Lincoln Educational Services Corp (LINC) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2013 Lincoln Educational Services earnings conference call. My name is Denise and I'll be the 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 Mr. Shaun McAlmont, Chief Executive Officer. Please proceed.

Thanks, Denise, and good morning everyone. Joining me in the room today is Scott Shaw, our President and Chief Operating Officer, and 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 forecast 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, 2012 and other periodic reports filed with the SEC. All forward-looking are qualified in their entirety by this cautionary statement.

This morning, I'll provide introductory comments. Scott will then provide an overview of our Company's operations, and then Cesar will review our 2013 and also provide our financial outlook for 2014, and we'll then take your questions.

Let me start by saying many Americans' most vital industries have found themselves, in recent years, at an interesting and challenging crossroads. The dynamics of their workplaces are changing as new technology drives innovation forward in their field and leads to increased productivity, improved efficiency, and enhanced quality of the final product. That product can be a tangible one like a safer automobile for a new heating or cooling system, or it may be a service like patient care, culinary, or cosmetic treatments.

The challenge, of course, lies in identifying qualified candidates with the skills necessary to succeed in a technologically advanced environment, no matter what the field. Lincoln's approach to career training began in 1946. And as we've grown throughout the years, the scope of our programs expanded from the original HVAC program to not only include other skilled trades, but also automotive technology, health sciences, business, information technology, and hospitality services.

With each new program we've launched, the first step after identifying the projected need and opportunity for graduates was then to connect with employers and highlight the benefits of hiring our graduates. This approach continues today, focused on a segment of training which remains a viable long-term opportunity for our Company.

Over the past few years, we've honed our approach and our programs to address this market. We've made significant improvements in our student success measures and our related outcomes. I also believe we have found ways to operate in a very challenged external regulatory and economic environment.

Our goal is to continue to make incremental progress in student outcomes, remain regulatory sound, and to grow our institutions organically while also seeking strategic opportunities for overall Company growth.

2013 marked an important point in our Company's history as we completed a series of initiatives which repositioned the Company following a long period of retrenchment. Our three-year focus on student outcomes and regulatory compliance has yielded improved results in key metrics. Notably student persistence and graduation rates have steadily improved, while our three-year cohort default rates have improved and are also in compliance with federal regulations.

In addition, our 90/10 ratio is the lowest it's been in years. And we've closed campuses that were no longer viable, reduced our ATB population, and tied out fully online degree programs to focus on our programmatic strength, which is certificate training in skilled fields. Improvements to these areas were crucial, given that many of our students are economically and academically challenged.

The effective performance in these regulatory areas enables us now to turn out flotation to growing our student population. We've reduced expenses in some areas and reallocated resources to once again drive new student start growth. Moreover, we've launched a series of initiatives which should contribute to this growth throughout the year, including scholarships, technology, increasing the number of admissions and financial aid representatives, and so on.

In 2013, approximately 80% of our campuses were either profitable or close to breakeven, while 20% did not come close to our profitability expectation. Thus, our initiatives are focused squarely on increasing new student starts, rebuilding our population, and improving our profitability throughout our organization.

As of December 31, 2013, we've completed the aforementioned retrenchment efforts which included campus closures, full PEID mergers, and the implementation of processes and systems to manage effectively in this new environment. We feel confident that we've positioned the Company with a stronger foundation.

The Company is now organized in seven OPEIDs, or federal institutions, which compromise (sic) 33 campuses. Each of the seven federal reporting units reflect strong regulatory compliance and student success. Moreover, all seven have three-year cohort default rates and 90/10 ratios which fall within the federal guidelines.

In 2014, we can look forward to continued advancement in the development and delivery of our educational programs, especially those through cooperation with the employers who hire our graduates. We can also take pride in the innovations arriving in our delivery methods.

This year Lincoln Technical Institute in Allentown, Pennsylvania will introduce our first adaptive learning curriculum, a program that evolves and changes for each individual student as he or she advances in certain areas, whether they face challenges in others, and ultimately, they learn on a system uniquely tailored to their needs. Allied Health Students in Massachusetts are utilizing our fully functioning online platform in a blended delivery system and now attend the physical campus only two or three days versus four or five in the past.

In addition, students in Indianapolis and Grand Prairie will train on CNC manufacturing equipment specific to our sponsoring employer partners, Hurco Technologies and Haas Automation. And in Mahwah, New Jersey, automotive technology students can now challenge themselves to be accepted into Chrysler's highly competitive apprentice program.

In addition in order to put these opportunities in reach for more students than ever before, we've proudly increased the number of scholarships available to students. We know that across the country, there are large numbers of upcoming high school graduates, career changers, and those who face economic difficulty in a job market that's still recovering.

