Lincoln Educational Services Corporation (LINC) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Michael Polyviou, EVC Group. Thank you. Please go ahead sir.

Thank you, Dylan, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its release reporting financial results for the third quarter ended September 30, 2019. The release is available on the Investor Relations portion of the company’s corporate website, at www.lincolntech.edu.Joining us today on the call are Scott Shaw, President and CEO; and Brian Meyers, Chief Financial Officer. Today’s call is being broadcast live on the company’s website and a replay of the 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 and may influence the accuracy of the statements in the projections upon, which the statements are based.Factors that may affect the company’s results include, but are not limited to the risks and uncertainties discussed in the Risk Factors section of the 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 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 and CEO of Lincoln Educational Services. Scott please go ahead.

Thank you, Michael, and good morning, everyone. Thank you for joining our call today to discuss another solid quarter, again demonstrating our continued progress through improved operating and financial performance.We are on the cusp of attaining our long-term goal to achieve top line growth and consistent sustained profitability as we continue to execute our operating plan. We have now reported same school student start growth, increasing student graduation placement rates and improved operating leverage for the past eight quarters.For the third quarter, same school revenue grew 4.8% as we continue to experience strong growth from our Healthcare and Other Professions segment, which rose 9.3%. Our Transportation and Skilled Trades segment again performed well and increased 3.2%.Student starts on a same school basis were up 3.4% and we continue to experience student start and revenue growth as well as profitability across both segments. And while I don't want to sound like a broken record, we are achieving these results during a historically low unemployment period. These results illustrate that the success of the plan we designed and implemented counter the employment cycle.However, it also took determination and commitment from everyone at Lincoln from the Board of Directors, senior executives, the entire team. Rather than reducing our advertising spending, it was critical to identify and invest in targeted marketing channels to attract students and our positive results to-date encourage us to continue with additional investments going forward.At the same time, the high cost of a four-year college education and the debt burden that comes with it are becoming a national discussion and is not going away anytime soon. More and more people are asking the right questions such as is college right for me? Is a college degree truly going to help me? What is it that makes me happy?So, when students and their parents question the value of a four-year college degree, they are not dismissing higher education. Rather they're asking what else is available to them. What path do they take to achieve the success they desire? We are working hard to give them the path by explaining what their career opportunities are for a hands-on tree.Lincoln Tech provides positive life-altering options and they are more affordable than you may think. Since the quality of our education is the backbone of Lincoln's success, I want to share two recent events that highlight our faculty and facilities. We've recently celebrated the 100th anniversary of Lincoln's Nashville Auto-Diesel College. The school which was cited by President Harry Truman for his Point Four Program following World War II has graduated tens of thousands of skilled trained technicians for the auto, diesel, collision repair, heavy equipment and welding industries.For decades, employers have relied on Nashville Auto-Diesel College to serve their needs and the stories from our alumni, reinforce the fact that we change lives and provide opportunity. It was encouraging to see hundreds of our alumni come out to commemorate the centennial of one of the nation's most renowned career training campuses.In addition, last month, Travis Cox of our Lincoln East Windsor Campus took first place at a national student technician competition that took place in Raleigh, North Carolina. The 2019 TMCSuperTech competition presented during the fall meeting of the American Trucking Association's Technology and Maintenance Council brought together more than 80 diesel technicians and students for a test of professional skills. The competition consisted of both written exams and a series of hands-on demonstrations and we could not be more proud of Travis' first place finish.We're also very proud of our strong student graduation and placement rates. We monitor these closely and are constantly enhancing our curriculum processes and levels of student support to continually increase student success. A key to driving improved graduation rates involves knowing each of our students and closely tracking their experience.Fortunately, many of our students possess a passion for what they are learning and this keeps them focused on graduating. But since life's challenges can often interrupt the students' attendance and eventual success, we've implemented enhanced reporting, focused on attendance, grades and other metrics, which allow our faculty and staff to intervene before a student drops. By being proactive and creating a positive student experience, I expect we'll be reporting a fourth consecutive year of rising graduation rates for 2019.As for our increasing placement rates especially with the healthy employment market, we advocate for our students and we work with employers to fill their personnel needs. It's one of the reasons why our roster of corporate sponsors continues to swell. In fact, I'll be announcing another automotive partnership next quarter with a foreign luxury brand, once we finalize the documents.We continue to find strong career opportunities for more of our students and employers continue to offer more and more incentives to our graduates to attract them to their companies. From signing bonuses to tuition reimbursement plans, these additional benefits further improve the return on investment a Lincoln Tech student receives. A perfect example of this is the program we launched with Mazda in our Queens New York Campus becoming one of only two schools to have this distinct honor with Mazda. This is a win-win for all constituents Lincoln, Mazda and our students.Mazda has and will donate more vehicles and training equipment to our campus as part of the agreement and we'll have the opportunity to recruit students that are near completion of their training.Students hired by Mazda on the other hand will be eligible for several attractive benefits, such as student loan repayment, a guaranteed living wage and one-on-one mentorship with senior Mazda technicians and we're in discussions of expanding this program with Mazda.As a valuable contributor to the communities in which we operate, we are constantly reaffirming our positive impact with potential students, faculty, business and community leaders. Following up on our recent Skills Gap Summit we held in Maryland, we recently held one in New Jersey at Lincoln Tech South Plainfield Campus and focused on solutions to the challenges hiring managers face when filling open positions on their teams.In attendance were educators, politicians, employers, business organizations and students. Topics ranged from how do we attract more students to rewarding hands-on careers to on-boarding programs and other initiatives to retain newly-hired employees.The skills gap is very real. I'm sure someone participating on today's call has had a recent experience where you had to wait to have something repaired. It's not just you. It's becoming more common place everywhere and it's going to cost us time and money.As a reminder, the U.S. is lacking enough qualified personnel to fill the skills gap, estimated to be well over two million jobs and possibly costing the U.S. economy up to $2.5 trillion over the next decade. I also want to highlight that our South Plainfield campus recently earned accreditation by the Associated Equipment Distributors Foundation or AED [ph] for our heavy equipment and truck technology program.For those not familiar with the AED, it is an international organization which represents companies across a wide range of industries that rely on heavy equipment. According to the U.S. Department of Labor's Bureau of Labor Statistics, there are 135,000 openings projected in the heavy equipment maintenance industry by 2026. The BLS also cites New Jersey as offering one of the nation's top 10 average pay rates for technicians in this field.In summary, we have a solid business plan and it's delivering positive results. We are building our brand, our reputation and our bottom line. Our opportunities are increasing. Employers continue to seek us out, as they struggle to find solutions for their talent needs and students and parents are increasingly including a Lincoln Tech education in their future.We anticipate further improvements in our key performance indicators, such as student starts, graduation placement rates and company profitability and we are pleased once again to reiterate that we remain on plan to achieve GAAP profitability for the full year 2019.Now I'd like to turn the call over to Brian for a review of our third quarter results. Brian?

