Lincoln Educational Services Corporation (LINC) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lincoln Educational Services Second Quarter 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 maybe recorded. I would now like to turn the conference over to our host of today's call, Mr. Doug Sherk, you may begin.

Thank you, Tonia, good morning, everyone. Before the opening of the market today, Lincoln Educational Services issued via news release its second quarter 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 made by management of Lincoln Educational Services Corporation regarding Lincoln’s business that are not historical facts may be forward-looking statements that turn to define the federal securities law. The words may, will, expect, believe, anticipate, projected plan of tend to estimate and continue and their opposites and similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved if at all. Generally these statements relate to business strategies and business plans, projected our anticipated benefits from acquisitions or depositions to be made by the company or projections involving anticipated revenues, earnings or other aspects of the company’s operating results. The company cautions you that these statements contain current expectations about the company’s future performance or events and are subject to a number of uncertainties risk and other influences, many of which are beyond the company’s control. That may influence the accuracy of the statements and the projects upon which the statements are based. The events described in forward-looking statements may not occur at all. Factors which may affect the company’s results include, but are not limited to the risk and uncertainties discussed in the company’s annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission. Anyone or more of these uncertainties risk and other influences could materially affect the company’s results of operations and financial conditions and whether forward-looking statements made by the company ultimately prove to be accurate. And as such, the company’s at results performance and achievements could materially differ from those expressed or implied in these forward-looking statements. 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 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: 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 for our students in a cost-effective manner or on a timely basis; risks associated with changes in applicable federal laws and regulations, 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; risk associated with the innovation 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 the risk factor section of our annual and quarterly reports. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly advise or update any forward-looking statements whether it’s a result of information, future events or otherwise after the date there off. Now, 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 second quarter 2016 conference call. With me today is Brian Meyers, Lincoln's Chief Financial Officer. I will begin the call by reviewing our recent operational highlights and strategic initiatives progress. Brian will then walkthrough our financial highlights and details for the quarter as well as a review of our outlook for the remainder of the year. And we’ll take questions from analysts and investors. Overall I would describe our operating and financial performance during the second quarter as very encouraging. Our organization made and continuous to make one month into the third quarter, solid progress towards achieving several key objectives and increasing the value of our enterprise. Here are some of our accomplishments. Since we last spoke with you in early May, we have stabilized students starts compared to prior year and generate our first modest student start increase during the past two years from our transportation skill trade segment. Second, by managing our cost and lowering our fixed expenses we’ve reduced our losses by 50%, even with lower revenues. Third, we’ve unlocked value within our real estate by signing a definitive agreement to sell our primary Florida facility which held as our healthcare and culinary programs. Fourth, we remained focused on our students’ success and continue to make investments that will enhance their experience. We’ve completed the rollout of our new automotive and diesel curriculum which incorporates videos, interactive exercises and we then require every student to have a laptop. And fifth, with strong demand from industry for our graduates, our placement rates are tracking ahead of last year. So despite the challenging economic and regulatory environment, and the distractions caused by our divesture effort, we continue to move forward in a positive way. I’m thankful to all the men and women at our campuses and corporate office who remain committed to ensuring that Lincoln truly stands out from the competition and provides a superior experience in education for our students. All-in-all, a very encourage quarter. The development which our students starts certainly – the development with our students starts certainly was one of the quarter’s highlights. Those of you who have followed our company for a while know that a key focus of our strategy has been to regain student start momentum. We’ve reorganized our sales leadership, enhanced our marketing strategy and increased the efficiencies infectiveness of our application and admissions’ process. Students starts is one of the building blocks to returning Lincoln to sustainable profitability, given that growing revenues largely dependent on growing the number of students starting a program at our campuses. We are declined victory with the quarter’s results, but we are encouraged by the progress. Students starts in our transportation and skill trade segment increased by six students as compared to the starts during the second quarter of last year. This is the first time in eight consecutive quarters that we have increased students starts in this segment, which as you know is the key component of our continuing operations. At the same time, students’ starts in our healthcare and other profession segment which have been classified for accounting purposes as discontinued operation since November 2016 also stabilized during the second quarter. Starts for the second quarter of 2016 for the healthcare and other professional segments were essentially flat and improvement from the past several quarters. Another key component to moving Lincoln