Lincoln Educational Services Corporation
Q2 2017 Earnings Call Transcript

Published: 7 Aug 2017

[Operator:]

Good day and welcome to the Lincoln Educational Services' 2017 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doug Sherk of the EVC Group. Please go ahead, sir.

[Doug Sherk:]

Thank you, Leanne and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its Second Quarter 2017 Financial Results news release. The release is available on the Investor Relations portion of the company's corporate website at www.lincolnedu.com. Today's call is being broadcast live on the company's website and a replay of this call will also be available and archived on the company's website. Statements during today's call made by management of Lincoln Educational Services Corporation regarding Lincoln's business that are not historical facts may be forward-looking statements as that term is defined in the federal securities law. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue and their opposites 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 and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved, if at all. The company cautions you that these statements concern 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 projects upon which the statements are based. Factors which may affect the company's results include, but are not limited to the risks and uncertainties described in the Risk Factors section of our 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 belief as of that time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date hereof. Now I'd like to turn the call over to Scott Shaw, President, Chief Executive Officer of Lincoln Educational Services.

[Scott Shaw:]

Thank you, Doug and good morning, everyone. Thank you for joining our call this morning to discuss our second quarter financial results as well as corporate development since we last talked with you in May. With me today is Brian Meyers, Lincoln's Chief Financial Officer. I'll begin with an overview of our recent operating performance and highlights of the quarter, then Brian will provide some further details on the quarter's financials, as well as our updated outlook for the current year. Afterwards, we'll take your questions. Before I share with you some of the many qualitative improvements we achieved during the second quarter, I want to address with you upfront our starts and what we're doing to improve our results going forward. Despite a very challenging operating environment brought on by the well-documented low unemployment rates and rising wages for skilled and unskilled labor, our organization continue to make progress over the past three months. We generated a 2.7% increase in student starts from our Healthcare and Other Profession Segment and we generate a slight increase in revenue from our transportation and skilled trade segment. At the same time, within our Transportation Skilled Trades Segment, we did experience a decrease in high school starts, as a result of a decline in the start rate. The start rate is measured as the number of students that start their program with Lincoln, compared to the number of students that enrolled. Our high school channel remains an important means for us to engage with students and educate them on the opportunities within the industries we serve, especially when coupled with an education from Lincoln. Not only does this channel result and starts for the current year, but it also translates into starts in future years. We know from surveys that many of our adult students first heard about Lincoln from one of our high school representatives. Our high school shortfall is mainly occurring at three campuses and is directly attributable to two issues that we are now addressing. The first issue involves processing people. At these campuses, we did not provide enough support and interaction with our enrolled students. Keeping students engaged with us requires constant contact, especially when students are enrolling seven months in advance. To address this concern, we are enhancing our engagement with the students both in person and electronically, and making additional changes to our organizational structure to ensure closer supervision of the process. Second, as we strive to find the optimum balance between tuition price and affordability, we clearly experience lower starts in markets where we scaled back the volume of scholarships. Overall affordability remains a major deterrent for many students and we believe that while a lower tuition is certainly a plus, we believe students are more inclined to start knowing that they've been awarded a scholarship. Consequently, we've increased scholarship opportunities for the remainder of the year. This is probably more detailed than you need to know, but since our growing our population is our number one means for returning to sustainable profitability, I wanted you to understand clearly what we were doing to achieve that goal. Moreover, we remain vigilantly focused on balancing our expenses with our revenues. We continue to lower our fixed cost through rent reductions, process improvements and appropriate staffing. We continue to operate in a challenging market. Students have more opportunities with a strong economy, which is why we need to be more involved with them from inquiry to start. We believe that we're being impacted by the growth and wages for the lowest income segment of our economy and the decline in the unemployment rate for those with less than a high school education can make up much of the low-wage workforce. In June, the unemployment rate for individuals with less than a high school education was 6.4% as compared with 7.5% a year ago. As a result, we believe potential students may choose to postpone training and enter the workforce directly. And