Lincoln Educational Services Corp (LINC) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2015 Lincoln Educational Services earnings conference call. My name is Kate and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this call is being recorded.

And now I would like to turn the call over to Doug Sherk. Please proceed.

Thank you, Kate, and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued a press release announcing its first-quarter 2015 financial results. The release is available on the Investor Relations portion of the Company's corporate website at www.lincolnedu.com.

Before we get started, during the course of this conference call, the Company will make forward-looking statements about its future plans, objectives, beliefs, expectations, and prospects. For this purpose, any statements made today that are not statements of historical facts may be deemed to be forward-looking statements.

These forward-looking statements are not guarantees of future actions, outcomes, results or performance. By their nature, these forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statements.

A discussion of the risks and uncertainties that affect Lincoln's business is contained in the Company's SEC filings, particularly under the heading Risk Factors, and in the press release issued this morning. Copies of these documents are available online from the SEC or on the Lincoln website. These forward statements are made only as of the date this conference call was initially held, and the Company assumes no obligation, and does not intend to update these forward-looking statements after the date of this conference call, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

And now I'd like to turn the call over to Shaun McAlmont, CEO of Lincoln Educational Services.

Thank you, Doug, and good morning, everyone. Joining me on the call today is Scott Shaw, President and Chief Operating Officer; and Brian Meyers, Chief Financial Officer.

This morning, I'll open the call with an overview of the progress we've made since we talked to you on our year-end call less than two months ago. Scott will review his vision for Lincoln under the leadership transition plan that we announced this morning, and Brian will focus his comments on our segment financial performance as well as other key financial metrics included or updated our financial guidance. And then we'll open up the call for your questions.

During 2014, our team executed a number of actions to improve our financial performance. And during the first quarter, we began to see the benefits of those actions. We generated results that were consistent with the outlook we provided back in March.

Overall, revenue was slightly down, but we generated substantially improved profitability. We completed the transition to segment reporting. And we continued to take additional costs out of the system, while at the same time, continuing to invest in technology, equipment and programs that distinguish Lincoln by providing students with the enhanced skills education needed by American employers.

We also continued to examine non-dilutive ways to build financial resources, and we've made some real progress in that area, which Scott will report on in a minute. Finally, we completed the leadership transition plan announced this morning.

While we have more work to do, our team significantly reduced our overall operating loss while doubling operating income from our transportation and skilled trade segment, and generating a 25% reduction in the operating loss of our Healthcare and Other Professions segment. While reduced unemployment rates are impacting our starts, and will likely do so throughout the year, we continue to rightsize the organization, and believe we have strategies to grow long-term, despite high unemployment.

We are refining our topline guidance for the year to a revenue range of $310 million to $320 million. The top end of this range would result in revenue on a continuing operations basis that would be about flat with last year. Because of the success of our expense management effort, we are able to reiterate our original bottom-line outlook. Brian will offer more specifics on the guidance in a few minutes.

The planned leadership transition we announced today is a result of a long and deliberative process. Collectively, our Board and management team believe in, and therefore we've been planning for, an orderly succession for both components of Lincoln's leadership. For example, Scott and I have been working together for the past two years with the goal of transitioning Scott to CEO.

In addition, our planning led to the addition last year of two new Board members with deep automotive industry experience. These additions were made with the thinking that new Board members would replace some of the existing team once the new members became fully versed in Lincoln's situation.

My decision to move on at this time reflects my personal commitment to my family in the near-term, and eventually looking at other career options down the road. This transition is timely in terms of the Company's ongoing restructuring plans to become a more efficient and profitable organization through reduced corporate expenses.

Because sector trends have not yet stabilized, we anticipate having to manage the Company in a more nimble fashion to achieve profitability sooner. You'll note that the transition we announced today does not involve naming a new Chief Operating Officer, but does reflect the implementation of a more nimble and efficient corporate structure.

At the Board level, Alexis Michas served the Company well from the time of Stonington's acquisition in 1999 to the IPO in 2005, and through our growth and retrenchment phases. We truly appreciate his 16 years of unwavering support and his guidance as we've managed through unprecedented times in the industry.

