Lincoln Educational Services Corporation
Q4 2017 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the First Quarter 2018, Lincoln Educational Services Earnings Conference call. [Operator Instructions] I would now like to introduce your host for today's conference, Doug Sherk. You may begin, Sir.

[Doug Sherk:]

Thank you, Norma. And good morning everyone. Before the open of the market today, Lincoln Educational Services issued its release reporting the financial results for the first quarter and it marks early one 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 also be archived on the company's website. Statements during today’s call made by Lincoln’s management regarding the company’s business that are not historical facts may be forward-looking statements as that term is identified 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. 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 projections upon which the statements are based. Factors which may affect the company’s results include, but are not limited to the risks and uncertainties discussed 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 and Chief Executive Officer of Lincoln Educational Services.

[Scott Shaw:]

Thank you, Doug, and good morning, everyone. Thank you for joining our call to discuss our first quarter operating and financial results, as well as recent corporate developments. With me today is Brian Meyers, Lincoln’s Chief Financial Officer. It's been about two months since we last spoke with you and we've had a solid start to 2018. On a same school basis, we generated 1.5% revenue growth. Our interest cost declined dramatically as a result of the new credit agreement put into place a year ago. Moreover, we achieved increased starts in both segments for the second quarter in a row. Increasing our population and finishing the year with more students than what we started with is a key objective in returning the profitability. With increased starts and higher retention of students, we are clearly on our way to achieve this goal. Our improved performance is a testament of our teams persistent hard work and dedication, the result we reported today are ahead of our internal plan and have enabled us to reiterate the previously provided guidance for 2018, which Brian will review in more detail during his prepared remarks. One of the drivers behind our improved student start has been the corporate partnerships we formed over the past several years with the likes of Audi, Fiat/Chrysler, plus AutoNation and BMW Mini. Increasingly, companies are looking to us for our expertise at both recruiting candidates into our curriculum design to meet their specific training needs and then executing that curriculum. The end result of each partnerships has been high graduation rates, high graduate employment rates, and a high return on investment for our graduates, our partners in Lincoln. We broaden our partnership model this year and in January we entered into a new partnership with Hussmann, a Panasonic company and a manufacturer of medium and low temperature display cases and refrigeration systems. As we reported to you back in February, Hussmann is building an advanced refrigeration training center on our Grand Prairie campus and our HVAC graduates from around the country will be trained for Hussmann careers. Additionally, Hussmann will cover not only the tuition but also room, board, and transportation. This partnership illustrates the broad-based relationships we are developing with corporate America and has highlighted the dire need of employers to find solutions to their ageing and retiring workforce as well as staff expanding operations. The first class under this partnership is scheduled to start in June of this year. In addition, in April we announced a new partnership with Johnson Controls, a global leader in creating intelligent buildings and energy storage. The partnership involves expanding career opportunities for Lincoln graduates and Lincoln to assist into building the Johnson Controls skilled workforce. Graduates of our HVAC and EEST programs throughout the country will have the opportunity to pursue careers with Johnson Controls which is assisting Lincoln in recruiting students for the programs. Johnson is providing training equipment and sponsoring class rooms at 10 Lincoln campuses. I'm proud to announce today our third corporate partnership of 2018 which is with Bridgestone Retail Operations. This agreement will primarily focus on student recruitment and branding. Our dedicated Bridgestone account manager will work closely with Bridgestone to facilitate the hiring of Lincoln graduates into automotive technician positions within Bridgestone locations throughout North America. Meanwhile the skills shortage continues to reach crisis proportions for employers in many regions of the country. And as a result of our 70 plus years of experience, as well as our more recent successful execution of a variety of different corporate partnerships, we continue to be approached by other companies facing similar challenges. Today, the partnerships have been developed with the transportation and skill trade segment of our company. We are exploring partnerships for Healthcare and other profession segment but for the short terms, our growth opportunities for this segment are focused on meeting workforce needs. While we did experience year-over-year growth in new student starts on a same school basis during the first quarter, we also faced several challenges which impacted our growth. Weather forced the closure of numerous campuses during the quarter at a rate significantly higher than last year. For instance, we lost a total of 91 days to weather during the first quarter of this year as compared to 51 days in 2017 on a same school basis. We believe this adversely impacted the number of campus visits and admissions appointments as well as reducing the number of potential referrals. We also experienced some drag in the number of media starts during the quarter due to reduced efficiencies and less than anticipated growth in the lead flow from our search engine optimization initiatives. This was caused when the largest search engine altered their search algorithms at the beginning of the quarter which reduced the organic and branded lead flow through our website. We quickly adjusted the websites content and structure to meet the new specifications which resulted in a return to budgeted site traffic and lead flow by the end of the quarter. We believe that this head win has been eliminated. As the second quarter progress and despite these challenges, we were able to achieve growth in both segments. We are also continuing to implement the marketing that I reviewed with you back in February. We've changed certain vendors, increased investments in strategic areas and improved our systems processes and efficiencies. The new TV advertising campaign focusing on inspirational, informative and humorous themes targeting millennials has been successfully running in support of our transportation and skill trades programs since early first quarter. The new creative combined with our more localized and highly targeted media buys using traditional broadcast as well as digital and social media channels has allowed us to achieve greater visibility and brand awareness. We also believe that the increased year-over-year advertising spend during Q1 has provided momentum that will continue to pay dividends in Q2. And we've seen this to date with increased lead flow in April. In the meantime, we are currently working on expanding the new Ad campaign to also encompass and support our various allied health programs as well as additional transportation and skill trades programs. As a result of these initiatives in our first quarter starts, we continue to believe that for the first time in many years, overall starts from our campuses operating as of January 1st, will grow for the entire year. And we believe that that growth rate and student starts will pick up in the second quarter as compared to a year ago. On the accreditation front, we have been verbally notified by ACCSC, other commission's decision at its main meeting to award our seven Hub schools an initial grant of accreditation. While the Hub schools current accreditor ACICS has regained its recognition status from the Secretary of Education. We've elected to transition these schools to ACCSC, which would enable the company to implement consistent standards across our 22 technical schools. Once we complete the transition to ACCSC, we do intent to launch a new IT program in several of the schools. Also staying on the topic of accreditation, we've been verbally notified by NEASC, the institutional creditor for our Stubbington campus of their intent to issue a show cost directive to the school. At this time we are not in possession of the letter from NEASC, but a verbal communication with the NEASC staff has been positive and we'll be able to respond to the request for more information by their next meeting in late June. In summary, our first quarter came in above our internal plan and we are continuing to execute the initiatives we put in place to continue grow student starts. Of course and closely monitoring our plan, we are making incremental improvements to grow our bottom line. At the same time, we demonstrated an ability to carefully listen to the market place to act on new opportunities such as the ones being created this year with Hussmann, Johnson Controls and Bridgestone while we continue to execute for our longer term partners as well as for our students. We continue to enhance our educational experience which has resulted in improved retention and more and more of our students are finding employment as evidence by improving placement rates. To give you more insight on our first quarter financial highlights and to review our 2018 guidance, I'd like to return the call over to our CFO, Brian Meyers.

