Lincoln Educational Services Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Lincoln Educational (LINC)

Lincoln Educational Services (NASDAQ:LINC)

Q2 2013 Earnings Call

August 07, 2013 10:00 am ET

Executives

Shaun E. McAlmont - Chief Executive Officer and Director

Cesar Ribeiro - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

David Chu - BofA Merrill Lynch, Research Division

Jeffrey Scott Lee - Wunderlich Securities Inc., Research Division

Paul Condra

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Lincoln Educational Services Earnings Conference Call. My name is Jackie, and I will be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to Mr. Shaun McAlmont, Chief Executive Officer. Please proceed.

Shaun E. McAlmont

Thank you, Jackie, and good morning, everyone. Joining me the room today is Cesar Ribeiro, our Chief Financial Officer. Let me begin this morning by reading the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements in this presentation concerning Lincoln Educational Services Corporation's future prospects are forward-looking statements that involve risks and uncertainties. There can be no assurance that the future results will be achieved, and the actual results may differ materially from forecasts, estimates and summary information contained in this earnings release. Important factors that could cause actual results to differ materially are included, but not limited to, those listed in Lincoln's Annual Report on Form 10-K for the year ended December 31, 2012, and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement.

This morning, I'll provide an overview of our company's operations, and Cesar will review our second quarter and provide the financial outlook for the third quarter of 2013. We'll then take your questions.

We announced 5 campus closures in a recent 8-K, reflecting our continued process to hone the company to its most viable units. It's always difficult to close operating units in communities where we've operated for years. Changes to ATB funding and the loss of state grants, which negatively affected our 90/10 balance, made the long-term operations of these schools difficult. Closing expenses and the impact to company operations are costly in the short-term. However, we feel that the closures will allow for more efficient long-term operations. We stopped enrolling students to these 5 campuses immediately after announcing the closures. Therefore, there were very few student starts at these campuses in the second quarter compared to last year.

Historically, these schools had high ATB populations, which affected student outcomes in 90/10 balances. With the loss of the Ohio State grant, we asked students to increase cash payments. And when ATB students were cut out of federal funding, the populations of these schools dropped to unsustainable levels. We believe that the closure of this group has been managed very well and will be completed this year. Secondly, we've taken steps for staff and students to receive outplacement assistance to ensure a smooth transition for everyone involved. Finally, the group will no longer be in operation and as such, relieves the company of its fastest-declining school populations, our highest 90/10 and highest cohort default rate schools. These closures bring our company to a core group of schools that we feel is sustainable in terms of long-term growth, profitability and regulatory outcomes.

The closure of these 5 schools and the 7 last year are an incredible disruption to the lives of many and are temporarily disruptive to the operations of our national approach to managing the company. It's a drain on our cash and our profitability will lag, however, we feel confident that we've taken the necessary steps to return our company to profitability.

As stated in our press release this morning, after giving effect to the closure of these campuses on a comparable basis, new student starts for the second quarter were essentially flat. Auto and skilled trade campuses continue to see improvement, which resulted in approximately 13% growth for the quarter from the second quarter of 2012. Unfortunately, while our health sciences and other programs improved from the first quarter of the year, they still experienced declines from prior year, thus offsetting the growth we experienced in the auto and skilled trade group. We foresee more positive trends as we are expressing growth in a number of our campuses, while at the same time closing these campuses whose performances were obstacles to our success. This should bode well for the future.

As we stated in our last call, we expected growth in the second quarter and second half of the year. However, the Ohio school declines weighed heavily on the company. Even after closing these schools, our expeditions have tempered and we expect flat growth for the year.

Student retention for the quarter improved yet again, showing a 90-basis-point improvement over the same period last year, which amounts to the third quarter-over-quarter improvement in student retention that we've seen. Our progress in graduate employment, 90/10 and default rates gives us confidence that as we look forward, these key outcomes will surpass defined accrediting and federal thresholds.

The second half of the year will be marked by efforts to improve our enrollment to start rate conversions from new students, while continuing to manage expenses in a responsible way. We will continue our focus on educational quality and our commitment to the initiatives, which are supporting the improvements we've experienced across all student outcomes. Even though our starts have not rebounded to expected levels and the cost of closing campuses is considerable, we are very pleased in our progress to date. It should be noted that historically, the demographics that we've served have been some of the toughest in the sector. And we've had to change our business model in order to keep access open to the many who need it, while also managing outcomes for these consumers. And in many ways, we've created a new company.

