Lincoln Educational Services Corporation (LINC) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Lincoln Educational Services Q3 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we'll 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 Doug Sherk. Mr. Sherk, you may begin.

Thank you, operator and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its third 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 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 projections 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 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 call to discuss our third quarter financial results as well as corporate development since we last talked with you in August. With me today is Brian Meyers, Lincoln's Chief Financial Officer. This morning we reported improved operating income for our total company excluding the transitional segment on a year-over-year basis for the quarter. We continue to execute our plan of strengthening our core asset while closing and divesting underperforming campuses. By the end of this year, we will complete the closure of our last two campuses and will enter 2018 without our transitional segment. This is a great accomplishment for the company and will make our financial statements much easier to follow in the future. As we've highlighted in our prior calls, we continue to operate in a challenging enrollment environment, while demand by employers is extremely strong and appears to be growing, the low unemployment rate means that fewer people are looking to switch careers or start a new career. With that said, our opportunities are tremendous. The silver tsunami of baby boomers retiring and increasing rate without new trained employees to replace them continues to face our country. Every month new employers are coming to Lincoln and asking us to help them with their workforce needs and from all that we've studied this need will continue to grow as more companies struggle to find their next generation of skilled employees. The common theme among the employers is that they cannot attract enough interest in their opportunities and they cannot attract enough people with the skills to be effective. Needless to say, Lincoln is focused on addressing both of these issues. The first challenge involves educating students, parents, guidance counselors and other decision-makers and influencers about the great career opportunities in the industries that we serve. Today's auto technician, CNC machinist and LPNs work in very different conditions and with very different tools than they did 20 years ago. The work is more collaborative and the conditions are more high-tech and professional. Additionally, the opportunities to make more than the average American wage are greater. To assist us in conveying this message, we continue to grow and strengthen our industry partnerships, enhance and expand our high school presentation activities and improve and adjust our marketing messaging. To address the second challenge of providing students with the skills that companies demand to be job ready day one, we continue to work with employers to clearly understand what technical and soft skills are most relevant to their workplace. We are constantly incorporating more technology into the classroom so that students are not only more technologically savvy, but also more engaged with the content. In short, Lincoln is uniquely able to meet employer's needs whether that employer is a local doctor's office or dealership or a national HVAC contractor. Back to the quarter, as we discussed during our last call, we experienced a shortfall in our high school recruiting program in the transportation skilled trade segment, mainly due to some organizational changes and a lower start rate. In response to this decline, we took swift action, which helped lessen the impact. Given the seasonality of the high school students, we knew it was going to be a challenge to generate growth from the high schools until we get to the second quarter of next year. So, we capitalized on the diversity of Lincoln in terms of our programs and put in place plans to respond to the situation. As a result of our efforts, while overall starts in the segment were off 2.4% as compared to the third quarter of last year, this decline was significantly less than during the second quarter. In fact, we achieved growth at half of our campuses for the quarter and if we excluded one campus, starts would have been up for the segment. Our starts attributable to our marketing efforts grew in the quarter, which helped to offset the decline in high school. We continue to improve our messaging and look forward to launching a new advertising campaign in the first quarter of next year. In order to grow, we need to help the next generation better understand the opportunities that Lincoln Education provides and we believe the new advertising plan does just that. Meanwhile we've made adjustments with our high school plan which appear to have already taken hold while we're only two months into a 10-month high school season, we are currently running 10% ahead of last year, which is an encouraging sign. One other point, I want to highlight is that our campuses for the most part are diversified. Nine