Lincoln Educational Services Corporation (LINC) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lincoln Educational Services Q1 2016 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Doug Sherk. Mr. Sherk, you may begin your conference.

Thank you, DeeDee, and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued, via press release, its first quarter of 2016 financial results. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. 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, and 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 risk and uncertainties that could cause actual performance or results to 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, are 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; risk associated with changes in applicable federal laws and regulations, including final rules that took effect during 2011 and other pending rulemaking by the US Department of Education; uncertainties regarding our ability to comply with federal laws and regulations regarding the 90/10 rule and cohort default rates; risk associated with the opening of new campuses; risks associated with the integration of acquired schools, industry competition, or 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 thereof, as well as the conference call today. With that out of the way, I'd like to turn the call over to Scott Shaw, President and Chief Executive Officer of Lincoln Educational Services.

Thank you, Doug, and good morning, everyone. Thank you for joining our first quarter 2016 conference call. With me today is Brian Meyers, Lincoln's Chief Financial Officer. I will begin the call by reviewing the quarter's operational highlights, touch on the topline results, and discuss our strategic initiatives in 2016. Brian will then provide further details on the quarter's financials as well as our outlook for the remainder of the year. Over the last 18 months, Lincoln has transformed as an organization, as we positioned the company to return to sustainable revenue growth and profitability while maintaining our reputation for compliance and strong ROI for our students. Last year, we secured the necessary financial flexibility to grow, implemented efficiencies across the entire organization through consolidation and streamlined operations, and increased awareness around the opportunities for middle skilled employment. In the first quarter of 2016, Lincoln built on this foundation by making steady progress on several key initiatives, including our sales force reorganization, increasing our corporate partnerships, exiting our Fern Park campus on schedule, and moving forward with the divestiture of the Healthcare and Other Profession segment. The sales leadership reorganization that we implemented last quarter has progressed nicely in the quarter, and remains on schedule, as we continue to move our best employees into positions that maximize their strengths. Our conversion rates are improving, which demonstrates that students are clearly understanding the value proposition of a Lincoln education. The operating environment has not changed. Unemployment rates remain low. The press remains negative to the sector, and the regulators seek to add additional barriers to prevent us from addressing the employment needs of the country. Despite all of this, we know we provide an excellent opportunity for many students. With 70 years of experience and hundreds of thousands of graduates, we remain confident that by staying focused on providing the best education possible, we will remain a leader. We have also continued to leverage our industry relationships by building corporate partnerships with local and national employers, essential features in positioning Lincoln as America's technical institute. These partnerships help prepare students to work with actual equipment used in real-world settings, and provide them with technical know-how that simply cannot be taught in a classroom. It also allows firms to observe potential employees as they train and learn on industry-specific equipment so that they are ready to work day one on the job. We've already established successful training programs with Audi, BMW, and Chrysler that provide students with manufacturer-specific career training on advanced automotive equipment. Also, our instructors provide training to GM technicians who need to upgrade their skills and better understand new technologies and systems. These partnerships enhance our students' skills, keep our faculty up-to-date with the latest technologies, and solidify our position as a valued leader within the transportation industry. To emphasize this point this morning, we have announced another partnership -- this one a training agreement with Volkswagen that is similar to our partnerships with the other auto manufacturers. We plan on launching this program at the start of 2017 in our very successful Mahwah, New Jersey campus. This agreement illustrates the auto industry's strong need for more automotive technicians to handle the increasing number of opportunities today and in the future, as well as Lincoln's leadership in providing the tailored training that enhances the productivity of our graduates day one on job. In addition to this OEM relationship, we also solidified placement and training opportunities with several other national and regional organizations. Also during the quarter, we executed the planned closing of our Fern Park campus on schedule and without interruption. The closing demonstrates our determination and focus on evaluating the long-term financial rewards of each campus to ensure it provides optimal value to our organization and our students. Additionally, the Teachout of our Hartford campus is well underway and we remain on track to close this campus by year-end. As a reminder, these two campuses comprise our transitional segment, and will provide roughly $6 million in combined annual savings following the completed closure in Hartford. Perhaps the most critical aspect of our efforts to transform Lincoln is our strategic plan to divest our Healthcare and Other Professions segment. For most of Lincoln's 70-year history, we've focused on hands-on vocational training in the transportation and skilled trades industries, and with this divestiture, we are returning to our roots and our core capabilities. We remain committed to managing our Healthcare and Other Professions segment, which is reflected in its performance during the quarter, where we generated an operating income on -- of $61,000, a significant improvement over last year's net loss of $741,000. We firmly believe the segment will add tremendous value to another organization that has the resources necessary to invest in its growth. Though we do not have anything definitive to report, we continue to make progress to achieve our plan to exit this segment. We are fully dedicated to completing a successful agreement that creates the most value for the shareholders, provides Lincoln with increased financial and operational capabilities, better prepares the students for middle skills careers, and burnishes Lincoln's brand as America's technical institute. Moving on to the quarter's results, we executed according to our plan, and we are reaffirming our year-end guidance. Revenues declined, as expected, as a result of lower populations, but average revenue per student increased by 3.8% due to program mix changes and last year's tuition price increases. We are committed to managing our costs, which is reflected in lower corporate expenses for the quarter as well as lower expenses at the schools. While starts in our Transportation and Skilled Trades segments were down overall in the quarter, we can attribute a significant portion of that to a single campus that has undergone managerial changes at the admissions level. To give you a clearer picture, our starts at this one campus were down 92 students. And so by excluding this one school, we were down only 35 students or 2% for the quarter. In fact, several of our segment campuses experienced growth, and we believe that starts will improve slightly across all of our transportation skilled trades campuses as they adjust to the reorganization we have implemented. We do continue to face macroeconomic obstacles like improving employment rates, which can deter students with immediate monetary gains instead of a longer-term investment in their rewarding career. We are also seeing some industry-specific concerns, such as hesitancy to take on debt from students and their families, along with increasing pressure from regulators at both the state and federal levels. We are working on building a nimble and lean organization that can adjust to any operating environment with a team that can effectively manage it. We continue to be focused on applying efficiencies across the entire organization in order to have a corporate structure in proportion to our size and reflecting our leaner model. In the face of increased regulation, we have maintained our ability to deliver improved outcomes to our students. Our student placement rate improved as demand remained strong and staffing remained stable. Our 90/10 remains safely below 85%, and we are in good standing with all of our creditors. Compliance and conservatism remain a core value at all of our campuses. As we continue to build on the momentum generated over the last year and a half, Lincoln is focused on executing on our two major objectives in 2016 -- successfully divest our Healthcare and Other Professions segment in a way that creates value for all stakeholders, and grow our student population through increased starts and greater retention. Now, Brian will review the quarter's financial results in greater detail and discuss our outlook for 2016. Brian?

