebranding initiative in February, well ahead of our initial schedule.

We consolidated 29 campuses under the Lincoln umbrella with eight campuses now operating as Lincoln College of Technology and 21 as Lincoln Technical Institute.

As we previously announced, this rebranding caused some confusion, especially in one of our markets, which contributed to the shortfall we experienced our first and second quarter starts.

Today, I'm happy to announce that as a result of the additional marketing effort we placed on that market during the second quarter through the reintroduction of the brand, this market has rebounded nicely. And we have experienced positive results in both June and July.

At Grand Prairie, we opened the doors to our expanded 101,000-square-foot facility in July of last year. Since then, we've introduced collision repair and expanded our skill trades offerings. These programs have ramped up quickly. And we expect continued growth over the balance of the year.

Our Queens automotive campus opened in March of last year. The campus turned profitable during the fourth quarter of 2006. And we currently have an enrollment of 359 students. The campus continues to generate healthy interest from local auto dealerships. And we expect enrollment to continue to grow throughout 2007.

At our Lincoln Rhode Island campus, we have added 12,000 square feet and are set to launch the cosmetology program in the third quarter, which was replicated from Euphoria Institute.

At our Columbia Maryland campus, we have launched our culinary program. We started our first class in July. We've also continued to make progress in expanding our associate degree programs. These programs are now offered in 18 of our on-ground campuses as well as online campuses.

In addition, our total enrollment in these programs was 19.3% at the end of the second quarter, compared to 17.6% at the same time last year. We expect to continue to build our associate degree program primarily through our online division.

Over the past year, we've also introduced new programs, such as criminal justice, dental assistant, and continue to replicate growing programs across our campus network with a goal of driving increased capacity utilization.

I would now like to update you on our progress since acquiring our licensed practical nursing program from Harrison Career Institute in New Jersey in March of this year. The curriculum has been approved by the New Jersey Board of Nursing and the accrediting commission ACCSET.

Therefore, we are set to transfer approximately 70 students, including the students assumed from Harrison to our Mount Laurel New Jersey campus. We currently expect this transfer to occur later this month.

In addition this morning, we are pleased to report that we have received approval for satellite locations of the LPN program in New Jersey.

As a result, we currently expect to implement the LPN program at one or more of our New Jersey locations in 2007, further capitalizing on this high-demand segment of the health services vertical.

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

Moreover, employment of LPNs is expected to grow about as fast as average for all occupations through 2014 in response to the long-term care needs of an increasing elderly population and the general growth of healthcare services.

Consequently, employment of LPNs in most healthcare industries outside the traditional hospital setting is projected to grow faster than average.

So to summarize, the markets in which we operate remain challenging. However, we are executing better. And we expect to see a return to organic growth in the second half of the year. We've established a solid presence in five key verticals.

And student interest in our programs remains high. In addition, we continue to see strong demand for our graduates.

Finally, on our first quarter earnings call, we said 2007 will be a rebuilding period for Lincoln as we focus on strengthening our high school recruitment efforts and fully servicing the benefits of the strategic initiatives we launched during the past year. I believe that we're well on our way.

And with that said, let me turn the call over to Shaun for review of operations.

Thanks, Dave. And good morning, everyone.

Today, I'll be giving you an update on our operational realignment, our second quarter sales, our high school sales performance, and a brief update on other operational objectives.

As Dave mentioned earlier, we continue to operate in a challenging environment, specifically related to diploma and certificate level technical training.

However, we feel that we're meeting this challenge head on through our ability to execute on a number of our operational objectives, namely the reorganization of our operational structure, managing the high school performance for the year, and our ability to better manage our internet business.

While we foresee no dramatic change to the environment, we're confident that the changes we've made to our organizational alignment have already begun to take hold.

As a reminder, in March, we realigned our Company's operations into the two distinct groups that Dave mentioned earlier, Lincoln Tech and Lincoln Education. This was done to focus our efforts, improve sales effectiveness, and to promote operating efficiencies across our organization.

The Lincoln Tech group is comprised of our primarily automotive and skill trades campuses. These ten schools continue to focus on gaining greater prominence in the field of automotive training and skill trades as well as expanding market share.

High school and national cable advertising have also begun to take traction in growing these schools.

The Lincoln Education Group is comprised of our primarily non-automotive campuses and the online division. These schools offer a diversified group of programs added through the multiple acquisitions we've made over the past several years.