To better serve this population and run a sustainable business, we changed our model and restricted admissions for the first time when we implemented our pre-orientation. We added the Wunderlich behavioral assessment and an academic assessment to create a baseline for each student's needs. We added the Early Student Engagement program to address life and academic circumstances very early in the students' tenure, and we continue with career development and financial literacy now as part of the Lincoln Edge program. These efforts have been costly in terms of fewer starts and substantial resources. However, they've strengthened our company and give us confidence that we can operate in any environment that may develop for our sector.

Due to well-documented changes to the environment around us, for the past 3 years, our strategy has been focused on regulatory compliance, student outcomes and our admissions process. We've made significant strides in each of these 3 areas. We continue to be maniacal about compliance and outcomes. Recovery in sales is slower due to economic conditions and less financial resources for families. Our progress towards successes in all of these areas continues. For example, in terms of 90/10, the company sits at its lowest level in years, actually below the 80% mark year-to-date.

The cohort default rate progress for continuing operations is significant. We expect that we will see long-term improvements in both 2-year and a 3-year rates, taking the company out of jeopardy. Graduation rates are trending better, and we expect rates to improve to a company best based on the progress we are seeing in retention rates at this point.

And for job placement, despite national unemployment rates, the increased verification for our placements we're tracking 2% ahead of the same time last year in this key outcome. ATB students are almost completely out of our system and our positive performance in Department of Education program reviews displays our commitment to accuracy, compliance and a solid working relationship with the department.

The transformation of our company is almost complete. And as I look back, the defensive posture we took was necessary in order for us to position ourselves with a solid foundation before we grew again. We now think differently about student access and we consider demand in terms of inquiry attainment and demand for graduate employment and the types of programs that can sustain enrollment in this type of environment. Our new student recruitment shows improving metrics. However, we saw a variance to the forecast we had last quarter based on start rate variants. We had ample enrollments, but the enrollment to start rate was lower than expected, especially in our non-auto campuses. I'm not sure how to predict exactly where our demand characteristics and conversions will settle. However, it is a critical moment for the company as we see an end to the steep and steady declines of the past 3 years. Based on performance in the most recent -- the past quarters, we feel growth is imminent. It just didn't come as soon as we expected.

As we look forward, we continue to work to stabilize the business amid external pressures. And to understand our second quarter and first half performance, we also have to look closely at the trends affecting the majority of our sector. First, the weak economy continues to pressure the value proposition of education. New student starts are down across education. We look at this in terms of consumer confidence and affordability issues and a cycle that we feel will eventually revert back to positive.

Second, recruitment policies are less aggressive due to a myriad of changes in the Federal rules for admissions and misrepresentation. We've seen a slow but steady increasing level of comfort in our new admissions process, resulting in better lead to enrollment conversions, yet enrollment to start is still lagging.

Thirdly, the negative publicity around for-profit education has impacted consumer confidence in the sector. However, we're seeing less negativity and hearing fewer comments about the bad press.

Self-regulation is the fourth area that affected the sector, but Lincoln has continued to maintain a strong regulatory record with no student or staff class action, extremely clean Department of Education program reviews and accrediting visits and limited contacts from other regulatory agencies. Lincoln was at the forefront in managing our student outcomes by reducing the number of challenged students in our schools over the past 3 years. Because of these macro factors, we continue to look closely at our continuing operations and our programs to effectively measure our performance trends.

Our outcome or our outlook for flat growth for the third quarter and -- at the remainder of the year is based on July results, August enrollment trends, our new programs that will launch in 2013 including: manufacturing and RN; improved student persistence; and increasing comfort of the admissions process.

These growth factors will offset softness in new health sciences student starts. Furthermore, early indicators show our high school leads and enrollments are slightly ahead of prior year, same time, and early financial aide package students are ahead of prior year. The number of representatives is flat, indicating at least, at this point, that comfort in the enrollment process is taking hold. Slowly recovering new student enrollment rates are pulling starts to flat.

