Element Solutions Inc (ESI) Q1 2013 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the ITT Educational Services 2013 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's 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 conference. 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. Good morning, ladies and gentlemen, and thank you for joining us on our conference call to review our 2013 first quarter results. Let me -- on the call with me this morning, as usual, is our Executive Vice President and Chief Financial Officer, Dan Fitzpatrick. In our prepared remarks, we plan to provide an update on several key focus areas for the organization. We will also discuss a few miscellaneous items, including an update on the renewal of the ITT Technical Institute's accreditation. At that point, I will turn the call over to Dan, who will provide some additional color in the financial results reported earlier this morning. With the agenda out of the way, let's get started. We continue to allocate a great deal of our energies towards stabilizing new student enrollment trends. We believe that new student enrollment results over the past several years have been negatively impacted by prospective students' increased sensitivity to the cost of postsecondary education. We also believe that the uncertainty of the value of additional education has increased recently, and prospective students' lack of confidence with respect to the value of a higher education has led some to put off a decision to pursue additional education. This uncertainty exists despite the overwhelming data that suggest that there is a growing skills gap in our country in particular disciplines, including health sciences, technology and engineering, at entry-level positions, such as technicians. While we continue to see strong demand for our programs of study, which were supported in the first quarter of 2013 by a 10% increase in advertising expenditures compared to the same period in the prior year, the conversion of prospective student inquiries to new student enrollments continues to lag historical trends. Based on our belief that prospective students are increasingly sensitive to cost and debt levels, we increased the availability of institutional scholarships for our current and prospective students through the introduction of the opportunity scholarship. The opportunity scholarship is an institutional scholarship intended to help reduce the cost of an ITT Technical Institute education and to increase access to our high-quality career-based technology and health care related programs of study. To give you a sense of the projected impact of the opportunity scholarship on the average ITT Technical Institute associate degree graduate, we currently believe that the average debt balance owed by an associate degree program graduate who benefits from the opportunity scholarship for the entire duration of his or her program of study will be approximately $20,000. That compares to the average debt balance of an associate degree program graduate just 3 years ago of approximately $32,000. As you can see, the opportunity scholarship has the potential to make a material difference in the overall value proposition of an ITT Technical Institute education for our graduates. All but 7 of our 146 ITT Technical Institute campuses across the nation offered the opportunity scholarship to prospective new associate degree-seeking students who enrolled for the start of the academic period that began in March 2013. 115 ITT Technical Institute campuses first began offering the opportunity scholarship approximately 8 weeks before the start of the March 2013 academic period. To provide more color regarding the impact of the opportunity scholarship on first quarter 2013 revenue, approximately 5% to 6% of the students benefited from the opportunity scholarship in the first quarter of 2013. Therefore, it is still very early in the roll-off of this new scholarship program. With that said, we believe the introduction of the opportunity scholarship led to the 230-basis-point improvement in the rate at which student applicants converted to new students in the first quarter of 2013 compared to the same period in the prior year. The conversion rate of student applicants to new student enrollments is commonly referred to as the show rate. As a result of the year-over-year improvement in the first quarter 2013 show rate, we are cautiously optimistic about the prospects of the new opportunity scholarship. However, while we have trained and coached the majority of our more than 1,300 admission representatives