Lincoln Educational Services Corporation (LINC) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the Lincoln Educational Services First Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Doug Sherk. You may begin.

Thank you, LaToya and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its first quarter 2017 financial results news release. 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 available and 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 as that term is defined in the federal securities law. The words may, will, expect, believe, anticipate, project, plan, intend, 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. The company cautions you that these statements concern current expectations about the company's future performance or events and are subject to a number of uncertainties, risks 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. Factors which may affect the company's results include, but are not limited to, the risks and uncertainties described in the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. 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. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date hereof. And now with that out of the way, I'd like to turn the call over to Scott Shaw, President, Chief Executive Officer of Lincoln Educational Services.

Thank you, Doug and good morning, everyone. Thank you for joining our call this morning to discuss our first quarter financial results as well as corporate development since we last talked with you in March. With me today is Brian Meyers, Lincoln's Chief Financial Officer. I will begin with an overview of our recent operational highlights and progress in achieving our corporate objectives. Brian will provide further details on the quarter's financials as well as our outlook for the current year. Then we'll take your questions. Since we last talked with you a couple of months ago, we've been hard at work executing our strategies to continue Lincoln's move towards consistent profitability. We've made a lot of progress and we're where we thought we would be at this current point of the year. We've now increased starts for our Transportation and Skilled Trades segment for 2 consecutive quarters. We've also maintained operating profit with this segment despite an investment in marketing designed to further advance awareness in student starts. And we continue to partner from within the industry to provide greater opportunities for our students, as evidenced by the launch of the MINI Step program this June at our Grande Prairie campus. The result is that we're reiterating the guidance for the full year that we provided back in early March and Brian will review that guidance during his remarks. I'd like to highlight 2 major actions since our last call. First, the Board of Directors agreed to abandon the company's efforts to divest its Healthcare and Other Professions segment which we call HOPS. Following the decision by the Board of Directors in November 2015 to divest HOPS due to underperformance of that segment, the company underwent an exhaustive process to divest the HOPS campuses which proved successful in attracting various purchasers but ultimately did not result in a transaction that our board believed would enhance shareholder value. When the decision was first made by the Board of Directors to divest HOPS, 18 campuses were operating in this segment. By the end of 2017, we will strategically close 7 underperforming campuses, leaving a total of 11 campuses remaining. Included in the 7 closed campuses I just mentioned are our Brockton and Lowell campuses which we recently decided not to renew leases for after 2017 due to their historical and projected losses. We believe that the closures and planned closures of the aforementioned campuses has positioned this segment and the company to be more profitable going forward as well as maximizing returns for our investors. Since the announcement of the sale of this segment, a lot has changed from the composition of the schools to a change in the government. In short, we were not being offered enough value for the asset and so we're holding onto the schools and continuing to invest in their long term growth. I'd like to mention 2 key points about the HOPS schools. First, Lincoln has always provided its students with a high-quality education in a supportive environment that enables students to be successful. This level of service and commitment has further - was further demonstrated by a group of our LPN nurses from our Northeast Philadelphia campus which we're teaching out. For students who could not complete their education before the school closed, we offered them the option of either a full refund of their tuition or they could wait 2 months and continue their education 40 minutes away at our Moorestown campus. I'm proud to report that 31 of the 36 students decided to stay with Lincoln to continue their education. To me, this speaks a great commitment by our students who want to better their lives and also to great support and engagement by our faculty and staff who make coming to Lincoln a valued experience for our students. Second, I want to highlight growth that we're seeing as a result of our actions. We had 2 cosmetology schools in Las Vegas and we decided to shut 1 down at the end of last year. We felt we could still serve all of the Las Vegas market with just one school but we were unsure as to how far students would travel for a Lincoln education. I'm pleased to report that starts at our Las Vegas campus were up 30% in the first quarter which proves that our decision to close 1 campus was a good one. With a growing population, this