Now in terms of our new student starts, which are a leading indicator of our future growth and profitability, for the fourth quarter of 2013 new student starts from continuing operations declined 7.2%. To date, for the first quarter of 2014, and despite numerous weather-related impediments to our admissions, we're slightly ahead of prior year start. Between the January and February start months, we're 3% ahead of the same time last year.

We expect the month of March to hold steady in terms of enrollment levels and start rates, giving us confidence that we'll see a 1% to 3% improvement in new student starts for the quarter over prior year. This would be our first quarter one increase and our best year-over-year quarter one performance since 2010.

Now we'll describe our growth initiatives in more detail. But let me just mention that we've implemented a series of tactical initiatives which are intended to mature over the year and contribute to start growth in different ways. The additional admissions representatives relate to enrollment volume. The additional financial aid representatives affect the rate at which enrollments start school. Automation allows for process efficiency and compliance and our scholarships will help with affordability.

I reported on our last earnings call that the third quarter of 2013 -- 10 of our 33 campuses had quarter over quarter new start improvements. In the fourth quarter of 2013, there were 15 campuses that improved over prior year. And now looking ahead to the first quarter of 2014, we expect that 23 of our 33 campuses will beat prior year numbers. This consistent progress and performance shows the positive results we have been working toward, and bodes well for attaining our 2014 goals.

Before I turned the time over to Scott, I think it's also important that I mention that we've been operating under a burdensome regulatory framework that at times contradicts itself. This reality forced us to put together a regulatory compliance program that has been at the forefront of our efforts while we also sought growth.

In our estimation, we found a way to balance these objectives and we've realized meaningful improvement across a number of key measures under these tough circumstances. Our expectations for slight quarter one start growth comes with significant effort. We also feel that our trend is encouraging when compared to the broader sector performance.

Scott Shaw, our President and Chief Operating Officer, has been focused on ensuring that our infrastructure is capable of fulfilling our mission, that we are tracking against our initiatives, and that our long-range goals keep us in line with continued strong student outcomes, regulatory compliance, and growth and profitability across our operating units.

I will now turn the time over to Scott for more details of our operations. Scott?

Thank you, Shaun, and good morning everyone. Let me start off reviewing our general business model and market approach, and then follow that with a review of what we accomplished in 2013. I will then conclude by discussing our 2014 strategy.

All of my comments will be focused on our continuing operations and thus exclude the shutdown of our five campuses in Ohio and Kentucky, as well as our online operations.

As Shaun mentioned in his remarks, we made great progress in 2013 in strengthening our Company for the long-term. We entered 2013 with three clear strategic goals. First, solidify our regulatory outcomes. Second, continue to improve our student outcomes, and third, return to growth and profitability.

We clearly achieved the first two goals, but fell short on the third. However, as I will share with you later in my remarks, we feel very confident that we are on our way to achieving the third goal of returning to growth.

Our focus remains on creating the middle skills career training company in the country. By concentrating on certificate and associated degree programs that are delivered in as short a time as possible, we are able to provide our students with a quick entry into the workforce and a good return on their educational investment. Furthermore, we select programs that lead to non-exportable jobs in order to maximize long-term demand for Lincoln and our graduates.

On top of this, we add our expertise in delivering hands-on education in facilities that are well-equipped to provide real on-the-job training. Delivering this type of education is definitely more expensive than offering nontechnical programs, but we believe our experience and commitment to these offerings differentiate us from nonprofit and for-profit competitors.

Furthermore, our education provides more than just entry-level job training. We strive to instill confidence, commitment, and professionalism in all of our students. As a result, many Lincoln graduates move up within their companies or even go out on their own to start their own businesses.

Our graduates range from the individual who draws blood at your local doctor to the owner of an Indy racing team to the CEO of a $5 billion internationally publicly traded software company. Where students go with their Lincoln education is up to them. We just know that we played an important role in jumpstarting their careers or helping them acquire skills to follow their passion.

As we continue to speak to employers and industry experts, we are reassured that the demand for what we offer is expected to increase. As our economy and society become more complex and technologically driven, the need for post-secondary education and training increases at all levels.

Furthermore, as more and more Baby Boomers reach retirement, the need for skilled workers increases. This worker deficit is exacerbated, especially in the middle skills area, by society's almost sole focus on promoting the need for a four-year degree in order to achieve success and fulfillment. Both of these circumstances create opportunities for Lincoln.

As for our 2013 results, we made excellent progress with continuing to improve our outcomes. With regard to student outcomes, for the third year in a row we increased both our retention rate and our placement rates. We view both of these metrics as critical measures of the quality of our education and of our students.

To strengthen graduation rates, we continue to expand and refine our Lincoln Edge program, which forms the foundation for how each campus is organized and operates. With Lincoln Edge, we provide students with support and encouragement throughout their time at Lincoln, starting from the day of enrollment to the time they accept a job offer.

