Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Lincoln Educational Services Earnings Conference Call. [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 first speaker today, Michael Polyviou with EVC. Thank you. Please go ahead, sir.

Thank you, Delan, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the third quarter ended September 30, 2020, as well as recent corporate developments. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. Joining us today are 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 on 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, plan, 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 and the projections upon which the segment and 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 the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements are based on the information available at the time of those statements are made and management's good faith belief as have the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement that Lincoln undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of 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 Education Services. Scott, please go ahead.

Thank you, Michael, and good morning, everyone. Thank you for participating in our call to discuss the continued consistent operating and financial progress of our company during the third quarter of 2020. We hope that you and your families have been impacted as little as possible by the ongoing COVID-19 pandemic, especially from a health care perspective. In addition, I'd like to wish everyone a happy Veterans Day. In 1946, our founder, Warren Davies, had a clear vision to serve our returning World War II servicemen and women by providing them hands-on skills to support their families and build a better post-war world. This vision has remained with Lincoln for its almost 75-year history and is why Veterans Day is an exceptionally important one for our company. Today, veterans make up about 10% of our student population, and we are proud to provide them with the skills and training needed to thrive in our economy. We are equally proud of this Veteran's Day -- proud on this Veteran's Day to recognize these veteran students as well as our veteran faculty members and staff, and thank you all for your service and contributions to our country. I'm going to focus my opening remarks this morning on how Lincoln has been able to successfully manage a wide range of operational challenges emerging from the pandemic as well as the resulting economic recession. Our navigation through these troubled times has led to increased enrollment as well as what is shaping up to be the best year from a financial performance perspective in Lincoln's recent history. Our strategies and actions continue to be developed and executed with the safety of our students, faculty, administration and management as our primary priority. This focus has enabled Lincoln to increase the number of students pursuing training for…

Thanks, Scott. Good morning, everyone, and thank you for joining us. Similar to what Scott said earlier, I also want to thank our veterans and those still serving today for their service to our country. I am very pleased to share with you the financial overview of our strong third quarter performance. In doing so, I'd like to thank the entire Lincoln team for their hard work and dedication, which continues to be the major factor behind our success. Starting with the top line. Revenue was $78.8 million, up 8.5% or $6.2 million, driven by our significant student stock growth that Scott highlighted, and our success at delivering education to our students when they were online and returning them to in-person instruction. We had approximately 5,500 new student stocks during the third quarter, representing a 15.3% increase over prior year. The stock growth consisted of 17.2% in our transportation and skilled trades segment and 10.6% in our health care segment. Let me take a moment to highlight that this quarter marks our second consecutive quarter of double-digit stock growth in 2020 despite the challenges from COVID. Also, it is worth noting that while our stock growth has recently accelerated, quarterly starts have now been consistently growing for almost 3 years with only one exception, which occurred in the first quarter of 2020 when the pandemic interrupted student starts in March. As a result, our average population increased 8.1% or about 900 students compared to the prior year, net of students on leave of absence due to COVID. Moreover, our quarterly ending population reached nearly 13,200 students, representing an increase of about 1,200 students over prior year. On a same-school basis, this is the highest population we had in our schools since 2012. Please note, this any population number excludes 104…

[Operator Instructions] I show our first question comes from the line of Alex Paris from Barrington Research.

First question, I just want to talk about the very strong starts, starts growth of 15.3%, driven by transportation and skilled trades up 17.2%. That's the highest that I've seen as long -- as far back as my model goes, looks like a decade or so. I know you touched on this a bit, but maybe some additional color to what do you attribute that growth. You mentioned internal execution, marketing, et cetera. And then to what extent do you see some of the strength coming from higher rates of unemployment, especially among younger individuals, younger male individuals?

