Lincoln Educational Services Corporation
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Lincoln Educational Services Earnings Conference Call. My name is Celia, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Shaun McAlmont, Chief Executive Officer. Please proceed, sir.

[Shaun E. McAlmont:]

Thank you, Celia, and good morning, everyone. Joining me on the call today is Cesar Ribeiro, our Chief Financial Officer; and Scott Shaw, our President and Chief Operating Officer. Let me begin this morning by reading the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements in this presentation concerning Lincoln's future prospects are forward-looking statements that involve risks and uncertainties. There can be no assurance that future results will be achieved, and actual results may differ materially from forecasts, estimates and summary information contained in this earnings release. Important factors that could cause actual results to differ materially are included in Lincoln's Annual Report on Form 10-K for the year ended December 31, 2012 and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement. This morning, I'll provide an overview of the company and our strategy. Scott will discuss our operations and Cesar will share our financial highlights and forecasts for the year. We'll then take your questions. There are 3 important points that I'd like listeners to take away from this call

[Scott M. Shaw:]

Good morning, and thank you, Shaun. I will begin with reviewing our organizational structure and major initiatives and then share more detail about a number of the 5 growth strategies for 2014 that Shaun outlined. We are focused on being the leading provider of middle skills training in each of our markets, and eventually, throughout the entire United States. We remain focused on 5 verticals

[Cesar Ribeiro:]

Thank you, Scott. Good morning, everyone. As we disclosed in our press release earlier this morning, student starts decreased 7.3% for the quarter. Excluding the announced campus closures, which we stopped enrolling in 2012, ATB and online student starts were down 4.9% for the quarter. Although, new student starts were still down for the quarter, we continue to believe that we are beginning to experience stabilization in our starts. We started the third quarter of 2013 with approximately 3,000 less students than we had on July 1, 2012. This led to a decline in our average population for the third quarter of 2013 of 14.2%, which resulted in revenue declining by 13.3% or approximately $13.5 million as compared to the third quarter of 2012. Approximately, $4.4 million of this decrease was from the announced campus closures. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which have averaged historically about 3%. The decrease in student starts also impacted our capacity utilization, which decreased to 37% from 41% in the third quarter of 2012. The decrease in capacity utilization produced significant negative leverage as our operating margin decreased to a negative 3.1% for the quarter from a positive 1.8% in the third quarter of 2012. Other key highlights in the quarter included

[Operator:]

[Operator Instructions] The first question comes from the line of Scott Schneeberger, Oppenheimer.

[Scott A. Schneeberger:]

Could you guys address what you are doing with regard to pricing? I think, Shaun, you mentioned a delay of first quarter tuition increases, and then you mentioned scholarships. Are the scholarships going to be in any specific programs versus others and just with the overall strategy is there.

[Shaun E. McAlmont:]

Yes, I'll start and then I'll hand it over to Scott and Cesar for a little more detail, if they see fit. But, yes, affordability continues to be one of the issues that consumers that are looking at our schools face. And so because of that, we've decided to address it in 2 ways

[Cesar Ribeiro:]

Yes, I guess, the only point I would add is that, again, we are deferring tuition increases, not necessarily across the board, but by geography and selected programs where we feel there are more affordability issues than others. And just like Shaun said, the same thing with scholarships; where there are more affordability issues, we will target selected scholarships to try to assess those students to be able to get an education.

[Scott A. Schneeberger:]

Could you guys elaborate a bit on persistence what you're saying, what you're anticipating going forward?

[Shaun E. McAlmont:]

Yes, I'll start and then let Scott give a little more detail. But we're very happy about what we've seeing in terms of persistence improvement. Scott mentioned our Lincoln Edge program, which really evolved from our early student engagement program and other steps that are focused on mentoring our students through the program. If you recall, when we had high numbers of ATB students, our goal was to always affect their ability to complete school because that completion rate was a proxy for loan repayment. That program, even though ATB students went away, became institutionalized, and we found that it helped students who've come in that have had different life circumstance challenges to progress to a point in school where they graduate at higher rates. We've seen our completion rate increase by about 10 percentage points based on that program over time. Scott?

