Lincoln Educational Services Corporation
Q3 2018 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Lincoln Educational Services Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Michael Polyviou of the EVC Group. You may begin, sir.

[Michael Polyviou:]

Thank you, Heather, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its release reporting the financial results for the third quarter and 9 months ended September 30, 2018. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. 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 team 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 and 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 projections upon which statements are based. Factors that may affect the company's results include, but are not limited to, the risks and uncertainty 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/or management's good-faith beliefs 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. 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. Thank you for joining our call today to discuss our third quarter operating and financial results. With me is Brian Meyers, our Chief Financial Officer. I'm pleased to report that over the past year, the Lincoln team has been successfully executing strategies leading to consistent predictable growth as well as improving our company's profitability. This morning, we reported that in the third quarter, student starts at our continuing operations grew 7.5%, and on a trailing 12-month basis, our student starts have also grown by 7.5%. That means for the last 4 quarters, we have achieved growth in both of our segments each and every quarter. A combination of new programs, curriculum diversification and improved marketing have all contributed to our success. With our improving operational and financial performance comes increasing optimism for the future opportunities. The mismatch of employer demand and the skills possessed by potential employees continues to grow. The number of employers and organizations seeking us out to help with training and placement of our graduates also continues to grow. Coupled with the acknowledgment of this skills gap is more research and discussion about alternative paths to college in order for one to obtain a solid middle-class career. All of these trends bode well for Lincoln, and we will capitalize on these trends to build a stronger, more impactful company that benefits all of our stakeholders. Our consistent student start growth has led to improved operating results from continuing operations and has positioned the company, we believe, to achieve GAAP profitability in 2019, which begins in less than 2 months. This consistency has been developed during an unprecedented period of high employment and perhaps the most challenging operating environment the industry has ever seen. For over 70 years, Lincoln has survived the ups and downs of the education sector, and we believe our 12 months of growth is a strong indicator of future opportunity ahead. The drivers of our third quarter growth illustrate the benefits of diversification we achieved through our Healthcare and Other Professions segment and our Transportation and Skilled Trades segment. During the quarter, Transportation and Skilled Trades student starts accelerated by more than 10%. This growth was partially driven by our high school programs achieving their start targets and rebounding from the issues we experienced in 2017. As a reminder, our high school program is a unique asset that few other larger educational organizations possess at our scale and scope. For 9 months of the year, over 90 Lincoln representatives are visiting high school classrooms around the country and introducing students to rewarding careers in skilled trades, transportation and health care. While such efforts are more expensive than media advertising, they enable us to create strong connections with schools, faculty and students that go beyond enrolling this year's class. We know many students seek us out later in life because they remember our message from a high school presentation. Again, we are pleased that all of our efforts around our destination high school program drove increased performance. Another factor for growth was new skilled trade programs within the segment. East Windsor Connecticut filled its second CNC class, and our new welding program in South Plainfield, New Jersey also sold out. In general, our Skilled Trades programs are performing very well and we will continue to invest to capitalize on this demand. We also remain very encouraged by our growing list of skilled trades industry partners. Our Hussmann TechX program graduated its second class and the response by our students and Hussmann dealers is extremely positive. We had kicked off ceremonies at 2 of the 10 campuses partnering with Johnson Controls, a global leader in creating intelligent buildings and energy storage. To attract more students to their industry, employees of Johnson Controls will be joining our high school representatives during their presentations in the high schools to make students aware of the great career opportunities with their company and industry. The feedback from these presentations has been very positive. Other partnership news involves the start of VW training in Mahwah, the solicitation by another major OEM who is unable to fill their advanced global training programs and has asked us to supply them with about 3 dozen students and the negotiation with another OEM for a new advanced level program. As demand by employers continues to intensify as the baby boomers retire, we expect to receive even more interest for our students and our capabilities to provide advanced level OEM-specific training. Our Healthcare and Other Professions segment student start growth, which has been stellar for the past 3 quarters, cooled a bit in the third quarter to 0.7%. But recall that for the last 12 months, starts in this segment are up 8.8%. Demand for the programs in this segment remains strong and we expect the growth rate to increase on a sequential basis in the fourth quarter. The overall student start