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Edited Transcript of LINC earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 Lincoln Educational Services Corp Earnings Call

WEST ORANGE Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Lincoln Educational Services Corp earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian K. Meyers

Lincoln Educational Services Corporation - Executive VP, CFO & Treasurer

* Scott M. Shaw

Lincoln Educational Services Corporation - President, CEO & Director

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Conference Call Participants

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* Alexander Peter Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst

* Michael Polyviou

EVC Group Inc. - Managing Member

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Presentation

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Operator [1]

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Good morning. At this time, I would like to welcome everyone to the Second Quarter 2019 Lincoln Educational Services Earnings Conference Call.

I would now like to turn the conference over to Michael Polyviou. Please go ahead.

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Michael Polyviou, EVC Group Inc. - Managing Member [2]

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Thank you, Liz, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its release reporting financial results for the second quarter ended June 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 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 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 segments are -- 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 our management's good faith belief as of the 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 they are up.

Now I'd like to turn the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [3]

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Thank you, Michael, and good morning, everyone. Thank you for joining our call today to discuss the progress our team continues to make towards consistent growth and profitability. The favorable operating trends we discussed during our Q1 call in May including consistent same school student start growth, increasing student graduation and placement rates, increasing operating leverage and strong cost containment continued through the second quarter, and when combined with our outlook for the remainder of the year, enable us to reaffirm all of our guidance for the year with the key objective to achieve GAAP profitability in 2019.

Earlier this morning, we reported our seventh consecutive quarter of student starts growth. Starts were up 3.6%, and the growth was balanced with the Transportation and Skilled Trades segment up 3.5% and our Healthcare and Other Professions segment growing 3.7%. Despite the low unemployment rate, which typically can mean a downturn in our enrollments, we are achieving consistent growth for a number of reasons. First, we continue to invest in productive marketing channels, which expands consumer awareness and attract interested students. Second, more and more students and parents are questioning the value of an expensive 4-year degree with a lot of debt and maybe not great job prospects. More importantly, some guidance counselors are even becoming more receptive to directing students to career technical training over a 4-year school. This shift, I assure you, is still in its infancy, but I'm encouraged nonetheless.

Finally, the demand by employers for skilled technicians remains as robust as we have seen, and I believe that our partnerships with Fortune 500 companies and others is also helping us to grow. Over the past 2 weeks, I attended 3 different events with 3 different partners, and the message was loud and clear: We need more skilled employees, and we have come to Lincoln Tech to help solve our problem.

For the second quarter, revenue from the continuing operations grew 6.6% with a strong 11.3% increase from our Healthcare and Other Professions segment and a solid 4.6% growth rate from our Transportation and Skilled Trades segment. We also continue to maintain a strict focus on our cost control efforts during the second quarter. And as a result, we had a double-digit percentage gain in operating income from the Healthcare and Other Professions segment while the Transportation and Skilled Trades segment grew more than 40%.

As we expected, we reduced our facilities costs for same-school operations by approximately $400,000 on an annualized basis as compared to the prior year second quarter, and we are continuing to evaluate opportunities to lower our lease cost to further benefit our bottom line in 2019 and the ensuing years. In fact, we just signed a new lease at our Melrose campus, which will lower our fixed cost at the campus by approximately $200,000 a year starting this month. Lowering our fixed cost while cost effectively driving higher revenues has been our focus and is the reason why we will return to profitability this year.

Now let me share some of the highlights that help us measure our progress and success. To begin, our student graduation and placement rates, which are a priority for us, continue to improve. In order to meet industry demand and to ensure as many students as possible complete their education, we are constantly evaluating faculty, enhancing our curriculum, tracking attendance, grades and other metrics so that we can provide assistance and guidance to students before they drop. As a result of these measures, we have improved our graduation rates for the last 3 years and are on track to do it again this year.

As for placement rates with the healthy employment market, 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.

We also measure success by our growing number of corporate sponsors. Partnerships provide excellent employment opportunities for our students and a qualified labor pool for our partners. In addition to offering students attractive compensation packages, our students can enhance their skills using equipment donated by our partners, and I can tell you firsthand that our students appreciate this competitive edge.