In 2013, we rolled out our new Career Edge program, which is a blended-learning professional development tool designed to help students enhance their professionalism and soft skills, which are attributes that employers increasingly tell us they seek in all new hires. We expect to achieve even greater improvement of our placement rates in 2014 as we benefit from a full year of this program.

Furthermore, our enhanced metric-driven process of managing our career services professionals will continue to strengthen this important area. We know that the number one reason why students come to Lincoln is to obtain a job, which makes our placement rate the ultimate measure of our success in delivering a strong return on each student's investment.

We also achieved success with our government outcomes of 90/10 in three-year cohort default rates. Lincoln's overall 90/10 rate was approximately 80%. With seven OPEID numbers, our lowest ratio was 67% and the highest was 85%.

Similarly, we recently received the draft of our 2011 three-year cohort default rates, and all of our remaining OPEID numbers were below 30%, with the lowest rate being 17% and the highest 27%. We continue to educate our students on their responsibilities to manage and repay their debt. We expect that these efforts, along with improving retention rates and greater focus on default rates, will result in lower rates going forward.

While we strengthened our outcomes, we were less successful in achieving growth in starts. Overall, starts declined by 11.4% or 2095 starts for the year. On the positive side, almost 75% of this decline occurred in the first half of 2013, with the decline in starts lessening in each quarter of the year, which bodes well for 2014.

Our decline in starts was surprising, since our total enrollments for the year were greater than the prior year. Unfortunately, we experienced a decline in our start rate, which led to the decline in starts. When I review our 2014 plan, I will discuss how we're addressing this issue, since improving our start rate is one of the major initiatives in 2014.

We entered 2013 with 2200 or 12.3% fewer students. Throughout the year, we continually removed cost in order to right-size our business, everything from lowering headcount to renegotiating leases to changing business practices, all with the goal of lowering our fixed costs. Unfortunately, our business has significant fixed cost, and since we never want to lessen the quality of our students' experience, it's difficult to cut costs dollar for dollar to offset declines in revenue.

Lincoln's operations are diverse from a geographic perspective and from a program perspective. However, all of our campuses are organized, staffed, and managed on a similar basis. We add programs and remove programs in response to local market demand. All campuses utilize referrals, TV, Internet, and high school admissions representatives to recruit.

When one looks across all of our campuses, one can identify certain trends from year to year. In 2013, we experienced fewer declines in our high school population than in our adult population. Amongst our five verticals, the greatest strength came from our skilled trades vertical, which increased slightly in starts as the demand for welders and electricians grew.

Our second-best performing vertical was automotive, which declined in population starts less than each of our remaining three verticals. As a result, our population mix has shifted. Our share of students in automotive and skilled trades increased, while the percent in health sciences, hospitality services, and business and IT decreased as reflected in our earnings release.

Increasing our populations and revenues are the keys to returning to profitability. Throughout 2013, we adjusted our marketing and sales processes, which resulted in the second half of the year performing much better than the first half. Throughout the fall, we continued to refine these processes and identified additional areas for improvement.

We expect to return to start growth in 2014 by focusing on three key areas. First, improving the media start rate. Second, improving the high school start rate, and third, launching new programs. To immediately increase media start rates in the first quarter of 2014, we have introduced additional scholarships, which could total up to $4 million.

Affordability remains a major obstacle for many families who are still reluctant or unable to borrow for their education. We believe that by selectively offering scholarships in the programs that appear most challenged, we will attract and enable more students to enroll with Lincoln.

Secondly, we have added additional sales staff at those campuses showing the greatest volume of inquiries. Third, and most importantly, we are continuing to improve our sales process by providing additional training, tools, and practices, and by decreasing the volume of low-converting Web initiative inquiries.

As a result of these activities, we are seeing increased performance and satisfaction among our admissions representatives. By lessening our dependence on high-volume, low-converting Web initiatives, our admissions teams are able to spend more time with prospective students to more fully educate them on Lincoln's value proposition.

Also, by making the interview process more engaging by utilizing videos and other multimedia tools, students develop a much better understanding of our programs and services. The end result has been positive for Lincoln and for the students.

To improve our high school start rate, we are also focused on affordability and better training, but in a slightly different way. The high school sales process is much longer than the media sales process, and thus requires a different approach. The critical component here is providing students with timely answers to their financial aid questions, so that students truly know in advance how they'll pay for college.

To better serve our students, we've expanded our centralized financial aid call center operation so that we can more timely package and address prospective student financial aid questions. This eliminates uncertainty and enables us to better determine the level of commitment by the prospective student.