to sustainable profitability is maximizing the return from our assets and lowering our fixed costs to levels appropriate for our student population. Our team has done an excellent job in this area for the past several years and may get additional progress during the second quarter, wherever possible, we are renegotiating leases and where it makes sense reducing our square footage. We are centralizing functions and ensuring our cost of line with student population. Yet – well unnecessary services are being eliminated, we continued to invest to make the student experience as robust as possible. Another major focus has been the planned divestiture of our healthcare and other segment. Last November our board set in place actions to move this segment of our operations to discontinued status for accounting purposes, as we initiated a strategy to divest these operations and focus on Lincoln’s core for the past 70 years to transportation and skill trade segment. Our intent was to sell the healthcare and other profession segment in its entirety but appears that our exit will be achieved by several transactions. We’ve entered into a definitive agreement to sell for $15.9 million of gross proceeds, our primary Florida facility which held as our healthcare and culinary programs. We intend to use the proceeds in part to reduce the current outstanding balance of our term loan, thus greatly strengthening our balance sheet. This transaction which remains to subject to certain conditions is expected to close during this current third quarter of 2016. As part of the definitive agreement, we intend to enter into a short-term lease agreement through March 2017 to permit the teach out of the majority of the currently enrolled students. We will continue to enroll students into our automotive HV/AC programs at our other Florida facility located down the street in Mangonia Park. I’d like to acknowledge the dedication and exceptional execution of our healthcare and other professions team during this team of transition. An excellent example of the team’s focus and dedicated effort is to stabilize students starts achieve for this segment during the second quarter as well as the segments overall improved profitability. I could not be more pleased by everyone’s professionalism and effort, the senior leadership of Lincoln as well as our board of directors, thanks his team for their outstanding achievements. Turning to some operational highlights from our transportation skill trades campuses during the quarter, we celebrated Lincoln’s partnerships with NASA and their hunch program which is an acronym for high school students united with NASA to create hardware. Students enrolled in our computerized numerical control program based at the Malware, New Jersey campus created unique parts of a specially designed NASA storage locker that will eventually be launched into space and used on the international space station. Speaking of C&C I also want to congratulate one of our C&C students from our Indianapolis campus who won the bronze medal at the Skills USA National competition. Skills USA is a partnership of students, teachers and industry working together to ensure America has a skilled workforce by providing educational programs, events and competitions that support career and technical education in the nation’s classrooms. Over 300,000 students participate in Skills USA and we are proud that a Lincoln student earned third place in the C&C competition. We continued to advance our partnership with Audi in that four more campuses during the quarter we’re approved to offer the program. We are seeing strong interest and excitement for this program. In addition, we’ve begun the approval process to launch our new VW program in the first half of 2017. Given our experience with Audi, we would then expect to expand the VW program to additional campuses throughout the year. In addition, we are having conversations with other OEMs who have strong demand for our graduates and who value the location of our campuses. While we execute on our 2016 initiatives, we were also building for the future. We already have a number of new initiatives underway for 2017. We are expanding our high school admissions’ team to increase our reach into new and existing markets. We received good results from our high school team so far this year and we believe with more representatives coupled with new and enhanced materials we can better educate perspective students about the rewarding career opportunities in the transportation skill trade sectors. It’s clear to us that general public is less aware of and less inclined to pursue careers that involve working with ones ends. Consequently we see great value in going into high school and sharing our message. The wave of retiring baby boomers coupled with rapid changes in technology are creating increased demand for technicians of all types and while we communicate this opportunity, on our website and in our marketing materials we see a need and benefit to speak openly and directly with high school students. Even if they don’t enroll with us immediately upon graduation, we’ll often have students to enroll later in life, tell us that they first heard about Lincoln while in high school. Additionally over the next 12 months we’ll be launching several new and revised programs which should appeal to more students and thus also assist with growing our population. Finally, we have maintained our dedicated focus to remain well within regulatory requirements and guidelines established at the national and state level for our industry. One regulatory area that has our attention is the recent decision that could possibly result in the [indiscernible] council for independent colleges and schools, losing its ability to credit schools. While ACICS is one of three organizations that at credit Lincoln schools, all of the Lincoln programs that fall under this credit body involve campuses that are included in our discontinued operations. Nevertheless we have started the process of having these campuses re-credit by another crediting agency. In summary, as I said at the beginning of the call, we are encouraged by various achievements during the quarter. We still have a lot of work to do but the fruits of our efforts are beginning to generate results and if we can continue the initial momentum, we are well positioned to move towards sustainable profitability while enhancing student outcomes. At this time, I’ll turn the call over to Brian for more detailed review of our financial performance.