As a result, the focus of this group remains on new programs, improved course delivery, and gaining management efficiencies within our geographic clusters.

Both divisions are headed by seasoned industry executives. Debbie Ramentol, President of the Lincoln Tech Group, and Ed Abrams, President of the Lincoln Education Group, possess over 50 years of collective experience.

Our realignment has allowed us to better focus on areas of our operations that require specific attention in addition to improving our execution in sales, student instruction, and student retention.

It's important to note that the realignment has significantly helped our efforts in high school and adult sales as the two divisions are now managed with specific attention to their unique markets, challenges, and also growth opportunities.

On our first quarter conference call, I discussed our four key priorities for 2007. To reiterate, these priorities include enhancing our recruitment organization on our related processes, redesigning existing programs and adding new programs to our lineup, taking advantage of the online infrastructure we've built by adding programs to it, and improving our marketing and branding efforts.

I'd like to give you a brief update on each of these priorities. We continue to take a number of steps to enhance our recruitment organization.

Our ability to effectively process and finance high school starts, our ability to start students early in the period, and improved internet lead conversions have all contributed to the mid-year successes that Dave mentioned earlier.

Looking specifically at the high school sales process for a minute -- the Lincoln Tech Group of schools account for 80% of our high school starts and also include our four destination campuses.

I'm pleased to report that our high school efforts have produced start growth over prior year at the end of June and have contributed to the 14% year-over-year improvement in June that Dave mentioned earlier.

July starts are also encouraging, giving us confidence that our overall third quarter starts will exceed prior year.

The Lincoln Education Group of schools account for approximately 20% of our high school starts and also demonstrated success within this market with a year-over-year increase in both high school starts and total starts for June and July.

As mentioned in previous calls, we refined various aspects of our high school financial aid packaging process, making it flexible and more effective, which allowed us to package students earlier than in the prior year.

The effort to secure a commitment from students at an earlier stage has benefited in higher June and July starts in the prior year.

We remain encouraged by our high school enrollment and continue tracking our financial aid packaging and housing to insure that students are taking steps toward starting school in the third quarter.

Noteworthy is the performance of our four destination campuses in Nashville, Indianapolis, Grand Prairie, and Denver, which performed well in quarter two and have started out quarter three in a similar fashion.

Our ability to relocate and start larger volumes of students speaks to the effectiveness of our high school packaging and relocation initiatives. All four of our destination campuses are up year over year in both June and July.

Our total Company year-to-date high school effort shows improvement in leads, enrollment volume, and starts contributing to our June and July overall start successes.

Lessons learned in financing, processing destination students, and timely follow up has positioned us for success in the high school market in 2007 and beyond.

While June and July have given us encouraging results, we do not expect the same rate of growth in August and September. We do, however, remain confident that at the end of the high school season in October our efforts will product low double digit year-over-year improvement in total high school starts.

As Dave also mentioned, the recent sales trends that we've noticed give us confidence that we can continue to operate in a challenging environment and the return to positive organic growth in the third quarter. With this said, just as important as high school sales is our ability to improve our internet sales.

As I mentioned on the last call, we initially focused our internet lead improvement plans on our ten Lincoln Tech schools. And we're currently in the process of implementing strategies across all schools and regions.

Incoming internet inquiries are now being managed by a combination of telesales and interview processes that best suit each individual campus depending on their lead volume.

I'm pleased to report that our sales training efforts are progressing well. And our conversion of web leads improved slightly during the second quarter over prior year.

Our national recruitment efforts kicked off in June with internet and national cable ads for our automotive programs. Leads from these efforts will be handled by our sales team housed in Nashville, TN.

You should expect to see Lincoln Automotive advertising on the Speed Network and ESPN2 to begin. The volume of this advertising will increase gradually throughout the year, becoming a stable lead source in 2008.

Sales manpower I should mention remains at levels necessary to achieve our enrollment targets. Our voluntary sales turnover numbers have decreased year over year for the second quarter while we have actually forced more turnover of underperforming reps in the same period.

We feel that revisions to lead distribution processes, representative training, accountability measures, and a change in structure have motivated admissions representatives, cut down their frustration in some cases, and improved voluntary turnover.

We are working with our Vice President of HR to consider new profiling tools to insure that we're identifying the right person for these unique and important positions. This will address our forced turnover statistics, thereby helping improve our overall turnover to great degree.

