Lincoln Educational Services Corporation (LINC) Q1 2019 Earnings Report, Transcript and Summary

Good morning. At this time, I would like to welcome everyone to the Q1 2019 Lincoln Educational Services Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn today's conference over to Mr. Doug Sherk. Please go ahead.

Thank you, Shalon, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its release reporting financial results for the first quarter ended March 31, 2019. 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 be archived on the company's website. Statements made by Lincoln's management today, during today's call regarding the company's business that are not historical facts may be forward-looking statements as the term is identified in federal securities laws. The words may, will, expect, believe, anticipate, project, planned, intend, estimate, and continue as well as 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 reflect 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 in the projections upon which the segments are based. Factors that may affect the company's results include, but are not limited to the risks and uncertainties discussed in the Risk - excuse me - Risk Factors section of the Annual Report on Form 10-K and quarterly report 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 the time with respect to the 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 thereof. Now, 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 today to discuss our solid start to 2019. With me is Brian Meyers, our Chief Financial Officer. When we last talked with you approximately two months ago, we talked about several favorable operating trends generated by our company over the course of 2018, including consistent same school student start growth, consistent student graduation rate and placement growth, consistent operating leverage and cost containment, consistent corporate partnership expansion and consistent progress towards profitability. These consistent achievements led Lincoln to meet or exceed our full-year guidance metrics for 2018 and they position the company for further growth, as well as the achievement of GAAP profitability in 2019. Today, we reported results for the first quarter that can best be characterized with an increasingly familiar turnaround here, consistent progress. Our student starts continue to grow. We generated revenue growth, our student graduation rate and placement rate growth continued to increase. We continue to execute to our operating budget. We continue to move towards profitability. We've expanded our corporate partnerships. And once again, we are reaffirming our full year guidance for 2019, which Brian will review in a few moments. Our ability to consistently grow the company's student starts over the past two years has been achieved despite the unprecedented period of high employment, and perhaps the most challenging operating environment in the history that the industry has ever seen. Unemployment is now at a 50-year-low and employers anxiety over finding new talent to rebuild their workforce as baby-boomers retire increases. Consequently, we continue to have more requests from employers than we have graduates to meet those requests. In addition, as more employers reach out to us to help them find talent, we are seeing new related markets emerging for Lincoln, as the need for technicians with a blend of electrical and mechanical skills grows. For example, every production facility in America is challenged with finding technicians to maintain their manufacturing, material handling and distribution equipment. We are investigating how best we can serve this market and we are excited by the opportunity. In Q1, we continue to make progress with our number one goal of better serving our students. Our measures of success here are graduation and placement rates, and we improved both during the quarter. For Lincoln, retention is a campus-wide activity. Our students range in age from 18-year-old high school graduates to 50-year-old parents with children. Overall, our average age is 26. On the day of matriculation, each student is excited and expecting that he or she will dedicate themselves through their education. However, as time unfolds life can often get in their way, personal matters, family matters or financial matters all start weighing on the student and can derail a student from his or her goal of graduating. We know this can happen and so we've developed tools that enable us to intervene before the student takes a negative action. Obviously, we are not always able to save a student, but we continue to get better and better. In addition to tracking attendance, test scores, class surveys and other concrete metrics, we strive to have a culture of support throughout every department on campus. Responsibility does not just fall on the shoulders of our faculty. We expect everyone on campus to be looking out for our students, everyone from a receptionist, to a campus President may have an interaction with the student that could prove helpful in retaining that student, and so we seek everyone's involvement. We are also increasing our overall placement rate. In March, we reported that our placement rate for the full year 2018 increased to 120 basis points to more than 81%, with an 83% rate in Transportation and Skilled Trades and a 78% rate in Healthcare and Other Professions segment. We improved these results again in the first quarter and we are striving to eventually achieve a company-wide placement rate of 85% in the near-term. Our goal is to continuously improve our curriculum and educational experience to enable even more students to graduate and find rewarding placement in their field of study. To support these efforts, we'd like to leverage our industry partners in a number of ways. First, our partners provide excellent employment opportunities often with additional benefits beyond a strong salary, such as a signing bonus or tuition reimbursement. Second, our partners often come on campuses to share their experiences, to motivate and encourage students to complete their education, while giving them pointers for job searches and interviewing. Third, we continuously enhance our curriculum with input from industry experts that ensure that we are teaching what is most relevant and practical in order to be successful in the workforce. Fourth, our partners donate their latest technology and equipment, which further enhances our labs and gives our students a competitive edge. Fifth and lastly, our partners allow us to leverage their brands to drive awareness of the various industries that we serve and the opportunities available. While we believe we play an important role in helping our economy by enabling companies to grow their workforce with skilled talent, we know that there is much more opportunity available to us. To capture this opportunity, we will continue to expand our list of industry partners to enhance opportunities for our students, while increasing returns for our shareholders. We reported first quarter student starts grew 2.6% over the same period a year-ago. However, same school students start growth was a healthy 5.6% with the Transportation and Skilled Trades segment up just under 1% and our Healthcare and Other Professions segment growing an impressive 15.2%. This was the sixth consecutive quarter in which we've achieved growth in both segments. We continue to diligently control cost during the first quarter, and as a result, we had solid percentage gains in operating income from both the Transportation and Skilled Trades segment as well as the Healthcare and Other Professions segment. As we expected, we reduced our facilities costs for continuing operations by approximately $500,000 on an annualized basis as compared to the prior year first quarter. And as we discussed last quarter, we continue to find opportunities to lower our lease costs, either through renegotiation or reducing our square footage, which would further benefit our bottom line in 2019. Employer demand for skilled employees continues to grow and we consistently hear about the skills gap from almost all of our employers. We are and have been a reliable source for skilled employees, especially for skilled employees trained to meet an employer-specific need. During the quarter, we added [Mazda] [ph] as a new corporate partner and will begin offering a specific Mazda curriculum at our Queens, New York Campus later this year. This follows the creation of our partnership with Fujitsu to develop a program focused on ductless air conditioners, which are becoming more popular here in the U.S., which we've discussed with you two months ago. Advanced discussions with other corporate partners continue and importantly we are also having numerous conversations with a variety of corporate partners regarding the expansion of their current programs to additional campuses. We will aim to provide a couple of examples of this type of expansion, when we report to you again in early August. Meanwhile, our welding program continues to enroll full classes and we are on track to launch our seventh welding program by the end of the third quarter. We believe that on a national level, we are seeing a growing resistance from students and their families to the high cost and declining return on investment of their traditional four-year college degree. More and more news articles and media pieces are raising the awareness of the strong career opportunities available to those who want to work with their hands and their brains. When families investigate a field of study focused on obtaining a solid middle class career, the four-year option presented increasingly difficult pathway for families to follow, especially when job placement rate in the field of study is considered. Our team has successfully raised the awareness of a Lincoln Tech Education in the communities in which we operate, while bringing success to the eventual students. Our activities motivate other students to consider our courses and if not now perhaps later in life, when they are seeking to improve the quality of their lives and achieve their dreams. On the political front, there is increasing negativity towards proprietary schools from a number of the presidential candidates and there sound bites. On the news can distort people's perceptions the fact for Lincoln is that our outcomes are much better than those from our competitors in the public sector. Well, not every proprietary school can say that, we can at Lincoln. To help drive this point home, we recently held a Skills Gap Summit at our Columbia, Maryland campus where we had approximately 60 attendees including state and local officials, members of [Maryland's Higher-Ed] [ph] Commission, employers, delegates from the Economic Development Authority and Chamber of Commerce and other interested parties discuss how we all can pull together to solve Maryland's Skills Gap challenge, which is frankly the same challenge that every state is facing. Lincoln has been serving Maryland citizens for over 60 years and we're the largest post-secondary provider of automotive and HVAC techs in the state. Our goal is to bring as many officials as possible into our campuses, so they can see for themselves the quality of our students, faculty and facilities. We are a firm believer that with education, others will see the positive impact that Lincoln makes each and every day. In summary, the first quarter of 2019 continued the positive trend established during 2018, improving our students' experience and strengthening our operating structure allowed us to report six consecutive quarters of solid start growth, and we continue to make progress with our starts, our population, our retention rates and our placement rates, while simultaneously controlling our costs. We are successfully navigating the macro headwinds and our performance to date in Q2 remains on plan. Now, I'd like to turn the call over to Brian for a review of our first quarter. Brian?

