Lincoln Educational Services Corporation (LINC) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 Lincoln Educational Services Earnings Conference Call. My name is Angela, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Shaun McAlmont, Chief Executive Officer. Please proceed, sir.

Thank you, Angela, and good morning, everyone. Joining me here in the room 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 future results will be achieved and 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 first quarter and provide our outlook for the second quarter of 2013, and we'll then take your questions. As stated in our press release this morning, early 2013 results show the continued stabilization of our operations. Our regulatory record also remains strong, our student outcomes are improving, and our Lincoln Edge program is delivering financial literacy and maintaining impressive student persistence rates. But to fully understand Lincoln's first quarter performance, we also have to look closely at the trends affecting the majority of the sector. One of the analysts covering our sector concisely summarized the factors contributing to performances, which have most sector stocks showing similar trends. First, the weak economy is putting pressure on the value proposition of education. New student starts are down across our industry after years of increases. We look at this in terms of consumer confidence and affordability issues. In the first quarter, for some of our schools, we're beginning to see less of this impact and expect some of these macroeconomic headwinds to subside in the second and third quarters, especially for high school student starts. Second, recruitment policies are less aggressive due to a myriad of changes in the federal rules for admissions and misrepresentation. Naturally, there's a process of adjusting to the new operating environment. We've seen a slow but steady increasing level of comfort in our admissions process resulting in better lead to enrollment conversion. 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's affected the sector, and Lincoln has continued to maintain a strong regulatory record with no student or staff class action. We have extremely clean DOE program reviews and accreditation visits and limited contact from other regulatory agencies. A renewed focus on outcomes also characterizes this environment. If you recall, Lincoln was at the forefront in managing our student outcomes by reducing the number of challenged students in our schools. We managed an open enrollment process for almost 70 years. However, that changed as outcomes like graduation rates, 90/10 rates and cohort default rates became critically important for the long-term viability of the institution. Our former Southwestern schools were impacted heavily by these 3 measures. And due to changes we forced on the operating model, they now reflect the majority of the decline, the default and negative earnings the company is experiencing. Because of these macro factors, it's critical that we look at our continuing operations and programs to effectively measure our performance against prior year. This said, excluding online, the closed schools and ATB, our new student starts from continuing operations are down 13.4% in the first quarter, and we expect this number will turn to positive year-over-year growth in the second quarter. Our efforts are producing results, and we also expect to return to positive earnings in the second half of the year. Our confidence in the second half is based on the overall performance of our verticals. Our automotive and skilled trade schools remain strong, and we expect further improvement leading up to our crucial third quarter, which benefits from the high school recruiting season. The health care vertical remains challenged. And as I mentioned earlier, we are experiencing significant weakness in our former Southwestern Colleges based primarily in Ohio. We will continue our strategy of focusing on vocational programs that provide much needed skills for today's workforce, however. We expect to introduce new certificate programs in manufacturing and health care later this year, as well as increase the number of training partnerships with industries that are designed to provide additional training to existing workforces, as well as placement opportunities for our students. Now in the first quarter, new students starts were down for continued operations, 13.4%, compared to the first quarter of 2012, which again reflects the stabilizing of our start declines. Again, excluding discontinued online programs and ATB, we also saw the following for our verticals. Our skilled trades programs are advancing, as welding and HVAC continue to attract new students and industry attention. We received the HVAC National Green School of Distinction Award as well. New starts were down slightly in this vertical at 2% behind prior year. Our automotive program is beginning to pick up momentum as we look forward to early high school starts in June. In the first quarter, new student starts were down 5.8% in this vertical. Business and IT were down 6.2%, allied health continues to be challenged, down 20%, and hospitality programs starts are down 30%. All of this adds up to the total 13.4% for the first quarter for continuing operations. In addition, I should also mention that our SMTI, EMT certificate starts increased from 36 new students in the first quarter a year ago to 358 new students this first quarter. This is a very positive sign in our quest to position ourselves as the skilled training leader in the country. Our look at growth for the second quarter and second half of the year is based on April results. In