The second priority is redesigning our existing programs and adding new programs to our lineup. There's no doubt that our operational realignment has better positioned us to both build out our program portfolio and replicate fast-growing, in-demand programs across our footprint. For example, our criminal justice program has already been launched in all planned markets.

As Dave mentioned, we've launched a culinary program on our Columbia Maryland campus and are set to launch cosmetology in Rhode Island.

Additionally, we'll be launching electrician and welding programs in Texas and online business and IT programs. We plan on launching the new IT programs at 16 campuses during the fourth quarter of this year.

Much of our new program and program replication opportunities have come through our acquisitions. However, we've now designed processes, allocated resources, and have individuals dedicated to program development and implementation to aid in the process of 2007 launches and future development for 2008 and 2009.

The acquired programs will continue to give us replication opportunities while we research new certificate, diploma, and degree-level programs. In addition, we will continually revamp existing programs to keep them both efficient and competitive.

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

We've reached our approximate population target for the second quarter and continue to anticipate having 600 students enrolled in our online program by the end of 2007.

Just as a reminder, we currently track online students as an aggregate of full online and degree completer, which together amount to our online population.

Approval for the online business programs are expected in September for October starts. We also have a number of programs in development for online, including network communications and information systems, specializing in security, network support, and Microsoft systems. We expect approval for these online programs in October with anticipated November start.

In addition, graphic design, web design, and computer-aided drafting will go to the accrediting commission in September with anticipated starts in December. Development of online associate and bachelors' degrees and construction management continue with a launch scheduled for late 2007 or early 2008.

As mentioned earlier, this expanded product lineup will help us reach our year end target population. We also anticipate the benefits of increased internet leads for current and new online programs via the launch of our new website.

Regarding our fourth priority, improving marketing and branding efforts, I'm pleased to announce the launch of our new website that can be found at lincolneducationalservices.com or lincolntech.com. The site has been built to optimize internet search processes, maximizing non-paid inquiry flow to the site.

The website replaces multiple sites for each of the previous brands and represents all Lincoln program verticals. The site is built so that search terms will directly lead candidates to the vertical campus or program page of interest.

We've developed new TV commercials and marketing collateral that have begun to launch this quarter. All of these marketing initiatives are aimed at generating incremental lead flow during the third and fourth quarters of this year.

As Dave mentioned, as you also recall, last quarter I discussed issues that we were facing in the Philadelphia market as a result of our rebranding effort.

The rebranding created some confusion in the market, specifically due to Lincoln being perceived as an automotive-only school because of the strong history in that region. There was continued impact in early quarter two affecting April and dragging our quarter two performance down.

We launched additional rebranding efforts in the Philadelphia region in April and May and are happy to report that these issues have been resolved with the lead flow increasing and starts returning to more normal levels in June and July.

Our prominent center city Philadelphia campus that was impacted most significantly has returned to normal start numbers, actually starting a record number of students in June.

I'd also like to make mention of our educational operations, specifically in regards to our student feedback. Our Company-wide student satisfaction scores have improved over 2006. We measure satisfaction using a two-part scale comparing high scores and low scores.

We saw increased satisfaction and decreased low satisfaction scores. This improvement is significant and reflects the health of our organization from the customer's perspective.

In summary, we're pleased with our operational improvement. We remain focused on building a strong operational foundation for the future of our Company. And we're encouraged by the progress made in our initiatives to date. We're still challenged with much to accomplish in this transition year.

However, our teams are motivated, continually developing, and very focused on achieving growth for the Company.

At this point, I'd like to turn the call over to Cesar for the financial review.

Thank you, Shaun. Good morning, everyone. Revenues for the second quarter of 2007 increased by $0.9 million or 1.2%, to $76.3 million from $75.4 million for the comparable period in 2006.

Included in revenue is approximately $4 million from the acquisition of New England Institute of Technology at Palm Beach, or Florida, which represents an increase of $2.1 million over the three months ended June 30, 2006.

On a same-school basis, our revenues declined 1.6% as compared to the quarter ended June 30, 2006.

The decrease in revenue for the quarter was attributable to a 5.1% decline in average student population, which decreased on a same-school basis to 15,994 students for the quarter ended June 30, 2007, from 16,853 students for the quarter ended June 30, 2006.

