Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 Lincoln Educational Services Earnings Conference Call. My name is Denise, and I'll be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Shaun McAlmont, Chief Executive Officer. Please proceed.

Thanks, Denise, and good morning, everyone. Joining me in the room today is Scott Shaw, our President and Chief Operating Officer; and 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 introductory comments, Scott will then provide an overview of our company’s operations and then Cesar will review our 2013 and also provide our financial outlook for 2014 and we'll then take your questions. Let me start by saying, many Americans most vital industries have found themselves in recent years at an interesting and challenging crossroads. The dynamics of their workplaces are changing as new technology drives innovation forward in their field and leads to increased productivity, improved efficiency and enhanced quality of the final product, that product can be a tangible one like say for automobile or new heating or cooling or maybe a service like patient care, culinary or cosmetic treatments. The challenge of course lies in identifying qualified candidates with the skills necessary to succeed in the technologically advanced environment no matter what the field. Lincoln's approach to career training began in 1946. And as we've grown…

Thank you, Shaun and good morning everyone. Let me start off reviewing our general business model and market approach, and then follow that with a review of what we accomplished in 2013. I'll then conclude by discussing our 2014 strategy. All of my comments will be focused on our continuing operations, and thus exclude the shutdown of our five campuses in Ohio and Kentucky as well as our online operations. As Shaun mentioned in his remarks, we made great progress in 2013 in strengthening our company for the long-term. We entered 2013 with three clear strategic goals. First, solidify our regulatory outcomes. Second, continue to improve our student outcomes and third, return to growth and profitability. We clearly achieved the first two goals, but fell short on the third. However, as I will share with you later in my remarks, we feel very confident that we are on our way to achieving the third goal of returning to growth. Our focus remains on creating the leading Middle Schools career training company in the country by concentrating on certificate and associated degree programs that delivered in a shorter time as possible. We are able to provide our students with a quick entry into the workforce and a good return on their educational investment. Furthermore, we select programs that lead to non-exportable jobs in order to maximize long-term demand for Lincoln and our graduates. On top of this, we add our expertise in delivering hands-on education in facilities that are well-equipped to provide real on-the-job training. Delivering this type of education is definitely more expensive than offering non-technical programs. But we believe our experience and commitment to these offerings differentiate us from non-profit and for-profit competitors. Furthermore, our education provides more than just entry-level job training. We strive to instill confidence, commitment…

Thank you, Scott. Good morning everyone. Our fourth quarter operational results reflect the seasonality inherent in our business and reflects the ceasing of operations at five of our campuses, which have been reflected as discontinued operations in the [accounting] [ph] schedules. My prepared remarks will thus focus only in continuing operations. As we disclosed in our press release earlier this morning, revenue from continuing operations for the fourth quarter of 2013 decreased 8.8% to $88.5 million. This decrease was primarily due to an 11.6% decrease in average student population which was impacted by current economic conditions which have resulted in a number of potential students being hesitant to incur debt and thus not enroll in our schools. Other key highlights for the fourth quarter include during the fourth quarter of 2013 the company recorded a $24.5 million valuation allowance against the deferred tax assets. This non-cash charge reducing the benefit from income taxes from continuing operations as a result of the company's assessment of the realizability of the deferred tax assets over a certain period of time. A primary factor in the assessment is that the company is in a cumulative loss position over three-year period ending December 31, 2013. This valuation allowance can be reduced or reversed in the future as the company returns to profitability. Loss per diluted share from continuing operations was $0.97 for the fourth quarter of 2013, compared to a loss per share of $0.24 per common share for the fourth quarter of 2012. Excluding the impact of the non-cash valuation allowance, earnings per diluted share for the fourth quarter of 2013 would've been $0.14 per common share. Our operating margin increased to a 7.4% for the fourth quarter of 2013 from a negative 4.3% in the fourth quarter of 2012. Fourth quarter of 2012,…

(Operator Instructions) Our first question comes from Jeff Silber with BMO. Please proceed.

Thanks so much and thank you so much for the color and the guidance in terms of where the company is going. I’m just curious. So in looking at your portfolio of campuses and programs, do you think you are going to be sticking with these 33 campuses or do you think there may be some parse then going forward?

Hi Jeff. This is Shaun. I’ll start and then I’ll turn it over to Scott and Cesar for more color. But we -- over the last two years, as you know, we’ve closed 12 campuses and we have closed those campuses that we thought were not viable for the long term for this company and the 33 schools that we operate today, we anticipate we will operate moving forward. The only opportunity to parse would come if a school was [thought had a lease and could] [ph] be merged with another school. So it would essentially not reduce the student population, we’d just lose the site but that only comes opportunistically. At this point in time though we’re running with the 33.