addition, early indicators for improved high school starts in the third quarter, new programs that will launch in 2013, including manufacturing in the fourth quarter, dialysis technician and registered nurse, also improved student persistence and increasing comfort in the admissions process all give us confidence. Early indicators show that our high school leads and enrollment are slightly ahead of prior year same time, and our early financial aid package students are significantly ahead of prior year. The number of representatives is flat, indicating, at least, at this point, that there is comfort in the new process, which is beginning to take hold in admissions. April starts are in, and have come in at a level where we feel confident in our forecast of approximately 7% growth for continuing operations. If we add back ATB and online to the prior year, the quarter would be down in the 8% to 12% range. Our long-term optimism for our strategy of leading the skilled training segment of our sector is based on the competitive landscape of the segment, which we feel positions us well. There are also high barriers to entry for automotive and skilled trades training and also nursing, and the expectations for continued long-term demand are strong. There are a myriad of recent studies also showing the increased demand and success opportunities for certificate versus degree training and related fast track to the job market. In addition, let me briefly mention other areas where the company is strengthening our performance in infrastructure. Student persistence is maintaining at rates that are the best the company has seen. Our 2012 net interrupt rate was 270 basis points better than 2011, which had exceeded the prior year by a similar amount. Our Lincoln Edge student services program continues to show great progress. New partnerships continue to develop and produce profitable earnings for the company. Although these numbers are small, they are significant and higher than the previous 3 years and expected to grow at impressive rates based on current contractual commitments. The online teach down, the closing of 7 schools and the elimination of the ATB program were difficult processes to manage for the company. But despite this, all were executed well and produced no regulatory or legal repercussions. Cohort default prevention effort, including financial literacy education, are in full swing as a part of our Lincoln Edge program as well. And they're also giving us confidence that cohort repayment rates in 2 to 3 years will be lower for the company. For cohorts from past years that are currently in repayment, we continue to contact these students aggressively to look to let them know their repayment and hardship option. On the last call, I mentioned that we identified 4 campus success models, which are currently operating within the company that will guide the future development of all Lincoln schools. First, there is our Denver model, which is a bigger box, 250,000 square foot, multiple-program skilled training school model, which really showcases state-of-the-industry equipment. This campus continues to grow and also receive broad acclaim from industry professionals and students as one of the best, if not the best, of the type in the country. Our Mahwah model is a medium-sized facility featuring partnership training programs, both on and off site, including the BMW training program and also Chrysler training. This campus has piloted our successful Lincoln Edge program and has the best placement outcomes in the company. Our Queens model is a similar -- or a smaller box with an auto-only offering, sharing the facility with a direct industry partner. In this case, it's the Greater New York Auto Dealers Association, which exposes students to the job market, while they're in school. This campus has the highest students outcomes across the board for our company. And fourth is our Paramus model, which provides health care training and medical front office and nursing. The Paramus campus has high satisfaction from its Allied Health students and recently hosted the New Jersey Technical Council conference, which attracted a large number of business and general public participants. Each of these campus models boasts strong local leadership, a focused approach to skilled training, active government relations, impressive facilities, and beneficial industry partnerships. They, again, represent Lincoln's future model for all schools, and we now have a growing number of our schools beginning to operate in the same fashion as these models. Now as a brief point of background, when the first Lincoln school opened in 1946, it did so with a simple mission, to help veterans coming home from World War II develop the skills they needed to find jobs in a changing American economy. Our reach has since grown and our business model has evolved, but the mission stays unchanged. We are here to provide training that leads to successful professional outcomes for every student who wants to change their life with a new career. We now operate in an environment where there is constant scrutiny on our sector based on both perceptions and some realities. However, a blanket approach has been applied from those in Washington and some in the media, yet we continue as a company to prepare automotive technicians, welders, health care workers and HVAC technicians better than most in this country. Our graduates find jobs in their field, and in the end, those who work hard can earn promotions and great, long-term careers. Now at this point, I'll turn the time over to Cesar to discuss our first quarter 2013 financial results and our guidance for the second quarter and year. Cesar?