Thanks, Scott and good morning, everyone. I'd like to begin my comments today with a review of our top line performance during the third quarter, followed by highlights from our segments and lastly, I'll conclude by reiterating our 2019 guidance. First, total revenue for the quarter improved $2.5 million or 3.6% over the prior year and on a same-school basis revenue was higher by $3.3 million or 4.8%.We continue to experience growth in both student starts and average student population, achieving 3.4% and 4.5% respectively over the prior year on a same-school basis. We are proud to report that the third quarter represents the eighth consecutive quarter of start growth during a challenging operating environment.Our consecutive start growth reflects the successful execution of marketing initiatives that continue to yield positive results. Our cost per start for the nine months is down demonstrating both marketing effectiveness and greater returns on our marketing investment.Now focusing on our segment performance. Revenue for our Transportation and Skilled Trades segment increased by $1.6 million or 3.2% to $52.7 million for the third quarter. The increase in revenue was due to our continued start growth, which drove a 2.4% increase in average student population quarter-over-quarter.Operating income increased by $400,000 to $6.8 million from the prior year quarter. This increased profitability was driven by higher revenue and reduced rent expense as a result of us successful lease negotiating at two of our campuses during the year. As a result, we anticipate achieving roughly $1 million in annualized rent savings.We experienced an increase in educational expenses as a direct result of our growing student population. Selling, general and administrative expenses increased due to a higher bad debt expense, mainly resulting from revenue growth along with a slight deterioration of our historical repayment rates.Turning to our HOPS segment performance. Revenue increased by $1.7 million or 9.3% to $19.9 million from $18.3 million in the prior year. Similar to our Transportation and Skilled Trades segment, the increase in revenue was mainly driven by a 9.1% increase in average new population, which is attributed to our continued stock growth.Operating income increased by $600,000 to $1.4 million from $800,000 from the prior year. This increase is primarily driven by higher revenue which is partially offset by an increase of approximately $600,000 in our education and facilities expenses and a $500,000 increase in selling and administrative expense.The increase in educational expenses was a direct result of our growing student population, while the selling, general and administrative expenses increase was due to additional bad debt expense, as mentioned previously. Corporate and other costs were $6 million for the quarter compared to $5.2 million in the prior year.And lastly, since our third quarter results were in line with our expectations, we are reiterating our previously disclosed 2019 guidance. First, we anticipate revenue and student starts to increase 3% to 5% excluding the Transitional segment in the prior year. Second, we expect to achieve approximately $2 million in net income. And finally, we expect 2019 EBITDA to be approximately $12 million.With that, I'll now turn the call back over to the operator so we can take your questions. Operator?