His successor, Barry Morrow, is an accomplished executive, having served as a Chief Executive Officer in the past. And importantly, he also brings policy experience from his role with the US Department of Education.

It's been a tremendous 10 years of Lincoln for me. My colleagues and I have seen both impressive growth for a number of years, and then decline, forcing retrenchment for the past few years. Despite these fluctuations, we've remained cash flow positive, regulatory-compliant, and we've improved our student outcomes.

Turning to Scott, most of you have followed Lincoln over the past year, and you've been exposed to his proven leadership and exceptional understanding of the industry via our earnings calls and our investor meetings. What you may not have gained is an appreciation for his clear and concise vision for both the Company's future and building shareholder returns. And I think you'll get that sense in short order. Scott's leadership, along with the guidance of a new Board, will serve the Company well.

At this point, I'll turn the time over to Scott.

Take you very much, Shaun. I've enjoyed working with you during the past five years, and I'm excited about the potential for Lincoln as we move into the next chapter of our Company's development.

I'd like to begin my remarks today by articulating our 100-day plan, and then our longer-term initiatives to return the Company to growth. Then I'll conclude my prepared remarks with some notes on our improved operating performance during the first quarter.

This organization has always focused on delivering a strong return on investment for our students while being a leader in maintaining regulatory compliance. It's my full intention to maintain and build on the 69-year reputation, while at the same time, returning our Company to profitability.

Over the next 100 days, our team has three key initiatives. First, we expect to replace the existing credit facility with a new larger lower-cost facility that provides the Company with long-term financial stability. We've received several letters of intent offering relatively attractive terms, and we are focused on moving to a definitive agreement with one of these institutions shortly. As we finalize terms, we will issue a news release announcing the new facility.

The second initiative that we expect to implement are more efficiency at the corporate and campus level, made possible by our move to segmentation, as well as the completion of a thorough review of our corporate cost structure. This component of our plan will enable us to further improve profitability, while at the same time, maintaining the level of student experience and training that has led many of our corporate partners to tell us that Lincoln students are the best prepared for the job.

By moving to segments, we are better able to align our resources with our opportunities. We are reorganizing certain schools and streamlining the management teams to best meet the needs of the students and employers in each market. And while we are consistently reassessing everything we do, we continue to make improvements and investments to increase our productivity and opportunity for growth.

Examples of these investments include fully rolling out a new customer relationship management software solution, which is enabling us to more quickly service our prospective students; also enhancing and expanding our call center operations for both our admissions and financial aid departments; and finally, continuing to refine our marketing approach and messaging.

The decision to segment was made to align our financial reporting with how we are now managing our business, as well as be consistent with how our industry has adopted segmentation. The greater insight into our business enabled via segmentation has already provided benefits. While the basic operations of running a school are very similar across all disciplines, the customers and markets served are very different.

Suffice it to say that nursing students and welding students are very different people. Similarly, our experience and research shows that prospective students interested in automotive could also be interested in C&C machining or HVAC, but most likely are not interested in medical assisting or culinary. And the opposite is true as well.

We believe that we will be better able to compete and serve our various markets by aligning our resources into two major operating segments instead of spreading out among 31 individual campuses. One operating segment is Transportation and Skilled Trades, and the other operating segment is Healthcare and Other Professions. We also have a third segment called Transitional, in which we have placed our Fern Park campus, which we are teaching out with an expected close date of March 31, 2016.

As part of our plan to return to profitability, we continue to evaluate the long-term financial rewards of each campus. For example, we have one campus in Hartford that is saddled with a building and lease that significantly drags down the profitability of our entire Healthcare and Other Professions segment.

We are working aggressively with the landlord to find a buyer for the building so that we can significantly reduce our facility costs at this campus. Unfortunately, the timing of achieving this is completely unknown, but to give you a sense of the magnitude of the problem, when we exit this lease and move the operation into a facility that matches the program's current size, we should save about $4.5 million of expense.

By becoming a leaner, more nimble organization, we will achieve the financial stability we need to fully capitalize on the tremendous opportunity Lincoln has to be America's technical institute. No organization -- and I repeat, no organization -- be it private or public, is better-positioned and capable to provide the hands-on skill training that so many industries need to operate. However, we need to do a better job in making America aware of our strengths.

