Lincoln Educational Services Corp (LINC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1, 2012 Lincoln Educational Services Earnings Call. My name is Shawna, and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would like to now hand the call over to Mr. Shaun McAlmont, President and Chief Executive Officer. Please proceed.

Thank you, Shawna. Good morning, and welcome, everyone. Joining me today is Cesar Ribeiro, our Chief Financial 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 Educational Services Corporation'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 but not limited to those listed in Lincoln's annual report on Form 10-K for the year ended December 31, 2011, and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement.

This morning I will provide an overview of our Company's operations, and Cesar will review our first quarter financial results and provide our outlook for the second quarter and full year of 2012, and we will then take your questions.

As an overview, let me start by stating that our Company strategy and mission is squarely focused on becoming the leading provider of vocational training in this country. Overall, we feel that our approach, which we've honed since 1946, has been sharpened based on a new reality for our industry. Our collective vocational expertise, the introduction of new program opportunities, and improving student performance metrics gives us confidence that we are on track to our target.

In our estimation, we address the skills gap in this country. We're not only different in our traditional counterparts, but also unique within our own sector, which we feel has slowly gravitated away from its vocational roots. So, to sustain long-term growth in this new environment, we will differentiate our offerings by focusing on this important sector within education. Furthermore, success in this arena will require a keen ability to succeed with more challenged demographics.

As we stated previously, we introduced an early student engagement mentoring program in 2011, which was designed to achieve successful outcomes for our more challenged students. To date, this program is proving to be very successful and is having a positive impact on student retention.

We entered the second quarter of the year with good momentum and we're maintaining our guidance for the balance of the year. Our admissions representatives are becoming more comfortable working in this new environment, which we expect will lead to continued improved conversion rates, easier year-over-year comparisons, coupled with the contribution of three new schools in the expansion of our new Denver facility last year make us optimistic that we will return to growth in the second quarter of 2012. While our visibility continues to be limited, we are optimistic regarding the second half of the year despite impending changes to the ATB program.

To reinforce our strategy, we acquired Florida Medical Training Institute in April, which has five locations in Florida and offers a variety of certificate programs. Although small, it provides an important platform for short-term, cash-based program offerings which will ultimately supplement our long-term growth and non-Title IV revenue.

We expect to emerge from these challenging times an even stronger company and, as I stated earlier, a leading provider of vocational and technical programs positioned to address the skills gap in this country. Moreover, we believe that the demand will always exist for Lincoln's programs in areas like nursing, paramedics, welding, automotive, and other skilled trades.

Now, in regards to our new student admissions, our corporate and campus admissions teams have done a fantastic job adjusting to recruitment in this new environment. We have trained all of our representatives and managers; we have thoroughly onboarded new admissions personnel; we constantly test products and process knowledge; and we continue to aggressively mystery shop our teams.

For the quarter, new student starts were off of our prior year mark by 4.9%, which equates to 287 fewer students than Quarter 1 last year. Students continue to face economic issues which pushed some students into the second quarter. We feel good about this performance, which reflects increasing stability.

As we look forward, we are pleased with our progress so far in the second quarter of this year, and while we still have a number of weeks of new student starts to come in, our starts are trending toward a 12% to 15% improvement over prior year, all while fully operating under new rules and processes. We see this as a major positive step toward our long-term rebuilding process.

We do not have visibility into the third quarter as of yet, and we expect pressure to remain on student financing. In addition, the hard stop to ATB student access to federal aid will have an impact in Quarter 3. This said, we are working to offset this impact through continued improvement in year-over-year conversions, our GED program, high school enrollments, and the addition of short programs.

A couple of additional points in regards to third quarter preparations. Our GED preparation and testing programs are operational at a number of our campuses and will be at all campuses by May 15. While we don't feel today that the GED program will provide a one-to-one replacement of ATB students, however, as I mentioned earlier, we are planning to supplement our program offerings with short courses replicated from our acquisitions or developed internally.

