Element Solutions Inc (ESI) Q1 2012 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the ITT Educational Services 2012 First 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. Mr. Modany, you may begin.

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us on our conference call to review our 2012 first quarter results. As usual, Dan Fitzpatrick, our Executive Vice President and Chief Financial Officer, is on the call with me this morning. For our prepared remarks today, we'll follow our standard format and limit our comments so as to allow more time for your questions during the Q&A session. We'll start the call with a few brief thoughts regarding the marketing and advertising results for the quarter. From there, we'll provide a few comments regarding the new student enrollment results. We'll then review student retention and persistence metrics in the first quarter. And at that point, we'll provide an update on the graduate employment metrics of our 2011 graduates. I will then provide an update on the execution of our strategic plan. Before I turn it over to Dan, I will provide a few comments regarding our 2012 share repurchase activity and our efforts to facilitate additional private education loan options for our students. Dan will then provide a few comments regarding the financial results reported in this morning's press release as well as the new credit facility. At that point, we'll open up the call for your questions. Let me begin by providing a review of the 2012 first quarter marketing and advertising results. Advertising expenditures increased 5.8% in the first quarter of 2012 compared to the same prior year period. This was slightly less than we had planned at the start of the quarter due, primarily, to a higher level of preemptions on certain television advertising. For the third consecutive quarter, we experienced a more material year-over-year decline in new student enrollment in criminal justice programs in the first quarter compared to the new student enrollment in our other curricula as a result of self-directed changes to program offerings at select campuses. The year-over-year decline in new student enrollment in the resident programs in the School of Criminal Justice during the 2012 first quarter represented approximately 65% of the year-over-year decline in new student enrollment in the first quarter of 2012. We also experienced a more material year-over-year decline in new student enrollment in our School of Drafting and Design in the first quarter of 2012 compared to all other schools of study. The year-over-year decline in new student enrollment in the School of Drafting and Design in the first quarter represented approximately 30% of the year-over-year decline in new student enrollment. As a result of these factors, new student enrollment decreased 17% in the first quarter of 2012 compared to the same period in the prior year. This year-over-year decline in new student enrollment in the first 3 months of 2012 compared to the first 3 months of 2011 was generally in line with our previously reported expectations. As we entered the second quarter of 2012, our key leading enrollment metrics suggested an opportunity for year-over-year increases in new student enrollment in the second half of 2012 for the academic periods beginning in September and December of 2012. However, we should note that we continue to experience greater levels of volatility in the enrollment environment compared to historical trends, which makes it difficult to predict future new student enrollment results with exact accuracy. Moving on to the discussion of student persistence. We again experienced an increase in the number of graduates in the 3 months ended March 31, 2012, compared to the same period in the prior year. Total graduates in the first quarter increased 12% compared to the first quarter of 2011. Student retention in the academic period that ended in March 2012 was consistent with student retention in the same academic period in the prior year. As a result, persistence rate declined 110 basis points to 72.3% as of March 31, 2012, compared to the same date in 2011. Now, a quick update on our graduate employment metrics. The graduate employment rate of our 2011 employable graduates as of April 22, 2012 was approximately 225 basis points higher than the graduate employment rate of our 2010 employable graduates as of the same date in 2011. The average annual salary reported by our 2011 employed graduates as of April 22 was approximately 2.4% higher than the average annual salary reported by our 2010 employed graduates as of that same date in 2011. Updating our geographic expansion efforts, we began operations at 4 new ITT Technical Institutes in the first quarter of 2012 in Southfield, Michigan, which is a suburb of Detroit; Springfield, Illinois; Douglasville, Georgia, which is a suburb of Atlanta; and West Chester, Ohio, which is a suburb of Cincinnati, Ohio. Counting the new locations that began operations in the first quarter of 2012, we had a total of 145 campuses and 3 learning sites in operation as of March 31, 2012. Our internal goal is to begin operations at 4 to 6 new locations in the remainder of 2012, pending the timely possession of the campus facilities and receipt of all the requisite regulatory authorizations. We continue to evaluate additional technology and healthcare-related programs that offer a potential for attracting returns on investment for our future graduates. We have no announcements however, to make on this subject today. As we reported on our January 2012 conference call, we were teaching a set of new programs at 111 ITT Technical Institute locations in the academic quarter that began in December 2011. These new programs are at both the associate and bachelor degree levels and involve a modified delivery format, which reduces the amount of time required for a full-time student to graduate. In addition, the associate degree programs are comprised of fewer credit hours, which reduced the total tuition cost of those programs by approximately 6%. We believe that we're on track with our planned implementation and roll up of these new programs. An additional 8 locations began teaching one or more of the new programs in the academic period that began in March 2012, bringing to 119 the total number of locations teaching these new programs. We believe that the majority of the remaining locations will begin teaching the new programs in an academic period that begins in 2012. There were no other material developments in the other key components of our strategic plan during the first quarter of 2012. As we stated in this morning's earnings release, we have adjusted our 2012 internal EPS goal from the range of $7.50 to $8.50, with a revised range of $8 to $9. Now moving to an update of our share repurchase activity. In the first quarter of 2012, we repurchased approximately 2.1 million outstanding shares of our common stock for $146.7 million or an average cost per share of $69.93. Approximately 3.7 million shares remained available for repurchase under the repurchase program as of March 31, 2012. From April 1, 2012 through April 17, 2012, we repurchased 928,500 outstanding shares of our common stock pursuant to our existing repurchase authorization at a total cost of $61.3 million or an average cost per share of $65.98. As a result, approximately 2.8 million shares remained available for repurchase under the repurchase program as of April 17, 2012. On April 23, 2012, our Board of Directors authorized us to repurchase an additional 5 million shares of our common stock, pursuant to our existing repurchase authorization. Thus, as of today's date, we have approximately 7.8 million shares remaining in our share repurchase authorization. Pursuant to the board's stock repurchase plan, we plan to repurchase additional shares of our common stock from time to time in the future, depending on market conditions and other considerations. During the first quarter of 2012, we made additional progress in our efforts to facilitate the availability of new third-party private education loan programs to our students to help them meet their gap financing needs. However, we cannot predict that this time, when any additional private education loan programs will be made available to our students. At this point, I'd like to turn the call over to Dan, who will provide an update on a few of the financial matters.