across the country on how to effectively communicate the benefits of the opportunity scholarship, we believe that we can improve the effectiveness of those communications to prospective students. Based on the initial results, we have decided to expand the eligibility for the opportunity scholarship to students interested in pursuing a bachelor's degree program at ITT Technical Institute. Consistent with the decline in historical conversion rate of prospective student inquiries to new associate degree program students over the past couple of years, we have also experienced a decline in the rate at which ITT Technical Institute associate degree program graduates enrolled in an ITT Technical Institute bachelor's degree program of study during that same period. To further evidence the impact of the decline and the rate at which associate degree program graduates enroll in a bachelor's degree program, new student enrollments in bachelor's degree programs of study declined by approximately 20% in the first quarter of 2013 compared to the same period in the prior year. We believe that the decline in the rate at which associate degree program graduates enroll in bachelor's degree programs is primarily due to the graduates' increased sensitivity to cost and value that we previously mentioned. Given the positive early results in the show rate for associate degree programs as a result of the introduction of the opportunity scholarship, we believe we have a chance to improve the conversion rate for our bachelor's degree programs by making the opportunity scholarship available to our prospective bachelor's degree program students. Coupled with that is the fact that we anticipate an increase in associate degree program graduates in the June and September academic periods due to the curriculum changes that were implemented almost 2 years ago that shortened the duration of our associate degree programs. Thus we believe that now is the right time to expand the opportunity scholarship to begin including new students enrolled in our bachelor's degree programs starting in the academic period that begins in June 2013. At this point, I would like to provide you with some programmatic color on the new student enrollment results in the first quarter of 2013. As we reported in our earnings release this morning, new student enrollment in the 2013 first quarter declined 3.6% compared to the same period in the prior year. Breaking that down by particular discipline and/or school of study. New student enrollment in our 3 core associate degree programs of study increased 9.8% in drafting, declined 1.5% in electronics and declined 1.8% in network administration in the first quarter compared to the 2012 first quarter. New student enrollment in the registered nursing program offered by the Breckinridge School of Nursing and Health Sciences increased 27.5% in the first quarter of 2013 compared to the same period in the prior year. Students participating in the Breckinridge School of Nursing and Health Sciences now represent approximately 9% of the total student census at ITT Technical Institute. 47 of our campuses are currently authorized to offer the registered nursing program, and we are actively pursuing authorizations to offer it at up to 11 additional campuses in 2013. New student enrollment in the School of Business in the first 3 months of 2013 increased 28.9% compared to the first quarter of 2012, while new student enrollment in the School of Criminal Justice decreased 28.4% in the first quarter compared to the same prior year period. Students pursuing a program in the School of Criminal Justice at the ITT Technical Institute represented 12% of the total student census as of March 31, 2013, compared to 17% as of March 31, 2012, and 21% as of March 31, 2011. Continuing our focus on stabilizing our new student enrollment trend, we plan to introduce new programs of study in 2013 throughout the 146 ITT Technical Institute campuses to better utilize the excess capacity in our facilities. We plan to offer one or more new associate degree programs in software development technology, industrial engineering technology and medical assisting and administration at a number of locations in the academic period that begin in June and September 2013. If the launch of these new programs at the select campuses is successful, we plan to roll out these programs to more locations in 2013 and beyond, pending receipt of the necessary regulatory authorizations. We have several additional STEM-related programs of study in various phases of research and/or development that could be introduced