We have dramatically shortened the time between when a high school representative meets with a student, and that student knows or has an estimate of how much financial aid he or she may be entitled to. Based off a similar approach that was used last year at one of our campuses, we believe these efforts will result in significant improvement in our high school start rate, all other things being equal.

Thirdly, we will be replicating and launching six programs in over a dozen campuses. Two programs serve our health sciences vertical, three serve the skilled trades, and one for automotive. New programs allow us to further penetrate the existing markets, and thus increase our population and subsequently, our profitability. These programs will be launched in the third and fourth quarter of this year.

In addition to these specific initiatives, we continue to remain focused on building the Lincoln brand with our students, employers, and industries served. In 2013, we started providing training to General Motors technicians through a partnership with Raytheon. We launched, in our Mahwah campus, Chrysler's highly competitive Mopar X-Press apprentice program, and we continue to work with BMW while we seek additional automotive OEM partnerships for future programs.

We successfully launched a new CNC machining program by working very closely with two industry participants, Haas and Hurco, who not only provided us with CNC machines, but also worked closely with us to find additional opportunities to expand this much-needed program.

In health sciences, we set the stage for expansion into RN and our first RN to BSN program. Furthermore, we successfully launched blended and adapted delivery for some of our health sciences programs. And given the positive feedback from students and faculty, we will expand these initiatives beyond the pilot stage in 2014.

These delivery approaches provide students with more one-on-one training and give them greater flexibility in their schedules, both of which should help differentiate us more in the marketplace. All in all, we continue to invest in our programs and campuses to meet or exceed our students' needs.

Despite the economic and political uncertainty, Lincoln is strong at its core and ready to move forward. Lincoln's heritage is one of compliance and regulatory strength and this heritage was further strengthened in 2013. We had numerous federal, state and accrediting visits, with all resulting in no material findings or penalties.

We continue to successfully manage our 90/10 ratio and have set the course for further lowering our three-year cohort default rates. We are very mindful of the concerns by our customers and the government to make sure that we are providing a strong return on our students' educational dollar.

With that said, we are continually impressed and satisfied by the stories we hear of the success of our graduates, especially when they combine their passion and drive with the skills and training that we have imparted on them.

Our focus in 2014 is simple and clear. We need to grow Lincoln's population, and that growth will eventually lead to profitability. Our management and staff know the goal, and by executing on these initiatives mentioned above, plus others, we are confident about our future.

I look forward to sharing our progress with you during our next call. And with that, I'll turn the call over to Cesar.

Thank you, Scott. Good morning everyone.

Our fourth quarter operational results reflect the seasonality inherent in our business, and reflects the ceasing of operations at five of our campuses, which have been reflected as discontinued operations in the accompanying schedules. My prepared remarks will thus focus only on continuing operations.

As we have disclosed in our press release earlier this morning, revenue from continuing operations from the fourth quarter of 2013 decreased to 8.8% to $88.5 million. This decrease is primarily due to an 11.6% decrease in our student population, which was impacted by current economic conditions, which have resulted in a number of potential students being hesitant to incur debt and thus enroll in our schools.

Other key highlights for the fourth quarter include, during the fourth quarter of 2013, the Company recorded a $24.5 million valuation allowance against the deferred tax assets. This non-cash charge, reducing the benefit from income taxes for continuing operations, is a result of the Company's assessment of the realizability of its deferred tax assets over a certain period of time.

A primary factor in the assessment is that the Company is in a cumulative loss position over a three-year period ending December 31, 2013. This valuation allowance can be reduced or reversed in the future as the Company returns to profitability.

Loss per diluted share from continuing operations was $0.97 for the fourth quarter of 2013, compared to a loss per share of $0.24 per common share for the fourth quarter 2012. Excluding the impact of the non-cash valuation allowance, earnings per diluted share for the fourth quarter of 2013 would have been $0.14 per common share.

Our operating margin increased to a 7.4% for the fourth quarter of 2013, from a negative 4.3% in the fourth quarter of 2012. Fourth quarter 2012 operating margin was impacted from approximately $14.3 million in impairment of goodwill, along with asset charges.

The overall decrease in operating margin is a result of a decrease in our average population for the fourth quarter of approximately 11.6%. This decrease in average population resulted in our capacity utilization decreasing to 37% for the fourth quarter of 2013 from 42% in the fourth quarter of 2012.

We generated free cash flow of $9.6 million for the fourth quarter of 2013, an increase from the $3.8 million generated during the fourth quarter of 2012, and we paid a $0.07 quarterly dividend on December 31, 2013. Now turning to our full-year results.

Revenues from continuing operations decreased by $37.7 million, or 12.3%, to $345 million for 2013, from $382.8 million in 2012. Revenues were negatively impacted during the year by us entering the year with approximately 2200 less students than we had in January of 2012, and continued declines in student starts throughout the year.

