Element Solutions Inc
Q4 2008 Earnings Call Transcript

Published: 22 Jan 2009

[Operator:]

Greetings, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Year-End Earnings Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. Joining us today from Management of ITT Educational Services, we have Kevin Modany, President and Chief Executive Officer and Dan Fitzpatrick, Senior Vice President and Chief Financial Officer. Before we begin, ITT Educational Services Incorporated wishes to remind you that this conference call may include forward-looking information and actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in today’s news release or in the company's public filings with the Securities and Exchanges Commission. Thank you Mr. Modany, you may begin.

[Kevin M. Modany:]

Thank you. Good morning everyone, and thanks for joining us on our conference call to review our operating and financial results for the fourth quarter and full year of 2008. As usual, Dan Fitzpatrick, our Senior VP and Chief Financial Officer, is with me on the call this morning. In a few minutes, he will provide additional color on our financial results in his prepared account. We will begin the call by giving you a quick overview of the items that we will review today. We will follow our usual conference call outline by providing you with updates in several key areas of the business. First we will provide you with some additional color on the exceptional fourth quarter operating results, reported earlier this morning in our press release. Then we will touch on the status of a few of the key elements of our strategic growth points. Following the strategic review we will give an update on the student lending environment. Now, I will turn the call over to Dan who will provide additional comments on the excellent financial results for the quarter and full year, including as previously promised some additional insight in to the reserve accounting for our internally funded student financing. I will then close of the call with a quick summary view of our current opportunities for the organization at which point, we will open up the phone lines for your questions. Let me start, by reiterating some of the information from this morning’s press release. We reported exceptional operational and financial results for the fourth quarter 2008, that far surpass our internal growth. This amazing performance was achieved through the focused efforts of our Management, faculty and staff and their efficient execution of our proven growth strategy. We would like to take a moment to recognize them for their contribution and to thank them once again for their dedication to our organization, our students and the employers who hire our graduates. As a result of their efforts we ended 2008 on an incredibly high note, and entered the New Year with a great deal of optimism regarding our ability to execute on our strategic plan to deliver additional shareholder value over the long-term. As a result of our terrific performance in the fourth quarter, and optimistic outlook regarding the strong demand for our programs of study as we entered the New Year, we have set our internal goal for 2009 EPS in the range of $6.25 to $6.45. Turning now, to a review of the key operating results. As read in the press release, New Student Enrollment increased to very impressive 29.2% to 14,911 in the three months ended December 31, 2008. Compared to 11,542 in the same period in the prior year, significantly exceeding our internal expectations. The New student enrollment increased in the fourth quarter, marked the single largest year-over-year percentage increase in new student enrollment since we became a public company back in 1994. The new student enrollment results were supported by a 5% increase in marketing expenditures during the first quarter of 2008, compared to fourth quarter of ‘07. The year-over-year increase in advertising expenditures in the fourth quarter of ‘08 was less than we had originally planned as the slowing National economy lowered the demand for advertising across the various media outlets that we utilize, which caused the cost to decline. Looking ahead, we believe that our total advertising expenditures in 2009 were increased by approximately 10%, compared to the prior year, as we support the opening of new locations and the introduction of new programs at existing locations. The material disruption in the economy and the escalation in the unemployment rate for unskilled labor further emphasized the importance and value of obtaining a high-quality career focused postsecondary education like that provided by ITT Technical Institute. We believe that the current economic environment, contributed to very robust response rate to our media placement across all six schools of study during the fourth quarter of 2008. In addition that a favorable advertising environment and the strong demand for our programs of study, the average tenure of our student recruiter staff increased in the fourth quarter of 2008, compared to the same period in the prior year, marking the second consecutive quarter for such a year-over-year increase. As many of you are aware, the lead conversion rates of student recruiters have a historically correlated with their tenuring the position. As a result more experienced recruiters typically converts student increase at a higher rate than less experienced representative. We believe that each of the favorable marketing and recruiting practice previously mentioned, contributed to the record new student enrollment increase during the fourth quarter of ‘08. Those positive factors continued, as we enter the New Year. As a result, the demand for our programs of study, measured by the level of inquiries from perspective students was extremely robust as we began the first quarter of fiscal 2009. Further, we believe we are very well positioned to service the increased level of perspective student interest in part, because we employed approximately 15% more student recruiters at the beginning of 2009, than we did at the start of 2008. Turning now, to Student persistence. As we noted in the earnings release, we experienced an 80 basis point decline in Student persistence in the fourth quarter of 2008 to 76.5% compared to 77.3% in the fourth quarter of 2007. This decline was driven by a large year-over-year increase in the number of graduates in the fourth quarter of 2008. That we had anticipated. If you exclude the impact of the increase in the number of graduates, student persistence improved in the fourth quarter of 2008 as a result of higher student retention, compared to the fourth quarter of 2007. In 2009, we believe that student persistence will be approximately the same as in 2008, after excluding the increase and the number of graduates that we anticipate in 2009. The incredibly strong increase in new student enrollment combined with student persistence that was higher than expected, resulted in a 16.9% increase in total student enrollment to 61,983 as of December 31, 2008 compared to 53,027 as of the same date in ‘07. Turning now, to graduate employment. As of December 31, 2008 the graduate employment rate of our 2008 employable graduates was approximately 