Q4 2023 Lincoln Educational Services Corp Earnings Call

Participants

Michael Polyviou; IR; Lincoln Educational Services Corp

Scott Shaw; CEO and President; Lincoln Educational Services Corp

Brian Meyers; EVP and CFO; Lincoln Educational Services Corp

Alex Paris; Analyst; Barrington Research

Steven Frankel; Analyst; Rosenblatt Securities

Eric Martinuzzi; Analyst; Lake Street Capital Markets, LLC

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Lincoln Educational Services fourth-quarter and full-year 2023 earnings and full-year conference call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Michael Polyviou, Investor Relations. Please go ahead.

Michael Polyviou

Thank you, Daniel. 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, 2023. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.au.
Joining us today on the call are Scott Shaw, President and CEO; and Brian Meyers, Chief Financial Officer. Today's call is being recorded and is being broadcast live on the company's website, and a replay of the call will be archived also 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 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. And 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 and 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, but new information, future events or otherwise after the date thereof.
Now, I would like to hand the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Bob, please go ahead.

Scott Shaw

Thanks, Michael, and good morning, everyone. This morning we released our financial results for the fourth quarter and full year that reflect the strong operating and financial performance of our company. Our team is successfully executing our transformation transformative growth strategies, which has led to increased student starts, retention, graduation and placement rates at the same time, we are benefiting from the building interest in skilled trade careers despite continued record low unemployment as well as the ever-present skills gap impacting corporate America's ability to grow as a result of these dynamics, we achieved all of our objectives during 2023, and our momentum has carried over into the first two months of 2024 for the full year, we achieved 10.3% same campus revenue growth and 11.4% same campus student start growth, which we believe exceeds our peer group's organic growth rate during the fourth quarter, same campus revenue growth was up 13.6%, while student starts grew 16%. We entered the new year with a student population as approximately 1,000 students higher than at the beginning of 2023, which provides us with a platform for further growth in 2024.
While we executed our capital investment strategy during 2023 to complete the build-out of our new East Point campus in Atlanta to begin the buildout of our new Houston campus to implement the relocation programs of our Nashville and Philadelphia campus as well as program extensions at four campuses. We finished the year with more than $80 million in cash and no debt. In addition, we recently closed on a new expanded credit facility, which can provide up to an additional $60 million of availability. Lincoln is in the best financial condition of the company's recent history and extremely well positioned to execute our future capital investment plans for growth. Our exceptional fourth quarter top line growth is being driven by our strong student starts and the highest level of student retention in Lincoln's recent history and 5.4% increase in average revenue per student. Our hybrid instruction old platform, or Lincoln 10.0 is a key driver of this increase in average revenue per student and has been incorporated into approximately three quarters of our adaptable programs. While it will be the first half of 2025 before Lincoln 10.0 is fully implemented. We do expect some bottom-line efficiencies emerging during the second half of 2024 in the form of lower instructional costs as a percentage of revenue. The new model combines hands-on learning and campus facilities with a greater component of classroom work delivered through online instruction. Our model enables our students to work part-time or manage other commitments while pursuing their Lincoln Education and is specifically designed to help a higher percentage of students to graduate.
As I mentioned a few moments ago, during the fourth quarter, Lincoln achieved our highest level of student retention in more than a decade. And we believe the biggest contributing factor to this development is the implementation of Lincoln 10.0.
Another key factor behind our student start growth is the continued increase of leads generated by our marketing programs. This lead generation is occurring across the board, both geographically and from a curriculum perspective and is accompanied by a healthy conversion rate of these leads. In addition, we are achieving some lead generation leverage in markets where we have more than one campus. We recently began marketing for our new East Point Georgia campus and have not only been pleasantly surprised by the demand for the new campus, but have also experienced an increase in interest in our Marietta campus, which is approximately 45 minutes north of East point depending on Atlanta traffic. The new eight point campus is the first result of our strategy to open one new campus per year offering hands-on training in the automotive and skilled trades fields. The campus has 56,000 square feet of trading space, including 15 automotive service space and up to 60 welding boots labs, classrooms and work areas. We are now enrolling students for training and for essential skilled career paths with the first place commencing in March as planned. We are proud of the campus and we will be showcasing that facility during our in-person Analyst Day on March 19th. We believe that the East Point campus is unique among trade schools. The facility capitalizes on the best ideas from all of our campuses while elevating the experience with its sleek, modern design, the labs and shops have the latest technology with lots of opportunities for hands-on learning. We are also excited to be the first school in the nation to incorporate electronic training aids into our automotive program. We have partnered with Elekta to develop our automotive curriculum since they are the world's leader in automotive training education. The agenda for the Investor Day includes a debriefing of Lincoln 10.0 and how our transformative growth