Including Florida, our average undergraduate student enrollment decreased by 2.7% to 16,905 students.

Our operating loss for the second quarter of 2007 was $2.3 million, which represented a $4.1 million decrease from operating income of $1.8 million for the second quarter of 2006. On an as-adjusted basis, our operating income was $0.7 million.

The reduction in operating income was due to a lower student populations during the three months ended June 30, 2007, as compared to the three months ended June 30, 2006.

Our average population for the second quarter of 2007 was 16,905 students compared to average population of 17,380 students for the second quarter of 2006.

Our educational services and facilities expenses for the quarter ended June 30, 2007, were $34.8 million, representing an increase of $2.2 million, or 6.6%, as compared to $32.6 million for the quarter ended June 30, 2006. The acquisition of Florida resulted in $1 million of this increase.

The remainder of the increase in educational services and facilities expenses was due to, one, books and tool expenses, which increased by $0.3 million, or 10.4%, as compared to the quarter ended June 30, 2006, primarily due to higher tool sales during the period; and two, facilities expenses, which increased by approximately $0.9 million over the same quarter in 2006.

Approximately $0.5 million of the increase in facilities expenses was due to additional square footage at some of our facilities and higher utility, insurance, and property taxes.

The remainder of the increase was attributable to higher repairs and maintenance expense at our facilities, approximately $0.2 million, and increased depreciation expense, approximately $0.2 million over prior year.

As a percentage of revenue, educational services and facilities expenses for the second quarter of 2007 increased to 45.6% from 43.3% in 2006.

Our selling, general, and administrative expenses for the quarter ended June 30, 2007, were $40.9 million, representing a decrease of $0.1 million, or 0.03%, as compared to $41 million for the quarter ended June 30, 2006. Included in the $40.9 million is an increase of $1.3 million related to the acquisition of Florida.

On a same-school basis, selling, general, and administrative expenses decreased by $1.4 million from the comparable period in 2006, due to decreases of $0.2 million in sales expenses, primarily due to delays in replacing sales representatives; a $0.2 million decrease in student services due to lower student population during the quarter versus prior year; and due to a $1 million reduction in marketing and administrative expenses.

The decrease in administrative expenses during the quarter is due to decreased expenses associated with pay incentives and other variable compensation due to lower than anticipated student enrollments during the quarter.

As a percentage of revenue, selling, general, and administrative expenses for the second quarter of 2007 decreased to 53.6% from 54.3% in 2006.

For the quarter ended June 30, 2007, our bad debt expense was 5.6% of revenues as compared to 5.7% for the same quarter in 2006.

As of June 30, 2007, as we've previously stated, we recorded a non-cash charge of approximately $3 million related to impairment of goodwill and other long term assets, due to the ceasing of operations at three of our schools.

This charge consists of $2.1 million and $0.9 million, respectively, to write down goodwill and the value of [lease hold] improvements to the estimated fair values.

As a result of the above, our operating margin for the second quarter of 2007 decreased to a negative 3%, 0.9% on an as-adjusted basis, from 2.4% in the second quarter of 2006.

Net loss for the second quarter of 2007 was $1.7 million, or $0.07 per diluted share, as compared to net income of $1 million, or $0.04 per diluted share, for the comparable period in 2006.

Earnings per share includes a charge of $0.01 per share for the second quarter of 2007 and 2006, respectively, resulting from our use of the fair value method of accounting for stock-based compensation as prescribed by Statement of Financial Accounting Standards 123R Share-Based Payment.

Loss per share for the three and six months ended June 30, 2007, also includes the impact of $0.07 per share incurred in connection with the write down of goodwill and other long-lived assets to estimated fair value in connection with the ceasing of operations at three of our campuses.

Now turning to our balance sheet -- as of June 30, 2007, we had $5.7 million in cash and cash equivalents, compared to $6.5 million at December 31, 2006.

In order to meet our working capital needs, during the second quarter, we borrowed $8.5 million under our credit facility at interest rates ranging from 6.32% to 6.34%. At June 30, 2007, we had $21.5 million outstanding under our credit agreement.

At June 30, 2007, our stockholders' equity was $149.4 million, compared to $151.8 million at December 31, 2006, with the decrease resulting from the net loss for the period.

As far as our enrollments and starts metrics, as previously mentioned by Dave, average student enrollment for the three months ended June 30, 2007, was 16,905 students, representing a decrease of 2.7% from the three months ended June 30, 2006. On a same-school basis, our average student enrollment declined 5.1%.