Sure. Well, I think it definitely is a combination. It's probably too early, I think, in the cycle for unemployment to necessarily have driven a lot of the third quarter opportunities, simply as we know that people were receiving additional benefits and the other things that were probably holding them back from looking for something new. But overall, we just had a really great execution. Frankly, our high schools team did exceptionally well. We had nice growth in our high school marketplace. And obviously, to get the volume that we had, we obviously had to get more adults. But they -- I can't say yet definitively, Alex, if it's due to the unemployment rate. Again, I think that we're just working on so many different initiatives from a marketing standpoint. And I think that the fact that our campuses were open and that people are realizing that maybe college isn't the right thing for them, that more and more people are more receptive. I'll say to our messaging today, and see the fact that our students are working even throughout this pandemic, that that is encouraging them. Hey, why don't I give this a shot? This is a short term, fast return on investment opportunity. And I think that our messaging of that to students is resonating more and more. But with that said, I think that the unemployment environment certainly will be a nice driver for growth into 2021.

Great. That's helpful. So it sounds like that lift is most likely ahead of us based on past experiences with rising unemployment and then the positive impact on enrollment with the lag. How about demand indicators, inquiries, conversions, show rates, any color there?

Yes. I mean, again, we've been experiencing, as we've said, 3 years of quarterly growth. It has picked up over the summer. So -- and those trends seem to be continuing into the fourth quarter. So, yes, all indications are that things that have occurred in past recessions may also occur again this recession. So, we're very optimistic.

Okay. Great. Then moving on, I was hoping to get some additional color on your new program replications. What can you tell us there? You said several campuses, where are they? What sort of programs are you replicating?

Yes, we're replicating a welding program into one of our campuses. I don't want to disclose quite yet where they are for certain competitive reasons. But we'll be replicating a welding program, we have a revamped IT program that's going into certain campuses. We have a dental assisting program that's going into campuses. We have a medical assisting program as well as expansion of welding into another campus. So basically, what we've been constantly doing is evaluating the local marketplace, seeing where there's opportunity for further growth, as well as our employers are coming to us in certain marketplaces, demonstrating increased interest in certain programs. So, we follow where the demand is, and we'll continue to serve it as best we can.

So of your 22 campuses, how many campuses are getting new programs over the next 12 months?

So 4 of them, I believe.

4 of them, okay. And then…

5 programs in total.

4 campuses, 5 programs in total?

Yes.

Okay. And then what's the cost associated with rolling out programs to campuses?

You said the process of how we go about it, or the cost?

Just the cost associated.

Yes, it will vary by a program. A welding program to launch it could be $1 million, a medical assisting program would be a couple of hundred thousand, so it varies.

Okay. That's helpful. The decline in revenue -- the average revenue per student in the quarter, is that attributable primarily to the LOAs? Or was there some discounting going on or scholarships?

Right. It was attributed to the LOA slightly, because even though we finished with only 100, the average for the quarter was a little bit higher than that. But if you do it on a tuition basis, actually, revenue per student went up. When you look at pure tuition, what hurt us was some of the ancillary revenue. If it is clinic revenue from industry partners, some of that was poor during the quarter, which hurt our revenue per student.

So speaking of which, you kind of called out that about $400,000 of revenue was deferred from the third quarter to the fourth quarter. But also, there was an impact on non-tuition revenue of $500,000 in the quarter. So we would expect to get that $400,000 in the fourth quarter, but the $500,000 in non-tuition revenue is simply loss revenue.

Correct, correct. Yes.

Okay. I have a bunch of questions, but I'm going to just kind of cut to the last one here in the interest of time, and we can follow-up on some of the others. A general question I've been asking my post-secondary-education-related companies is, what are your thoughts about the outcome of the election? I know it's not completely settled, but assuming a Biden presidency, what are your thoughts with regard to the positioning of Lincoln, and expectations going forward?

Sure. You must be reading my closing remarks, but I'll jump to them now. I mean, obviously, with the change in administration, there'll be more regulatory scrutiny. But at the end of the day, Lincoln fared very well in the past administration when these regulations were being rolled out. I believe we'll continue to fare very well. The nature of our programs and the way we deliver them, and the fact that they are short-term, high-return type programs, I feel very good about where we stand, as long as the administration is fair and equitable. But all in all, I think that Lincoln will end up showing very well.

