Element Solutions Inc
Q2 2011 Earnings Call Transcript

Published: 22 Jul 2011

[Operator:]

Greetings ladies and gentlemen and welcome to the ITT Educational Services 2011 Second Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. Joining us today from the management of ITT Educational Services we have Kevin Modany, Chief Executive Officer and Chairman; and Dan Fitzpatrick, Executive Vice President and Chief Financial Officer. Before we begin, ITT Educational Services, Inc. wishes to remind you that this conference call may include forward-looking information. 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 Exchange Commission. Thank you. Mr. Modany, you may begin.

[Kevin M. Modany:]

Thank you very much operator. Good morning ladies and gentlemen and thank you for joining us on our 2011 second quarter conference call to review our results. Joining me on the call this morning as usual is our Executive Vice President and Chief Financial Officer, Dan Fitzpatrick. We will begin our call this morning with an overview of the second quarter marketing and advertising results. We will then provide a few brief comments on our new student enrollment results for the academic period that began in June 2011. From there we will move on to review our student retention and participants results for the second quarter. At that point we will give you an update on our few of our student outcome metrics including our final 2010 graduate employment metrics and an update on our employment metrics for our 2011 graduates. Next we will provide an update on our progress executing our strategic plan. I’ll then provide a few comments regarding our review of the new gain for employment regulations. At that point I’ll turn the call over to Dan and he will provide a standard commentary regarding the financial results included in this morning’s press release. Upon conclusion of Dan’s prepared remarks we will open up the call for your questions. Let’s begin with the review of our second quarter advertising results. Advertising expenditures in the three months ended June 30, 2011 increased approximately 13% compared to the same period in 2010. We accelerated our advertising spend in the later part of the quarter as we have identified additional opportunities in some of our alternative meetings. We believe that these opportunities will continue to be available as we head into the third quarter (inaudible) that advertising cost in the third quarter of 2011 will be approximately 20% higher there the same period in 2010. Both cost for several of our primary television media outlets remain higher compared to historical levels through most of the second quarter of 2011. We did observe very early signs of some softening in select television spot cost as we began the third quarter of 2011. It is too early, however, to determine a fees changes represent a start of the trend. We experienced degradation in the response rates from some of our national television advertising during the second quarter of 2011 compared to historical levels. However, as we continue our on going efforts to rebalance our advertising away from this traditional media to alternative media. We believe that we should be able to partially offset the impact of any change in response rates from national television [spot]. We believe that the volatility in the media markets will continue throughout the remainder of 2011. So, we will continue our efforts to rebalance our advertising mix and response to those changes. Primarily due to the changing advertising mix, we experienced a decrease in the number of perspective students who expressed an interest in our programs of study during the second quarter of 2011 compared to the same period in the prior year. Continuing trend that began in the first quarter of 2011, the rate of which enquires converted to applications during the second quarter of 2011 increased compared to the second quarter of 2010. As we projected during our first quarter 2011 earnings call, however, we experienced a year-over-year decline in the rate of which applicant converted to new students in the second quarter of 2011. Overall, the rate at which enquiries converted to new student enrollment declined 10 basis points in the second quarter of 2011 compared to the same period in the prior year. We believe that these trends will likely continue throughout the remainder of 2011. For a balancing of our advertising mix combined with the decline in the rate of which applicants converted to new students led to a 19.9% decrease in new student enrollment in the second quarter of 2011 compared to same period in 2010. It's early in the recruitment period for the academic quarter that begins in September 2011. We have observed encouraging trends in our year-over-year leading enrollment indicators compared to the same point in the recruitment period for the academic quarter that began in June 2011. Considering the recent volatility of the recruitment environment, however, we hesitate to draw any definitive conclusions from the change in trends at this time. As a result of a changes in our advertising mix and resulting reduction in student enquiries during the second quarter of 2011 compared to the same prior year period. We reduced the number of recruitment representatives by 10% as of June 30, 2011 compared to June 30, 2010. We believe that the number of our recruiting representatives declined by approximately 15 to 20% as of December 31st, 2011 compared to the same date in the prior year. I’d like to now provide some additional insight into the second quarter student persistence metric. 140 basis point decline in our persistence rate as of June 30, 2011 compared to the same date in 2010 was primarily due to an increase in the number of graduates in the academic period that ended in June 2011 compared to the same prior year academic period. Total graduates in the three months ended June 30, 2011 increased approximately 30% compared to the same three month period in the prior year. Our current forecast includes year-over-year increases in total graduates of approximately 30% in each of the remaining quarters of 2011. As a result we believe that we will experience year-over-year declines in the persistence rate in each of the remaining quarters in 2011. As expected study retention in the academic period that concluded in June 2011 was substantially the same compared to the academic period that concluded in June 2010. We believe that student retention in the second half of 2011 will remain consistent with the same period in the prior year. At this point I’d like to provide a current update on our graduate employment metrics. A period for measuring the employment results of our 2010 graduates ended on April 30, 2011. Approximately 70% of our 2010 employable graduates obtained employment in positions using skills thoughts in their programs and study as of April 30, 2011 compared to approximately 73% of our 2009 employable graduates as of April 30, 2010. The average annual salary reported by our 2010 employee graduates was approximately $31,300 compared to approximately $31,600 reported by our 2009 employee graduates. To provide with you an update on our 2011 graduate employment metrics, the graduate employment rate of our 2011 employable graduates as of July 20, 2011 was approximately 310 basis points higher than the graduate employment rate of our 2010 employable graduates as of the same date in the prior year. The average annual salary reported by our 2011 employee graduates as of July 20, 2011 was approximately $32,500 or 1% higher than the approximate 32,400 annual salary reported by our 2010 employee graduates as of the same date in 2010. Our graduate employment rate continue to be impacted by the slow economic recovery and the higher employment rate. However, we are cautiously optimistic regarding the prospects for a year-over-year improvement in our graduate employment metrics in 2011 as a result of increase (inaudible). Moving on to provide a quick update on our activities related to the execution of our strategic plan and more specifically our geographic expansion efforts. We began operations in one new location in the second quarter of 2011 with the opening of our new ITT Technical Institute in Durham, North Carolina. We plan to begin operations at 7 to 9 new locations during the remainder of 2011. We began in the third quarter of 2011 with a total of 131 campuses and 4 learning sites in operation. We continue to evaluate additional program offerings that presents the potential for attractive returns on investment for future graduates and we have several programs in study in various stages of research and development. We currently believe that future programmatic expansion opportunities for the ITT Technical Institutes will likely focus more on technology and health sciences discipline. As we disclosed at a recent investor conference. We have begun offering a set of new programs across the ITT Technical Institute location. (Inaudible) the associate and bachelor degree levels and involving modified delivery formats which reduces the amount of time required for a full time student to graduates. The associate degree programs also are comprised of fewer credit hours which reduces the total tuition costs of the program by approximately 6%. Thus for in 2011 we have obtained approximately 70% of the necessary regulatory authorizations to offer these new programs at the ITT Technical Institute locations and believe that we are on-track with our planned implementation and rollout of these new program offerings. Approximately 10 locations offered one or more than new programs in the academic period that began in June 2011. We anticipate that an additional 75 locations will begin offering the new programs in the academic period that begins in September of 2011. There were no material changes to the other key elements of our strategic plan during the second quarter of 2011. Turning now to brief discussion of our review with a new gain for employment regulation. We continue to evaluate the (inaudible) of educations regulation and its impact on our programs and study. Depending upon how the ad interprets and applies to gain for employment requirements. If any of our programs fail the annual loan repayment rate requirement over the debt to income limit using the applicable earnings information from the social security administration, we believe based on our analysis of the available graduate employment data, that we may be able to sell aside the debt to income requirements for the vast majority of our existing programs and study that have produced graduates by using the Bureau of Labors Statistics earnings alternatives specified in the regulation. Institutions can use BLS earnings as an alternative to social security administration earnings to calculate the debt earnings ratio for federal fiscal year's 2012, ‘13 and ‘14. As was reported in our earnings release this morning we have adjusted our 2011 internal EPS goal to the range of $10 to $10.50. We are not providing any additional financial or operating guidance beyond fiscal 2011 at this point. However, we currently anticipate providing a preliminary 2012 outlook for the business during our October 2011 earnings conference call. At this point I’d like to turn the call over to Dan, who will provide an update on a few financial (inaudible).