Now in regards to market demand. For the first quarter, our front-end demand characteristics in terms of new student inquiries adjusted proportionately to our spend. We spent 29% less and generated 25% fewer inquiries against prior year. In terms of enrollments, however, we improved our conversion of this lower lead amount by about 120 basis points. 25% of our spend was on TV, which generated only about 5% of our increase for the quarter, while 56% of our spend was in Web-based channels, which generated 91% of our increase for the quarter.

Looking forward and based on what we are currently experiencing, we believe market interest remains strong in our programs and adequate to exceed our prior year new student starts in Quarter 2 by the 12% to 15% amount I mentioned earlier. I should note that there are still affordability issues pushing start decisions out further than normal for some students and their families.

Now in regards to student persistence. We have seen an improvement in overall student persistence for the first quarter and we expect the positive trend to continue into Quarter 2. We measure persistence in terms of interrupted students, net of students reentering from leaves. For Quarter 1, our net interrupt rate was 8% versus 11.3% prior year, or a 330 basis point improvement. This significant improvement is driven by our early student engagement efforts, which are functioning well at all of our campuses and which we hope will start influencing graduation rates in 2013.

This first quarter performance follows a 2011 full year improvement of 230 basis points, all accomplished against an interrupt headwind caused by program structure and program length changes related to 90/10 management and other affordability issues faced by in-school students last year.

We are very pleased with this performance and continue working on executing our pre-orientation and early student engagement programs to ultimately benefit completion, placement and repayment rate outcomes for our students and the Company.

Regarding job placement, we strengthened our placement leadership and services in 2011, as we worked against the high unemployment headwind. We also added training and performance-tracking systems to assist graduates in finding employment. Furthermore, we have added social networking elements to our training and services.

Our final placement rate for 2011 is forecasted to be 72.2% as compared to approximately 71% in 2010. This improvement, although modest, gives us confidence in our ability to train students for vocational careers through the current economy.

Now in regards to growth-related activities. We slowed our growth-related initiatives in 2011 so we could better understand the new environment in which we now operate. We did, however, continue to manage a number of initiatives already launched, including the pursuit of short, cash-based training companies, like SMTI. We are looking at additional small companies focused on medical training as well.

We are currently assessing other short programs, including Lincoln program extensions, which we feel will drive growth in our core markets and increase our percentage of non-Title IV revenue. These opportunities, although small, will give us a future platform for short, cash-based programs that we feel will attract a different demographic, perhaps an older student looking for a faster path to career change, and one who has access to discretionary income.

We opened our three new campuses in Cleveland, Columbus and Hartford last year, and we expanded our Denver facility last year as well. We expect these new campuses and expanded programs to increasingly contribute to our incremental new student starts throughout 2012. In Quarter 1, we saw approximately 200 incremental students from these entities.

We are fine-tuning our online delivery platform to move away from a retail approach to an internal support system for our ground infrastructure, and select partnership new start opportunities through our regionally accredited programs. Prior year online starts will be offset by the new and expanded campuses as well.

In summary, we have been actively managing our Company internally to operate in a new environment. We clearly understand who we are, who we serve, and what opportunities lay ahead. Our mission has been sharpened by necessity, and our strong regulatory standing has positioned us to move forward.

Now I'll turn the call over to Cesar for the financial review, including our outlook for the second quarter and year. Cesar?

Thank you, Shaun. Good morning, everyone. As we disclosed in our press release earlier this morning, our student starts commenced to stabilize during the first quarter of 2012. Although new student starts were still down 4.9% for the quarter, we believe that the momentum we have gained will produce positive starts for the second quarter.

The deteriorating start numbers we experienced during 2011 resulting in us commencing the first quarter of 2012 with approximately 7,500 less students than we had on January 1, 2011. This led to a decline in our average population for the first quarter of 2012 to 31.2%, which resulted in revenue declining by 27.9%, or approximately $40.5 million as compared to the first quarter of 2011. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which averaged about 3%.

