Lincoln Educational Services Corp (LINC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Lincoln Educational Services earnings conference call. My name is Steve, and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And now I would like to turn the call over to Mr. Shaun McAlmont, Chief Executive Officer. Please proceed, sir.

Thank you, Steve, and good morning, everyone. Joining me in the room today is Scott Shaw, our President and Chief Operating Officer; as well as Cesar Ribeiro, our Chief Financial Officer.

Let me begin this morning by reading the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements in this presentation concerning Lincoln Educational Services Corporation's future prospects are forward-looking statements that involve risks and uncertainties. There could be no assurance that future results will be achieved, and actual results may differ materially from forecasts, estimates, and summary information contained in this earnings release.

Important factors that could cause actual results to differ materially are included but not limited to those listed in Lincoln's annual report on Form 10-K for the year ended December 31, 2013 and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement.

This morning I will provide some opening comments, and Scott will provide a more detailed overview of our Company's operations. Cesar will then provide a financial review of the quarter and our Q2 forecast. We will then take your questions.

For those of you listening that are new to our name, I'd like to provide a background of the Company's most recent performance. Three years ago we managed a system of open enrollment and saw some of the highest growth we've had in the Company's 70-year history. The 2008 economic downturn forced individuals back to school for training as jobs became scarce. Our programs were tailored to allow those who missed the opportunity of a traditional education to return to get skilled training and thereby find employment in specific fields.

To maximize our growth, we added fully online programs and expanded into fields like business, IT, and criminal justice. As the tough economic conditions prolonged and aggressive federal rulemaking and negative media attention toward for-profit education continued, we launched a strategic plan to ensure we were offering the right products and managing the fine balance between front-end sales demand and back-end employment demand for our graduates.

Moreover, our student demographic, being nontraditional and representing some of the most academically challenged in education today, required that we managed our student experience so we had more students graduating, finding jobs, and repaying their federal loans. Student persistent rates and employment rates became proxies for lower cohort default rates.

Managing through this tough student demographic in a time of significant change required a new operating model for Lincoln. Students qualified for increasing amounts of Title IV funding, while at the same time, states reduced their funding, all of which created significant 90/10 challenges for the Company. At the same time, cohort default penalties expanded to a new three-year window.

Our strategy had to evolve to ensure we strengthened our expertise and the academic and behavioral performance of our demographic. In addition, we focused on remaining compliant under all federal guidelines, staying out of the media by offering solid customer service and student outcomes, understanding new misrepresentation laws while implementing revised marketing and sales processes, and also creating a solid operating platform that would comply with any new rule that the Department could create.

Furthermore, it was our impression that pressures on for-profit education would require not only compliance and outcomes, but a business model that differentiated our product from that offered at community colleges and other sector companies. Therefore, we honed our product over the last three years to shift from fully online, undifferentiated degree programs, which were out of Lincoln's expertise, to utilizing our online platform for blended learning. We considered programs that offered a short academic timeline toward a job, and we favored the skilled trades and technical areas for our future growth.

Retrenchment in the public eye is not an easy task. I reiterate the background that we have shared in bits and pieces over the last three years because, in addition to all we have endured, we have also managed significant changes to our sales process, which we implemented early and aggressively.

And for the first time in three years, and despite weather-related setbacks in Q1, we have returned to growth in the year-over-year new student admissions, which is an important inflection point for the Company. Although we continued to suffer EBITDA losses early in the year, we anticipate a positive cash flow year and seasonal trends that will bring us back to profitability in the second half of the year.

In addition, we expect our earning population will approximate last year's population in the third quarter, again showing an inflection point in our student population for the first time in over three years.

As we assess the current operating environment for Lincoln, the distraction of impending federal regulations remains. A recent US Chamber of Commerce article reminded us that as our country faces an increasingly widening skills gap, now hardly seems the time to strip at-risk students of opportunities for educational equality. While we can't solve all of the issues facing education in this country, we believe that students who secure a vocational or technical education or learn a trade will be prepared to enter the workforce.