[Daniel M. Fitzpatrick:]

Thanks Kevin. I plan to follow the same format as our March 2011 earnings call and I will begin my comments with a review of the key points of the financial results from the second quarter of 2011. Revenue per student was down 2.9% in the three months ended June 30, 2011 compared to the same period in the prior year primarily due to increased levels of scholarships and awards as well as the impact of accounting for revenue received from certain private education loans (inaudible). We believe that the year-over-year decline in revenue per student will continue in each of the remaining 2011 quarters primarily due to the same factors. In the three months ended June 30, 2011 our students received approximately 23 million in scholarships and awards compared to approximately 16 million in the same period in 2010. In the second quarter of 2011 we received approximately 44 million of net disbursements of private education loans made to our students. As of June 30, 2011 the time period to originate loans under the PEAKS third-party private education loan program ended such that no additional private education loans will be originated under that program for our students. During the second quarter of 2011 we continued our efforts to negotiate an additional third party private educational loan program for our students that is similar to the PEAKS program. We are cautiously optimistic regarding the prospects of a new third-party private education loan program being offered to our students in the third quarter of 2011. Days sales outstanding decreased by 11.3 days to 11 days as of June 30, 2011 compared to 22.3 days as of the same date in 2010. This is primarily due to an increase in the amount of funds received from our private educational loan programs available to our students as well as scholarships and other awards received by our students in the second quarter of 2011 compared to the same period in the prior year. Bad debt expense as a percentage of revenue decreased 120 basis points to 4.5% in the three months ended June 30, 2011 compared to 5.7% in the same period in 2010. Our 2011 internal goals for DSO and bad debt expense remain as follows. Days sales outstanding in the range of 10 to 15 days, bad debt expense as a percentage of revenue ranging from 4 to 6%. Moving on to an update of our share repurchase activity. We repurchased 1.1 million shares of our common stock in the three months ended June 30, 2011 for approximately 79 million at an average price of $72.20 per share. Approximately 1.7 million shares remained under our share repurchase authorization as of June 30, 2011. In July 2011 our Board of Directors authorized us to repurchase an additional 5 million shares of our common stock pursuing to our existing repurchase authorization. In accordance with the board stock repurchase authorization we plan to repurchase additional shares of or common stock from time to time in the future spending on market conditions and other considerations. With that I’d like to hand the call back over to Kevin.

