Lincoln Educational Services Corporation
Q1 2020 Earnings Call Transcript

Published: 13 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Lincoln Educational Services Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today Mr. Michael Polyviou. Thank you. Please go ahead.

[Michael Polyviou:]

Thank you, Jimmy and good morning everyone.Before the market opened today Lincoln Educational Services issued its release reporting financial results for the first quarter ended March 31, 2020, as well as recent corporate development. The release is available on the Investor Relations portion of the company's corporate Web site 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 Web site and a replay of the call will be archived on the company's Web site.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 and management's good faith belief as of the time with respect to the future events.All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date thereof.Now I'd like to turn the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

[Scott Shaw:]

Thank you, Michael, and good morning everyone.In light of what is an extremely challenging period in our country, we appreciate you taking the time to join our call this morning. We have our entire Board of Directors. We hope the impact of the COVID-19 pandemic on you and your families has been as limited as possible especially from a health perspective.I'd also like to acknowledge the innumerable contributions being made by Lincoln graduates serving on the front lines in an effort to contain the virus. We thank them as well as all the frontline responders in the communities where we operate for their service.While, many of you know the history of Lincoln Tech, I'd like to take a moment to describe who we are as a company. In 1946, our founder Warren Davies had a clear vision to serve our returning World War II servicemen and women by providing them with hands on skills to support their families, and build a better post war world. From our beginning, we possessed a spirit of optimism, dedication and service. And over the years, we've added resiliency, adaptability and courage. It is the sum of these qualities that has enabled us to effectively respond to the COVID-19 pandemic.Furthermore, we have always believed that our graduates who are the nation's unsung heroes making significant contributions to the economy and their communities. But, now it's official approximately 90% of our students are pursuing careers that the U.S. Department of Homeland Security deems as essential critical infrastructure workers. From our licensed practical nurses and allied healthcare graduates who are testing people for the virus or helping them recover to our auto and diesel technicians keeping the delivery trucks running, our graduates are following their passion while serving our society.I encourage you to visit our Web site lincolntech.edu and click on our Media Gallery to watch a two minute video saluting our healthcare graduates who sent us images of themselves on the front lines along with words of encouragement and thanks.I will later discuss our successful transition from on ground to distance learning. But first, I want to share with you our robust first quarter results which reaffirm the power of our actions to solve the skills gap. Despite the disruption the COVID-19 containment effort, which were Lincoln meant rapidly executing a distance curriculum delivery format, across 22 campuses, we had an exceptional quarter. We grew revenue by a healthy 10.7%. Our transportation and skilled trades segment and our healthcare and other professions segment, each group at nearly identical rates for the period.Our average student population ended up by 6.6%. This increased growth substantially improved operating margins, as we began to realize the planned operating leverage from various operating expense reductions and margin enhancement strategies over the last several years. Both our transportation and skilled trade segment and our healthcare and other professions segment each generated operating income that was more than double prior year results. As we've highlighted in the past, our business model achieves high operating leverage as evidenced by our more than 70% improvement in profitability for the quarter.In addition, we achieve growth in both key outcome metrics for retention and placement rates, which improved 2.3% and 1.7% respectively for the quarter, all in all an excellent start to the year.Now I'd like to discuss how we have successfully responded to the COVID-19 pandemic and our positive outlook on the future of Lincoln Tech. In the latter half of March, we implemented a plan to comply with federal, state and local requirements to successfully move all of our programs to a distant education format. Our actions were two pronged

[Brian Meyers:]

