Lincoln Educational Services Corporation (LINC) Q4 2008 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the fourth quarter and year end 2008 Lincoln Educational Services earnings conference call. (Operator Instructions) This conference call is being webcast. An audio version of the call will be available on the company’s website for 90 days. As a reminder, this conference is being recorded for replay purposes. Before we begin today’s call, the company would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events; future financial performance; strategies; expectations; competitive environment; regulations; and availability of resources. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially or from those stated in any forward-looking statements based on a number of factors and other risks which are more specifically identified in Lincoln’s filings with the SEC. And I would now like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, David.

Thank you Shane. Good morning everyone and welcome to the Lincoln Educational Services fourth quarter and year end 2008 earnings conference call. Joining me today is Shaun McAlmont, our President and Chief Operating Officer as well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer. Following my remarks Shaun will provide an update on operations and Cesar will provide a detailed review of our results. We will then open the call for the question-and-answer period. And now turning to our results from continuing operations, revenue from continuing operations rose 18.9% to $107.3 million in the fourth quarter and included revenue of $1 million attributable to the acquisition of Briarwood. We benefited from a combination of strong carry in population as well as new student starts growth in the fourth quarter of 17.1%. Net income from operations was $12.8 million and diluted earnings per share was $0.49 versus $0.37 in the fourth quarter of last year. However, diluted EPS from continuing operations for the fourth quarter of 2008 included $0.02 of charges related to the Baran acquisition which closed on January 20 of 2009. For the full year 2008, our revenue grew by 15% to $376.9 million compared to $327.8 million for 2007. Net income from continuing operations was $20.2 million compared to $13.8 million for 2007. Diluted EPS from continuing operations was $0.78 in 2008 compared to $0.53 for the year ended December 31, 2007. Again 2008 GPS of $0.78 included $0.02 of charges for the Baran acquisition. Our performance during the fourth quarter capped off an outstanding year for Lincoln. We generated strong financial results, consistently strong starts in enrollment growth, and effectively advanced our various growth initiatives. We built upon the momentum and positive trends in our business and as a result we believe we are…

Thanks Dave and good morning everyone. Our fourth quarter and full year 2008 results demonstrate the benefits of our efforts over the past few years to diversify our company. Although we continue to evolve in this regard, we’re positioned well with multiple avenues from which to grow our business. Our new student start growth and overall population increases were achieved through improvements in our new student conversions. Our leap to enrollment performances improved, in addition to increases in our enrollment to start or our show rate conversions. These gains reflect the efforts of many in our organization and have supported nine consecutive quarters of new student start growth. The accelerated growth seen in the fourth quarter and also anticipated for the first quarter of 2009 also reflect the impact of the current economic climate. Operational improvements over the past year have bolstered the business and have given us a foundation from which we can launch the next phases of our strategic plan. We continue to build programmatic expertise within our company and also deepen our management strength. Our strategy over the next three years involves expanding the breadth of our program offerings; expanding the depth and validity of our degrees; continuing to re-brand under Lincoln; and further developing our online platform and also continuing to consider strategic acquisitions. This plan is designed to position the company for long term sustainable growth and also margin expansion, though I’ll come back to the strategy in just a moment. During the fourth quarter we continued to execute on the three key priorities that I outlined at this time last year. I’d like to take a few minutes to provide an overview of the significant progress we’ve made over the course of 2008 before I turn to our 2009 plans. The three key priorities…