growth from continuing operations for the first 9 months of the year stands at 6.8%, and we are in excellent position to achieve our improved guidance for the year. However, the real story is that student population at the end of the quarter is ahead of last year by more than 650 students, and we expect to carry into 2019 with at least 400 more students. As a reminder, our population peaks in the fall and declines by year-end as students graduate from programs started in the prior year. Our higher population is generating higher revenue and profits. While our operating leverage for the quarter was not as strong as we would have liked due to some timing issues that Brian will talk about later, we firmly believe that the company is well positioned to benefit from future revenue growth. This positive development from a revenue growth perspective is due to the start growth as well as the continued improvement in our retention rates. Growing our population starting off 2019 with more students than we had in 2018 is central to our plan to return to profitability in 2019. While markets can change with the results through the first 9 months, we clearly intend to achieve our goal of profitability for the full year 2019. The fact that this objective is in clear sight without the opening of any new physical locations illustrates the exceptional performance of our team as we continue to create real value for all of our stakeholders. We continue to diligently control cost during the quarter. And as a result, on a GAAP basis, generated modest operating income for the period. Operating income for the Transportation and Skilled Trades segment improved 3.4%, and our HOPS segment generated nearly 200% increase in operating income as compared with last year. Overall, while our marketing costs increased approximately $1 million over the third quarter of 2017, our cost per start has remained relatively flat. We closely monitor all of our marketing initiatives and will continue to invest in our marketing strategies and programs, given the results we are generating from these investments in the form of increased starts. Administrative costs declined by more than $2 million and we continue to lower our facilities cost. We have identified additional lease savings, which will further help lower our fixed cost over the next 12 months and beyond. Also, during the quarter, we closed on the sale of our remaining West Palm Beach property, which Brian will review during his remarks. We also expect to achieve approximately $1.7 million in annualized cost savings through the closure and teach-out of Lincoln [Technical Difficulty] As we mentioned during our last call, in late July, we received notification from NEASC, the accreditor for this school, that their commission had placed LCNE on probation. Given that the school was losing so much money and was not important to our long-term plans, we decided that it was in our best interest to close the school. Fortunately, we found a great partner in a neighboring school who has been able to take on all of our students with no interruption of our students' educational experience. By December 31 of this year, the last student will be transferred to this other school. While the teach-out is causing Lincoln about $4 million in additional expense this year, we will have no expense in 2019, which will further improve our profitability during the year. The teach-out is progressing as planned, and I'm pleased to report that we've had no significant complaints. Moreover, the accreditor is holding us up as an example of how a teach-out should be conducted. Speaking of accreditation, as we noted on our last call, the transition to ACCSC accreditation at 7 of our campuses is done, and we are now in a position to submit new programs and program modifications that we expect to launch next year. Having one accreditor moving forward will streamline our compliance activities and make us more efficient. Continuously improving our outcomes is at the heart of everything that we do, and we made progress in the quarter with both our retention rate and placement rate. Our students are investing their time and money with us and we take that responsibility seriously. We have created new reports that allows to quickly assess teacher performance and student engagement. And by continuously monitoring these reports and taking corrective action, we are able to increase retention. Our placement rates are also improving and we hope to achieve 80% placement overall for 2018, which will be the first time in over a decade that such levels had been achieved. Besides advocating for our students for employment, we also seek to obtain the best compensation packages possible. Due to our efforts, coupled with strong demand from employers, we are able to obtain for more and more of our students signing bonuses, student loan repayment programs and benefits that reward students for their investment in their education. Another outcome metric which also improved was our cohort default rate. In September, the government released a final 3-year cohort rates for 2015 and for the fifth year in a row, our rates improved. In fact, our rates are on par with traditional schools and meaningfully better than other for-profit schools and speaks to our strong outcomes and strong student success. In summary, for the first 9 months of 2018, we are ahead of our internal plan and we can clearly see achieving profitability in 2019. We've had 4 consecutive quarters of solid start growth and continue to make progress with our starts, our population, our retention rates and our placement rates. Costs are in line and profitability is improving. There is still some heavy macro winds out there, but our team is dedicated to meeting these challenges head-on and focused on building on the emerging trends. Our main objective is to continue the growth trends that are emerging and beat our plan while we continue to execute for our partners as well as our students. Now I'd like to turn the call over to Brian for a review of our third quarter financial highlights as well as an update on our guidance for 2018.