Thanks, Scott, and good morning everyone.As Scott indicated our first quarter results was strong. Despite the challenges created by the COVID-19 pandemic in March, we are very pleased that we achieved positive EBITDA in the quarter for the first time in over five years. We entered 2020 with positive momentum, as our beginning population was hired by approximately 760 more students than the prior year. Then during the pre-COVID period through February, this momentum continued as students start finished 14% ahead of last year. However, in March the impact from COVID-19 forced class starts scheduled for the latter part of the month to be postponed.As a result, we ended the quarter with 2,716 starts down about 150 or 5% compared to the prior year. Subsequently in April we more than made up for the first quarter shortfall achieving a 30% start growth over April 2018. We finished the quarter with 10,947 active students, 267 more or 2.5% higher than last year. This population increased growth to 591 students, or 5.5% when we include students on leave of absence due to COVID-19 circumstances, which I will discuss shortly in more detail.Now turning to the financial highlights for the quarter. First, revenue increased 6.7 million or 10.7%, driven by a 6.6% increase in average student population and a 3.7% increase in average revenue per student. The largest increase in average student population occurred in our healthcare and other professional segments up 12.5%, while our transportation and skilled trade segment increased 3.7%. In March, we anticipated that COVID-19 would have an impact on our first quarter results as we incurred additional COVID-19 related expenses and experienced a small revenue decline. As a result, we probably implemented measures to reduce expenses in order to mitigate the losses of revenue in subsequent quarters.Second, operating loss was reduced by 3.5 million or 72.3%, primarily driven by revenue growth. We generated an overall operating leverage of approximately 50% on our 6.7 million increase in revenue. We leveraged our large amounts of fixed costs as population of revenue growth with minimum related incremental expenditures, resulting in more revenue contributing to operating income. On a segment level, the operating leverage was approximately 60% and 50% for transportation skilled trade segment and our healthcare and other professional segment respectively.Third, as mentioned, we had positive EBITDA of 500,000 compared to negative EBITDA of 2.8 million in the prior year. The first quarter is historically our weakest quarter of the year in terms of EBITDA profitability. So this performance is especially encouraging.Now turning to operating expenses, there was an increase of 3.3 million or 4.8% to 71.4 million. The main contributing factors were bad debt expense and instructional expenses resulting from a larger student population. Bad debt expense for the quarter was higher as accounts receivable grew primarily due to our revenue growth, coupled with a delay in [indiscernible] disbursements and the decline in collections in the second half of March may related to financial hardships due to the COVID-19 pandemic.As a result, we are working with our students to provide financial relief and support during the healthcare crisis. Most recently, as the environment began to stabilize we have seen an improvement in collections towards normalized levels.In regard to corporate expenses, and other costs, we had expenses of 8.2 million or 500,000 over the prior year quarter. The increase is primarily due to increases in salaries and benefit expenses, and approximately 700,000 of expenses incurred as a result of COVID-19, partially offsetting these, of course, were non-recurring strategic initiative expenses incurred in prior year.Now, in terms of liquidity, as of March 31, we had approximately 30.7 million of liquidity comprised of cash on hand of 9.7 million and the 21 million in availability on our credit agreement. The CARES Act will provide significant additional liquidity in 2020 through the following provisions. First, we've elected to defer the employer FICA payroll tax through the end of 2020 equating to an estimated 3 million. For [indiscernible] and the deferred amount will be paid by December 31, 2021 and the remaining 50% will be paid by December 31, 2022.Second, we are following current guidelines, which waives our obligation to return title for funds for any student that which was during a payment period, or a period of remote enrollment due to COVID-19. We estimate saving over 1 million per month throughout at least June 30m 2020.As mentioned, we anticipate receiving a total of 27.4 million from the CARES Act, Higher Education Emergency Relief Fund. The majority of these funds will be used to provide financial support to our students. In addition per guidance from the Department of Education, we anticipate a portion of these funds to be used towards offsetting costs incurred as a result of COVID-19 including costs associated with transitioning to and from our online platform.And finally, we are currently evaluating the mainstream lending program for the midsize companies affected by COVID-19 as a potential source of additional liquidity if needed. Also, we're pleased to announce that we have been given some rent relief in the second quarter thanks to certain landlords who have worked with Lincoln to support us during the COVID-19 pandemic.Now expanding on the revenue impact from COVID-19. First, as Scott mentioned, as of the quarter end 97% of our student population was active and about 325 students were under leave of absence due to COVID-19. All this number increased to around 1000 students since March, we expected number the decline in the coming weeks. As a reminder, revenue recognition is suspended on leave of absence students until they are able to resume their education.Second, as noted earlier, programs such as Welding and Cosmetology, which require majority of hands on training have been decelerated while online. As such these programs are being extended to allow students more time to complete their hands on labs. Accordingly, their revenues daily rate on these students were adjusted downward to reflect the longer period.For the most part, we anticipate this revenue to be recovered during 2020. During the quarter, we continue to focus on plans to grow our business. As we completed the build out of one welding program and made significant progress on a second. However, certain program expansions were delayed due to COVID-19 circumstances. Additionally, we decided to postpone other capital expenditure projects to the second half of the year in order to preserve cash and gain greater clarity of our financials and our business landscape.Keep in mind as we continue to grow our business additional offering costs will be incurred, which will temporarily cause operation leverage to go down slightly. However, as new programs are launched, and grow our ability to leverage our growing revenue into higher margin will return.And lastly, a reminder, our 2020 guidance; due to the lack of visibility as when our campus will reopen, and the full extent of what will be needed to adopt to ensure they operate safely under social distancing guidelines, we are withdrawing our 2020 guidance.Thank you for your time today. And with that, I'll turn the call back over to the operator so we can take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Alex Paris with Barrington Research. Your line is now open.