Thank you Shaun. Good morning everyone. As we disclosed in our press release earlier this morning and as Dave stated in his prepared remarks, we are very pleased with our fourth quarter and 2008 full year results. Our fourth quarter results were positively impacted by our entering the quarter with approximately 2,900 more students than we had in the fourth quarter of 2007. This larger carry in population and the 17.2% student start growth we generated during the fourth quarter drove our approximately 19% revenue growth. Other key highlights for our fourth quarter include we generated free cash flow of $19.9 million compared to $13.3 million during the fourth quarter of 2007; our operating margin improved 100 basis points to 19.8 from 18.8% for the fourth quarter of 2007; earnings per diluted share grew 32.4% to $0.49 from $0.37 per share from the fourth quarter of 2007 as we benefited from the increased capacity utilization and the leverage inherent in our business model. We closed on the acquisition of Briarwood College on December 1, 2008 and funded the purchase price of $10.5 million net of cash acquired with cash on hand. We finished the year with $15.2 million in cash and cash equivalents and no borrowings outstanding on our [inaudible] agreement. And bad debt for the quarter was favorably impacted by strong cash collections and was 5.4% of revenue as compared to 5.7% for the fourth quarter of 2007. Now let me turn to our full year results. Revenues increased by $49.1 million or 15% to $376.9 million for the fiscal year 2008 from $327.8 million for 2007. Approximately $1 million of this increase was as a result of our acquisition of Briarwood on December 1, 2008. Excluding Briarwood, the increase in revenues was primarily attributable to a 13% increase…

Okay. Thanks Cesar. To summarize, we’re extremely pleased with our fourth quarter and full year results. We delivered record financial results and generated consistent starts in enrollment growth over the course of the year. We continued to see the benefits of the many operational initiatives we have implemented over the past several years. In addition, we further diversified our program offerings and continued building a strong presence in the five verticals that possess attractive employment prospects. During 2008 we made considerable progress expanding our addressable market by strengthening the overall breadth of our program offerings and accelerating our concerted push into higher degree levels. Our efforts in these areas will serve to extend our student life cycle as well as offer degree completer opportunities. The recent acquisitions at Baran and Briarwood are consistent with this strategy. As a result of our efforts and continued successful execution of our growth strategy, Lincoln today is a much stronger and balanced company, positioned for sustainable and long term growth. And with that said, we’d be happy to begin the question-and-answer period. Thanks.

(Operator Instructions) Your first question comes from [Unidentified Analyst] - Credit Suisse First Boston.

Can you give some updated thoughts on how you view the economy impacting enrollments and perhaps also do you have any reason to believe that a weak economy won’t continue to help enrollments if things worsen further?

Well, I would say that – first part of your question, certainly we’re seeing the benefits of the increased unemployment, particularly over the last couple of quarters. The trends certainly have continued into the first quarter of 2009. I would say that, you know, given the fact that we’re watching placement rates very closely and we have programs that are focused on high demand markets and job opportunities, we feel pretty comfortable that a continued weakened economy, assuming it doesn’t last forever, we’re pretty well positioned to deal with that.

What assumptions about the economy if any are reflected in ’09 guidance?

Well, I would say this. You saw our overall guidance for the year. You’ve seen the guidance for the first quarter in terms of start growth. We’re pretty mindful that two quarters don’t make a year. So basically we see the impact. We’re very pleased with the trends in the first quarter but overall for the year we’re assuming that, as you can tell from the first quarter, that 25 to 28% and the 13 to 15% overall for the year, so we’re not attributing the last three quarters to a continuation of this trend. A more conservative view. I think when we speak to you next quarter, perhaps we’ll update our guidance based on what we see. But at the moment our visibility is pretty well limited to the next quarter.

Your next question comes from Gary Bisbee - Barclays Capital.

I guess first question, can you give us some sense what the contributing factors to the $0.10 to $0.12 dilution from the acquisition [biz]? What part of that might be just the amortization versus are these businesses actually losing money today versus what level of investments you’ve planned to making them over the next couple of quarters?

Well, I’ll let Cesar talk about the accounting side of it and everything else. But I’ll give you an overall view, Gary. In terms of the acquisitions and basically five of the six schools we’ve owned for 60 days. Our operating people have been into the schools, had access over the last 60 days. They’re very excited about the upside and the potential. And with that said, they’ve identified a number of opportunities that we want to be able to take advantage of sooner rather than later. And for that reason we’re providing ourselves the opportunity to do that in terms of the $0.10 to $0.12. Cesar.