[Scott M. Shaw:]

Sure. As Shaun mentioned, I mean, it's a lot of initiatives underway to drive greater persistence. I mean, as a company, we're seeing improvement frankly across the board at almost every single campus, with total persistence improving overall. And the level of increase that we're looking for is around a 1% to 2% increase in our overall graduation rate per year, and where we seem to be tracking in that direction again for this year.

[Scott A. Schneeberger:]

Thanks. And then lastly, Scott, thanks for the discussion on marketing and advertising. Could you just take us through that a little bit more? I'm curious about the timing on what you're doing. We saw a bit of a decrease in third quarter, might we see a pickup in the fourth or first, or how we should think about that going forward and just the overall plan with regard to the advertising strategy?

[Scott M. Shaw:]

Sure. Again, we're constantly looking at the numbers and seeing where we're getting the best return on our investments. And as we were looking at where leads were coming from and what our productivity was, there definitely saw a weakness in inquiries coming from various aggregators and partners out there. And we just decided that the best thing for our students to convey the message of what we offer is to allow our admissions folks to spend more time with them. So in order to achieve that, we decided where can we cut out, something that's been less productive and consuming too much of their time, and it's really around these leads of what we call the web-based initiative leads. So by cutting back on those dollars, you cut back a lot of volume, which frankly frees up the admissions people to spend more time with the students to really explain what the value proposition is. And as our numbers showed and we noticed from our adult starts, we saw definitely a pickup in that area even though we had fewer inquiries than we did in the prior year, and we spent less money. So obviously, that's just a 1-quarter event. We started this... You asked about timing. We started this in July. But it's something that we're going to continue to do and we'll continue to refine where we allocate our dollars in order to get that message across to the students. Again, just in summary, we know that students that come in to our facilities are much more likely to start. And so, we are trying to create more opportunities for students to see exactly what we do by encouraging them to come in to our facilities, but also by having these videos I mentioned, so that students have a real sense for what's going on even before they walked into our doors. The objective is to continually connect with the students, show them the value proposition, show them what they can expect to experience when they join us, then hopefully, at the end of the day, as we continue to drive greater graduation placement rates, everyone will be much happier and better off.

[Operator:]

Your next question comes from the line of David Chu, Merrill Lynch.

[David Chu:]

So based on your annual guidance, why is there such a wide forecast for 4Q starts, despite being in early November already?

[Shaun E. McAlmont:]

Let me just go back just a little bit here. There have been times over the last few quarters where we have missed our guidance on the starts side, and I'll tell you, there is no question that on the forecasting we've really tried to stabilize that as have many of our industry peers have as well. Our metrics, David, as you know, the ones that serve as leading indicators really have shifted over time as the new rules have taken effect and as representatives operate under new performance criteria, and consumer buying behavior changes as well. So the new norms are becoming more evident to us and our teams are finding more reliable indicators to give us and our local managers better forecasting tools. So over time, we found that our forecasting is getting better just based on consumer behavior and our own leading indicators. So at this point in time, we also feel that because the numbers are so small -- I mean, relative to other quarters, the fourth quarters is our smallest enrollment. If that number swings by 50 students, that's 2 percentage points. And so that's the only reason, David. It leaves a little bit of room for that fluctuation. And we think that the fourth quarter will operate somewhat like the third quarter. But as Scott mentioned, we are essentially putting 5 different pieces of a revised strategy back in the place within the fourth quarter to affect the first quarter, which include increased spending again, et cetera. But that's essentially why the gap in -- the range in that forecast.

[David Chu:]

Cesar, can you provide 4Q '12 starts and average enrollment on a continuing operations basis?

[Cesar Ribeiro:]

I can provide starts. I do not have average enrollments. But total starts on a continuing operations basis, including -- excluding obviously the announced school closures, ATB and online, were 17,212.