throughout the campus network in 2014 and beyond. These programmatic efforts are a part of our strategic plan to more effectively utilize and leverage existing capacity available at our campus facilities by offering additional STEM-related programs of study that we believe present graduates of these programs with strong prospects for solid returns on their educational investment. Shifting gears a bit. I would like to talk about our efforts to continue expanding our already extensive network of employers that support our institution in a number of ways, including but not limited to participating on our program advisory committees, advising our current students and/or employing our graduates. In the first quarter of 2013, more than 2,600 employer representatives participated in a program advisory committee meeting at one of our campuses. As additional evidence of the depth and breadth of our employer network, more than 15,000 different organizations worked with one of our more than 260 career services professionals to employ an ITT Technical Institute graduate in 2012. In addition to hiring our graduates, employers play an integral role in our institutional operating plan as curriculum and career readiness advisors. For more than 40 years, we have relied on the advice and council of the employers who hire our graduates, and we believe that our relationships with companies, both large and small, across the nation constitutes a material differentiator for the ITT Technical Institute. A key component of our strategic plan includes further developing these relationships and better communicating the value of our 4-decade-long engagement with our employer network through all of our key constituents, including but not limited to current and prospective students. We believe that this is especially important today given the current state of the postsecondary education environment and the uncertainty that exists with regard to the perceived value of a postsecondary education. Moving on, I would like to provide you with a brief update on our graduate employment metrics. As of April 15, 2013, the graduate employment rate of our 2012 ITT Technical Institute employable graduates was 336 basis points lower than the graduate employment rate of our 2011 ITT Technical Institute employable graduates as of the same date in 2012. The year-over-year decline was primarily due to the decrease in the number of graduates who are excluded from the graduate employment calculation. We refer to these excluded graduates as waivers. Employable graduates are defined in accordance with the graduate employment metrics that we are required to report to our accreditors, the Accrediting Council for Independent Colleges and Schools, ACICS, and include all of the graduates from the ITT Technical Institute's program of study in the applicable year, except for certain waivers, including graduates who continue their education after graduation. The decrease of waivers in 2012 compared to 2011 was primarily due to the decline in the rate at which associate degree program graduates continued their studies in a bachelor's degree program, as previously mentioned. The decrease in waivers represented 170 basis points of the year-over-year decrease in the graduate employment rate of our 2012 ITT Technical Institute employable graduates as of April 15, 2013. We also believe that the graduate employment rate has been affected by employer hesitancy to hire additional employees based on recently reported jobs data in a report released last week by the National Association of Colleges and Employers. On a positive note, as of April 15, 2013, the average annual salary reported by our 2012 ITT Technical Institute employee graduates increased 2.5% to $32,609 compared to $31,820 reported by our 2011 ITT Technical Institute employee graduates as of the same date in 2012. At this point, I would like to provide you with an update on the renewal of the accreditation of our largest ITT Technical Institute institution, which is comprised of the main campus located in Indianapolis, Indiana; 142 additional locations and 2 learning sites. We're pleased to report today that during its April 2013 meeting, the ACICS renewed the accreditation of all 145 ITT Technical Institute locations that make up that institution for a period of 5 years. And lastly, before I turn the call over to Dan, I'd like to reiterate that our EPS goal for 2013 remains in the range of $3.50 to $4. And now let me turn the call over to Dan, who will provide you with some additional thoughts on the financial results reported this month. Dan?