so, in light of the unexpected decline, in our start rate, we felt that it would be prudent to reexamine and revise our guidance. Later, Brian will review in more detail and discuss our modified guidance for the remainder of the year. As I've said in the outside of today's call, we did have many positive developments both during the second quarter as well as in July. The 2.7% increase in student starts at our Hop segment was due to an increase in our License Practical Nurse or LPN program starts. There are strong demands for LPNs from healthcare providers and during the quarter, we implemented some tuition adjustments in select markets to be more competitive. Remaining focus on HOPS, we also made progress during the quarter and in achieving re-accreditation for our seven HOPS campuses that were formally accredited by ACICS. You may recall that last year, the federal government decided to not recognize ACICS-accreditation and this meant that this seven campuses were pretty much [indiscernible] in terms of new programs and reacting to the market's needs. Based on the progress to date, if our re-accreditation visits from the fall go as expected, we anticipate transitioning to a new accreditor during their first quarter of 2018. Once we're accredited, we'll be able to add new programs that fit the needs of our partners and the local markets. In turn, new program should lead to increased starts and improved profitability at these HOPS campuses. Overall, the refocused HOPS operations are executing to their strategy and our team appreciates the energetic commitment to Lincoln and our students. Turning to the Transportation and Skilled Trades Operations, I'm most confident about Lincoln's increasing role in helping American companies meet their workforce needs. Each quarter, new companies reach out to us because we are uniquely positioned to serve their needs. No one else has the breath of automotive and skill trades offerings and experience at our scale. Moreover, our existing partners continue to experience success for Lincoln and seek to expand their commitment to us. One clear example is our strong partnership with Haas Automation who is the largest machine tool builder in the western world. During the quarter, we launched our first Gene Haas automation center at our Indianapolis Campus. This is now our third Haas CNC program and we are waiting for regulatory approval to commence enrolling students at our fourth location in Connecticut. It has helped us connect with employers and we have helped their customers grow with trained CNC machinist. To further support us and the manufacturing industry the Gene Haas foundation awarded a grant of $250,000 to support scholarships for our students. In addition, our Grand Prairie Texas campus was selected by Haas to host the 2017 Annual America's H-Tech [ph] Education Conference. Over 180 attendees from industry and academia attended lectures and demonstrations at our campus during the second week of July. Other partnership activities during the quarter included launching the new Mini Automotive Technician Program in June with a fully-enrolled class as well as enrolling a second mini-class that will begin in October. In addition, we received over a dozen vehicles from FCA Corporation to support the new [indiscernible] Level II training. Our first Volkswagen class is scheduled to start in November. We have several pilot programs scheduled to be launched over the next nine months with companies from refrigeration vendors to material handling providers. Our pipeline of opportunities continues to grow, which again confirms that Lincoln is uniquely positioned to serve the industry as the pressures of staffing of qualified employees increases with the retirement of the baby boomers. Next, I like to highlight a couple of other positive dynamics, which occurred during the quarter. First, our overall student retention rate remain stable, illustrating that once a student starts a program, chances are they will complete the program. Second, our placement rate continue to improve, which confirms that our graduates continue to be in high demand. Our placements are out for both HOPS and Transportation Skilled Trade Segment. Moreover, employers continue to seek ways to attract our best students by offering signing bonuses, loan repayment plans, tools and other incentives. Now I'd like to circle back to the discussion about affordability and how we better-serve future students. It is clear that industry needs more trained entry-level people and that fewer individuals are seeking these opportunities, hence the skills gap. And despite the fact that the economy may be strong, segments of the population are clearly unable to afford the quality education that we offer. To address this situation, we continue to explore delivery and pricing models that could help attract more students. Towards the end of the second quarter, we rolled out a new Collision Repair Program at several campuses, which we hope proves to be successful and could become the model for all of our future programs. This program is shorter in duration, which lowers its cause and enable students to enter the workforce more quickly. In addition, 25% of the program is delivered online which means that students come to campus one or two less days a week, which enables them to better-balance their adult lives and hopefully give them more opportunity to work and earn an income while attending school. Since the program was just launched, it will be several quarters before we have a complete assessment of outcomes and increase it to enrollment, but I feel confident that students will like this model. On a regulatory front, the industry did begin to see some relief during the past several months with two changes at the federal level

[Brian Meyers:]