Training at Lincoln has prepared individuals for specific trades, careers, and professions for 70 years. I know I speak on behalf of all Lincoln employees when I say that we remain optimistic and focus on our mission and strategy despite all of this external distraction and negativity.

Earlier this week I had the great pleasure of accompanying a member of Congress to one of our campuses and was reminded every step of the way why we are an important part of the country's educational infrastructure. As we toured the facility and walked through the automotive bays, stopped in the high-performance racing lab, toured the HVAC training area and, also, the two-story electronics Smart House that educates students about wiring and electrical systems, I couldn't help but think that this is where the skills gap is being addressed. The Congressman agreed the students of this campus would be described as a challenged demographic; yet, when they leave our doors, an entirely new world of opportunity is open to them, one that wouldn't be there without a Lincoln Tech school.

And for this particular campus, over 100 employers in this Congressman's district hired Lincoln graduates, the names of which are commonly known, with some smaller companies included, and other small businesses owned and operated by some of our past graduates. It is the American dream in action.

At this particular campus we enrolled and started 1,000 new students, which we do every year; and we have been doing that in this particular community for years. The Congressman agreed that if it were not for a Lincoln Tech in his area, those young people would be a financial drain on the community versus impacting it positively.

While we continue to drive improvements of student outcomes across our Company, our primary objective is to return to growth in student starts and rebuild our student population. We're pleased with the first quarter of 2014, which marks a reversal of the decline in starts we have experienced over the last three years.

We also believe our efforts will result in improved second-quarter 2014 new starts over the prior year. Moreover, we expect that our student population at the end of the second quarter will approximate our ending population as of June 30, 2013, which will be the first time we will see flat year-over-year comparison in student populations since 2010.

We get many questions about our verticals and how they perform when we manage our Company as one segment, which gives us the latitude to add diversified programs to any campus in order to leverage the local management infrastructure. As I mentioned on the last call, ex-corporate, we had approximately 80% of our campuses profitable, while 20% weighed down the Company's performance, based on highest fixed costs, diminished ATB population, and some other issues. We are exploring all strategic options to address the poor-performing campuses.

Moreover, of the schools performing well, our automotive and skilled trades campuses lead the Group in terms of profitability. On a positive note, our health-related campuses, although not as profitable, so the highest amount of new student growth in the first quarter.

Let me take a quick minute to speak about our dividend. We added the dividend as a shareholder benefit and did it with a long-term expectation that the Company would remain viable even through a period of retrenchment.

Our goal is to continue issuing the dividend on a quarterly basis, based on our expectations for long-term success and in the spirit of valuing our shareholders, and until a time comes where we can't sustain it or we have better use for those dollars operationally. To the latter, because of the timeline to approve and launch new programs, it would be rare that we would see a need to reallocate those dollars with short notice.

We still have a ways to go in the Company's transition. However, through focused effort and a vision for the future that includes Lincoln becoming the preeminent technical training provider in the country through honing programs and strategic industry partnerships, we know we are differentiating our Company within the landscape of educational options within the United States.

Scott Shaw, our President and COO, has been focused on ensuring our infrastructure is capable of fulfilling our mission and that we are tracking against our initiatives. And I will now turn the call over to Scott for an update on our operations. Scott?

Good morning, and thank you, Shaun. I will spend my time sharing with you the progress that we've made in returning Lincoln to start growth as well as continuing to communicate how we are positioning Lincoln for long-term success.

As Shaun outlined in his remarks, we are focused on meeting the needs of our shareholders, students, regulators, and employees. We will meet these needs by continuously taking actions that lead to long-term, sustainable growth and profitability.

Therefore, every decision we make must be balanced and must result in moving the Company forward. We will continue to drive for growth while further improving our student outcomes. We will create increased shareholder value while continuing to meet or exceed every government regulation. We will continue to build a Company that empowers our employees to serve our students in new and creative ways. All of this is very achievable, and our first-quarter results show that we are on track to achieve these objectives.

During our last call I shared with you our vision to be the leading middle-skills training Company in the country by concentrating on offering certificate and associate degrees in high-demand fields that offer our students a high return on their educational investment. We also shared our success in improving our student outcomes and successfully lowering our exposure to government regulations. We also highlighted that we saw improvement in our enrollment trends that indicated that we should achieve growth in student populations in 2014.