This resulted in a 12.3% decrease in our average population for 2013 as compared to 2012. Average revenue per student was essentially flat in 2013 as compared to 2012, as a mean increase in tuition was offset by additional scholarships given to students.

Operating loss from continuing operations was $9.6 million for 2013 compared to a loss from continuing operations in 2012 of $14 million. Operating loss from 2013 includes $3.9 million impairment of goodwill in long-lived assets compared to $25.2 million in 2012.

Net loss per share from continuing operations was $1.50 for the year as compared to a loss of $0.71 for 2012. Losses for 2013 and 2012 include the impact of goodwill in long-lived assets impairments of $3.9 million and $25.2 million respectively.

Additionally, for 2013, the Company established a valuation allowance against the deferred tax assets of approximately $24.5 million. This non-cash charge, reducing the benefit from income taxes for continuing operations, is a result of the Company's assessment of the realizability of its deferred tax assets over a certain period of time. A primary factor of the assessment is the Company is in a cumulative loss position over a three-year period ending December 31, 2013.

The decrease in average population during 2013 resulted in reduced capacity utilization of 37% at December 31, 2013 versus 42% for the year ended December 31, 2012.

Costs per start increased 8.5% for 2013 to $4000 from $3687 in 2012. Costs per start was negatively impacted during the year by higher head rates as well as lower conversion rates from enrollment to start than in prior years.

Bad debt expense for the year decreased to 4.1% for 2013 from 5.1% of revenue in 2012. The decrease was attributable to improved collections in 2013.

All of the above factors resulted in a diluted loss per share from continuing operations for 2013 of $1.50, from a loss from continuing operations of $0.71 in 2012. Excluding the non-cash impairment charges in the impact of the valuation allowance, the loss per diluted share for 2013 would have been $0.28 per common share as compared to earnings per diluted share of $0.18 for 2012.

For the year ended, we generated cash flow from operations of $3.2 million for 2013, down from $16 million in 2012. However, free cash flow decreased to a negative $3.3 million in 2013 from free cash flow of $7.1 million in 2012. We finished the year with $67.4 million in cash and cash equivalents and restricted cash, and $54.5 million of borrowings outstanding under our credit agreement.

Net accounts receivable at December 31, 2013 were $23 million as compared to $23.5 million at December 31, 2012. Net property and equipment decreased to $127.3 million at December 31, 2013, as compared to $154.1 million at December 31, 2012. Capital expenditures for 2014 are expected to be about 3% to 4% of revenue.

Now turning to our loan program. As of December 31, 2013, loan commitments to our students net of interest that would be due on the loans to maturity were $26.5 million as compared to loan commitments of $25 million at December 31, 2012. For 2014, we expect that these loan commitments will increase by approximately $2 million to $5 million.

We finished the year with shareholders' equity of $145.2 million, down from $198.5 million at December 31, 2012. Shareholders' equity at December 31, 2013 reflects $6.7 million of dividends paid as compared to $6.4 million for the year ended December 31, 2012.

I'll finish my prepared remarks by providing our current outlook for 2014 as well as our outlook for the first quarter. Our guidance is based on our current expectations. Our guidance also excludes any benefit for income tax for both the quarter and the year, as we are expected to be in a loss position. For comparison purposes, our historical tax rate is approximately 40%.

For the year ended December 31, 2014, we expect revenue of $340 million to $350 million, essentially flat with 2013. Loss per share of $0.62 to $0.74 compared to a loss per share from continuing operations of $1.50 for 2013. Loss per share for 2014 and 2013 exclude any benefit for income taxes, as any deferred tax assets are expected to be offset by a full valuation allowance.

Student starts from continuing operations in 2014 are expected to be up in the mid to high single digits as compared to starts from continuing operations in 2013.

For the first quarter of 2014, we expect revenues of $77 million to $79 million, representing a decrease of approximately 10.9% over the first quarter of 2013 and a loss per share of $0.57 to $0.60. Loss per share for the first quarter of 2014 excludes any benefits for income taxes, as any deferred taxes are expected to be offset by a full valuation allowance. We expect student starts from continuing operations for the first quarter of 2014 to be up 1% to 3% from the first quarter of 2013.

And finally, the Board of Directors has set the record and payment dates for the dividends for the first quarter of 2014. The Board approved a cash dividend of $0.07 per share which will be payable on March 31, 2014 to shareholders of record on March 14, 2014.

In conclusion, 2013 is behind us, and in 2014, our focus is a return to growth. We expect to start to gain traction in momentum in the seasonally -- second half of 2014. And with that, we will open your call to questions.

I'll turn the call back over to the operator. Operator?

(Operator Instructions) Jeff Silber, BMO.

