Lincoln Educational Services Corporation (NASDAQ:LINC) Q4 2022 Earnings Call Transcript

Lincoln Educational Services Corporation (NASDAQ:LINC) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good day, and thank you for standing by. Welcome to the Q4 2022 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to Michael Polyviou. Please go ahead.

Michael Polyviou: Thank you, Lisa, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the fourth quarter and full year ended December 31, 2022. 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 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 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 those statements are made in 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'll hand the call over to Scott Shaw, President and CEO, Lincoln Educational Services. Scott, please go ahead.

Scott Shaw: Thank you, Michael, and welcome, everyone. Despite continued historically low unemployment and persistent economic growth, Lincoln established several positive trends throughout 2022 and generated 4.7% same-campus student start growth during the fourth quarter. We achieved strong financial results in the fourth quarter with both revenues and adjusted EBITDA growing in comparison to last year. For the full year 2022, we achieved all guidance targets, as the team continued to implement the new hybrid teaching model, the centralized financial aid process and our two major growth initiatives. We achieved a 500-basis point improvement in our graduation rate to 68.8% of students and increased the graduate placement rate to 81.6%.

We enrolled the first class under our new partnership with Tesla, launched a new career pathways program with Johnson Controls, signed two new corporate partnerships and are engaged in negotiations with two existing corporate partners to expand our programs with them. Despite the operating environment of high employment economy and rising interest rates, we grew revenues 4.5% and adjusted EBITDA by 7.4%. And we finished the year with significant debt-free non-dilutive resources that are poised to grow in 2023 when we closed the sale of our Nashville campus. These resources are enabling the implementation of our two major growth initiatives as well as extending and expanding the size of our share repurchasing program to a total of $40 million.

Over the past three years, we have transformed Lincoln's profitability and balance sheet. Now with the success achieved to date with our hybrid teaching model, centralized financial aid and program expansion, we have the opportunity to accelerate our investments to build a more scalable and higher-return business. Key to this strategy is our new hybrid teaching model, which we began to implement at our campuses in 2022. This model delivers our programs with a hands-on learning on campuses, combined with a greater component of classroom work delivered through online instruction. It enables our students to work part-time or manage other commitments, while they pursue their Lincoln education, which will enable a higher percentage of students to graduate.

The model also standardizes our programs across campuses with on-campus time slots of morning, afternoon and evening and with consistent start dates that provides greater flexibility, efficiency and overall capacity at our existing campuses. The rollout of our hybrid model at most campuses, coupled with adding existing proven programs at select campuses, will drive higher campus and company profitability. We have already started the process to have 10 new program replications across our existing campuses over the next two years. This results in organic growth with the fastest and highest return on investment as we leverage our existing infrastructure, campus management and market knowledge. We anticipate that these 10 new programs will reach their full run rate after approximately three years of operation, at which time each is expected to provide an average of $1 million in added profitability annually.

We expect to launch at least three programs before the year-end, with the remainder opening in 2024. Programs we are focused on include electrical, HVAC, welding, automotive and medical assisting, since these are all some of our most successful and in-demand programs. Pursuing this strategy requires a higher level of investment during 2023 in terms of both operating and capital expenditures. Completing the transition to our hybrid teaching model by the end of 2023 will result in increased instructional costs over the short term, but is expected to lead to greater efficiency beginning in 2024. Our investment in centralizing our financial aid process is extending into 2023, and we will also incur expenses associated with the initial launch of our new programs.

We are forecasting modest revenue growth for the full year based on our forecast for an increase in new student starts of between 5% and 10% and higher revenue per student. Our efforts to roll out our hybrid teaching model, complete the centralization of our financial aid process, launch 10 new programs across our campuses and increase marketing spend to maximize our student start growth in a high employment economy will impact our profitability in the near term, resulting in a forecasted 2023 adjusted EBITDA of $19 million to $24 million. We will also significantly increase our capital expenditures to $35 million to $40 million to advance our growth plans, including our new campus in Atlanta. Balancing the capital expenditure spend will be the anticipated closing of the sale of our Nashville campus in the second quarter that is expected to result in approximately $35 million in gross proceeds and generate a significant net gain.