Thanks, Kevin. Revenue decreased 51 -- $54.1 million or 15.8% to $287.7 million in the 3 months ended March 31, 2013, compared to $341.8 million in the 3 months ended March 31, 2012. The primary factors contributing to this decrease included a 16.6% decrease in total student enrollment as of December 31, 2012, compared to December 31, 2011, and a 14.2% decrease in total student enrollment as of March 31, 2013, compared to March 31, 2012. Cost of educational services decreased $9.7 million or 7.2% to $125.2 million in the 3 months ended March 31, 2013, compared to $134.9 million in the 3 months ended March 31, 2012. The primary factors that contributed to this decrease were lower compensation and benefit costs resulting from fewer employees and a decrease in course supplies expenses due to lower student enrollment. Cost of educational services as a percentage of revenue increased 400 basis points to 43.5% in the 3 months ended March 31, 2013, compared to 39.5% in the first quarter of 2012. This is primarily attributable to the decline in revenue, which was partially offset by decreases in compensation and benefit costs and course supply expenses. Student services and administrative expenses were $106.3 million in both the 3 months ended March 31, 2013 and 2012. Student services and administrative expense increased to 36.9% of revenue in the 3 months ended March 31, 2013, compared to 31.1% in the same period in 2012. The principal causes of this increase were the decline in revenue and increases in bad debt and media advertising expenses, which were partially offset by a decrease in compensation and benefit costs and certain scholarship-related expenses. Bad debt expense as a percentage of revenue increased to 6.9% in the 3 months ended March 31, 2013, compared to 4.6% in the first 3 months of 2012, primarily as a result of the increasing amount of internal student financing that we provided to our students in the first quarter of 2013 compared to the first quarter of 2012. DSO increased 18.1 days to 32.6 days as of March 31, 2013, compared to 14.5 days as of March 31, 2012, primarily due to the expiration of the third-party private educational loan programs and a delay in receipt of certain federal financial aid funds as a result of internal processing issues caused by system enhancements implemented during the quarter. In the 3 months ended March 31, 2013, we have recorded an additional reserve of $3.5 million related to our guarantee obligations under the 2009 risk share agreement, which increases the reserves accrued related to our guarantee obligations under that program and the PEAKS Program as well as other contingencies to approximately $79.4 million as of December -- as of March 31, 2013. The increase resulted from our analysis of additional student loan default data obtained in the 2013 first quarter with respect to the private loan programs associated with the 2009 risk share agreement, which suggested an increase in default level trends on the loan pool under that program that originated in 2009, which is the oldest of the 3 loan pools under that program. We estimated default trends for the other 2 loan pools under the 2009 program, which included student loans originated in 2010 and 2011, as well as the loan pool associated with the PEAKS Program, which also includes loans originated in 2010 and 2011, did not change in the 2011 -- 2013 first quarter and therefore, our reserves related to those 3 loan pools were not adjusted. The estimates of our projected guarantee obligations are calculated with the assistance of our third-party credit consultants. In our October 12 -- or October 2012 conference call, we said that our goal was to reduce our annual operating expenses by approximately $50 million through various operational efficiency initiatives. Based upon the actions we've taken through the end of 2013 first quarter, we believe we're well on our way to achieving that savings target for the full year of 2013. At this point, I'd like to reiterate our financial goals for 2013: revenue per student 2013 versus 2012 in the range of minus 6% to minus 4%, EBITDA in the range of $165 million to $190 million, earnings per share in the range of $3.50 to $4. Please note that projected EBITDA is a non-GAAP financial measure. A reconciliation of projected EBITDA to our projected net income can be found on our website at www.ittesi.com. Before I turn it over to Kevin, I'd like to provide a quick update on our default management efforts related to our federal cohort default rates. In March 2013, the Department of Education published a preliminary 2-year cohort default rates for the 2011 federal fiscal year and a preliminary 3-year cohort default rates for the 2010 federal fiscal year. The average preliminary 2-year CDR for the 2011 federal fiscal year for institutions was 13.5%, and the average preliminary 3-year CDR for our 2010 federal fiscal year for institutions was 29.2%. These rates compare to the average 2-year CDR for the 2010 federal fiscal year of 16.4% and the average 3-year CDR for the 2009 federal fiscal year of 32.9%. As such, we're pleased with the results of our default management efforts thus far, and we believe that our federal cohort default rates are trending in a positive direction. Lastly, I'll be happy to entertain any questions you might have regarding any of the financial metrics included in this morning's earnings release that we didn't touch upon in our prepared remarks. With that, I'll turn the call back over to Kevin.