Thanks, Kevin. First, I'd like to provide a few brief comments on the financial results that we released this morning. Revenue for student was up 3.1% in the 3 months ended March 31, 2012, compared to the same period in the prior year, primarily because of the initial impact of the roll out of the new programs at a number of our schools. In the 3 months ended March 31, 2012, our students received approximately $20.7 million in scholarships and awards, compared to approximately $18.7 million in the first quarter of 2011. Day sales outstanding increased 0.5 days to 14.5 days as of March 31, 2012, compared to 14 days as of the same date in 2011. Bad debt expense as a percentage of revenue increased 130 basis points to 4.6% in the 3 months ended March 31, 2012, compared to 3.3% in the same period in 2011. The increase was primarily due to a decrease in the amount of funds received from private education loan programs available to our students in the first quarter of 2012 compared to the first quarter of 2011. At this point, I'd like to provide a quick update on our new credit facility. As we reported in a Form 8-K filing in March, we entered into a new credit agreement that provides for $325 million revolving credit facility. New credit agreement also provides that we may seek revolving or term loan commitments up to an additional $125 million. The lenders under the new credit agreement are not under any obligation to provide any such additional borrowing commitments. New credit agreement expires in March 2015. A portion of the borrowings under the new revolver were used to prepay the entire outstanding indebtedness under our prior $150 million credit facility. The prior credit agreement was also terminated on March 21, 2012. The outstanding balance under the new credit agreement was $175 million as of March 31, 2012. Now I'd like to turn the call back over to Kevin.

Thanks, Dan. Operator, if you would, please open the lines so we can entertain questions from the analysts.

[Operator Instructions] The first question comes from Kelly Flynn of Credit Suisse.

I had a question about the new student enrollments. Two things, one, for this quarter, let's see, the second quarter, do you think that decline will improve or be similar or worse versus what you just reported? And then could you just revisit what you said about the back half? You said there's an opportunity for improvement. Are you saying you think they can grow year-over-year? And kind of what indicators are you basing those comments on?

Sure. First part of the question was trends, I believe, for the June academic period and what are we seeing for that on academic intake. And right now, leading indicators for us would obviously be applications received as well as -- probably even a better indicator, net applications, so anybody who has canceled through the process. At this point in time, we're getting very fairly close to being even with prior year in terms of the cumulative number of net applications received for the June academic period. And then more current run rates have been pretty close to slightly above prior year in terms of gross applications that were taken on each week. So right now, trends are looking as if there's improvement there. We've talked a lot about show rate. That's where kind of the volatility comes in, to be honest, Kelly. It's -- we're getting the applications there now and at higher levels than we've seen, but we're still a little uncertain relative to the show rate. So generally, I'd say it appears based on current data that we would see an improvement in the year-over-year trend in the June academic period. Now for the second part of your question, relative to second half, and that would be our September and our December intakes. Just looking at, again, leading indicators, looking at applications, looking at folks working their way through the process net of any cancellations, and then also comparing obviously to the prior year levels and where those comps are, it looks like we have an opportunity to see results above the prior year numbers for those respective academic intakes. So trends improving for June, and it and looks like September, December could give us an opportunity to be above prior year.

Our next question comes from Gary Bisbee of Barclays.

Can you give us an update on the mix of students by the different schools? I guess how much has Criminal Justice come down, and what does that look like today? Is it much changed from a year ago?