As Shaun mentioned, we achieved a 4.6% increase in our starts. We continued to improve our student outcomes, and our interactions with our accreditors and regulators continues to be very positive. Despite the impact of this past winter and a strengthening employment market, we continue to see strong interest in our programs and a significant increase in our year-over-year lead-to-enrollment performance. This demonstrates a strong public awareness of the value of a Lincoln program and of the impact training at Lincoln can have on a person's career prospects.

As we've mentioned in our last two earnings calls, we have been adjusting our marketing spend in order to become more efficient. For the quarter, we spent less in advertising and, as expected, received fewer inquiries. However, we achieved more enrollments and more starts.

Our success in growing starts is directly attributable to improvements we are making in our admissions process coupled with additional scholarships. We have taken new steps in 2014 by reengineering our admissions interview processes. Our campuses are now using interactive tablets to engage prospective students by showing videos of actual Lincoln instructors discussing the very subjects in which students are going to train.

Bringing our classrooms and training base to life in this way is innovative and speaks directly to the new generation of potential students. Videos are also shown on topics such as financial aid process, ensuring that future students gain factual information which is standardized across all campus locations. This also happens as our admissions reps take students on walking tours of our campuses, adding an exciting, interactive new dimension to those tours at the touch of a button.

Lincoln has also launched a new online applicant portal, which reshapes the way students apply for admissions with a paperless one-stop online tool, now available at more than half of our campuses nationwide. Students seeking admission can now take advantage of a single website that walks them step by step through the application, enrollment, and financial aid processes. All of our actions are designed to improve the student experience, build the Lincoln brand, educate students as to their opportunities and responsibilities, and improve processes that eliminate hurdles to start their education.

While we are pleased to be growing starts again, we are not satisfied with the level of growth. Our plan is to significantly build our population so that we can benefit in 2015 from a larger carry-in population that will generate profits. In the near-term we continue to see strength in enrollments, but at the same time, the environment remains very choppy. Overall, student start growth for the Company continues to be achieved, but we are still not at a point whereby all campuses are rising in unison.

Given these trends, we are focused on growth initiatives that are both Company-wide as well as campus-specific. In general, start growth in the first half will be generated by enhancements to our admissions process, which I reviewed. In the second half, we expect to add to these improvements, with additional starts coming from improved high school starts and new programs.

Just as we have made adjustments to our media admissions process, we have also improved our high school admissions process. The most concrete change has been the speed with which we process our students through the financial aid process. We know that start rates improve when students clearly know how they will pay for their education well in advance of starting. Consequently, we have increased our financial aid resources and expanded our centralized call center to better serve our high school students relocating to one of our five destination automotive campuses. We believe that by having more students further along in the financial aid process prior to starting, we'll produce improvements in starts at these campuses.

The ultimate goal of increasing our starts is to increase our profitability through better capacity utilization. We continually seek to maximize each class start while also evaluating what additional programs could be offered at a campus to further penetrate our market and increase capacity utilization.

Campus profitability is determined by a number of factors, including facility costs; student acquisitions costs; average class size; and total population. In general, our verticals with the largest average class size are automotive and skilled trades, because classes in these verticals can be more easily merged. As a result, on average, campuses that have these offerings tend to be our more profitable campuses.

Again, our focus is on returning our Company to growth. Our student satisfaction surveys tell us that our students are pleased with their education and that they would recommend Lincoln to their friends. After interviewing our graduates, we know that our students consistently highlight support from our faculty and staff as a major reason why they were successful and why someone should enroll at Lincoln. We believe our employees are our greatest asset, and they create the environment that enables our students to become successful.

Furthermore, whenever we bring potential employers, industry organizations, or politicians to our campuses, they all comment on how impressed they are with our students, faculty, and facilities. We know we have a quality product and that our impact to our local communities is overwhelmingly positive.

Despite all this success, there are definitely many prospective students who are unaware of who we are and what we can do for them. To help overcome this, we are increasing the number of local events that our campuses sponsor in order to drive more people onto our campuses.