Starts for the second quarter of 2007 of 4,907 increased 3.2% compared to starts of 4,757 in the second quarter of 2006. Starts for the second quarter of 2007 include 238 students from our acquisition in Florida. On a same-school basis, starts decreased by 1.8% from the same period last year.

With respect to guidance, the announcement we made on August 2, 2007, to cease operations at three of our schools will naturally impact both our yearly revenue and the GAAP EPS guidance we have previously provided.

At this point in time, however, we are not able to quantify what the effect of closing these schools will be on the full year guidance we introduced on our 2006 fourth quarter call.

Included in the guidance we previously provided, however, there's approximately $11 million in revenue associated with these campuses and an EPS loss of $0.03 for the year ended December 31, 2007.

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

Thanks, Cesar. To sum up, we've made solid progress by improving our internal operations, executing on our growth strategy in a difficult environment. We've managed our costs effectively on a monthly basis during the first half as we experienced pressure on revenues.

However, we are pleased with the momentum we have now seeing with June and July starts nicely ahead of last year. This gives us additional confidence in our ability to (technical difficulty) organic growth in the second half of the year.

Our main focus in the upcoming months is maintaining the momentum in starts. This focus should enable us to start 2008 with a significantly larger beginning population when compared to the prior year.

Finally, we may also choose to make additional investment in sales and marketing for the buildup of momentum, not only for the balance of 2007 but into 2008.

And with that, we'd be happy to take your questions. Thank you. Operator?

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

Hi. Thank you. Good morning.

Good morning.

Good morning.

Just to check, can you hear me because there's quite bad static on my line? I don't know if others are experiencing that.

We're not. But no, we can hear you just fine.

Okay. Great. The first question that I had was with respect to your guidance, I understand that given the change in status of those three schools it's difficult to project what those costs will be.

But if you hadn't been planning to close those schools, would there have been any change to your guidance?

Not at this time, no.

Okay. So the kind of start growth that you're seeing in June and July are really reflective of kind of what you were expecting.

Well, I think that --

Or anticipating in the guidance.

As I mentioned, Sarah, we certainly see [the pressure] in the first half on our revenue relating to the slow start. Having said that, our focus at this point really is driving our starts in the second -- third quarter and second half.

And we're encouraged (technical difficulty) number one being able to put some of the issues behind us or the issue behind us as it relates to the Philadelphia cluster that certainly impacted our second quarter starts, so we don't see that repeating.

And furthermore, as we look at both June starts as well as into the third quarter, we're very, very confident that we're going to exceed last year's high school start.

And we're seeing positive growth in our Southwestern college, Connecticut schools and selective other campuses. Overall, we're pleased, although I have to admit (technical difficulty) the revenue side of it is extremely tight.

I'm sorry. I missed that last with your revenue side of it is what?

I'm saying we're certainly under pressure on the revenue side. Having said that, we're very confident about the second half and have a lot of optimism there.

And as I mentioned, (technical difficulty) also the opportunity presents itself and we believe it probably will (technical difficulty) to achieve a higher start.

Okay. And then this is a second question, I guess my follow-up question. Regarding the 14% student start growth in June and the 23% growth in July, it sounds like that was coming at least to some extent from the high school automotive market.

Can you give us more of a sense of whether or not that was being largely driven by the high school automotive market or if you were seeing it across the adult market as well? And then just within that, you mentioned that you don't expect those rates to be sustainable.

Is that more you're trying to be conservative? Or is there something that would lead you to believe that those rates aren't sustainable into the fall?

Well, let me just speak first to the second quarter start. Overall, we were up 3.2% for the quarter. On a same-school basis, we were down 1.8% with 14% increase in June.

We were impacted particularly in April and into May by a shortfall in starts principally in the Philadelphia schools. So without that impact, we certainly would've been positive in the second quarter.

As it relates to your question on the third quarter, if you recall, not only do we have -- we also have quarterly starts in both Southwestern College as well as our West Palm schools in the month of July, which contributed overall to the increase.

And as Shaun mentioned in his comments, the fact that we've been able to repackage -- or package I should say -- students earlier in the season as it relates to high school, a number of our students have elected to start in July rather than in subsequent months because they frankly were ready to relocate.

