Lincoln Educational Services Corporation (LINC) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Lincoln Educational Services Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Doug Sherk. You may begin, sir.

Thank you, Norma, and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its release, reporting the financial results for the first quarter ended March 31, 2018. 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 Lincoln's management regarding the company's business that are not historical facts may be forward-looking statements as that term is identified in the federal securities laws. 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. 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 -- that should be 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 discussed 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. 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 first quarter operating and financial results as well as recent corporate developments. With me today is Brian Meyers, Lincoln's Chief Financial Officer. It's been about 2 months since we last spoke with you, and we've had a solid start to 2018. On a same school basis, we generated 1.5% revenue growth. Our interest costs declined dramatically as a result of the new credit agreement put into place a year ago. Moreover, we achieved increased starts in both segments for the second quarter in a row. Increasing our population and finishing the year with more students than what we started with is a key objective in returning to profitability. With increased starts and higher retention of students, we are clearly on our way to achieve this goal. Our improved performance is a testament of our team's persistent hard work and dedication. The results we reported today are ahead of our internal plan and have enabled us to reiterate the previously provided guidance for 2018, which Brian will review in more detail during his prepared remarks. One of the drivers behind our improved student starts has been the corporate partnerships we formed over the past several years with the likes of Audi, Fiat Chrysler, Haas Automation and BMW MINI. Increasingly, companies are looking to us for our expertise at both recruiting candidates into our curriculum designed to meet their specific training needs and then executing that curriculum. The end result of these partnerships has been high graduation rates, high graduate employment rates and a high return on investment for our graduates, our partners and Lincoln. We've broadened our partnership model this year, and in January we entered into a new partnership with Hussmann, a Panasonic company and a manufacturer of medium and low-temperature display cases in refrigeration systems. As we reported to you back in February, Hussmann is building an advanced refrigeration training center on our Grand Prairie campus, and our HVAC graduates from around the country will be trained for Hussmann careers. Additionally, Hussmann will cover not only the tuition but also room, board and transportation. This partnership illustrates the broad-based relationships we are developing with corporate America and has highlighted the dire need of employers to find solutions to their aging and retiring work force as well as staff-expanding operations. The first class under this partnership is scheduled to start in June of this year. In addition, in April, we announced a new partnership with Johnson Controls, a global leader in creating intelligent buildings and energy storage. The partnership involves expanding career opportunities for Lincoln graduates and Lincoln's assistance to building the Johnson Controls skilled workforce. Graduates of our HVAC and EEST programs throughout the country will have the opportunity to pursue careers with Johnson Controls, which is assisting Lincoln in recruiting students for the programs. Johnson is providing training equipment and sponsoring classrooms at 10 Lincoln campuses. I'm proud to announce today our third corporate partnership of 2018, which is with Bridgestone Retail Operations. This agreement will primarily focus on student recruitment and branding. Our dedicated Bridgestone account manager will work closely with Bridgestone to facilitate the hiring of Lincoln graduates into automotive technician positions within Bridgestone locations throughout North America. Meanwhile, the skill shortage continues to reach crisis proportions for employers in many regions of the country. And as a result of our 70-plus years of experience as well as our more recent successful execution of a variety of different corporate partnerships, we continue to be approached by other companies facing similar challenges. To date, the partnerships have been developed with the Transportation and Skilled Trades segment of our company. We are exploring partnerships for our Healthcare and Other Professions segment, but for the short term, our growth opportunities for this segment are focused on meeting workforce needs. While we did experience year-over-year growth in new student starts on a same school basis during the first quarter, we also faced several challenges, which impacted our growth. Weather forced the closure of numerous campuses during the quarter at a rate significantly higher than last year. For instance, we lost a total of 91 days to weather during the first quarter of this year as compared to 51 days in 2017 on a same school basis. We believe, this adversely impacted the number of campus visits and admissions appointments as well as reducing the number of potential referrals. We also experienced some drag in the number of media starts during the quarter due to reduced efficiencies and less-than-anticipated growth in the lead flow from our search engine optimization initiatives. This was caused when the largest search engine altered their search algorithms at the beginning of the quarter, which reduced the organic and branded lead flow through our website. We quickly adjusted the website's content and structure to meet the new specifications, which resulted in a return to budgeted site traffic and lead flow by the end of the quarter. We believe that this headwind has been eliminated as the second quarter progresses, and despite these challenges, we were able to achieve growth in both segments. We are also continuing to implement the marketing investments that I reviewed with you back in February. We've changed certain vendors, increased investments in strategic areas and improved our system's processes and efficiencies. The new TV advertising campaign focusing on inspirational, informative and humorous themes targeting millennials has been successfully running in support of our Transportation and Skilled Trades programs since early first quarter. The new creative, combined with our more localized and highly targeted media buys using traditional broadcast as well as digital and social media channels, has allowed us to achieve greater visibility and brand awareness. We also believe that the increased year-over-year advertising spend during Q1 has provided momentum that will continue to pay dividends in Q2. And we've seen this to date with increased lead flow in April. In the meantime, we are currently working on expanding the new ad campaign to also encompass and support our various Allied Health programs as well as additional Transportation and Skilled Trades programs. As a result of these initiatives in our first quarter starts, we believe -- we continue to believe that for the first time in many years, overall starts from our campuses operating as of January 1st will grow for the entire year. And we believe that, that growth rate in student starts will pick up in the second quarter as compared to a year ago. On the accreditation front, we've been verbally notified by ACCSC of their commission's decision at its May meeting to award our 7 HOPS schools an initial grant of accreditation. While the HOPS schools' current accreditor, ACICS, has regained its recognition status from the Secretary of Education, we have elected to transition these schools to ACCSC, which would enable the company to implement consistent standards across our 22 technical schools. Once we complete the transition to ACCSC, we do intend to launch a new IT program in several of the schools. Also staying on the topic of accreditation, we've been verbally notified by NEASC, the institutional accreditor for Stonington campus, of their intent to issue a show cause directive to the school. At this time, we're not in possession of a letter from NEASC, but our verbal communication with the NEASC staff has been positive, and we'll be able to respond to their request for more information by their next meeting in late June. In summary, our first quarter came in above our internal plan, and we are continuing to execute the initiatives we put in place to continue to grow student starts. Of course, in closely monitoring our plan, we are making incremental improvements to grow our bottom line. At the same time, we've demonstrated an ability to carefully listen to the market place, to act on new opportunities, such as the ones being created this year with Hussmann, Johnson Controls and Bridgestone, while we continue to execute for our longer-term partners as well as for our students. We continue to enhance our educational experience, which has resulted in improved retention and more and more of our students are finding employment, as evidenced by improving placement rates. To give you more insight on our first quarter financial highlights and to review our 2018 guidance, I'd like to return the call over to our CFO, Brian Meyers.