campus will become very healthy and strong. One final point regarding our Healthcare and Other Professions segment is subsequent to the board's decision to abandon the divestiture, the results of operations of the campuses, including the HOPS business segment, are now being reflected as continuing operations in the consolidated financial statement. Later in this call, Brian will introduce HOPS segment guidance for the remainder of the year. I think the most important message from that guidance is that we believe that the entire organization and by that, I mean, the Transportation and Skilled Trades segment, the HOPS segment and our Transitional segment, the combined operation will be profitable on a GAAP basis for the remaining 9 months of the year. This would be a positive step forward for this company. The second major action since our last call was the securing of an alternative financing solution that lowers our annual interest costs beginning in 2018 and enables us to meet the needs of our numerous corporate partners and students while providing us resources to pursue opportunities. In March, we completed a new $55 million secured revolving credit facility with Sterling National Bank. The new credit facility which expires in May 2020, replaces the existing $45 million term loan that has been repaid in full and terminated concurrently with the closing of the new credit facility. We did incur some termination costs which impacted our first quarter results which Brian will go through, but the net effect of this new agreement is a significant reduction in our interest costs beginning in 2018. These lowered interest costs illustrate the financial stability Lincoln is achieving is a marked change from the interest costs we were offered just 2 years ago. In addition, after the quarter closed, the company entered into a short term secured term loan in the amount of $8 million which provides the company with additional flexibility to undertake certain strategic initiatives. The loan is secured via mortgage on the company's West Palm Beach, Florida property which is currently under contract for sale for a purchase price of $16.3 million. Upon the consummation of the sale which is due to close in the third quarter, the term loan will be repaid. The remaining proceeds after repayment of the term loan will provide additional liquidity to be utilized strategically as needed. Let me now turn to the progress of our Transportation and Skilled Trades segment. A key component in the positive direction for student starts in this segment is that demand from employers for students remains strong. We continue to lead the charge in solving workforce deficits through placement partnerships, employee training and by offering a curriculum that enables our students with the specific skills that employers demand. We're very pleased with the relationships that we've constructed and expanded on with industry leaders such as Audi, Fiat Chrysler, Volkswagen, BMW and MINI. We currently offer the Audi program at 6 campuses and Lincoln's ability to consistently produce large numbers of high-quality technicians from these programs to meet Audi strong demand fosters this key relationship. Our Fiat Chrysler automotive partnership continues to build. We recently upgraded our FCA technician training levels from 0, 1 to level 2. The upgraded training program is progressing nicely and resulted in Chrysler donating 12 cars to the Mahwah campus in the first quarter. We're seeing that offering higher levels of training is encouraging students to stay enrolled at Lincoln longer while they develop the higher-level skills that will enable graduates to begin their careers at a higher level that is commensurate with a higher wage. Lincoln's corporate partnerships are extremely beneficial to all involved. Graduates from our programs are highly sought out. Our students graduate from Lincoln with the technical skills needed to be top performers in the respective fields. Our partners also express satisfaction with the level of service our team provides, their organization and our campus outreach. In order to continue the growth momentum with the Transportation and Skilled Trades segment, we continue to explore ways to make more potential students aware of the great opportunities that exist in industry and that can be accessed through a Lincoln education. Getting the word out is our biggest challenge and opportunity. Our industry partnerships validate the quality of our education, as do our outcomes. Our facilities have the capacity to train many more students and our employers are seeking more graduates. To help drive more awareness, we stepped up our marketing efforts in the first quarter. Since results from such initiatives are not immediate, we will closely monitor our spending with our results over the next few quarters. As always, if we do not see results that justify the added spending, we will cut back. We're committed to growing our populations prudently. We continue to maintain a very high level of compliance in all aspects of our operations. We meet or exceed all of the current stringent regulatory requirements. Our 90/10 ratio is 79%, well below the threshold. Our composite score's projected to be - expected to be above 1.5 and our 3-year cohort default rate continues to decline with our most recent published rates well below 15% at 12.6%. The strength of these and other compliance ratios demonstrates Lincoln's long term commitment to its students and dedication to providing our graduates with strong returns on their investment. At this time, I'll turn the call over to Brian for a review of the key financial results.