The decrease in student starts also impacted our capacity utilization, which decreased to 40% from 58% in the first quarter of 2011. The decrease in capacity utilization produced significant negative leverage as our operating margin decreased to a negative 3.8% for the quarter from 12.7% for the first quarter of 2011.

Other key highlights of the quarter included loss per share was $0.14 for the first quarter of 2012, as compared to earnings per share of $0.46 for the first quarter of 2011. We generated free cash flow of $3 million, slightly down from the $3.2 million during the first quarter of 2011. We paid a $0.07 quarterly dividend on March 29, 2012. We finished the quarter with $27.6 million in cash and cash equivalents, no borrowings outstanding under our credit agreement.

Net debt for the quarter was 3.5% of revenue as compared to 4.7% for the first quarter of 2011. Improvements in bad debt percentage reflects lower outstanding balances resulting from lower student population.

Average revenue per student increased 3.5% for the first quarter of 2012, to $5,358 from $5,109 in the first quarter of 2011. Average revenue per student increased primarily from tuition increases which averaged 3% during the quarter, from changes to some of our program offerings. which shortened the delivery time of these programs' slightly accelerated revenue.

Cost per start decreased 17% for the first quarter of 2011 to $3,739 from $4,505 in the first quarter of 2012. Cost per start during the quarter was positively impacted by improved conversion rates.

Net accounts receivable on March 31, 2012 were $22.5 million as compared to $25.3 million at December 31, 2011. This decrease to net accounts receivable is primarily due to the decease in average student population.

Capital expenditures for 2012 were expected to be about 5% of revenue.

Now, turning to our loan program, as of March 31, 2012, loan commitments to our students net of interest that would be due in the loans to maturity were $21.4 million as compared to loan commitments of $20.2 million at December 31, 2011. For 2012, we expect that these loan commitments will increase by $2 million to $5 million.

We finished the quarter with shareholders' equity of $234.5 million, down from $239 million at December 31, 2011. Shareholders' equity at March 31, 2012 reflects $1.6 million in dividends paid during the quarter.

I'll finish my prepared remarks by providing our current outlook for the second quarter and for the full year. Our guidance is based on our current expectation and reflects the impact of the changes we made to our business in order to ensure we are prepared to meet what we believe is the Department of Education's focus on improving student outcomes.

For the second quarter of 2012, we expect revenues of $101 million to $104 million, representing a decrease of approximately 20% over the second quarter of 2011. Loss per share of $0.14 to $0.18. Guidance for the second quarter of 2012 is based on an expected increase in student starts of 12% to 15% for the prior year period.

For the full year, we continue to expect revenue of $440 million to $460 million, representing a decrease of approximately 10% to 14% over 2011, and diluted EPS of $0.25 to $0.40 a share, representing a decrease of approximately 49% to 68% over 2011. Guidance for the full year is based on an increase in expected student starts of 6% to 8% over 2011.

The board of directors has set the record and payment dates for the dividend for the second quarter of 2012. Cash dividend of $0.07 per share will be payable on June 29, 2012 to shareholders of record on June 15, 2012.

In conclusion, we believe that 2012 will be a rebuilding year, and we expect to return to profitability in the second half of the year. We will continue to balance our growth objectives with our responsibility to deliver quality education and to enhance student outcomes. And now we will open the call to your questions. With that said, I'd like to turn the call back over to the operator. Operator?

Thank you. (Operator Instructions) Your first line of questioning comes from Jeff Silber, BMO Capital Markets. Please proceed.

Just a couple of questions about your guidance. Does it include the Florida Medical Institute acquisition in terms of the growth in starts this quarter?

It does not, Jeff.

Okay, great. In just kind of scoping out the numbers, in order to meet the range of the $0.25 to $0.40, it looks like you are expecting a pretty sizable increase in net income on a year-over-year basis. Can you tell us where that will come from, specifically, which line item? I mean, it looks like revenues may still be down year-over-year. I'm assuming it's on the cost side?