Thank you so much for the color and the guidance in terms of where the Company is going. I'm just curious; so, in looking at your portfolio of campuses and programs, do you think you're going to be sticking with these 33 campuses or do you think there may be some parsing going forward?

Hey Jeff, this is Shaun, I'll start, and then I'll turn it over to Scott and Cesar for more color, but yes. Over the last two years, as you know, we've closed 12 campuses. And we have closed those campuses that we felt were not viable for the long-term for this Company.

And the 33 schools that we operate today we anticipate we will operate moving forward. The only opportunities to parse would come if a school was small and had a lease and could be merged with another school, so it would essentially not reduce the student population. We would just lose a site.

But that only comes opportunistically. At this point in time, though, we're running with the 33.

Okay, great. And also appreciated the color on all the regulatory issues. One you did not mention was gainful employment. I know there's still a tremendous amount of uncertainty out there.

But based on what you know right now, do you think the programs that you have in place will comply with the proposed regulations?

If you recall, over the last three years as we have been talking about gainful employment, whether we look at the repayment metrics or debt to income, we have felt that the shifts that we've made to position ourselves in a certificate program -- group of programs, we would essentially make our way through that gainful employment regulation quite well.

The assessment we're doing today relates to a programmatic look versus a look by OPEID number. And even still, I think as we look at the types of programs that we offer, the cost and the length of programs, we feel pretty confident in where we sit today.

I think as the rule is better defined and we can do a full analysis, we would essentially share what our full impact is. But as of today, I think that's how we look at it.

Okay, great. And just a modeling question for Cesar; in trying to get to your net loss per share, which is pretty sizable, I'm still a little bit confused on the tax rate. Does that mean if you have a pretax loss that we should be expecting no income tax benefit, but actually and income tax expense? And that's how we get to such a loss per share?

That is correct. So there will be no benefit in -- the benefits will have to be -- it will be a zero, be fully offset by a valuation allowance. So historically if you had, let's say, a $0.50 loss for a quarter, you would expect that your EPS loss would be $0.30. Now that loss -- you would take that benefit and you would have to set up a valuation allowance, your taxes would be zero, and you still would have a loss per share of $0.50.

So when you're comparing, you need to take into consideration what the historical 40% benefit would've been on those losses.

Okay, great. And in terms of just specific line items, and just looking between your educational services and facilities in the SG&A, do we expect to see any leverage on those line items?

Not for 2014. I think, as you know, Jeff, we're entering 2014 with less students than we entered 2013. So, as I said in the past, we're seasonal business. But as I think we've demonstrated over the years, we do return in the second half of the year and we usually have a very strong fourth quarter, and we expect to see the same type of momentum.

But as where we sit today, I think our structure is pretty much fixed. And so what we expect to see is a return back to student start, which would drive higher revenues.

Okay, great. I'll let somebody else on. Thanks so much.

David Chu, Merrill Lynch.

Can you speak to what you're seeing in terms of lead flow in conversion rates so far in the first quarter and what you saw in the fourth quarter?

Again, I'll start, David. Our lead flow really hasn't varied significantly. Our start rates are improving but they're not back to historical highs. And so, as far as demand, we see good demand on the front end.

When Scott talked about our initiatives, our initiatives are clearly focused on start rates. So it's taking more of those inquiries, more of the enrollments, and getting them to a start status. And so we feel good about the front in demand, we feel better about the initiatives that are improving start rate and I think that in the first quarter, we are seeing a combination of the two.

And so we're seeing ourselves return to flat to up growth, and it's coming on the start rate side. Scott?

Yes, I'll just add. We did make some adjustments in our marketing. As you know, we get inquiries in through TV, through the Web, and through Web-based initiatives and referrals. And we did scale back the Web-based initiatives, which are very plentiful and easy to get, but a very low-converting type of inquiry and it consumes people time.

And we thought it would be much more productive to scale that back, to give our reps more time to work with the other students that are coming in. And as we do that, we see that our conversion rates are improving. And so it seems to be a good swap-out of assets -- reduce the number of inquiries coming in, but get more starts at the end of the day.

And that's really kicked in in the second half of last year and we're continuing that process. And given the other initiatives that we have underway that Shaun touched on and I touched on for improving start rates, that's what seems to be helping us, certainly in the first two months of this year.

Okay, so it sounds like you are seeing some improvements to conversion rates, at least so far in 1Q. It sounds largely based on higher quality leads.

Correct.

Okay. And so based on guidance, when do you expect average enrollment to turn positive?

Well, as you know, there's probably a good 6 to 9 months before that would happen.

It wouldn't be for a while because obviously, unless you have very strong starts, it would take at least 6 to 9 months before you'd see average enrollment turning positive.

So (multiple speakers) 6 to 9 months post start growth?