Thanks, Scott, and thank you, all, for joining us this morning. I'll begin my comments with several highlights and updates from prior matters that have impacted the company during the quarter and then I will discuss some operating financial performing highlights, specifically from our operating segments. First in the prior quarter, the company had entered into our purchase-and-sell agreement to sell two or three properties located at West Palm Beach Florida and subsequently executed a short term loan which was secured by two properties scheduled to sell. The sell process was progressing well and is scheduled to close August 14. Under the terms of the transaction, the company has received in Escrow $3.2 million non-refundable deposit. We anticipate receiving net proceeds of approximately $15.2 million and recording a $1.4 million gain. We'll use part of the net proceeds to retire the $8 million short term secured loan. Second, our net interest expense has decreased by approximately 55% quarter-over-quarter as a result of the new security revolving credit facility with Sterling National Bank, which became effective March 31, 2017. Now I would like review some of the segment operating financial highlights from our second quarter. Our transportation and skilled trade segment revenue increase slightly to $41.3 million for the three months ended June 30, 2017 as compared to $41 million in the prior year comparable period. Students starts for the three months ended June 30, 2017 were down 9%, primarily due to a lower start rate in our high school demographic, which Scott previously mentioned. However, I would like to add that often decline in student starts was an increase in revenue due to an increase in our carrying population quarter-over-quarter. Operating income for the Transportation and Skilled Trade Segment decline to $0.9 million for the three months ended June 30, 2017 from $2.4 million in the prior year comparable period as a result of selling general administrative expenses, which increased by $1.8 million. The increase in expenses was largely due to a $0.9 million of additional bad debt expense mainly driven by higher student accounts receivable balances. Higher accounts receivable write-off and the timing of Title IV receipts. The write-off mainly stem from students who have dropped from their program and failed to make payments for a period of time. Additionally, sales and marketing expenses increased by $0.7 million, resulting from a strategic marketing initiative intended to reach more students. These initiatives resulted in a slight improvement in our start in our adult demographic quarter-over-quarter. Our Healthcare and Other Professional Segment revenue was $17.9 million for the three months ended June 30, 2017 as compared to $18.7 million to prior year comparable period. The decrease in revenue can mainly be attributed to a 3.4% decline in average revenue for student caused by shift in our program mix combined with tuition rate decreases in various programs. Slightly offsetting the decline of revenue was the 2.7% increase in student starts for the quarter compared to the prior year comparable period. Operating loss for the Healthcare and Other Professional Segment was $0.6 million for the quarter as compared to the operating income of $0.9 million for the prior year comparable period. The decline of $1.5 million was a result of several factors including a decrease in revenue of $0.7 million quarter-over-quarter which was mainly attributed to a 3.4% decline in average revenue per student, a $0.6 million increase in sales and marketing expense which has driven starts up by 2.7% for the quarter and a $0.3 million increase in administrative expenses primarily the result of increased bad debt expense. Operating loss for the transitional segment decreased to $0.8 million from $1.5 million in the prior year comparable period. The decrease is primarily attributed to a decrease in expenses due to the suspension of new student enrollments and declining student population. Corporate and other cost increased by $0.3 million to $5.4 million for the three months ended June 30, 2017 from $5.1 million the prior year comparable period. The increase in our corporate and other expenses was driven in part by a $1 million increase in medical cost as compared to the prior year. During 2016, the company experienced historically low medical claims compared to this year, resulting in this significant increase quarter-over-quarter. Partially offsetting the increase was a reduction in salaries and benefits of $0.7 million. I would also like to note that including corporate and other expenses for the three months ended June 30, 2017, there's approximately $0.3 million of additional dormitory request directly relating to the closure of over the Hartford Connecticut campus which occurred on December 31, 2016. Let's turn now to the balance sheet and cash flow for the quarter. As of June 30, 2017, the company had net debt of $19.6 million compared to net cash of $3.4 million as of December 31, 2016. The net debt balances calculated as the total long term debt including the current portion less cash, cash equivalents and restricted cash. Their increase in our net debt was mainly the result of the net loss during the six months ended June 30, 2017 in combination with the seasonality of the business. Now, let's turn to the guidance. We are modifying our previously disclosed guidance due to the lowered unexpected high school starts on our Transportation and Skilled Trade Segments which resulted in a decrease in this segment's student population. The modified guidance includes first for the full year the company expects revenue to range from essentially flat to a low-single digit revenue decline in Transportation Skilled Trade Segment; second, the company expects to range from essentially flat to low single digit declines for Healthcare and Other Professional Segments; third, for the full year, the company expects to break even or incur a slight operating loss excluding the impact of closed campuses; fourth, we anticipate to break even or incur a slight net loss for the remaining nine months of the year; and lastly, we anticipate the complete teach out of the remaining campuses classified on our transitional segment. With that, I'll now turn the call back over to the operator so we can take your questions. Operator?