Okay. Great. I also appreciated the color on all the regulatory issues. One you did not mention was gainful employment. I know there is still a tremendous amount of uncertainty out there. But based on what you know right now, do you think the program that you have in place will comply with the proposed regulations.

If you recall, over the last three years, as we’ve been talking about gainful employment, whether we look at the repayment metrics or debt to income we felt that the shifts that we’ve made to position ourselves in a certificate program -- group of programs, we would essentially make our way through that gainful employment regulation quite well. The assessment we’re doing today relates to a programmatic look versus a look by OPEID number and even still, I think as we look at the types of programs that we offer, the cost and the length of programs, we feel pretty confident where we sit today. I think as the rule is better defined and we can do a full analysis, we would essentially share what our full impact is but as of today, I think that’s how we look at it.

Okay. Great. And just a modeling question for Cesar, in trying to get to your net loss per share which is pretty sizable I’m still a little bit confused on the tax rate. Does that mean if you have a pretax loss that we should be expecting no income tax benefit but actually an income tax expense and that’s how we get to such a loss per share?

That is correct. So there will be no benefit. The benefits will have to be -- will be zero, will be fully offset by valuation allowance. So historically if you had a, let’s say, $0.50 loss per quarter, you would expect that your EPS loss would be $0.30. Now that loss, you would take that benefit and you would have to set up the valuation allowance, your taxes will be zero and you still would have a loss per share of $0.50. So when you're comparing -- when you're comparing, you need to take into consideration what historical 40% benefit would've been on those losses.

Okay. Great. And in terms of just specific line items, and just looking between your educational services and facilities in the SG&A, do we expect to see any leverage on those line items?

Not for 2014, I think as you know Jeff we’re entering ‘14 will less students than we entered 2013. So as I said in the past, we’re seasonal business. But I think we've demonstrated over the years, we do return in the second half of the year and you’d have a very strong fourth quarter. And we expect to see the same type of momentum. But as where we sit today, I think our structure is pretty much fixed. And so what we expect to see is a return back to student start which would drive our revenues.

Okay. Great. I’ll somebody else on. Thanks so much.

Sure Jeff.

Our next question comes from David Chu with Merrill Lynch. Please proceed.

Thank you. So, can you speak to what you are seeing in terms of lead flow and conversion rate so far in the first quarter and what you saw in the fourth quarter?

Yeah. Again, I will start, David. Our lead flow really hasn’t varied significantly. Our start rates are improving but they are not back to historical highs. And so as far as demand, we see good demand on the front end. When Scott talked about our initiatives, our initiatives are clearly focused on start rates. So, it’s taking more of those inquiries, more of the enrollments and getting them to a start status. And so we feel good about the front-end demand, we feel better about the initiatives that are improving start rate. And I think that, in the first quarter, we are seeing a combination of the two. And so we are seeing ourselves return to flat to up growth and it’s coming on the start rate side. Scott?

Yeah. Just to add, I mean, we did make some adjustments in our marketing. As you know, we had inquires in through TV, through the web, and through web-based initiatives and referrals. And we did scale back the web-based initiatives, which are very plentiful and easy to get but very low converting type of inquiry and it consumes people time. And we thought it would be much more productive to scale that back to give our reps more time to work with the other students that are coming in. And as we do that, we see that our conversion rates are improving and so it seems to be a good swap out of assets, reduce the number of inquiries coming in to get more starts at the end of the day. And that's really kicked-in in the second half of last year and we are continuing that process. And given the other initiatives that we have underway that Shaun touched on and I touched on for improving start rates, that's what seems to be helping us certainly in the first two months of this year.

Okay. So it sounds like you are seeing some improvements to conversion rates at least so far in 1Q. It sounds largely based on, I guess higher quality leads?

Correct.

Okay. And so based on guidance, when do you expect average enrollments to turn positive?

Well, as you know, there's probably a good six to nine months before that would happen. It won’t be for a while because obviously, you would need - must have very strong starts, it would take at least six to nine months before we see average enrollment turning positive.

So the six to nine months post-start growth?

Correct. As it is based on – based on the guidance we provided you. Obviously, if the starts come in much higher than that, it could be sooner than that.

Got it. Got it. Okay. And just to, I guess, continuing Jeff’s question, so how should we think about SG&A cost given higher admission advisor headcount in 2014? I mean, can you just help us think of it in terms of an absolute dollar basis?

I think what you should expect for ’14, based on our guidance is you should see pretty much flat operations for 2014 as you saw in 2013. The big difference that’s going to happen is, we expect that we'll finish 2014 with a much higher population than we did in 2013, which will lend well for 2015.