We expect the successful execution of our business transformation plans will lead to significantly higher profit margins beginning in 2024, with a more efficient and scalable platform to drive sustainable growth thereafter. Continued strong demand for our programs, combined with the efficiency and growth from these investments, including the early contribution from our new Atlanta, Georgia campus enable us to forecast that our adjusted EBITDA will approximately double from 2022 levels by 2025. We also continue to evaluate additional locations as part of the plan to open five new campuses optimized for our new hybrid delivery model in the next five years. Some of these new campuses may include the reallocation of current Lincoln campuses, such as Nashville.

The first new campus under development is our second location in Atlanta. The build-out of this campus is progressing as planned, while some regulatory approvals are taking a bit longer than anticipated, and our first classes at this facility will begin by the first quarter of 2024. We continue to expect that within four years of its opening, the 56,000 square foot facility will be generating approximately $20 million in annual revenue and $5 million in annual EBITDA. We plan to replicate the cost-efficient design of the new Atlanta facility into the new Nashville campus. The development of this campus will begin once the transaction to sell the existing Nashville facility closes, which we expect will be by the second quarter of this year. As outlined in the sale agreement, we can remain at our existing location for up to 18 months while we build out the new campus.

I should note that all of our initiatives are predicated on the current environment of moderate economic growth, high employment rates and no recession. With that said, we are benefiting from a positive trend of individuals considering careers and skilled trades. Our leads are increasing as are our enrollments. And once all the changes with our centralized financial aid processes are completed, we should be able to better capitalize on this increased demand with even more new starts despite the challenging environment. Even the economic growth deteriorate, we are poised to benefit from such macro development, and with our new hybrid model, we can efficiently scale up to meet higher levels of demand. However, our strategies are designed to foster growth even in a growing high employment economy.

At the top of this call, I mentioned the successful launch of the Johnson Controls Academy, a six-week intensive training program focused on developing the next generation of building technicians. The program based at our Columbia, Maryland campus was created to provide a pathway to employment at Johnson Controls locations throughout the United States. Johnson Controls supports the students with on-site housing and relocation packages and plans to onboard approximately 130 new technicians or more each year. The hands-on learning opportunity of the Academy builds upon Lincoln Tech's electrical and electronic systems technician education for participants and prepares them for real-life experience in the field. The launch of the Academy follows a five-year partnership between Lincoln and Johnson Controls, and we are exploring other avenues through which we could expand the relationship.

The new partnership with Tesla began operations quickly as we enrolled our first class in mid-December at our Denver, Colorado campus. We also launched the BMW FastTrack program in Mahwah, New Jersey and Grand Prairie, Texas; a new corporate partnership was signed with Peterbilt Trucks, under which we will be offering a 12-week advanced training program for diesel students at our Denver campus; and we launched a partnership with Marriott International at our Marietta Georgia campus to train HVAC and electrical students for careers with Marriott. These agreements help our partners fill the urgent skills gap they are experiencing in light of the nation's continued overall low unemployment rate and increasingly more difficult search for employee training solutions required to continue their respective corporate growth.

Our company has paved the way in terms of creating innovative customized training programs with our partners and the percent of Lincoln students directly benefiting from our partnerships continues to grow. As we look to 2023, we continue to face the headwinds of a low unemployment economy that is providing students with other job opportunities, concerns over taking on debt in a rising interest rate environment and inflation's impact on rent, food and transportation costs. As I noted earlier, we generated same-campus start growth of 4.7% during the fourth quarter. And overall, we believe we will grow student starts in the 5% to 10% range for the full year 2023. Demand for highly skilled students remains extremely strong. This demand, along with our growing number of programs and corporate partnerships continues to generate strong interest in Lincoln training from prospective students.

Despite the short-term challenges, we continue to be quite optimistic that our strategic growth initiatives will generate consistent long-term growth for all of our stakeholders. Finally, I'd like to welcome Sylvia Young to our Board of Directors. Sylvia brings deep knowledge and experience with over 35 years in the health care industry. This week, she retires from HCA Healthcare after having been the CEO and President of HCA Healthcare's Continental Division since 2012. Her division generates over $3.6 billion in revenue and serves over 2,700 patients daily. Sylvia's insights will support our initiatives around expanding our nursing and allied health programs as we seek to lessen the skills gap in this important and growing sector of our economy.