Our partners allow us to leverage their brands to drive awareness of their various industries that we serve and the opportunities available. During the second quarter, we added Mazda as a new corporate partner, and Lincoln is 1 of only 2 schools in the world to have this partnership with Mazda. We were able to work with Mazda to create a program that truly benefits them and our students. Besides offering a good wage and tuition reimbursement, students will also be paired with a mentor for 3 to 6 months who will have subsidized car lease payments if they need a car to get to their job. We encourage Mazda to include the mentor and lease subsidy after surveying students to find out what attributes appeal to them in selecting an employer. We are in advanced discussions with other new corporate partners, and we are expanding existing partners to additional campuses.

Besides working closely with large national companies, we are constantly surveying each of our local markets to understand employers' needs. As a result, we will be launching our seventh welding program and 2 hospitality programs this fall. In addition, we are finalizing our research to launch 3 to 5 more skilled trades programs in 2020. New programs enable us to further leverage our facilities and improve profitability while increasing our impact on the local employment workforce.

Finally, at the end of the second quarter, we submitted our application for degree-granting in New Jersey. While we cannot be sure if our request will be approved, we know we have a strong application and expect to hear back within a year. With 6 campuses in New Jersey, degree-granting is -- in the state will enable us to expand some of our current programs as well as offer new programs, which would further support our employers and Lincoln's growth.

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. While it's too early to gauge the reaction from our first-ever skills gap summit we held in May at our Columbia, Maryland campus, I do believe events like this are required and will help demonstrate the importance of our educational platforms for students and employers.

It's estimated that the skills gap could possibly cost the U.S. economy up to $2.5 trillion over the next decade with as many as 2.4 million jobs being unfilled over this period. Local and regional economies rely on healthy small businesses. And if companies cannot find new talent, their businesses are negatively impacted. We plan on holding several more of these forums in other locations, and I would expect the reception to be positive.

From an accreditation perspective, we had 3 planned visits during the quarter. These were all successful and our accreditor commended Lincoln for the long average tenure of our faculty, exceptional student support and very strong student surveys. We believe the positive reaccreditation visits will help Lincoln expand and launch new programs more easily.

In summary, our second quarter and 6-month results continue the positive trend that started nearly 2 years ago. Our key performance indicators, revenue, student starts, graduation and placement rates and improving bottom line, position us for success throughout 2019. Profitable, we will be.

In addition, as we look to the next year and beyond, we see strong bottom line results. We are at an inflection point. As we continue to grow our revenues through marketing and new programs, we will see our net income continue to increase as a result of our strong operating leverage. Moreover, with $60 million in net operating loss carry-forwards to shelter our earnings, almost all of our operating leverage will drop to the net income line for a while. We look forward to delivering strong results to our shareholders as we better serve students, employers and our communities.

Now I'd like to turn the call over to Brian for a review of our second quarter results. Brian?

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Brian K. Meyers, Lincoln Educational Services Corporation - Executive VP, CFO & Treasurer [4]

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Thanks, Scott, and good morning, everyone.

I would like to begin my comments with highlights from our second quarter performance, offer some comments regarding our segment performance starting in the period and then conclude with a review of our 2019 guidance, which, as Scott noted, we are reiterating this morning.

To begin, revenue for the quarter improved $2.5 million or 4% over the prior year, and on a same-school basis, revenue was higher by $3.9 million or 6.6%. Our student starts and average student population on a same-school basis were up 3.6% and 5.8%, respectively, over the prior year. Successful execution of our strategies to drive growth have now led to 7 consecutive quarters of student start growth. This is a very important accomplishment for the company given the challenges in the industry and is reflective of the strong commitment and effort by our team to provide an exceptional educational experience for our students while improving the company's financial strength.

We continue to make additional marketing investments during the quarter, which we believe will continue the favorable student start trend for the remainder of the year. As a result, the cost per start was up slightly during the quarter. However, the cost per start for the first half of the year is down, which is demonstrating both marketing effectiveness and improved returns on our marketing investments.