of our 12 transportation schools offer skilled trades programs and we experienced growth in these programs for the quarter. Part of that growth is attributable to increased demand for welding and HVAC technicians, but part is attributable to offering an enhanced electrical program, which we've now rolled out to two more campuses, which will provide growth in 2018. Meanwhile our healthcare and other profession segment student starts were off only 1.7% versus Q3 of last year with eight of the 11 campuses generating gains or HOPS schools are performing stronger than last year with their current population of over 125 students. While nursing remains a very consistent performer, we also achieved growth in culinary and cosmetology. We had several positive developments during the quarter. Our new MINI Step automotive technician program for BMW got off to a very strong start and we've been asked by BMW to double this program's enrollment. We launched our first Gene Haas Center for advanced automation in Indianapolis, which partners Lincoln with the largest CNC machine manufacturer in the Western Hemisphere. To further our leadership position in the CNC training area, the Gene Haas Foundation has awarded Lincoln $0.5 million in CNC scholarships to support enrollment and help meet the employment needs of CNC customers. The opening of the Indianapolis Center attracted a great deal of local media interest and coverage for the campus and our team is working hard to turn that coverage into enrollment interest. We also had some very positive news from the Department of Education concerning our strong cohort default rate performance. As you know, this is an important regulatory measure that tracks the percent of students who have not made a payment on their student loan. According to the Department of Education, the final 2014 overall three-year cohort default rates increased overall for the industry while Lincoln achieved lower rates. In fact, Lincoln's rate of 10.3% was 2% lower than the previous year and is lower than the national average of 11.5% for all schools. Specifically, when compared to other two-year and less schools, Lincoln's performance was approximately 30% better. We are very proud of our revelatory record and will continue to remain focused on exceeding every metric. During the past few years, our team is focused on improving the financial performance as well as the overall strength of the company. One of our efforts has been to improve our flexibility in terms of funding our working capital needs as well as the strategies designed to drive long-term profitability. For instance, nine months ago, we entered into a new revolving line of credit to replace our fixed long-term debt. The new facility enables us to better manage our outstanding debt given the seasonality of our cash flows and this coupled with lower interest rate helps improve overall profitability. Brian and his team have done an excellent job putting this flexibility to work for us as illustrated during the third quarter. With the proceeds from the sale of the West Palm Beach properties and the operating performance during the quarter, we reduced our debt at of September 30 to approximately $17 million from $45 million at the beginning of the year. And in doing so, our interest expense during the third quarter declined by 50% as a result of lower debt level as well the reduced interest rate of the revolver. Last quarter, we spoke about the progress being made to achieve reaccreditation for our seven HOPS campuses that were formally accredited by ACICS. You may recall that last year the federal government decided to not recognize ACICS-accreditation and this meant that these seven campuses were pretty much stymied in terms of new programs and reacting to the market's needs. Our progress with this effort continued during the third quarter and we anticipate transitioning to a new accreditor during the first quarter of 2018. Once reaccredited, we will be able to able to add new programs that fit the needs of our partners in the local markets. In turn, new programs should lead to increased student starts and improved profitability at these HOPS campuses. We continue to be cautiously optimistic about our future and while there are persistent headwinds mainly in the form of strong employment and unbalanced regulatory policies, America's industries are continuing to look to Lincoln to help solve their intense need for skilled workers. Given our diverse program offering to students, probably the most diverse of our peers, we're getting an increasing number of inquiries from corporate America to discuss how we can help meet their labor force needs and we are continuing to provide a very highly prepared student to these employers. Our placement rates remain exceptional and are currently running 3% ahead of last year. Moreover, more employers are providing signing bonuses and excellent starting compensation in order to attract our skilled students. We look forward to increasing our role in providing solutions to both the student as well as corporate America while increasing our returns to our shareholders. Now, I'll turn the call over to our Chief Financial Officer, Brian Meyers, for a review of our financial highlights.