Our long-term optimism for our strategy of leading the skilled training segment of our sector is based on competitive landscape within the segment, which we feel positions us well. High barriers-to-entry for auto and skilled trades and also nursing, the expectations for continued long-term demand, a myriad of recent studies showing the increased demand and success opportunities of certificate versus degree training and related fast track to the job market.

In addition, let me briefly mention a couple of other areas where the company is strengthening our performance and infrastructure. Student persistence is maintaining at rates that are the best the company has ever seen. Our Lincoln Edge student program continues to show progress.

The online teach down, the closing of 12 schools and the elimination of the ATB program were difficult processes to manage for the company. Despite this, all were executed well and produced no regulatory or legal repercussions.

Cohort default prevention efforts, including financial literacy education, are in full swing as a part of our Lincoln Edge program and giving us confidence the cohort repayment within 2 to 3 years will be at all-time lows for the company. For cohorts from past years in current repayment, we continue to contact these students aggressively to let them know their payment and hardship options.

Finally, the company has made substantial gains in new partnerships, which continues to develop and produce earnings for the company. Although these numbers are small, they are significantly higher than the previous 3 years and expected to grow at impressive rates based on contract commitments.

OEMs, which produced the machines for our new manufacturing programs, are donating a significant amount of equipment to launch these new programs, which are unique to our sector.

Partnership with Raytheon has begun as GM vehicles have arrived at our Denver facility, and we will begin training GM technicians this quarter.

The BMW training programs in Texas and New Jersey are in full swing, and we continue to work with other external businesses to identify training needs where Lincoln can add value.

In summary, despite the noise caused by 12 school closures over the past 12 months, we've created a foundation from which we can now manage reasonable growth, successful outcomes and a return to profitability.

Now I'll turn the time over to Cesar to discuss our second quarter financial results and the guidance for Q3 and 2013. Cesar?

Cesar Ribeiro

Thank you, Shaun. Good morning, everyone. As we disclosed in our press release earlier this morning, our student starts decreased 20.4% for the quarter. Excluding online operations, the announced campus closures and ATB students, which we stopped enrolling in 2012, student starts were essentially flat for the quarter. Although new student starts were still down for the quarter, it reflects an improvement from the comparable decrease in student starts of 12.4% for the first quarter of the year.

Start of the second quarter of 2013 with approximately 2,600 less students than we had in April 1, 2012. This led to a decline in our average population for the second quarter of 2013 of 15.4%, which resulted in revenue declining by 11% or approximately $11.8 million as compared to the second quarter of 2012. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which averaged 3%.

The decrease in student starts also impacted our capacity utilization, which decreased to 36% from 41% in the second quarter of 2012. The decrease in capacity utilization produced significant negative leverage as our operating margin decreased to a negative 17.8% for the quarter or negative 12.1% to the second quarter of 2012.

Other key highlights in the quarter included a loss per share from continuing operations was $0.42 for the second quarter of 2013 as compared to loss per share from continuing operations of $0.62 for the second quarter of 2012. Loss per share for the second quarter of 2013 and 2012 includes goodwill and long-lived asset, noncash impairment charges of $0.10 and $0.38, respectively, and also includes operating losses for the announced campus closures of $0.12 and $0.16 per share for the second quarter of 2013 and 2012, respectively.

Free cash flow for the second quarter of 2013 was a negative $11.3 million, down from negative free cash flow of $3.8 million during the second quarter of 2012. We paid a $0.07 quarterly dividend on June 28, 2013. We finished the quarter with $4.3 million in cash and cash equivalents and no borrowings outstanding on our credit agreement. Bad debt for the quarter decreased to 4.7% of revenue as compared to 5.9% for the second quarter of 2012. And average revenue per student increased 4% for the second quarter of 2013 to $5,632 from $5,417 in the second quarter of 2012. Average revenue per student increased primarily from tuition increases, which averaged 3% during the quarter, a better improved student retention.

Cost per start increased 18.7% for the second quarter of 2013, or $4,678 from $3,641 in the second quarter of 2012. Cost per start during the quarter was negatively impacted by elimination of online and ATB leads, as well as the announced closure of the 5 schools.

Net accounts receivable at June 30, 2013, were $26.6 million as compared to $23.5 million at December 31, 2012. This decrease in net accounts receivable is primarily due to seasonality.