[Kevin M. Modany:]

Thanks Dan. This concludes our prepared remarks. Operator would you please open the line for questions?

[Operator:]

(Operator Instructions) Our first question comes from Trace Urdan from Signal Hill. Please go ahead.

[Trace Urdan:]

Kevin my first question was with respect to the decline in the starts which I think I heard you kind of squarely attribute to media mix? And I’m wondering what gives you the confidence that it's really about media mix and not about message or some other factor?

[Kevin M. Modany:]

Well, there are couple of things going on there Trace, the first of which is definitely media mix related because we can see the results we are getting relative to our enquiry flow in. Enquiries are down as we have reduced our spend on campaigns and sources that generate increase at low conversion rates just generally speaking. So, we know that that ultimately is we can calculate the impact of that to a certain degree. The other aspect of it is overall that conversion rate decline that I talked about when you talk lead the start is about down about 10 basis points, but the bigger piece of it is related to the (inaudible) from an application to start. So, students are applying from legal application we are seeing increases there. And you would expect to see that what the media mix shifts we are making from application to start we are seeing degradation there. So, to the extent there is something about messaging or other noise in the marketplace. I think that would be showing up in that (inaudible) degradation that we have been experiencing that we are not completely ruling that out. We certainly have spoken in great detail about our work and trying to correlate that (inaudible) decline looking at student demographics and characteristics looking for some correlation in that decline. We haven’t really uncovered anything significantly in the last three quarters that we have been looking at it. I will say by adding the third quarter data to that analysis, we have been able to see a little bit of a correlation to two groups of students. We saw a material decline in (inaudible) for our students that are 18 year's old and then a material decline in (inaudible) for students over 36. There is two groups don’t make up a huge percentage of our population to be honest but decline in (inaudible) for those two groups did speak to a decent portion (inaudible). Probably a little more color than you wanted but there could be come other noise factors outside of our dataset that could be impacting (inaudible). So, I don’t want anyone to think that we are seeing that we are completely confident we are not seeing, we just haven’t been able to attribute it to any.

[Trace Urdan:]

Okay. Thank you for that. And then I think maybe two questions for Dan. The rollout of the program so they are going to come in I think you said at 6% lower cost for the students. How would you anticipate that current flowing through expectations around revenue per student over the next I don’t know I guess 12 plus month.

[Daniel M. Fitzpatrick:]

Well, as we roll those programs out, it will have a slight favorable impact on revenue per student, because the cost for credit hasn’t changed. So, now you got a situation where you got a 4.5 course versus a 4 credit course. So, you would see a little bit of an impact on revenue per student for that as they rollout.

[Trace Urdan:]

Okay, fair enough. And then Dan I think the other question related to the forward expectation is, sounds like you might have a bit of a gap with respect to the lending situation, (inaudible) was expired than you don’t yet have the new program in place. Would we expect some kind of a bump as you guys maybe are forced to learn from your balance sheet in bad debt expense or how is that going work?

[Kevin M. Modany:]

We actually have other third-party private financing programs typically I think referred to as the credit in new programs as referred to the NASDAQ. That will provide us with funding at least through the end of the third quarter, and then as we mentioned in the call we are cautiously optimistic about the prospects for an additional third-party lending program being made available to our students during that third quarter. So, at this point we don’t see a gap in the financing made available, but we still have to complete discussions and negotiations on that other third-party program.

[Operator:]

Our next question comes from Gary Bisbee of Barclays Capital. Please go ahead.

[Gary Bisbee:]

I guess just following up on that one, what would the economics of this other third-party the credit union situation BTU, I assume you are still taking the risk there, but reporting revenue net and all that stuff be similar or just something very different there.

[Kevin M. Modany:]

Substantially similar for us relative to the PEAKS programs so it's structurally very similar and the economics are very-very similar. The difference is really our student facing where we have been able to negotiate some favorable changes to the economic components as it stands right now. And those are really all being passed onto the students, so we will see some reductions in rates for students if the programs plays out the way it is right now and the structure that’s on the table.