Thanks, Dan. At this point, we've concluded our prepared remarks. Operator, if you would, please open the line for questions.

[Operator Instructions] And our first question comes from Sara Gubins from Bank of America Merrill Lynch.

Could you talk about your expectations for new student starts in the second quarter and maybe the rest of the year? Do you think that now that you're rolling out the scholarships more broadly that, that might actually suggest that we would see starts flat or even up by the second quarter?

Thanks, Sara. Right now, our internal goals are for new student enrollment for the full year to be between minus 5% and 5%. Obviously, that's suggesting that there's an opportunity for us to see some positive start growth. I would say, without giving any kind of specifics on what our expectations are for the second quarter, we continue to be optimistic, cautiously optimistic, with what we're seeing in terms of the application volume right now. The net apps right now are pretty much flat for the June academic period as we sit here today so that gives us a good opportunity, again, to potentially see continual improvement. I caution everybody on that just to say that there is still continual volatility here so the transparency isn't as good as we'd like. But again, as we sit here today, the net applications are flat with prior year, and we continue to be cautiously optimistic as we roll the opportunity scholarship out to additional schools and continue to enhance the training and communication of that scholarship to our prospective students.

Great. And then as a follow-up, can you help us think through the negative impact that we should see on revenue per student in the second quarter and beyond as you do roll out more scholarships?

Sure. We're going to see -- we have the offsetting impact. We've got the fact that we're still seeing more of our total students in the 4.5 credit hour courses, which would, in the near term, increase revenue per student, offset by the timing of the impact of rolling out the opportunity scholarship, which would decrease it. So again, as we progress throughout the year, you're going to see it move more towards the guidance that we talked about on an annual basis, which will be minus 6% to minus 4% so we should move in that direction for the rest of the year.

Our next question comes from Corey Greendale from First Analysis.

A couple of questions about the opportunity scholarship. So first of all, I know it's early, but do you have any early returns on whether it's having an effect on persistence? And secondly, if students are becoming more price-sensitive, what gives you confidence that this is going to be enough and that additional reductions or more scholarships might not be necessary some point?

With regard to persistence, Corey, we haven't seen any indication of a positive impact as of yet. I would say it's probably still a little bit too early for that. So we'll monitor that, and if we see some sort of indication there of a correlation between the scholarship and retention levels, we'll certainly, certainly let you know. In terms of whether or not this will have the desired impact, I guess I would say, right now, we're pleased. We're -- again, we're cautiously optimistic. However, the intent is to continue to evaluate the elasticity here and to see what type of demand or conversion improvements we see with this level of scholarship-ing. And we will evaluate that on a going-forward basis, and if adjustments are appropriate, that would suggest that we can have a more favorable ratio or favorable outcome with an adjustment of the ratio, then we'll certainly do that. But right now, we're seeing positive impact. The show rate is improving second quarter in a row. We saw it in the test schools, now we're seeing it overall. And so that's a positive, and then we'll just continue to evaluate it. If there's an opportunity to optimize that ratio as far as scholarship level and conversion rate, then we'll do it. But right now, we don't have any indication that we should do that just yet.

Okay, appreciate it. And then just could you speak to your advertising expense plans for Q2 and the rest of the year? And Dan, in talking about the guidance, I didn't hear you mention free cash flow. Are you reiterating free cash flow guidance as well?

I'll take that, Corey, in terms of the advertising expense for the rest of the year, I would say slightly above the prior year for the remainder of the year, single digits. With regard to the free cash flow, and I'll remind everybody as we speak to free cash flow, it's a non-GAAP metric, so reconciliation is on the website. But we had talked about $50 million to $75 million, and that's still the internal goal for the full year at this point.

Our next question comes from Peter Appert from Piper Jaffray.

This is George Tong for Peter Appert. Just wanted to get some additional color on your scholarship for B.A. students. What's the conversion rate now? And what are your expectations for where it could go to after the scholarship? And then as a follow-up, what are your expectations for rollout timing of the scholarship to your campuses?

Sure, George. When we spoke in the prepared comments about a conversion rate, we were speaking specifically about our calculation of the associate degree graduates from an ITT Technical Institute, what percentage of those students continue on to a bachelor's degree program of study, if there is a bachelor option for them at that particular campus. We have historically seen that, that -- we'll refer to that as matriculation rate, has historically been -- or recently been in the range of about 40%. More recently, as we've seen that decline, the most recent quarter in March, it was about 32%, so we've seen about 800-basis-point decline there. So it's definitely an opportunity. And in terms of the rollout of the bachelor portion of that, we're rolling that out in June, so students who are applying for a bachelor's degree program of study that would begin in the June 2013 academic period, pending certain eligibility requirements, would receive the opportunity scholarship. In terms of other schools at this point, we have a handful of schools, principally our Pennsylvania schools that had not yet been approved for the scholarship. However, we have received that approval. And so all schools will be offering the scholarship program to all incoming students with the June 2013 academic period.

Our next question comes from Paul Ginocchio from Deutsche Bank Securities.

To follow up on that free cash flow question, your AR spiked to almost 33 days. Is the government slowing down payments to you? Can you just talk about how it's -- at 33 days, it's the highest it's ever been and how you're still going to achieve the $50 million to $75 million with your AR that high?