strategy positions Lincoln for increasing long-term returns members of my management team will present an overview of operational I'm sorry, of operations and actions to drive growth and even better outcomes. I highly encourage you to attend. We have timely events so that analysts and institutional investors can fly into Atlanta that morning attend our event toward the North new facilities and fly home in the late afternoon. For those that are unable to attend in person. We do anticipate webcasting some of the presentations from will provide information as we get closer to the event, a key component of our growth strategy is to develop one new campus per year. And as we announced last year, our second greenfield site is in Houston, Texas. We remain on schedule to welcome our first classes at this campus, which is our second in Texas in the first quarter of 2026 campus is located in the heart of one of Houston's busiest commercial corridors and strategically located for both student convenience and maximum graduate exposure to area hiring managers. The new campus will feature approximately 100,000 square foot training center offering career opportunities in the auto diesel welding H vac and electrical fields of the 2.4 million jobs that are expected to become available nationwide in these industries by 2030 to over 290,000 of those jobs are projected to be in Texas. In addition to new campuses in Atlanta, Houston, we are relocating existing campuses in Nashville and Philadelphia to new locations that facilitate existing program expansion and our replication strategy over the next two years. As we layer on new campus openings and the program replication strategy, we consistently expand our opportunities to increase overall student starts. While we remain focused on continuing the impressive organic start growth at existing programs, I'm pleased by all the progress we have made and will continue to make the need for our programs by employers has been with us for years now appears that student demand is growing to meet this need from a new campus and program replication perspective, our biggest obstacle is receiving regulatory approvals in a timely manner. It seems that many governmental agencies, whether at the state or national level are understaffed and the delay from one organization to increase a cascade of delays along the way we have taken this new reality into our planning.
And so let me summarize for you the timing of our growth opportunities in 2023, we replicated four programs in 2024. We will replicate six programs and open the East Point campus. And in 2025, we will replicate six to eight programs in the first quarter of 2026, we will open the Houston campus with a possible other new campus by the end of 2020. As other opportunities arise, we will certainly look to take advantage of them. But as of today, these are our program and campus openings. And just to reiterate, we expect each new program to generate annually on average $1 million of additional EBITDA and each new campus on average should generate at least $6 million of EBITDA after being open for 36 months during the fourth quarter. And during the first two months of 2024, we continued to learn of studies and surveys questioning the value of a four year degree in the accompanying deck, many students that eventually graduate from a four-year degree, don't have the marketable or applicable skills that today's employers demand at Lincoln, we strive to provide strong ROI programs that lead to solid in-demand careers and we deliver these programs in a supportive environment that focuses on graduating and placing students. Also the careers we offer will most likely not be replaced by artificial intelligence or moved off shore, adding security to a student's career decision. We continue to expand our corporate partnerships at play a key role in our graduate placement rate. Most recently, Peterbilt trucks signed on to expand our partnership at the Nashville campus to our Denver campus. And we are in active negotiations with several existing corporate partners to expand their programs to additional campuses as well. Additionally, we have established a partnership with Honda Genesis who will be offering students at six campuses opportunities for this advanced level training also to further expand our reach into the HVAC industry We participate in a panel discussion at the recent AHR Expo, which brings together manufacturers and suppliers of all sizes and specialties to share ideas and showcase the future of HVACR. technology. We discussed how Lincoln helps attract and train people for the industry and how we have partnered with major corporations to provide specialized training that meets their specific needs. The AHR Expo is the HVAC industry's largest place for OEM.s engineers, contractors, facility operators, architects, educators and other professionals to experience everything new and build the vital relationships that grow businesses and careers. We are discussing with several partners ways to build enrollments in their programs through student debt management, scholarships based on metric achievements and higher skilled level programs we're also talking with institutions outside corporate America to determine the feasibility of applying skilled trade training programs, the non-corporate organizations any student start to achieve over the long term from these discussions will layer on to the high single digit organic growth rate we believe we will achieve during 2024.+ 2023 was an excellent year for Lincoln. We exceeded all of our financial goals starts were up double digits. Revenues were up double digits and EBITDA exceeded the top end of our guidance as we ready the new Greenfield campus increased graduate placement rate and continue to have more demand from employers than we have students as our strong graduation and placement rates provide excellent reference points.
Our balance sheet, which has never been stronger is enabling Lincoln to expand our programs and locations, which will create long lasting benefits to our students, our graduates, our instructors or corporate partners and increasing returns to our shareholders. We finished the year in excellent financial shape and are very well positioned to continue both our operating and financial momentum in 2024.
Now, I'd like to turn the call over to Brian, so he can review some of our recent financial highlights and present our guidance for 2020 for Brian.