[Operator:]

[Operator Instructions] And your first question is from Alex Paris with Barrington Research. Your line is open.

[Scott Shaw:]

Alex, are you there?

[Alexander Paris:]

Hi. I'm sorry, I had it on mute.

[Brian Meyers:]

No problem.

[Scott Shaw:]

Yes. We can hear you now. Good morning.

[Alexander Paris:]

Good morning, transportation and skill trades, down 9%. I expected a slight gain. You kind of went through what the issues were. It was primarily three schools you say. Question, the aggregate of the others were up in terms of starts?

[Scott Shaw:]

They were probably flat the aggregate of the others, but we saw the biggest decline. Basically we have five destination of high schools, Alex, and of those five, three of them is where we saw the most significant softness.

[Alexander Paris:]

Was it those schools also that kind of pulled back on scholarships?

[Scott Shaw:]

Yes, that's what was the interesting aspect of it. We're looking at it and trying to understand the rationale for why the start rate was lower. Those were the campuses that had the biggest decrease in the scholarship dollars. We've made a strategic decision to cut back on some scholarships and put some more money into marketing and we did that in different markets and we can see now what the result of that is. So we're quickly changing our approach and realizing that students, when they're given a scholarship, almost regardless of what the dollar amount is, it just makes them, for say, feel good as well as ties them closer to our campus. We think that we can turn around going forward, part of that decline.

[Alexander Paris:]

And what was the nature of the scholarship before you scaled it back? What was the range of scholarship available and how was that awarded with it?

[Scott Shaw:]

Sure.

[Alexander Paris:]

Based on high school grades, or what have you?

[Scott Shaw:]

It's really based on that they apply for it, they write an essay and the dollar amount range from I think maybe a $1,000 to $3,000 in total. So up to maybe 3% - I'm sorry, up to about maybe 10% of the program. So we gave them out judiciously, but it wasn't based off of their financial needs. It's strictly based off of their demonstration of their interest in coming to Lincoln.

[Brian Meyers:]

As well as we had housing scholarships and some nursing scholarship as well for a particular program.

[Alexander Paris:]

Okay. Was it that you just eliminated these scholarships last quarter?

[Scott Shaw:]

No, we didn't eliminate them, but when you look at the volume that were handed out, it became a lot less. I mean the one school; they reduced the volume by 80%. So it's a very simple correction that needs to be made. But probably the bigger point, Alex, is we could start packaging these students earlier in the year than we could last year because of some changes that they could use last year's tax numbers and so, we had people package sooner in the process and I guess long story short, we may be a lost sight of that and then keep them as engaged as they should have. In the past, they were packaged much closer to the start so our representatives were more engaged with them closer to when they were actually going to start. And since we're able to get frankly ahead of the game this year, we probably didn't keep the students as engaged and given the strong economy and we went back in Kansas students, 'Why did you not come?' a percentage may be 10% or so, decide, 'Well, I'll just go right into the workforce.' Again, going forward, we just need to stay more engaged with the students throughout the whole process.

[Alexander Paris:]

Okay. And then you noted then [indiscernible] were there changes in processes, but change in the organizational structure. What did you mean by that?

[Scott Shaw:]

Sure. We'd centralize more of the whole high school recruiting up at the corporate level and while we're going to keep certain aspects that are working quite well like using our call center out in Denver; we're going to move back to having the five destination campuses more in control of the oversight for the high school program.

[Alexander Paris:]

Okay. These changes were made immediately. They were made real-time. So all of the things being equal, you would expect a better outcome in the third quarter for transportation and skill trades in terms of starts?

[Scott Shaw:]

Well, yes and no. Everything is being put into place, but we have students that are starting last week this week. August is a big month for starts. Some of these students, we may not be able to reach. So I wouldn't say that this is a turn on a dime, but I certainly would say that with each passing month, our level of improvement gets better.

[Alexander Paris:]

So these changes were made post Q2 and have been kind of been implemented during Q3.

[Scott Shaw:]

Correct. It wasn't until we were able to see the results of June, which was the first time of the high school starts we take place and then when we start seeing some of those results, that's when we start to dig in, to understand why it was happening.