[Alex Paris:]

Congratulations on a really strong quarter. I think you topped my expectations and all met with the exception of starts, and despite incurring those additional costs related to COVID.I guess I'll begin with starts, starts were very strong 13.6% through February. Obviously, for the quarter, it was down 5%. So you took a hit in the month of March. My expectation is, I thought you would grow starts 3.2% for the quarter, so the delta is really about 200 students. Now you say April, you're up 30% to 850. Just a point of clarification. Those 200 that didn't start in late March started in April, I'm assuming and, but you still had 650 new starts, right?

[Scott Shaw:]

That's correct.

[Alex Paris:]

Have you made any changes to your market? And seems like a really good number? Perhaps it's influenced by COVID and the rise in unemployment, but are you changing your marketing message or changing your marketing mediums? I think, some competitors said on their call the other day that some of the typical places they had advertised live sports and things and they're not getting played, they've had to shift their marketing to elsewhere.

[Scott Shaw:]

Yes. I wouldn't say that ours have been maybe as dramatic as that. But certainly, with marketing in general, we're constantly reevaluating. It's a very fluid marketplace. And certainly one seeing more and more social media coming into playing a bigger part. So our team is constantly reevaluating and constantly looking for those channels that are going to be the most productive. So that's just an ongoing thing. I would say that one of the things that has changed though, which is that people are at home, so when they express an interest, frankly, they're not as distracted by other things and have more time to spend with our admissions people. And I think as a result of that, our admissions people are able to convey what we do and how we do it. And the students seem to be very responsive to that.So I would say it's -- a lot of it's due to the improvement that we're seeing just in the conversations that we're having with the interested parties. But marketing is always constantly evolving.

[Alex Paris:]

And then, this is also sort of a remarkable search number in the month of April, given all those uncertainty related to COVID, I'm assuming these new starts because campuses are closed, had to start online, and that didn't really deter these students from starting.

[Scott Shaw:]

Yes. That's something really one of the most exciting aspects of all this and not only are they starting online, but for the first time we have students have never been on one of our campuses kind of as a reference, our typical process would be to encourage students to come to our campuses, so they can see how robust the facilities are. And these are students who aren't visiting our campuses live, we obviously have videos and images up on our Web site, so they get exposed to it. But again, it's very encouraging news, both for this period as well as we look to the future to figure out ways to further enhance how we reach students.

[Alex Paris:]

Okay, great. And then moving to LOAs. As I think you said in the press release, you had 324 leaves of absence, as of March 31. And now you have about 1000. So it looks like you're adding about 150 a week or so. Yes. And why is that? I'm assuming in some cases, there's no online classes available for these students that are enrolled in their program, so they have no choice but to stop out. And then I would assume to others that say, what, I'll just wait to your campuses are open again, I'll take a leave of absence.

[Scott Shaw:]

Yes. So it's happening because certainly on the healthcare side externships and being in clinical sites is a part of the curriculum and required for them to get -- reach graduation. And in those instances, we've been able to work with the states and the accreditors to replace the on-ground with simulation. And that's being rolled out over the next couple of weeks. And so students that aren't able to go to a clinical site will be able to do the simulation to get the hands on skills and knowledge that they need.At the same time, though, we are seeing every week, even in certain states, like here and New Jersey that is very much locked down mode for COVID-19. Even more doctors offices and hospitals are opening up and each day frankly, more of our students are able to get back inside one of these facilities to do their clinical work. And so that's very reassuring as why we think it'll decrease going forward the number of people in LOAs.

[Alex Paris:]

So, that thousand number is, based on everything that we know now and the gradual reopening of the academy. Is that LOA number sort of a peak or within -- very close?

[Scott Shaw:]

Yes. I would say that maybe it goes up another 300. And but then I believe it's going to start dropping as well by that month, certainly by June 1.