Brian Meyers

Thanks, Scott. Good morning, and thank you for joining our fourth quarter earnings call. As Scott mentioned, 2023 was another successful year. We exceeded all guidance metrics and achieve an impressive double digit growth in both student starts of 11.4% of revenue of 10.3% year over year. We finished the year with over 1,000 more students than last year and $80 million in cash with no debt outstanding after investing over $40 million in total capital expenditures, our momentum has continued into 2024 and current visibility calls for continued growth, which is reflected in our guidance for 2024.
To start, I'd like to recap our top five growth initiatives in 2023, which are shaping our operational landscape. While all these initiatives are significant and that they each entail an investment of over $10 million. We believe that each will deliver a strong ROI and advance our progress toward achieving our long-term strategic goals.
We are determined to drive innovation, greater efficiencies and higher financial returns.
Our first two initiatives expand our footprint to 23 locations first and our new East Point Georgia East Point campus in Georgia, which is set to welcome its first class in the coming weeks. In 2023, we incurred capital expenditures in excess of $10 million to build a new state-of-the-art facility, providing students a superior educational experience and trade this campus. As in all, our new location was designed from the ground up to take advantage of the efficiencies of our new hybrid learning model. This allows us to deliver for our core programs out of our 56,000 square foot facility. We will incur losses as the population ramps up in this 1st year, but expect that campus will be accretive to earnings in 2025, its 2nd year of operations, second, in our new Houston, Texas campus, which is in the beginning pre-construction phase and likely to open the students in early 2026, offering career opportunities in auto welding age age back in electrical, we estimate that we'll incur capital expenditures of approximately $15 million in 2024 for the build-out of this 100,000 square foot campus.
Our third initiative is our national campus relocation to a newer more efficient facility. The new 120,000 square foot facility will enable us to add two new programs, electrical in a track while also expanding our industry partnerships in 2024, we expect to invest around $20 million in capital expenditures to build out this new location, which is expected to open in late 2025.
Fourth initiative is our Philadelphia campus relocation to nearby Liberty town, Pennsylvania. As discussed, we purchased this facility in September of last year and subsequently entered into a sale leaseback agreement announced in February this year, sale and purchase transactions were essentially cost neutral. Our new campus will significantly expand our market presence from our only single program canvas of 30,000 square feet to a 90,000 square foot modern multi program CapEx quarterly, we expect to invest approximately $15 million of capital expenditures to prepare this new location to open during the second half of 2025.
Lastly, the fifth initiative is the expansion of our program offerings at our existing campuses to drive organic growth. In 2023, we initiated the buildout of several program replication, mostly in with mostly within the skilled trades, but we expanded the capacity of two of our welding programs fall. A couple of programs have been rolled out with a small number of starts in 2023. We continue to make progress with the remaining programs are currently. We expect to see a benefit in certain sites in the second half of 2024 and see the new program central positive contribution to our bottom line in 2025.
In total, during 2023, we invested close to $10 million in capital expenditures to implement these new programs and will continue to expand new programs in the current year.
In summary, in summary, we are well into executing our growth strategies and have set out aggressive goals. Our team is working efficient efficiently to execute on these projects simultaneously, thank you to everyone for your hard work and commitment.
Now turning to our fourth quarter performance. Please keep in mind to discuss financial results exclude preopening costs of our new East Point canvas, our campus pre relocation expenses and nonrecurring expenses in the Transitional segment, the Transitional segment is made up of a made up of a single campus in Somerville, Massachusetts, which was successfully taught out at the end of October. That will no longer be part of our financial results going forward.