Thanks, Scott and thank you all for joining us this morning. I'll begin my comments with several highlights that have impacted the company during the quarter ended March 31, 2017, then I will discuss some operating financial performance highlights. First, as Scott mentioned, we entered into a secured revolving credit agreement with Sterling National Bank, pursuant to which the company obtained a credit facility in the aggregate principal amounts of up to $55 million. The new credit agreement replaced our old previous term loan which was repaid in full and terminated upon approval of our new revolving credit line. Second, on March 14, 2017, the company entered into a purchase and sale agreement to sell 2 of 3 properties located in West Palm Beach, Florida for a cash purchase price of $16.3 million. In addition, in April, the company executed on a short term secured term loan of $8 million relating to 2 of the 3 properties located at the West Palm Beach facility that are on the contract to be sold. Proceeds received from the mortgage will provide additional flexibility for the company and are expected to be retired with the proceeds from this sale. Third, as Scott detailed, the Board of Directors has abandoned the plan to divest our Healthcare and Other Professions segment. The results of this decision is that the operating results of this segment have been moved from discontinued operations and are now being reflected as part of our continuing operations on the profit and loss statement. Continuing operations are now comprised of our Transportation and Skilled Trades segment, our Healthcare and Other Professions segment, our Transitional segment and lastly, Corporate. The Transitional segment refers to operations that are closed or are currently being towed out. For the first quarter of 2017, this segment consisted of 5 campuses, Northeast Philadelphia, Center City Philadelphia, West Palm Beach and our Brockton and Lowell campuses. Now I'd like to review some of our operating financial highlights for our first quarter. Our first quarter year-over-year revenue decline of $5.5 million was mainly due to our Transitional segment which accounted for approximately 80% of the decline due to the suspension of new student starts at our Transitional campuses. In addition, we noted reduced revenue in our Healthcare and Other Professions segment which is mainly attributable to a lower carrying population for the quarter as well as a change in program mix which had adversely impacted revenue. Student starts - student start results for the quarter decreased by $11.6 million with our Transportation and Skilled Trades segment showing growth of 3.9%. Our Healthcare and Other Professions segment was down 10.1% after an increase of 6% in the fourth quarter of 2016. And our Transitional segment was down 71.2% quarter-over quarter. Education service and facility expenses decreased by $4.4 million to $32.7 million for the quarter from $37.1 million in the prior year comparable period. The decrease in costs were the results of our Transitional segment. Selling, general and administrative expenses decreased by $1.8 million to $38.3 million for the 3 months ended March 31, 2017, from $40.2 million in the prior year comparable period. The primary cause of the decrease was due to the Transitional segment which accounted for approximately $3.3 million in cost savings as these campuses prepare to close during the year ended December 31, 2017. Partially offsetting these cost savings are increasing spending from marketing of $0.8 million and a $0.3 million increase in bad debt expense. Interest expense for the quarter had increased 5.2 - increased to $5.2 million from $1.6 million in the prior year comparable period. The $3.6 million increase is mainly due to the write-off of noncash cost of $2.2 million that were expensed for the quarter pertaining to the previous term loan agreement. Further, because of the retirement of the previous term loan and the early termination fee of $1.7 million was also paid during the quarter. However, as Scott had mentioned, the termination of the term loan will allow the company greater flexibility in pursuing opportunities and should yield cost savings of approximately $3 million in the form of reduced interest expense going forward. Now focusing on our first quarter segment financial results. Our Transportation and Skilled Trades segment revenue was $42.2 million for the 3 months ended March 31, 2017, as compared to $42.3 million in the prior year comparable period. Student starts for the 3 months ended March 31, 2017, were up 3.9% and this segment saw 2017 with approximately 100 more students than it had on January 1, 2016. Revenue was mainly - revenue has remained essentially flat quarter-over quarter, mainly due to the underperformance of one campus. Operating income for the Transportation and Skilled Trades segment decreased by $1.3 million to $2.1 million for the 3 months ended March 31, 2017, from $3.4 million in the prior year comparable period. The decrease was due in part to increased marketing spend to help stimulate student population and increase brand awareness as well as an increase in administrative salary and benefit expenses resulting from the reallocation of regional administrative salary expenses. Our Healthcare and Other Professions segment revenue was $18.8 million for the 3 months ended March 31, 2017, as compared to $19.8 million in the prior year comparable period. The decrease in revenue can mainly be attributed to a lower carrying population of approximately 100 fewer students than we started with in the prior year which resulted in lower average population for the 3 months ended March 31, 2017. In addition, student starts were down 10.1% for the quarter and average revenue per student was down 2% quarter-over quarter. The decrease in average revenue per student is primarily the result of a shift in program mix. I would like to note that the student starts for this segment increased 6.6% in the fourth quarter. Operating income for the Healthcare and Other Professions segment was $0.2 million for the quarter as compared to $1.8 million in the prior year. The decline was the result of several factors, including a decrease in revenue of $1 million quarter-over quarter, 0.4 - $0.5 million increase in marketing expenses and a $0.2 million increase in administrative expenses, primarily the result of increased bad debt due to the timing of collection of Title IV funds received during the quarter. Our Transitional segment had revenue of $4.3 million compared to $8.6 million in the prior year comparable period. The revenue decline was largely due to the closing of campuses and the suspension of new student enrolments at campuses within this segment. Operating loss for the Transitional segment decreased to $0.6 million from $3.6 million in the prior year comparable period. The decrease is primarily attributed to a decrease in expenses due to the suspension of new student enrolments and a declining student population. Let's turn now to the balance sheet and cash flow for the quarter. We finished the quarter with $19.9 million of cash, cash equivalents and restricted cash. This was compared to $47.7 million of cash, cash equivalents and restricted cash as of December 31, 2016. The decrease in our cash balance is mainly the result of our net loss during the 3 months ended March 31, 2017, refinancing of our credit facility which lowered our - which resulted in a lower debt outstanding and the seasonality of our business. Now let's turn to guidance. We're reaffirming our previously disclosed guidance provided in early March as well as provide updates subsequent to the decision to abandon the plan for the divestiture of our Healthcare and Other Professions segment. The previous provided guidance reiterated today includes, first, the company expects to achieve positive operating income with the exception of closed campuses for the entire year; second, for the year, the company expects to achieve low single-digit revenue growth in the Transportation and Skilled Trades segment; third, we expect to complete the planned teach-outs of our Northeast Philadelphia, Center City Philadelphia and our West Palm Beach campuses in addition to our Brockton and Lowell campuses in 2016. In addition, we would like to introduce of the following new guidance, first, we anticipate to achieve net income for the remaining 9 months of the year; second, for the full year, the company expects the Healthcare and Other Professions segment's revenue to be flat to low single-digit decline. With that, I'll now turn the call back over to the operator so we can take your questions. Operator?