A couple of things that they talk about or they speculate about under a Biden administration is 90-10, potentially really reducing it to 85-15 and including military and the numerator. What are your thoughts there? I think your 90-10 is less than 80% now. Is that correct?

Correct. It's right around 80%, 79-80%. So, if you factor in military, last time I looked, I haven't looked at it most recently, we're around 85% to 86%, when you factor in military. So if it did drop to 85-15 with military included, we'd have to make some adjustments, but not meaningful adjustments, I don't think. But most of all the conversations I've heard is maybe focusing on 90 10 with military included, in which case we'd be perfectly fine.

Great. And then last question on the same topic, gainful employment. Last time, gainful employment was -- in the Obama years, gainful employment.

Yes.

Today, today, do you have any programs that violated the previous definition of gainful employment, or were in the zone?

We definitely had some programs that were in the zone. We've gotten rid of most of those programs, and we've made some adjustments to others. For example, we still have 2 culinary programs out there, but we've shortened the program to help lower the cost to give a better return on investment. I mean, the challenge is, the income data that we have is 5 years old, so it's tough to know exactly where we stand. But given the changes that we've taken based off of the past information, I feel very good about where we should stand, as far as all the other programs, given the demand we continue to hear from employers. And given I know where I'm seeing salaries, we should be fine.

Our next question comes from the line of Steven Frankel from Colliers.

Scott, could you talk a little bit about what the employment rate looks like for recent graduates in this COVID environment, and what are you hearing from employers? You've made some comments that they're encouraging you to add programs and add students, I wonder if you could give us some additional insight into that.

Sure. So as of right now, we're running about 3 percentage points below where we were last year in total employment, but we're making ground on that. We were a little over 4.5% at the end of the second quarter. So as more and more I'll say, companies are re-engaging with their workforce needs, we're seeing improvement there. Just in general, I mean, the people that are speaking to us from a training perspective are looking beyond just November and December, but also looking down the pipeline for what their needs are going forward as they look at their workforce and see all the baby boomers who are retiring. And so a lot of our conversations are much more focused on those longer-term objectives that these companies have. But needless to say, employment is picking up kind of across the board for us as well as we just see strong demand going to the future.

Okay. And then, where is high school as a percentage of the mix? And you've mentioned it was up year-over-year, kind of tell us where it is now, where it was a year ago. And are you doing anything to drive that up further?

Yes, it's around 20% of our population is the high school marketplace. And it's been plus or minus a few percentage points over the years, and we'll probably stay at that level, in the low 20s. Again, high school recruiting efforts are very expansive in that we send reps, we have about 90 of them, around the country to go and present to students, and then they meet with the students and the families to enroll them into school. We had a very successful program, as I said last year, even though we were basically shut out of the high schools as of March with the COVID situation. But again, we were able to stay intact and in contact with the high school prospective students and keep them engaged, which is what resulted in a strong showing for high school students this past summer. I will say, though, as a caveat, this year will be a little bit different. A lot of high schools are closed to us, and so we're having to do things more remotely, which is more challenging. There's no doubt about it. So, we're still working on adding even additional new ways of reaching our high school students with a lot more videos and informational information that we're sending out electronically. But this year's high school marketplace for us -- and I would imagine, frankly, for every school is more -- much more challenged.

And going back to those few remaining LOAs, especially the ones that have clinical elements they need, how many quarters do you think it will take to clean that up given the recent COVID spikes?

Well, it's hard to say, but I mean, we seem to always make some progress on it. I mean, we're down to just, whatever, 104, and that's spread out over a number of campuses. So, as of right now, while COVID is top-of-mind with a lot of people, I haven't heard necessarily as of yet, more clinical sites closing. And so it really becomes a scheduling issue of just getting them through the ones that are open. With that said, if more clinical sites did close, it would back up our population. But as of right now, I'm seeing more progress than a negative response.

Yes, where we are today, we would anticipate all those 104 students -- or a majority of them come back in the fourth quarter and have, unless something changes, almost zero at the end of the year.

Great, that's what I was looking for. And have show rates improved throughout the year?