Now, I'd like to turn the call over to Brian for a review of our fourth quarter financial results and 2023 outlook. Brian?

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Brian Meyers: Thanks, Scott. Good morning, everyone, and thank you for joining us. As Scott described, we ended 2022 on a positive note with growth across starts, revenue, adjusted EBITDA in the fourth quarter, meeting all our 2022 guidance metrics. I'll begin my remarks by discussing recent operational developments, followed by an overview of our financial results and finally conclude with our financial outlook for 2023. First, as Scott mentioned, the sale of our Nashville, Tennessee campus for $34.5 million is moving forward as planned. The local meetings and approvals have all taken place according to plan, and we continue to anticipate that this transaction will close in the second quarter. Through December 31, we received $500,000 of non-refundable deposits towards the purchase price, and we are scheduled to receive an additional $700,000 during the first quarter of 2023.

We are pleased with the progress and look forward to the campus relocation. Second, in November, we were able to force the conversion of all of our outstanding preferred stock into 5.4 million shares of common stock. We executed this transaction as soon as the third anniversary of the preferred stock investment had occurred, since the price performance and volume of our common stock met all the applicable requirements. As a result, the associated quarterly dividend ceased, translating into a $1.2 million annual cash savings in 2023 and beyond. Beginning with the first quarter of 2023, our EPS will be calculated using the standard common treasury stock method as opposed to the two-class method, which we utilized for the past three years. We currently have 31.1 million outstanding common shares.

Third, we continue to return capital to our shareholders through our stock repurchase plan. During the fourth quarter, we repurchased 489,000 shares for $2.7 million. And in total, during 2022, we repurchased 1.6 million shares with $9.4 million. Subsequent to year-end, our Board of Directors extended the plan by one year through May 2024 and increased the total authorized amount to $40 million, resulting in available balance of $30.6 million for future repurchases. Fourth and finally, as previously announced in November, our Board of Directors approved a plan to close our Somerville, Massachusetts campus as a result of the landlord exercising its option to terminate the lease as of this December. For 2022, this campus had revenue of $6.8 million, representing 2% of our total revenue with an operating loss of $400,000.

We anticipate that the closure of the school, including expenses associated with providing the approximately 200 remaining students with the education and support to complete their training will result in a loss of approximately $2 million in 2023. Our students are our priority, and we are pleased to report that we expect all our current students to complete their education prior to the campus closure at the end of 2023. For reporting purposes, the Somerville campus is presented under the Transitional segment in our financials beginning in the fourth quarter. Now before I discuss the financial results, please keep in mind that all of these results exclude the impact of the Transitional segment. Our revenue for the fourth quarter grew 4.8% or it's $4.2 million to $90.2 million.

Revenue increased mainly due to a 6.8% increase in average revenue per student, which more than offset the decline in average student population of 2.3%. Increased average revenue per student was driven by tuition increases, along with the rollout of our hybrid teaching model, which delivers higher daily rates in certain programs due to a reduction in the overall program length, both notable in our evening program. Another contributing factor to the revenue growth worth highlighting was our solid organic growth of 4.7% during the quarter. Our consolidated operating expenses were $77.6 million, up 5% over prior year, excluding the non-cash impairment and gain on sale of assets in both years. The increase in expenses was expected in line with our internal plans.

Increases in operating expenses were both notable in instructional costs, which increased largely due to higher staffing levels. We are currently operating with higher staffing at several of our campuses that have launched the hybrid teaching model as we provide instruction through both the new and traditional models. We anticipate the majority of our campus will transition will be -- will have transitioned by the end of 2023. Whilst we're experiencing higher expenses across the board as inflation price costs up in consumables, books and tools, to mitigate cost increases, we have added a procurement manager focus on expense controls. Facility expenses increased as a result of additional rent expense in 2022 in connection with the sale leaseback transaction executed in November of 2021 in combination with repairs and maintenance expense.