Consequently, the third initiative of our 100-day plan is a multipronged approach designed to increase the awareness of employer demand for middle-skilled employees amongst prospective students. Again, demand for these types of skill sets has never been a greater. And the employers see this demand increasing, as the baby boomers retire in increasing numbers over the next decade. Our opportunity is to make more people aware of this need by industry, and to show them that Lincoln is their best path to a successful career.

As part of this plan in January, to leverage our significant footprint, long history of providing hands-on skill training, and our role in filling the nation's skill gap, we launched our new campaign to position Lincoln Tech as America's technical institute. The messaging is uplifting, positive, and direct. Our students speak about what they achieve by attending Lincoln and why they now feel so positive about their future.

We believe that part of our challenge in attracting more students is making the students more comfortable with a decision to go back to school for training. By showcasing happy and successful graduates, we hope to give prospective students the confidence to follow their passions.

In addition, we continue to work with our industry partners to leverage their resources to educate and motivate others to pursue careers for which we provide training. Our employers could speak best about industry demand and the benefits of a Lincoln education. Consequently we will continue to incorporate them into our advertising, our recruiting process, and our general outreach efforts.

One example of how we are working with industry to bring the Lincoln message to a broader and interested market is our attendance at Napa's Expo this week. Napa asked us to join them at their national conference because their customers are constantly telling them that they cannot find enough technicians. More than 18,000 are in attendance, and our employees will be showcasing our ability to offer them skilled technicians, and seeking partnerships to attract more students into our schools. This is just one example of dozens of initiatives we currently have underway to strengthen the Lincoln brand and create more awareness.

We believe that we are well-positioned to capitalize on leveraging our industry relationships. Attendance by industry at our career fairs has never been higher, and more and more students are being offered signing bonuses to encourage their acceptance of job offers. Moreover, more students than ever are being hired prior to graduation, and the employers are telling us that Lincoln students seem better prepared during the interview process, which is so critical to getting that job offer.

Turning to the longer-term, a major initiative is to capitalize on our capabilities to provide additional services to our employers in the form of corporate training. This is a natural extension of our leadership in providing entry-level skills training. We already offer limited amounts of this type of training, but we see a growing need as technology continues to advance, and many organizations have cut back on their internal employee training capabilities.

We have the capacity to serve a much broader audience. And by serving this new segment, we hope to lessen the decline in demand that occurs when unemployment rates decline. Our core customer is plentiful when the unemployment rates are high, but they are far less plentiful when unemployment rates are low. Conversely, as the economy strengthens, companies tend to invest more in training their existing workforce.

We hope to profit from this need, and we will be dedicating more resources to this initiative. As we achieve success in this high potential area, I will be sure to share them with you.

In a few moments, I will turn the call over to Brian to provide detail on our financial performance in the first quarter, but I'd like to focus on a few operating metrics that illustrate our progress.

First of all, our profitability increased in that we decreased our losses by 37% as compared to last year's first quarter. This was achieved despite lower revenues, due to our cost-saving actions from last year. Starts in aggregate were down 8.2% in the first quarter, with Transportation and Skilled Trades down only 3.9%, and Healthcare and Other Professions down 10.5%.

In general, our Transportation and Skilled Trade segment is currently a much healthier segment, but we firmly believe that Healthcare and Other Professions can become just as strong over time, and we will continue to take actions to achieve this objective. In general, the marketing environment is challenging. Costs are increasing, which puts even more pressure on us to create greater efficiencies.

As we roll out our new call centers and customer relationship platforms, we are seeing increased efficiencies, which should be positively impacting our entire Company by the beginning of the fourth quarter. We will continue to adjust our marketing spend to find the right mix of lead source and volume to maximize the productivity of our admissions teams.

We have seen an increase in our start rates across schools as we expand our level of financial aid services and strategically offer scholarships. As I mentioned earlier, we will continue to leverage our industry relationships to draw more attention to us, and give prospective students increased confidence that they should take the important step of getting an education through Lincoln.