7 percentage points lower than the graduate employment rate of our 2007 employable graduates in December 31, 2007.We recognize the impact of the material changes in the economy, on the employment prospects for our graduates, we believe that the December 31, 2008 graduate employment rate, was adversely impacted disproportionately of the large number of graduates in the fourth quarter of 2008. As a result, we believe that the final graduate employment rate of our 2008, employable graduates as of the cutoff on April 30, 2009 will be less than the final graduate employment rate of our 2007 employable graduates, but that is a year-over-year difference in the graduate employment rate will be less than 7%. We will report the final graduate employment rate of our 2008 employable graduates, in our July 2009 earnings release. The average starting salary reported by our 2008 employee graduates as of December 31, ’08 was $33,370. This average is approximately 2% higher than the average starting salary reported by our 2007 employee graduates, as of the same date in ‘07. Despite the economic slowdown, we are cautiously optimistic that the final average starting salary of 2008 employed graduates, will be higher than the average starting salary of our 2007 employee graduates, but that the increase in the average starting salary will likely be less than the year-over-year increases of more than 5%, experienced in each of the past two years. At this point I would like to provide an overview of our progress with a few of our key growth initiatives. As many of you already know a key part of our organic growth strategy involves increasing the number of locations in our system. We expand geographically by adding new colleges from which we are now 105, and new learning sites of which we are currently nine. As we reported in our earnings release this morning, we began operations at our 104th and 105th colleges during the fourth quarter of 2008, with the opening of our new colleges in Springfield, Missouri and Huntington, West Virginia. A new location in West Virginia marked the beginning of operations in our 37th State. These two new ITT Technical Institutes across the eight the number of new colleges that began operations in 2008, which is the high end of our previously reported goals beginning operations at between 6 and 8 new locations in 2008. It is our internal goal to open between 6 and 8 new locations during 2009. Developing and introducing new associate and bachelor degree programs of study and both technology and non-technology fields that can be delivered both in residents and online, is another key part of our internal organic growth strategy that we have deployed over the years. In the 12 months ended December 31, 2008. We added 190 programs that we are offering at new and or existing ITT Technical Institute throughout the United States. As a result we significantly exceeded our originally stated goal to add approximately a 125 programs in 2008. As results were reported in our earnings release this morning, it is our internal goal to add 250 programs to new and or existing ITT Technical Institutes in fiscal 2009. During the fourth quarter, we continued our work to expand the number of our colleges that offer an associate degree in nursing, as we obtained all of the necessary regulatory authorization to begin offering the ASM program at three additional locations; bringing to four the total number of ITT Technical Institute to authorize and offer the new nursing program. We anticipate receiving the required authorizations to offer an associates degree in nursing program at several additional colleges, during 2009 and remained very excited about the prospects of our nursing curriculum making a significant contribution to our growth strategy over the long-term. As has been our practice, we entered the New Year with several additional programs of study and various stage of research or development. These potential program offerings are in both technology and non-technology areas of study and can be delivered both in residents and online. We plan to introduce several of these new programs at one or more of our ITT Technical Institutes in the second half of 2009. I would like to shift gears and then provide an update on the student financing environment. We will begin with a very brief update on the market for private student loan. As we have noted in the earnings release, we did not observe any further disruption in the ability of our students to access private student financing during the fourth quarter of 2008 and there were no material changes in the number or composition of lenders offering private loans to our students. In addition, based on those recent discussion with private lenders, we do not expect any further material disruption in this area, during 2009 and could have a significant adverse impact on the ability of our students to access the financing they need to pay the cost of ITT Technical Institute education. During the fourth quarter of 2008, we continue to provide internally funded financing to eligible students that require our financing but do not qualify for private education loan as a result of the tighter underwriting standards currently used by private lenders. The criteria that we used to determine a student’s eligibility for our internal financing program continue to be similar to the criteria used by the lender that made the most of the private education loans to our students prior to 2008. The impact of the internally funded student financing on our financial statements during the fourth quarter of 2008 included the 3.8 day increase in our day sales outstanding at December 31, 2008 to 9.8 days compared to 6 days at the same point in the prior year, and the 280 basis point increase in our fourth quarter of 2008 bad debt expense as a percent of revenue to 4.9% compared to 2.1% in the fourth quarter of 2007. We expect to continue providing internally funded financing to our students in 2009 and based on the information that we obtained to date regarding the current underwriting standards used by the lenders that offer private education loans to our students. We believe that the amount of internally funded student financing that we may need to provide to our students in 2009 will be approximately $75 million. We have incorporated our estimates to the amount of internally funded student financing in 2009 into our internal goals for the new year, including the related impact of the financing on our bad debt reserve and day sales outstanding. We continue to make progress on our initiative to charge interest on the internally funded student financing that we provide and remain on track for this component of the program to be implemented by the end of the first quarter or beginning of the second quarter of 2009. We have not however included in our 2009 internal EPS goals any estimate for any interest income that may be derived in the future from our internally funded student financing. While we did take into consideration in studying our 2009 internal goals, our estimate of the type and the model financing that will be available to our students in 2009. To reiterate, those relevant goals are as follows

