Lincoln Educational Services Corp (LINC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Lincoln Educational Services Corporation earnings conference call. My name is Janetta and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the conference over to your host for today, Mr. Shaun McAlmont, President and Chief Executive Officer. Please proceed.

Thank you, Janetta. Good morning, everyone, and welcome. Joining me today is Cesar Ribeiro, our Chief Financial Officer. I'll provide an overview of our operations, and Cesar will review our first quarter financial performance and provide our outlook for the second quarter. We'll then take your questions.

But before I begin, let me remind you of the Safe Harbor Statements under the Private Securities and Litigation Reform Act of 1955. Statements in this presentation concerning Lincoln Educational Services Corporation's future prospects are forward-looking statements that involve risks and uncertainties. There can be no assurance that future results will be achieved and actual results may differ materially from forecasts, estimates and summary information contained in this presentation.

Important factors that could cause actual results to differ materially are included but not limited to those listed in Lincoln Educational Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2010 and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by those cautionary statements.

As an overview, we continue to execute our plan of reducing our [highschool] students with the intent of long-term improvements in critical student outcomes. In addition, we've implemented steps to manage our 90/10 ratios without significantly raising tuition. These important retrenchment efforts have and will continue to impact our new student starts and reduce our earnings leverage in the short term. However, in this new environment, we know we're making the right decisions for our students and for the long-term viability of our institutions.

We made a conscious decision last year to change our business model in order to address current regulatory rules. We also assumed the end of existing regulatory remedies and made changes in anticipation of the final Gainful Employment rules. As I mentioned in the last call, we anticipated that we would feel the greatest impact of these changes in the first half of the year. Adjustments to our business model were made through improved long-term student outcomes including graduation, cohort default and placement rates, as well as compliance with the 90/10 Rule.

We anticipate continued weakness in student starts in the second quarter, which will negatively impact revenue and profitability for the year. We are actively managing our expenses with the intent of preserving reasonable profitability expectations. As expected, the first quarter of 2011 proved to be quite challenging, as the significant decrease in new student starts reflects the impact of the aforementioned actions and challenging economic conditions.

Even though our visibility into the near term is limited, we remain confident that the steps we've taken, while initially painful, are necessary to position our institutions for long-term growth and will ensure that students who enrolled receive the best return on their education investment.

We are optimistic regarding the long-term view of the Company, as we anticipate an eventual end to this uncertain environment. We expect that our enrolment trends will improve in the future quarters as the year-over-year comparisons should get easier as employees embrace the new policies and procedures we've put in place and as we continue to implement our growth strategies of select acquisitions, new campus openings and online program offerings. We ultimately expect to emerge from these challenging times a stronger Company and a leading provider of vocational and career, technical programs. Moreover, we know that demand will always exist for vocational and technical training in areas like nursing, medical office, automotive and the skilled trades.

Now, regarding our demographics. We're confident that we offer training in ways that allow students to better their lives in a short time frame. It is clear that a traditional education is not for everyone and so we sometimes educate those who only might be open to vocational training. Not every student comes to Lincoln with a background in education that will position them for academic success and so there are definitely outcome risks associated with these students.

Historically, we've opened the doors of our institutions and committed to helping every student who wants to learn to succeed. However, our historical outcomes reflect the population we serve and presents an opportunity for improvement.

Some of the trades we teach are not seen as glamorous but this said, there are not many institutions that provide these training opportunities as well as we do. The environment is causing us to retrench but in the long run, we feel our institutions will continue to stand as a model for vocational and technical training in this country.

In regards to our new student admissions, new student starts trended downward in the first quarter by 38.8%, which is slightly greater than we anticipated. Our efforts to reduce our ATB population continue to screen out high-risk students through test scores and a pre-orientation. These efforts resulted in 1,100 fewer ATB students in the quarter versus prior year and have reduced our overall ATB students by approximately 200 basis points to 11% of the population.

In addition, affordability issues continue to affect student starts. These issues are somewhat amplified as tough economic conditions exist and we continue to require more of a cash commitment from students in the enrolment process and on a monthly basis to address long-term 90/10 levels.