Thank you, Scott, and good morning, everyone. I would like to begin my comments with a few highlights that have occurred during the first quarter of 2018. Later, I will discuss the operating performance for the individual segments and briefly review the 2018 guidance. First, revenue on a same school basis was up approximately $900,000 quarter-over-quarter. As a reminder, we completed all campus closures as of December 31, 2017, which means for the first time in several years, we do not have any closing campus expenses. Second, student starts on a same school basis were up 2.2% over the prior year. I am pleased to highlight that both segments exceeded prior year and are demonstrating positive momentum. The third, although we started 2018 with approximately 130 fewer students than in 2017, our increased marketing investment, combined with our operational initiatives, successfully made up this shortfall. As a result, by the end of the first quarter, our ending population had grown to the same level as in 2017's first quarter. Now turning to our segment performance for the first quarter of 2018. Before I begin, I would like to mention that during the quarter, we reclassified our Marietta, Georgia campus from the Healthcare and Other Professions segment to the Transportation and Skilled Trades segment. Since the majority of student concentration is currently enrolled in Skilled Trades programs, we believe the change was appropriate and in line with our segment structure. With that in mind, I'll begin our financial results. Our Transportation and Skilled Trades segment revenue decreased to $42.7 million for the quarter as compared to $43.2 million in the prior year quarter. The decrease in revenue was a result of a 2.2% decrease in average student population, driven by lower carrying population of approximately 300 students. Partially offsetting this reduction was a 1.3% increase in average revenue per student mainly from tuition increases. Student starts for the quarter increased slightly compared to the prior year comparable period. Operating income was $700,000 for the quarter, as compared to $1.9 million in the prior year. The decrease was mainly due to the selling, general and administrative costs, which increased by $600,000 over the prior year due to increased marketing investment, primarily directed at future growth. Now a very strong results from our Healthcare and other Professions segment. Revenue increased by $1.3 million or 7.3% to $19.1 million for the quarter as compared to $17.8 million in the prior year. The increase in revenue was a result of a 4.6% increase in average student population, driven by an increase in carrying population of approximately 150 students and a 2.5% increase in average revenue per student. Additionally, student starts for the quarter increased 5.5% compared to the prior year comparable period. Operating income was $200,000 for the quarter as compared to $300,000 in the prior year. The decrease was mainly due to selling, general and administrative costs, which increased by $1 million over the prior year, driven by $600,000 of additional marketing investment and $400,000 of increased administrative expenses. Lastly, the Transitional segment, as mentioned earlier, do not have any operating activity during the quarter. However, revenue and operating loss for the quarter of 2017 was $4.3 million and $600,000, respectively. Corporate and other costs decreased by $200,000 to $7.3 million for the quarter from $7.4 million in the prior year. The decrease in costs was primarily driven by reduction in salary and benefits of approximately $400,000, partially offset by a loss on sale of assets of $100,000. The loss on sale of assets relates to a catch-up depreciation expense in connection with the building previously classified as held for sale during 2017 but reclassed to held for use as of January 1, 2018. Finally, our 2018 guidance. We are reaffirming our previously disclosed guidance, which includes the following. First, we anticipate revenue to increase by low single digits compared to the prior year, excluding the 2017 Transitional segment. Second, student starts are expected to increase by low single digits compared to the prior year, excluding the 2017 Transitional segment. Third, we expect 2018 operating income to be in the range of breakeven and a loss of $3 million. Fourth and last, we continue to expect our 2,000 year-end population to be greater than prior year. With that, I'll now turn the call back over to the operator so we can take your questions. Operator?