[Gary Bisbee:]

And then you mentioned the enquiry flow was down year-over-year in the quarter, can you (inaudible) how that’s trended the last few quarters as the trend line being that it has been getting progressively weaker or declining at an accelerating rate or is this not wildly different from what you are seeing in recent quarters?

[Kevin M. Modany:]

It's not wildly different from what we have seen and it really stems from the changes we made in our mix where it's been backing away from our traditional media source of television just due to cost. Although we are still spending decent amounts there as well as just walking away from some of the other media sources that just didn’t generate the kind of return that we desire. So, it's consistent with that, I’m looking forward we are starting to see as we build up campaign opportunities as I mentioned we started to see some of these towards the tail end of second quarter and we expecting to continue into the third quarter. We build up these alternative media campaigns, we can allocate some funding there and we are anticipating and we are kind of seeing early signs of encouraging trending there as we validate the return on investment dynamics for some of these new opportunities.

[Gary Bisbee:]

I guess, part of the reason for the question was, that the declines in enquiries is not just similar from what you have seen but yet the new student starts is actually despite an easier year-to-year growth comp quite a bit worse. I guess I’m trying t understand what else is going on and how we might think of that going forward. If you are reducing the rep count further on a year-over-year basis by year-end enquiries are down but maybe not wildly different. Could things get worse from here or any way we can think about that? Thank you.

[Kevin M. Modany:]

Sure, we are trending right now as I said is encouraging and you are talking about kind of looking at the second quarter when you think about the lead flow and you think about ultimately where we landed. The major difference there is in the show rates some applications starts that we seeing some degradation there as we have sort of projected when we were talking in the last call and some of the investor conferences, so that’s really where the difference has been. Again as we look forward into the third quarter, we are seeing some encouraging signs on both fronts really as we look at the different measurement points in the recruitment cycle, whether we are looking at the enquiry flow with the front end whether we are looking at some of the conversion numbers on those enquiries as they move to the process as they get into the financial [aide] process as they get into the registration process. And some of those leading indicators are encouraging for Q3 in comparison to where we were at the same point on a year-over-year basis in Q2. That’s what we see right now.

[Operator:]

(Operator Instructions) The next question comes from Brandon Dobell from William Blair. Please go ahead.

[Brandon Dobell:]

Maybe try and reconcile your commentary about declining reps with encouraging trends, are you expecting some sort of the material or decent tick up in productivity in the existing (inaudible) or is it just that lying indicator and trajectory in starts in the next two, three, four quarters is in line with what you would expect those reps at the year-end you will be able to produce. I’m not sure (inaudible) better than I guess.

[Kevin M. Modany:]

No I think I understand what you are saying and is really is about efficiency and let me see if I can add a little color (inaudible). We are trying to be very intelligent with our advertising allocation and the campaigns that we are utilizing to generate student enquiries. And where we see a very little return on investment or enquiries that really don’t generate conversions through the process and we are pulling dollars away from it. That results in a reduction in enquiry flow. Generically speaking we have a fat ratio of the number of representatives that we maintain that correlates directly to the number of enquiries that we have. So, if we were able to remove inefficient enquiries from the system, we don’t need the same level of staffing to address those and it should result in a more efficient outcome and should generate productivity. And we have seen that happen in the past, that’s really what e are projecting in the numbers we are talking about today.

[Brandon Dobell:]

And then relative to your enrollment rep force given the change in incentive compensation that you guys haven’t talked about too much of an impact, but how do all those things kind of square together right now. Is any part of the reduction in rep force related to incentive compensation rules or do you expect any impact from those changes in near-term starts or (inaudible).

[Kevin M. Modany:]

No changes in rep staffing related to incentive comps, there is no correlation between those two at all. In terms of any impact from the incentive comps just to update our comments previously, we really weren’t anticipating anything material there, just based upon the degree of change that we put in place. Really what institutions have to do is disconnect performance from compensation as (inaudible), but we have done that. We don’t have a sufficient amount of data just yet to analyze to determine whether or not there is a correlation there. We looked at the first quarter data, nothing conclusive at this point. We will continue to look at that and see if there is anything there relative to the comp. I don’t see anything right now, I’ll think anything that we are experiencing it has anything to do with that. I will note this point and it's a little bit off topic of your question, but as e look at the issue we are dealing with in terms of the recruitment process certainly there is advertising mix issues, (inaudible) some show rate issues as e have been talking about over the last couple of quarters. But I don’t to discount the fact that from organizational perspective we have been dealing with a significant amount of change relative to new regulations, new rules and changes in our business model, new programs and we have a lot of work going on, there is a lot of activity happening in the organization and to a certain extent there could be some execution issues here. And we are not making excuses for that. We need to do better, we need to perform better and we will perform better, but we will put the effort for it to perform better. But at the end of the day there is a lot going on right now with the organization. So, that plays a part in this as well.

[Operator:]

The next question is from Jerry Herman of Stifel Nicolaus. Please go ahead.