Sure. So with regard to any sort of slowdown in disbursements initiated by any governmental entity, the answer is no to that. With regard to the DSO spike, we're seeing a couple of things impacting that. We had a delayed disbursement in some of our funding correlated to some systems changes we're making. So we're making changes in our financial aid processes, which ultimately will lead to some efficiencies, and some of this is correlated to some of the savings initiatives we have. But as we rolled that out and put some new systems in place, it caused some delays in disbursements of Title IV funds, which have subsequently been received in the second fiscal quarter. So that had a little bit of an impact. And then also, as we roll out the opportunity scholarship, we basically eliminated all third-party private funding sources, and the opportunity scholarship has been rolled out and reintroduced to a larger number of new students. But when you think about those students generating tuition revenue for the first quarter, there are only 5% to 6% of those students who received the opportunity scholarship, so the remaining portion of those students for their gap financing is basically trade credits, so it's AR. And so you're seeing that increase there and then, therefore, the corresponding increase in the bad debt. Over time, as the rollout expands, you'll see the DSO, over the next couple of quarters, begin to come down, probably not yet for the second quarter and maybe even for the third quarter. But probably in the fourth quarter, we'll still start to see that come down. The DSO will come down, and then you'll start to see the corresponding impact that Dan referenced earlier with regard to revenue per student, where that number starts to come down as well. So it just plays itself out as the opportunity scholarship is rolled out throughout the campus footprint and should be mostly completed and fully evident in the financial results by the time that we get to the end of the year.

Can I ask a follow-up?

Sure.

Just persistence was down 100 basis points, I think, on a decline a year ago. What's going on there?

It's principally as a result of the graduate level increases in excess of the beginning census variance on a year-over-year basis. So graduates are impacting that, and we're probably going to see that for the next 2 quarters as a well, as we see sort of those larger enrollment increases from 2 years back kind of working their way through the system, in addition to the curriculum changes, where we shortened the duration of the program of study. So we've got sort of what some people refer to as a double graduation impact, and we'll see that in June and September. So it's a graduate thing more so than it is a retention rate. Retention of students is slightly down, not materially down but slightly down, but not a material impact on that overall persistence number.

If I could just sneak one more. Any change to your payments on contingent liabilities for this year and next?

No expected change. The information that we provided in the January call with regard to projected payments is still our current estimate.

Our next question comes from Gary Bisbee from Barclays.

Just wanted to follow up on that. Can you be any more specific on what we might think about for the double graduation impact. I think in the past, you've downplayed it to the extent that it was like a huge thing in any given quarter, but then it would bleed in over several quarters and have a negative impact. But since we're getting on top of that, is this -- should we think of this is as a significant impact to persistence and total enrollment growth?

Well, you're right, Gary, in that it's not going to all be in one quarter. As we initially rolled out some of those changes, we thought we would see a larger impact in the upcoming quarter because that was the timing when the students in a 7-quarter associate degree program would also be graduating with those students that were still in the 8-quarter associate degree program. So we will see an impact in this June quarter in the second quarter results that we report. But it's not going to be as substantial as originally thought because it will bleed a little bit into the September quarter as well. So you're going to see it over the next 2 quarters. By the time we get to the fourth quarter, it should have worked itself through, and that's probably the best way to look at it at this particular point.

And I mean, order of magnitude, could this be a couple of hundred basis points to persistence?

It's probably in the neighborhood of about 100 to 150.

Okay, great. And then on the -- thanks for the color on how the different areas performed in terms of starts this quarter. Did I hear the numbers right, the Criminal Justice was really the only one that was down sharply, couple of the IT ones were down a touch?

Correct.

Are you comfortable with the 12% of the mix now or are you deliberately trying to shrink that area further in terms of number of students?