Administrative expenses increased due to several factors, including bad debt expense, employee medical benefits due to higher claims, severance expense incurred to better align our cost structure in certain functions and startup costs related to our new Atlantic campus. Partially offsetting the increase in administrative cost was a decrease in incentive compensation expense. To clarify, the $1 million non-cash impairment resulted from a single underperforming campus and plans have been implemented to adjust the program offering at this campus to drive increase in profitability. Also, startup costs related to our new Atlanta campus were close to $400,000 in 2022, in line with our projections. In 2023, we anticipate expenses associated with the opening of the campus will result in an EBITDA loss of approximately $3 million.

As Scott noted, we now expect classes to begin in the first quarter of 2024. Our adjusted EBITDA for Q4 was $15.7 million or 7.4% over prior year, after the add-back of non-cash and non-recurring items detailed on non-GAAP schedules in our Q4 earnings release. Turning to the balance sheet, our cash position at year-end was strong with a total of $65 million in cash and cash equivalents, restricted cash and short-term investments with no debt outstanding. During Q4, we experienced a delay in Title IV receipts due to a system upgrade, resulting in our ending cash balance being reduced by approximately $8 million. These funds was subsequently collected in the first few weeks of 2023. Looking ahead, according to our internal plan, we anticipate that our cash balance to be approximately $85 million at the end of the second quarter.

Although I'll note that this cash projection may vary depending on changes in CapEx spending and share repurchase investments. To complement our cash balance and increase our total available liquidity, we are looking to add a new credit facility to have available for funding future growth initiatives, if needed. We anticipate sharing more details on our next earnings call. As we reflect back on 2022, it was a pivotal and progressive year for Lincoln. We made significant investments focused on our financial aid services, create future efficiencies and savings while also improving the student experience. In addition, we use capital resources to redesign our programs through a hybrid learning model, incurring additional temporary expenses, particularly in instructional salaries during the transitional phase.

While these investments reduce our profitability in 2022 and 2023, we believe that these key initiatives should deliver sizable returns beginning in 2024. Our three-year goal is to double our adjusted EBITDA from 2022 levels by 2025. Now I'd like to introduce our 2023 guidance, which excludes the impact of our new Atlanta campus and our Transitional segment. Revenues ranging from $345 million and $360 million; adjusted EBITDA ranging between $19 million and $24 million; adjusted net income ranging from $7 million to $11 million; student stock growth ranging from 5% to 10%; and capital expenditures ranging from $35 million and $40 million, with approximately $30 million earmarked towards growth initiatives, including program expansions. In addition to the guidance, I'll share a bit more insight into our outlook for 2023.

Consistent with our seasonality, we expect revenue to grow during the first half of the year in low single digits with slightly higher growth in the second half; operating expenses should be in the mid- to low-$80 million range with the exception occurring in Q3 when the higher number of starts is expected to push total operating expenses in the mid-to-low $90 million range; interest income of approximately $1 million from short-term investments spread evenly through the year; non-cash stock-based compensation expense of $2.5 million, recognized evenly each quarter; depreciation and amortization of approximately $9 million with about 60% in the second half of the year; and finally, our effective tax rate is expected to be around 28.5%. Please note, adjusted EBITDA includes an add-back of non-cash stock compensation, the Atlantic campus startup costs, our Transitional segment and one-time expenses now considered part of our normal business operation and the gain and expenses associated with the Nashville sale and relocation.

The same add-back adjustments will be factored to arrive at adjusted net income. As we progress through the first quarter, we are pleased to report that costs are trending positively according to plan, and we're confident that we'll achieve our targets. Lastly, as Scott mentioned, to leverage our total campus infrastructure and better utilize our capacity, we will integrate some additional skilled trade programs into our health care campuses. And similarly, we plan to integrate nursing and health care programs into our transportation and skilled trades campuses during 2023. With this approach, the majority of our campuses will become more blended, making it more difficult to distinguish between the two segments. As a result, we are currently evaluating our segment reporting for 2023 to determine whether transitioning to a single segment would be appropriate.

With that, I'll conclude my remarks by thanking our entire team, including our faculty and students for their outstanding efforts during 2022. We look forward to (ph) our progress throughout 2023. And now, I'll turn the call back over to the operator so we can take your questions. Operator?

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