[Dan Fitzpatrick:]

Thanks Kevin. I would like to begin by reviewing the key financial highlights for the quarter and the full fiscal year. In the three months ended December 31, 2008, revenue increased 21.4% to $279.8 million compared to $230.4 million in the same period in 2007. The revenue increase was primarily due to a solid total enrollment increase as of September 30, 2008, compared to same point in 2007. Revenue per student increased 5.9% in the three months ended December 31, 2008, compared to the same period in the prior year as a result of improved student retention, and the 5% increase in tuition that became affective with the academic quarters that began in March 2008. Revenue in the full year of 2008 increased 16.8% and crossed a $1 billion mark for the first time to $1.02 billion compared to $869.5 million in the 12 months ended December 31, 2007. Plus educational services increased $13.1 million or 14.8% to $101.6 million in the three months ended December 31, 2008 compared to 88.4 million in the three months ended December 31, 2007 primarily due to the higher costs and to support an increased number of students and to operate our new colleges. Cost of educational services as a percentage of revenue decreased 200 basis points, to 36.3% in the fourth quarter of 2008, compared to 38.3% in the three months ended December 31, 2007. In the 12 months ended December 31, 2008 cost of education international services as a percentage of revenue decreased approximately 350 basis points to 37.8%, compared to 41.2% in 2007. Student services, administrative expenses increased $11.5 million or 17.8% to $76.2 million in the fourth quarter of 2008 compared to $64.7 million in the same period the prior year. The increase was primarily due to the increase in bad debt expense to 4.9% of revenue in the fourth quarter of 2008 compared to 2.1% in the same period of 2007 as a result of the increased amount of internal financing that we have provided for our students, as Kevin previously mentioned. To reiterate, we expect to continue offering internally funded financing to our students who require GAAP financing but do not qualify for third party private loans due to higher student or higher lending standards credit standards. As a result, we believe that the amount of internally funded student financing that we need to provide for students in 2009 will be approximately $75 million and that our bad debt expense will be in the range of 4% to 6% 2009 revenue. Despite the 280 basis point increase in bad debt expense, student service administrative expenses as a percentage of revenue declined 90 basis points to 27.2% in the three months ended December 31, 2008 compared to 28.1% in the three months ended December 31, 2007 primarily as a result of the efficient execution of our advertising plan in the fourth quarter of 2008. As Kevin noted, we believe that we will continue to experience a favorable advertising market in the New Year, we believe that the year-over-year increase in 2009 advertising expenditures will be approximately 10% compared to 2008. For the full year, student services administrative expenses as a percentage of revenue decreased 100 basis points to 29.9% in 2008 compared to 30.9% in 2007. Operating income increased $24.8 million or 32% to $102.1 million in the fourth quarter of 2008 compared to $77.3 million in the three months ended December 31, 2007. Operating margin increased 290 basis points to 36.5% in the fourth quarter of 2008 compared to 33.6% in the fourth quarter of 2007. The operating margin for the full year of 2008 increased to 32.3% of revenue or 450 basis points compared to 27.8% for the full year 2007. As we reported in this morning's earnings release, diluted earnings per share in the fourth quarter of 2008 increased 34.2% to $1.61 compared to $1.20 in the same quarter of 2007. For the full year of 2008, diluted earnings per share increased 39.4% to $5.17 compared to $3.71 in 2007. Cash equivalence restricted cash investments were $375.9 as of December 31, 2008, compared to $317.2 million as of December 31, 2007. Day sales outstanding increased 3.8 days to 9.8 as of December 31, 2008 compared to 6 days at the same period in the prior year. The increase resulted primarily from the increase the amount of internally funded student financing provided to our students. As noted early on the call and reported in this morning’s earnings release, we anticipate DSO for 2009 will be in the range of 15 to 20 days. In the three months ended December 31, 2008 we did not repurchase any shares of our common stock they are approximately 4 million shares of our common stock remaining under the share repurchase program authorized by our Board of Directors. Depending on the market conditions we intend to repurchase additional shares of our common stock during 2009. Lastly, I would like to provide a brief explanation of our method for determining the bad debt reserve for our internally funded student financing. The receivable balance and the amount due from us from internally funded student clients is recorded as tuition is earned at the duration of the program of study. We record a bad debt reserve as a percentage of this receivable balance on a student-by-student basis. The reserve rate applied to each student is specific to that student and based on the historical default for data for private loans made to students with a similar credit profile. The historical default data was derived from third party private loans they are offered to our students prior to 2008. In addition to the initial reserve that I just described a second layer of bad debt reserve is applied to the account for each student that drops out of his or her program before graduating. This additional layer of bad debt reserve is to write down the amount of internally funded financing and the account balance of inactive students for our historical collection rate for balances owned by student’s no longer in school. As most of you know the percentage of the balance is collected with generally less for inactive students then for graduate that is the need for a second layer of bad debt reserve. Our third layer bad debt reserve is applied to inactive student balance that is not collected within 12 months from the date that student went inactive. This layer result in a complete write-off of inactive student balances within 12 months. To summarize, the amounts reflected on our balance sheet as accounts receivable from our internally funded student financing consists of three categories of student balances, first balances owed by students who have graduated from the program of study net of a credit specific reserve. Second, balances owed by students currently enrolled net of a credit specific reserve. Third, balances owed by students who became inactive during the past 12 months and net of a credit specific reserve an additional inactive student reserve. All reserve amounts noted above are recorded on our income statement as bad debt expense. Our 2009 expectation for bad debt expense as a percentage of revenue is in the range of 4% to 6% and incorporates the previously noted reserve methodology that we believe is both appropriate and conservative. I would like to close out my prepared comments by emphasizing that we believe that the fundamentals of the company are incredibly strong. Our prospects for a continued strong end performance in 2009 look very good. I would also like to reiterate that we are confident that our students will continue to have access with sufficient financing to pay the cost of the ITT Technical Institute Education, and we believe that we are incredibly well positioned to achieve our internal 2009 EPS goal in the range of $6.25 to $6.45. With that I will turn it back over to Kevin.

[Kevin M. Modany:]

Thanks Dan. Hopefully you can tell that we are as optimistic as we have ever been about our ability as an organization to achieve our internal operating goals and we believe that we are well positioned for continued success throughout 2009. At this point I would like to ask the operator to open up the line, so that we can entertain questions.