Also, we improved our cash flow as we were cash flow positive from operations for the quarter and increased cash flow from operations for the 3 and 6 months ended June 30, 2019, by approximately $2.4 million and $1.5 million, respectively, compared to the same period of the prior year. Historically, we have generated strong cash flow in the second half of the year, and we anticipate the same trend to occur this year, which led us to forecast positive cash flow from operations for 2019.

Now turning to our segment performance for the second quarter of 2019. Our Transportation and Skilled Trades segment revenue increased by $1.9 million or 4.6% to $44 million for the 3 months ended June 30, 2019. The increase in revenue is due to continued start growth, which drove a 3.6% increase in average student population quarter-over-quarter.

Operating income increased $700,000 to $2.5 million for the 3 months ended June 30, 2019. The operating income improvement were primarily driven by evaluating implementing efficiencies where needed as well as continuing expense controls. Our education service and facility expenses for the quarter remained essentially flat while selling, general and administrative expenses increased by approximately $1 million primarily due to increased investments in marketing during the quarter.

Now turning to our HOPS segments. Revenue increased by $2 million or 11.3% to $19.5 million from a $17.6 million in the prior year. Similar to our Transportation and Skilled Trades segment, the revenue increase was mainly driven by a 10.3% increase in average student population, which is attributed to our continuing start growth.

Operating income increased by $300,000 to $1.8 million from $1.5 million in the prior year quarter. This increase was primarily driven by higher revenue, which is partially offset by an increase of approximately $600,000 in our education services and facility expenses and a $1.1 million increase in selling, general and administrative expenses. The increase in education services and facility expense was a direct result of our growing student population. While the increased selling, general and administrative expenses increase were due to additional bad debt expense in combination with the increase in sales and marketing expenses. Corporate and other costs were $6.4 million for the 3 months ended June 30, 2019, as compared to $5.9 million in the prior year.

Now let me review our 2019 guidance. Our second 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 by 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alex Paris with Barrington Research.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [2]

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Congratulations on the beat.

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [3]

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Thanks, Alex.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [4]

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So I have a couple of questions based on your prepared comments. First of all, with regard to student graduation and placement rates, can you quantify those a bit, I mean, on a percentage basis? Do you -- I think at one time, you at least gave placement rates.

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [5]

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Yes. Basically, the graduation rates are around 65% to 66% and our placement rates are 80% to 81%.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [6]

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And those are improvements over last year?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [7]

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Yes, yes. We would be increasing them anywhere from 50 to 150 basis points. It varies quarter-to-quarter, Alex, but that's in the range.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [8]

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Got you. And then congrats on the growing number of corporate sponsors, the addition of Mazda. Would you mind, just as a review, kind of rattling some of those off for us at least maybe by segment Transportation and then Hospitality?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [9]

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Sure. Unfortunately, I can't rattle off any major ones in the Hospitality side. So right now, the major ones are all in the Transportation and Skilled Trades. We have Audi, VW, Johnson Controls, Hussmann, Chrysler, Mazda. Those are the major ones. Bridgestone Firestone.

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Brian K. Meyers, Lincoln Educational Services Corporation - Executive VP, CFO & Treasurer [10]

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Mercedes.

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [11]

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Mercedes, we're doing some work for as well as we're doing things with the Penske automotive in the trucking side and a number of others.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [12]

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Great. And then you're in advanced discussions with more new partners that I presume you hope to announce before year-end?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [13]

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Yes. Absolutely.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [14]

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Okay. And then the -- you said that this fall, you're going to introduce the welding program to a seventh campus, and then if I got this right, 2 hospitality programs this fall?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [15]

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Yes. The hospitality programs are just 2 massage therapy programs, Hand & Stone and Massage Envy come to us in local markets looking for massage therapists. And so they'll be small programs, maybe capping out around 50 to 60 students each, 1 in the Boston market and 1 in the New Jersey market.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [16]

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Great. And then for next year, I think you're just kind of going fast for me, 3 to 5 more skilled trade programs in 2020? Are they additional programs or just transplanted programs into additional campuses?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [17]

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Transplanted programs with maybe 1 new additional one. We're evaluating plumbing basically in any campus where we have electrical and HVAC. Plumbing is kind of a natural. We're still trying to evaluate to find out how incremental plumbing would be or would it cannibalize some of our programs. But that will be the only new one, but we're looking to replicate the HVAC, electrical and welding programs. We see opportunities, frankly, in several markets for those.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [18]