It is, Gary, specifically related to Criminal Justice. It had probably peaked at about 22% of the census. And we're looking at probably in the 15% to 16% range of the census right now, and that number will continue to trend downward, the majority of those students being in 2-year CJ program, so we'll start to see that kind of work itself out. And I would anticipate that it could get as low as 10% or lower, as we see kind of this self-imposed restriction work its way out. Just to remind folks, we've started that principally in the September '11 academic intake. So we'll see another quarter of that in June where it'll be materially impactful, probably a little bit impactful in September, and then December it's kind of comping on equal numbers, if you will.

So there are though still schools in the network that are starting students in these programs?

Yes, absolutely. I mean, if the schools have good outcomes, if we're seeing salaries and employment rates demonstrate a good value proposition then we're continuing to offer it. So it's not really relative to the viability of the program because we have markets and locations that are making that happen. But if we're not seeing the kind of outcomes we want to see, then we've kind of restricted the intake until such time that those outcome metrics improve. And so I'm just giving you feedback relative to the assumption that maybe they don't improve and we don't turn those funnels back on, if you will, for those programs at those specific locations.

Okay. And then can you give us an update on the performance of the loans in the PEAKS structure? I think according to your filings, you have written down the subordinate amount that is on your balance sheet over the last couple of quarters. And I guess -- that would seem to imply that maybe it's doing worse than the -- what you'd built in as the likely performance of those. So any comment on that would be helpful.

Sure. Yes. Thank you for giving me a chance to clarify that because I think there's some misunderstanding out there relative to value of the subnote. I have commented on this multiple times in multiple venues, and for whatever reason the point doesn't seem to stick. But again, I appreciate the chance to really maybe, once and for all, clarify this point. There has not been any valuation write-down of the subordinated note whatsoever. There has been none. Any kind of reduction in that value that is disclosed -- and being clear to everybody because I don't believe it's clear, that is a contingent asset. But any kind of adjustment in that value is relative to refunds that have occurred. And when you record a refund, you basically unwind the transaction. And a part of that unwinding of the transaction impacts the subordinated note value. So you'll see that continue to adjust downward slightly as we process a few additional refunds for some of the students that are in the program. Other than that, there's been no change in that valuation of the subordinated note. Again, I truly appreciate the chance to clarify that. I'm just not sure why that point doesn't resonate despite multiple communications on our part.

So is the refund because the student drops out, so the loan was made for a couple of quarters worth of time or a full quarter and then they drop out?

Correct. That's correct. So the private loan -- the way the PEAKS disbursements work in the majority of the states, unless otherwise prohibited, is that there would be a disbursement for 3 full quarters or 1 academic year all upfront. If the student discontinues their program of study at any point during that duration, there's a calculation of allowed tuition and application of funds accordingly, and any differential is then refunded back to the program.

The next question comes from Paul Ginocchio.

Say why it was declining -- if you did, I missed it. Can you just repeat that?

Paul, if you could repeat that, I only caught half of your question.

The School of Drafting Design, it's 30% of the year-on-year decline in new enrollment. Why is that school declining? If you said it, I apologize.

No, I did not. I appreciate that. We've got 2 sort of disciplines, if you will, impacting that school. We've talked quite a bit about CDD, our Computer Drafting and Design or Drafting and Design Technology now in the new program. And we were seeing falloff there, and we correlated to what was going on in the construction markets. Those are folks that really do drafting, design-type work, learn the AutoCAD-type skill set. So we're still seeing that fall off a little bit, although the degree of year-over-year decline in those enrollments has tightened a bit, so it's not as much of a contributor. The other discipline, if you will, in that school of study that's being impacted would be what I might characterize as graphics design-type programs. So Visual Communication/Multimedia-type programs, and we're seeing a falloff there. And the year-over-year decline in those types of programs are more substantial than the Drafting and Design Technology programs there. So we're hopeful that some of the early indicators we're seeing on the Drafting and Design Technology is suggesting that we're seeing a little bit up a pickup there, but it's a little bit early. But it would be those 2 disciplines right now that are being impacted.

Our next question will from Jeff Meuler of Baird.

Given that applications, it sounds like, are pretty close to flat year-over-year, I was wondering if you could talk about some of the programs that you're seeing better growth or better improvement in terms of either applications or new enrollments?

Sure, I'd be happy to. It would be in a couple of areas, and I would say in the School of Information Technology, School of Electronics Technology, our School of Health Sciences, which is principally our Associate Degree Registered Nursing program, and then our School of Business to a little lesser extent than it was above the prior year, although on smaller numbers. We are seeing in those 4 schools positive activity. Again I would say in the Drafting and Design Technology, seeing a little signs of life but still below prior year. And then the CJ is really kind of self-imposed to be perfectly honest with you. We're not seeing any falloff in the student interest, but we're just trying to police that relative to our discipline around student value proposition.