Thank you, Scott, and good morning everyone. I’ll begin my comments this morning on the financial performance of our continued operations which is comprised over our transportation and skill trade segment, our transitional segment and our corporate and other segment. The transitional segment refers to operation that close or being faced out. So we consist our firm part Florida campus which was fully toured out as of the end of the first quarter of 2016 in the Hartford, Connecticut campus which is on scheduled to be fully toured out by the end of this year. Each school previously mentioned employees a gradual process that enables the school to continue to operate well current [indiscernible], complete their courses study and is important to note that the Hartford campus is no longer enrolling new students. Revenue from continuing operations for the quarter was $41.9 million versus $44.7 million in the prior year comparable period. The decrease was a result of 2016 with approximately 800 fewer students than on January 1, 2015, which led to a 9.6% decline in average student population to approximately 6,600 as of June 30, 2016 from 7,300 for the prior year quarter. As a sign note, our transitional segment accounted for approximately 50% of the revenue decline from the prior year period. This decrease in revenue was partially offset by 3.5% increase in average student revenue for a student for the three months ended June 30, 2016 due to a shift in program mix. As Scott mentioned, we did have a slight increase in students’ starts from our transportation and skill trades for the second quarter. As soon as it starts it appear to have stabilize with the increase to 1,936 versus 1,930 for the second quarter of 2015. With that in mind, we’re expecting to finish the year with approximately the same student population that we enter the year with. As noted earlier, we continue to implement efficiencies and cost reductions across the entire organization through consolidation and streamlined operations. For example, education service and facility expenses from continuing operation decreased by $0.8 million with 3.7% to $21.7 million for the quarter from $22.5 million in the prior year period. General and administrative expenses for continuing operation decreased by $3.5 million or 13.2% compared to $23.1 million for a three months ended June 30, 2016 from $26.6 million the prior year period. These reductions reduce expenses were driven by a variety of factors including reduction, salaries and benefits mainly due to lower healthcare claims, the closure and consolidation for certain facilities, the decrease and bad debt expense from improved historical collections and a shift in student population. Now let’s move to continuing operations for the second quarter with smaller by over 50% as compared to the second quarter of last year to $2.7 million or $0.12 per share, excluding the transitional segment the second quarter’s net loss from continuing operation decrease to $1.6 million as compared to $3.4 million in the prior year period. In addition, the net loss from continuing operations includes $0.2 million of additional depreciation from the reclassification of our campus out of held for sale and $0.3 million of additional rent from the modification of our lease. Both of these costs were not incurred during the comparable period in 2015. Now moving on to the second quarter segment results. Our transportation and skill trade segment revenue was $41 million for the three months ended June 30, 2016 as compared to $42.4 million the prior year period, primarily driven by a7% decline in average student population. Average student population decreased to 6,500 from 7,000 in the prior year period. However, operating income only decreased by $0.4 million to $2.4 million versus $2.8 million as a result of general cost reduction such as administrative salaries and benefits. As previously mentioned, this quarter’s operating income of $2.4 million includes a $0.2 million of additional depreciation expense from the reclassification of campus out of held for sale and $0.3 million of additional rent from a modification of a lease which was not present in comparable period of 2015. Excluding these expenses, operating income increase slightly at a $2.9 million compared to $2.8 million the prior period. Our transitional segment which for the quarter ended June 30, 2016 consists solely of our Hartford Connecticut campus had revenue of $0.9 million for a three months ended June 30, 2016 as compared to $2.3 million the prior period, mainly attributed to the closing of our Fern Park campus during the first quarter of 2016 and the suspension of new student enrollments of the Hartford campus effective during the fourth quarter of 2015. Our corporate and other segment expense decreased by $1.1 million to a $4.1 million for the three months ended June 30, 2016 from $5.2 million for the price comparable period. The decrease in corporate expense was primarily the result of lower salaries and benefits [indiscernible] healthcare costs, management efforts to meet our long-term student and financial objectives. Now lastly our healthcare and other professional segment on the discontinued operations significantly improve this operating results for the second quarter of 2016 compared to the same period in 2015. Currently the operating was decreased by $1.4 million to $0.4 million from $1.8 million for the second quarter of 2016 to 2015 respectively. As Scott mentioned earlier, as a result of selling our primarily Florida facility for $15.9 million of gross proceeds, we intend to use approximately $10 million of the proceeds to reduce our term loan and the remaining low increase working capital. Let’s now turn to the balance sheet and cash flow for the quarter. We finished the quarter with $37.8 million of cash and cash equivalents and restricted cash. Of this total, $28.6 million is restricted cash. During the quarter we use an operating activities, $9 million in cash and $18 million for the six months. The utilization was comprised of our net loss of $2.9 million lease termination fee in connection with Fern Park Florida campus, $0.7 million loan modification fee paid to the company’s lender in relation to our amendment of our term loan agreement and $0.7 million of severance is paid during the six months ended June 30, 2016. In addition, the decrease in the Company’s cash position is reflective of the seasonality of the business, the reduction of revenue, and the timing of Title IV funds received. Due to the seasonality of the business, the Company expects to increase its cash position during the second half of the year to a position in excess of our term loan repayment obligation by year end. Finally, we are reiterating our previous provided guidance for 2016 as follows; first we reframing our expectations to fully exit to transitional segment and reduce the losses incurred through the timely closure of the Hartford Connecticut campus by year end. Second, we continue to expect revenue from the Transportation and Skilled Trades segment to decline by low to mid-single digits, on a percentage basis, compared to 2015’s revenue from this segment. Lincoln anticipates ending 2016 with approximately the same student population level at the beginning of the year in our Transportation and Skilled Trades segment. Third, we continue to anticipate generating slightly positive net income for the year from continuing operations excluding the transitional segment. The profitability outlook includes a non-cash gain in 2016 of approximately $6.6 million relating to a lease amendment. Fourth and lastly, we anticipate year-end cash position net of our term loan repayment obligation, positive cash position. With that, I’ll turn the call back over to the operator so we can take your questions. Operator?