Well, obviously, as we return to start growth, we expect revenues to pick up in the second half of the year, although they will still be down. So, most of those improvements will come on the cost side.

And any specific line item we should be modeling more than others?

Well, again, don't forget. I mean, last year's earnings were $0.79 a share. We are guiding this year to $0.25 to $0.40 a share.

Right. But I'm just trying to scope out, just at least in terms of the rest of the year, in terms of educational services, expense and SG&A, where do you think you'll see more of the leverage?

I think some, probably 60% of the leverage will come from SG&A and the rest will come from educational services and facilities.

Okay, great. And can you just remind us what your exposure is to ATB students?

I think we're at about 6.9% total population, and that will tail off as the enrollments stop in the third quarter.

All right, great. All right, thanks so much.

Your next line of questioning comes from Gary Bisbee, Barclays. Please proceed.

Hey, guys, good morning. Let me follow-up on Jeff's last question there. How much of the quarter to date, second quarter starts is from the ATB channel? Is there any way to think about how much of an impact this growth rate would decelerate in the back half because of no longer signing those students?

Yes, I mean, it's difficult to quantify specifically. However, I will say that if you recall, we had started decelerating ATB starts about a year and a half ago, and there is only one component of our business that continued to have higher ATB starts as a percent of their population. Everybody else really had decelerated, and so that deceleration will just continue and then stop in the second half.

Ultimately, ATB students, as we look at the third quarter, where they stopped receiving Title IV funds, amount to about 1,200 students compared to last year. We feel that with the number of our initiatives, whether it's improved conversions as we've seen in the first quarter, the high school starts coming in, the GED program, and some of the new campus contributions and short programs will offset that number of students.

Okay. So, it sounds like you're not expecting like a major lag here between starts and -- or, I shouldn't say that. Let me ask the question -- are you expecting more significant lag than we've seen in the past from starts rebounding relative to when the population does? I mean, a quarter or two, but it wouldn't likely be worse than that based on these antibodies?

No, not at all. Not at all.

Okay. And then we've obviously seen over the last couple of years how rapid declines in students and revenue can have a pretty negative impact on margins, but if we were to think about at some point in the future a modest revenue growth recovery, would we also see similar very high incremental margins on a modest revenue growth, or do you need more substantial revenue growth to see those incremental margins really come back?

I think we would need a little bit more substantial revenue growth. I think, because we said and we expect 2012 to be a rebuilding year, return to more modest revenue growth in 2013, which you'll see improved in incremental margins. But at the end of the day, capacity utilization is up 40%, so we need to see capacity utilization return to the 50% and 60% before you really see those spikes in operating margins.

But I'm not so much questioning about this year. Like, if we were to get 5% revenue growth, is that enough that you would see an awful lot of that drop to the bottom line? And I'm thinking over the next couple of years, or are there incremental costs you're going to be layering in that would mean you might need 8%, 10% growth to really see the margin start to come back?

There would be incremental costs that we'd have to layer in, including just obviously annual increases, whether it be to rents or whatever, would probably average somewhere around 3%. So, if you saw 5% revenue growth, you probably would have incremental costs at 3%, and you probably would expect to have a more modest 2% or so growth to the bottom line.

Okay, that's very helpful. Thanks, guys.

(Operator Instructions) Your next line of questioning comes from David Chu, Bank of America. Please proceed.

Good morning. Thank you. I just wanted to see how your April, I guess, trends are looking in terms of starts or application rates. Are they up like 10% to 15%, and is that what gives you confidence that 2Q is going to -- early Q2 start numbers are going to look the way you guys suggest it will?

Yes, David, I won't give you a specific month, but I will tell you that just based on the conversion rate we see today, the inquiry rate and the start rate stabilization, it gives us confidence. In addition, remember, last Q2 was probably our worst quarter of the year in fiscal 2011, so the comps are also easier. But that's where our confidence comes from.

Okay, thanks. And, also, in terms of, I guess, student demand by program, any areas of, like, strength or weakness?