Capital expenditures for 2013 are expected to be about 4% of revenue.

Now turning to our loan program. As of June 30, 2013, loan commitments to our students, net of interest that would be due on the loans-to-maturity, were $24.2 million, as compared to loan commitments at $25 million at December 31, 2012. For 2013, we expect a few loan commitments will increase by $2 million to $5 million.

We finished the quarter with shareholders equity of $180.2 million, down from $198.5 million at December 31, 2012. Shareholders equity at June 30, 2013, reflects $3.3 million of dividends paid.

Outlook. I'll finish my prepared remarks by providing our current outlook for the third quarter and for the full year. We are updating our guidance to give effect to the announced campus closures and the continuing softness in our student starts. Our guidance is based on our current expectations.

For the third quarter of 2013, we expect revenues of $86 million to $88 million, representing a decrease of approximately 15% over the third quarter of 2012 and a loss per share of $0.20 to $0.25. Loss per share includes $0.12 to $0.14 loss related to the announced campus closures.

Guidance for the third quarter of 2013 is based on our expectation that student starts will be essentially flat on a continuing operation basis as compared to the third quarter of 2012.

For 2013, we now expect revenue of approximately $355 million and a diluted loss per share of $1. Diluted loss per share includes approximately $0.60 to $0.65 loss related to the announced campus closures. We now also expect student starts to be essentially flat for the year as compared to 2012.

And finally, the Board of Directors has set the record and payment dates for the dividend for the third quarter of 2013. A cash dividend of $0.07 per share will be payable on September 30, 2013 to shareholders of record on September 13, 2013.

In conclusion, we continue to make progress with our initiatives and are optimistic that we will return to profitability in the second half of the year. Now we will open the call to your questions. That said, I'd like to turn the call back over to Jackie. Jackie?

Question-and-Answer Session

Operator

.

[Operator Instructions] The first question comes from the line of Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Yes, the -- one of the things I'm curious about, Cesar, is with the cash position and the continuation of the dividend, what is the stock going forward? It sounds like you're optimistic about profitability going forward. What's the consideration for the dividend program?

Cesar Ribeiro

Honestly, every quarter, the Board of Directors takes a look at the dividend. I think the policy of the company is, as long as we believe that the losses that we've been incurring are short-term in nature, I -- in my opinion, I believe the board will support it until we see something different. As you know, they approved the dividend for this quarter, and it is our expectation that if things improve, that dividend will not be in any harm. But again, that could [indiscernible] that the board will consider every quarter.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And then you mentioned some new 2013 programs manufacturing and RN. Could you elaborate a little bit more on that please?

Shaun E. McAlmont

Let me just say, Scott, at this point -- this is Shaun, that we've been preparing for the last year to launch the manufacturing programs, which are unique to our sector. And we feel will add a lot of value to Lincoln's programs in a meaningful way down the road. The programs are being added with a lot of feasibility on the front end that looks at demand for students on -- upfront from an interest perspective and also jobs on the back.

The good news about the manufacturing program was the fact that those who manufacture the equipment for these programs, CNC machining in particular, are searching for qualified employees. And so the cooperation with these employers has been tremendous as we develop the program. We think we'll probably use this model for other programs that we'll develop down the road.

So as those programs launch in the fourth quarter, we expect a managed start to the growth of these programs to ensure that we're covering all of the student onboarding metrics, good faculty qualification and preparation and also solid educational outcomes. So we're very excited about that program in particular, and that will launch in Grand Prairie, Texas and in Indianapolis, Indiana in the fourth quarter.

Our RN program is one that we're also excited about. It is a natural extension of our LPN program, and it will launch in a number of sites around the country for us. This program is typically limited in enrollment on the front end until the program has legs. And so again, it will be like manufacturing with measured growth and then we'll watch all of our metrics, in terms of educational quality as we go along. We think that both manufacturing and RN will be solid pieces of our program lineup and portfolio as we move forward.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And then with regard to health sciences, you mentioned improvement quarter-over-quarter is still down year-over-year and a bit of a trouble area. Could you speak to what are the headwinds there, and anything you guys can proactively do to address that? And just maybe speed or magnitude as to when you think you can bring that back?