And then with CJ, are you guys -- is there a greater number of campuses relative to 1 quarter or 2 ago, where you're restricting enrollment, or as you've maybe been able to make some tweaks to the program, or where the end market might be improving? Is that number peaked or starting to decline?

It really hasn't changed since we started imposing some of the local level restrictions. It doesn't mean it wouldn't, so we just monitor all of the program outcomes on a quarterly business. And if we see any kind of weakness there for an extended period, let's just say a couple of quarters or even a year, then we go in and we'll impose, again, our internal controls around that until we see the outcomes improve. But at as it relates to CJ, there were a handful of schools that we imposed some restrictions on, and that number really hasn't changed since that September 2011 implementation date.

Okay. And then last one for me, just given the fairly sizeable increase in the repurchase authorization and the new credit agreement, can you just talk about how you think about potentially taking on debt to do share repurchases, or if it's going to be more restricted to free cash flow.

Sure. I think from our perspective, we look at our share repurchase opportunity relative to the return on investment. And I've spoken to this point several times. We're taking a look at where we think the business can go and applying some very reasonably conservative valuation principles to those operations and the financial result. And when we do that and we compare it to where the market is, we continue to see a pretty significant opportunity. So from our perspective, that's a terrific investment. And allocation of capital there on our shareholders' behalf makes a lot of sense. So it continues to be a priority. That being said, we've talked a couple of quarters ago that we are very bullish and positive on education in general. I know we may be in the minority from that perspective as it relates to the markets, but we're excited about opportunities there. And we're looking for opportunities to allocate capital to some growth areas within the education space as well. So I would say those 2 capital opportunities, capital allocation opportunities are at the top of the list for us. Clearly the board reauthorized an additional 5 million shares, and I think the indication there is clear that they, too, continue to see that opportunity. And that's really the message we're sending with that authorization increase.

Our next question will comes from Jim Samford of Citigroup.

I apologize if this has been answered, but can you comment on how you roll out of nursing and how you're doing there? I mean, is that primarily focused on RN to BSN conversion? Or where are you focused in that market?

It is around 40 schools right now. We'll probably add another 10 to 15 throughout the remainder of 2012. And the program is exclusively a resident 2-year associate degree program that enables a graduate to take the NCLEX exam to become a registered nurse. So it's an -- or they refer to it as an RN program, a 2-year RN program. And it's exclusively resident across all of those 40 locations.

Great. And I just have a quick follow-up on -- where do you stand on sort of internal loans on a dollar basis? And how will that flow through to, maybe, 90-10 going forward, starting next year?

Sure. Any kind of internal financing that we're doing right now is really best described as trade credit. And so you're going to see that on our accounts receivable. So when you look at the AR on the balance sheet, you're going to see a number net of the accumulated reserve, of course, that is inclusive of all internal lending that we are currently doing. So it's pretty clear and open relative to what balances were accumulating on that front. Did I miss a part of your question there?

90-10. So I'm just trying to gauge the size of internal loans as part of AR, and then how that flowed through to 90-10?

Yes, the 90-10 impact is fairly clear as well. I mean, these are amounts that are not included in 90-10, only to the extent that we give payments on them. And there's some deferment included in that trade credit, if you will, for students that are continuing in the program. So it's not included in the 90-10. We have talked a lot about it. The private lending gap, if you will, whether it's trade credit or whether it's through third-party financing, is roughly 10% of revenue somewhere in that range, plus or minus 1 point or 2. You'll be pretty safe using that as an estimate for a full year amount of internal credit required.

And I guess one last one on share count, what's your share count assumption for the year, or your projected EPS for the year, goal for the year?

Yes. We're not assuming any additional share repurchase in our revised internal goal of $8 to $9 per share. And that's pretty consistent with what we had done when we gave the initial internal goal. If we make a change there and we get active again and we talked a little bit about our interest in doing so then we'll make an adjustment to the goals accordingly.

Our next question will comes from Brandon Dobell of William Blair.

I wonder if I can get maybe a little color on how you're feeling about the progress on the Internet marketing side, those lead gen or Internet advertising, compared to the last couple of quarters? And is there any major delta in the inquiry or conversion rates that you're seeing move around on that channel these days?

Sure. I would say generally speaking, we feel pretty good about our progress there. And I think it's been pretty widely reported, at least by us, that what we've been doing is moving dollars out of television and more into those, I'll just say, alternative spaces, principally web-based advertising of all sorts, including search, display, et cetera, et cetera. So again, fairly pleased with that. Not seeing any material changes in terms of cost, I think that was part of your question. Our conversion rates have been holding pretty well. When we think about costs, though, I obviously want to be clear. Our cost for inquiry, if you will, or more importantly cost for application through these alternative means is much more favorable than what we see on the television side, at least to the extent we can attribute the appropriate amount of inquiry flow to each one of those channels. So we see an opportunity from a cost perspective to reduce our overall spend by reallocating that mix. And again, right now it's fallen in line with expectations. We still have a lot more to do. It's just the way we go about this is fairly measured, so we move dollars in a fairly measured way until we could substantiate that the new channels generate the returns that we expect. And then once they do, we add those channels to the portfolio. So it takes us sometime to get there. But through each step in the process right now -- we've been pretty pleased with it and feel pretty good about what that means for our marketing and advertising spend for the remainder of the year. I don't think we'll see the 20%-type increases that we had previously seen with the historical mix, if you will. And hopefully, we could be in low double-digit-type ranges, potentially even below double digits and high single digits. But again, we have to continue to play this out. But so far so good.

