Lincoln Educational Services Corporation (LINC) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Lincoln Educational Services Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Chris Dailey, Head of Investor Relations. You may begin.

Thank you, Nicole and good morning everyone. Before the open of the market today, Lincoln Educational Services issued via press release its fourth quarter and full year 2015 financial results. The release is available on the Investor Relations portion of the company's corporate website at www.lincolnedu.com. Today's call is being broadcast live on the company's website and a replay of this call will also be archived on the company's website. Statements during today's call regarding Lincoln's business that are not historical facts may be forward-looking statements that involve risks and uncertainties, forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indicators of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results that differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to; our failure to comply with the extensive regulatory framework applicable to our industry or our failure to obtain timely regulatory approvals in connection with a change of control of our company or acquisitions. Our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis; risks associated with changes in applicable Federal Laws and Regulations, including final rules that took effect during 2011 and other pending rulemaking by the U.S. Department of Education. Uncertainties regarding our ability to comply with Federal Laws and Regulations regarding the 90/10 rule and cohort default rates. Risks associated with the opening of new campuses; risks associated with the integration of acquired schools; industry competition; our ability to execute our growth strategies; conditions and trends in our industry; general economic conditions; and other factors discussed in our Annual Report on Form 10-K. Before discussion of such risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements, see “Risk Factors” in Lincoln's Annual Report on Form 10-K. All forward-looking statements are qualified in their entirety by this cautionary statement, and Lincoln undertakes no obligation to revise or update this news release to reflect events or circumstances after the date hereof. Now, I'd like to turn the call over to Scott Shaw, President and Chief Executive Officer of Lincoln Educational Services. Scott?