[Alexander Paris:]

All right. The other national competitor in the space reported results last week and they had a much better start within their automotive schools than I think analysts were expecting. I don't cover the company. But I don't know if they gave this any credit, but one of the things that they've done that is pretty unique to the post-secondary education sector is they adapted a new incentive compensation structure for their enrollment councilors which allows for some incentive pay based on the headcount of graduates as supposed to the headcounts of enrollments. Have you considered that? Are you considering doing something like that?

[Scott Shaw:]

Yes. We've looked at that and I guess just from competitive standpoint. All I will say is that we will be addressing our salary compensation plans for our high school reps in the next year, but we've been making adjustments throughout the period. I frankly didn't hear anything on the call that suggested that they were attributing any of their success to that plan. I guess I'll have to go back and may re-listen to it, but it's something that we are constantly engaged with.

[Alexander Paris:]

I didn't mean to suggest that they said anything about it. I don't know if they did or something, but I know that they implemented that; I know they had a stronger result in a similar macroeconomic environment. Different locations, different geographies, but it's challenging at this end as opposed secondary spectrum where you have a strong job market.

[Brian Meyers:]

Correct.

[Alexander Paris:]

All right, just a couple of small ones. Looks like you're on target to close the sale of the West Palm Beach properties, August 14, having non-refundable money in Escrow makes it you're pretty certain that it will close. Of that $15.7 million, you'll have a gain, but what is your intent in terms of debt reduction?

[Brian Meyers:]

We will be going to be paying off that closing, the $8 million short term loan that we took out for those two facilities and then I would say during the end of the third quarter and then going into the fourth quarter, we'll be paying down our debt. We're hoping to finish out the year with a little or no debt. I would say we should finish out the year with no debt outstanding.

[Alexander Paris:]

Great. And then the interest expense during the quarter of roughly $700,000, is that the run rate? At least until you make these debt reductions under the new revolver?

[Brian Meyers:]

Correct and it should even go lower in Q3 and Q4 as we start paying down our debt and we will finish out the year with a nice cash balance with no debt outstanding.

[Alexander Paris:]

Okay. Good. That's helpful for now. I'll be talking to you later. Thank you.

[Brian Meyers:]

Sure. Thank you.

[Scott Shaw:]

Thanks, Alex.

[Operator:]

[Operator Instructions] Your next question is from Justin Putnam with Talanta Investment. Your line is open.

[Justin Putnam:]

Hey, good morning. Just real quick, a kind of a higher level, a 30,000-foot level here. 2017 is obviously a transition year for you - closing campuses, bringing the HOPS back in. How does where we are so far this year fits your outlook, made you a little bit further past end of the year according next year both from profitability and from a growth standpoint?

[Scott Shaw:]

Sure. Well, the short fall starts is putting us a little bit behind the [indiscernible] here. We'll end up the year probably a little bit down in population than we were anticipating, but as we mentioned earlier, we do have a number of initiatives under way to hopefully turn around things in the remaining basically at this point, about five months of the year. It has probably maybe delayed things by a quarter or so, but again, I'm optimistic. As I said overall, if you're looking at the bigger picture, again, more and more companies continue to reach out to us to figure out how they can in scale get more entry-level people. So these conversations take time to come to fruition, but the challenge that they face isn't going away. How they solve that challenge is what they're trying to work on and we're trying to work with as many companies as possible. So while that we're having a little softness right now, again, looking towards the future, all systems are really pointing our way so we just have to get in front of all of that.

[Brian Meyers:]

And the one thing I'll add, Justin, is depending on where we finish out with our population at year-end, we'd look to be profitable at 2018. We're not anticipating to close any more schools as of today, so we won't have the transitional segments that we're hoping to be profitable in 2018 [indiscernible] what comes out.

[Justin Putnam:]

Well, my next question is about your confidence underlying your call structure beyond the end of the year. Obviously that's a little bit more in your control than perhaps enrollments on the macro issues.

[Brian Meyers:]

Correct.

[Justin Putnam:]

All right. That's it for me. Thank you.

[Scott Shaw:]

Yes.

[Brian Meyers:]

Thank you, Justin.

[Operator:]

I'm showing no further questions. I would now like to turn the call back to Scott Shaw, President and CEO for any further remarks.

[Scott Shaw:]

Thank you, all, for joining us today. We appreciate your interest and as I said, we're quite bullish on the future that Lincoln has and we'll continue to address our current short fall and continue to enhance the assets that we think are unique to the industry and we look forward to updating you all in our progress in early November. I hope you all have a great week. Thank you.

[Operator:]

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