Good day, ladies and gentlemen, and welcome to Q1 2014 Lincoln Educational Services Earnings Conference Call. My name is Steve, and I'll be operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Mr. Shaun McAlmont, Chief Executive Officer. Please proceed, sir.

Thank you, Steve. And good morning, everyone. Joining me in the room today is Scott Shaw, our President and Chief Operating Officer; as well as 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 could 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, 2013, 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 some opening comments, and Scott will provide a more detailed overview of our company's operations. Cesar will then provide a financial review of the quarter and our Q2 forecast. We'll then take your questions. For those of you listening that our new to our name, I'd like to provide a background of the company's most recent performance. 3 years ago, we managed a system of open enrollment and saw some of the highest growth we've had in the company's 70 year history. The 2008 economic downturn forced individuals back to school for training as jobs became scarce. Our programs were tailored to allow those who missed the opportunity of a traditional education to return to get skilled training, and thereby find employment in specific fields. To maximize our growth, we added fully online programs and expanded in the fields like business, IT and criminal justice. As…

Good morning, and thank you, Shaun. I'll spend my time sharing with you the progress that we've made in returning Lincoln to start growth, as well as continuing to communicate how we are positioning Lincoln for long-term success. As a Shaun outlined in his remarks, we are focused on meeting the needs of our shareholders, students, regulators and employees. We will meet these needs by continuously taking actions that lead to long-term, sustainable growth and profitability. Therefore, every decision we make must be balanced and must result in moving the company forward. We will continue to drive for growth while further improving our student outcomes. We will create increased shareholder value while continuing to meet or exceed every government regulation. We will continue to build a company that empowers our employees to serve our students in new and creative ways. All of this is very achievable, and our first quarter results show that we are on track to achieve these objectives. During our last call I shared with you our vision to be the leading middle skills training company in the country by concentrating on offering certificate and associate degrees in high-demand fields that offer our students a high return on their educational investment. We also share a success in improving our student outcomes and successfully lowering our exposure to government regulations. We also highlighted that we saw improvement in our enrollment trends that indicated that we should achieve growth in student populations in 2014. As Shaun mentioned, we achieved a 4.6% increase in our starts, we continue to improve our student outcomes, and our interactions with our accreditors and regulators continues to be very positive. Despite the impact of this past winter and strengthening employment market, we continue to see strong interest in our programs and significant increase in…

Thank you, Scott. Good morning, everyone. As we disclosed in our press release early this morning, and as Scott and Shaun mentioned, student starts increased 4.6% for the first quarter of 2014 as compared to the first quarter of 2013. We remain optimistic that this positive momentum will continue into the second quarter of 2014. The deteriorating start numbers we experienced during 2013 resulting -- resulted in us commencing the first quarter of 2014 with approximately 1,800 less students than we had on January 1, 2013. This led to a decline in our average population for the first quarter of 2014 of 9%, which resulted in revenue declining by $7.3 million or approximately $6.3 million as compared to the first quarter of 2013. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which resulted in average revenue per student increasing 2.2% over the first quarter of 2013. Average revenue per student for the first quarter of 2014 was $5,645 versus $5,541 for the first quarter of 2013. The decrease in student starts during 2013 also impacted our capacity utilization, which decreased to 35.4% for the first quarter of 2014 from 38.3% in the first quarter of 2013. The decrease in capacity utilization produced significant negative leverage as our operating margin decreased to a negative 11.8% for the quarter, from a negative 8.6% for the first quarter of 2013. Other key highlights of the quarter included: loss per share from continuing operations was $0.49 for the first quarter of 2014, as compared to a loss per share from continuing operations of $0.24 for the first quarter of 2013. For the first quarter of 2014, we were not able to avail ourselves to a benefit for income taxes as a result of a valuation…

[Operator Instructions] Please stand by for your first question which comes from the line of Alex Paris from Barrington Research.

I have a question about guidance, I suppose. Looking at the better-than-expected, or better than your guidance new student starts for the quarter, of 4.6%, I think you said in the last conference call, you're up 3% through February, so that sort of suggests that March was up at an even greater rate. Yet your guidance for the year-over-year growth in the second quarter is conservative. Could you add some more color there please?

Hi Alex, It's Cesar. Yes, I think while we beat our guidance that we gave for the first quarter, we are a bit concerned with the third quarter estimates that we previously had; primarily due to the impact we had on the high school program related to weather in the first quarter. So for now, we've taken some caution to make sure that we can make up those days that were missed to try to make up some of those high school enrollments. As far as the guidance for the second quarter, it's in line with what we projected for our total year guidance. I think where we're a bit different from the street is obviously in the third and fourth quarter guidance, but our guidance for the year remains intact.