Okay. And I think you mentioned -- I know I got on a little bit late, but I think you mentioned the impact of graduations this quarter how should we think about the next several quarters, I think, I guess, finishing out through '12 in terms of the headwind the graduations will put on your total population number?

Yes, it'll continue to be there pretty much through the remainder of this year. So the rate of increasing grads will decline. However, if you looked at in terms of graduates as a percentage of the beginning quarter census, that number is going to stay pretty elevated. And so it'll have a little bit of an impact on the persistence. As we look at the retention component of persistence, we don't see that changing at all. And quite frankly, there's a potential for that to actually improve. So we feel good about the retention component. But we're just seeing these larger classes that we took in 2010 -- 2009 and '10 start to work their way through the funnel. And again, by the end of the year, that'll mostly have worked itself through. But there will still be some impact there and you'll see it in the persistence.

Okay. And then final one for me, any commentary on the upcoming gainful employment release, all that data from the DOE, as expected, at some point here in May or June?

I got to tell you, in the absence of having a crystal ball here, I don't have a clue. Anybody who does, please give me a call.

The next question comes from Corey Greendale from First Analyst (sic) [Analysis].

I wanted to ask specifically about the bad debt. So I would've expected it to be up a little more, given more internal lending that you're doing, can you just speak to why it wasn't up more? And what's your expectation as for the rest of the year?

Well, yes, it stands the reason that as we go throughout the year, the bad debt should increase. You're seeing much of it in the first quarter, and in fact, you saw the biggest impact relative to AR, deferred revenue as far as the decline of deferred revenue. And I think Kevin mentioned earlier that a lot of the private loans are disbursed for an academic year as opposed to a quarter. So the expectation is as you go throughout the year, assuming no additional private loan program is in place, that bad debt will continue to climb. So yes, don't be misled by the fact it didn't go up as much as you might have expected in Q1.

Okay. And, Kevin, I was -- just hoping you could comment on the outlook for your advertising spending for the rest of the year? What do you think the gross is? And if there's any specific seasonality around the election or anything like that we should be thinking about?

Yes. Right now, nothing material around the election. We've done a lot of planning around that obviously and certainly expect it to be a pretty heavy ad buy from the political folks. But I would say that if you're modeling in at 10%, you're probably pretty good at 10% year-over-year. We should be in and around that range, plus or minus a couple of hundred basis points.

The next question comes from Sara Gubins of Bank of America Merrill Lynch.

So it's encouraging to see some signs of life in applications and potentially starts in the second half. I'm wondering what you think is really driving this. What are your enrollment advisers saying about it? Or is there any particular good strategy that you think is starting to work?

Yes, I think it's probably a couple of things. And I certainly wouldn't discount the comparison, so we've had a couple of quarters now comping of declining growth. So the comps has gotten a little bit easier. And again, I'm not trying to avoid the obvious, Sara. Absent that, I think if you look at just some of the operational metrics and some of the productivity there, we're having good results with the advertising adjustments that we're making, being fairly efficient and generating very solid inquiry flow. Then as far as the inquiries that we're receiving, how we're processing those through the channels, we're -- I think having better luck in terms of our ability to be more efficient there than what we've seen in previous periods and various points in that channel. And that has to do, I think, with just some better execution on our part. So I would probably prioritize it as first being the advertising marketing mix kind of coming together in a positive -- well, the comps first, then the advertising marketing mix, and then really just better operational execution. We've all been focused on the different parts of the funnel, where we've seen some degradation and put various initiatives in place to try to mitigate what we were seeing there. And I think we're seeing some of the start to come to roost.

Okay. And just as a follow-up, I'm wondering about visibility. We're in April, and I'm wondering how much visibility you typically have into the September and December quarters by -- at this point of the year?

Well, it's obviously -- it gets better with shorter duration to the start, obviously. But we've got decent visibility. I wouldn't say it's the same as what the historical trends have been. I tried to reference that in some of the prepared remarks in our early comments, and volatility is higher than what it has historically been. But there's decent visibility into the September numbers, a little less so but decent visibility into the December numbers. We start to take applications for some of those periods more so September than December. But you can see trends, you can extrapolate on some of the advertising costs and the conversion rates by channel and then see what that means for the year-over-year comparisons based on what those comps are. And we have reasonable confidence there. Again I cautioned everybody and I didn't want to give any kind of absolutes to say that, that's a guarantee that we're going to have year-over-year increases with September and December. But with a reasonable visibility, it looks like we have a good opportunity for that.