Starting with the top line, revenue grew an impressive 13.6% or $12.3 million to $102.5 million. The increase was was due to growth in both the average student population up 7.8% and average revenue per student of 5.4% compared to prior year. We are very pleased with our organic new student start growth for the quarter, which increased an impressive 16% outperforming or outperforming our initial expectations. Our suite of sites last year has positioned us to deliver strong revenue growth in 2024. We are entering the new year with 1,000 more students than we had in the prior year, which will continue through to the revenue acceleration in 2024. Operating expenses were $89 million after adjusting for nonrecurring items, detailed in our adjusted EBITDA calculation reflects in our Q4 earnings release, while expenses came in above our internal plan, so which was mainly driven by instructional expenses resulting from population growth. In addition, performance-based incentives increase based on our improved financial results.
In terms of EBITDA, we ended the fourth quarter with adjusted EBITDA of approximately $16 million. After adjusting for nonrecurring items detailed in our Q4 earnings release, I'll turn to our balance sheet and cash flow. We continue to have a very strong balance sheet, which benefited from our business, generating more than $22 million in cash flow from operations during the fourth quarter. As mentioned earlier, our year-end cash balance was over $80 million compared to $65 million in prior year. For over a year end, we had working capital in excess of $60 million. Capital expenditures for the full year were $41 million, including the purchase of 11 town Pennsylvania facility for temporarily a net total of 31 million, excluding 11 count, is consistent with our guidance, approximately 75% of the net $31 million in CapEx related to growth initiatives.
In terms of liquidity we now have more flexibility as we recently entered into a new three year $40 million credit facility with Fifth Third Bank. In addition, the agreement includes a $20 million accordion option, which provides greater financial flexibility at funding, should the Company decide to pursue a sizable inorganic growth transaction. While we do not anticipate any reason to draw on the credit facility in the near term, access to new credit facility further enhances the Company's financial strength, stability and ability to execute on growth opportunities.
Lastly, in terms of the key regulatory compliance metrics, we project to be in very good standing with both our financial responsibility ratio and our 90 10 ratio. We project our 2023 financial release responsibility composite score to be 3.0 that maximum two achievable score and projected 90 10 ratio to be approximately 81% compared to 75 or 75% of the prior year. The increase is the result of the new calculation rules, which became effective for 2022 rate. The main rule change relates to the Veterans Affairs benefits, which are now treated as federal funds and counted in the Navy side, along with Title four. While the change in the calculation methodology resulted in our ratio increasing by several percentage points, we expect to continue to be well under 90% threshold.
Now as we turn to 2024, the positive mobile momentum generated during 2023 is carried over into the first two months of the new year. Our full year guidance for adjusted EBITDA and adjusted net income will exclude the impact from one new campus in campus relocation costs to program expansions and three non-cash stock based compensation, we are forecasting 2024 revenue to range between $410 million, $420 million adjusted EBITDA, ranging between $35 million, $40 million; adjusted net income ranging between $10 million, $15 million student starts, student stock growth ranging between 7% and 12% in capital expenditures ranging between 65 and $70 million on capital expenditure expenditures plan. And this was the confidence we have in our growth initiatives, the largest components of the CapEx plans of the build-out of the Houston, Texas campus and the relocation for Nashville Philadelphia, which total around $50 million for all three projects. We expect to fund these significant capital investments through the combination of our cash liquidity of $80 million. Cash flow from operations generated in 2024 and $10 million of proceeds associated with Levittown, Pennsylvania facility sale and leaseback completed in February in terms of net interest expense, one, while we do not expect to have interest expense associated with borrowings, we project net interest expense for approximately 700,000. Total interest expense is projected to be $2.7 million maintenance, similar to others measure all new leases to determine the appropriate accounting treatment. As such, we have two new finance leases in 2024, resulting in $2.2 million of interest expense. The remainder the remainder relates to fees associated with our new credit facility. This expense will be largely offset by approximately $2 million of interest income.
With that, I'll conclude my remarks by thanking our entire team, including our faculty and students for their outstanding efforts during 2023. We look forward to communicating our progress throughout 2024.
And now I'll turn the call back over to the operator, so we can take your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Alex Paris, Barrington Research.