Regarding our highschool recruitment program, the highschool teams around the country have recruited and enrolled approximately 9,700 highschool futures this year versus 10,900 last year or a 10.5% reduction in enrollment volume year-to-date. The primary cause of this softness, in our estimation, is affordability on the part of parents who were approved for financing but shows not to take on debt on behalf of their dependent children. It's difficult to say how start rate will be affected for the highschool cohort, but we expect some of our first highschool starts in late June, which will give us a better indication of start rate and allow us to more accurately forecast our third quarter results.

Regarding incentive compensation changes, we finalized compensation adjustments for our admissions personnel and we feel that our approach in removing graduation incentives and adjusting base salaries was extremely fair. We've extended this methodology of fixed-rate compensation to all campus-based personnel based on their close working relationship with students. This is a conservative take on the incentive compensation rule. However, we feel it's prudent to remove incentives for anybody working directly with students or who manage a campus. We feel that our methodology resulted in competitive salaries for our representatives and campus-based staff.

The final incentive compensation rule did cost some uncertainty for admission staff, when first announced by the department and may have temporarily affected productivity, especially in conjunction with internal changes we made to admissions processes, affecting student acceptance and payment criteria.

In regards to market demand, based on what we're currently experiencing, there is continued market interest in our programs as the volume of inquiries remains strong and approximates prior-year levels. Inquiry volume has decreased only slightly year-over-year due to reduced marketing spending.

As a part of our revised business model, we made the decision to no longer specifically recruit ATB students in our advertising. However, embedded within our inquiries are still many of these higher-risk students who fail to meet our more selective entrance requirements. In addition, there are a large volume of economically challenged prospective students who continue to inquire and enroll, but do not start. This has caused a decrease in the Company's start rate. We feel that as consumer sentiment shifts, start rate will return to more normal levels.

Our advertising cost metrics reflect some of the strain we're seeing on new student start rates. Our cost per start in the first quarter increased by 72% against prior year based on lower starts and increased spending. Another important metric is our cost per inquiry, which increased to $86 in this period versus $80 prior year as we shifted between advertising channels. Of our total inquiries for the quarter, 53% came from online aggregators, 12% from TV and other sources, and the remaining 35% from search terms and organic web sources.

We've focused on reducing the volume of inquiries from aggregators and are seeing progress to date. Our efforts will become more aggressive in this area over coming quarters. However, we will do it ways that maintain a volume of overall inquiries.

In regards to student persistence, we've seen slight improvements in new student persistence within the first 90 days in our schools where we made the earliest changes of higher-risk student admissions. We anticipate positive long-term impact for the total Company once we find equilibrium following this initial period of change. Furthermore, we've begun tapping into the expertise and resources of our marketing team to develop general communications, financial literacy and career preparation tools for students. We feel that strengthening this life cycle approach to student communications will help us manage students who work their goals, while at the same time allowing the institutions to achieve the outcomes necessary for long-term success.

In regards to overall persistence, our automotive schools saw better persistence in the first quarter against prior year. Our non-automotive schools saw persistence deteriorate slightly due to changes in programs structure and increased in-school payments, which forced some students to leave schools.

In regards to our efforts to manage our 90/10 ratio, we're assuming no long-term legislative relief. So as I mentioned last call, we've made adjustments to program structure, which immediately lessens Title IV availability and creates the needs for students to make higher cash payments. 90/10 structural changes have also caused our degree portion of our population to decrease by approximately 200 basis points to 20% of the total population, as some degree programs were eliminated and others shortened or accelerated. These structural changes were made as an alternative to significantly increasing student tuition to create a funding gap.

Regarding job placement, managing our services to students has always been a priority for our institution, and as you can imagine, working with many of our students required services sometimes above and beyond regular advising and support. We begin transforming a student from day one of their time with us to the time they are interviewing for a job and in many cases, this is a significant effort. We invested in our placement services in 2009 and early 2010 and we're working against a headwind caused by a prolonged economic downturn.

This year, we've replaced the leadership in this area and we've instituted additional training and performance tracking systems to ensure all graduates have ample opportunity to find employment. Furthermore, all incentive-eligible corporate managers will have a career placement outcome as a part of their plan in the future to ensure that we're all focused on supporting our campuses and students in this important process. Year-to-date, we're running slightly off last year's 75% pace and anticipate a final 2010 rate between 71% and 73%.

Regarding cohort default rate and prepayment rates, improving these rates is a key long-term Company objective. Ultimately, improved graduation rates and strong financial responsibility training for students will be the long-term solution in this area. While we strive to improve the core default rates for each of our institutions, the current economic climate combined with the demographics of the students that we traditionally serve, it makes those objectives even more challenging.