Well, we've talked in previous calls about the fact that we're sort of self-policing that, as we typically do. We just haven't had this level of self-policing that was required. But we've looked at all of the schools in the system, and we really don't see the type of salaries and/or the employment rates that we expect. We've cut off the new student enrollment there. So we've not added a significant number of schools to that mix in the most recent quarter. But I would say that we're managing that very closely. We may see another couple of percentage points decline in that overall census over the next couple of quarters. And I think if you go back maybe a year or 2 on the script, I think I was asked this question a while back, and we had estimated that we thought that the census could come down to around 10% of the total, so we're at 12% now. There's probably a couple more points that we could see decline there, and a reasonable guess at this point is it settles in at around 10%.

And then just on the business, which was up so much, can you remind us what you're actually doing, what programs are in business and roughly how much of the mix that is these days?

Sure. Business right now is probably around 7% or 8% of the total census, and about half of that is project management. So one could argue that, that might have a little more of an IT focus than business. However, it is a program that is included in our School of Business and that program saw nice growth mid- to high-single digit growth in new student enrollment in the March quarter, so it was a solid contributor. But it represents about half of that 7.5% to 8% of total census. So we're really comfortable with that program of study based on the outcomes in employment and salaries.

And our next question comes from Jeff Volshteyn from JP Morgan.

Could you just give us a sense on the increase in receivables, how much of it roughly came from the systems issue versus the on-balance-sheet lending?

Yes, I think, roughly it would probably be somewhere in the neighborhood of about 5 days. And again, we've -- as Kevin mentioned before, some of those delays we pretty much caught out for that here in the second quarter.

Okay. As a follow-up, I'm glad that you got the accreditation for another 5 years. Looking back at your 10-K, there was some findings from the ACICS that had to do with improving the retention rates, I think, to 52% and placement rates to 47% and the number of campuses and programs. Where do you stand in the effort to improve those metrics? And how should we think about those numbers, let's say, for this year?

Sure, I appreciate that question. The large percentage of those programs that were identified in the 10-K, and here I'm speaking of somewhere in the 70% to 80% range of those programs of study, actually I think a little bit higher than that, north of 80%, closer to 90% of those programs are being taught out. So those programs -- really, there's not an effort or remediation effort that is underway for those programs of study, again, because they're being taught out. So -- and that's probably a point of clarification that was important to make, and I appreciate the question on that front.

Our next question comes from Jeff Lee from Wells Fargo.

I just wanted to get more color on the June starts. Was the improvement in new student starts versus Q4 more of a function of increased leads in student demand or is it more leads to increased conversion rates?

Let me try to see if I can answer that question in this way. We saw an increase in year-over-year lead flow. It's kind of a hard with the seasonality to compare it on a quarter-over-quarter basis. But on the year-over-year basis, we saw an increase in lead flow. We also saw an increase in the conversion rate. So there is -- I would say I would lean more towards conversion rate improvement than lead flow improvement. If I had to really try to break that down on a quarter-over-quarter basis, and again, we're correlating that conversion rate improvement to the continued rollout of the opportunity scholarship.

And our next question comes from Jerry Herman from Stifel.

Kevin, I wonder if you could talk about retention of students that are actually in the scholarship program? Is it -- can you measure that at this point? Is it incentivizing stay?

At this point, it's a little early to measure that. I had mentioned a little bit earlier, we haven't seen any sort of improvement that we can correlate to the opportunity scholarship. But again, I would just say, it's really early to do that. Probably sometime in the third quarter we'll have a sufficient amount of data where you can go back and take a look at it and get some statistically valid comparisons to see if there is a correlation. We're hopeful. We're not building that into any models at this point. We're not expecting that. But certainly, there's a reason to think that we could see some improved retention as a result of it. But it's too early to see it just yet.

And then a question about the loss related to the private student loan programs, the additional $3.5 million. I guess in timing, it seems to be in close proximity to the last time the analysis was done. And from a mechanical point of view, should we expect a truing up of those estimates every quarter? Is that how we should think about it? And then part b of that question is, any progress on the other loan providers in terms of coming to some, perhaps, settlement with them so that you don't have to worry about those liabilities?