[Operator:]

Thank you, ladies and gentlemen at this time we are conducting a question and answer session. (Operator Instructions). Our first question comes from Mark Marostica from Piper Jaffray. Please proceed with your question.

[Mark Marostica:]

Thank you and congratulations on the quarter.

[Kevin Modany:]

Thank you Mark.

[Mark Marostica:]

My first question relates to the historic growth that you put up in the quarter and I am curious whether there was historic growth across all your schools of study or were there any schools that were incredibly strong and maybe others that were weaker and could you give us a sense how that played out?

[Kevin Modany:]

Sure, we actually saw very strong response rates, conversion rates and starts across all six schools of study but one of them wholly sort of isolating in the last couple of calls of business, I would say if anyone of then was lagging a little bit it would be the business program but aside from that pretty evenly dispersed across all the other schools.

[Mark Marostica:]

Okay and as you look at your guidance 625 to 645 for ’09. What are you implying in terms of historic growth in that metric?

[Kevin Modany:]

Well, we are not giving guidance at the start line we are not giving guidance at the revenue line and we talked quite a bit about our long-term expectations for historical growth, which should probably take in the 8% range on total enrollment and new start quite clinically. We have also said there are periods where we have performance above that and periods where we will be below that I would say that just with the dynamics that exist in the market place today this will be one of the series of time where you would expect to do a little better than that. We have taken all those variables into consideration and putting together the plan, but ultimately it leads to the 625 to 645 guidance.

[Mark Marostica:]

Okay and then I wanted to just touch on the graduation rates that you talked about placement rates I should say. In the past you have given us the forward looking metric on job orders I believe as the percentage of next six months graduates. Given a sense how that metric looks at the current time?

[Kevin Modany:]

Mark, we have not given that metric. I am not sure if somebody else has given it I can tell you that you know we are still seeing job orders coming through but what we are also seeing is that employers are delaying some of their planning, and so our career services professionals are indicating to us that while we are not hearing at our level, at the types of jobs that our students take, that while they are not completely pulling back that they are really delaying the planning. I think people are waiting for more information to come in before they finalize plans, but job orders are still coming in. As I mentioned, we are right now 7 points off the prior year. Just to add a little more color, that was as of December 31st. We have already closed that GAAP by another 100 basis points since the year end and literally as of today quite frankly. We hope to make more progress on that front. I expect we will do just that.

[Mark Marostica:]

One last question, I will turn it over. Can you give us a sense of the bad debt that you recorded in the quarter that is attributable to that you say organic or baseline bad debt as opposed to bad debt tied to reserves for your internal loan program?

[Kevin Modany:]

Sure. The regular bad debt if you will for such a thing in terms of sort of our historical pre-2008 really didn't change very much at all. You know we have been running in the 2% range there. Anything north of that is really kind of related to the incrementals, so 2% to 2.5% is probably a baseline number to use.

[Mark Marostica:]

Great. Thanks so much.

[Kevin Modany:]

Sure.

[Operator:]

Our next question comes from Gary Bisbee with Barclays Capital. Please proceed with your question.

[Gary Bisbee:]

Hey guys, congratulations on the quarter.

[Kevin Modany:]

Thanks, Gary.

[Gary Bisbee:]

You know, you didn't comment on you know what you thought was likely to be the gap and obviously this question is excluding any, the pending legislation you mentioned, but is 12 to 13 still a reasonable gap assuming get the full benefit from the 2008 loan limit increase?

[Kevin Modany:]

To be honest here, we are probably going to come in a little bit better than that, maybe a point or two. I know there is a lot of moving parts on that you know the eligibility requirements and what not for the various pieces of title funding; the Stafford loans, the Pell grants, all the different pieces that have changed in 2008. As we gather more information on that, we have got a decent win. It looks like we may be a point or two inside of that original 12% to 13% guidance. That is at least what it looks like right now.

[Gary Bisbee:]

Okay, great. That would imply that your students still are getting pretty substantial access from third-party lenders, I am wondering if, which obviously is a lot better than the sort of fairer states we assume. You were going to make all of them. I wonder if you could give us any sense. Is it largely one lender, are there a couple who are doing that, or any color on how that is going will be real helpful? Thanks.

[Kevin Modany:]

We still have access here. The changes in the numbers from 2007 or 2008 numbers are substantial. We do not back away from the fact that there has been a material change in terms of the availability. It's there and I would say it's obviously there at higher levels and probably what some of the strongest pessimists were expecting. Aside from that, we are not giving a whole bunch of color. We did mention previously too that there is one lender that is providing a large portion of the private loan and that has not changed as I mentioned in the prepared comments. The composition of the lenders has not really changed much in the fourth quarter.

[Gary Bisbee:]

Okay. Any sense why? I know you have mentioned it a couple of quarters over the last year that your emissions rep turnover has come down as the tenure is improving. Is that the economy, people are finding it harder to get jobs or have you focused on that in any other way that is allowed that to happen? I guess I am trying to get a sense of whether this is a trend that could continue in ‘09?

[Kevin Modany:]

Sure. Yes. You know it's hard to pinpoint the economic impact on that. I will not say that it is or is not. I will tell you, if there were a specific initiatives that the operations team implemented relative to hiring of recruitment representatives, we actually earlier in the year and even sort of towards the tail end of ’07 implemented some assessment methodologies for hiring reps. We went out and evaluated our best performing representatives with the characteristic associated with those higher performing reps so I could correlate in many ways, and included those in an assessment. We think we will have better jobs hiring the right person. Then we couple that with the revised training program that hat we implemented and we are showing good results from that. I know that is contributing because the numbers tell me that it's contributing. Is there also a tail wind and some economic shifts? I really do believe the majority of it is coming from some of the actions from our HR and operations team.