Shaun E. McAlmont

Thanks, Scott. I'll start and Cesar can jump in. I -- just looking at the metrics for these particular programs and especially the admissions metrics, I would say that the demand on the front is there. So students are interested in coming into programs within the health sciences vertical at Lincoln. I see an affordability problem that has continued. And we do see some people sitting on the sidelines instead of starting school. I think that, that trend will turn. We see in a cycle that look to those kinds of metrics over the last few years and I think that, that cycle will come back. Cesar?

Cesar Ribeiro

Yes, I think, today, as we look at it, I think affordability in some of our programs is the biggest challenge that we face. With more and more parents being denied PLUS loans and some of these programs has large gaps that students are either not able or not willing to finance. So I think until they get some more confidence, I think a lot of them are just deciding to stand on the sidelines. It's something that we continue to look at to see how we can see the change in delivery models or do -- make other options to the program so that we can make the program more affordable to students. And that's something we continue to look at, to see how we can attract more students to these programs during this time of economic uncertainty.

Shaun E. McAlmont

Let me just -- and then to close this particular question, I'll just say that the there were some geographies where we saw changes that we made to credit hours within programs affect the Title IV availability, the students, their families. And so we saw that as also an extenuating circumstance for some. We have made some adjustments to programs to address that in particular, and I think that, that will show in future terms. And I'll also say that we've added scholarships where it made sense, especially for high school students coming in to the summer and fall starts. And so there are some ways, I think, we can offset the affordability issue, but we are looking for the cycle to turn ultimately.

Operator

Your next question comes from the line of David Chu with Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

So last quarter, I believe, you expected starts to be flat underlying. You maintained these forecasts, but shut down the worst-performing campuses. So if these campuses were running, what would you expect starts to be for the year? I'm just trying to gauge it on an apples-to-apples basis here.

Shaun E. McAlmont

Yes. I'll just say for the quarter, David, if those starts had continued, we would expect overall starts to be down about 11% versus the 20% in total.

David Chu - BofA Merrill Lynch, Research Division

11% for what time period?

Cesar Ribeiro

For the second quarter.

Shaun E. McAlmont

Second quarter.

Cesar Ribeiro

Well, for example, when we announced closures, we had a -- most of the starts in those campuses come at the -- late in June. We had about 400 or so starts that we did not start. The Southwest campuses because we just -- we'd have to pitch them out. So once we announced and even before that, we stopped enrolling at those campuses. Obviously, the second quarter start numbers that you see for 20.4%, had we started those students, we probably would have been about 11% for the quarter.

Shaun E. McAlmont

Which would be up in continuing operations.

Cesar Ribeiro

That's correct.

David Chu - BofA Merrill Lynch, Research Division

Okay. So I'm still trying to gauge it on an apples-to-apples basis. So if last quarter, you mentioned starts for the year to be flat. How are you thinking about it comparably for the year now? I understand that you, like, you've like [indiscernible] Any way you can kind of...

Cesar Ribeiro

Well, we were saying that starts for the year were supposed to be flat with Southwest. Now we're saying stars for the year will be flat on a continuing operations basis, including Southwest. So obviously, the numbers in Southwest continue to deteriorate. So starts would have been down with Southwest.

David Chu - BofA Merrill Lynch, Research Division

Right. And I understand, but can you quantify? Can you help us quantify that? Let me ask you in a different way. What were starts for Southwest in 4 quarters of 2012?

Cesar Ribeiro

There were 1,582 students.

David Chu - BofA Merrill Lynch, Research Division

1,582 students in the Southwest last year?

Cesar Ribeiro

Correct.

David Chu - BofA Merrill Lynch, Research Division

Okay. And separately, in terms of costs for the second half 2013, I mean, how much in cost will be taken out due to the closure of these campuses?

Cesar Ribeiro

We -- will be taken out or will be incurred?

David Chu - BofA Merrill Lynch, Research Division

Just on a recurring basis, taken out.

Cesar Ribeiro

Well, Southwest will probably lose, I think, as I said, $0.60 to $0.65 this year. Of that, there's about, I would say, $0.30 a share or $0.25 to $0.30 a share that are normal operating losses and the remaining would be teach-out or shutdown costs.

David Chu - BofA Merrill Lynch, Research Division

Okay. And so in 3Q, the, I guess, cost -- the onetime cost mentioned, should that be it, or should we expect more onetime costs in 4Q as well?