Thanks Scott and thank you all for joining us this morning. I'll begin my comments with a couple of highlights from our third quarter followed by a review of certain operating, financial performance highlights from our operating segments. First on August 14, the company completed the sale of two West Palm Beach, Florida properties, resulting in net proceeds of $15.3 million and a $1.5 million gain for the quarter. The sale proceeds were partially used to repay an $8 million short term loan collateralized by the West Palm Beach properties. Second, the company reduced its debt obligation by $15.5 million from their prior quarter. The repayment of the debt strengthens the company's balance sheet and will lower interest expense into the fourth quarter. As a result of the lower debt outstanding in combination with more favorable terms under the new credit facility, our net interest expense decreased by approximately $0.7 million or 50% quarter-over-quarter. Now regarding the segment's operating financial highlights. Our transportation of skilled trade segment revenue decreased slightly to $47.7 million for the three months ended September 30, 2017 at $47.9 in the prior year's comparable period. The decrease in revenue was properly driven by a 2.1% decrease in average student population, slightly offset by a 1.6% increase in average revenue per student compared to the prior year comparable period. Student starts for the quarter decreased by 74 students or 2.4% compared to the prior year comparable period. The overall decline in student starts was the result of the on the performance of our Indianapolis campus which decreased by 98 students. Excluding this campus, student starts for the quarter would have grown. Operating income for the transportation of skilled trade segment, remained essentially flat at $6.1 million for the three months ended September 30, 2017, as compared to the prior year comparable period. Education, service and facility expenses decreased by $0.4 million, primarily resulting from more favorable lease terms at one of our campuses in addition to reduce depreciation expense driven by fully depreciated assets. Partially offsetting these cost savings are increased cost of $0.2 million in selling, general and administrative expenses. Our selling, general and administrative expenses continue at a high fixed cost component and are not scalable at some of our other expenses. As our student population decreased, we typically experienced a reduction in average class size and therefore are not always able to align these expenses with the corresponding decreases in population. Our healthcare and other professional segment revenue was $18.4 million for the three months ended September 30, 2017 as compared to $18.6 million in the prior year comparable period. The slight decrease in revenue can be attributed to a 2% decline in average revenue per student, due to shifts in program mix and a tuition decrease in certain programs. Student starts for the quarter decreased by 24 students or 1.7% compared to the prior year comparable period. It is important to point out that this segment consists of 11 campuses and despite an overall decrease in student starts for the three months ended September 30, 2017, seven of the 11 campuses showed an increase in student starts. Of the remaining four campuses, one remained flat, two underperformed and the last campus had a shift in start dates into Q4 which lowered starts compared to prior year. Operating loss for the healthcare and other professional segment was $0.6 million for the quarter as compared $0.1 million in the prior year comparable period. This decline was primarily the result of a reduced revenue resulted from the 2% decrease in revenue per student I mentioned previously in combination with the $2 million increase in constructional expenses and a $2 million increase in sales and marketing. Operating loss for the transitional segment was $2.5 million for the three months ended September 30, 2017 from $2 million in the prior year comparable period. This change is primarily attributed to the closing of campuses within this segment. Corporate and other cost decreased by $1 million to $3.7 million for the three months ended September 30, 2017 from $4.7 million in the prior year comparable period. The decrease in corporate and other expenses was driven by a $1.5 million gain from the sale of the West Palm Beach Florida property on August 14 and a decrease in salaries expense of approximately $0.9 million. Partially offsetting these reductions was a $0.9 million increase in benefit expenses and a $0.6 million in closed school costs. The increase in benefit expense was attributed to the historically low medical claims in 2016, while the additional closed school costs related to an apartment lease from the closure of our Hartford Connecticut campus on December 31, 2016. The additional expense related to the Hartford Connecticut campus will terminate with the apartment lease, which ends in September 2019. Let's now turn to the balance sheet and cash flow for the quarter. As of September 30, 2017, the company had net debt of $3 million compared to net debt of $19.6 million as of June 30, 2017. The net debt balance is calculated as the long-term debt, including the current portion less cash, cash equivalents and restricted cash. The decrease in net debt balance was a result of the repayment of debt during the quarter of $15.5 million. Now let's turn to guidance. We are reaffirming our previously disclosed guidance provided in early August. The previous provided guidance reiterated today includes, first for the full year, the company expects revenue to range from essentially flat to low single-digit revenue declines in transportation skilled trade segment and the healthcare and other professional segments. Second, for the full year, the company expects a breakeven or incur a slight operating loss, excluding the impact of closed campuses. Third, the company expects to break even or incur a slight net loss for the last nine months of the year. And lastly, we anticipate the complete teach-out of the remaining campuses classified in the transitional segment. With that I'll now turn the call back over to the operator, so we can take your questions. Operator?