[Gary Bisbee:]

Okay. Lastly, you know I appreciate the description of how you get to bad debt expense. Are you willing to give us some sense on a blended average basis, what the average number is, I mean is it in the mid to upper 30s? The average reserve you're taking on the loans you made.

[Kevin Modany:]

We are not going to give the numbers here but I will give you some color and I will tell you that ultimately the methodology that Dan walked you through results of not having a reserve percentage on these amounts. That said, substantially higher than the historical default rate. The accounting methodology or pronouncements will allow you to make some adjustments on historical information based on current environment and Dan and his team have done just that. Aside from that, we are really not going to get into specific percentages. There is plenty information out there though to get to a number pretty close to it, but obviously we have got some NDA agreements in place, where we can not talk about specific percentages and what not. I feel relatively comfortable that we are providing a pretty clear and transparent look at where we are at and what we are doing.

[Gary Bisbee:]

Well, I appreciate that that you said substantially higher. Can you comment on how it looks relative to past recessions? I know you had like 10 years or so data with (inaudible) and that clearly included the last recession. Has there been big variability and are you comfortable that you have taken into account what could be a couple of tough years to the economy.

[Kevin Modany:]

It really has not been in the historical data and when we go back and look at the most recent recession in that eight year data pile that we have and then also even looking at our 20 plus years worth of data relative to our FFEL program, the loan program in the performance of those loans. Not a lot of spikes there; obviously moves a bit with the economy. I will say that in the current environment, and what we are doing, we are being pretty conservative there and again I will not quantify substantial but we are being much more conservative than we have ever been and feel pretty comfortable with where we are at.

[Gary Bisbee:]

Great appreciate that color.

[Operator:]

Our next question comes from Gordon Lasek with Robert W. Baird. Please proceed with your question.

[Gordon Lasek:]

You mentioned earlier that your job placement rates have been trending down a little bit versus last year. Do you plan to add any additional career placement personnel in 2009 to somewhat offset that?

[Kevin Modany:]

Well, I will not get in to the specifics of what the initiatives are but I can assure you that we are allocating resources to the item. There is really no more important metric for us than our graduate employment rate. When we run into environments that present some challenges we certainly are sort of well served to allocate additional resources there. We are doing exactly that. We have already done quite frankly.

[Gordon Lasek:]

Okay. Thank you. What are your thoughts on price increases going forward? How sustainable do you think that the 5% increases you have done in the past are for 2009-2010?

[Kevin Modany:]

Probably the best way to answer that is they will have an increase in March 2009. Our strategy on pricing does not change. It really is purely related to the value proposition. We run that calculation every year and we try to see where it's at. It's moving in a positive direction right now. We do not have any intention of backing away from that strategy and as long as we are doing our job and we are delivering value to our students, then that strategy that we had in terms of pricing over the past 20 years, will stay in place and that is what we expect right now.

[Gordon Lasek:]

Okay. Thanks a lot for that color and just one final question. Can you give us any additional color on trends with regards to matriculation; are you seeing more students continue to get their bachelors degree given the economic downturn, any comments there?

[Kevin Modany:]

We saw a little bit of a lift on that last quarter and then we pretty much held it this quarter. It's not substantial and I wouldn't point to it as being a huge piece of what we are seeing in terms of the enrolment growth right now but it certainly contributed.

[Gordon Lasek:]

Thanks a lot guys.

[Operator:]

Our next question comes from Jerry Herman with Stifel Nicolaus. Please proceed with your question.

[Jerry Herman:]

Thanks. Good morning everybody. Hi guys.

[Dan Fitzpatrick:]

Hi.

[Jerry Herman:]

The first and I know you do not want to talk specifically about the stimulus package but can we at lease clarify that your guidance does not include any assumptions with regard to what might be enacted there?

[Kevin Modany:]

Sure and I may go one step further. It does not include any assumptions with regards to the stimulus package and there is no reason to that if it did go through that it would be, that it would impact us any differently than the previous $2000 and subsidized increase. I am sure you appreciate and the reasons for you I hope appreciate the reasons for refrain from commenting now with regard to the legislation. If it passes, and we hope it does, and we fully support the effort for the reasons we mentioned in our comments, if it passes we will get more details on it.

[Jerry Herman:]

That is great. With regard to the value proposition that your comments has intrigued me Kevin that the trends there are moving in a positive direction and I just maybe if you can give us some clarification, I see in this environment declining placement rates, some pressure on salary inflation if you will, and I am wondering, I know you guys have a formula there but what other inputs might be acting positively, maybe interest rates or…

[Kevin Modany:]

Yeah. Interest rates certainly are a big piece of the legislation that was passed in 2008. Now 2007, actually was the tail end of 2007. We saw a five year interest rate reduction put in place on part of the Stafford loans. That would really drive a very nice impact in terms of the value proposition for our students lowering their debt service costs. Also increases in FFEL loans versus the Stafford loans themselves, basically you replace higher cost private loans with lower cost Stafford loans. Thirdly, we are seeing Pell Grant increases that were put in place as part of the 2007 legislation, legislative for the next five years that really provides them with a nice subsidy against their cost of the education. Those are some of the major components moving in the right direction. In the previous two years we saw salary increases north of 5%. In other words, north of our tuition increase. If you look over a couple of years, we are moving it in the right direction, pretty substantially when you run the numbers. We are still upbeat on that front. Always have to monitor, always have to run the calculation and again, I mentioned earlier, our strategy on pricing does not change. That is pretty much how we do it.