Thank you, Shaun. Good morning, everyone. As we disclosed in our press release earlier this morning, student starts decreased 25.7% for the quarter. Excluding online operations and ATB students, which we stopped enrolling in 2012, student starts were down 13.4% for the quarter. Although new student starts were still down for the quarter, we believe that we have a positive momentum and expect student starts, excluding online and ATB students, to turn positive in the second quarter. The deteriorating start numbers we experienced during 2012 resulted in us commencing the first quarter of 2013 with approximately 2,400 less students than we had on January 1, 2012. This led to a decline in our average population for the first quarter 2013 of 13.6%, which resulted in revenue declining by 10.9% or approximately $11.1 million as compared to first quarter of 2012. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which averaged about 3%. The decrease in student starts also impacted our capacity utilization which decreased to 35% from 40% in the first quarter of 2012. This decrease in capacity utilization produced significant negative leverage as our operating margin decreased to a negative 12.3% for the quarter from a negative 2.6% for the first quarter of 2012. Other key highlights of the quarter included a loss per share from continuing operations was $0.33 for the first quarter of 2013 as compared to a loss per share from continuing operations of $0.10 for the first quarter of 2012. Loss per share for the first quarter of 2013 includes long-lived asset, noncash impairment charges of $0.05. Free cash flow for the first quarter of 2013 was a negative $4.8 million, down from free cash flow of $3 million during the first quarter of 2012. We paid a $0.07 quarterly dividend on March 29, 2013. We finished the quarter with $17.3 million in cash and cash equivalents with no borrowings outstanding under our credit facility. Bad debt for the quarter was essentially flat at 3.9% of revenue as compared to the first quarter of 2012. Average revenue per student increased 3% for the first quarter of 2013 to $5,521 from $5,358 in the first quarter of 2012. Average revenue per student increased primarily from tuition increases, which averaged 3% during the quarter, product mix and from changes to some of our program offerings, which shortened the delivery time of these programs and slightly accelerated revenue. Cost per start increased 33.7% for the first quarter of 2013, or $4,939 from $3,695 in the first quarter of 2012. Cost per start during the quarter was negatively impacted by the elimination of online and ATB weeks. Net accounts receivable on March 31, 2013, were $19.5 million as compared to $23.5 million at December 31, 2012. This decrease in net accounts receivable is primarily due to decrease in average student population. Capital expenditures for 2013 are expected to be about 5% of revenue. Now turning to our loan program. As of March 31, 2013, loan commitments to our students, net of interest that would be due on the loans to maturity, were $24 million as compared to loan commitments of $25 million at December 31, 2012. For 2013, we expect that these loan commitments will increase by $2 million to $5 million. We finished the quarter with shareholders' equity of $190.2 million, down from $198.5 million at December 31, 2012. Shareholders equity on March 31, 2013, reflects $1.7 million of dividends paid during the quarter. I'll finish my prepared remarks by providing our current outlook for the second quarter and for the full year. Our guidance is based on our current expectations. For the second quarter of 2013, we expect revenues of $86 million to $90 million representing a decrease of approximately 9% over the second quarter of 2012 and a loss per share of $0.30 to $0.35. Guidance for the second quarter of 2013 is based on a decrease in starts of 8% to 12%. The reduction in starts in the second quarter is due to the continued loss of the ability to benefit students and our elimination of our fully online programs in the first half of 2012. Excluding the impact of these items, student starts from continuing operations are expected to increase 7% as compared to the second quarter of 2012. We are reaffirming our 2013 guidance of revenue of $395 million to $405 million and a loss per share of $0.05 to diluted earnings per share of $0.05. And finally, the Board of Directors has set the record and payment dates for the dividend for the second quarter of 2013. The cash dividend of $0.07 per share will be payable on June 28, 2013, to shareholders of record on June 14, 2013. In conclusion, we believe that we are gaining momentum in some of our verticals 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. With that said, I'd like to turn the call back over to the operator. Operator?