When we bring students onto our campuses, we know that our facilities, employees, and offerings will win them over. These events bring excitement to the campus and often reach students that we may not have reached through other means. Moreover, these events also bring employers onto our campuses, which helps with placement and with fostering deeper ties with the local community.

Here are two examples of some recent events and how the health campus in Pennsylvania worked with the local County Chamber of Commerce to post a two-day youth leadership conference for 80 students from six local area high schools. Another example is: an automotive campus recently held a car show with 420 cars and over 1,000 attendees. These events have resulted in new enrollments, donations of equipment, job opportunities, internships, and even the offering of a scholarship by one happy employer.

In conclusion, our focus is on returning the Company to population growth and profitability. We feel confident that our actions are bringing us closer each day to this goal. We remain committed to upholding Lincoln's long legacy of compliance and strive to further differentiate ourselves from the competition.

We continue to invest in our people, programs, and facilities with the belief that quality endures and brings long-term value. Over the decades we have built our brand and established an important role for our schools in their local communities.

Some examples of our qualitative standings are: we believe that we have more ASE Master Certified Instructors in the Northeast than any other school. We are the largest provider of licensed practical nurses in the state of New Jersey. We have more Certified Master HVAC educators in the country than any other school. And we are one of the largest providers of post-secondary HVAC graduates.

These statistics are important to us because our vision is to be the largest middle-skills provider in the country. And with that, I will turn the call over to Cesar.

Thank you, Scott. Good morning, everyone. As we disclosed in our press release earlier this morning, and as Scott and Shaun mentioned, student starts increased 4.6% for the first quarter of 2014 as compared to the first quarter of 2013. We remain optimistic that this positive momentum will continue into the second quarter of 2014.

The deteriorating start numbers we experienced during 2013 resulted in us commencing the first quarter of 2014 with approximately 1,800 less students and we had on January 1, 2013. This led to a decline in our average population for the first quarter of 2014 to 9%, which resulted in revenue declining by 7.3% or approximately $6.3 million as compared to the first quarter of 2013.

The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which resulted in average revenue per student increasing 2.2% over the first quarter of 2013. Average revenue per student for the first quarter of 2014 was $5,645 versus $5,541 for the first quarter of 2013.

The decrease in student starts during 2013 also impacted our capacity utilization, which decreased to 35.4% for the first quarter of 2014 from 38.3% in the first quarter of 2013. The decrease in capacity utilization produced significant negative leverage as our operating margin decreased to a negative 11.8% for the quarter from a negative 8.6% for the first quarter of 2013.

Other key highlights of the quarter included: loss per share from continuing operations was $0.49 for the first quarter of 2014 as compared to a loss per share from continuing operations of $0.24 for the first quarter of 2013. For the first quarter of 2014 we were not able to avail ourselves to a benefit for income taxes as a result of a valuation allowance on our deferred tax assets.

The impact of the valuation allowance on a comparable basis was $0.21 per share for the first quarter of 2014. Free cash flow for the first quarter of 2014 was a negative $9 million as compared to a negative free cash flow of $4.8 million for the first quarter of 2013.

We paid a $0.07 quarterly dividend on March 31, 2014. We finished the quarter with $7.1 million in cash and cash equivalents and $5 million of borrowings outstanding on our credit agreement. Bad debt for the quarter was flat at 3.9% of revenue as compared to the first quarter of 2013.

Cost per start decreased 9.2% for the first quarter of 2013 to $4,389 from $4,834 in the first quarter of 2013. Cost per start during the quarter was positively impacted by a shift in advertising away from the aggregators.

Net accounts receivable on March 31, 2014, were $24.2 million as compared to $23 million at December 31, 2013. This increase in net accounts receivable was primarily due to seasonality. Capital expenditures for the first quarter of 2014 were $0.6 million and are expected to be about 3% of revenue for 2014.

Now turning to our loan program, as of March 31, 2014, the loan commitments to our students, net of interest that would be due on the loans to maturity, were $23.9 million as compared to loan commitments of $26.5 million at December 31, 2013. For 2014 we expect that these loan commitments will increase by $2 million to $3 million.