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

I have a few questions that have arisen out of your prepared comments. First off, ACCSC verbally informed you for the 7 HOPS schools. I presume then you'll get it in writing. How soon will you be able to launch new programs under ACCSC?

Alex, it will probably take a couple of months just to go through the process. As you can imagine, they have a lot on their plate, with a lot of the schools going through the process of transitioning over. But I'm optimistic that by the middle of the summer, we should be able to have something out there with the new IT program.

And why IT? It could be any of the programs. It could be anywhere really, right?

It could be, but as we looked at our programs, and we've done a review of the programs also with a third party, it appeared that we were certainly underrepresented with that opportunity in a number of our markets. And from talking to employers and from, frankly, employers and people at the campuses, the program needed to be updated. And so given the strength that's out there, we really think it's a good opportunity for us to get some additional growth. It won't be a huge program for us, but every additional body certainly helps us. And it should be a nice performer for each of those campuses.

Great. And then with regard to NEASC and your regional accredited campus. Show cause, I suppose not a surprise given, if I recall correctly that, that campus loses money. What was the reason for a show cause? Was it a financial responsibility issue?

Yes, it's a financial, exactly, financial issue. And so we'll be meeting with them in June, kind of giving them a clearer picture. As you can imagine, our financials aren't the easiest to read and understand given all the changes that have taken place. But also as you know, we've gotten our footing in a good place and things are turning around, so I'm very confident about the future for that campus.

And just give us orders of magnitude idea. How big is that student -- is that campus in terms of either revenue or enrollment or however you want to characterize it?

Sure. It's around 400 students.

Okay. 400 of your over 10,000 students.

Right.

And does that come in under Healthcare and Other Professions?

Yes, it does.

Okay. Next question, unrelated. The altered algorithm, the adjustments to your website, just to make sure I have that clear. You -- after the changes, you returned to sort of budgeted traffic and lead flow by the end of Q1, is that what you said?

Yes, that is correct. They made an adjustment, which they thought would be helpful. But basically, without getting too far into it, it started pulling up a lot of information from all the closed schools that we have, and it was kind of confusing the marketplace. Needless to say, once we figured out what the issue was, we got it corrected and things are back on track.