Thank you, sir. [Operator Instructions] I show our first question comes from Alex Paris from Barrington Research. Please go ahead.

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

Hi, Chris.

Hi. Congrats on the quarter. In no specific order, you had mentioned in the past the degree granting application in New Jersey. As I look at this opportunity that you have within your existing base of LPNs, how should we characterize or put boundaries around the potential that you have in converting these LPNs to the program?

Sure. So first of all there's a lot of timing issues here. So we've applied to the State of New Jersey for degree granting, we did that in the summer. And we're hoping in the next three months or so to hear back from them that we've attained that status. Then want to go and apply to the Board of Nursing for the RN program.So the earliest that it would maybe happen is at the end of next year and with a lot of RN programs your first year is limited. So we'll maybe have 20 or 40 starts for that program. So it's really not going to start impacting us dramatically until latter part of 2021. But the huge potential is just what you're getting to. Basically, 99% of our LPN would like to become RN. So that is a rich pool of people for us to tap into, now continue their education to become RNs. We literally have had thousands of LPNs graduate in New Jersey as well as there's just a strong demand by itself for RNs. And so it really will open up a great opportunity for us at our three health care schools in New Jersey, but it will be – his is – we're investing for the future here.

That's great. Thank you for the color. And I guess moving on that, you're seeing the demand for RNs. Transitioning to the skills gap that's ever prevalent in this country as we look at that and relate it to different geographic opportunities in other words where the skills gap is wider, how should we think about that opportunity as it pertains to optimizing your footprint with additional campus and increasing that awareness in these pockets of growth that we could see narrowing of the skills gap and further potential for income opportunities for these prospective students?

Sure. Well, I would say certainly from an employer's perspective, I see no difference in any part of the country from the demand that the employers are coming to us where all of our schools are today. We definitely have more job openings than we have students. However, we also as we continue to partner with industry, have our industry partners asking for us to go into new geographies to better serve them. Though, the one that jumps to mind that they all want us in, which I'm not quite sure we're going to jump in right away is California.Just from a regulatory standpoint, it's a little bit challenging out there. So – so that maybe settles down or the right opportunity comes around, we wouldn't be going into that market, but there clearly are other markets for us to be looking at. We only have one school in Texas. We have no schools in Florida. There are other schools in the south that could benefit from having a school like ours and our employers would benefit from that.So there definitely is an opportunity to expand our footprint into, I'd say more to South and the West as potential areas. But with that said, we also have pockets of opportunity in and around some of our existing campuses. And so what's so exciting frankly is that, the opportunities are increasing for us. I mean, as far as the demand and the need for what we're doing and from the number of people coming to us seeking some way to help them solve their problems.

Great. And my last question, the corporate partnerships continues to do well. As you look at the mix of your corporate partnerships as of right now that seems to be there's more of a weight towards automotive. But how should we look at the diversification of this mix across your different skills-based training into 2020 and beyond? And how you see this as being more material to revenue and related enrollments?

Yeah. Well, definitely, you are correct that we have a strong presence on the automotive side. Obviously, that's a long heritage of ours and it's our largest program. But I really see more opportunities arising from our skilled trade side using our electrical or HVAC or welding and if we end up rolling out plumbing those fields. Those are aspects that we are seeing interest from kind of a broad range of the industries from manufacturers to maintenance to organizations. And we've mentioned before our initiative with the Food Processing Association creating a technician program.We are working closely with Johnson Controls. Right now, it's more on the electrical side, but they have with New York a strong demand on the HVAC side, they're more commercial. Today, we're more residential. So we're having conversations with them about well how can we enhance our program to broaden our offering to have more of an industrial commercial aspect to our HVAC program? So again, these opportunities are there for us. And we're going to continue to explore them and put the resources needed in order to unlock these opportunities for us.

Thank you, Scott. That's all I have for right now. I'll hope back in the queue.

Okay. Thanks, Chris.

Thanks, Chris.

Thank you. [Operator Instructions] I show no further questions in the queue. At this time, I would like to turn the call over to Scott Shaw, CEO for closing remarks. Please go ahead.

Great. Thank you all for joining us today. We remain committed to our students and to the long-term success of our company. I thank all the employees at Lincoln for their hard work and we look forward to sharing our continued success with you all in the New Year. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.