Finally, our focus on outcomes remains as strong as ever. By continually improving our graduation and placement rates, we will ensure that we are providing our students the return on investment that they seek. Furthermore, we continue to seek opportunities to lower our cohort default rate to 90/10. We expect to end 2015 stronger in each of these metrics.

With that, I will now hand the call over to Brian, who will cover the financial highlights from the quarter. Brian?

Thank you, Scott. I'll focus my comments on our segment results for the first quarter as well as some key financial metrics and our revised financial guidance for 2015.

As mentioned this morning, our Transportation and Skilled Trade segment performance in the first quarter was solid. We increased revenue nearly 1% to $44.8 million from $44.5 million quarter-over-quarter, and we increased operating income $5 million as compared to $2.3 million in the first quarter of 2014. Starts in this segment were down a total of 3.9% to approximately 1,800, which we believe is due to the improving employment rate that has been reported nationally, as well as in many of the key geographies where we operate.

Our Healthcare and Other Professions segment reported 7.6% decline in revenue from a year ago. However, our efforts to contain costs reduced our operating loss by 25.8%. Revenue for this segment was $31.3 million versus $33.9 million in the first quarter of 2014, and our operating loss was $0.5 million as compared to $0.7 million during the last year's first quarter. Starts for this segment was approximately 1,700, which represented a 10.5% decrease from the year-ago quarter.

We have implemented a number of actions to improve this segment. For instance, we began adding blended and adaptive learning programs to the curriculum to enhance the student experience.

Finally, our Transitional segment, which is only comprised of the Fern Park, Florida campus, generated operating loss of $0.7 million versus $0.5 million last year, due to the anticipated revenue decline from ceasing new enrollments during the first quarter, as this campus will close during the first quarter of 2016. Corporate expenses declined 6.4% to $9.2 million compared to $9.8 million in the prior quarter. This positive trend relates to lower salary and benefit compensation.

Management continues to analyze further cost-saving strategies while maintaining a focus on student outcomes and a strong regulatory compliance. I would like to note for investors that if we look at the financial performance for the total Company without the Transitional segment, the two campuses that merged with neighboring campuses during 2014 and the Hartford campus Scott discussed earlier, our operating loss would've been $3.6 million versus $6.4 million.

Average revenue per student for the first quarter increased to $5,723 due to tuition rate increases. The decrease in student population during 2015 also impacted our capacity utilization, which decreased to 34.7% for the first quarter of 2015 from 35.4% in the comparable quarter last year. In looking at the balance sheet, we use $6.3 million to fund operations during the first quarter and repaid all outstanding debt.

As a result, we finished the quarter with a cash balance of $5.2 million. As Scott mentioned during his remarks, we expect to further improve our financial stability with the completion of a new credit facility from one of our -- from one of the institutions that provide us with a letter of intent. And we would update you as soon as we finalize details.

In terms of our guidance for the remainder of 2015, given that we now have four months of experience in terms of starts, we are refining our revenue outlook for 2015 from continuing operations to a range of $310 million to $320 million as compared to our previous outlook of approximately $320 million, based on starts declining between 1% and 5% for the full-year. This compares with our initial outlook of approximately flat starts for the full-year.

At this time, we are reaffirming our previously provided expectation to generate positive cash flow from operations in line with prior-year, as well as our expected EPS loss of $0.32 to $0.47 for the year.

With that, operator, we will now open to taking questions.

(Operator Instructions) Alex Paris, Barrington Research.

I have a number of questions but I'll just start with two. First of all, with the new segmentation, how many schools are in each? How many -- I know you have one in the Transition; how did the other schools break out?

Sure, Alex. It's Scott. There are 12 in the Automotive segment, and 18 in the Healthcare and Other Professions segment.

Okay, good. And then I think several quarters ago, you gave a breakdown that said 10 of your campuses had positive starts. I think that was third quarter. I don't know if you gave a similar number in the fourth quarter. Would you care to offer a little color there?

Sure. The only -- I guess the color I'll give is that certainly the Transportation segment is a much healthier segment and it shows growth kind of across all the campuses. More of the softness is definitely proportionate to the Healthcare segment.