Okay. Would you be willing to give me some sort of idea in terms of where your leads come from, categories like SEO, TV, et cetera, et cetera, like percentage of lead flow?

I can just tell you that the bulk, meaning, like 75%, are through the Internet.

Okay. And then...

Because it's always tough to describe what TV is actually doing for you Alex, as you know.

What's that? Oh, yes, yes. Exactly. I mean, TV is meant to just drive folks to the Internet, right?

Correct, correct.

So it will become a lead that way. All right, and then, starts. Congrats on the positive starts and then your reiterated guidance for the full year of positive start. It also sounds like you said that starts will pick up in the second quarter. So maybe sequential year-over-year improvement, is that what you said in the prepared comments you provided?

Yes, and that's correct.

Great. Lastly, recasted numbers for each segment historically. Is that going to be available through -- I know it's not a lot, it's a $1 million or so. But it -- was a $1 million in the quarter, it looked like. Are you going to restate -- or make available the restated historical quarters for our earnings models?

Yes, we will, and everything that we put out in the earnings release has a restated at least to first quarter of 2017 versus '18. But yes, we're going to restate all quarters.

Good. It would be nice to have the quarters of last year at a minimum, so -- for projections for this year.

Right.

[Operator Instructions] Our next question comes from Justyn Putnam, of Talanta Investment.

My question is, I think, you mentioned that the first quarter results and progress was kind of above your internal estimates. I was just curious to know, you left the guidance unchanged. Is that just being conservative? Or is there maybe a potential bump in the road further in the year that maybe we should be aware of?

We're unaware of any bumps in the road, but I think it's just prudent for us to maintain the guidance that we have for now.

Okay. And then my next question, maybe a little harder for you to answer, Scott, but I would like to get your thoughts on how you see the environment as we do come toward the end of the year and into 2019. I think having the year-end population being equal to the last year and potentially growing going forward, I think, one thing we would have a bit of a tailwind from an operating leverage standpoint -- or just the headwind you've been fighting for a few years. So how do you see the environment as we come toward year end? Do you see a potential for maintaining growth, accelerating growth? I don't know, I'd just like to get your thoughts on a little longer-term view.

Sure. Well, I think that the environment is, frankly, going to remain challenging. I mean, unemployment rate continues to drop. However, with that said, I think that we feel like we've figured out at least how to drive some incremental growth into our campuses -- excuse me. Despite these headwinds -- I'm not sure what's happening to my voice.

The one thing I'll add while Scott is catching his voice, was by us achieving that -- our guidance of the same -- the carrying population to be at the same level as prior year, our year-end population, rather, that will put us in good footing for 2019. And Scott was talking about our projections for continued still hopefully some modest stock growth there. But that will put us on really good footing for 2019, getting back to profitability. So if we are able to achieve that and we think we will be, we can -- now that we don't have those -- the expenses from our Transitional segment and the closing campuses, we should return to profitability in 2019. And that is our goal.

And just to add a little color, if you want. I do feel despite the challenges of low unemployment rate, more people are talking about what is the value of college and are there other alternatives? It's still a slow ship to turn, but every now and then, even in The Wall Street Journal, you'll see these articles that are popping up. And I have to imagine that it does have some help to us. But it's not dramatic enough. Maybe I have allergies or something, I don't know. It's not dramatic enough to make a big difference. But what Brian summed up is exactly what we're shooting for. We're going to be focused on improving our retention rate, building that population and continue to incrementally move forward, was that is -- will be what we will turn the company around.

Okay. And then one last question for you, Brian. I think there's a fairly significant lease rolling off for 2019 that should help with the profitability picture. Is that true for your Connecticut campus?

Since we lease the dorm.

Oh, yes, yes. That doesn't expire until towards the end of 2019. But you're right. Once -- we have losses over a $1 million for that lease. So once that -- I think it expires in the fourth quarter of 2019. So really, that will pick us up for 2020 more than '19.

Thank you. I'd like to turn the call back over to Scott Shaw, President and CEO, for final comments.

Hopefully my voice will hold out for this one last sentence, but maybe not. Thank you for joining us today. We look forward to updating you on our progress as developments merit. I hope you all have a great day. Thanks again. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.