[Jerry Herman:]

I want to focus again on the front end here, Kevin you recently indicated you did expect material decline in starts relative to last quarter. I’m just wondering if the performance is actually worse than expected and probably more relevantly your hope that 2012 would bring growth in distant starts maybe as early as the early part of ‘12, your updated thoughts on that if you will?

[Kevin M. Modany:]

Sure, I wouldn’t say it's materially worse than we anticipated, we can see the leading indictors of what’s happening and try to speak to the fact without giving specific guidance that we were going to see enrollment trends as we are down from the prior quarter just try to get people compared to that. So, I wouldn’t say there is a material change there, as it relates to our current thinking on ’12, all the data we are still seeing and when I’m speaking to relative to the very early indicators for Q3 still lead us to the same conclusion we have before. Obviously, with new data unless updated information and what would be described as a volatile environment particularly on the advertising front. It's not as easy to predict that, but right now if you lay all the data points, use all of the information we have current and historical, I don’t think we change our view on what would transpire in 2012, but all of that is encumbered upon the (inaudible).

[Operator:]

The next question is from Corey Greendale of First Analysis. Please go ahead.

[Corey Greendale:]

Wanted to focus on the (inaudible) question, could you offer any hypothesis on what, (inaudible) given those specifics. Of course you mentioned the under 18 of the 36. And talk a little bit about what you were doing internally to work to an improving the (inaudible) trend.

[Kevin M. Modany:]

Corey, I’m not good at given hypothesis, so I’m going to stay away from that, but what I can say is that we are certainly focused executionally on improving our results relative to servicing our prospective students. So, and each step in the process from an application point grew to a new student enrollment. That’s been revisited and again I don’t want to make too much of this but execution is a Participant of this and we have to execute that. So, we are going to analyze data, it will tell us what we should be thinking about and what we should be doing. We should be focusing on certain groups who are not getting the kind of results that we have historically gotten which I mentioned there were a couple of those groups. Again they don’t make up a large percentage of the population really less than 20%, but at the same time we want to address that population and focus on execution, focus on the steps and the process and do (inaudible) and it's time for us to get focus back on our process and our business.

[Operator:]

The next question is from Andrew Steinerman of JP Morgan. Please go ahead.

[Unidentified Analyst:]

Good morning. This is Jeff for Andrew. I wanted to find out about your close efficiencies in non-admission folks. So, suppose to have faculty and specifically facts and sizes.

[Kevin M. Modany:]

Well, in the deleveraging scenario that we are going through right now, obviously you are going to loose some efficiencies and that shows up relative to the margin declines that we are seeing and that if you look at EPS guidance is inherent in those projection. So, you will loose some (inaudible) we will loose some efficiencies on servicing. We have pretty said servicing staff ratios to students. So, there could be a point where we see a step down in that, but as you are working on your way down certainly you loose some efficiency there as well. So, all of that is embedded in the EPS guidance or expectation for all of that. We have pretty good visibility into that and feel pretty confident about our expectations on the cost, but certainly we will see some loss and efficiency as we work our way through this shift and turn.

[Operator:]

The next question is from Gordon Lasik of Robert W. Baird. Please go ahead.

[Gordon Lasik:]

Wanted to come back to revenue per student. What are your thoughts on revenue per student in ’12. I mean it looks like you are going to had some benefits from the changes in the program duration, any other offsets we should be considering increase in scholarships for ’12 or the PEAKS changes.

[Kevin M. Modany:]

Well, actually now that we have anniversaried PEAKS’ programs which started effectively in the second quarter of last year and even in the increase in scholarships and awards. You still can see some impact there, but you are going to have some as I mentioned before, you are going to get a little bit of positive bump if you will from the alpha programs. So, going forward it's hard to say within definitive point at this stage again we will talk a little bit more in the October call as to guidance for next year, but we have anniversaried some of the things that really pressured revenue per student over the past let’s say 4, 5 quarters.

[Operator:]

The next question is from Paul Ginocchio of Deutsche Bank. Please go ahead.

[Paul Ginocchio:]

I appreciate your recent disclosure on the size of the ’07 and ’09 ROCEs. Do you think you will make any cash payments on any of those, this year or next and so what will be the size of those. And as a follow-up you talked about Durbin’s recent build to discharge, private student loans and bankruptcy and the patent needed through Congress which is a [big hit], but if it did would it change the liabilities on your balance sheet. Thanks.

[Kevin M. Modany:]

With regard to the RSA programs in 2007, 2009, it's hard for us to say that there will be any cash payments on that. At this point in time we are not projecting any, but again it's hard to say that trending is such that we are booking reserves accordingly based upon anticipated default rates and I’d say we are in line with our expectations at this point. Keeping in line some of the data is not fully baked, we have got some very early data points on some of the stuff. So, at this point we have got reserve booked, we adjust them every quarter and we are accounting for that in accordance with our expectations. So, I don’t see anything unusual there anything that occur there. We are not accounting for in our expectations going forward. And then your second question with regard to Durbin’s bill relative to potential discharge of private student loans and bankruptcy. I don’t think that will have a material impact on us as e look at the expectations and the performance of these portfolios just from our analysis not speaking to the third-party folks involved in their analysis, but our analysis then and the results, we don’t see a huge impact from collections and bankruptcy. So, we wouldn’t anticipate a huge impact if anything like that would have become loss.