[David Chu:]

And last question. So you guys spoke about trends improving in 1/3 of your campuses. Just wondering if there are certain characteristics unique to these schools either in terms of geography or program offerings?

[Shaun E. McAlmont:]

Yes, it's interesting, David. I mean, many of our schools, as Scott mentioned in his prepared remarks, have a variety of programs. And so we have schools that have automotive programs, skilled trades, and we have 1 school that has all 5 verticals and a number of schools that have 2 verticals. And so on a school-by-school basis, we see a variety of performance metrics. I will say that there are certain programs that have shown different levels of success. For example, automotive and skilled trades have had less decline over the past couple of years as compared to non-auto. And that's probably the most distinct variation we have seen programmatically. In addition to that there are performance differences. The schools that have utilized some of the technology that we mentioned earlier, the centralized financial aid packaging process in addition to the various portals, those particular campuses have seen better efficiency in their enrollment process and better overall results. So what we -- what it gives us is, is confidence that there are certain performance metrics, systems and programs that have seen success and we are replicating elements that are successful, and making sure that we execute those in other schools as well. I would tell you that there are other programs that continue to struggle based on market demand, and those will become fewer, but we are also addressing those with some of the affordability metrics that Cesar described earlier.

[David Chu:]

Okay. And so, how long do you believe it will take to implement these operational changes at these other campuses?

[Shaun E. McAlmont:]

I'll take a shot and I'll turn it over to Scott to talk about the more specific operational elements. But I'll say, David, that we really looked at this from a strategic perspective in those particular 5 areas, and the goal is to have the majority of those elements in place in 2013 to impact first and second quarter of 2014 primarily. I think that most of the technology -- while the technology already exists and is being utilized in certain places, we have increased the manpower in the centralized financial aid group, and we have other new programs in development. And so I would say that 90% of those initiatives will be in place for us to impact the first quarter of 2014. Scott?

[Scott M. Shaw:]

Yes. Definitely, we are rolling everything out as we speak, and some areas have already had some of these changes. As Shaun mentioned, certainly by year end, everything from a marketing and sales perspective will be out there and then it's just a matter of how quickly the different campuses are able to roll it out through training and adoption. But as far as new ways of looking at financial aid and helping that process along, that will be rolled out by the end of the fourth quarter. New ways, as I mentioned, of having enhancing the experience for students. Every campus will have that technology and training by the end of the fourth quarter as well. And so we do anticipate that starting in the first quarter we'll start seeing impact of this, and hopefully, that should grow throughout the rest of the year.

[David Chu:]

Okay, and just one last quick one. And so, Scott, how much were leads down overall in 3Q on a year-over-year basis?

[Scott M. Shaw:]

I don't have that directly in front of me. I know that our web initiative leads were down 60%. Let me just try to find. Hold on here. I have it here. For the quarter....

[Shaun E. McAlmont:]

Hi, David. While Scott is looking for that number, I just wanted to reiterate that the fact that we made a contest decision to make sure that each representative had a manageable number of inquiries to work with. And so the higher volume inquiries that we talked about that convert at lower rates, were just a no-brainer to reduce. Moving forward, our goal really is to increase overall volume, but overall volume of the higher converting leads, which we believe we can do. Scott?

[Scott M. Shaw:]

Yes, sure. So for the quarter, media leads were down 30%, and yes, at the same time, our enrollments were up and our starts were flat.

[Operator:]

[Operator Instructions] At this time, with no further questions, I'll turn the call over to Mr. Shaun McAlmont for closing remarks. Please proceed sir.

[Shaun E. McAlmont:]

As you can see through Scott's detailed operational report, Cesar's report as well, we're focused and we have been very busy executing on a number of initiatives, which are essentially working to continually stabilize the company's former declines and have positioned us well in a time of continued uncertainty. We have managed our existing strategy and are really moving our organization in a direction which we feel gives us a great opportunity to grow, while also maintaining the progress we've made in student outcomes and regulatory compliance. I'd like to thank you all for joining us today, and we look forward to updating you on our fourth quarter and year in March. Have a good day. And thank you, Celia.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.