We finished the quarter with shareholders' equity of $133.5 million, down from $145.2 million at December 31, 2013. Shareholders' equity at March 31, 2014, reflects (technical difficulty) of dividends paid during the quarter.

I will finish my prepared remarks by providing our current outlook for the second quarter and for the full year. Our guidance is based upon our current expectations.

For the second quarter of 2014 we expect revenue of $77 million to $79 million, a decrease of $3.8 million or 4.6% from the second quarter of 2013. Net loss per share from continuing operations of $0.57 to $0.60 per share as compared to net loss from continuing operations of $0.30 per share for the second quarter of 2013. Net loss per share for the second quarter of 2014 excludes any benefit from income taxes. We expect student starts from continuing operations for the second quarter of 2014 to be up 2% to 4% from the second quarter of 2013.

We are reaffirming our previously issued 2014 guidance in terms of revenues, loss per share, and student starts. We also expect to generate positive operating cash flows in 2014, consistent with prior years.

Finally, the Board of Directors has set a record and payment date for the dividend for the second quarter of 2014. The cash dividend of $0.07 per share will be payable on June 30, 2014, to shareholders of record as of June 13, 2014.

In conclusion, we believe that we are gaining momentum in some of our verticals and are optimistic that we will return to profitability in the second half of the year. Now we will open the call to your questions. With that said, I'd like to turn the call back to the operator. Operator?

(Operator Instructions) Alex Paris, Barrington Research.

I have a question about guidance, I suppose. Looking at the better-than-expected or better-than-your-guidance new student starts for the quarter of 4.6%, I think you said on the last conference call you were up 3% through February. So that suggests that March was up at an even greater rate. Yet your guidance for the year-over-year growth in the second quarter is conservative. Could you add some more color there, please?

Alex, it is Cesar. Yes, I think while we beat our guidance that we gave for the first quarter, we are bit concerned with the third-quarter estimates that we previously had, primarily due to the impact we had on the high school program related to weather in the first quarter. So for now we're taking some caution to make sure that we can make up those days that were missed, to try to make up some of those high school moments.

As far as the guidance for the second quarter, it is in line with what we projected for our total-year guidance. I think where we are bit different from the Street is, obviously, in the third- and fourth-quarter guidance. But our guidance for the year remains intact.

Okay, very good. So with regard to weather, again, given the financial performance, I'm assuming that you made up those days in terms of revenue with Saturdays and so on. The issue is you don't necessarily get back the days for marketing. Is that right?

Alex, it is Scott. Yes, that is right. So it's really kind of two different impacts. For our non-high school markets, you are absolutely right with regards to the media. There are ways -- and we did encourage our employees to work longer hours; work over the weekend; and continue, frankly, to work from home when possible, because they have access to all of our technology and can communicate with the students.

What you lose is that ability to bring the students into your schools, which as I mentioned, is a very powerful selling tool. But certainly on the media side there were much more ways for us to overcome the challenges that the weather provided us.

On the high school side it's a little different, because to the extent that a high school is closed, and a rep could not get in and visit and make the presentation; and then that gets compounded by the fact that many schools got pressed for number of days, and therefore, frankly, maybe shut their doors more often than not to having reps come in -- we see that it could impact us on the high school side. But with that said, there are also activities that we are doing with regards to high school to overcome those challenges.

It had to impact us somehow. It's very difficult to quantify. But as you can see, we're still growing as a Company. And we're very confident that we can overcome the challenges going forward.

Okay, so based on that guidance of 2% to 4% new student starts growth in the second quarter, you are saying that the total population at June 30 going to be equal to that of the year-ago number?

That is correct. The end of the year population, correct.

So based on the fact that you are getting positive -- oh, the end of the year population, not the year-end --?

I am sorry -- end of the quarter, I meant to say.

Okay, yes. So based on the fact that you are getting positive revenue-per-student growth -- I know you are not giving guidance, but then that suggests third-quarter revenue is going to be positive year over year. And then with that positive, you're going to have a shot at better-than-breakeven earnings in the third quarter. And I know you have said it for the second half, but I'm just saying, the third quarter.