[Operator:]

The next question is from David Shue of Bank of America/Merrill Lynch. Please go ahead.

[David Shue:]

Based on what you guys had said at Brandon’s conference. I think like you guys said that that is expected to come down about 45,000 on average per student. But my math suggest that the changes to the credit structure accounts for maybe about 3000 of it. Is the other like 1 to 2000 reduction in debt coming off from scholarships or are there other things that should help lower that.

[Kevin M. Modany:]

Principally the scholarships and awards.

[David Shue:]

Okay. And just as a quick follow-up, I mean what are your expectations in terms of timing when this would be implemented across all the campuses.

[Kevin M. Modany:]

When what would be implemented?

[David Shue:]

Just kind of the programmatic structural changes.

[Kevin M. Modany:]

We had 10 locations offering the new programs and the June academic quarter. There will probably be somewhere around 75 maybe a little bit more offering the programs in September. The remaining schools will sort of rollout over the period of time as the requisite regulatory authorizations are obtained. So, I think substantially we will have a substantially all of the schools through in the early part of 2012. There are few states that just take a little while longer to get through their process and so we will have a few stragglers but we will get through most of them by the early part of 2012 we believe.

[Operator:]

The next question is from Peter Appert of Piper Jaffray. Please go ahead.

[Peter Appert:]

So, Kevin I understand the negative operating leverage associated with declining enrollments, but I was just wondering if you could share with us any perspective on what you think the appropriate or attainable level of operating margin from the business longer term. (Inaudible) partly just in the context of the evolving media environment and your evolving media mix.

[Kevin M. Modany:]

Well, not necessarily looking out beyond 2011 at this point. So, I don’t want to get into too many of the specifics there, but I think people just follow the historical patterns. We are not anticipating material changes in the major class components for our business and you can see there have been shifts in advertising cost and spend and we had many over the last couple of year's. And as our enrollment trends has shifted where you have seen it grow, now you are seeing us come on the other side of that as we transition through a temporary period or an adjustment if you will. You see how that impacts our margins and you see where we are coming out and so, again without giving specific guidance I think the history gives you a pretty good view of how this model works, it's fairly transparent and its enrollment driven. As we see increases enrollment we see leverage as we see decreases in enrollment, we see the deleverage and I don’t mean to be overly simplistic but without given any additional guidance on ’12. I think if you look at the history you can get a pretty good sense of where we think we can be. Advertising costs are at fairly high levels right now. They have been at highest levels we have seen for quite some time. We started to see some softening and I’m seeing like just weeks worth f data. So, it's very-very new data. We got some data points from third-party that analyze the advertising environment suggesting some supply and demand shifts that could pose some favorable change on the cost side for us on some of those traditional media sources, but I think it's too early to say that we are seeing a shift there, but we are monitoring all those variables and we will see how those plays out. I think we also have proven that a pretty good managers of our costs to a certain extent we can manage some of that. We take an advantage of that, and we will continue to do so. But a lot of it is enrollment driven.

[Operator:]

The next question is from Ariel Sokol of UBS. Please go ahead.

[Ariel Sokol:]

Just a quick question regarding once you guys anniversary the programmatic changes that you are making. How will persistence trend?

[Kevin M. Modany:]

Well, we will have a period at some point on 2013 roughly. And for maybe a couple of quarters where we have the old programs and the new programs both having a graduating class. I think this might be what you are getting at. And so we will see that at some point out again in 2013 probably towards the tail end of ’13. As you see the largest portion of these new programs going out in September of 2011 will be a couple of year's out and those folks start to graduate, we will have two graduating classes there. So, it will have an impact on that, otherwise if you are asking about retention related changes as a result of the new programs, there is a reasonable thought that hey could generate some positive retention because we have shortened the duration and consolidated the hours of study, so that student can deplete as an example on associated (inaudible) program and sticks in two-thirds quarters whereas the current order programs required 8 quarters. So, that could result in some positive retention. We have not built any of that into our models at this point until we see that. We probably won’t do that. But I think those are the two things to consider when you are thinking about student persistence and the related impact from the new program rollout.

[Operator:]

The next question is from James Samford of Citigroup. Please go ahead.

[James Samford:]

Just wanted to focus on actually some of the opportunities I guess and specifically I’m thinking about nursing program, I think you are increasing this sort of the amount of schools you could be launching this year. And wanted to know how that’s trending. And secondly also any update on Daniel Webster and when that might be as well.