Alex Paris

Morning, guys. Thanks for taking my question and congratulations on the big beat and the guidance above consensus expectations for 2024. I wanted to dive into the starts momentum a little bit because that was a significant outperformance in the quarter. I think starts were up 16% year over year, excluding the transition segment, it came out at close to 3,200 new students versus our estimate of 28 50. And then if you look at it by field of study transportation and skilled trades, let it up about 21% where healthcare and other professions were up 10, 11%. You did a pretty good job. It's in my opinion, not covering it in your prepared comments. But what other color could you offer us in terms of that just great momentum that leads us to above average guidance in 2024?

Scott Shaw

So thanks, Alex. Well, we constantly daily are monitoring our leads that are coming in and we did strategically invest more in marketing in the fourth quarter because we constantly are just managing what's the cost per start. And whenever we see opportunity to invest more, then we take advantage of that. And so we did spend more in marketing in the fourth quarter than the prior year. And I think that that frankly, and it hit us in the fourth quarter and frankly seems to be also generating increased demand in the first quarter and so that's one thing that we're doing. And we're constantly refining our marketing. We're constantly looking at getting out of lower return investments in marketing areas so that we can hopefully get the best returning leads as possible. And we have a new partner that we started with last year, which has certainly helped us achieve those objectives. And we anticipate, frankly, even more efficiencies in 2024 now that we've been working with them for a year. And then as we've mentioned, it does seem as if the world is waking up to the fact that these are great careers and we're there certainly is a lot more anecdotal evidence to suggest that with that said, though, we look at all of our starts and any number of ways. And I can't say that the younger people are coming to us in a greater number than I'll say, the older people, the average age of our student is around 25, 26 years old. And if I look at the makeup of our starts over the last 12 months, the percentage of each, I'll say, age from 1819 20 to 21 hasn't changed year over year. So while we know that high school students and parents are talking a lot more about, oh, maybe I don't need to go to college, which has seen a benefit across the board, frankly.

Alex Paris

That's very helpful. Thank you. And then let me just ask a quick question about guidance to before I get back in the queue, our guidance was better than expected versus consensus expectations. It looks like in that guidance. If you use the midpoint of guidance, we're expecting revenue acceleration and adjusted EBITDA margin expansion. But even out that the adjusted EBITDA margin guidance is about 9% versus 7% in 2023, 200 basis points. But you haven't you said in the past that you thought mid 10s is a good target for adjusted EBITDA. And when do you think you'd get there?

Scott Shaw

Yes, absolutely. Absolutely. We should be able to get to that 15% EBITDA level. And we anticipate, as you're seeing some acceleration in some of that expansion of our profitability. And we think that as these new programs roll out as we get the benefit of Lincoln 10.0. As we continue to refine our marketing, you will see hopefully an acceleration of that increase. So to get to 15%, it's not going to be in 2024, 2025, but I would anticipate shortly thereafter.