As a result, we've increased our default management personnel to help enhance the financial literacy of our students and graduates. With the goal of helping students, they current in their loan payments as well as engaging third-party consultants to assist those institutions who historically have the highest cohort default rates.

In regards to growth-related actions, we will continue to manage our initiatives focused on new campus locations, expansions, online programs and acquisitions. In late 2011, we will see the contributions of our three new campuses in Columbus, Cleveland and Hartford. In addition, we're on track to open our new expanded Denver facility in June.

We continue to proceed with our plans to develop regionally accredited online and degree programs predominantly in the health sciences. Our program approvals is slow, considerably based on the accreditation process and timeline and our plans are also dependent on gainful employment parameters, which we expect in knowing the near-term. We also continue acquisition opportunities that will provide long-term growth opportunities and program diversification for the Company. Obviously, we must be very selective when considering the regulatory environment. However, we have an active pipeline of opportunities that we are evaluating.

In summary, we are confident in what we do as a Company and the thousands of graduate success stories we've recorded since 1946 strengthen that confidence. In 2011, the shape and face of our Company will change, however the pride, effort and focus of our faculty and staff will not. We feel that shareholder value is tied directly to student value. This critical relationship will be strengthened by the many efforts that we're making.

As we look out over the year, we will manage our expenses; however, not to the detriment of our long-term goals to improve student performance. In the short term, we will see margin contraction, as we've mentioned in previous calls. In addition, we will continue to build the foundation of this company by renovating and relocating facilities that we feel will benefit our long-term plans. We will selectively add student services staffing in places with the greatest need to assist students outside of the classroom. We will evaluate our online opportunity based on the regulatory landscape and build online programs to support our vocational base.

We will seek out start-up locations and acquisition opportunities using a filter based on the quality metrics we are aspiring to, and we are in the process of modifying programs to help us manage and prepare for longer-term 90/10 issues at some of our institutions. We've made an incredible number of changes in a relatively short period of time, which we felt was the right thing to do for the long-term performance of our Company. We've assumed that existing federal regulatory rules will continue with no long-term remedies and that some version of the new rules will be finalized as drafted.

Finally, we've seen a great impact to operations, greater than expected based on the changes we've made. However, the impact of the implementation is now behind us. Uncertainty and a lack of visibility make forecasting difficult, but we feel confident that we will stabilize in the second half of the year and expect our comparison trends against prior year to begin to improve as employees are more confident and comfortable in executing our new business model. Ultimately, we feel that Lincoln can emerge in the long term as a vocational and technical education leader in this country.

Now, I'll turn the call over to Cesar for a financial review, including our outlook for the second quarter and 2011. Cesar?

Thank you, Shaun. Good morning, everyone. As we disclosed in our press release earlier this morning, and as Shaun stated in his prepared remarks, the first quarter of 2011 has proven to be more challenging than we originally anticipated.

The numerous changes that we have made to our business model in anticipation of the proposed regulations and to ensure compliance with existing 90/10 and cohort default rules, all significantly impacted the number of new student starts in the first quarter of the year. We expect that this trend will continue into the second quarter and begin to stabilize in the second half of the year, as our three new schools, our online offerings and our new program offerings at our relocated Denver campus will start to contribute to student starts.

The deteriorating start numbers we experienced in the second half of 2010 resulted in us commencing the first quarter of 2011 with approximately 4,700 less students than we had on January 1, 2010. This led to a decline in our average population for the first quarter of 2011 of 7.8%, which resulted in revenue declining by 4.7% or approximately $7.1 million as compared to the first quarter of 2010. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which averaged about 3%.

The decrease in student starts also impacted our capacity utilization, which decreased to 58% from 68% in the first quarter of 2010. The decrease of capacity utilization produced approximately 390 basis points of negative leverage as our operating margin decreased to 12.7% for the first quarter of 2011 from 16.6% in the first quarter of 2010.

Other key highlights in the quarter include, earnings per diluted share decreased 28.4% to $0.46 from $0.55 in the first quarter of 2010. We generated free cash flow of $3.2 million, down from $6.3 million in the first quarter of 2010. We paid a $0.25 quarterly dividend on March 31, 2011. We finished the quarter with $43.7 million in cash and cash equivalents after repayment of $20 million of borrowings outstanding under our credit agreement.