[Jerry Herman:]

Okay. Great and then with regards to placement rate, is there any area of particular strength or weakness and I guess it'd be great to hear your commentary on criminal justice given it's one of your newer programs.

[Kevin Modany:]

Sure. I will take the first part and then I will come back to the criminal justice. In terms of the employment market right now, one of the areas where we see a little bit of an impact is in the construction because some of our CDD grads end up in the construction market. We are in the mid of kind of moving those opportunities around and we are seeing job orders from other areas. However, that would be one that sticks out a little bit and everybody so I think fully aware of what's happening in the construction space. That is not something we are dealing with. On the CJ front we just still yeah, do not have a ton of graduates relative to the total number of graduates in the pool. We are getting them placed, they are finding jobs but I again probably do not have enough of a data assess to give you a lot of information on that. We should be seeing a lot more in 2009 at which point we can probably provide additional color on what that looks like but right now probably too early to say.

[Jerry Herman:]

Thanks, guys.

[Kevin Modany:]

Okay. Thank you.

[Operator:]

Our next question comes from Trace Urdan with Signal Hill. Please proceed with your question.

[Trace Urdan:]

Good morning, Kevin, thank you for the detail on the lending by the way. I think that is very helpful. Is it possible to characterize what the GAAP now looks like on average for an associate degree student and a bachelor degree student?

[Kevin Modany:]

I am sorry, say that again?

[Trace Urdan:]

Is it possible for you guys to characterize the average size of the GAAP on a per student basis for associate students and bachelor students?

[Kevin Modany:]

We are not providing that number but I think with everything that we put out there, somebody probably could calculate what the average GAAP would be. Again we said 12% to 13% in total. We said before that about 60% of the students are getting a private loan. We are now saying we are seeing that 12% to 13% probably a point or two lower that is based on all the information that is coming in. I think you could take that and probably calculate a reasonable number. It's not a metric that we are providing any guidance or color on at this point.

[Trace Urdan:]

I was just hoping to get you to say the number out loud. The other question I had was in terms of the methodology for calculating the bad debt expense the second component that is your average experience in collecting debts from students that have dropped out, are you seeing any change in that pattern sort of to date?

[Kevin Modany:]

Not a material change. It may be off by a point or two from what we have seen historically, but nothing material at this point. I wish it was higher, quite frankly. However, it's pretty close to what we see if you look at any other metrics in terms of similar type recoveries or collections from some of the collection bureaus that are out there. I would like to see it higher, but it's kind of staying in the same range.

[Trace Urdan:]

You're obviously using that most recent information to set your guidance?

[Kevin Modany:]

Absolutely, it's really trued up every year and even more frequently than that. Dan and his team look at it on a quarterly basis and if there is an adjustment required for that then they provide it immediately.

[Trace Urdan:]

Okay. Just shifting gears a little bit in terms of the new program openings, you are anticipating a pretty significant increase there looks like on a year-over-year basis. How do you gauge whether that drives enrollment growth or to what extent that activity cannibalizes growth that might come in to other programs and how do you make the decision about how aggressive to be on the program?

[Kevin Modany:]

To your first question in terms of whether it cannibalized or whether drove a certain percentage of the enrollment growth, obviously we can pull the data and look at it. We have over the years said that we get a decent contribution from new programs almost an equal contribution from new locations and relatively close contribution from the current schools, so same school growth if you will. It contributes and we can see that fairly clearly. In terms of trying to make a decision on where we put programs and what we do in terms of rollout obviously we are looking at the data we can on the demographics and the marketplace and what the demand is and our market research group goes for a fairly exhausted review of trying to determine where it has to put programs; certainly some times regulatory components of that. However, that is probably a smaller piece of it, just the market research review to trying to where we get the best demand. We do not always see it perfectly but they do a pretty good job.

[Trace Urdan:]

In making that assessment are you querying the student as to whether or not they would only enroll in that program or whether they were today, do you make that determination on the ground?

[Kevin Modany:]

No it's not on a survey basis, it’s based upon the data in the market and we are looking at demographic data and anticipated response rates and occasionally we will pilot some of the programs in certain markets that have similar demographics and then we will try to collect that data to see what it might at. However, we should expect to see in similar markets with similar demographics. There no rocket science here just basic market research and sort of piloting and testing of those findings to get comfortable enough to roll it out across the network.

[Trace Urdan:]

Okay. Thanks Kevin.

[Kevin Modany:]

Sure.

[Operator:]

Our next question comes from Kelly Flynn with Credit Suisse. Please proceed with your question.

[Kelly Flynn:]

Thanks. Couple of questions; one relates to the stimulus package but it's not predictive in nature, so I hope you can answer. Can you help us interpret the 90/10 implications of the proposal. Is your understanding that if the $2000 increase goes through then it would be subject to the same exemption as the recent one?

[Kevin Modany:]

Kelly, this is how we understand it right now.

[Kelly Flynn:]

Okay. Thanks and then the second one do you have off balance sheet arrangements related to your company lending program? Any factored receivables or anything like that.

[Kevin Modany:]

(inaudible).

[Kelly Flynn:]

Okay. Thanks.

[Dan Fitzpatrick:]

Okay. Sure.

[Operator:]

Our next question comes from Brandon Dobell with William Blair. Please proceed with your question.

[Brandon Dobell:]

Hi, thanks. As you look at the progression of population growth compared to capacity the last year, year and a half. I wonder if you can give us a sense of if its increased class sizes, more classes during hours of the day didn't used to have class. Trying to get a feel for how the utilization is being taken up at the different locations.