[Brian Meyers:]

Thanks, Scott, and good morning, everyone. I am pleased to share with you our highlights from the third quarter 2018, the operating results for the individual segments and our raised 2018 guidance. To begin, revenue and operating income for the quarter improved by $2.8 million and $800,000, respectively, over the prior year. In addition, on a same-school basis, revenue was higher by $4.6 million or 7.1% over the prior year. Second, total student starts were up 4.7% over the prior year and 7.5% on a same-school basis. The increase in student starts represents the fourth consecutive quarter with start growth, which is attributed to continued investments in marketing, our enhanced high school admissions program and an improved admissions process driving more consistency in the student cycle from lead to start. Third, we continue to invest in marketing initiatives resulting in approximately $1 million of additional spending in the third quarter compared to the prior year. While the marketing investments are high, the quest to obtained prospective students has remained relatively flat when compared to the prior year. This means that marketing dollars are providing a return on our investment and should continue to yield start growth over the next several quarters. Fourth, as a result of our positive start trends, improved financial conditions, during the quarter we were able to secure new surety bond provider and negotiated better terms. Surety bonds are required by many states for companies within our industry. The new terms resulted in a $3 million of additional liquidity during the quarter, and we anticipate another $1 million of improved liquidity in the fourth quarter. Fifth, on August 20, 2018, we announced a teach-out of our Lincoln College of New England campus at Southington, Connecticut. The campus struggled financially over the last couple of years and was projected to lose approximately $1.7 million in 2018. The decision to teach-out a campus is never made lightly. And unfortunately, as we strive for profitability, these difficult decisions are necessary for the overall health of the company. Our teach-out plan was structured with 2 goals

[Operator:]

[Operator Instructions]. Your first question comes from Alex Paris with Barrington Research.

[Alexander Paris:]

Wow, what a difference a year makes. I got a couple of questions, it might be all over the place. But first off, marketing costs up $1 million but costs per start flattish. Obviously, you're converting more leads. What's going on there?

[Scott Shaw:]

Well, as I said in my remarks and as we've always done, we watch that very closely. So we're getting results, we're changing where we market, we're changing some of the channels and wherever we don't see a quick enough response, we try to reallocate those resources as quickly as possible. Our sales teams have been fully trained and we've been working on that for the last, frankly, 24 months giving them better tools, better practices, more consistency, more program training. All in all, there's been just a lot of initiatives taking place. And over time, they've all started build on one another to lead to the results that we're getting. So it's a lot of little things by a lot of -- everyone out there in the field and it's working and we see it continuing, frankly.

[Alexander Paris:]

Despite the headwind from the job markets, which is impressive...

[Scott Shaw:]

Yes. That surely is the most exciting part of it all because as you know, as unemployment rate drops, that does limit the number of people looking for our opportunities. But it does seem to be that we're at this stage now that there's so much demand by the employers that -- it seems like more and more people are just contemplating and looking at the opportunities that we offer even in this low unemployment level.

[Alexander Paris:]

And then speaking of which, that 80% placement rate that you're forecasting for 2018, is that Lincoln in total, Lincoln overall includes both the auto schools and the HOP schools?

[Scott Shaw:]

Yes. Yes, that is. Last year, we're around 79%. As you probably know, our Transportation and Skilled Trades side is probably closer to 85% level and the Healthcare side is around the 75% level, but they average out around 80%.

[Alexander Paris:]

Great. Let me see. So now that you sold the last piece of real estate in West Palm Beach, is there anything left in the real estate portfolio that's going to be turning to cash at some point in the future?

[Brian Meyers:]

We do have one other facility that's vacant -- that's been vacant for a few years. It's in Connecticut, in Southfield, Connecticut. The appraised value of that is approximately $3 million. We are receiving some interest, not much on the sale. We did lower the price down so hopefully, in the next year or so. It's hard to say because we haven't had much interest there, but the appraised value is about $3 million of that.

[Scott Shaw:]

But that's the last unproductive asset that we have.

[Alexander Paris:]

Got you. And then ACCSC, the seven campuses, now you can introduce new programs. What are you thinking there in terms of new programs? Should we expect new programs in 2019 and should we expect them early in the year?