Gary, the acquisitions basically it’s all a result of acquisition accounting, especially on the 141R. There’s a significant amount of fair value items that need to be valued and amortized into the P&L and all those come below the line. So a lot of those are charges related to that. But as far as the EBITDA level, all these acquisitions were profitable. It’s just that acquisition related amortization and intangibles, student contracts, etc. become dilutive in the first year.

And how long does the amortization go or how quickly does it fall off? I know you –

They’ll be accretive in 2010. It’s usually 12 to 15 months – 12 to 18 months is usually the amortization period on a lot of these items. But starting in 2010 these acquisitions will be accretive to earnings.

Bad debt was down quite a bit in I know you talked about the year, but in the quarter relative to the last couple. Can you give us any color on that and how should we think about this trending in ’09? Is the annual number for ’08 a decent proxy give or take a little bit for how we should think about that?

I believe we continue to model 6 to 6.5% of bad debt expense. I think what you’re starting to see and it’s too early to tell at this point, is that I think you’re starting to see a lot of the benefits that we made within our financial aid package and in our cash collections starting to come home. However, with that said, one quarter of excellent cash collections as received from our cash flow from operations – I’m not ready yet to predict the year. So I would still stick with the 6 to 6.5% and as we go through the first quarter or second quarter for the year we’ll update that accordingly when we see better trends.

Obviously on the front end starts are doing great and obviously the market. One of the big fears as we get deeper and deeper into the current jobs recession is that placement’s going to get tougher. So can you give us some sense – how are you feeling about the ability to place kids, particularly one that I feel like I don’t have a good handle on and a lot of investors don’t is the Skilled Trades programs. Are there lots of jobs? I mean with the implosion of the housing and commercial real estate in terms of new building, a lot of people wonder if a lot of those jobs will still be out there. How are you thinking about it and how confident are you in the ability to continue to place these kids going forward?

This is Shaun. I’ll take that question. We’ve always been very aggressive in placing our students and we’ll continue to do that. Just as background, we’ve got 90 career services professionals out of our schools that work on a local basis with students. And we start with them from day one all the way through finding a job. And you know we’ll stay very aggressive in that regard. We’ll increase that number as necessary. But we continue to watch each local market very carefully and each vertical. And we feel like today there is some pressure on numbers as we compare to our prior year total 83% placement rate. And what we see today are some lengthening timelines for students trying to find jobs. Maybe some employers pushing start dates out a bit, but this said, our students are still finding positions. For our two largest verticals they’re holding well, Automotive and Health Sciences, very close to last year’s period to date numbers. We in the Skilled Trades place a number of our students into HVAC positions which continue to see demand. We don’t place that many in real estate to tell you the truth, especially residential. Commercial real estate we were placing a few. We feel that there’s an advantage coming in the stimulus package infrastructure development that will be happening on many state levels. So as of today, we’re not necessarily concerned about the Skilled Trades but we’ll continue to just look at it very specifically as we do all the verticals. And also I just wanted to mention that we report our full year numbers in June and I can’t tell you what we anticipate for all the verticals along the way, but we feel very confident that the numbers we’re seeing today aren’t varying too much from what we saw last year.

I assume – I don’t think you said exactly. I assume that auto, you said all five verticals had starts growth, auto probably a lot slower so several of the other verticals probably a lot quicker than the number you reported in the fourth quarter in total. When we think about the capacity utilization, how much room is there in the schools that are teaching the curriculum that is in strong demand today relative to schools that might have more modest growth? I know a big strategy’s been putting Skilled Trades into the auto schools where you had a lot of excess capacity. But is much of that excess capacity still in the schools that were traditionally auto? Or do you have enough that you’re real confident you can grow capacity utilization, even if healthcare continues to be the dominant part of your growth over the next year? Thanks a lot.

Yes, Gary, as of December we’re at 60%. And that’s pretty much across the board. 57, 58% is Auto; 62 is Health Sciences and that’s pretty much spread across all of the schools. It’s an average but it’s also pretty much where all the schools stand. So we still have ample capacity. I think we’ve said in the past that not until it gets to about 75% or so do we really need to continue to invest in capacity. So I think there are lots of opportunities there. We have a long way to go. What we hope that – we went from 53 to 60% this year and we hope to accomplish the same thing next year or better.