And to the extent, we made investments in new admissions people we took out matching cost in another area.

So, SG&A being largely flat, is that what you are speaking to?

That’s correct. I mean, I think what we guided to is revenue to be essentially flat and I think we are guiding to EPS on a pro forma basis to be essentially flat as well.

Okay. And so last question, if you guys do generate pre-tax income on any given quarter, we should be kind of utilizing a 40% tax rate, correct? It's only when you guys have losses that you zero that out?

No, we will be reducing valuation allowance.

So, on a GAAP basis….

On a GAAP basis, it would still be -- you will be reducing some of your valuation allowance that you set upward reserves for.

Okay. Thank you.

Our next question comes from Trace Urdan with Wells Fargo. Please proceed.

Thanks. So, Cesar, I’m just going to say this outright. I've no idea what you're talking about when you are describing the valuation allowance or what to do with taxes. So, I can get that from you offline. But my question is -- and I think you started to hit this before. But if we are looking at this on a non-GAAP basis, are you guys saying that your revenues are going to be flat and your operating expenses are going to be flat in 2014?

That’s pretty much what we’re saying.

Okay, great. Thank you. That’s very helpful. And then, I just wondered if you might be able to give us a little bit of color on what your placement folks are telling you about the tone of the market in the larger degree areas that you’re offering? Are you seeing -- is hiring improving, is demand improving? Is it -- can you just speak in a little bit more detail by program offering if you don’t mind?

Sure. I mean, I will jump in Trace, it’s Scott. I mean, obviously, overall, for the whole company, our placement rates are up and we’re seeing improvements frankly across the board.

Okay. Let me quantify the question for a second, Scott. So that's great of course, but it's also the case that your populations are way down, right. So, that doesn't necessarily speak to what we might be seeing in the market overall. That's why I was kind of hoping for little bit of qualitative feedback, maybe just from what folks are suggesting, because the fact that you're pumping up your graduates and their replacement is going up is great. But, it doesn't necessarily speak to a better environment out there.

Sure. Well, I guess, there hasn’t been any feedback from any of the campuses saying that they’re experiencing any kind of troubles that you feel about their way of approaching the marketplace and reaching out and finding more potential employers is serving their needs. And frankly, I haven't heard any kind of comment back that they have any challenges facing them and getting students placed. So that’s the only I can base it all for Trace.

Okay. I don’t want to put words in your mouth, are you suggesting that the -- I mean, what I just heard you say was that they're doing more and be more creative in finding more spots for students, but that's not the same thing as saying that the overall employment environment is firming.

That maybe true, but I guess I don’t have any other insight beyond that.

Okay. All right. Thank you very much.

Our next question comes from Alex Paris with Barrington Research. Please proceed.

I just have a follow-up on taxes again. So Cesar, if I hear you right, we’re bottling zero for income tax expense throughout 2014, whether we model in a pre-tax loss or a pre-tax profit.

That’s correct.

Then based on the valuation allowance and based on a return to profitability in 2015, a reasonable expectation of return to profits in 2015, do we continue to model zero for a while?

No, the expectation is that after four quarters of profitability, we will reverse the valuation allowance, so whatever is left of it.

Okay. So I if had a profit in the fourth quarter say and I haven’t done my model yet, there were still -- and then those profits continued into the first three quarters of 2015, I am zero, zero, zero, zero, and then I have to access in the fourth quarter of the next year?

Well, then you have gain because you reversed the full valuation allowance. We could talk about that outside. So you’re reversing the valuation allowance. And once that done, then you take whatever is left and you put it back in your balance sheet in order to -- and you recognized the benefit for income taxes.

Okay. That's good. Then with regard to the guidance for the first quarter, it obviously in March already sort of assumes what it assumes, but it also takes into account weather, what impact has weather had on your operations in the first quarter.

I would say Alex that we essentially lost a number of sales days and also days that students would complete their hours in class. What we ended up doing was replacing those days with weekend their longer hours. Now some of those replacement days were not as ideal as the regular work week that we typically engage. So I would say that there is some loss there. I can’t quantify it for you, specifically at this point in time, but we’ve been -- I guess the way we looked at it was to take it up and I think we’ve done a pretty good job of that. Now there always are sort of backlog of enrollments that we’re able to get finance for their start or other increase that we aren’t able to get enroll because they might have missed an appointment, etcetera. We essentially tried to get those students in for the next schedule start, and so some of those starts might occur in the second quarter. So what was we quantify what the loss was from Q1 on weather? We will have some amount of that that flows into starts for Q2.