[Brian Meyers:]

Thank you Scott, and good morning everyone. I like to begin my comments with a few highlights that have occurred during the first quarter of 2018, later I'll discuss the operating performance for the individual segments and briefly review the 2018 guidance. First, revenue on a same school basis was up approximately $900,000 quarter-over-quarter. As a reminder, we complete all caps closures as of December 31st 2017, which means for the first time in several years, we did not have any closing campus expenses. Second, students taught on the same school basis were up 2.2% over the prior year. I am pleased to highlight that that both segments exceeded prior year and our debt demonstrating positive momentum. Third, although we started 2018 with approximately a 130 few students than in 2017, our increased marketing investment combined with our operational initiative successfully made up the short fall. As a result, by the end of the first quarter, our ending population had grown to the same level as in 2017's first quarter. Now, turning to our segment performance for the first quarter of 2018. Before I begin, I would like to mention that during the quarter, we reclassified our Marietta, Georgia campus from the Healthcare and Other Professions segment, to the Transportation and Skilled Trades segment. Since the majority of student concentration is currently enrolled in skill trades program, we believe the change was appropriate and in line with our segment structure. With that in mind, I'll begin our financial results. Now, with transportation and skill trades segment revenue decreased a 42.7 million for the quarter as compared to 43.2 million in the prior year quarter. The decrease in revenue was a result of a 2.2% decrease in average student population driven by lower carry in population of approximately 300 students. Partially offset in this reduction was a 1.3% increase in average revenue per student mainly from tuition increases. Student starts for the quarter increased slightly compared to the prior year comparable period. Operating income was 700,000 for the quarter as compared to 1.9 million the prior year. The decrease was mainly through the selling general administrative expensive cost which increased by 600,000 over the prior year due to increased marketing investment primarily directed at future growth. Now, a very strong results from our Healthcare and other professional segments. Revenue increased by 1.3 million or 7.3% to 19.1 million for the quarter as compared to 17.8 million in the prior year. An increase of revenue was the result of a 4.6% increase in average student population driven by an increase in carry in population of approximately a 150 students and a 2.5% increase in average revenue per student. Additionally, student starts for the quarter increased 5.5% compared to the prior year comparable period. Operating income was 200,000 for the quarter as compared to 300,000 in the prior year. The decrease was mainly due to selling general administrative costs which increased by 1 million over the prior year driven by 600,000 of additional marketing investment and 400,000 of increased administrative expenses. Lastly, the transitional segment as mentioned early, did not have any operating activity during the quarter. However, revenue in operating was for the quarter of 2017 was 4.3 million and 600,000 respectively. Corporate and other cost decreased by 200,000 to 7.2 million for the quarter from 7.4 million in the prior year. The decrease in cost was primarily driven by reduction in salary and benefits of approximately $400,000 partially offset by a loss on sale of assets of a $100,000. The loss on sale of assets relates to a catch up depreciation expense in connection with the building previously classified as held for sale during 2017 but re-class held for use which for as for January 1st 2018. Finally, our 2018 guidance. We are reaffirming our previously disclosed guidance which includes the following. First, we anticipate revenue to increase by low single-digits compared to the prior year, excluding the 2017 transitional segment. Second, student starts are expected to increase by low single-digits and hedge through the prior year excluding the 2017 transitional segment. Third, we expect 2018 operating income to be in the range of breakeven a loss of 3 million. Fourth and last, we continue to expect our 2000 year-end population to be greater than prior year. With that, I'll now 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 of Barrington Research. Your line is open.