Okay. Yet starts were down 3.9% for the Transportation group, the 12 campuses as a whole.

That's correct.

So, were there a couple of campuses in there that were particularly negative?

No. Nothing particularly negative and nothing particularly positive. There were ones that were positive and were moving forward. Again, in total, we are talking maybe 100 students as far as that whole swing goes. So it just takes a couple at each campus.

Yes. And then I wonder -- you've been doing a lot in terms of streamlining the organization, taking out excess capacity, reducing costs. Can you quantify for that -- quantify that for us like on an annual cost savings basis, what have you done? What do you see left to do? Or how much more can you get this year?

Sure. I mean I think that last year, we said that we probably achieved around $12 million to $14 million of cost reductions. This year, we are looking at making an additional cost reductions, not at the same magnitude of that level.

Okay. And then one last one. Credit facility, it's $20 million now undrawn. You're going to have something significantly larger. Is this with alternative lenders? And is it going to be securitized, I suppose? Secured by real estate?

That is correct, yes.

And on the order of magnitude, do you think you'll double that line of credit or more?

We are looking to hopefully double the line of credit.

Okay. And then just a bookkeeping question. Are you going to provide us with some historical restatements by segment? Or are you just going to report it on a quarter-by-quarter basis?

We were just going to report on a quarter-by-quarter basis. I know that's a little bit frustrating for you all for your models, but that's the way we are going to just proceed at this point.

Okay, fair enough. Thank you very much.

Thanks, Alex.

(Operator Instructions) Doug Ruth, Lenox Financial Services.

Thank you for the transparency. It's very much appreciated. Could you -- in the past, you had told us that there were six problem schools, and that four of the six were fairly close to breaking even. Is there any update? Is there any additional color you could give us on that?

Sure, Doug. It's Scott, and welcome to the call. Yes, the color is that -- we just spoke to you, I guess, last two months ago, so there hasn't been dramatic movement. But as you can see in the first quarter, our performance is better at the bottom line. And so we are seeing improvement in those campuses. But it still will take some time to get them all to be where we need them to be.

One of the things that's difficult for us is we hear about the increased need for healthcare workers, but then we are hearing Lincoln struggle with your Healthcare segment. Could you offer a little color or commentary on how we reconcile those two different things?

Sure. I mean, it's a good question and one we think about often. Also, I don't think it's too -- when I look at some of the landscape out there, I see others having some similar challenges as we do.

But in the Healthcare side, certainly on the employer side, there's -- the demand is still very strong. It's really getting the people in the front door. And there is overall more competition on the Healthcare segment. And so given that there's this overall softness, I think we are all suffering a little bit.

But as Brian mentioned, we do believe that by enhancing our curriculum, and making our program more flexible by having blended learning, that will appeal to more people, especially the single moms who enter the healthcare field. And that will help us going forward.

Okay. Is there an exit strategy or an exit date maybe for the Hartford campus?

Well, our desire would be to do it as quickly as possible. But as I kind of mentioned in our remarks, we are really not in control of that process. It's really the landlord needs to find a buyer for the property and that could take some time.

And is Lincoln somehow involved in helping with the marketing of that?

Sure. Yes, we are.

Okay. Okay, well, thank you for answering the questions. And again, thank you for the improved disclosure and transparency. It gives all of us some further comfort.

Great. Thanks, Doug.

Thank you for your question. I would now like to turn the call over to management for closing remarks.

Great. Thank you all for joining the call today. As you can see, we are making progress in many areas. We had a strong quarter, but the market remains uncertain. We have successfully executed a succession plan that will enable us to build off our strengths while bringing in new ideas and direction.

We continue to rationalize our business as we operate in a choppy environment, characterized by strong demand by employers and uncertainty by prospective students. Our goal is to strengthen our balance sheet in the near-term so that we can further invest for long-term growth. We remain very committed to our students in maintaining our leadership role within our industry.

And finally, before we end the call, I would like to once again think Shaun and Alexis, our Chairman, for their leadership during this very challenging time. Thank you all again. And we look forward to updating you on our next call.

Okay. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.