Certainly. [Operator Instructions] And our first question comes from Alex Paris of Barrington Research. Your line is open.

Good morning, guys.

Good morning, Alex.

Good morning.

Congratulations on the quarter. It’s nice to see that transportation segment make the turn I had forecasted slight declining had a very, very slight increase but still do you think that will be sustained going forward that you – I mean I think almost mathematically it has to be sustained in order to get to the 6,600 students that you started the year with, right?

Yes, I guess the question is of timing in those quarters means tough to know exactly what will happen in the next quarters, but yes you were right, we are anticipating some growth overall as well as just some improved retention in other things that will help get us to that population number.

Okay. You mentioned Scott the – one of your initiatives for 2017 is to expand the high school admission team because you’ve had good results so far this year. I realized this is sort of the prime recruiting time for high school in the summer leading up to the fall. How do you measure those good results at this juncture, is that leads, is it conversations, is it conversions, is it applications?

Yeah.

And then also related to that, what is the size of the high school admissions for this year versus last year?

Sure, good questions. So we’ve had some high school starts already in the second quarter and the starts that we’ve experienced have been greater than the prior year. As we look to basically our largest starts come in August and September and we’re seeing some good indications there. So when I say that is performing well I’m looking at something that’s going to be let’s say flat overall for the year, but when I look at what are our opportunity is and how we have do markets to go into I can increase our rep force which we’ve already hired up for and go into new markets and grab more market share and get greater penetration. And basically we’ve increased the rep force from about 75 reps up to about 85 reps for next year. So that should give us a good bump given all the other changes we’ve made in our high school sales force, so I think that will be a good source of opportunity for us, just put in context as just the transportation and skill trade segment, the high school represents about 30% of our total starts in that segment.

Okay, good. So 75 going to 85 for next year, how does that 75 compared to last year, is it similar number?

It’s down a little bit.

Okay, thank you for that. And then a question on the sale of the Florida facility. Florida is one of 17 facilities, 17 schools, but as I recall it’s the only one that you own the rest release, is that correct?