Alex, look. I will turn it over to Cesar in a second. Let me just temper your comments just a little bit. We still look at average population as the key indicator of revenue growth. And so although we are very excited about the end of quarter population approximating last year, the average population still has to catch up a little bit. So I will turn it over to Cesar.

Yes, obviously, we're not providing guidance for the third quarter, Alex, but I think Shaun is correct. The average population lags by a quarter. So if we would expect our ending population to approximate what it was last year at June 30, we wouldn't expect that the earning population, which is based on average population -- that it is a quarter lag.

Right. So this is -- I get you; I understand that, then. But for the second half, Q3 plus Q2, it is positive net income.

Q2 plus Q3?

I'm sorry, Q3 plus Q4.

That would be correct, based on our yearly forecast.

Yes. Okay, thanks very much.

Alex, you set the record for eight questions in one. (Laughter)

Sorry about that. I will jump back in the queue.

Jeff Silber, BMO Capital Markets.

It is actually Henry Chien calling on behalf of Jeff. Just had a question on the capacity utilization, up 35.4%, that you mentioned. Do you guys have a view when do you think that will improve?

Sure. It will improve each quarter. As we continue to grow the population, that capacity utilization will improve. So every quarter where we get increased start growth improves the capacity utilization.

Got it. Disappointing -- you mentioned that it was a decline year over year. When do you expect it to improve year over year?

It would be similar to the population. So just as we said, at the end of the second quarter, our populations will equal, we anticipate, where it was last year. And the average population well then start increasing over the prior year in the third quarter. So with each of those steps, the capacity utilization will improve. So the same timing.

Got it. Okay, thanks. And just a quick question on the second-quarter guidance. In terms of the EPS loss, it is much worse than first quarter 2014, but revenues are somewhat flat. Are there any major differences in the expense lines that we should model in between first quarter and second quarter? Thanks.

Well, the second quarter is historically our weakest quarter of the year. Obviously, it's a time when students don't necessarily -- it is our lowest start period of the year. I should say that except for the fourth quarter, but the fourth quarter gets the benefit of the average population.

So the second quarter -- traditionally, we continue to invest for our third-quarter starts. But historically, it has the lowest start rate as far as the actual number of students. And so that does always impact our operations numbers in the quarter.

So it is seasonal in nature. And if you go back to every single quarter for the last couple of years, you'll always see that in the performance in the second quarter. The expenses tend to hold flat, but revenue tends to increase little bit. So it's just the seasonality of the business.

Got it. And so I guess that we'd point to the SG&A line, then?

Well, we would expect -- that is correct. We would expect that, obviously, since the starts are less in the second quarter, that revenue would be -- I mean, we guided to $77 million to $79 million. So, obviously, we expect revenue to be down from the first quarter. And so, obviously, if revenue is down, expenses remain relatively flat. That is where you would come up with the difference in the guidance on the EPS.

Got it. Okay. Thanks so much.

Trace Urdan, Wells Fargo Securities.

I just --

He seems to have dropped off. (Operator Instructions)

That was odd. Sorry about that. So wanted to just begin with a clarifying question. So when you say that you think that the end of quarter population will be flat year over year, what is your end of quarter number for June 2013? Because I have 13,985.

That is a correct number.

Correct.

Okay. So if you do 3% start growth, and you think you're going to end the population at 13,985, in my grammar school math suggests that the persistence is going to step up pretty considerably here in order to get to that number. Is that your expectation?

That is true.

But it is also graduation.

Right, but that is the part we can't see.

Correct. But Trace, let me just mention that persistence has held strong. It is actually -- our performance is benefiting from persistence along the way. And so we have seen those improved rates over the last few quarters sequentially -- you know, the Lincoln EDGE program that we put into place really was designed to assess enrollment risk, and provide financial literacy, and mentor students, et cetera. In the first quarter alone we saw persistence improve by about 80 basis points. And so we are seeing a benefit from persistence that we expect will continue throughout the year.

Okay. And combined with your graduations, I take it, as well.