Thanks, Scott, and good morning everyone. I'd like to begin my comments with highlights from our first quarter performance followed by our operating results for the individual segments and finally conclude with our 2019 guidance. To begin, revenue for the quarter improved by $1.4 million or 2.2% over the prior year and our same school basis, revenue was higher by $3.8 million or 6.3%. In addition, total student starts on a same school basis were up 5.6% over the prior year. This increase is directly related to improved processes and marketing and admissions as the enhancements made in these areas have resulted in Lincoln starting 2019 with approximately 760 more students on a same school basis. In addition, the costs to retain these students were down slightly when compared to the last 18 months, indicating that we are rolling more students per dollar invested. Now turning to our segment performance for the first quarter of 2019. Our Transportation and Skilled Trades segment revenue increased by $1.6 million or 3.7% to $44.3 million for the three months ended March 31, 2019. The increase in revenue is due to a 6.3% increase in average student population, which is attributed to our consistent start growth over the last year and a half. Operating income increased by $1.1 million to $1.8 million for the three months ended March 31, 2019. The operating income improvement was driven by increased efficiencies, expense controls, which have kept total operating costs in this segment relatively flat. With a high amount of fixed costs combined with increased revenue, we are experiencing operating leverage of approximately 70%. Typically, we would expect to achieve operating leverage of approximately 40%. Now turning to our Healthcare and Other Professions segment. Revenue increased by $2.2 million or 13.1% to $18.9 million from $16.7 million in the prior year. Similar to our Transportation Skilled Trades segment, the increase in revenue was mainly driven by a 11.6% increase in average student population, which is attributed to our consistent start growth over the last year and a half. Operating income increased by $600,000 to $1 million. This increase was primarily driven by higher revenue was partially offset by an increase in certain operating costs necessary to remain competitive in several of our programs. As a result of some of these additional costs, our operating leverage was approximately 30% for the quarter. Lastly, the Transitional segment. We do not have any campuses classified in this segment in Q1 of this year compared to one campus in the prior year. Revenue in the year ago quarter was $2.4 million and the reported operating loss was $100,000 in the prior year. As a reminder, we have fully taught out our Lincoln College of New England at Southington Connecticut campus as of December 31, 2018. Corporate and other costs were $7.7 million for the three months ended March 31, 2019 as compared to $7.2 million in the prior year. The increase is primarily driven by costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value. Now, let me review our 2019 guidance. Our first quarter results came in as expected. So, we are reiterating our previously disclosed guidance, which includes the following. First, we anticipate revenue in student starts to increase 3% to 5% excluding the Transitional segment in the prior year. Second, we expect to achieve $2 million in net income. And finally, we expect 2019 EBITDA to be approximately $12 million. With that, I'll now turn the call over to the operator so we can take your questions. Operator? [Operator Instructions] Your first question comes from the line of Alex Paris from Barrington.