[Alex Paris:]

Hi guys, congrats on the quarter.

[Scott Shaw:]

Thanks, Alex.

[Brian Meyers:]

Thanks, Alex.

[Alex Paris:]

I have a few questions that have risen out of your prepared comments. First off, ACCSC verbally informed you for the seven Hub schools, I presume then you'll get it in writing. How soon will you be able to launch new programs under ACCSC?

[Scott Shaw:]

Alex, it'll probably take a couple of months just to go to the process. As you can imagine, they have a lot on their plate with a lot of the schools going through the process of transitioning over. But I'm optimistic that by the middle of the summer we should be able to have something out there with the new IT program.

[Alex Paris:]

And why IT?

[Scott Shaw:]

Because it's a --.

[Alex Paris:]

It's the program, it could be anywhere really, right?

[Scott Shaw:]

It could be but we as we looked at our programs and we've done a review of the programs. Also with a third party it appeared that we were certainly under represented with that opportunity in a number of our markets and from talking to employers and from frankly employers and people at the campuses the program may be updated. And so, given the strength that's out there, we really think it's a good opportunity for us to get some additional growth. It won't be a huge program for us, but every additional body certainly helps us and it should be a nice performer for each of those campuses.

[Alex Paris:]

Great. And then, with regard to NEASC and your regional accredited campus, show cost. I suppose not a surprise given if I recall correctly that that campus loses money. What was the reason for show cost, was it a financial responsibility issue?

[Brian Meyers:]

Yes, it's a financial.

[Scott Shaw:]

Exactly, financial issue. And so, we'll be meeting with them in June. Kind of giving the clear picture as you can imagine. Our financials aren’t the easiest to read and understand, given all the changes that have taken place but also as you know we've got in our footing in a good place and things are turning around. So, I'm very confident about the future for that campus.

[Alex Paris:]

And just give us orders of magnitude idea, how big is that student -- is that campus in terms of either revenue or enrollment or however you want to categorize it?

[Scott Shaw:]

Sure. It's around 400 students.

[Alex Paris:]

Okay. 400 of your over 10,000 students. And does that come in under Healthcare and other professions?

[Scott Shaw:]

Yes, it does.

[Alex Paris:]

Okay. Next question and related the altered algorithm, the adjustments to your website, just to make sure I have that clear. You after the changes you returned to sort of budgeted traffic and lead flow by the end of Q1 is that what you said?

[Scott Shaw:]

That's correct. They made an adjustment which they thought would be helpful but basically without getting too far into it, it started pulling up a lot of information from all the closed schools that we have and it's kind of confusing the market place. Needless to say, once we figured out what the issue was, we got to correct it and things are back on track.

[Alex Paris:]

Okay. Would you be willing to give me some sort of idea in terms of where your leads come from, categories like SEO, TV, et cetera? Like percentage in it, well.

[Scott Shaw:]

I guess, the bulk meaning like 75% of to the internet.

[Alex Paris:]

Okay. And then, --.

[Scott Shaw:]

Its better talk to describe what TV actually doing for your, Alex as you know.

[Alex Paris:]

What's that? Oh yeah, exactly, I mean.

[Scott Shaw:]

TV is just meant to just drive folks to the internet, right.

[Alex Paris:]

Correct.

[Scott Shaw:]

So, become a lead that way.