For us, again, getting into the granularity, show rates have not improved, but our lead to start has improved. So we're gaining a lot more interest in leads, converting them into enrollments at much greater numbers, and that has diluted a little bit the show rate. But overall, the lead to start rate has improved.

[Operator Instructions] Our next question comes from the line of Raj Sharma from B. Riley.

I wanted to touch upon the inquiries, I know you've been asked that question again. So the lead to starts have improved, your interest versus last year has gone up, and your show rates have gone up too. Could you give us some color on that, you are seeing increased interest versus last year?

Yes, we're definitely seeing increased interest versus last year. I won't go in any more specifics, frankly, beyond that. But certainly, more people are reaching out to us. We're connecting with more people. As I said, we're getting more people are signing up for enrollments because, again, they see the value in what we're offering and the opportunity to kind of go through a quick accelerated program to get out in the workforce sooner rather than later. And so, again, it's all very, very positive for us.

And the increase in the show -- the decrease in the show rates, is -- you think that should come back to some sort of a normalized level?

Yes, certainly.

And it's highly related to the COVID situation and response?

Yes. It's really tough to know what is driving it. I don't know if it's just the larger volume that we're getting through that's leading to a lower show rate. But again, just like I look at the overall cost per start, I look at overall lead to start. And as long as we continue to manage the business and improve that metric, I feel that we're being very successful. So I'm less concerned about a show rate returning to a historical level as long as we continue to drive greater efficiencies overall.

And that shouldn't affect the drop-off rates going forward, right?

No, no.

And then I have another question on -- so you talked about the cost of acquisition. The overall marketing costs have gone up, but your cost of acquisition have gone down for this quarter. Could you just provide some color on that and your efficiency, marketing efficiency in this quarter and the following quarter?

Sure. So again, it's really 2 components that are -- makeup, obviously, the cost per start. There's the marketing efficiency and then there's also the effectiveness of our admissions team. And I'll just start with the admissions team first. The admissions team has been very effective in educating students on the opportunities and having them enroll, so that's helping us. On the marketing side, we're definitely moving more and more away from third-party activities or lower-converting activities and getting better responses on our activities around adult website interaction, partially due to increased engagement with social media, partially due to better engagement with our website. So, again, it's -- you can't stand still when it comes to marketing. It's constantly evolving and changing and what works one quarter doesn't necessarily work the next quarter, but I'm very pleased with our teams and how they're responding and how they're staying ahead of changes that occur to give us the good results that we're getting.

Great. So the cost of acquiring these clients went down, but the overall increase in the marketing cost, that was -- that went up, and that sort of is what the starts number is about?

Sure.

Am I getting-- you got more efficient, but you just spent a lot more or you spent more to get more?

Yes, I wouldn't say we spend a lot more. Again, we are spending more. Also in this quarter's number was about $600,000 that we spent to create some new TV ads. So those are kind of an investment in one quarter that will last, frankly, for the next 8 quarters. So again, overall, it's -- we're getting nice efficiencies out of our marketing.

Right. And then just lastly, you mentioned SG&A cost savings and moving your headquarters. Is that -- can you quantify that number again? I'm sorry, I'm sure you mentioned it.

Yes. It's around a $200,000 savings that we'll get on an annual basis. To be honest, we have a really good rent where we are today, simply because our building is going to be torn down, and we've just been staying on until the developer gets to all the right permits and such -- he's given us a very attractive lease. But we'll able to move to something that even has a more attractive lease going forward, which will benefit us by, as I said, the tune of about $200,000.

Our next question comes from the line of Austin Moldow from Canaccord.

The first one is on the Republic Services partnership. Is that the first of that kind of program? And did you say that was employee paid or an employer paid?

Employee -- I'm sorry, I might have said employee, I meant employer. Thank you for that correction. So Republic is paying for this. And it's similar to our Hussman program. So in Hussman's case, they built a training facility on one of our properties, and it's -- our graduates who are going into that program. The students don't pay anything, and they get trained to be Hussman technicians in an advanced level. This is similar, but the only difference is instead of taking place on our facility, they're building out a new training facility and we'll provide the training within their facility. But again, students pay nothing for it. It gives them advanced standing, additional skills. And what's different is that we will be also upskilling some of their existing employees. It just won't be entry-level Lincoln Tech students that are receiving the training.