[Alex Paris:]

And then they'll come off LOA, if they can do simulation, if they could get into the clinic, and then if they could get into the campus, right? So as those things come on, we'll start to see those LOAs come off. And not only did the students get to continue their education, but you get to resume recognizing the revenue associated with their enrollment.

[Scott Shaw:]

Correct. Seven schools that are coming -- through to come back on June 1. Soon as they come back, we'll start recognizing the revenue for that and they'll start coming off of the LOAs. Well, although recognized revenue for the ones doing the simulations are going to clinical sites besides the seven that are reopening.

[Alex Paris:]

Got you. And then speaking of reopening, I think you said in the press release, Dallas is reopening this week, which I assume is the Grand Prairie campus. And you'll have seven in total opened by June 1. What's next after Grand Prairie.

[Scott Shaw:]

We have Nashville, Denver, East Windsor and New Britain and Shelton and then our Indianapolis campus. So again, that's based off of what we know today, some days these local officials tweak what they think. But based off of what we know today, that's the starting date we anticipate with probably Nashville and Grand Prairie starting next Monday.

[Alex Paris:]

And then what is your thoughts for the rest of the campuses? So that'll be seven of your 22? What about the other 15? Based on what you know today what would be next after that? And when should we have all these campuses open? I know difficult to say.

[Scott Shaw:]

What's probably easier to say what will be last, I'm guessing, unfortunately, New Jersey and New York, where we have seven campuses would probably be last just given the severity. But with that said, we are looking to see what we can do to accelerate that because in New Jersey, 100% of our students or 98% of them are in programs that are deemed to be essential infrastructure workers according to Homeland Security. And if you go on our Web site, you'll see pictures of our students. We have lots of LPNs and people in allied health field who are frankly truly on the front lines, testing people for the COVID virus. And so in a state that's looking for more support in the healthcare field, we believe that we provide a very important resource to the state.So we're trying to accelerate that process, but nothing is given. But I would think that New Jersey, New York would be last. And then the other states should come in up online and we're hoping over the following 30 days, so by July 1, we anticipate or hope that if not every campus, the vast majority of our campuses are reopened. It's just hard to know at this time.

[Alex Paris:]

Okay. So, not only are you near the peak in LOAs, and I know you've withdrawn guidance, but I suspect Q2 would also be the bottom in terms of its impact on your financials driven by the LOAs, right, because you're going to have those start to come back and with most campuses open by July, I would think we're kind of back to somewhat normal operations. I realize it's going to be, some inefficiencies, like nine to one student teacher ratios and things like that. But is it reasonable to assume that second quarter would kind of beat the trough?

[Scott Shaw:]

I would say so it's typically our trough and just given the scenario that you just laid out is, I think that's very logical.

[Brian Meyers:]

Yes. For our revenue compared to prior year. Yes, I would definitely agree. Expenses might drag along a little bit longer than that making up, some overtime and the nine to one teacher ratio that you mentioned. So it could be additional expenses. And when we get more clarity on the other portion of the CARES Act that the company can use, maybe we can offset some of those costs as well for transition as students from online.

[Alex Paris:]

Got you. And then, I guess lastly, given that it looks like based on what we know now, Q2 being the trough, the ample liquidity that you have looking over the valley to the other side, you should not only get back to normal, but you should derive the benefit from the rise in unemployment. And I would assume, given your success with these online programs, should we expect a different approach to business going forward, maybe blended programs more use of online and the curriculum?

[Scott Shaw:]

Definitely going forward, we're looking at that and creating and valuing that as we speak, obviously, it takes a long time to get the approvals and to get it fully designed. But certainly this experience has proven to us that our students are very receptive to it and many are looking forward to a blended program. It'll help us in our planning for the future, create greater capacity for us, which means we could frankly have potentially smaller campuses and be more efficient as well as. Just the fact that everyone within Lincoln is working remotely and working just as effectively as they were before that can cause other opportunities for us to look for ways of delivering services to our students in a more effective way.So this is a really needless to say, knows how traumatic this whole thing has been. But for us as an organization, what we're going to take away from it will be very powerful, I believe and help us going forward.

[Alex Paris:]

And then lastly, I guess based on everything that you know now and things kind of roll out as you expected, there's no resurgence in COVID, is it your intent to restore, providing guidance when you report next time.