Thank you, Chris and good morning, everyone. Thank you for joining our fourth quarter and full year 2015 conference call. With me today is Brian Meyers, Lincoln’s Chief Financial Officer. 2015 was a transformational year for Lincoln Educational Services and we are well positioned to capitalize on several of the initiatives we put into place as 2016 unfolds. This morning, I’m going to provide a brief overview of our accomplishments during the past year and discuss the strategic direction of the company going forward and then turn the call over to Brian who will cover the financial highlights. As we’ve maintained during the past several quarters, our goal is to drive Lincoln towards sustainable profitability while simultaneously delivering a significant ROI for our students. We are committed to right sizing our operations in order to maximize profitability and cash flow and our 2015 results clearly demonstrate our success in eliminating expense as the industry’s landscape has continued to shift during the past few years, it became clear that we needed to focus on our core strength in order to continue to provide exceptional value to our students and our corporate partners while increasing returns to our shareholders. In 2015, we took a number of steps towards that objective. One step was to set in place the leadership team to move the company forward from the board to the sea suite, our regional managers and sales rep, we are focused on becoming a leaner, more nimble organization determined to build on our 70 year legacy of uniquely preparing students for careers in the Transportation and Skilled Trades industries. Most recently we reorganized our sales leadership in order we gained momentum in starts for the continuing operations. These changes have brought us new energy, new ideas, and new confidence. We have promoted two individuals who have had several years of success during our industries most challenging period. I’ve asked them to bring their practices and ideas to all of our campuses and I believe we are already seeing improvements from their efforts. The move has allowed us to reassign our existing staff so that we won’t lose their talents and can continue to capitalize on their strengths. Change is increasingly becoming more common and our organization is becoming much more receptive and responsive to all the changes we continue to implement to position us for long term success. Our sales leadership reorg filed a successful implementation of our 100 day plan beginning last May which focused on strengthening Lincoln through three key initiatives. First, in order to provide the company with the necessary financial flexibility and a extended timeline required to execute our growth strategy, we secured a new credit agreement in July. We also sought to increase operational efficiencies across our campuses in corporate organization to lower our cost structure and improve our profitability while still maintaining our high standards. We consolidated and eliminated positions and streamlined the operations. We introduced a centralized cost center to service more campuses and students which increased efficiency and reliability and as a result we have seen improved conversion rates. We also implemented a new customer relationship management system to effectively convert leads into starts and refocused our efforts on our website in social media. Lastly, we work with our students and their families as well as our corporate partners to increase the awareness of the job opportunities and demand for middle skilled employees. We strengthened our relationship with local and national employers to create a customized curriculum for our students, one that will provide them with the skills required to excel day one on the job. We were able to more than double the number of corporate partnerships in 2015 with top five organizations like Audi, BMW, Hendrick Motor Sports, Scott equipment and many more and will look to build on these partnerships during 2016. We have also worked to position Lincoln as a thought leader in a debate on education to our television ads, ovoid [ph] pieces and articles that highlight the current middle skills job crisis. Most recently this effort led to a very favorable coverage of Lincoln in U.S. news and world report. We will continue to share our message about the benefits of middle skilled employment and Lincoln’s role in preparing students to meet the increasingly complex needs of employers as the year progresses. Each one of these initiatives has helped move Lincoln towards the objective of achieving sustainable profitability as well as improved our capacity to better serve our student and their families. We look forward to building on this momentum in 2016. In November, we took another step towards profitability in building shareholder value and we announced the plan to sell our healthcare and other profession segment. We made this strategic decision to refocus on our core strengths of hands on training and middle skills industries like automotive, HVAC welding that are crucial to our nation’s economy as well as capitalize on our 70 year history of leadership in this sector. The divestiture program creates a streamlined organization focused on what we do best while positioning the company for improved financial performance to lower operating costs and a strengthened balance sheet. We are keenly aware that in the current operating environment our organization has to be diligent and judicious with how we allocate our resources. Given our core abilities and the strong demand by industry for our graduates we are confident that concentrating on our Transportation and Skilled Trades segments will create the most value for our students, employees and shareholders. Now I’ll move on to our performance in the fourth quarter and more broadly on 2015 as a whole. Last quarter, I mentioned that the tangible results from our structural changes over the last year were beginning to emerge and that fourth quarter that trend continued with the second straight quarter of operating income generation. This result is a reflection of our efforts to streamline the business and focus on improving efficiencies within the organization that will enable Lincoln to operate profitability despite continued operating headwinds. We were able to generate full year total revenue which includes discontinued operations of $306 million. As a reminder, our guidance for revenue was approximately $300 million for the full year and our $0.14 loss per share was significantly better than our net loss outlook of $0.45 to $0.50 per share. Our net loss includes a non cash gain in connection with the Hartford Connecticut Lease termination which reduced our loss per share by $0.14. Without this gain our net loss per share would have been $0.28 which is still significantly better than our guidance of $0.45 to $0.50 per share. Brian will provide further detail on the fourth quarter results. However, I’d like to emphasize that our improving financial performance is a direct result of our efforts to control costs, build starts, retain more students and streamline the business. We continue to see improved outcomes for our students, particularly in our cohort default rates and student retention rates. We are updating our curriculum, introducing various new technologies and continually enhancing our student support services all with the goal of increasing retention and graduation rates. Our education department and teams at each campus are focused on ensuring that our students complete their education timely which result in higher outcomes, lower bad debt and lower cohort default rates. The DOE recently released our 2013 three year draft cohort default rates which range between 10% and 15%. These rates demonstrate marked improvement over prior years and are a reflection of our shift to better outcomes. Furthermore, our 90/10 ratio for 2015 is expected to remain comfortably around 80%. We continue to work very hard to keep these important operating metric trends moving in a positive direction. A critical aspect of our success in 2015 was our ability to establish quality partnerships with top flight employers in our target industries. We were able to build nine national placement relationships with companies like Audi, CarMax, Ryder [ph], Hyundai and many more. We now have a total of 17 corporate partnerships and will look to grow that number in 2016. These partnerships are crucial for three reasons. First, it provide our students with practical hands on training that is tailored to their need and will be applicable to their career from start to finish. This is customizable real world experience that alleviates the Lincoln curriculum. Employers get first class recruits; they are able to contribute immediately after they are hired because they have the technical knowhow and are comfortable working with these complex tools and machines. The Lincoln brand also benefits from helping skilled technicians land their dream jobs with quality employers creating a win win environment for our students and our corporate partners. As an example, our education training program with Audi provides our students with manufacture specific courses and access to the real world equipment used by our leading automaker. We just completed the build out of two of our five Audi labs and we expect to announce another industry partnership shortly. In addition we are speaking with several other OEMs about providing similar training partnerships and advanced levels of training that will lead to higher salaries and greater opportunities for our graduates. In the fourth quarter, we took another step forward when we successfully negotiated the termination of our burdensome Hartford Connecticut campus lease. We’ve begun the process of teaching out the campus and have structured the lease terminations that are designed to return our investment within two years. The transaction will reduce our overall 2016 operating cost by about $3 million and also makes our healthcare and other profession segment more attractive to potential buyers. Speaking of our healthcare and other professions discontinued operations, the process to find a new home for these campuses continues with many entities expressing interest in signing MD&As [ph]. Discussions are ongoing and we will provide updates when definitive material developments occur. Although we’ve made progress throughout our organization, we are still facing challenges that will hinder our growth in the short term, namely the impact of improving national employment and the continued hesitancy for many students to take on debt to fund their education. We believe however, that the initiatives I have discussed will overcome these challenges over the long term. Lastly before I hand the call up to Brian, I like to provide some insight into our goals for 2016. As mentioned, 2015 served as a transformational year for Lincoln. Through managerial, structural and organizational changes, we have positioned the company to return to profitability. In 2016, we’ll look to capitalize on those initiatives and will seek to restart the engine for growth. Specifically we will look to accomplish two objectives, successfully divest our healthcare and other profession segment in a manner that benefits all stakeholder involved and return to average population growth through a combination of greater retention and more starts. We are confident about achieving our first objective and we are working very hard to achieve the second objective. Our plan to reinvigorate start growth in 2016 is focused on building on the initiatives that we have established over the last 15 months. These include our new leadership teams at all levels of the organization, our new leaner infrastructure that improves our internal capabilities and efficiency, our new marketing program that positions Lincoln as Americas technical institute, launching several new programs, to pivot back to our roots as a provider of hands on technical training, building on our increasing number of industry partnerships, and as always striving to improve our student outcomes through high placement and retention rates. We have made some incremental progress as a decline in start to our Transportation and Skilled Trades segment declined only 1.6% during the fourth quarter which was our best quarterly performance in 2015. As we celebrate Lincoln’s 70th year as a vocational and training leader, we are actively seeking to continue our reputation of serving students with a high quality education that provides a fulfilling career and will continue to match our history of regulatory compliance. Despite the operating headwinds that are stunting our growth in the short term we remain optimistic about the road ahead and the entire Lincoln team is looking forward to executing our initiatives, delivering for our students and building shareholder value. Now, I’d like to turn the call over to Brian Meyers for a financial review. Brian?