Alex Paris

Great. That's helpful. Thanks and congratulations again, I'll get back into the queue.

Operator

Steven Frankel, Rosenblatt Securities.

Steven Frankel

Good morning. A very impressive metrics all the way around. Could you detail for us what the graduation and placement rates were in 2023 or so of placement rates were around, let's say, 82% and our graduation rates as we track them cross the 70% threshold or just around 70%. As we look at how we are managing that, our actual ACCSC graduation rates could be slightly less because they look at a different timeframe than what we're looking at. But anyway, we ended up at the 70% number, which is, as you may recall, a goal that I've set out for our company is to get 85% placement rate and 70% graduation rates. And that's that's great. And and the starts are really impressive. And what do you think you're doing differently from a marketing perspective that enabling you to gain share sufficiently for?

Scott Shaw

Well, we know that, as I said, with this new partner, we seem to be not seeing. We are achieving better, I'll say, purchasing of key words. And we've also kind of narrowed down the scope of the number of keywords that we're buying, which is creating some efficiency. So we're in constant dialogue with our partner on this, and we're looking at metrics all the time. And we're also testing, and that's kind of the beauty of the Internet marketing, you can test different words or different styles of presenting things in one market to see if it's creating a difference. And then when it does, then we look to replicate that in other markets. So it's working with a strong vendor and constantly being on top of things.

Steven Frankel

Okay, great. Thank you very much. I'll jump back in the queue. Sir.

Operator

(Operator Instructions) Eric Martinuzzi, Lake Street Capital Markets.

Eric Martinuzzi

I know we're not disclosing kind of a forecast of the new student starts by by trade group, whether it's transportation, skilled trades or health care. But just curious to know if you're seeing the same demand trends, the two historic sides of the business I think it's been about a 70 30 mix between Transportation and Skilled Trades versus healthcare and other.

Scott Shaw

Yes, I would say that transportation skilled trades still tend to be slightly stronger for us than health care. And I mean what one of the exciting parts is and I'll just throw this out. Our automotive business grew by 11%, and we haven't opened any new auto programs. So that kind of shows you the underlying strength in these core careers that we're offering. But overall, to your point, automotive and skilled trades is definitely slightly better than the health care sector at this point.

Eric Martinuzzi

Okay. Great. And then the your forecast for 2020 for what's kind of the macroeconomic assumptions built in because historically, we've faced headwinds around interest rates, inflation, unemployment, is it an assumption that the status quo persists for the rest of the year?

Scott Shaw

Yes. We're basically based off of what we're seeing already in the first quarter and yes, we assume that the economy will be the same. Obviously, I think many people have been surprised that the strength of the economy, unemployment still remains very low. So if that were to change, I could see that only benefiting us, meaning if unemployment increases. But again, what's so exciting is the fact that we're able to get this type of growth in this low unemployment market, which to me suggests there's been a fundamental shift, so are benefit taking place out there.

Eric Martinuzzi

Got it. Congrats on the quarter and the outlook.

Operator

(Operator Instructions) I'm showing no further questions at this time. I would now like to turn it back to Scott Shaw, CEO, for closing remarks.

Scott Shaw

Thank you all for joining us today to listen to our strong performance and progress to date at Lincoln, we all cannot be more excited about all of our opportunities and our leadership position to continue to eliminate the skills gap is most exciting could be what I will refer to as a renaissance of skilled trades after decades of societal pressure to only go to college, we are seeing and hearing that more and more people are becoming aware of the robust and enduring careers available by working with your hands for more than 75 years. Lincoln has been solely focused on providing the best hands-on training possible and increasingly feeling the Americas getting onboard. I want to thank all of our instructors and staff for their steadfast commitment to our students into our mission of changing lives. And I hope that you will join us on March 19 at our East Point Georgia campus for our first ever Investor Day. I'm confident that you will walk away from the event with as much excitement as we have for Lincoln's future. Thank you, all, and have a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.