We're seeing across-the-board improvement in our conversions, but we're also seeing just the stability in our inquiry flow coming to our program.

Okay. And I guess last question, in terms of admission advisor productivity, so it sounds like things are improving but on a year-over-year basis, are they still down, or are we, kind of, I guess, flat line at this point and expected to improve?

Think about it this way. In the first quarter we spent about 29% less in marketing dollars and we -- actually it produced about 25% fewer inquiries. However, the conversion of inquiry to start improved about 120 basis points, which is a great improvement for us on that front-end conversion. So, the way we look at year-over-year productivity in the representative force is that they've improved continually, or I would say sequentially quarter-over-quarter to where they are today, and we expect that those conversions will continue to inch forward in improvement.

The one conversion which has held somewhat steady is the start rate, the enrollment to start number that we're working on, and that is typically the one affected by affordability. But equally as important is that front-end conversion where we see an improvement.

Okay. And I think you said earlier that you plan to ramp up your headcount. First of all, is that correct, and second, just kind of wanted to see by how much maybe by the end of 2012?

Yes, I did not say that.

Okay. So, you guys do not plan to increase headcount this year, at least as of now?

We are at a headcount that we'll run with for the year. The way we look at headcount is we'll look at the forecasting that we do at the beginning of the year. If there is an opportunity to do it, based on what we see coming in as far as inquiry, we'll look at it at that point in time, but as of right now we're running with the headcount we'll have for the year.

Okay, thank you.

Your next line of questioning comes from Scott Schneeberger, Oppenheimer.

Thanks. Good morning. SMTI, could you speak to -- I think you answered an earlier question that it was not included in second quarter; could you talk about contribution annualized or whatever? And then how long is the average program there, and is it all cash, there is no Title IV?

Yes, I'll take the very front-end of that, Cesar can talk about contribution. At this point in time, SMTI programs, most of their programs are two- to three-month programs all cash. They've got one program that is equivalent to one of our diploma programs in terms of length, that's the paramedics program, but that is also an all-cash program. So, the programs are markedly shorter, it's a demographic that is a little older, students that are looking for EMT/paramedic training, etc., and they have discretionary income to pay for it. I'll have Cesar take the rest of that.

Yes, Scott, for the remainder of the year we expect it to contribute about $2.2 million to $2.5 million to revenue, and obviously a lot more next year.

Great, thanks. And you said that you're pretty happy with the program load and how the positioning is and the branding and the marketing, but, Shaun, I get the sense that you might be doing more SMTIs, just the cash in the shorter term. Just how should we think about that, any deeper on the color there?

One of the reasons we looked at this acquisition is the opportunity to reduce our reliance on Title IV dollars. I mean, that's just looking at the long-term reality of this sector. We find SMTI to be a smaller, manageable way to launch that platform for Lincoln versus building it ourselves, and we feel that those programs can be replicated across most of our campuses. Through facilities that we have merchandising our current advertising methodology, etc., we feel we can promote those programs pretty effectively. All we really need to do before that happens is go through the appropriate regulatory approval process and ensure that those SMTI entities are linked with the proper Lincoln [ODEID] numbers, to make sure that we're benefiting on the 90/10 side. But I think you will see us either expanding or looking for other acquisition opportunities like SMTI.

Thanks. A couple more, if I could. The second quarter start improvements and a few questions around it. Specifically with ATB, you said that was about 6.9%, and then obviously tailing off starting in the third quarter. I don't believe there's a grandfather clause to someone who starts in the second quarter and then continues to persist with a favorable situation there. But would you expect -- is that part of the starts increase or is that not right, you just would not get the third quarter benefit of an ATB?

If a student starts before the third quarter, if they start before July 1, they will benefit from Title IV, if they're an ATB student. Any student, to our understanding, that starts after July 1, will not be open to Title -- be entitled to Title IV aid. So, that's just the basic framework that we're working with.