Right. Well, the graduation number ebbs and flows, but yes.

Right. Okay. And then I also wanted to ask -- I think in your prepared remarks, Shaun, you described positive cash flow for the year. Did I hear that correctly?

You did.

Yes.

And are we talking about operating cash flow or free cash flow?

Operating cash flow.

So that suggests, as well, that you expect --.

Actually, we expect to have both operating and free cash flow for the year.

Okay. So that also suggests a pretty strong second half, because the first quarter obviously is putting you in a net deficit position against that goal.

Well, that is correct. But I think if you go back and you historically take a look at our third- and fourth-quarter results, you will see that our fourth quarter has historically been profitable. Even last year we had a profitable fourth quarter.

So I think that is just the seasonality inherent in our business. And it has always been a hockey stick, and we don't see any reason why it would change this year.

All right. And then the final question, just on the mechanics here, is -- Cesar, I think you said that CapEx was going to run at 3% of revenue for the full year?

That is correct.

You are, like, at 3 times that number for the first quarter. So can you just talk qualitatively about what is going on in that --?

No, I'm up $0.6 million for the first quarter. $600,000.

Oh, $600,000. I thought you talked about -- I thought you said $6 million. So that is --

No, it's $0.6 million.

$0.6 million.

Got it. All right. I thought I heard $6.6 million. So my bad there. Thank you.

And then the last question I had was just wondering if you could comment a little bit on the relative demand across the different program areas. You gave a shout-out to automotive there a little bit, but can you describe what you are seeing -- if there are any identifiable trends by program offering?

Trace, it is Scott. I can't say there are really any identifiable trends, but I can say that for the first quarter, we definitely saw more strength this quarter in our Allied Health program. So they grew more so than our automotive programs -- which is nice, because as Shaun said, our automotive programs -- our campuses with those programs are more profitable schools. So to the extent we can build up the Allied Health programs more, that will help drive greater profitability over more campuses.

Other folks in the Allied Health space have suggested that a strengthening employment market was creating something of a headwind. Do you see that at all, or you not seeing that?

Well, it is always tough to know who doesn't come to you. All I can tell you is from a segment -- from a vertical standpoint, we were able to increase our populations. Again, we feel, at this time at least, the greater hurdle is just the financing of the education, not as much so the lack of demand for the education.

Okay, great. Thank you.

Alex Paris, Barrington Research.

Just one follow-up this time, I promise. (laughter) And I know you are trying to tamper my enthusiasm, but I'm looking back to past peaks. Back in 2010 you had operating margins of 20.2%. I realize that was on nearly $700 million in revenue, with 45 campuses and maximum capacity utilization. Over the next three or four years, what do you see, based on what you expect today, operating? Can we get back to those past peaks, or that would not be in the cards?

Over the next three to four years, I think it's hard to predict. I think that the growth that we achieved in the 2009/2010 periods -- I think those are things of the past. I think we going to see a lot more modest growth.

Over time, I do believe that 10%, 15% operating margins are achievable, but whether or not that would be within a three-year period -- again, it's all dependent on the economy and what happens in DC. But I would be a little bit more tempered, because the days of growing starts 20%, 30% -- at least we -- in this economy, we don't see that happening in the near term.

But with that said, we do have schools that operate at that level when they have the right population today.

What is the incremental -- and this is related; it's not a completely new question. What is the incremental margin contribution for additional revenue?

It is probably around somewhere around 50%, until you probably get up to about 50% capacity utilization. Once you go over 50% capacity utilization, it probably starts going more -- it continues to rise 60%, 70%, depending on the capacity utilization. In our peak it could be as high as 80% in the past.

Great. That's helpful. Thanks, again, very much. Good job.

There are no further audio questions at the moment. (Operator Instructions). There are no further questions. I would now like to turn the call back to Shaun McAlmont. Please go ahead, sir.

Thank you, Steve, and thank you, everyone. As you can see, we are focused, and we have been very busy executing on initiatives which we know will continue to better position us, especially through this time of uncertainty. But we do look forward to updating you on our next call, and I wish everyone a good day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.