Cesar Ribeiro

No. Most of the costs will come in Q4. There will be some costs in Q3, but most of the costs will come in Q4.

David Chu - BofA Merrill Lynch, Research Division

You mean these onetime costs?

Cesar Ribeiro

That's correct.

Operator

.

Your next question comes from the line of Jeff Lee with Wells Fargo Securities.

Jeffrey Scott Lee - Wunderlich Securities Inc., Research Division

Can you just remind please remind us how many ATB students were enrolled last year in Q3 and in Q4?

Cesar Ribeiro

I'm sorry. Can you repeat the question?

Jeffrey Scott Lee - Wunderlich Securities Inc., Research Division

Sure. Can you remind us how many ATB students you have enrolled last year in Q3 and then in Q4?

Cesar Ribeiro

I don't know if I have that information handy. I mean, I know we started. Obviously, it would have been 0 last year. But I don't know how many were sitting in the population. I believe, it was probably somewhere around 5%, 6%. But I don't have those numbers in front of me.

Shaun E. McAlmont

We will have to get you that number separately, Jeff.

Jeffrey Scott Lee - Wunderlich Securities Inc., Research Division

Okay, thank you. And then how many students are there currently at the 5 closed campuses, and then when do you fully expect to close them out?

Cesar Ribeiro

I believe it's about 240 or 250 students left, and we expect that all students will be -- we plan on shutting the school, all the campuses down by December 31, so all students will be gone by then. So basically, if you are graduating by December 31, you are allowed to continue your studies and graduate with a degree. If you are not going to graduate by December 31, we refunded your money.

Shaun E. McAlmont

Or transfer...

Jeffrey Scott Lee - Wunderlich Securities Inc., Research Division

Okay. And then the last question. What other sources of strength do you feel drive student starts to flat for the year from the negative 20% that we've seen in the first half of the year? Is it largely the high school enrollments that have given you confidence, or is there anything else?

Cesar Ribeiro

I just want to clarify something, Jeff. The guidance we're giving is for continued operations. So that excludes Southwest, online and ATB. For the first half of the year, that's only down 6%.

Shaun E. McAlmont

And then just a follow-up on the remainder of your question. I would say that we see a number of things. I mean, as we said just a minute ago, we've got a couple of new programs that will be added in the fourth quarter, which we think will have incremental growth over prior year. Secondly, we are really encouraged by the growth we're seeing at our auto and skilled trades campuses and we feel that, that will be a continuing trend. But the comps, I mean, if we look at our fourth quarter last year, the spending, the conversions from both inquiry to enrollment and enrollment to start were the lowest in 3 to 4 years. Just based on our trends today and what we expect to spend, including our manpower, we feel that we will beat the fourth quarter pretty significantly. And so just -- again, looking at the trends that we see today in all of our metrics, also the tenure of our reps, the process, et cetera, gives us confidence in the second half. And although we've tempered what we expect for the next 2 quarters, we still think, on a continuing basis, that starts for the year will be flat. And we've got to say that, that is significantly better than we've seen over the last 3 years and it allows us to actually plan accordingly moving forward for growth from a new foundation. Remember, the company has been repositioning itself for the last few years in a number of areas, including sales. And so we feel that our footing has become solid, and now we can look forward a little more aggressively.

Operator

.

Your next question comes from the line of Paul Condra with BMO.

Paul Condra

I wanted to ask about -- let's see, it looks like you gave us restated starts numbers for second Q '12. So this is, I guess, similar to the other questions that have already been asked, but can you give us what the restatements will be for starts for 3Q '12 and 4Q '12?

Cesar Ribeiro

Well, from a continuing operations basis, again, this is, excluding Southwest, ATB and online, Q3 '12 were 6,857 and Q4 '12 were 2,577.

Paul Condra

Okay, great. And then, I also wanted to ask about -- on capacity, is that -- does that -- your continuing operations capacity number, that 36%, I think, you said?

Cesar Ribeiro

I don't recall. I'll have to get back to you on that question.

Operator

[Operator Instructions] And your next question comes from the line of Alexis Paris with Barrington Research.