I'm not sure how to react to the second part of your question. But as we look at Quarter No. 2, there are ATB students in there, I would say about eight of our schools probably have ATB new student starts at a little bit of a higher rate than the rest of the Company, but we had tailed that down considerably from prior years, so we have already been reducing that number.

We feel that we are positioned pretty well with our GED prep program to start taking ATB students in and routing them through that program before they become a Lincoln student. We just won't see that mechanism start working until there are more students going through that particular part of the process. But we feel like we are positioned pretty well right now to take advantage of it.

Now, as I mentioned in my prepared remarks, the GED program essentially won't give us a 1-to-1 ATB student offset; however, we do have other contributing elements that we feel will benefit the third quarter when this goes into effect.

Thanks. And one final question. I know you're not giving guidance on third quarter and fourth quarter, but you've maintained the start guidance for the full year and we now know what you did in the first quarter and what you expect for the second quarter. Is there going to be a dramatic difference between third and fourth quarter on comparisons or anything else you're seeing, where as we do our modeling we should have those dramatically different from each other?

Well, I would say this at this point in time. It's very hard to say. We don't have a lot of visibility, as you know, that far into the year. However, I believe the fourth quarter comps will probably give us a better improvement in the fourth quarter than we'll see in the third quarter.

Great. Thanks very much.

Your next line of questioning comes from Jeff Meuler, Robert W. Baird. Please proceed.

It looks like maintaining your full year starts guidance of 6% to 8% implies some deceleration and starts growth in the back half versus the Q2 guidance. Is that correct and is there something other than the ATB students losing the Title IV eligibility that is going on, or is it conservatism, or how should we read that?

At this point in time there is no other element that we forecast decelerating. I mean, ATB is really the only one. I mean, we've seen conversion improvement that we would expect to continue forward.

But let me just remind you that through all of these starts we're also seeing the tough economic situation affect affordability. So, in the back of our minds there is conservatism in that. Students are delaying going to school at times. In the first quarter we did expect to be flat, but some students will delay that decision to start school and sit on the sidelines. We were about 287 students shy of last year, and part of that reflects that buying behavior. But as we move forward, really, ATB is the only area that we see decelerating, to answer your question.

Okay. And then I'm sorry if I missed this, but what's the timing of rolling out the GED test prep program, and any change in terms of what you're planning on implementing around that relative to what you were thinking the program was going to look like three months ago?

I think we've gotten a little smarter about how we'll operate it. We've had a couple of schools testing it. We, today, about a quarter of our schools have already launched it. The remaining three quarters we'll launch it in the next two weeks. The way we take care of ATB students today, a student will come in and basically identify right off the bat that they do not have a high school diploma, and so we would put them through an ATB testing process with the proctor, etc., and then put them into a pre-orientation. The way that will change moving forward is that they'll be routed into the GED preparation process and we've got a pretty rigorous program that is somewhat self-paced. If a student needs assistance, there are faculty members there to help them, and the program essentially will last anywhere from 6 to 8 weeks, depending on the student's abilities.

And so we will see the same volume upfront and ATB students coming in. The number that actually make it through the GED program we're trying to assess as we pilot the program. But the mechanics of the program are set and have been implemented and will be finalized in the next couple of weeks.

Okay, thank you.

At this time there are no further questions. I would like to now return the call over to Mr. Shaun McAlmont for closing remarks.

Thank you very much. As you can see, we are focused and have been very busy executing on initiatives which continue to better position us in a time of uncertainty. We are managing our key outcomes of cohort default and 90/10 risk factors, we've sharpened our strategy that will ultimately allow us to compete in a unique segment of education and training. And we have this long-term strategy really to position Lincoln as a market leader, and we believe strongly in vocational training and our ability to operate in this sector. We also believe in the viability of the skilled trades and other careers that we teach, and we feel that our Careers that Build America campaign will drive our Company strategy for the long term.

I thank all of you for joining us today and we look forward to updating you on our second quarter results later in the year. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.