Correct. Based on the guidance we provided you. Obviously if the starts come in much higher than that, it could be sooner than that.

Got it, got it. And just to continue Jeff's question, so how should we think about SG&A costs given higher admission advisor headcount in 2014? Can you help us think of it in terms of an absolute dollar basis?

Well, I think which you should expect for 2014, based on our guidance, is you should see pretty much flat operations for 2014 as you saw in 2013. The big difference that's going to happen is we expect that we will finish 2014 with a much higher population that we did in 2013, which will lend well for 2015.

And to the extent we made investments in new admissions people, we took out the matching costs in another area.

So SG&A being largely flat? Is that what you are speaking to?

That's correct. I think will be guided to is revenue to be essentially flat. And I think we're guiding into EPS on a pro forma basis to be essentially flat as well.

Okay, and so, the last question; if you guys do generate pretax income on any given quarter, we should be utilizing a 40% tax rate, correct? It's only when you guys have losses that you zero that out.

No, you will be reducing your valuation allowance.

So on a GAAP basis --

On a GAAP basis, it would still be -- you would be reducing some of your valuation allowance that you have set up reserves for.

Okay, thank you.

Trace Urdan, Wells Fargo.

So, Cesar, I'm just going to say is right, I have no idea what you're talking about when you are describing the valuation allowance or what to do with taxes, so I can get that from you off-line. But my question is, and I think you started to hint at this before, but if we're looking at this on a non-GAAP basis, you guys saying that your revenues are going to be flat and your operating expenses for going to be flat in 2014?

That's pretty much we're saying.

Okay, all right. Thank you, that's very helpful. And then I just wondered if you might be able to give us a little bit of color on what your placement folks are telling you about the tone of the market in the larger degree areas that you're offering.

Are you seeing -- is hiring improving? Is demand improving? Is it -- can you just speak in a little bit more detail by program offering, if you don't mind?

Sure. I'll jump in, Trace. It's Scott. Obviously overall for the whole Company, our placement rates are up and we are seeing improvements frankly across the board. I mean I -- (multiple speakers)

Okay. Let me qualify the question for a second, Scott. That's great of course, but it's also the case that your populations are way down, right? So that doesn't necessarily speak to what we might be seeing in the market overall.

That's why I was kind of hoping for a little bit of qualitative feedback, maybe just from what folks are suggesting, because the fact that you are pumping out fewer graduates and their placement is going up is great, but it doesn't necessarily speak to a better environment out there.

Sure, well, I guess -- there hasn't been any feedback from any of the campuses saying that they're experiencing any kind of troubles. They feel like their way of approaching the marketplace and reaching out and finding more potential employers is serving their needs. And I frankly haven't heard any kind comment back that they have any challenges facing them in getting students placed. So that's the only thing I can base it off of, Trace.

Okay, I don't want to put words in your mouth. Are you suggesting that the -- what I just heard you say was that they're doing more and being more creative in finding more spots for students. But that's not the same thing as saying that the overall employment environment is firming.

That may be true, but I guess I don't have any other insight beyond that.

Okay, all right. Thank you very much.

Alex Paris, Barrington Research.

I just have a follow-up on taxes again. So Cesar, if I hear you right, we're modeling zero for income tax expense throughout 2014, whether we model in a pretax loss or a pretax profit.

That's correct.

Then, based on the valuation allowance in based on a return to profitability in 2015, a reasonable expectation of a return to profits in 2015, do we continue to model zero for a while?

No. The expectation is that after four quarters of profitability, we would reverse the valuation allowance, so whatever is left of it.

Okay, so if I had a profit in the fourth quarter, say -- and I haven't done my model yet, there would still -- and then those profits continued into the first two quarters of 2015, I'm zero, zero, zero, zero, and then I have taxes in the fourth quarter of the next year?

Well, then you have bigger gains because you reverse the full valuation allowance. We could talk about that offside. So you're reversing your valuation allowance, and once that's done, then you take whatever is left and you put it back on your balance sheet.

Okay.

And you recognize the benefit for income taxes.

Okay. That's good. Then with regard to the guidance for the first quarter, it obviously -- we're in March already, so it assumes what it assumes, but it also takes into account weather. What impact has weather had on your operations in the first quarter?

I would say, Alex, that we essentially lost a number of sales days and also days that students would complete their hours in class. What we ended up doing was replacing those days with weekends or longer hours.

Now some of those replacement days were not as ideal as the regular work week that we typically engage, so I would say that there is some loss there. I can't quantify it for you specifically this point in time. But we didn't -- I guess the way we look at it was let's make it up. And I think we did a pretty good job of that.

Now there always are sort of a backlog of enrollments they weren't able to get financed for their start, or other inquiries that weren't able to get enrolled because they might have missed an appointment, etc. We essentially try to get those students in for the next scheduled start, and so some of the starts might occur in the second quarter.