[Operator Instructions] And the first question comes from Scott Schneeberger from Oppenheimer. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Kind of, I know you guys have not provided specific quarterly guidance for the second half of the year, but could you give us a feel for how you think the trend in starts will build, I don't know how much I want to quantify it, but will we see a big lumpiness in the fourth quarter? Do you think it'll be fairly balanced third and fourth?

Well, Scott, this is Cesar. As far starts are concerned, obviously, the third quarter is a crucial quarter, so where we hope to recover a lot of those starts are in the third quarter. We also hope to see positive improvement in the fourth quarter, which was very soft last year, as far as starts are concerned. As you know, due to the seasonality of the business, the stronger quarter from a revenue and earnings perspective is always the fourth quarter, where we enjoy all the benefits of the third quarter and we get the full 3 months of students in-house. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: That's helpful. Could you guys comment a little bit more on -- obviously, the strength of the retention and persistence sounds good. Could you talk about maybe some of the things you're doing or what you're hearing from students with regard to the persistence rates?

Yes, Scott, this is Shaun. I'll just say that the way we have look at persistence over the last couple of years relates to some of the earlier initiatives. When we saw our outcomes a couple of years ago start decreasing in some areas, we lowered the number of challenged students. So that was the first effort we had to make in order to have the overall persistence rates for the company improve. For those students who started school, we put them through a more challenging orientation program, and then also enrolled them in our Early Student Engagement program. And both of those were components of what we call our Lincoln Edge, which is really just a focus on students that is related to making sure that they successfully graduate from the programs, and also are placed in a job in a short period of time. That Lincoln Edge program really provides mentorship for students who may not have been successful in other educational experiences in their life. And so as a company, there was just a more direct focus on ensuring that we assess the students upfront, oriented them well, and then gave them academic and other types of life mentoring programs throughout their time with us. I think that those efforts, as they have become more institutionalized over the last couple of years, have just put us at a pretty successful plateau in terms of student retention. We've had some great improvement again, anywhere between 200 and 300 basis points year-over-year for the last couple of years. And we've gotten to a point that is holding steady at a very successful clip, we feel, for the company. And we think that, that will continue with this level of focus. I think what it also does is it prepares us for what we feel to be higher numbers of high school students coming in, and also students coming into new programs that will add at the end of the year. And again just a methodology that focuses on the student no matter where they come from, but just anticipating that we'll see success in graduation rates. Last point on this, all of our retention efforts are not merely just to have the students retain, but also graduate, placed and, more importantly, repay their loans on the tail end. We just see a direct correlation between persistence rates and loan repayment. And so we feel that our cohort default rates will benefit down the road. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay. One more, but actually kind of a 2-parter. With regard to capacity and the size of -- with your footprint of campuses, does it feel about right, inclined to expand or contract at this point? And then also, just a follow-on would be view on short program strategy, looking to increase that, looking to still do tuck-ins there?

Obviously, capacity is at an all-time low for the company at 35% in the first quarter. That capacity will increase over the rest of the year, especially as we get the third quarter starts. But we are introducing new programs to a lot of these campuses that we have to try to increase capacity to those campuses. I think Shaun mentioned, we're rolling out manufacturing programs, dialysis programs, [indiscernible] programs in some of our campuses. We also are looking to replicate some of the programs that we have acquired as part of the FMTI acquisition to some of our other campuses this year and next year to further strengthen those campuses from a 90/10 perspective. So those are all things that we're looking to do for the remainder of 2013 as we head into 2014, to not only diversify the campuses from a financial aid perspective, but to increase capacity at the campuses.

Yes, and then just to add one more point to Cesar's comments. The FMTI programs, we feel, can be replicated at other sites. In addition to the contract framing that we are currently doing and looking to expand, to train, essentially, employees of certain industry companies that relate to the programs we offer, and then also looking at suites of new programs that are related to our existing programs that are shorter in nature and also non-TITLE IV. So at some point down the road, Scott, the shorter programs will become a bigger part of our population. Of course, they have different price dynamics, but we'll probably expand upon that a little more in future calls.

Next question comes from Jeff Lee from Wells Fargo.

Can you just expand on how the average revenue per student compares for your short programs versus your regular programs?

It doesn't compare. That's why we separate the 2 in our press releases, so that you can see the average revenue per student for the short programs is considerably less. Those are programs that can run anywhere from 100 to, say, 300 hours, et cetera. And so the revenue per student is significantly less than it would be for a traditional certificate program. And that's why we do not consider those students in our population as far as starts and we disclose them separately, so that you can model out separately with the models are.

Okay. And then can you give us some color on what your expense lines, both educational services and SG&A should look like for the rest of the year?

Well, as far as -- I mean, I would think that as percentages, they ought to be -- follow the same trend as in prior year. Obviously, there's not a lot of leverage to be taken out of instructional services and facilities to more decreases in population just because we still have to teach those classes. So I would expect that the percentages, as far as the overall percentage that you saw on prior year, will mirror this year, the same pattern. So if you just take a look at last year's quarterly numbers, that's -- you should see the same pattern you foresee for 2013.

Okay, great. And then one last one. What are your expectations for revenue per student growth for the rest of the year?

I'm sorry. Can you repeat the question?

What are your expectations for revenue per student growth for the rest of the year?

We would expect revenue per student growth just to remain at around the 3% level year-over-year, 3% to 3.5%.

[Operator Instructions] Ladies and gentlemen, I'd now like to hand the call back. Please go ahead, Shaun.

Thank you. As you can see, we're focused and have been very busy executing on initiatives, which we feel will better position us in this continued time of uncertainty. We continue to manage an important 90/10 and cohort default risk factors, but we've also sharpened the strategy that we feel will allow us to compete in a very unique segment of education and training in the country. And we have a long-term strategy to ultimately position Lincoln as a market leader in this segment. But we believe strongly in vocational education, as you can see, and in the viability of skilled trades careers. And we feel that our Careers that Build America campaign will ultimately drive our company's strategy long term. I thank you all for joining us today, and we look forward to updating you on our second quarter results down the road. Thank you very much.

Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining, and have a good day.