[Scott Shaw:]

You definitely should expect some new ones. It's really up to kind of the timing of getting through the accreditation. I would be looking for them more in the second half of next year. And these programs we're looking at, frankly, two massage programs where employers have come to us. These will be small programs, maybe 50, 60 students in two markets, and we've revamped our entry-level IT program. And so we anticipate, once that's fully approved, having some growth there in the existing campuses as well as we're going to introduce it to get good traction into two more campuses. So those are the expansions that we'd be looking at in 2019 for those 7 ACC new campuses.

[Alexander Paris:]

Okay. And then I have your guidance here, which is raised from the most recent guidance, and then you had furthermore to say, expect GAAP profitability in 2019.

[Scott Shaw:]

That, we do.

[Brian Meyers:]

I was just going to add the main driver of that, as Scott mentioned, is we're anticipating over 400 students higher in carrying population, which will really drive the profitability for 2019.

[Alexander Paris:]

And how goes the fourth quarter, I guess? That would be my last question. Any change from trends we've been seeing because the trends have all been favorable over the last four quarters or so?

[Scott Shaw:]

No changes.

[Operator:]

[Operator Instructions]. Your next question comes from Justyn Putnam of Talanta Investment.

[Justyn Putnam:]

I have a question for you on what you mentioned about your surety bonds. Just want to clarify, it sounds like you cleared out about $3.7 million in this quarter and you're expecting another $1 million in the fourth quarter, is that correct?

[Brian Meyers:]

It was $3 million. We had a restricted cash because we had a cash collateralized risk. So with the new bond provider, we were able to greatly reduce that so we were able to move $3 million in the third quarter from restricted to operating and then we anticipate at least another $1 million in the fourth quarter.

[Justyn Putnam:]

Okay. So as you move toward the end of the year, do you have any thoughts on what your net debt should look like?

[Brian Meyers:]

With the teach-out of LCNE, it's going to probably be slightly in a debt position by $1 million to $2 million.

[Justyn Putnam:]

Okay. To clarify, last year, you were net debt about $30 million at the end of the year?

[Brian Meyers:]

Last year, we were slightly positive, I think, by about $2 million when we add all the restricted to cash versus our debt. Yes, I think we have something in the press release I can send you. In the fourth quarter, I can send you after the call as well.

[Justyn Putnam:]

Okay. All right. Moving into -- okay, then moving into 2019, assuming you meet your objectives and profitability, what other opportunities are there to free up some liquidity? I mean, you hold -- a big amount of your debt you hold because of responsibility ratios and buying requirements and so forth. So what opportunities do you see in 2019 to free up some further liquidity?

[Brian Meyers:]

Yes. We do have that one property that we could be selling. We don't know if that would free up liquidity. We will have to work with the bank. Similarly, as I mentioned in the remarks, we had that a little over $2 million sitting in restricted cash. We're working with the banks now and we're optimistic that, hopefully, that could get freed up. But also with our profitability for 2019, we should be -- we will generate cash from operations and even add to the cash position. We anticipate we'll be in a positive net debt position.

[Justyn Putnam:]

But you don't foresee lowering your overall debt cost during the year substantially?

[Brian Meyers:]

Not for 2019, not that much. That one facility, which is our facility one, which is about $25 million. Next year, I anticipate it being outstanding for the most part of the year, at least the first half of the year, and then maybe during the second half of the year start paying it down a little bit like we did historically.

[Justyn Putnam:]

Okay. So this year, you were somewhere -- looks like you're going to be somewhere in $2.2 million in interest expense for the year. For 2019, that would be falling in the same ballpark maybe a lower, but...

[Brian Meyers:]

Correct.

[Justyn Putnam:]

Not a big change.

[Scott Shaw:]

Correct.

[Brian Meyers:]

No big change.

[Operator:]

And I am showing no further questions at this time. I'd like to turn the call back over to Scott Shaw for closing remarks.

[Scott Shaw:]

Thank you, operator, and thank you for joining us today, and we look forward to updating you on our progress as developments merit. We feel very good about our progress to date, and we remain bullish on our opportunities going forward. Thank you, everyone, and have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.