So it's not a lack of confidence. It's more a case of reality that we enjoyed a nice year-over-year increase in July. But it wouldn't be realistic to assume that's going to continue in August and September.

Okay. Thank you.

You're welcome.

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

Thank you. Just for the record, Dave, I think we're all experiencing that static. So you might want to check with your conference provider afterwards.

Thanks, Trace. Can you hear us okay, though, when we're speaking?

Yes, if you speak up. I think during Sarah's questions you maybe drifted away from the mike a little bit.

The first question I want to ask was about the closed schools. And what is it about these markets and the programs that you were offering in these markets that make you so pessimistic about the opportunities there that you feel obliged to close down in those markets rather than just sort of see your way through what might be a cyclical trough here?

Well, they each have their -- they're each a little different. But essentially, if you recall, these are three of the former computer learning center locations that we -- the facilities which we acquired back in '01.

And they were ideally suited at that time for IT training. An example would be the case of Henderson, NV. The demographic where that school was located was ideal for IT. When we moved away from IT, as we found necessary to do, we were really in an area without public transportation.

And the students that we were drawing to that school, principally allied health students, frankly were passing our competitors if they were trying to get to our schools.

So despite all the attempts that we've made over the years there, it just didn't make any sense to continue going forward there.

And to some extent, that would be also true in the case of Plymouth Meeting, which was a school in an office building without a whole lot of visibility, ideal at one time for IT training principally and programming. And it really lost all traction in the connection with allied health programs.

And finally, the Norcross, GA, school, although we looked at the possibility of putting even a skilled trades program in there, the demographics surveys that we conducted didn't support that. So after over three years of losses in those three schools, we've elected to close those three schools.

Okay. That's really helpful. What would you say was the catalyst for deciding to pull the plug now? And is there anybody else? Are there any other campuses?

No.

You don't have to name them. But maybe, do you have a watch list of others that might be falling in or be in that category?

Well, we've had what we would consider our underperforming schools. And we evaluate all our schools on a monthly and quarterly basis.

I think the real lynchpin here was as we looked at the new programs that we're rolling out, whether it be IT or other programs, did these -- would these schools benefit from those new programs?

In our opinion, they would not based on all the research we did, while we're comfortable that the other schools will. These are the only three schools that we're closing and we're comfortable that the initiatives we're taking with some of the program rollouts, whether it be criminal justice, IT, or some of the others, will increase our capacity utilization in the other schools going forward.

Ask about the (technical difficulty) that's in the press release. And I know you're not giving sort of post close guidance at this point, but can you help us understand what these numbers on the cost side -- I guess on the revenue side it's pretty straightforward -- but what the cost numbers here represent, whether these are all costs that you'd expected to really lose entirely? Or are there resources here that might be redeployed elsewhere in your network?

Trace, what that represents is the cost that we've incurred at these schools for the first six months of the year. So those are actual costs that we've incurred.

So would we expect then to the extent that there are people attached to these costs that these people would be terminated once the campuses are physically closed.

That is correct.

That's correct.

So obviously we would need to transfer the students or teach them out or whatever the case is. And we're going to incur additional costs associated with the closing of these schools. We need to pay retention benefits while we teach out these students.

We have lease, contract termination costs, as well as other contracts that we need to terminate. So at this point, we have not yet been able to quantify what those costs are.

But what the pro formas show you on the press release is the actual cost of what the P&L of those three schools looked like for the three months ended June 30th as well as year to date and what the impact of the Company would've looked like had those schools had been closed.

Okay. So to the extent that there are centralized resources in the sales and marketing line, for example, that were associated with those students, those are not reflected here, correct?

No, there is no allocation of corporate overhead whatsoever. This is strictly at the school level.

Okay. Great. Thanks. I'll let you move on.

Okay, Trace.

Your next question comes from the line of Jeff Silber of BMO --

Just a follow up on Trace's question -- do you think by the time you guys report next quarter you'll have enough information to give us and these will be classified as discontinued operations?

I --

Let me take that one. We probably will have enough information to come up with a range of estimates. I do not believe that this will be qualified as discontinued operations in the next quarter call. I mean, our goal would be to close these schools by the end of the year, but from a GAAP perspective, we cannot report them as discontinued ops until we actually cease all operations.

What I would envision doing is, to the extent that they're not closed by that point, is we would provide the same pro forma information that we provided both in our press release on August 2nd as well as the earnings release today.