Okay. That's helps. Then with regard to the absolute number of enrolment counselors, when did you start adding them? What did you finish the year at and what percentage will they increase in 2014 based on what you have in place now?

Well, I think the simplest way to look at is, we added about 10 reps and we added them starting in January and so those individuals on average could generate anywhere between 30 to 60 starts in the year.

And then of what base was that?

For total percent?

Yeah. What if you have an ECS at 12/31?

It’s about 10% for the adult reps, a 10% increase in reps for the adult media representatives.

Okay. Good. There are no change to the high school number reps?

No, the high school number reps stay the same. But along with that, we also increased the Financial Aid team, that Financial Aid team that is doing remote packaging, et cetera and that might have been about 15 bodies that represents kind of the same increase as well.

Probably, 20% or 30% increase in that level.

Great. And then, the President’s budget proposal scheme out yesterday and one of the things that he proposed that you will know how this goes is restoring financial aid to people who haven’t graduated from college. Those who passed the ability to benefit test, that’s something they took away from us over the last couple of years. I don’t know if that applies only to community colleges or everyone. Have you seen that and if that does come to pass, would you dive back into those waters or would you avoid it?

Let me start with that one. We started ramping down our ATB population. Before the rule came, the ATB students didn’t qualify for aid. When we started ramping down that population, we added barriers to entry for the ATB students. And so when we saw our final ATB students moving through our system, they were performing at much higher rates than historically speaking. I think that we found a way to manage those students effectively and if they were able to qualify for aid again, I think that we would take a similarly conservative approach with them. I don’t think, we would have opened it up in the ways that we have done before and I think it would be at schools that had programs that showed us, work well for ATB students. We would want to make sure that any of those students that came into our program would not detract from the outcomes that we work so hard to achieve to this point in time. There are quite a few proposals in the President’s budget that relate to education, and I am not sure how many of them are going to come to fruition. But we are looking at all of them if they pass and what we would do, et cetera and we’d probably have more color on that as time goes on.

Fair enough. Thanks very much for the color, guys.

Thank you.

(Operator Instructions) Our next question comes from Douglas Ruth with Lenox Financial Service. Please proceed.

Hi. Thank you for hosting the conference call. Is the absolute advertising budget going to be up in 2014?

It’s going to be essentially flat.

Okay. Are we spending more on -- we are spending on TV and less on the internet, is that essentially what I heard?

I think you can look in a couple of ways, Doug. The overall marketing budget will be approximately flat. However, the way we spend will be different by quarter and I think that earlier on, we don’t see the high school starts coming until the third quarter. So, for the first two quarter, as Scott said earlier, much of our spending has shifted to different sources. But I will tell you that the most successful channel that we have is our own website. And so the more we can drive students to our own website, the more that we find students, are able to target the geography in a program that fits for them and they can go into the school, they find programs that meet their needs and services through the website, et cetera, so to do that we found different ways. We go to TV to ultimately drive people to our website. We buy such terms that will drive people to our website etcetera. I think what Scott was referring to are the large volume non-differentiated sort of aggregator leads that take a lot of time to contact a prospective student etcetera. So those will go away and the expense that we attributed to that channel in particular will be shifted to TV and other channels that can send students to our website. So it is a reallocation of resources under the overall marketing spend but that spend will remain the same.

Okay. Could you comment some about the Florida schools and how they’re performing?

Are you referring to the FMTIs or we have other operations in Florida?

Yeah, the FMTI schools.

Yeah. Right now, there are a bit challenged overall and populations are increasing at those campuses, but they're not in a position where we want them to be for the long term.

And Doug, if you recall, we acquire those Florida schools because there were cash programs, there were short programs in paramedics and EMT training that fit our vertical but also contributed to our company’s cash there by reducing our need for Title IV. I think that when we attributed those schools through accreditation to have Title IV be able to be reduced, it required additional staffing in those schools that weren’t there pre-acquisition. And so Scott is probably really reflecting change in dynamic at those schools that we need to manage through. And ultimately, our goal is to grow them at the same rates that we grow our other schools, but they are a little different in nature of operation.

Okay. Well, thank you for answering my questions. We look forward to future calls.

Thank you.

We have no further questions. I would now like to turn the call back over to management for closing remarks. Please proceed.

Thanks, Denise. Thank you everyone for joining us on the call today. As you can see, we’ve taken important steps to improve the long-term strength of our institutions and our company. We’re working within the evolving regulatory metrics that we have to position Lincoln to be the leader in diversified skill training. We look forward to updating you on our first quarter results on our next call. Thank you. And have a good day, everybody.

This concludes today's conference. You may now disconnect. Have a great day.