Thank you, Scott and good morning everyone. Given the information we have provided in our results release this morning and covered by Scott, I will focus my comments on continuing operation performance for the fourth quarter. As a reminder, the healthcare and other professional segment is classified as discontinuing operation on the statement of operation and as assets and liabilities held for sale on the balance sheet. Fourth quarter revenue from continuing operations which included our Transportation and Skilled Trades segments, corporate and our transitional segment declined by approximately 80% compared to the fourth quarter of 2014, primarily due to lower student population and fewer starts. Revenue also decreased due to higher scholarship recognition than last year as we see to compete with an improving job market. While scholarships had negatively impacted revenue, we believe it will provide more students with an opportunity to pursue their educational goals by assisting in their affordability challenge. We were able to offset the decrease in revenue with a slight increase in average revenue per student due to improved student retention. In the fourth quarter we generated operating income from continuing operations of $4.4 million compared to $4.8 million in the prior year fourth quarter. In 2015, operating income includes a $1.6 million in catch up depreciation charge in connection with a reclassification of real estate out of held for sale. This change is a result of our strategic shift to focus on our Transportation and Skilled Trades segment and therefore no longer sell the real estate within this segment. Excluding these charges operating income from continuing operation increased by $1.2 million to $6 million compared to prior year. Operating income for Transportation and Skilled Trades incorporate excluding transitional segment was $5.9 million versus $7.2 million in last year’s fourth quarter. This is our second consecutive quarter with positive operating income and reflects the improvements made by our ongoing efforts to align costs with our student population. Net income from continuing operations improved significantly over same period in the previous year to $5.4 million, a 31.2% increase over the $4.1 million in the 2014 fourth quarter. Again this is indicative of our cost control initiatives. When excluding our transitional segment net income from continuing operation was $4 million versus $6.9 million last year’s fourth quarter. Moving on to the fourth segment results, our Transportation and Skilled Trades segment operating income decline to $8.4 million compared to $10.1 million in the prior year, primarily due to decrease in starts during the year and a $1.6 million catch-up depreciation charge recorded as a loss from sale of assets as a result of the reclassification of real estate out of held for sale. Our transitional segment, which is comprised of our Hartford, Connecticut and Fern Park, Florida campuses, reported an operating loss of $1.5 million compared to $2.4 million in the prior year. This quarter’s result includes the non-cash gain of $3.3 million in connection with the lease termination at the Hartford campus. Following Hartford’s lease termination new student enrollment has ceased and current students will be sort [ph] out through the end of the year. Similarly, the Fern Park campus as planned will complete the student teachout and close at the end of the month. Now, quickly focusing on the full year’s performance, in addition to Scott’s remarks, I want to highlight that net income from continuing operation excluding our transitional segment was $2.2 million compared to a $5.3 million loss for 2014 which speaks to the financial strength of our core segment. Revenue for the Transportation and Skilled Trades segment was approximately $184 million which exceeded our guidance of $180 million. Likewise, student starts performed better than expected resulting decline of 6% compared to our guidance of 80%. Turning to cash flow and balance sheet, we generated significant cash flow from operations of $11.8 million during the fourth quarter and $14.3 million for the full year, which resulted in approximately $61 million of restricted and unrestricted cash and cash equivalents, an improvement of approximately $19 million over December 31, 2014. Please note the $61 million cash balance is net of the Hartford’s lease termination fee of $5 million paid in December. This week, we completed the second amendment to our $45 million term loan revising the financial covenants for 2016 and future years to provide more financial flexibility given our divestiture plan while also establishing maximum loan repayment amounts upon the sell of healthcare and other professional segment. To conclude 2015 operational highlights, I’m pleased to announce that we expect to exceed the Department of Education’s financial responsibility ratio, which stipulates an institution must have a minimum composites score of 1.5 to be consider financial responsible. This improvement in our score should allow us to operate outside of our previously designated parameters of Heightened Cash Monitoring 1. Lastly, looking ahead to 2016 and our guidance, we have a number of positive operational development and we will expect we will make us a stronger company in the long term. First, we will fully exit our transitional segment campuses and reduce our annual losses incurred by these two campuses by an estimate of $8 million. In general, we continue to eliminate costs to maintain maximum profitability. Second, we will continue to focus on our plan to divest our Healthcare and Other Professional segment in order to reorganize and refocus on our core business while streamlining on our corporate processes and expenses. And lastly, our strong year end cash position will support our funding of operations and capital expenditures through this transitional year for the organization. Our Transportation and Skilled Trades population started 2016 with approximately 590 fewer students than the beginning of 2015, leading to a projected decline in 2006 revenue. Our goal is to finish 2016 with the same student population levels at the beginning of the year. If we’re able to achieve our student population goal, we believe that our revenue for the year for this segment will decline by low to mid single-digits from 2015 revenue. In addition, we believe to generate slight positive net income for the year from continuing operations excluding our transitional segment. Our profitability outlook does anticipate recording of one time non-cash gain in 2016 of approximately $6 million related a lease amendment. This lease was previously recorded as a financial obligation and as a result of the amendment will be account for on the sale accounting. In closing, we are making measurable progress in our strategic plan to fundamentally improve our company and produce positive results and returns for our students and shareholders over the long term. With that, I’ll now turn the call back over to the operator so that we can take your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Alex Paris of Barrington Research. Your line is now open.