Thank you, Scott, and good morning, everyone. Given the information we have provided in our results released this morning and covered by Scott, I'll focus my comments on continuing operations performance for the first quarter. As a reminder, the Healthcare and Other Professions segment is classified as discontinued operations under Statement of Operations and as Assets and Liabilities Held for Sale on the balance sheet. First quarter revenue from continuing operations, which includes our Transportation and Skilled Trades segment, and our Transitional segment, declined by approximately 9% compared to the first quarter of 2015, primarily due to starting off the year with approximately 10% fewer students than we had on January 1, 2015. Our Transitional segment accounted for about 30% of this decline in population. We were able to slightly offset the decrease in revenue through an increase in average revenue per student of 3.4%. In the quarter, we had an operating loss from continuing operations of $6.3 million compared to $4.8 million in the prior-year first quarter. Operating loss for the Transportation and Skilled Trades segment in Corporate, excluding the Transitional segment, was $3.3 million versus $3 million in prior-year's first quarter. During the quarter, corporate expenses decreased by approximately 16%, which, as Scott mentioned, reflects our efforts to align corporate expenses with the size of the company. Net loss from continuing operations was essentially flat versus the same period in the previous year at $6.1 million. When excluding our Transitional segment, net loss from continuing operations was $3.2 million versus $4 million in prior-year's first quarter. The improvement in net loss, as noted earlier, was mainly driven by a 16% reduction in corporate expenses. Now moving on to our first quarter segment results; our Transportation and Skilled Trades segment operating income was $3.4 million compared to $5 million in prior-year's first quarter. The change was driven by a 5.7% decrease in revenue due to beginning 2016 with approximately 8% fewer students. In addition, educational service and facility expense increased due to two main factors. First, a lease modification in connection with three of our campuses where rent is now included in the facility's expense rather than interest expense; and second, the cost of laptops provided to new student enrollments in certain programs. These increases were partially offset by a decrease in SG&A expenses impacted by headcount and cost reductions. Our Transitional segment, which is comprised of our Hartford, Connecticut and Fern Park, Florida campuses, reported an operating loss of $3 million compared to $1.8 million in prior-year's first quarter. Our Fern Park, Florida campus was officially closed as of March 31, 2016, while our Hartford, Connecticut campus is currently teaching out the remaining students through December 2016. I would also like to highlight that our Healthcare and Other Professions segment performed well for the first three months of 2016 when compared against the prior-year's first quarter. Operating income for Healthcare and Other Professions increased by $0.7 million to $0.1 million for the three months ended March 31, 2016 from an operating loss of $0.6 million in the prior-year's first quarter. The improvement was primarily the result of our 2015 efforts to streamline our operations structure. Turning to the cash flow and balance sheet, we used cash from operations of $9.2 million during the first quarter, which was expected due to the seasonality of our operations. We continue to -- I'm sorry -- we finished the quarter with approximately $47.8 million of restricted and unrestricted cash and cash equivalents. Lastly, looking ahead to the remainder of the year and our guidance, as we are reaffirming the guidance we provided back in March, as following. The company expects revenue from the Transportation and Skilled Trades segment to decline by low to mid-single digits compared to 2015 revenue; we anticipate ending 2016 with the same student population level as the beginning of the year at approximately 6,600 students; and lastly, we continue to anticipate generating slightly positive net income for the year from continuing operations, excluding the Transitional segment. The profitability outlook includes recording a non-cash gain of approximately $6.6 million related to a lease amendment. With that, I'll turn the call back over to the operator so we can take your questions. Operator?