Bad debt for the quarter was 4.7% of revenue as compared to 5.6% for the first quarter of 2010. Improvement in bad debt reflects a continued effort to improve financial aid processing through centralized administration.

Average revenue per student increased 3.4% for the first quarter of 2011 to $5,109 from $4,934 in the first quarter of 2010. Increase in average revenue is primarily due to tuition increases, which as I previously stated averaged 3% throughout the year. Cost per start increased 73.3% for the first quarter of 2011 to $4,505 from $2,604 in the first quarter of 2011 (sic - see Press Release). Cost per start has been negatively impacted by our decision to limit the number of ATB students we will enroll in our schools and the other changes we've made to our business model to ensure compliance with the 90/10 and cohort default rules.

Our net accounts receivables on March 31, 2011 were $29.4 million as compared to $42.9 million at December 31, 2010. This decrease in net accounts receivable is primarily due to improved cash collections previous mentioned. Net property and equipment grew to $175.6 million at March 31, 2011 as compared to $172.4 million at December 31, 2010. Capital expenditures for 2011 include certain expenditures that are being carry forward from 2010 and are expected to range between 7% to 9% of revenue.

Now, turning to our loan program, loan commitments to our students, net of interest that will be due on the loans through maturity, as of March 31, 2011 were $12.8 million, as compared to loan commitments of $15.4 million at December 31, 2010. For 2011, we expect that these loan commitments will increase by $5 million to $10 million, as we are creating financing gaps for many of our programs to ensure our continued compliance with the 90/10 ratios.

Shareholders' equity at March 31, 2011 was $233.8 million, up from the $222.5 million at December 31, 2010 and shareholders' equity at March 31, 2011 reflects accrued dividends of approximately $11.2 million.

I'll finish my prepared remarks by providing our current outlook for the year 2011 and for the second quarter. I'll remind you, our guidance is based on our current expectations and reflect the changes we previously discussed to our business model. As a result of a larger than originally anticipated decrease in both first quarter student starts and projected decrease in second quarter new student starts, we are revising our previously issued guidance. We now expect for the full year, revenue of $565 million to $585 million, representing a decrease of approximately 8% to 12% over 2010.

We are actively managing our expenses and our cost structure to better align them to our expectations for student population. However, the impact of the greater-than-anticipated decrease in student starts in the first quarter and projected student starts for the second quarter are causing us to adjust our previously diluted EPS guidance.

We now expect diluted EPS of $1.50 to $1.80, representing a decrease of approximately 35% to 46% from 2010. Diluted EPS for 2011 includes $0.28 per share in investments in our online business, our three new campuses and the relocation of an existing campus.

We now expect student starts to decrease 12% to 16% for the year over 2010. Student starts are expected to stabilize during the last half of the year, as we will benefit from easier year-over-year comparisons and we will have three new campuses contributing to student starts in 2011, new online program offerings, as well as the relocation of our Denver campus to a new larger facility, which will have more program offerings.

For the second quarter of 2011, we expect revenues of $130 million to $135 million, representing a decrease of approximately 13% over the second quarter of 2010. Diluted EPS of $0.14 to $0.20, representing a decrease of approximately 66% over the second quarter of 2010. Guidance for the second quarter of 2011 is based on expected decrease in student starts of 30% to 35% over the same period in 2010.

And finally, our Board of Directors has set the record of payment dates for the dividend for the second quarter of 2011. Cash dividend of $0.25 per share will be payable on June 30, 2011 to shareholders of record on June 15, 2011.

In conclusion, while we continue to operate in a challenging and difficult environment, we are confident that the actions we have taken will benefit not only our students but our Company in the long term. We will continue to balance our growth objectives with our responsibilities to deliver quality education and to enhance student outcomes.

Now, we will open the call to your questions. And with that said, I'd like to turn the call back over to the operator. Operator?

Thank you. (Operator Instructions) Gary Bisbee, Barclays Capital.

Hi, it is Zach Fadem for Gary. Your full-year guidance for starts to decline 12% to 16%, does this imply that you expect starts to turn positive in the third or fourth quarter? And maybe you can give us a little more color on your expectations there.