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

Good morning. This is Chris Howe, sitting in for Alex Paris.

Hi Chris.

Good morning, Chris.

Good morning. I had a question surrounding the two campuses at the healthcare and other professions that underperformed as well as the one campus within the transportation and skilled trades. Would you be able to provide just some more color on what happened at these campuses?

Sure. On the skilled trades campus, the issue is really focused around what we've discussed around the high school plan. It's in a market that's more dependent I'll say on high school than on its local or -- than on its local media and we had a shortfall there at that campus and so it seemed impact that one more. And then as far as on the healthcare side, it's really two different schools in two different markets and one of them is our regionally accredited school, which has had a mix of programs. I don't think there is anything of real note as to why it was down. It's just a competitive marketplace and the other one was down I think just because they had such a strong year last year for the comparable period.

Okay. That's helpful. And the one campus in the skilled trades, was that a high school destination?

It was.

It was. Okay. And then last quarter you had mentioned the centralization of the high school recruiting process or the effort going on there. Is that now complete and fully gaining traction?

Yes, yeah, absolutely. We've made changes from how we were operating last year and we've learned a lot in that process and so we now have the team in place, the reporting in place. We have new reports to attract different metrics and they're going to educated on that. And as I mentioned in my remarks, as we look through the first two months of September and October and look at our enrollments, we're running 10% ahead of last year. So that to me is a good sign of the changes that we've made are being effective.

Thank you. And then you had also mentioned previously that I guess simple, free to do or to flip the switch in staying more engaged or increasing an engagement with the students, since they are entering the funnel earlier when it comes to handing out scholarships. And what are you seeing there as it relates to the strong employment market, are you able to retain the students throughout the entire process or how are you working on that?

Yeah occasionally we'll have employers that may try to pick off if your question is about students leaving us early to go to the strong employment market. There are occasionally employers that might do that. We certainly discourage it both for the student's standpoint to finish their education, as well as we don't appreciate from the employer's. So occasionally we do have situations like that, but we're able to manage around it if that was your question Chris.

It was helpful, but it was some comments you had made last quarter just about -- it was in direct relation to scholarships and just how you were able to I guess package the student earlier in the process and staying engaged with them throughout that.

Yes, no, so that's why I was referring to -- maybe there was a change in financial aid, what you can now use as far as the information. So yes, so for last year, we were able to let students know much sooner in the process, what their financial aid package would be. They didn't have to wait for the following year's tax reports to come.

Okay. And then as far as 2018, would you be able to provide any very general color? You had mentioned profitability in 2018 that's still the goal I assume?

Ladies and gentlemen, please stand by. Your conference call will resume momentarily. Speakers you may resume your conference.

Hello, Chris, are you still there, it's Scott Shaw.

I am still here.

Okay. Don't know what happened there, but we seemed to have lost you for a minute. So, I think that you were asking about in the process of new students and getting them packaged and staying in touch with them and I guess also there is a component about the scholarships there and so that whole process is the same as last year, but we certainly have enhanced it. So again, were able to package students much sooner in the process and let them know what their financial obligations are. Obviously, we do give scholarships as well and so that's part of the packaging process and then I guess part of the secret always, since we are able to package them sooner or when the challenge is that just means you have to stay more engaged with the student throughout the process until they start the following summer. And so that was maybe one of the challenges we had last year, which we have now hopefully addressed by more communication and some different activities that we have lined up this year to keep those students engaged and for us to more constantly monitor their progress throughout the financial aid process.

And the one thing I'll add, we were able to as you mentioned flip the switch a little bit in Q3 and also into Q4 we did increase the scholarships, the amount of scholarships that we were giving out to the students and that did help with the start rate as well that we saw in the third quarter and going into the fourth quarter. So, we were able to do that.

Does that answer your question now, Chris?

It sure does. And I was cut off, but the next question was in regard to '20 are there any further transparency that you would be able to provide other than profitability, which I assume is still the target?

Speakers, you may resume.

Hi Bill, it's Scott Shaw. Sorry, not sure what happening with this line, but hopefully we have another line now.

Still here. Hello?

Yeah. I am here. Can you hear us?

Yes. Okay. My next question was just in line with 2018, is there any further transparency that you would be able to provide? I assume that profitability is still the target?

Yes, still the target and it's too early for us to provide any more guidance going into 2018 at this time.

Okay. And then I just have one last little question. You had mentioned the success that you're having at the BMW related program and the goal of doubling enrollment there. What would double enrollment there look like? How many students would that be?

Fair question, it will increase probably from about 30 students a year to 60 students.

Okay. Thank you for taking my questions.

No problem. Thank you.

Thank you. Our next question comes from the line of Bill Nasgovitz with Heartland Advisors. Your line is now open.

Yes, good morning.

Good morning, Bill.

What is your opinion of the [student] education transaction and what effect that might have on Lincoln?

Well I really don't, they're in a different sector than we expect that two big guys are consolidating. Probably makes a lot of sense to a degree that's flat. But I really don't know too much of what their strategy is and what they’ve announced, but let's see how it makes sense.

Okay. Thank you.

Thank you. [Operator instructions] And I am showing no further questions in queue at this time. I would like to turn the conference back over to Scott Shaw, President and CEO for closing remarks.

Thank you, operator. And thank you all for your patience as we had a little technical difficulty there. Again, we appreciate your participation on the call and your support of Lincoln and we look forward to updating you on our progress in early March. Hope you all have a great week. Thanks again. Bye, bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You many now disconnect. Everyone have a great day.