[Operator Instructions]. The first question is from Alex Paris of Barrington Research.

This is Chris Howe sitting in for Alex Paris. My first question was in regard to the Transportation and Skilled Trades segment. In the prepared remarks, you had mentioned industry stabilization as a contribution towards the growth in new student starts. Could you provide some additional color on your current outlook for this segment? And more specifically perhaps, what your expectation for student starts would be for the full year 2017.

Sure, Chris. This is Scott. Again, we're seeing strong demand certainly by our employers out there. And given our mix, the programs that we're offering, we're anticipating to see a low single-digit growth in starts in our Transportation and Skilled Trades segment for the year. So we had growth in the fourth quarter. We had growth again in the first quarter. And given our initiatives again, we expect to see growth overall for the segment going forward.

Okay, that's helpful. And could you provide some color on the successful marketing initiatives that were implemented for the one underperforming school within the segment? And is this campus set up for the remainder of the year? Or do you anticipate investing more into their marketing spend? And generally, how do you anticipate marketing spend playing out for the remainder of the year?

Sure. So yes, as we've mentioned in the past, we've had one troubled automotive campus, the Indianapolis campus and we have made lots of changes there. It's really a combination of people as well as resources. And we're pleased in that, the first quarter from a number of quarters of declining enrolments, that their enrolments increased and we forecast that to continue going forward. And so it's really a combination of getting the right people on board as well as getting the resources spent properly to make students aware of the opportunity. As far as overall, as I mentioned in my remarks, we did increase marketing in the first quarter and it takes a while to see the benefits of that increase in spending. And what we'll do is continue to look at it and monitor it going forward. And if we see continued results, we will continue to make prudent investments. But at the same time, if we feel like some of the changes that we're making, looking at new avenues, whether it's social media or other venues, if we prove - we think that they're not being as productive as we thought, then we'll cut back.

And as far as the mix of campuses, is that currently optimal at this moment? In other words, do you anticipate any additional teach-outs in 2017? And for the 11 remaining campuses within the HOPS segment, is there the potential to add more campuses?

Well, yes, our objective is, as you can tell by looking at our financials, things are quite complicated. We're anticipating going into 2018 with a clean slate. No more closings and then no more major changes so we can have a much more stable organization as well as have clean financials. So at this time, the 11 HOPS schools are going to remain as they are. Sure, we will constantly look at opportunities at both segments to evaluate campuses for the long term, what makes sense. And if we see opportunity to expand in certain markets, that is certainly something we will evaluate. But as of right now, it's really taking what we have and strengthening it for the long term.

Okay. And this will be my last question and then I'll hop back in the queue. In regards to the last West Palm Beach facility, can you comment on that sales process? Do you expect it to close this year or is it still too early to tell?

No, it's scheduled to close. I think maybe Brian mentioned it.

Yes, it's scheduled. The third West Palm Beach campuses, the students are going to be added a facility in September.

Are you saying close of the sale or close of the school?

As far as the sale, you had mentioned that 2 of them are...

Yes, so that sale we're anticipating should close in the summertime. I'm anticipating that to happen. As you may recall, we had an opportunity last summer to close on one. And at the last minute, it didn't happen. But all is looking very good for this one. So I don't want to jinx ourselves but hopefully by the summertime, we'll be able to announce something there.