The next question is from Jerry Herman of Stifel, Nicolaus.

I wanted to give you guys the opportunity to talk about or comment on the private loan program progress, PEAKS in particular or something like it. And also, do you still feel there's a need? And as part of that, are you noticing any sensitivity to students or new students given the absence of such program?

Yes, sure. In terms of an update -- and it sounds like we're singing the same song here, but I can honestly say we have made progress this quarter towards working out with third parties, private lending options for our students. And if there were a number of variables that we were still working on, we've certainly reduced those numbers. And I would say the confidence level in terms of our perspective on the ability to get a private lending program had certainly increased since the last time we talked. So we're cautiously optimistic, I used the same terms last time, but a little bit more positively inclined than we were last time, I will say that much. Relative to whether there's still a need I guess that's -- it's dependent upon how you define need. If you're thinking in terms of a 90-10 need, we don't need -- and that is probably the leading variable that has dictated our pace on this. I know there's some impatience in the market relative to this getting this done, but there's really not an urgency. And we prioritize our tasks and initiatives, and it's not at the top of the list. We've done some internal financing for students, and that gets us through the process. But I think there's gap financing needs for students. We want to make sure we give them the best alternatives, and we think a third-party program structured the appropriate way is the way to do that, and so we continue to pursue it. I think I got your questions. Did I miss anything?

No, you got it. And then just a follow-up, the concept of just capital allocation, generally, repurchase and the context of financial responsibility ratios and also your reference to potentially exploring opportunities, can you maybe talk about wherewithal to do a deal?

Okay. If we are not doing anything in terms of allocating capital for any kind of M&A opportunity, we're probably looking at about $100 million more in repurchase capacity for the fiscal 2012 period while leaving us plenty of room on the financial responsibility ratio. And that's a little bit of cushion above the zone at 1.5, if you will. If we're doing something on the M&A front, and depending upon what that transaction would entail relative to the balance sheet intangibles, things of that nature, we might not be looking at any additional share repurchase. So it's -- I will comfortably say that we're probably looking at those 2 alternatives as priorities, and it just depends how things transition and play themselves out. I can fairly clearly say that about $100 million on the repurchase side of things.

Our next question will is from Paul Ginocchio from Deutsche Bank Securities.

I just want to ask about the Consumer Finance (sic) [Financial] Protection Bureau. They've been making statements, and I think one of the things they said that was -- if loans are predicted to have high default rates, that they may view those as predatory. I don't know if you've been paying attention to that or what you think, I just wanted maybe your comments on that?

Yes. Sure, Paul. Absolutely paying attention to it, I think, as anybody would in our sector. And at this point, we've taken in all the feedback and certainly stayed very close to their commentary. Nothing definitive has come out yet on that front, so I really -- I don't want to speculate on what may come from CFPB. I will say that as you look at our programs -- and I would say the third-party programs that we offer to our students, the underwriting criteria for those programs are fairly similar, substantially similar I would say to the PLUS loan program that the department offers. So from the perspective of whether or not these programs will be classified as predatory, I would confidently say they'd be put in the same bucket as the PLUS Loan program. So I would expect and hope that they'd get equal treatment as the PLUS Loan programs would get. That being said, I will say that we actually do have another eligibility criteria that the PLUS Loan program does not have, and that is that a student actually make it through to the second academic year. When you make it to the second academic year, we know, and there are numerous studies that show, that repayment rates for students who complete their program of study are much higher. So there's a correlation between program completion and repayment. And so that's an additional eligibility criteria that we have that you would not see in a PLUS Loan program. So I threw that out just for some comparisons, for folks to think about it. Obviously, again, nothing we can say about the CFPB until we get some definitive commentary from them. But once again, we're very mindful of it, paying attention and we'll react accordingly.

The next question comes from Peter Appert from Piper Jaffray.

This is George Tong for Peter Appert. You had said earlier that revenues per student this quarter were up due to new program rollouts. Do you expect the pace of program rollouts in the remainder of the year to result in similar growth in revenue per student?

Yes, the impact should accelerate somewhat just because of the fact -- as you just think about it, as those programs are rolled out and more and more students are in those programs. It should have an increasing impact throughout the year, but I would caution folks to think that it's going to go too far. But nevertheless, the ramp should continue throughout the next few quarters.

If you look at full year revenue per student 2012 versus 2011, you'll see a similar rate of increase as what we saw for the quarter, may be slightly higher than the 3.1%, maybe 20, 40 bps higher than, but somewhere in that range for the full year, which obviously means Q3 and Q4 will be the north of what we saw in Q2.