That’s correct, within that segment.

Yeah. And then given your comments that you had been hopeful to sell them in one transaction, this transaction obviously suggest that it’s going to be as you said more than one transaction. It’s taken eight months to get to this point or so since you announced it.

Yes.

Is part of the length of that trying to get it done on all one transaction now coming to the realization that it’s going to be more than one transaction? And then with that signal maybe a faster closing of the balance of the schools?

Yeah, it’s really hard to predict but certainly your first statement is correct and that what we’re trying to sell it as one property, one group, it was more challenging. And as kind of got indications in prospect we could sense which campuses were most in demand. I mean as you know there is some difficulties out there in the financing market that still remains good interest. Most of all though what’s the good news is that segments performing better than it performed last year, so we continued to deliver and find ways to attract more students and create value there. So the good news from my perspective is that whole segments performing a lot better than it did last year and we’ll continue to look at opportunities to figure out ways to maximize the value.

And then how large was the Florida facility in terms of enrollment? Healthcare in total you had 3,700 students at the end of last year?

Yeah, so the – that facility currently only has about 400 students and probably about 100 and – as I’m looking at the wrong one Brian?

No, no you’re right.

Yeah, so 400 students and probably about 125 of those are in the automotive HVAC programs which is what we’re keeping.

All right. So where will those automotive students be taught after your lease term expires I mean next year, you have another facility for them to move to?

They are already in another facility, we have multiple facilities at that location.

And we own the other facility as well. It’s a smaller facility.

Okay, all right, got you.

So basically what we’re doing is teaching out some programs and keeping other programs. But at the same time selling off some of the real estate for those affiliated with those programs that we’re teaching out.

And then I would assume the balance of the schools the other 16 which are not owned but leased were either be sold as a business or taught out because of no reasonable buyer for that business?

That is all possibility.

Okay, that’s helpful. Thank you very much. I’ll get back in the queue.

Okay, thanks Alex.

And our next question comes from Doug Ruth of Lenox Financial Services. Your line is open.

Brian and Scott, congratulations on getting the students starts to increase, that was a tremendous achievement for you.

Thanks Doug, we appreciate it.

The Indianapolis campus was really challenged last quarter, how is that doing at this time?

Well, it’s still a little bit challenged. We have new leadership in the admissions area which is providing some stability but obviously it’s tough to turn this around within three months. But I think that were certainly on our way in the right direction.

Okay, so it’s moving into right direction.

Correct.

The term loan that you have, what is the size of that?

Well, right now it’s approximately $44 million.

Okay, so it’ll drop down to $34 million if the real estate sale goes through?

Correct.

And then can you give us – I think you gave us a little bit of broad, but could you maybe give us a little more color on the – what is the interest in the other healthcare properties and what is the sort of the general status of the state of the industry?

Sure. I don’t really go into too many specifics Doug, but what I can tell you is that first of all the schools are performing well which you can see from the results. There is definitely interest in the schools but I think as you also can be aware of the ability of individuals to get financing is challenging. And therefore things take a little bit longer and maybe we originally thought but again there are good schools, good assets performing well and so I’m confident of their long-term value and liability.

Okay. When you look at the skill trade and transportation segment, do you see any pockets of strength there that any area that you seem to be having more success with?

No, there is really nothing that really stands out as far as really dragging it down or making it more successful. I mean the areas that do poke up or really all around I think management and making sure you have the right teams in place, but I can’t say there is one pocket of the country performing particularly better or worse than another or one program particularly performing that much better or worse than another.

Okay, well you made really good progress. Congratulations on that and then thank you for hosting the call today.

Thank you, Doug.

Sure, thanks Doug.

And then I’m showing no further questions at this time. I’d now like to turn the call back over to management.

Great. Thank you all for your continued interest and support in Lincoln. We continue to manage to maximize our results in the short-term while letting the foundation for long-term growth. I thank all of my fellow employees for their dedication and determination to serve our students and deliver the quality education and opportunity that has sustained Lincoln for more than 70 years. I’m sure that there’ll be bumps in the road ahead but I’m confident that Lincoln is positioned to stay on course. Thank you again, I look forward to updating you during our third quarter call. Have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.