Okay. Very good. So with regard to weather, again, given the financial performance, I'm assuming that you made up of those days in terms of revenue with Saturdays and so on. The issue is you don't necessarily get back the days for marketing. Is that right?

Hi, Alex. It's Scott. Yes, that's right. So it's really kind of 2 different impacts, for our non-high school markets, you're absolutely right. With regards to the media, there are ways, and we did encourage our employees to work longer hours, work over the weekend and continue, frankly, to work from home when possible because they have access to all of our technology and can communicate with the students. What you lose is that ability to bring the students into your schools, which, as I kind of mentioned, is a very powerful selling tool. But certainly on the media side, there were much more ways for us to overcome the challenges that the weather provided us. On the high school side, it's a little different because to the extent that high school is closed and a rep could not get in and visit and make the presentation, and then that gets compounded by the fact that many schools got pressed for number of days, and therefore, frankly, maybe shut their doors more often than not to having reps come in. We see that it could impact us on the high school side. But with that said, there are also activities that we're doing with regards to high school to overcome those challenges. It had to impact us somehow, it's very difficult to quantify. But as you can see, we're still growing as a company and we're very confident that we can overcome the challenges going forward.

Okay. So based on that guidance of 2% to 4% new student starts growth in the second quarter, you're saying that the total population at June 30th is going to be equal to that of the year-ago number?

Correct. It's the end of the year population. Correct.

So based on the fact that you're getting positive -- Oh, the end of the year population? Not the year...

I'm sorry, end of the quarter, I meant to say.

Okay, yes. So the -- so based on the fact that you're getting positive revenue per student growth, I know you're not giving guidance but then that suggests third quarter revenue is going to be positive year-over-year. And then with that, that positive you're going to have a shot at better than breakeven earnings in the third quarter. And I know you said it for the second half, but I'm just saying the third quarter...

I'll turn it over to Cesar in a second. Let me temper your comments just a little bit. We still look at average population as the key indicator of revenue growth. And so end of -- although we're very excited about the end of the quarter population approximating last year, the average population still has to catch up a little bit. So I'll turn it over to Cesar.

Yes, obviously, we're not providing guidance for the third quarter, Alex. But I think Shaun is correct, the average population lags by a quarter. So if we would expect the earning [ph] population to approximate what was last year at June 30, we wouldn't expect that the earning population, just based on average population, that is a quarter lag.

Alright, so then -- I get you, I understand that then. But for the second half, Q3 plus Q2, it's positive net income?

Q2 plus Q3?

I'm sorry, Q3 plus Q4.

That would be correct based on our yearly forecast.

Alex, you set the record for 8 questions in 1.

And your next question is from the line of Jeff Silber from BMO Capital Markets.

It's actually Henry Chen [ph]. I just had a question on the capacity utilization of 35.4% that you mentioned. When do you think -- do you guys have a view, when you think that will improve?

Sure, it'll improve with each quarter as we continue to grow the population, that capacity -- excuse me, that capacity utilization will improve. So every quarter where we get increased start growth improves the capacity utilization.

Got it. I mean I was just pointing -- you mentioned that it was a decline year-over-year. Just I guess, when do you expect it to improve year-over-year?

It'd be similar to the population. So just as we said at the end of the second quarter, our populations will equal, we anticipate where it was last year and average population will then start increasing over the prior year in the third quarter. So with each of those steps, the capacity utilization will improve, so the same timing.

Got it. Okay. And just a quick question on the second quarter guidance. In terms of EPS loss, it's much worse than first quarter 2014 but revenues were somewhat flat. Are there any major differences in the expense lines that we should model in between first quarter and second quarter?

Well, the second quarter is historically our weakest quarter of the year. It's -- obviously, it's a time when students don't necessarily -- it's had a lower start for the year. I'll just say that except for the fourth quarter, but the fourth quarter gets the benefit of the average population. So the second quarter traditionally, we continue to invest for our third quarter starts, but historically, has the lowest start rate as far as an actual number of students. And so that does always impact our operations in that quarter. So it's seasonal in nature and if you go back to every single quarter for the last couple of years, you'll notice that the performance in the second quarter, the expenses tend to hold flat but revenue tends to -- or tend to increase a little bit. So it's just the seasonality of the business.

Got it. And so I guess that 3.2 would be the SG&A line then?

Well, we would expect -- that's correct. We would expect that obviously, since starts -- the starts are less in the second quarter, that revenue would be -- I mean we guided to $77 million to $79 million. So obviously, we expect revenue to be down from the first quarter. And so obviously, if revenue is down, expenses remain relatively flat, that's where you've come up with the difference in the guidance and the EPS.

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

So I wanted to just begin with a clarifying question. So when you say that you think that the end-of-quarter population will be flat year-over-year, what are you -- what is your end of quarter number for June 2013? Because I got 13,985 and that...