[Operator Instructions] Our first question comes from Alex Paris at Barrington Research.

Good morning, guys.

Good morning, Alex.

I've got a couple of questions, not necessarily in any order here. Just because I don't have the model in front of me -- the $6.6 million non-cash gain associated with the lease amendment, was that taken already? Or will that be taken in the future quarter?

It was taken straight-line -- it's being taken straight-line throughout the year. So about $1.6 million was recorded this year -- for this quarter.

$1.6 million a quarter, got you. Okay. And then, second, you said starts were up -- were down only 2%, excluding that single campus, but then you said starts will increase slightly. Were you referring to second quarter or for the year?

I'm sorry, Alex. Yes, for the year.

Okay, for the year. And that's the Transportation and Skilled Trades? We don't have starts in Transitional.

Correct.

And then that single campus. You said it had management changes. So do you expect better performance from that immediately going forward? Or is it going to take a little time to turn that around?

It will probably take a quarter, but it's underway.

And the rest of the campuses were generally performing at or around expectation?

Yes. I mean, in general, as I said, the remaining ones were down about 2%, which is kind of where we were last quarter in 2015.

Okay. And then, broadly, I know you can't say a lot about the divestiture process, but maybe you can give us a little bit of a background. When did it start? When do you expect it to end? You probably can't answer that.

Yes. Sure, let me help you there. Well, we started in January. Needless to say, there's lots of interest and the industry is very challenged. All I can tell you, Alex, is that I'm sure I will have more to report to you at the next quarter, and I would probably like to leave it at that.

Okay. Fair enough. I think that's it. The quarter was relatively on target. Revenues were in line with our expectations, as were the pretax loss. Starts were a little bit below expectations -- my expectations -- but it was explainable by the one school. And it seems like -- and then guidance for the full year is essentially maintained and things seem on track. Is that a fair characterization?

You couldn't have said it any better.

Or faster. I'm juggling five earnings reports between last night and this afternoon, so I apologize for my curious behavior.

No problem. Good luck.

All right, thank you very much. Good luck, guys.

Thanks, Alex.

Thanks, Alex.

Mr. Shaw, I'm not showing any further questions at this time. Please proceed with any further remarks.

Well, thank you, operator. Again, we appreciate everyone joining us on the call today. We are pleased with what our results are for the first quarter. And we look forward to updating you in the first week of August as we share with you our second quarter results. Hope you all have a wonderful day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.