Got it. And how does the enrollment in those programs work? Are those students sort of fed to you from those employers, or do you still -- are you still spending marketing dollars to acquire them into that track?

Well, again, one of the, I'll say, benefits that employers have by working with us is that we have a nice pipeline of students. So these are students who will have graduated from our diesel program, who will then get placed into the Republic Services program. So, it's kind of a double benefit for the employers that partner with us, not only do they get individuals with good skills that make them productive in their workplace, but we're also helping them find these students, which helps them build their workforce.

Got it. Is there any push within Lincoln to expand these kind of programs from the 2 you have to many, many more?

Yes. Oh, yes. We have others besides the one that I mentioned, and we're constantly out there speaking to employers all the time. And we're in discussions with probably 3 or 4 of them right now for different types of programs, similar to what I just described. Despite their great challenges in finding people, it takes them a lot of -- it takes them a long time to actually make the decision to move forward. But the ones that we've moved forward with are very pleased with what we're able to offer them.

Okay. And my last question is on the healthcare and other segment. So, the start growth decelerated there. Can you provide some color on that trend and whether the turmoil and the healthcare industry as a whole from the pandemic is impacting starts in that segment for you at all?

No. I mean, I think it's just these things vary from quarter-to-quarter. If you look at year-to-date numbers for the health care side and the average increase in population, it's quite robust. We're actually seeing more demand and interest because of COVID, frankly, on the health care side, sometimes it's just timing of when classes can be offered. And there's strong demand, I'd say, kind of across the board for most of their programs. So, I wouldn't view the lower double-digit growth that they had in the third quarter as anything negative.

I show we have time for one final question from the line of Justyn Putnam from Talanta.

I just had one quick question. A year ago, last November, you raised some capital, improved your credit facility, cited a number of reasons for doing that, but one of them was potential for maybe strategic transactions. And I was just curious to know as you sit today and you look out, how do you view the relative suitability of any potential strategic transactions today?

Sure. While we continue to look and investigate them and are completely open to them, certainly, the pandemic kind of put a hold on a lot of different activity in the second and into the third quarter. But I'm seeing activity increase, and it remains a -- definitely an opportunity that we will continue to pursue to find additional ways for Lincoln to grow beyond opening up our own campuses or replicating programs within our campuses.

Any potential chance that the Department of Education changed that view?

No. Because, again, the areas that we're focused on are high-return types of investments. I mean, it's a high-return programs. So I mean, I think that definitely, as I mentioned, the regulatory environment will become certainly more challenging than it's been. But if you look at Lincoln and our outcomes and compare us to our nonprofit peers, we performed quite well. Not everyone in the for-profit sector can say that. But I feel very comfortable saying that. So, while it will be more challenging, frankly, to me, for those that are stronger, both financially and from a regulatory standpoint, that should provide us with, frankly, more opportunities in the future, I would think.

This concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Scott Shaw, CEO and President, for closing remarks.

Thanks, operator, and thank you all again for joining our call. And to all the veterans, thank you for your service to our country. We remain very confident Lincoln Tech's future is bright. As we prepare to celebrate our 75th anniversary, we are reminded of what has enabled our schools to thrive. It is our focus on student outcomes and achievement. By developing programs that have a strong connection to industry and having them -- having those programs delivered by passionate, caring, battle-tested professionals, we have created a supportive, engaging learning environment that lifts students up while giving them the skills and confidence to enter the workforce. While we expect the regulatory environment to heat up with the change in administrations, we remain confident that Lincoln Tech will continue to outperform. By offering high-demand programs with outcomes that exceed our not-for-profit colleagues, we believe that we are well positioned to further aid our country as we seek to build the middle class. I look forward to speaking with you again earlier next year to review our year-end results. Thank you all again, and please stay safe.

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