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

Good morning, Chris.

Good morning, Chris.

First off, starting with cost per start, can you talk about the progress made in this metric and your goals for further improvement in cost per start or further maintenance of where it is currently? And, I guess, any room for improvement here through better utilization of your marketing spend?

Yeah, let me - I'll take that one. So, as we said from the onset, with the low unemployment rate, we feel that we have to constantly get out into the community and invest more in our marketing dollars to get the word out to attract more people. And with the way we monitor the success of that is by looking at the overall cost per start. And so, when we look at that we are constantly looking and making sure that that cost per start is not increasing, frankly, at a significant rate. And the good news is that for the quarter, our cost per start was very steady. And so that gives us - I guess, reassures us to continue to invest in our marketing spend to help drive more growth. So, we don't have a specific target that we're working towards, Chris. But what we're doing is looking to monitor that cost per start to make sure it's not going to get out of whack and it frankly become negative as far as hurting our margins.

The one thing I'll add, Chris - this is Brian - is that for the quarter cost per start was slightly down. But some quarters during the year it could be up depending on the timing of our marketing spend. For instance, we spend a lot in June. Our second quarter could be slightly higher because we'll get that benefit in the future quarter. But over the year, we're expecting it to be relatively flat.

And also just to be clear, it includes both the marketing as well as our admissions teams. So it's the dollar spent to attract the students and then it's the dollar spent to enroll the student. So it's a complete cost of acquisition.

Got it. That's very helpful. And following up on marketing, as we look at program versus channel versus market, you mentioned and highlighted the 5 million jobs in this country that remain unfilled, that Lincoln is helping to be the solution here. Are there any new geographies that could be in the future or is the current footprint going to remain constant? And how should we look at this opportunity of 5 million jobs as far as available potential, and what's realistic and what's out there? Thanks.

Sure. Well, definitely in the future, we do anticipate opening up new campuses, but certainly nothing is planned for the next 12 months. We certainly hear from our employer partners about needs in other states, frankly, where we don't have a presence. But as of right now, there are no plans in place to open up any more campuses, as we still have good capacity to fill up in our existing campuses. But to your, the point of the 5 million, this is where we constantly are reaching out to employers and new people that are coming to us. And we are seeing opportunities, I'll say, that involve a lot of the skill-sets that we teach. And then, we need to figure out how we package those skill-sets into a - I'll say, into a career that's defined by the government, since obviously as a proprietary school, we had to train people for specific jobs. So I kind of referenced one that we started to kind of touch on the edge with, and that's working with the Food Processing Association, whereby there just is a big need for technicians in every kind of distribution and manufacturing facility to take care of the equipment. And we're seeing additional opportunities for us to blend some of our mechanical or electrical, hydraulic, other skills together into programs that could better serve, frankly, new customers in existing markets, where we are today. And we're going to continue to invest and figure out how best to tap into that opportunity.