Okay. That's great. And just so I can get a gauge, on a typical third quarter, high school students represent what percentage of your starts?

About 40%.

40%. Okay. So good. So the starts growth again looked really good for the high school starts. Again in terms of the non-high school starts, do you think it'll be lower in terms of the starts growth for the third quarter?

Can you say that again, Jeff, lower?

Just when I compare growth rates, high school versus non-high school, expecting lower growth in the non-high school starts.

Yes, yes.

Okay. Just wanted to double check that. And then finally, in terms of bad debt expense, it spiked up. Where do you think that goes over time, and if you can give us some color on why it did spike up?

Well, the second quarter usually spikes up just because of the fact that is one of our lowest revenue quarters. The third quarter, it usually spikes down due to higher revenue obviously. But I would envision bad debt somewhere around 5%.

Okay. Great. I'll let somebody else jump on. Thanks.

Okay, Jeff.

Your next question comes from the line of Brian McGuire of Lehman Brothers. Please proceed, sir.

Hi, guys. This is Brian McGuire on for Gary Bisbee. Good morning.

Morning.

Morning.

I apologize if you already commented on this. But it was a little staticy during your prepared remarks. Are you guys giving specific revenue or EPS guidance for the third quarter?

No, we are not.

Okay, so just sticking with the full-year guidance that you had issued before, excluding the impact of the three campuses being sold or discontinued.

Right. For now, we're telling you what the impact of these schools was when we gave out guidance originally during our fourth quarter call.

Okay. Great. My next question was if you--last quarter you mentioned that the show rate was pretty stable.

I was wondering if you could comment on any improvement you were seeing there in the second quarter or some trends you might be seeing early in the third quarter with the July starts.

Shaun, you want to take it?

Yes, I'll say that the show rates remain stable. We look at a number of conversions throughout the period. And I'll tell you that our lead to enrollment has remained stable and actually had some slight increase.

Our enrollment to start, which is actually our show rate, is strong, as strong as the prior year. And our lead to start was slightly up for all sources combined. And so we're happy with our show rates at this point in time and anticipate that they'll remain stable for the remainder of the quarter.

Okay. Great. Thanks. And then also, I was hoping you could comment on any challenges you're facing -- that you might be facing hiring admissions reps. Has that been a problem for you?

We've had no challenge in hiring the reps at all. As I mentioned earlier in my prepared remarks, we manage our turnover quite aggressively.

And we saw improvement in our voluntary turnover, or the number of reps that left due to dissatisfaction, which we were happy about, although we actually forced more rep turnover for underperforming representatives.

And so what we're working on is a new profile with our HR Department to better identify rep talent for this unique skill set that they possess.

And from there, we think our turnover numbers will be better year over year. But no, we've had no problem hiring volumes of reps.

Okay. And I assume your productivity improving a little bit here with the nice pickup in starts towards the end of the quarter and early in the third quarter.

Yes, high school productivity specifically and internet productivity. TV remains a challenge for us. But we have a number of initiatives that focus on that area.

Okay. Great. And then my last question before I turn it over, are you guys seeing any change in the demand for graduates, employment rates, starting salaries? Or is it a little too early?

No, I think we watch that through our career services group on a quarterly basis, if not more frequently. And we haven't really seen any real change. In most cases, there are enough job orders to either match or exceed the number of grads coming out of our schools.

Okay. Great. Thanks a lot guys.

Your final question comes from the line of [Frank Atkins] of BMO Capital Markets. Please proceed, sir.

Hi, there, this is Frank. I'm following up -- Jeff had to jump off the call real quick. I wanted a couple quick numbers questions. If we could get ending student population as of June and CapEx for the quarter?

Sure. Ending population was 16,580 students. And CapEx for the quarter -- give me one second. I believe it was $5.9 million. But just give me one second here.

And then do you have any CapEx guidance for the year?

I believe the guidance we had originally given was 10% to 12% of revenues.

Okay. Great.

Let me just double check that number for you for CapEx. CapEx for the quarter was $6.4 million.

All right. Great. Thanks so much.

I would now like to turn the call back over to management for closing remarks.

Okay. Thanks, everyone, for joining us today. We look forward to updating you on our progress on our next call. Thank you very much. Good day.

Ladies and gentlemen, this does conclude the presentation. Thank you for participating in today's conference. You may now disconnect, and have a great day.