[Scott Shaw:]

Gladly. As soon as we have some greater clarity, we will gladly provide guidance.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Raj Sharma with B. Riley FBR. Your line is now open.

[Raj Sharma:]

So I just wanted to go forward in the same line of thinking starts will create more any color on -- are they happening in one program more than the other or -- and, how is that -- what do you explain the success in starts?

[Scott Shaw:]

Sure. It is happening across the board. There are always programs that one particular month might be stronger than the next but there's nothing that I would say really sticks out, except that I would say we are seeing going forward some increased demand for our healthcare side. That's just getting a lot so much attention. I guess with everyone's seeing what's happening in the news that that is certainly helping us.And we just, certain programs do remain very robust welding remains very popular. Our skilled trades programs remain popular. But there's nothing really that jumps out as being like -- this is the only thing that's driving our growth. It's pretty spread out.

[Raj Sharma:]

Right. And specifically, the start increases in April of 2020 over 2019 were split 50

[Scott Shaw:]

Yes. What I can share is that indications are good right now. So it's still preliminary, but certainly things are on the positive side. Definitely not on the negative side as far as interest coming in enrollments and things of that nature. We still have a long ways to go between now in August, September, October, but as of right now, things are definitely on the positive side.

[Raj Sharma:]

Got it. And on the LOAs again, remarkable given some of your competitors are showing higher LOAs, are these -- how are the LOAs here split, are they -- one particular program more than the other or they are equally split across program?

[Scott Shaw:]

It's about 50

[Raj Sharma:]

Got it. Thank you. And so my question on the expense levels, any variability in your expense levels, given the fact that you can't recognize revenue during the last quarter and this quarter some on the LOAs in any -- do you have levers to pull to control expenses? Can you talk a little bit about that?

[Scott Shaw:]

Yes. In March it, we only lost I would say less than a $0.5 worth of revenue due to the starts that we didn't get at the end of the month and people going on to the LOAs. Naturally we did have some like tools, expenses associated with the start to come down. consumables have been weighed down, for the most part, a lot of that will just be timing because, while the students are online are not earning revenue, we won't have those expensive, but that's more timing. Marketing was down the pay for clicks has been a little bit down, we were able to push out some our production, it's later half of the year. So, marketing, there's some savings there as well. But, as I mentioned, will have significant rent savings, almost about $0.5 in the month of -- in the second quarter due to our landlords working with us and actually to their credit not asking for the rent at all for the two months, not even making up for it a lot of landlords. So that's going to be a lot of savings there.And then, there's savings -- to travel, our buses as well, which is over $100,000 a month so as we're online and not having on-ground campuses, so there is a lot of savings there. Unfortunately, we did furlough about 100 employees as well. So there are ways and in the month of April, expenses due to what I mentioned came in very favorable to our internal budget and prior year as well.

[Raj Sharma:]

So, I know that you pulled guidance, is it fair? Is it your understanding that you should be able to make back this missed revenue displaced revenue within this year? I mean, given where, what you think is the schedule right now, of the campuses reopening? I mean, is that a fair assumption?

[Scott Shaw:]

Yes. That's we're assuming now, obviously, with the social distancing, that's going to play a role into that, but we definitely believe at least the people on the LOAs, today will make up all that revenue this year. And we got to see how the social distancing and our facilities won't be open longer, trying to get the students in there to complete their clinicals, well, their labs as well.

[Operator:]

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Scott Shaw for any closing remarks.

[Scott Shaw:]

Thank you, operator. In closing, I like to say that in my over 18 years with Lincoln, I have never seen our organization more aligned and motivated to serve our students. We entered 2020 with tremendous momentum. Student population had been growing for nine consecutive quarters and continued to grow, increased population and cost controls enabled Lincoln to dramatically increase profitability in their first quarter, despite the negative impact of closing down campuses due to COVID-19. The organization rapidly rallied to move all programs and operations to a distance delivery model, which enabled us to continue to grow our population over prior year even through April.We are now implementing plans to reopen campuses as soon as permitted with seven campuses representing about 40% of our students expected to open by June 1. And as we look to the fall and beyond, we expect our population will grow as more and more displaced workers seek a better opportunity through our Lincoln Tech Education.While the COVID-19 pandemic continues to create uncertainty in the near term, Lincoln's future remains bright. And we will be sharing our story with investors through virtual non-deal roadshows over the coming weeks. We look forward to updating you on our progress in August until then, stay safe. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.