So, once we quantify what the loss was from Q1 on weather, we will have some amount of that that flows into starts for Q2.

Okay, that helps. And with regard to the absolute number of enrollment counselors, when did you start adding them? What did you finish the year at and what percentage will they increase in 2014 based on what you have in place now?

Well, I think the simplest way to look at it is we added about 10 reps, and we added them starting in January. And so those individuals on average could generate anywhere between 30 to 60 starts in a year.

And then of what base was that?

Total percent?

Yes. (multiple speakers) What did you have in ECs at 12/31?

It's about 10% for the adult reps, a 10% increase in reps for the adult and media representatives.

Okay, good. And then no change to the high school number of reps?

No, the high school number of reps has stayed the same. But along with that, we also increased the financial aid team -- that financial aid team that is doing remote packaging, etc. That might have been about 15 bodies that represents about a 10% increase as well.

Probably a 20% to 30% increase on that level.

Great. And then the President's budget proposals came out yesterday, and one of the things that he proposed -- and who knows how this goes -- is restoring financial aid to people who haven't graduated from college. Those who passed the ability to benefit test -- that's something that took away from us over the last couple of years. I don't know if that applies only to community colleges or everyone.

Have you seen that? And if that does come to pass, would you dive back into those waters or would you avoid it?

Let me start with that one. We started ramping down our ATB population before the rule came that ATB students didn't qualify for aid. When we started ramping down that population, we added barriers to entry for the ATB students.

And so when we saw our final ATB students moving through our system, they were performing at much higher rates than historically speaking. I think that we found a way to manage the students effectively. And if they were able to qualify for aid again, I think that we would take a similarly conservative approach with them.

I don't think we would open it up in the ways that we've done before, and I think it would be in schools that have programs that showed us work well for ATB students. We would want to make sure that any of those students that came into a program would not detract from the outcomes that we've worked so hard to achieve to this point in time.

But I will say this. There are quite a few proposals in the President's budget that relate to education. And I'm not sure how many of them are going to come to fruition, but we're looking at all of them. If they pass, what we would do, etc., and we probably have more color on that as time goes on.

Fair enough. Thanks very much for the color, guys.

(Operator Instructions) Douglas Ruth, Lenox Financial Service.

Is the absolute advertising budget going to be up in 2014?

It's going to be essentially flat.

Okay. But we're spending more on TV and less on the Internet? Is that essentially what I heard?

I think you could look at a couple of ways, Doug. The overall marketing budget will be approximately flat. However, the way we spend will be different by quarter.

And I think that early on, we don't see the high school starts coming in until the third quarter. So for the first two quarters, as Scott said earlier, much of our spending has shifted to different sources. But I'll tell you that the most successful channel that we have is our website.

And so the more we can drive students to our own website, the more that we find students are able to target the geography and a program that fits for them. And they can go into the school, they find programs that meet their needs and services through the website, etc.

So, to do that, we found different ways. We go to TV to ultimately drive people to our website. We buy search terms that will drive people to our website, etc.

I think what Scott was referring to are the large volume non-differentiated sort of aggregator leaves that take a lot of time to contact a prospective student, etc., so those will go away. And the expense that we attributed to that channel in particular will be shifted to TV and other channels that can send students to our website. So it is a reallocation of resources under the overall marketing spend, but that spend will remain the same.

Okay. Could you comment some about the Florida schools and how they are performing?

Are you referring to the FMTIs? Or -- we have other operations in Florida.

Yes, the FMTI schools.

Right now, they are a bit challenged overall. And populations are increasing at those campuses, but they're not in a position where we want them to be for the long-term.

And Doug, if you recall, we acquired those Florida schools because they were cash programs. They were short programs in the paramedics and EMT training that fit our vertical, but also contributed to our Company's cash, thereby reducing our need for Title IV.

I think that when we attributed those schools to -- through accreditation to have Title IV be able to be reduced, it required additional staffing in those schools that weren't there pre-acquisition. And so Scott is probably really reflecting a change in dynamic at those schools that we need to manage through. And ultimately, our goal is to grow them at the same rate that we grow our other schools, but they are little different in nature of operation.

Okay. Well, thank you for answering my questions. We look forward to future calls.

We have no further questions. I would now like to turn the call back over to management for closing remarks. Please proceed.

Thanks, Denise. Thank you everyone for joining us on the call today. As you can see, we've taken important steps to improve the long-term strength of our institutions and our Company. We're working within the evolving regulatory matrix that we have to position Lincoln to be the leader in diversified skill training.

We look forward to updating you on our first-quarter results on our next call. Thank you, and have a good day, everybody.

This concludes today's conference. You may now disconnect. Have a great day.