The next question is from Eric Landry of BML Capital.

So you mentioned there was $8 million from the loan from the Palm Beach sale that was going to be used to undertake certain strategic initiatives. Is there anything you could add to that? Is this more marketing or is it possible expansion somewhere else?

No, I mean, it's really basically - we have an opportunity to sell the West Palm Beach campus and so we weren't really focused on it as part of our new credit facility. But again, just to build in some, I'll say, conservatism or prudence, our lender said, "Hey, well, why don't we also mortgage that property? If the sale goes through, it'll be very short term loan. If the sale doesn't go through, then maybe we'll have some conversations to extend it." So it's really just trying to bring some additional liquidity for our business overall. There's nothing imminent that we'd be using it for.

Got you, okay. And the third building is quite a bit smaller than the 2 that are now sold, correct?

Correct. Well, they're not sold yet. We have an offer to buy them.

Right, okay. And is that third building going to be sold then once the campus closes?

It's up for sale, so it's up for sale now. It's a smaller facility. I think it's appraised at around what?

Yes, it's appraised a little - slightly over $3 million. I think it's $3.2 million. But there is interest in that building and it's currently being shown.

Okay. I got you, all right. So how many of the HOPS campuses are profitable of the 11 that remain? Are they all profitable now?

No, 7 of the 11 are profitable, 4 are not.

Okay. And of the Transportation, all but one are profitable?

That is correct.

And the next question is from Douglas Ruth of Lenox Financial Services.

I give you a lot of credit for being able to adjust the business model. I know it's not been easy for anybody there at Lincoln.

Thanks, Doug. I appreciate it.

Okay. Could you give us a little more color about the marketing? We - in the old days, we advertised on the television and in the newspaper and now I think you're really doing a pretty good job trying to connect with the students. Could you tell us some - I see the website is constantly being updated and I thought that some of these initiatives are pretty good. Are you able to offer any commentary?

Sure. I mean, we spend a lot of time thinking about marketing and what we're doing. And as you say, it certainly has changed a lot over the last 10 years and then again over the last 5 years. So it's a mix of things, Doug and we're constantly trying to tweak it to figure out what works best and it can vary from quarter-to quarter. So we still do some TV advertising. I get your brand out there. It makes people aware of what the opportunity is. TV is a lot less than what it has been in the past but still a broad-based medium that we're using. But at the end of the day, it's always difficult to attribute starts specifically to TV because they watch the ads and then, needless to say, everyone goes online to learn more. So we spend the bulk of our dollars on web-based type activities to drive people to our website, to do banner ads, to do other things to make people aware, as they're on the Internet, of what we have to offer. In addition to that, needless to say, social media is becoming a bigger role. We've been doing a lot of activities in social media, frankly, that don't require dollars, just having presence of our campuses and our students involved in social media to get the name out. But we're also exploring and trying to see which other venues in social media we can apply dollars to, to get a bang for a buck. It's very difficult to determine at times. Some of these things are new to us [indiscernible] where students are actually hearing about us can be difficult. But those are some of the new areas that we're looking into. Also, another area that we've done recently, it kind of builds off the social media. We have a partnership with Schmidt Peterson racing and Dave generously enabled us to have at 6 different races, student - 1 student and 1 faculty member be basically mentors for the weekend in the pit. And it's been a great event so far. We've had three races with three faculty members and three students. The students compete across the campuses to get this opportunity. And while they're there about the races, they are making movies, they're posting what they're doing and we're getting lots of engagement at the campus level as well as, hopefully, through other people. So we will continue to explore and try to maximize the opportunities that are out there. Our biggest frustration is we love what we do. We know we have a quality of product. We have employers coming to us. It's just really how do we make more people aware of the opportunity. And so we'll continue to explore and try new things to make more students and parents aware of what these careers can mean.

Yes. We just hear constantly that there's a shortage of people in the skilled trades but we're just struggling to connect and it just seems like the opportunity is so huge for the company. And I commend you for what you're doing and thank you for doing what you're doing.

Thanks, Doug. Really appreciate it.

And at this time, I'd like to turn the call back over to Scott Shaw for closing remarks.

Well, thank you, operator and thanks to everyone for participating in our call this morning. We continue to position Lincoln towards sustained profitability while offering the superior educational programs our students have come to associate Lincoln with. We're continuing to make progress in these objectives and we look forward to updating you on our advancement as developments occur and talking with you again in August. Have a great day. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.