That's very helpful. Can you comment on trends in terms of what you're seeing in enrollment counsel productivity and how much room for improvement you expect?

Sure. I guess there's a lot of different ways to think about enrollment productivity -- enrollment rep productivity. One of the simplest ways is just to take a look at the number of starts per recruiting representative. And there, we're seeing flat to slightly positive performance, keeping in mind the number of recruiting representatives. We've been down from anywhere from 15% to 20% when the new student enrollment results have been down a little less than that. So I would say right now we're pretty flat with prior year, slightly above it in terms of productivity. And I would say we're settling in to the new construct, if you will. And it was a little bit easier for us to do that. Again, we didn't have commissions or bonuses, it was all salary-based compensation program that we had. So again, a little bit easier to settle in. So no major issues on that front from our perspective.

The next question comes from Kelly Flynn of Crédit Suisse.

Sorry if you covered this. I'm pretty sure you didn't. But is there any way you could give the exact amount of internal lending you did in the quarter and also what you're accruing on the income statement against it? Some other companies have said, in the past, close to 50%, 60%. I want to know if that's ballpark?

In terms of the volumes, you wouldn't be too far off the mark if you just kind of looked at, I'd like to say, the 8% to 10% of revenue range is typically what we're seeing in terms of the internal gap financing requirements. So that ought to give you a good range. What was the second part of the question, Kelly?

I'm basically looking at what reserve you're taking. And I said other companies have mentioned in the past 50%, 60% reserve rates against their internal lending programs. I wanted to know if that was ballpark?

No, thankfully it's not ballpark for us. We don't disclose it, but I feel comfortable and I feel it's important that we say that we're not in that range. But you can get a general understanding of that by looking at the year-end disclosures in terms of the roll forward on AR. It gives you a general sense of what that looks like. There's the reserve and then the write-off levels. So you can get a rough idea and I think you'll clearly see it's not in that range.

The next question comes from Brandon Dobell of William Blair.

Just a quick follow-up, actually, I think on George's question about the enrollment advisers. In terms of, I guess, maturity or tenure, kind of metrics of turnover, I know you're down kind of 15% to 20%. But in the recent quarters, have you seen a slowdown in turnover, increase in turnover, those kinds of things? I'm just trying to get, I guess, a sense of the average maturity, and how that force looks now compared to a year ago or so?

Yes, sure. And it's an interesting look at it quite frankly. And it's a good question. If you look at the turnover rates for, let's say, the 0 to 9-month group, we've picked up a little bit on, and so we're turning them a little bit more quickly. To be honest, we don't get much productivity out of them during that time period anyways. It's mostly at training and then on-boarding, and they're not very productive in the 0 to 9. But the turnover there is a little bit higher. However, if you look at the average tenure of the rep force, it actually has increased. We've seen some fairly steady increases on that year-over-year over the past several quarters. And here I'm talking about 0.5 month, 1 month or so each quarter, but the total tenure of the rep force has actually increased. But again, turnover in that early group, the 0 to 9 months, has picked up a little bit.

[Operator Instructions] The next question comes from Peter Appert of Piper Jaffray.

Just had a quick follow-up question on the PEAKS Program. In your mind, what would you need to see changed from a macro or a company perspective before a third-party loan agreement can be reached?

Nothing. We don't need to change anything. We're just in negotiations relative to the rate. I think we have a pretty good understanding at this point, and it really is about information gathering, quite frankly. Pretty good understanding of what the debt markets are willing to do, what the cost of capital is, and then what, if any, premium is being required on the part of investors to invest in those secondary ed student lending, et cetera. And there is an expectation of a premium there. And so over the past 1 quarter or 2, we've really done a lot of work to gain an understanding of what that premium needs to be, what our tolerance levels are and kind of where we're likely to land. So nothing needs to change though from the perspective of being able to get something done.

I guess from a macro perspective, would we need to see more stability in the fixed income markets for you guys to reach a rate that you can agree upon?

No, not necessarily. I think we're very fastly zeroing in on what that rate needs to be. The debt markets are fairly open. The challenges are more related to just the sector. And there have been some refinancing -- refinancings out there that you can look at that can give you kind of a perspective of the variance between maybe sector financing and just general financing of equal credit quality. And that would be very representative of the kind of premiums that folks are looking for. And then we just did our homework on that, making sure that we looked at all the market transactions, looking at those kinds of differentials that existed in the marketplace and making sure that we negotiate it to those levels. And again, as I've mentioned in earlier comments, our confidence level has increased from the last time we talked. And it's principally around the work we've done to educate ourselves and make sure that we're making an informed and educated decision when it comes to any kind of third-party private lending program that we put forth in front of our students. And again, we've made progress on that front.

The next question is from Thomas Allen of Morgan Stanley.