[Kevin Modany:]

Sure. First one, we have not seen material changes in the section size, class size as you referred to it in 2008. Nominal improvement there, but very small. We have small average class sizes. There is not a huge number when you compare us to most post secondary institutions. In terms of using other time slots or days of the week if you will, certainly we are trying to be as efficient as we can there in utilizing different time slots and what have you, days of the week if you will as well. We are seeing a majority of the students in the evening and we are still running at about 75%. I know we are probably seeing a little bit of a pick up in the morning as we sort of work to maximize utilization. Just to close it out, we still are at a point where we are probably only in the 75% capacity utilization range. We still have a lot of capacity and like we do every year, and I have mentioned this before, we go through and evaluate the schools and see who needs additional space, and typically there is somewhere between five and ten schools where we have to expand capacity and add some square footage, and 2009 is not going to be any different. We have about five to seven schools where we have to add some capacity, and we should be in pretty good shape. We are certainly trying to maximize facility utilization, but there has not been anything materially different than we are doing to make that happen.

[Brandon Dobell:]

I have some kind of tougher question for you to answer maybe, but as you look at the local competition for your schools or maybe it's a state college, a vocational competitor or community college. What is the general sense around the communities about their ability to sustain the program they have, their ability to sustain the enrollment they want to given what is going on in the budget, and are you seeing students making choices about where they go to school based on those kinds of comments or feedback?

[Kevin Modany:]

I think we are hearing the same thing that everybody else is hearing with regard to what is happening for us, especially state schools that rely on anywhere from 30% to 40% of their budget from state funding. We all know that a lot of states, some of the larger states are having some fiscal crisis pricings if you will. The impact is there. We are hearing different things; some schools are saying they are turning students away. Some schools saying that the financing disruption that we talked about so much in this call, private financing and what not is impacting their students' ability to come to their schools. I think all that is going on Brandon, and whether or not that is driving an increase in enrollment to us, can not point to it specifically, but I tell you, I doubt it to be honest. I do not see any kind of major changes in the throughput or the types of students coming to us. I do not think that is impacting us in any material way, but I will say again, we are hearing the same kinds of things that you're hearing.

[Brandon Dobell:]

From a marketing perspective, the relatively small increase in advertising dollars spent; has that come with a significant driven material increase in what you consider the quality of those inquiries to be or is it just more, they are spending the same money in getting a lot more growth inquiry. I am trying to figure out how the conversion rate trends are looking and what might be impacting those.

[Kevin Modany:]

We are seeing a pretty similar quality of lead flow quite right. We are always trying to maximize leads growing. I am sure my marketing team would tell you that. We are improving the quality of lead flow all the time. To a certain extent there is truth to that. I wouldn't say it's anything that we need to point out on this call.

[Brandon Dobell:]

Okay, great. Thanks a lot.

[Kevin Modany:]

Sure.

[Operator:]

Our next question comes from Corey Greendale with First Analysis. Please proceed with your question.

[Corey Greendale:]

Hi, good morning.

[Kevin Modany:]

Good morning.

[Corey Greendale:]

First question; there have been a lot of questions about what free cash flow does in '09, up, down or sideways, and obviously the strong growth, hopefully damping it some what, but I was wondering if you would be willing to provide any directional suggestions where free cash flow may come in, in '09.

[Kevin Modany:]

I will speak for it directionally. If you look at 2008, we had previously talked about $150 million free cash flow target, and I am being compelled to say that that is a non-GAAP measure which is reconciled on the website. My attorneys are making sure I throw that out, but $150 million. We ended the year with about $155 million. Certainly, if you look at just the information we provided you, in terms of EPS and in terms of the internal financing DSO, I think your math should result in a number that is north of that, but again, we are not giving guidance in that regard and trying to just provide those numbers on internal financing and DSO and that should provide you enough to get that.

[Corey Greendale:]

Okay. I wanted to ask about the guidance you suggested on how much of the price of financing you are going to provide to $75 million.

[Kevin Modany:]

Corey.

[Corey Greendale:]

That number strikes me as very specific because in the context of other entries you are getting much wider ranges than that. How can you be so specific, and I know you said you are not giving guidance on revenue, but is there anything you can give us or could you give us some sense of why you can be so specific on that, knowing you have a pretty good idea where revenue is going to come in.

[Kevin Modany:]

It is just specific as any estimate could be, I will tell you that. Obviously inherent in the word estimate is some level of uncertainty. I do not want to give you the wrong impression that we exactly know where it's at. That being said, we certainly have a reasonable amount of data which as u all know, we have been talking about waiting for our ability to collect this sufficient amount of day to the give us comfort on any estimate that we put forth. We have taken all the information we have in terms of what we are seeing in the underwriting standards, we think we backed into a reasonable estimate of what's likely to occur going forward. We provided that to you to provide the clarity that we had promised in terms of internal financing, but it's not an exact number there was a lot of moving targets here but we feel pretty comfortable with that number so we threw it out there.

[Corey Greendale:]

Okay, and then I wanted pull up the value proposition obviously things are going very well right now, but I think the question that will start coming up if certain trends continue is not that the value proposition is not strong but if placement rates continue to be down and starting salary increases continue to be lower, the price of the program continues to be up and delayed but proposition is not as strong as may be it was and whether over time that leads to lesser growth in leads and can you just, logically that, they are going to at least hold some water as you need to speak to whether you would disagree with that argument and so you know what the reason will be?