That is a correct number.

Correct.

Okay, so if you do 3% start growth and you think you're going to end the population at 13,985, in my grammar school math suggest that the persistence is going to step up pretty considerably here in order to get to that number. Is that your expectation?

That is true.

But it's also graduation.

So that's the part we can't see so...

Correct. But Trace, let me just mention that persistence has held strong. I mean it's actually -- our performance is benefiting from persistence along the way. And so we've seen those improved rates over the last few quarters, sequentially, that the Lincoln Edge program that we put into place really was designed to assess enrollment risk and provide financial literacy and mentor students, et cetera. And in the first quarter alone, we saw persistence improve by about 80 basis points. And so we are seeing a benefit from persistence that we expect will continue throughout the year.

Okay. And combined with fewer graduations, I take it, as well?

Correct, the graduation number ebbs and flows, so yes.

Right. Okay. And then I also wanted to ask, I think in your prepared remarks, Shaun, you described positive cash flow for the year, is that -- did I hear that correctly?

Yes.

You did.

Are we talking about operating cash flow or free cash flow?

Operating cash flow.

So that suggests as well that you expect...

Actually, we expect to have both operating and free cash flow for the year.

Okay, so that also suggests a pretty strong second half, because the first quarter obviously is putting you in a net deficit position against that goal?

Well, that is correct. But I think if you go back and you historically take a look at our third and fourth quarter results, you will see that our fourth quarter has historically been profitable. Even last year, we had a profitable fourth quarter, so I think that is just the seasonality inherent in our business. And as -- so it's been a hockey stick and we don't see any reason why we change this year.

Alright, and then the final question, just on the mechanics here is, Cesar, I think you said that CapEx was going to run at 3% of revenue for the full year?

That is correct.

You're like at 3x that number for the first quarter. So can you just talk qualitatively about what's going on in that?

No, about $0.6 million for the first quarter. $600,000.

Oh, $600,000. I thought you talked about -- I thought you said 6 million, so that...

No, it's $0.6 million.

Got it. All right. I thought I heard 6.6, so my bad there. And then the last question I have was just wondering if you could comment a little bit on the relative demand across the different program areas? I mean, you kind of gave a shout-out to automotive there a little bit. But can you just sort of describe what you're seeing, is there any identifiable trends by program offering?

Hi Trace, it's Scott. I mean I can't say they're really identifiable trends but I can say that for the first quarter, we definitely saw more strength this quarter in our allied health program. So they grew more so than our automotive programs, which is nice because, as Shaun said, our automotive programs our campuses with those schools, with those programs are more profitable schools, so to the extent, we can build up the allied health programs more that will help drive greater profitability over more campuses.

Other folks in the allied health space have suggested that sort of a strengthening employment market, it was creating something of a headwind. Do you see that at all or you're not seeing that?

Well it's always tough to know who doesn't come to you. All I can tell you is that from a segment -- from a vertical standpoint, we were able to increase our populations. Again, we feel, at this time at least, the greater hurdle is just the financing of the education, not as much so the lack of demand for the education.

And your next question is from the line of Alex Paris from Barrington Research.

Just one follow-up this time, I promise. And I know you're trying to temper my enthusiasm but I'm kind of looking back to past peaks. Back in 2010, you had operating margins of 20.2%. I realize that was on nearly $700 million in revenue with 45 campuses, maximum capacity utilization. Over the next 3 or 4 years, what do you see, based on what you expect today, operating? Can we get back to those past peaks or that would not be in the cards?

Over the next 3 to 4 years, I mean, I think it's hard to predict. I think that the growth that we achieved in the 2009, 2010 periods, I think those are the things of the past. I think we're going to see a lot more modest growth. Over time, I do believe that 10%, 15% operating margins are achievable. But whether or not that would be within a three-year period, again, it's all dependent on the economy and what happens in D.C. But I would be a little bit more tempered because the days have grown starts 20%, 30%. At least we -- in this economy, we don't see that happening in the near term.

But with that said, we do have schools that operate at that level when they have their right population today.

What is the incremental, and this is related, it's not a completely new question. What's the incremental margin contribution for additional revenue?

It probably is around, somewhere around 50%. Until you probably get up to about 50% capacity utilization. Once you go over a 50% capacity utilization, it probably starts going more, it continues to rise to 60%, 70%, depending on the capacity utilization. In our peak, it could be as high as 80%, in the past.

There are no further audio questions at the moment. [Operator Instructions] There are no further questions. I would now like to turn the call back to Shaun McAlmont. Please go ahead, sir.

Thank you, Steve. And thank you, everyone. As you can see, we're focused and we've been very busy executing on initiatives which we know will continue to better position us, especially through this time of uncertainty. But we do look forward to updating you on our next call, and I wish everyone a good day. Thank you.

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