That will be correct, Zach. Again, as we said, in the second quarter, we will have sunset all these provisions that we have put in place, all the changes we have put in place. And as we said, we are going up against much easier comps in the second half of the year coupled with the contribution that we expect from three new schools, online as well as new program offerings at our expanded and relocated Denver campus.

Okay. And last year, in the third quarter, you wrapped up your share buyback authorization. Do you intend to bring back repurchases or should we view that dividend is your preferred method for returning excess cash to shareholders?

Well, as you are probably aware right now, we do not have a share buyback authorization in place. The Board of Directors has declared a dividend, that was for the full year, which will take us through the September 30 quarter. I think at that time, the Board will evaluate how best to return money to shareholders. I think our intent would be to try to continue dividend versus a buyback but that will be up to the Board at that time to evaluate.

Okay. And I've got just one more modeling-related question. Your revenue per student grew at 3.5% in the quarter. Do you consider this a reasonable run rate going forward or do you see it kind of leveling off a little bit?

No, we continue to expect to increase tuitions anywhere from 2.5% to 3.5%. So I would say, we continue to expect revenue to grow 3% a year.

Okay. Great. Thanks a lot.

David Cui, Bank of America Merrill Lynch.

Thanks. Good morning, guys. In your prepared remarks, you mentioned that there have been changes made to address GE? Are there specific changes that you can discuss or are these just the broader changes that have been highlighted today and in recent quarters?

David, let me just say that all of the changes that we've made relate to the current rules as we see them, no real remedies coming legislatively on any of those particular rules specifically 90/10. And then, the early dropped looked that we had a gainful employment. Many of the changes that we've made address all three. So you're not going to find anything much different than we've already disclosed.

And just as a reminder, we've adjusted our ATB entrance criteria. We have increased student's cash contributions that are more related to 90/10 and then, we've got some slight admissions changes and then admissions compensation changes, all related to, again, existing rules or looking generally at graduation rate improvements that we feel will ultimately manage to repayment improvement.

The only other change I would reflect to you is some program adjustments that's changed the Title IV structure of a particular program by either shortening it or some other changes to pieces of the curricula, again, that are geared at 90/10. But there aren't much more changes than those and those changes have been put in place anywhere between a year ago to the beginning of the first quarter and we'll see them run through the year.

The confidence that we have in looking at the second half of the year really reflects, as Cesar mentioned, to the fact that we made the majority of our changes early on sort of felt the pain early. We'll see campuses adjust to those changes in the short term and will see sort of better contribution later on in the year.

Okay. That's great. That's helpful. And also, you guys talked about starts stabilizing in the back half of the year and partly due to the launch of these three new campuses. Can you discuss what starts would look like or expectations would look like, excluding those three campuses?

I can't really sort of give you that at this point in time. But I will say that for the campuses that are opening either in the late second quarter or early third quarter, plus the contribution from online, we expect that those campuses will all open under the new methodology that we have according to all of the systems we've put in place and they're opening in a tougher environment. However, they will all contribute incrementally over prior year. So that's all I can give you at this point, David.

Got it. Thanks, guys.

Thank you.

Scott Schneeberger, Oppenheimer.

Hey. Thanks. Good morning.

Good morning, Scott.

Shaun, I'm going to follow up on that last one, you may not be able to answer, but could you -- if not for the new campus openings in Denver, would second half starts be positive or negative? I know you may not be able to cover it exactly, but just had a try and ask it again?

Scott, it's a good question, but I can't give that to you. I mean you know that visibility is tough, especially in this environment where we expected the first quarter to come in a certain place. I mean, we came in a little worse than our expectations. And I think that again, we are counting on the fact that most of the disruption that we've seen in our processes and some of the things that we've done to ourselves will somewhat stabilize and then the Company will find an equilibrium in the second half. I can't tell you exactly when we'll see that turning point, but we feel very confident that it will come. But to get specific to answer your question, I can't give you that detail at this point.

Fair enough. I'm going to turn to expenses. You mentioned that you're going to continue to manage them, but not to the detriment to the long term. I guess, could you just discuss where you're looking as far as expense management, what are some things you've done and may continue to do? And then, kind of an add-on to that would be, how advertising spending -- you mentioned some changes there that it sounds like you've slowed it a little bit, especially with ATB, but obviously rates are a little higher year-over-year, if you could address that specifically in the cost discussion? Thanks.