Your next question comes from Jeffrey Silber - BMO Capital Markets.

In your remarks you talked a little bit about the funding environment and the potential increase in Pell grants and the stimulus plan. If that does go through does that change any of your thoughts in terms of lending or in terms of revenue guidance, enrollment growth, etc.?

No, it does not. I mean obviously to date I think as we said in the prepared remarks we really haven’t seen any issues as far as being able to finance our students. It wouldn’t affect enrollment growth at all because it hasn’t impacted it to date. There’s $500 right now on the table for additional Pell. That will probably cover 3, 3.5% tuition increases so I would expect it to be pretty much status quo. Obviously there might be a $200 benefit which will be positive but I don’t think it’s going to have a meaningful impact.

I just wanted to clarify something on your guidance. You’re looking for I guess you’d call it same school starts growth of about 25 to 28% in the current quarter. What would be the impact of both Baran and Briarwood on that number?

I would say Baran starts in the first quarter are probably in the –

We’ll have to get back to you, Jeff.

Do you have what the Briarwood impact was on the fourth quarter in terms of starts?

Zero.

And again just some modeling related questions. What should we be looking for for capital spending and taxes in 2009?

Capital expenditures will be I’d say between $25 to $30 million. Taxes you should probably model in 40 to 41%.

In terms of D&A, depreciation and amortization for the year?

It continues to run about I’d say about 4%.

And that’s including the additional amortization from the acquisitions you mentioned?

No. That’s on a same school basis.

And do you have again we’re just trying to model for the entire company what the incremental amortization would be for the year? With the acquisition?

Not yet and only because we’re still in the process of having as you might appreciate, January 1 we have a new basis of accounting that was introduced. Everything needs to be valued. So we have made preliminary estimates on what those valuations are but they’re still subject to completion and there are valuation people in the field today trying to revalue everything in accordance with 141R. So we have an estimate but we prefer to hold off until we have the final valuations completed.

And roughly when will that happen?

That should happen – we’ll have that by the second quarter results.

Just in terms of your balance sheet right now post this acquisition, what does it look like?

Well, we have obviously zero debt. We had borrowed money to fund the acquisition of Baran. We used the proceeds from the offering to pay that off. So to date we continue very healthy with zero debt.

And the availability on the credit line?

It’s $100 million.

Your next question comes from Trace Urdan - Signal Hill Group, LLC.

Could you speak to the improvement at the Educational Services line? Is it solely due to the increased enrollment or were there other items in there that may have contributed to that sort of year-over-year improvement at the Educational Services line?

No, it’s really due to increased enrollment. As you know we get a lot of leverage (a) our facility costs are fixed so as revenue goes up, we get a little leverage from facility costs; and the main benefit comes from the instructional costs. As we increase capacity, our student-teacher ratios increase and we obtain leverage from that line item.

Can you comment, Cesar, on – I don’t even know if you have something like this, but how much of your capacity has been diverted from Auto into other areas on a year-over-year basis?

None. I mean as you know we have 10 Auto schools and those Auto schools were basically not Auto. All of our schools are diversified so we had other programs in there. But we still classified those schools as Auto schools as part of our Auto capacity. So even if we introduced new programs, they’re still part of that Auto capacity. But the latest program we introduced to an Auto school was our Columbia Culinary School and that was at the beginning of 2008.

Your next question comes from David [Shoe] – Bank of America. David Shoe – Bank of America: Just a question on in your prepared remarks you mentioned a recent pick up in Auto. Can you just elaborate a little bit on that?

I would say that based on a number of the changes in our messaging, we have seen increased lead flow and positive trends. We mentioned we had positive start growth in the fourth quarter of 2008. We would attribute a good part of that to overcoming some of the negativity out of Detroit. And I would say further that we’re seeing very positive trends in the first quarter of 2009 as well, largely due to the fact that there is the weakening economy but more importantly as it relates to Automotive we’re getting the message out that the jobs are still in demand. David Shoe – Bank of America: I mean, you guys had mentioned no change in the job outlook. I mean, I guess going forward do you expect that to continue?