[Kevin M. Modany:]

Sure, on the nursing front, we anticipate having 42 of our locations offering the associate degree and registered nursing for the academic period that begins in September 2011. And as I have mentioned previously we anticipate that we could be adding several more schools as many as 20 that would be the upside before the end of the year. And so we are going to continue to rollout the programs across the network. It takes some time as we work through the regulatory process and get approvals from the various state boards of nursing. But we are very pleased with that rollout program and we are happy with the results that we are getting on all fronts right on the nursing side. We are very optimistic about that. As I mentioned in the prepared remarks our expansion going forward is going to be in the areas of technology and health sciences and the registered nursing program is a big part of that and the outcomes and the return on investment dynamics are very attractive for our students. On the DWC front really nothing to report there. We have not made any major progress in terms of moving through some of the steps that we have to gain some of the approvals that we are looking for. So, we got work to do there, and we don’t have any expectation for any changes on that front in our model for the remainder of 2011 at this point, but we continue to keep you updated as we make progress there.

[Operator:]

The next question is from Bob Wetenhall of RBC Capital Markets. Please go ahead.

[Unidentified Analyst:]

This is actually (inaudible) on for Bob. I was just wondering if you guys had any guidance or expectations for the number of students per institute going forward looking out maybe next year and do you expect it to get back kind of levels we saw on ’09 or do you think it will trend down towards what we saw earlier in ’07?

[Kevin M. Modany:]

Well, we are not giving any guidance booking beyond 2011 and haven’t given any enrollment (inaudible) respond to that. Other than to say that aside from the changes in new student enrollment and some of the persistence metrics we talked about, we are not anticipating any other changes (inaudible). So, in October we will give some guidance per search engines relative to our expectation for the business and at that time you might be able to use some of those comments refine your estimates in that regard, but right now we are not speaking deal in 2011.

[Operator:]

The next question comes from Kelly Flynn of Credit Suisse. Please go ahead.

[Kelly Flynn:]

Relates to starts expectations for the fourth quarter, I know a number of people kind of touched on this, but I just want to ask a specific question. Do, you expect starts growth for the fourth quarter will be worse than then 19% that you just put off or do you think it might be better given the leading indicators. I hope (inaudible) manage expectations.

[Kevin M. Modany:]

Sure. Well, as we said relative to the leading indicators we are seeing for Q3, there are encouraging signs that so if that trend continues and I caution everybody relative to the volatile environment we are dealing with so makes it very difficult to predict a quarter at a time going on two quarters. But if those trends continue the cops ease off a bit, we are optimistic about our opportunities. Again we are not giving specific enrollment guidance but so many had asked earlier about what our outlook looks like. Can you turn the corner at the end of the year into the beginning of 2012. It seems like that’s possible and I know I’m couching our comments but if you all have the data that we are looking at. I think you would do the same, so encouraging trends, encouraging relative to the prior quarter and we hope those continue and if they do then our expectation potentially turn in the quarter and early part of ’12 and could come to fruition.

[Operator:]

The next question is from Suzie Stein of Morgan Stanley. Please go ahead.

[Suzie Stein:]

Do you understand as how long the third-party (inaudible) programs that you have in place now we will carry you. And then also how concerned are you about the impact of possible (inaudible). Would you envision increasing loans if you had availability (inaudible) and how would you handle that?

[Kevin M. Modany:]

I had mentioned earlier the expectation for current third-party financing (inaudible) and financing programs that are available should carry us through third quarter and we are in the midst of conversations on creating an additional third-party program that will carry us well beyond that point in tie, but we are still working on that and haven’t finalized that. Although, we had mentioned we are cautiously optimistic about completing discussions such as that program will be (inaudible). The second part of our question about programs, we are not speculating on what’s likely to happen there but I think we are like all companies who run on different scenarios and trying to determine the approaches to take for our students to try to provide them with financing alternatives should the (inaudible) fee eliminated. And I think really the solution will be inclusive of various components, and certainly private lending will be an option for some students awards and scholarships might be an option for others and grants. So, different scenarios result in different outcomes relative to how we put those student mix together. So, I’m not going to speculate on exactly where the sources come from, but it would be private loans and it would be grants and awards to what degree, we will have to see if there are changes in the (inaudible).

[Operator:]

The next question is from Maria Karahalis from Goldman Sachs. Please go ahead.

[Maria Karahalis:]

My question relates to the trend in bad debt expense if you can give us a little bit of an update it does appear to have improved year-on-year although perhaps deteriorate little bit from the first quarter?

[Daniel M. Fitzpatrick:]

You are going to get a little bit of ebb and flow in that line, but it's quite honestly the improvement year-over-year was what something we have expected when we talked about for a while, we thought our range is 4 to 6 and we since quite honestly we probably at the lower end of that range. Just based upon the fact that we have private loan programs. Now again we have mentioned a couple of times on this call that we are cautiously optimistic we will get another one in place. That would have a big impact if not, but we anticipate that if such a program is put in place in the third quarter or sometime this year than you would expect to see a bad debt (inaudible) we are pretty much where it is.

[Operator:]

We have another question from Corey Greendale of First Analysis. Please go ahead.

[Corey Greendale:]

It looks like you are expecting the number of new campus opening to accelerate pretty meaningfully in the back half of the year. (Inaudible) in the first half the result in you are just being focused on other bigger picture items, is there anything going on in terms of regulatory approvals that are slow or anything like that?