[Alex Paris:]

All right, and then starts, congrats on the positive starts and then you're reiterating guidance for the full-year of positive starts. It also sound like you said that starts will pick up in the second quarter. So, maybe sequential year-over-year improvement, is that what you said in the prepared comment. Your?

[Scott Shaw:]

Yes, that's correct.

[Brian Meyers:]

Yes.

[Scott Shaw:]

Yes.

[Alex Paris:]

Great. Lastly, re-casted numbers for each segment historically. Is that going to be available to, I know it's not a lot, it's a 1 million or so but it was a 1 million in the quarter it looked like. Are you going to restate or make available the restated historical quarter for our earnings, Meyers?

[Brian Meyers:]

Yes, we will. And everything that we put out in the earnings release has it restated for at least to first quarter 2017 verse '18. But yes, we're going to restate all quarters.

[Alex Paris:]

Got it. It'll be nice to have the quarters of last year at a minimum. So, for projections from last year.

[Brian Meyers:]

Right.

[Alex Paris:]

Thank you very much and good job on the quarter, guys.

[Scott Shaw:]

Great. Thanks, Alex.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Justin Hartmann of [Atlanta Investments]. Your line is open.

[Justin Hartmann:]

Good morning.

[Scott Shaw:]

Good morning, Justin.

[Brian Meyers:]

Good morning.

[Justin Hartmann:]

My question is I think you mentioned that the first quarter result in progress is kind of above your internal estimates. I was just curious to know you left the guidance unchanged that is being conservative or is there may be a potential bump in the road further in year than and that we should be aware of?

[Brian Meyers:]

We're unaware of any bumps in the road but I think it says prudent for us to maintain the guidance that we have for now.

[Justin Hartmann:]

Okay. And then my next question maybe a little harder for the answer, Scott. But I would like to get your thoughts on how you see the environment as we do come toward the end of the year and into 2019. I think having the year-end population being equal to the last year and potentially growing -- going forward. I think one thing we would have a bit of a tail win from operating leverage standpoint but is the headwind getting fine for a few years. So, how do you see the environment has become to the year-end and these be potential for about maintaining growth, accelerating growth. And I just like your thoughts on a little longer term view.

[Scott Shaw:]

Sure. Well, I think that the environment is trending or remain challenging. I mean, unemployment rate continues to drop. However with that said, I think that we feel like we -- excuse me -- figure it out, at least had to drive some incremental growth in to our campuses -- excuse me. And despite these headwinds, not sure what's happening to my voice.

[Justin Hartmann:]

Well, right.

[Brian Meyers:]

Well, hang on that -- well, Scott catching his voice.

[Scott Shaw:]

Well, you know by not achieving that our guidance of the same the carry in population to be at the same level as prior year or year-end population rather. That will put us in good floating for 2019 and got to talk about our projections which continued. Continued so hopefully some modest stock growth there. But that put us on really good footing for 2019, getting back to profitability. So, are able to achieve that and we think we will be. We can now that we don’t have those, the expenses from our transitional segment the closing campuses, we should return the profitability in 2019. And that is our goal. Yes. And just add a little color if you want. I do feel despite the challenges of low in employment rate, more people are talking about what is the value of college and are there other alternatives. It's still a slow ship to turn. But every now and then, even in the Wall Street Journal you'll see these articles that are popping up. And I have to imagine that it does have some help to us. -- excuse me. But it's not dramatic enough. Maybe I've allergies or something, I don’t know. It's not dramatic enough to make a big difference. What Brian summed up is exactly what we're shooting for when we focused on improving our retention rate, building that population and continue to incrementally move forward. That is will be will turn the company around.

[Justin Hartmann:]

Okay. And then, one last question for your Brian. I think there is a first this can lead throwing off between '19 should help with the possible pictures that true. But we're going to get [indiscernible].

[Scott Shaw:]

So, to say -- oh lease.

[Justin Hartmann:]

The door.

[Brian Meyers:]

Yes. That's it's an [indiscernible] towards the end of 2019 but you're right. Once, we have losses over a $1 million for that lease. So, once that you know I think it expires in the fourth quarter of 2019.

[Justin Hartmann:]

Yes, I think, yes.

[Brian Meyers:]

So, really that'll pick us up for a 2020 more than '19.

[Justin Hartmann:]

Okay, thanks. Okay great, thanks for taking my question.

[Brian Meyers:]

Thanks, Justin.

[Operator:]

Thank you. I'd like to turn the call back over to Scott Shaw, President and CEO for final comments.

[Scott Shaw:]

Hopefully my voice will hold out for this one last sentence, -- maybe not -- excuse me. Thank you for joining us today. We look forward to updating you on our progress as developments emerge. I hope you all have a great day. Thanks again. Bye-bye.

[Brian Meyers:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.