Unknown Analyst

It's actually Joe, filling in for Alex. Shaun, you kind of mentioned the high school channels. You mentioned you're seeing lead flow in enrollments, those trends are higher from previous years. Maybe just take a step deeper and kind of -- are you doing something differently there, kind of driving the value proposition differently or -- I know you have new management in place there. Maybe just take it a step further and kind of tell me what you're doing on the ground level.

Shaun E. McAlmont

I'll just give you a couple. First of all, manpower is critical in our high school sales in that the high school group, for the most part, generates their own inquiries. They go into schools. Many of them have been doing it for a long time, and they speak to seniors. And so having a solid tenure in that group just continues to improve our inquiry generation. And so that's been very positive for us.

Secondly, I think we're seeing comfort in the admissions process in general over the last couple of years. It's very difficult to manage admissions in this particular environment, and I think we've gotten more comfortable in doing that considering new rules around misrepresentation, et cetera. And so we see that comfort coming in, in terms of the inquiry-to-enrollment conversions.

Thirdly, one of the differences we've made year-over-year is the rate at which and the timing of how we financial-aid package students, especially those who are enrolled early in the process. We used our centralized financial aid group to process the packaging process for many of the early enrollments, which was very positive for us. And so the June starts that were high school-specific exceeded last year's June starts pretty significantly, especially on the auto and skill trade side. And so those are some of the efforts that we've made from an operations perspective to help that process along. We still feel, though, that overall, I mean, once you start getting into July, August and September, we'll see flat growth in the high school area. And again, for a company that's seen declines in a number of our sales metrics, we're pleased in seeing the starts taper off, again giving us at least a look-forward to how we might grow based on this new footing we have. So anyway, I hope that answers your question. But we've seen just lots of good things from our representative force, processes and the rate at which students are being packaged.

Unknown Analyst

It does, thank you. And then my second question, maybe just comment on the school footprints. Are there any -- the way you see it now, are there -- is there 1 or 2 possibility that you're just keeping a close eye on that might come down the road depending on performance, or you think 38 is the right number?

Shaun E. McAlmont

The way we look at it, we've closed 12 schools over the last year. And our footprint is at a place that we feel today we can manage forward. The schools we closed -- I just want to reiterate the fact that we closed the schools that were suffering from a number of impairments, the loss of the state grant in Ohio, the restructuring of those programs, the need to collect more dollars from students to manage 90/10 and then cohort default rates that were skyrocketing because of some of the attrition from high-ATB populations. Those issues were very unique to that group in Ohio and the one in Kentucky School, the former Southwestern School, and so that's why we made that particular decision. And we really assess the operation, the current look and the future looked very carefully before we made these decisions because they impact so many lives. And so at this point in time, we feel that the group we have is a manageable group. We always look at the metrics of these schools on an ongoing basis and make decisions accordingly. But the footprint we have right now, we feel that we will manage forward in its current form. The 38 will soon be 33, with 5 of the FMTI learning sites. And so that will be our long-term footprint.

Operator

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And your next question comes from the line of Trace Urdan with Wells Fargo Securities.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

It's a housekeeping question, and I'm sorry to be so dense about this. But Cesar, could you give us the 4 quarters for 2012 now that reflect the no ATB, no online and no Southwest? Because I think you've given us 3 out of 4 quarters now, if I'm not mistaken.

Cesar Ribeiro

Q1 2012 was 4,170; Q2 was 3,608; Q3 was 6,857; and Q4 was 2,577, for a total of 17,212.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

The 17,212 is the foundation for the flat start guidance for the year. Is that correct?

Cesar Ribeiro

That's correct.

Operator

With no further questions, I would like to turn the conference back to Mr. McAlmont. You may proceed.

Shaun E. McAlmont

Thank you, Jackie. Well, as you can see, we're focused and have been very busy executing on a number of initiatives, which continue to better position us in a time of uncertainty. We're managing our 90/10 and CDR risk factors and also our closed operations very carefully. We've sharpened the strategy that will allow us to compete in a unique segment of education and training for the long-term and we've got a strong position here as a market leader. We believe strongly in vocational training and the viability of skilled trades. And we feel that our Careers That Build America campaign will drive our strategy for the long-term.

I just want to thank everybody for joining us today, and we look forward to updating you on our next quarter call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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