That's interesting. And I'm assuming that opportunity would be a combination of existing skills that you train for that, that wouldn't involve new programs.

Correct.

And as far as new programs, you had mentioned entry level IT in the past and a small entrée into massage therapy. In regard to entry level IT, how many enrollments would that represent if it was at full capacity? And is there any desire to move beyond entry level and how should we think about new programs beyond this year?

Sure. On entry level, we only have the IT program. I don't have it in front of me, but I want to say, it's maybe in four campuses, so I would imagine, there would be programs of the scale of around 60 to 70 students, Chris. For beyond that from our research, you really need to be more into a degree granting status and while we do have degree granting in several states, what we are seeing is more growth in the IT area frankly at a higher level than associates degree, where we are. So at this time, I don't see us expanding the IT opportunity dramatically. Obviously, we're constantly reevaluating these things and testing the markets in trying to see where the careers are. As of right now, I don't see that as a major driver for us going forward. The massage is something that's popped up literally in just a handful of markets, whereby employers have come to us and there's more, I'd say national chains and people of that nature that makes it more attractive to us, because in the past massage was something whereby by lot of people went to work for themselves and with gainful employment you can never really track their performance. But as other chains have risen over the last decade, we feel much more comfortable training students to go work for them and making sure that they have solid earnings. And again, that is probably we have that at three campuses and that's not going to be widely rolled out into other campuses. I would say that the areas that we're looking to for growth are frankly looking to rollout more with regards to skilled trades. I mentioned, we have our next welding program opening up. I could see maybe another one or two more welding programs in the future, and we're looking to figure out how we can combine the electrical skills. As I said in our mechanical skills to basically come out with a new program, but it's really kind of just assembling existing curriculum to create that new program.

Great. And my last question, you mentioned the improved retention rates. As we look at conversion rates, retention rates in the overall student quality of the current population as well as new incoming students, can you provide some additional granularity into the investments today, you're making to drive these metrics, and more specifically, are there any investments being made around analytics and technology to further enhance your efficiencies here?

Yeah. So I would say that is to say, we're always looking to increase our efficiency. We are looking to take advantage of the massive amounts of data that we do have on our students. I'd say that we really are just at the very, very beginning stage of capturing and utilizing all the data that we have on our students to help us become more predictive of their success to help drive retention. But that is a future opportunity for us. I'd say that what we're doing today is a lot of the basic of blocking and tackling. As we probably have said on other calls in one of our basic avenues of ensuring that we're on top of our students is we call them when they're absent from school to see where they are or what's the reason and try to solve issues for them. So right now, it's really more of a collective effort on behalf of everyone on the campus to really understand, who their students are and what their issues are as a way of ensuring that we can deliver the quality program and help them achieve their goal of graduating. I do anticipate, though, as frankly we could become more sophisticated and maybe some technologies become more available to us and we'll be better able to utilize. As I said, the massive amount of information that we have on students that have both enrolled and not matriculated to students, who have enrolled and not graduated to better help us in the future.

That was very insightful. That's all the questions I had for right now. Thanks, Scott and Brian.

Sure, Chris.

Thanks for your interest.

Your next question comes from the line of Justyn Putnam.

Hi, Justyn.

Hey, Scott, I apologize if you already addressed this, but I was curious to know, it looks like a fairly sizable investment in valuation of the strategic initiative and to increase shareholder value. I was just curious to know what - maybe the range of possible initiatives you might be mentioning there?

Sure. As of right now, I'd like to be a little more cryptic on it frankly from a competitive standpoint. We're constantly looking at opportunities to create greater shareholder value and serve new markets and right now, I'd rather not say more than that, Justyn.

You didn't hire McKinsey though, did you?

No, no, we didn't do that.

Okay. All right. That's all my questions at this morning. Thank you.

There are no further questions at this time. Do you have any closing remarks?

Yes. Thank you, operator. So thank you all for joining us for our call and we look forward to updating you on our progress. We're very proud of what we are achieving here at Lincoln. And we are optimistic and very positive about the future. So thank you all for the call and we look forward to updating you in August. Have a great day. Bye-bye.

This concludes today's conference call. You may now disconnect.