Good morning, guys.

Good morning, Alex. How are you?

Good. How are you?

Good. Thanks.

So, good results versus guidance, good results versus my estimates. I just want to focus in on a couple of things. First of all, with regard to guidance for the coming year, you’re talking about finishing the year with the same number of students that you start the year. And given that we’re currently have new student declines, even though that new student decline was less than we had estimated. That does imply that all of things being equal that new student enrollment should turn up at some point this year. That combined with retention gains which you noted have been improving, should result in that number if all goes well. Just want to follow the logic there, right?

Yes. That is exactly correct. And as we pointed out our fourth quarter declines in our auto segment were around 1.6%, so certainly it got better, but we all know that one quarter does not make a trend, but we believe that we have taken a number of initiatives and as you pointed out we think that later in the year we could see some growth, but we’re also anticipating continued focus on the student experience and getting some improvement from retention as well.

So, if you end the year where you start the year and there’s a little bit of a hole in the first part of the year, your average population will be down and that’s what translates -- that end revenue for student is what translates into the lower revenue expectation for the full year?

Yes. That is correct. I mean, we typically, when we’re able to build the population it does usually happen in the later part of the third and beginning of the fourth quarter, so it is certainly much more weighted to the back end of the year.

Okay. And then you say, that said, you expect a slight positive net income excluding transition. But that does include a $6 million gain that runs through the P&L. So, just to be clear that would mean, if I excluded that gain you’d have slight loss from -- on the net income line excluding transition?

That is correct, due to what you mentioned about our average population being down and revenue being down slightly.

Okay. And then, but obviously that does not have a negative impact on cash flow, because it’s a non-cash?

Correct.

With regard to transition I think you said, Brian that Fern Park will be taught out by the end of March and Hartford taught out by the end of the year?

That is correct.

Okay. And transition as a segment was responsible for a loss in 2015 of $6.9 million. So, we would expect that loss to diminish in 2016 as that occurs?

Correct. And one thing I want to highlight that $6.9 million included as we mentioned $3 million gain from the termination of Hartford lease, so their losses were in excess of $9 million. But it will diminish in 2016.

Okay. Then with regard to the sales process the sales process began when? And where are we…?

It began in earnest in the middle of January and we anticipate, starting to get indications of interest over the next couple of weeks. So, we’ll have a clearer picture at that point.

And I think you had said previously when you announced the plans to divest these operations that you expected to conclude it by mid-year. Is that still is the thought process?

Well, I think that we expected to conclude it by year end. We’re optimistic that something definitive will be there by mid-year, because of regulatory and everything else, I would imagine its not going to fully close until year end.

Okay. And any thoughts about potential proceeds from those divestitures that you’re willing to share?

No, not this time.

Okay. The composite score, your financial responsibility score, 1.5, I think that was a positive development. I had been just assuming that you would be on Heightened Cash Monitoring after the end of the year. But then, again, thinking that is no matter because you’ve historically taken your disbursements on a delayed basis, so you managed to produce a composite score above 1.5?

That is correct. Even though it really don’t have effect on the financials but it’s nice to get out of that, Heightened Cash Monitoring

Yes, absolutely. Okay. Thank you. Appreciate it. And I’ll go back in the queue.

Okay. Thanks Alex.

Thank you. [Operator Instructions] Our next question comes from the line of Justin Putman of Tellena [ph] Investment. Your line is now open.

Good morning. I just had a question about CapEx and depreciation and amortization for next year. What are your expectations for those?

We’re anticipating it would be around $6 million for our capital expenditures. And as far as depreciation its similar to the same levels as this year for corporate and transitional, we’re looking at approximately $11 million.

In transportation.

In transportation, yes. From continuing operations, about $11 million.

Thank you. [Operator Instructions]. And now I’m showing no further questions at this time. I’d like to hand the call back over to Scott Shaw for any closing remarks.

Thank you, Nicole. Thank you all for joining us today. In summary, I’m very pleased with our 2015 results. We exceeded our guidance and improved our profitability while continuing improving our outcomes in student experience. Excluding impairments and other one time charges all 12 of our Transportation and Skilled Trades schools have positive four-wall EBITDA. Moreover eight of the 12 schools improved their profitability year-over-year. To various cost saving initiatives and other actions we increase our cash balances which strengthens our balance sheet and enables us to continue to make strategic investments in our student services and experience. By continuing to focus on strong outcomes and quality education, we’ve continued to lower our cohort default rates and based of the most recent draft released by the DOE this week, we expect to be under 15%. Similarly our financial responsibility ratio should be over 1.5 which means that we are no longer in the zone once the final numbers are released in the fall. And our 90/10 remained safely around 80%. We’re encouraged that more and more companies continues to join with us to create programs that will enable our students to have advanced skills which will better position them for higher paying careers. In 2016 we will launch several new programs to meet local employers needs and coupled with increased retention efforts will help us achieve our population goal for 2016. Finally, our sale of Healthcare is moving forward and the closure of Hartford and Fern Park will strengthen our balance sheet and free our financial and human resources to concentrate on our long term goal of being America’s technical institute. 2016 marks Lincoln’s 78th year and I look forward to updating you on our progress throughout the year. Thank you all again for joining us.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.