[Kevin M. Modany:]

No Corey, that’s the way (inaudible) we are not seeing any changes in the regulatory front relative to approval levels. All of the agencies and groups we are dealing with still going through their processes but it just felt that way and we have the last year or two we were kind of backend loaded as well. That’s nothing relative to a plan or changes in responses that we are seeing to our request in applications open new locations. That’s just coincidental.

[Operator:]

The next question comes from Scott Schneeberger of Oppenheimer. Please go ahead.

[Scott Schneeberger:]

Thanks. Just curious if it was a leading comment when you were discussing graduate employment rate and you made the commentary that you are expecting improvement on increased employer interest is that just speaking to the demand environment or are there any incremental programs that you have going on (inaudible).

[Kevin M. Modany:]

Well it's definitely based on employer activity that we are seeing and we do have some larger employers that I do not desire to name at this particular point for obvious reasons but some specific employers that have some hiring programs that are going on, we are helping them and assisting them with their efforts across multiple campuses. So, just the increased level of activity that we are seeing gives us reason to be cautiously optimistic and if you look at the 2011 grad data versus 2010 as e mentioned in the prepared remarks, we got 310 basis point improvement there. So, it's showing up in the numbers, but it's also showing up in the activity that we are seeing relative to the number of job orders that we are seeing come through the systems. So, we still have to work those we are still not seeing levels that we have seeing prior to 2008, so we are still not where we want to be. We got lot of work to do. Once again I’m going to use the term encouraging relative to the trends we are seeing there. Just we are seeing an increased level of employer activity and interest in our graduates.

[Operator:]

We have a question from James Samford of Citigroup. Please go ahead.

[James Samford:]

Just a quick follow-up on the bachelor versus associate mix and actually how has the gain for employments are softening the language at least the calculation changed your view if not on pursuing more bachelor focused degrees.

[Kevin M. Modany:]

The mix right now is about 83% associates, 17% bachelor and then as the bachelors picked up I believe it's about 200 basis points from the prior year. There has been a little bit of shift there, but it's about ebbs and flows. So, I’d say we are right in the historical range. In terms of thinking about bachelor programs, we just rolled out a whole host of new programs those included bachelor degree programs and we are focusing on programs where we think there is a very strong value proposition. And those strong value proposition should translate into an opportunity to comply with gain for employment regulations although we can say with certainty. We are certainly directionally positioning ourselves there and we think we have an opportunity to do that with some of these programs. So, we are not backing away from that at this point but I wouldn’t say that I’d anticipate a major shift in the mix that we have historically seen. So, that 85, 15 mix is likely to continue.

[Operator:]

The next question is from Kelly Flynn of Credit Suisse. Please go ahead.

[Kelly Flynn:]

A question relates to the new credit hour structure if you will, I think you explained Dan, that students are going to have to pay more early or in the program because they are more credit assigned for class. So, can you talk a little bit about the funding, how are you assuming (inaudible) titled for or have to be alternative sources and then I guess related to that, you guided to revenue per student declined for the remainder of the year, I’m surprised that’s not turning positive given that this is going to be a boon for revenue per student, so if you can connect that dot there that would be great.

[Daniel M. Fitzpatrick:]

I don’t know that said it was boon, and that a couple of things yet specific, think about the rollout even though that we are going to be rolling in out in the later part of the year rather substantially in September. It's going to take a while this is for new students. It's going to take a while to works it way through. And again the increase I think we should focus on the fact that he overall cost for the programs is going to decrease, it's just it shifts a little bit forward. So, as far as the revenue per student increase, what we have been talking about this year, I don’t see that’s changing and we have been saying up till now that you can expect a year-over-year decline for the remaining couple of quarters as well.

[Kevin M. Modany:]

Let me add a little color to Dan’s comments Kelly that with regard to the new programs and the reconciliation of a second quarter financial results, recall we said that 10 of the schools are offering the new programs and they offered them to the very first time in the June academic period and only for the new student as Dan mentioned. So, the amount of revenue impact from those individuals is really less than two weeks worth of revenue. So, you really not going to see it, and then again only for 10 schools. We will start to see a little bit of it in September 75 schools that’s why we were trying to get some color relative to the rollout and how it plays out. So, you can sort of extrapolate that towards some revenue impact. And again keeping in mind new students only we can kind of roll that out, see how it has an impact on the revenue and think a little bit about how it will impact revenue per student. I think Dan gave a little bit of color relative to revenue per student for the rest of the year and even touched a little bit on 2012. And we will give more color on that in October as we talk about the primarily business outlook for 2012 at that time.

[Operator:]

This concludes our question-and-answer session, I’d now like to turn the conference back over to Mr. Modany for any closing remarks.

[Kevin M. Modany:]

Thank you very much operator. I just want to thank everybody for participating in a call today. And we look forward to talking to you in October for our third quarter earnings call. Thank you again.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.