Are you speaking specifically about Automotive? David Shoe – Bank of America: Yes, just outlook for Auto.

Let me just say a couple of things on Automotive. You know, as we prepare technicians we’re all looking at the same statistics about the age of vehicles on the road today, they continue to increase. And there’s a turnover in technicians out there as well. So we feel very confident about the outlook for Automotive technicians, although dealerships are going through some struggles, we’re finding that dealerships are also increasing their service hours and looking to gain greater revenues from their service parts of their business. And so that bodes well for our graduates moving forward. We met recently with our Greater New York Auto Dealers Association’s executive director and he shared the same news, that dealerships really are turning to more aggressive service while independent shops are also seeing their business boom and also related tool companies. And so for our direct Auto placement or related Auto placements we feel very confident that they’ll continue to be strong. David Shoe – Bank of America: The conversion of that Auto school to a Field Trade school, what’s the difference between that and your general I guess strategy of just kind of adding Skilled Trade to your Auto schools?

Nothing really. We had the opportunity to refurbish the smaller Automotive school that we had in the Grand Prairie market – Dallas market. It’s – I don’t know, I think it’s 0.8 of a mile away from the main facility, so it’s just a dedicated facility with welding, HVAC, ST and so on in one particular building under the same management. So not a big difference.

Your next question comes from [Gordon Lasy – Robert Beard]. Gordon Lasy – Robert Beard: I just wanted to dig a little deeper into the sales and marketing expense line. You know you mentioned the hiring of additional sales reps contributed to that. I wonder if you can quantify that increase and what are your thoughts for 2009? How comfortable are you with the number of reps you have? And then kind of an offshoot of that is, is your guidance assuming a [rand] in productivity of those sales reps and if so how much?

We probably increased our representative sales force by 5% year-over-year. And those representatives also saw increases in conversions. We feel there’s additional upside in their ability to convert from lead to enrollment and enrollment to start, and so we don’t see significantly increasing that representative force into the subsequent year. We’ve had better retention and so we again we continue to see their productivity increase and we see that there’s additional upside there. But I’ll also mention that an added benefit from the acquisitions gives us a well trained representative force representing Automotive and non-Automotive programs, especially from the Baran acquisition. And those representatives are local and we also have a team of national representatives as well that will add to our high school force. So we feel very good about where we sit today and our sales force and feel that there’s upside without having an increase in number. Gordon Lasy – Robert Beard: Are you going to make any cuts to the sales force of your acquisitions?

You know, we also get an opportunity to rationalize the sales force. We don’t see cuts but we do see a revision of territory. And we feel that that’s probably the first opportunity that we have to continue to address the market that we currently serve and also to move in to new markets. And so you’ll probably see the same total and shifting focus geographically. Gordon Lasy – Robert Beard: Just a little bit of a longer term question. Right now you talked about 21% of your students are Associates, 1% are Bachelors. You know as we think about the ramp up of online and some of these upstream programs, as we think about two to three years out can you give us any kind of thoughts on where you think Associates and Bachelors can trend over that timeframe?

I think we’ll provide more clarity on where we see our degree mix. I would say two to three years out we feel very confident we can move from the 20, 22% range to approximately 35%. And our opportunity really does relate to how quickly we can add regionally accredited degrees. We feel that there’s a competitive advantage to having a valid or validated Associate and Bachelors option out there and so our ability to work with [audio impairment] especially will give us that opportunity on a quicker basis. I’ll remind you that our first regionally accredited programs are expected to be offered on ground in Connecticut and also online 12 to 15 months. And so that will give you a little bit of our timeframe.

I would now like to turn the call over to management for closing remarks.

Thank you. Thanks everyone for joining the call today and we look forward to updating you on our progress on our next call in early May. Thanks very much and good day.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.