Yes, just real quickly, I'll turn it over to Cesar, but yes, I think we're looking at all of our expense categories as we always do. There would be -- there will be sort of workforce reductions over time and we will look at all of our major expenses as related to either the current population or the volumes of these students. And so we'll just continue to do that as we always do.

Yes. I guess what we're saying is, if you take a look at our population, we're down about 6,000 or 7,000 students from what we were last year. So obviously, there's opportunities to manage not only our instructional costs, but all of our people costs to right size the business, or to better align the business that a population that we expect to have at the end of the year. And so that's what we're doing.

Included in that, obviously, when we first came out at the beginning of 2011, we had certain expectations for what our revenue would be, what our population would be, so we have budget accordingly. To the extent that we do not believe that those estimates are achievable now, obviously, we will reduce accordingly. Included in that is marketing costs.

Obviously, we're not going to reduce marketing costs to below last year's levels, but again, even if we spent the last year's levels on marketing, it's still on a much lower student base that we are projecting than we had in the prior year. So again, we continue to look at all costs and to better align cost to student population in all areas. And that is just a way we have always managed our business, so it is nothing new for Lincoln.

If we don't meet expectations that we set out, we will adjust costs accordingly. Obviously, there is negative leverage in the business and you can't take out dollar for dollar, but I think if you model out what we projected for revenue declines versus our EPS, I think you will see that we are doing a very good job managing our costs.

Thanks. One more if I could sneak it in. Could you guys remind us what the goal is ATB as a percentage of mix of the total population and any further color with regard to persistence that you've seen? Just recently, you've covered a little bit on the call, perhaps by degree, category or just within areas of which offer? Thanks.

Thanks. Persistence is hanging in there. It's flat to last year, but I will say that we've seen some improvement in the schools especially that started adjusting the business model early last year. For students who have been in school 30, 60, 90, 120 days, we've seen improvements there but it's difficult to look at persistence overall at this point in time because we're also seeing some students leave school based on some of the adjustments we've made in adjusting our programs and the cash contribution levels, et cetera. But as of right now, we are happy with the level of persistence that we are seeing.

In regards to ATB, we sit today at about 11.2% of the full population being ATB students and that's on a much smaller base of overall student population and so if you were to look back at our population last year, the number of ATB students we have today would approximate probably 9% of the population. I think our goal ultimately is to always manage to high-single digits, approaching 10% of ATB population. We think that's a population that we can manage effectively toward better student outcomes and better repayment rates overall.

Thanks a lot.

Thank you.

Trace Urdan, Signal Hill.

Hi. Good morning. Shaun, I am going to take a run at this intriguing statement that you made in your prepared remarks about acquisition. I am wondering if you can kind of help us frame that a little bit, maybe starting with what your general attitude is towards the issue of accretion versus dilution what kind of size we should be thinking about in terms of what would be considered appropriate. And are you looking to -- in the degree or non-degree area or both, are you looking at new geographies, new programs, new brands, possibly? Can you just give us a little bit more of a flavor of what you have in mind there?

Trace, I think you asked 15 questions in that one question, but I will just try --

I just tried to get at it from every angle.

Right. I would say this. At this point in time, many of the acquisitions that we are looking at are on the smaller side and they've got to fit a certain outcome profile, obviously. And I think the question is probably intriguing right now because you don't see much activity in that regard happening, but we feel that there are opportunities for us to add programs that would enhance our current vertical. We find opportunities are out there to bring on stronger, maybe diploma-based programs or shorter programs that could help us on the 90/10 level.

And ultimately, any acquisition we look at really should benefit the Company in the short term at this point in time. It is very difficult in this environment because we don't have to finalize a Gainful Employment rule yet, et cetera. But what we do know is that 90/10 is an issue for us and so any acquisition that can help us in that regard, we will look at very closely. But I would say that the -- it's not really intriguing for us in that we have a long track record of making acquisitions, approximately ten over the last 12 years.

And so we will always continue to look at acquisitions that can be quickly accretive for us. That's probably all I can give you at this point in time, but I think it probably gives you more color as time goes on. The point we wanted to make today is that, we do have a pipeline of some of these acquisitions that can help us in the short and long term, and we don't feel that would hurt the Company financially or operationally at this point in time.

Okay. Thanks, Shaun.

You're welcome.

Gordon Lasik, Robert W. Baird.