Sure. Appreciate the questions. With regard to the adjustment for the quarter and sort of the methodology that goes into that, the answer to your question is yes, that is a quarterly analysis that occurs. A little more color on it or just to emphasize what we had in our prepared remarks. Principally relates to one of, let's say, 4 pools that exist or 3 pools of loans in the 2009 risk share agreement and then you have the PEAKS program, which I'll just call a separate pool. One of those 4 programs showed a degradation in performance, and it was the oldest of the group of loans -- the pool of loans, the 4 pools. And also, it was most impacted by servicing issues. So there's some reason for, I think, what's happening there versus all of the other pools being much more consistent with expectations. But yes, every quarter, we have to take a look at that, and we'll look at performance of enroll rates and make adjustments accordingly. Whether or not we'll see this level of adjustment going forward, hard to say. It's just very difficult. But whatever -- there's a methodology in place. You collect the data, you evaluate it and then you follow the methodology and make the adjustments accordingly. So this quarter, we had to make one, and we'll see what happens with the next quarter.

He also asked about settlement.

I'm sorry, on the settlement front, yes, nothing to report on that front at this point. We're certainly interested in having conversations, but there's nothing to report as of today.

And our final question in queue comes from Timo Connor from William Blair.

You said 5% to 6% of the total population has received the opportunity scholarships. What about new students in the quarter given that they're generally packaged upfront, I think?

Sure. So when we were referring to that number, we're trying to give a little bit of a sense of how it impacted revenues versus those students that actually were offered it in terms of impacting enrollment. And I think you're getting more to the latter point, if I understand correctly, than the former. To the latter point of how many people were offered the scholarship that could have potentially impacted the enrollment decision, we had all but probably 7 to 10 -- I think it's 7. It was in the prepared remarks, 7 schools that were offering the scholarship to their new students. Now that being said, out of that group of roughly 141 locations or 139 locations that were offering it, 115 of those began offering at about 8 weeks before the start. And so that's 8 out of 12 weeks of the recruitment period so its a substantial portion of that. But I will note that as we saw with our test group of 24 schools that began offering it in December, there is a ramp-up period here. It would take some time for the schools to get their arms around effective communication, and I think in our prepared comments, you'll note that we referenced that we do believe there's an opportunity to improve our communications. Certainly, with the 24 schools that have been offering it to new students for 2 quarters and most certainly with the group of 115, now it will be 122 that will be offering it for the June academic period, 115 for the second time and then the 7 that we obtained approval for offering it for the first time for June students. So we've got some opportunity there. But at this point, as we head into June, all schools will have it, and they'll be offering it to all new incoming students.

Okay. And then one follow-up on the individual loan loss accrual. So you said the 2009 cohort, that's the one that you took the additional accrual loan, but the 2010 and '11 you didn't, I think. What were the differences there? And then what are some of the indicators you're looking for potential losses?

I think principally, we believe, based on the evaluation of the data, that the major difference in that pool is servicing. There was material disruptions in servicing at the initiation of the program just that go toward the poor performance that we're seeing in that pool, and that is the worst performing pool of all 4 pools, by far. And again, it was impacted by poor servicing and poor management of the program, if I could say it specifically. And as far as what goes into evaluating it, really, it's -- not professing to be a credit expert here, but really it goes into looking at loan performance, students in repayment, students in default, rule rates on defaults. If you missed the first payment, what percentage of those people are likely to default. All of these different projections are part of the historical performance and also taking a look at even recoveries on defaults, all of that goes into the analysis. And again, the methodology is constant. It's consistent, you get actual data, and you plug it into the model and you go from there. I don't want to oversimplify it, but it's a pretty consistent process that we utilize.

And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the conference call back over to Mr. Modany for any closing remarks.

Thank you very much. I just want to thank everybody for participating in the call today, and we look forward to talking to you again on our next conference call to review our second quarter results in July 2013. Thank you, everyone, and have a great day.

Ladies and gentlemen, today's conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.