[Kevin Modany:]

Well I will refrain from replying on your comments and I would just say that not everybody on the call probably has had benefit of history in terms of the performance within the organization, and I might point you back to looking at other periods of economic disruption where quite frankly we have had graduate employment rates and other numbers that has led to value propositions, aren't as high as where we are today or aren’t as high where I expected to be in 2009 so this is a tough market. There is no doubt about it, there is no denying that. That being said I do not anticipate our value proposition dropping below ranges where we have historically been quite frankly and I do not see that changing as you look longer term. We feel pretty good about that, we are well inside of the boundaries of where we have been previously, which is the best indicator for you in terms of what’s likely to happen and so you know I just say look at the data look at the history and then make your projections from there but we feel pretty good about where we are at.

[Corey Greendale:]

Ok that is great and one just last quick one if I could and could give us any help on what perceptions may look like if you include graduates if so we can get into kind of model that?

[Kevin Modany:]

Sure. First quarter we were looking at a pretty large graduating class again and then that is a by-product of just improving retention. We are probably going to be off there maybe in similar ranges as to what we saw in the fourth quarter, which is probably a reasonable estimate. I think probably projecting that forward or little less than that through the rest of the year is probably a reasonable range, just to give you a rough estimate of it.

[Corey Greendale:]

Okay, great. Thank you.

[Kevin Modany:]

Okay.

[Operator:]

Our next question comes from Andrew Steinerman with JPMorgan. Please proceed with your question.

[Andrew Steinerman:]

Hi and congratulations on the quarter. I know you are not going to give us the exact reserve percentage on the $75 million of internal loan that you project to use, but I just wanted to listen to the methodology that I was thinking and just tell me if it makes sense in terms of a methodology. You know basically looking at above average bad debt expense of about 3%, which is you know the 4 to 6 compared to the average 2 and 2.5. Then you take the 3% of your 2009 revenue estimate, our estimate not guidance, and you divide that into the $75 million, and you get something in the 40s.

[Kevin Modany:]

I do not think that is an unreasonable way to think about it.

[Andrew Steinerman:]

Okay. I appreciate that. Just one follow-up question; what looks particularly strong is the growth in our revenue per student, which has been accelerating for a few quarters now, and you know I know the price range, which originally came into place last March, but if you look at each of the last three quarters, including this quarter, where revenue percent is up 6%, it's been accelerating. What has been causing the acceleration past the March tuition rate?

[Dan Fitzpatrick:]

Andrew this is Dan. It really just comes down to the strong retention. You know, even though you do not have that visibility because you do not see the breakout of grads and drops, but I mean we are seeing a situation while retention is improving quarter-over-quarter. Occasionally you have a variation in the terms of timing of drops. That really did come into play this time around.

[Andrew Steinerman:]

All right. In other words, there is nothing to do really with mix

[Kevin Modany:]

No, our pricing is the same across all programs.

[Andrew Steinerman:]

Okay. Super. Thank you so much.

[Kevin Modany:]

Sure.

[Operator:]

Our next question comes from James Mayer with ThinkEquity. Pleased proceed with your question.

[James Mayer:]

Thank you. Nicely done. It was a good quarter. Most of my questions have been addressed. Let me ask you that if you have any concern with the jump that we are seeing here in new student starts. Are you seeing anything about the new students that would warrant that you would describe this perhaps demographically or type of students' commitment level, anything that is different, that is potentially worrisome going forward? I mean it seems like everything is obviously favorable right now. Is there any concern there?

[Kevin Modany:]

No. Not at all.

[James Mayer:]

Okay. It’s a pretty straight answer. Are you still seeing that your associates are about 80% of the total population?

[Kevin Modany:]

They are. Yes.

[James Mayer:]

Okay.

[Kevin Modany:]

You are asking questions I can answer in a very distinct way.

[James Mayer:]

Okay, Thank you very much.

[Kevin Modany:]

Sue. Thank you.

[Operator:]

Our last question comes from Andrew Fones with UBS. Please proceed with your question.

[Unidentified Analyst:]

Yes. Hi. This is Jim for Andrew. Question on the quarter.

[Kevin Modany:]

Okay.

[Unidentified Analyst:]

Couple of other questions on this part, did you see any particular strength in this part, after your associates for the bachelor's level?

[Kevin Modany:]

You're fading away on me. I think you were asking me if there was any particular strength in the bachelor degree program.

[Unidentified Analyst:]

Yes.

[Kevin Modany:]

Okay. Very good. We are seeing strength in both. I mentioned earlier we are seeing the matriculation rates improve a bit. That helped out; of the two of the associates, a bit stronger right now than the bachelors.

[Unidentified Analyst:]

Okay. Okay. How about in terms of geographic regions, anything notable in terms of either increased lease or conversions or stocks there?

[Kevin Modany:]

Probably nothing that is material but I will tell you that if you're are looking or a correlated variable, probably the best thing to do is look at unemployment rates for individuals whose highest education attainment level is a high school degree. As you see that level of unemployment go up, not just whole unemployment rate, just look at that unemployment rate for unskilled individuals and we typically see a correlation geographically with those numbers in different markets.

[Unidentified Analyst:]

Okay. That is very helpful. One last question; have you seen any increase in interest or enrollment for the online program?

[Kevin Modany:]

Online is growing nicely as it was last quarter. Still yet though, the preponderance of growth is coming from the resident operation. Online is growing. It's a nice contributing part of the growth strategy, but still yes, we are primarily a resident operation.

[Unidentified Analyst:]

Okay. Thank you.

[Kevin Modany:]

Okay. Thank you.

[Operator:]

Mr. Modany, we are out of time today. I would like to turn the floor back over to management for closing comments.

[Kevin Modany:]

Okay. Thank you very much. I just want to thank everybody for participating on the call. Hopefully we provided you with some of the additional information that you were looking for, and we look forward to talking to you folks in our April call. Thanks again.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.