Hi. Thanks for taking my questions. My first question kind of circles back to you managing your costs again. I guess, how comfortable are you with current recruiter staffing levels and is this an area where you'd be looking to make cuts and then kind of the same question for career services and default management?

Well, let me just say that Cesar answered the question very well in that over time, we always look at our current level of expense compared to either where our incoming student volumes are or our carrying population of in-school active students. And so we manage along the way. We manage our expenses along the way. We made a commitment to ensuring that certain services to students remain very robust. And included in those services are career services and default prevention. So I would imagine that we would see staffing levels in those areas continue to be where they are today.

In relation to admissions, there are some areas where schools have really decreased in size and in those cases, I think, those school managers are managing their employee populations accordingly.

But let me just go back to our earlier point about ensuring that we keep our services alive, sound and robust for students. That also includes the work we're doing with admissions and assessing student career opportunity, et cetera. I think what you might find is that in some cases, instead of looking at our representatives in total the way we have in the past, we might swap out some positions for other types of positions. And in that swap out, we might find some expense saving. But that's how I'll answer the question at this point. I don't know, Cesar, if you've got any other thought for it?

No. I think as I said before, we are looking at all positions. And I think as we said, the ones that we have invested on and will continue to invest on is the ones that will produce or tied into our mission of placement, graduation and repayment rates. And so that would make career services and default obviously two of those things that we will continue to invest in.

Great. I just have a couple more quick ones. First, just on bad debt, that continues to trend nicely year-over-year. Is that the level of improvement that you would continue -- or expect to continue for the remainder of the year given updated full year [guidance]?

Yes, I have an updated forecast. I knew someone was going to ask me because we have two positive quarters, I'm not very good out to 4.7%, but I think we're -- now we think 5.5% to 6% is more realistic versus 6% to 6.5% we have previously guided to.

Okay. And then, just a quick one on Pell Grants, could you comment on impact from the elimination of year-round Pell to your business potentially?

It has some impact, but not very significant and that's because of a lot of the changes that we have made to our business model. Again, if you remember, Lincoln is predominantly a diploma-based school, or at least 80% is. And so to the extent that we even shorten programs further, students would not have access to that year-round Pell. So it will have some impact, but we don't expect that impact to be that significant.

In addition, I think as I said in my prepared remarks, we are actively creating financing gaps for students. So we actually find that will be a positive to try to help us achieve that within the 90/10. And so we would expect to be able to step up and fund that ourselves, and that's why we said we expect our loan commitments to increase by $5 million to $10 million for 2011.

Great. Thanks a lot.

(Operator Instructions) Jeff Silber, BMO Capital Markets.

Thanks so much. I know this is a Board decision. But I'm just wondering about the dividend policy given the reduction in guidance, have you had any discussions with the Board about rethinking the dividend for the rest of the year? Thanks.

Jeff, I think the only thing I will say, obviously, it's up to the Board and they will reassess it at that time. I will tell you that it was -- the intent of the Company was not to declare a one-time dividend and that continues to be our intent.

I see. So I guess dovetailing on that, and this is probably more of a management decision than anything else, if the trends continue to deteriorate and we see a potential reduction in cash flow or at least the rate of cash flow, would the Company consider to lever up to make those dividend payments?

That certainly will be something that the Company would consider, especially if we thought that it would be -- that everything is behind us and that is a short-term impact that will be more than sustainable over the long term.

Okay. So I appreciate that candor. Just a couple numbers questions, actually more of a timing issue, when exactly are the three new campuses expected to open?

Two have opened, but they're just about to start to recruit students and one will be opening later on this quarter. And the Denver School is expected to relocate in June and first classes in July.

Okay. Great. And then, just a couple of quick numbers questions. What was capital spending in the first quarter?

It was about $11 million -- CapEx was at $11.8 million.

$11.8 million. And the tax rate embedded in your guidance for both the current quarter and the rest of the year?

40.5%.

Okay. Great. Thanks so much, Cesar.

And at this time, we have no further questions. I would now like to turn the call back over to Shaun McAlmont for any closing remarks.

Thank you very much. And then, thank you to everyone for joining us on the call today. As you can see, we've taken important steps to improve the long-term strength of our institutions and our Company. Now, we're working within the evolving regulatory matrix here to position Lincoln to be really the leader in vocational and technical education, and we think that we're making strides toward that. We look forward to updating all of you on our second quarter call in August. Thank you and have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.