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And then you submitted the degree-granting application in New Jersey, you got 6 campuses in New Jersey. Realistically, how long is that approval process? I realize there are moving parts. And then once received, what do you think this allows you to do specifically?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [19]

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Sure. It will definitely take us a year to get it. And assuming we get it, the big thing that we are driving for is to launch an RN program in New Jersey. We have 3 hospitality campuses. In order to offer RN, you need to be degree-granting. 99% of our LPNs all want to become RNs, so we have a great base of people that want to become RNs that we can reach out to, but also it's just the largest portion of the health care field. New Jersey needs more nurses, so we see a great opportunity if we can launch that.

In addition, we would then be able to offer degree-granting to some of our automotive, diesel and Skilled Trades programs as we do in certain other states. And there's always a segment of the population that does prefer to earn a degree. So that would just help us again gain more market share in those areas as well.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [20]

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Okay. Understood. And then as we enter the third quarter here, obviously, a big primary intake for high school-related students. What has been the trend in high school enrollments over the last couple of years? And what are your expectations for this year? And then what percentage of new student enrollment in the third quarter on the Transportation side comes from high school grads?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [21]

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I'll have to get back to you on that last point just to make sure I give you the factual. In general, I know high school overall is about 20% of our population for the full year. But I'll have to get back to you for specifically what it will be in the third quarter, Alex.

But basically, high school for us has been incrementally growing for the last 24 months. And so it's in the low single digits, and that's mainly from penetrating some new markets and having some greater productivity. The high school market is a challenging market. It's a very expensive market to reach, but it's also a very important market for us. As I said, about 20% of our students come from that market. And what we are seeing, as I kind of mentioned in my prepared remarks, and again, it's very, very preliminary and it's certainly -- the shift hasn't changed. But I am hearing more of our high school guidance counselors talk about the fact that they are seeing some positive momentum as far as people being more willing to consider a career technical education because, as you know, one of the reasons why we have the skills gap is everyone's been pushed to go to 4-year schools. And as that hasn't proven to be the panacea for everyone, people are giving career technical education some second thoughts. So I am very optimistic about where that will go in the future, but overall, as I said, the high school market remains about 20% of our population.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [22]

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Great. And then lastly, I just wanted to talk a bit about free cash flow. I think you said in the prepared comments you expect positive free cash flow for the year, and that would be an improvement year-over-year. We moved -- this is the -- you used cash in the first half. You generate cash in the second half generally how it is -- how the most significant producer of cash flow from operations. And then the fourth quarter, maybe a slight decline from the third quarter, but still quite robust. Is that expectation the same? And do you expect to generate more cash flow from operations in the second half of '19 versus the second half of '18?

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [23]

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Yes. I'll let Brian address that.

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Brian K. Meyers, Lincoln Educational Services Corporation - Executive VP, CFO & Treasurer [24]

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So Alex, this year, we are forecasting to have actually slightly higher cash flow from operations in the fourth quarter versus the third quarter. And as I mentioned in my prepared remarks, we're actually slightly cash flow positive for the second quarter this year, a few hundred thousand, but it was slightly positive, which is a significant improvement to the $2.3 million in the prior year in that quarter. So in the second half of the year, we are anticipating a strong cash flow. Last year, we used cash flow from operations about $2 million so we should have significant improvement over that.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [25]

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Okay. And then will the 10-Q be filed today or tomorrow?

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Brian K. Meyers, Lincoln Educational Services Corporation - Executive VP, CFO & Treasurer [26]

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It will be filed today.

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Operator [27]

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(Operator Instructions) I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Shaw for closing remarks.

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Scott M. Shaw, Lincoln Educational Services Corporation - President, CEO & Director [28]

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Thank you all for joining our call today and learning more about Lincoln. For over 70 years, we've been a leader in career technical education and training, and we believe our best years are to come. To all the Lincoln employees who are on the call, I thank you for your tireless support of our students. And to our shareholders, we look forward to updating you on our progress after the third quarter. Have a great day.

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Operator [29]

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