It's Suzi Stein. I had a question going back to the issue of this financial responsibility ratio and the $100 million that you talked about. I guess in the past, you had said that one of the ways to look at it is that you wouldn't do share repurchases above the amount of net income. So if we add Q1 purchases to that $100 million, that implies $300 million of, I guess, implied net income. Maybe that's not the way to look at it anymore, but can you just clarify that for us?

Yes. Suzi, all things being equal, that would hold true, but we had a little bit more gunpowder, if you will, coming into this year. There's a number of factors that play in to the composite score. But equity is a key one there. And so obviously we're pushing down equity as we buy share. So it's more a matter of where we and up with equity at the end of the year. So we just had a little bit more room this year to go beyond that threshold.

Suzi, what we do when we're modeling that, I mean, as you would expect, we're looking at kind of different variables that go into our modeling. So we model the repurchases -- let's say, for example, during 2011, we've modeled certain level of repurchases based on a certain level of income expectation. We had a little extra cushion there, so we had a little extra equity. We ended up at a financial responsibility ratio of, I believe, about 1.8, which was 0.3 turns above the 1.5 level that we try to stay above. So that's kind of the extra cushion that we had coming into the year that Dan's referring to that we're going to make use of. And then same holds true for 2012. We're modeling to stay north of that 1.5. If there's any kind of positive change in terms of the performance or there's any kind of upside on expense mitigation, then it gives us a little more gunpowder. We'll try to use it during 2012 and allocate it -- allocate that excess capital in accordance to our priorities. But if we don't and we end up at the end of year with a couple of percentage points or turns above the 1.5, then we'll use that going into the next year. But net income is generally a way to use it -- to look at it, plus or minus the beginning balance of equity.

Okay. And then is there anything in the new credit agreement that limits your internal lending capabilities?

Yes, there are some covenants around that, if you will. All of them, though, we feel do not limit us on the basis of our planning and modeling and give us more than sufficient room to continue to do what we do and provide those third-party programs to our students. So we don't see it as a limiting factor, and we certainly negotiated to that -- to those levels.

Okay. And then just finally, is there any update on the appeals on the loan issuance in CDRs?

Nothing as of yet. We certainly had some communications with the ED on those appeals. I think we've mentioned, of those that we've heard back from we received a favorable response and a favorable decision. So we won all of the appeals we've heard back on, and we're just waiting to hear back on the remainder of them. And hopefully, that will be in a matter of 1 month or 2. Now keep in mind this is on the 2-year 2009 CDR. We'll do the same appeals process, keeping in mind it's the same cohort, the same loans, so it ought to extrapolate. But we'll do the same thing in the 3-year, when September comes around, when we first can do those appeals. But I'll say generally, we feel pretty good about that.

The next question comes from James Stamford (sic) [Samford] of Citigroup.

Just a couple little ones. First off, what was your share count at the end of the quarter -- that you ended up?

Slightly below 24 million.

Yes, it's 24 million, yes.

And in the -- on the deferred revenue side, it looks like it's sort of a pretty sizable pullback here. I assume that's just sort of about lower enrollment. But how should I think about where that trends, or is that just going to bounce around here at this point?

Well, clearly lower enrollment has some impact on that, but really, the big issue there was the private loans. You had private loans that were still being originated and dispersed in a large way in December. And so somebody asked a question earlier about the impact on AR and bad debt. That takes a while to play out because think about the folks who started in December, they had private loans made available to them. So it's going to -- you're going to see an impact on that, in private loans even more so because of the fact, what Kevin talked about before, they're dispersed on an academic year basis, so you see that build when there are private loans and deferred revenue. And when there aren't, you see a decline a little bit sharply.

The next question comes from Paul Ginocchio of Deutsche Bank Securities.

Dan, looking at your just free cash flow less -- or operating cash flow less CapEx, have your -- do think based on your current EPS guidance that your existing repurchases have already used up all your free cash flow generation for the year?

Well, keep in mind we've got more availability in our line now. So no, we haven't used all the free cash flow that we plan to generate, but now with the additional line, if we choose to go in that direction we've got some availability there.

Okay. So just to...

I think this question was posed earlier that the net of it is that we probably -- if we don't do anything else in terms of capital allocation, there's probably an additional $100 million of repurchase capacity that exists, that keeps us in the safe zone relative to the FRR, Financial Responsibility Ratio.

Well, yes. I'm just trying to get a sense on your free cash flow generation operating cash flow less CapEx for the year. It's north of the share repurchases year-to-date?

Well, we're not giving details on the free cash flow per se other than what you can see. I think you can kind of back into that if you wanted to. But again relative to the share repurchase, I think we've given you pretty good color on what's likely to occur there. And also with the additional facility, you see we've got additional gunpowder on that front. So kind of all the numbers that you need to kind of get to wherever it is you're trying to get, I think, are available to you.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Modany for any closing remarks.

Great. Thank you very much. I just want to thank everybody for their time and their questions today. And we look forward to talking to everybody in the next conference call. Again, I appreciate your time. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.