Lincoln Educational Services Corp (LINC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2015 Lincoln Educational Services earnings conference call. My name's Dave. I'll be your operator for today.

At this time, all participants are in listen-only mode. We will conduct the question and answer session towards the end of this conference. (Operator Instructions) As a reminder the call is being recorded.

I'd now like to turn the call over to Mr. Doug shirk. Please proceed, sir

Thank you, Dave, and good morning, everyone. Before we open up the market today, Lincoln Educational Services issued a press release announcing its second-quarter 2015 financial results. The release is available on the Investor Relations portion of the Company's corporate website at www.lincolnedu.com . Today's call is being broadcast live on the Company's website again www.lincolnedu.com and a reply of this call will also be archived on the Company's website.

Statements during today's call regarding Lincoln's business that are not historical facts may be forward-looking statements that involve risks and uncertainties. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by with such performance or results will be achieved.

Forward-looking statements are based on information available at the time of those statements are made and/or management's good faith belief as of that time with respect to future events and are subject to risk and uncertainties that could cause actual results or performances to differ materially from those expressed in or suggested by the forward-looking statements.

Important factors that can cause such differences include but are not limited to are failure to comply with the extensive regulatory framework applicable to our industry or failure to obtain timely regulatory approvals in connection with a change of control of our company acquisitions. Our success in updating expanding the content of existing programs and developing new programs in a cost effective manner or on a timely basis.

Risk associated with change in an applicable federal laws and regulations including final rules that took effect during 2011 and other pending rule-making by the US department of education. Uncertainties regarding our ability to comply with federal laws and relations regarding the 9010 rule in cohort default rates. Risk associated with the opening of new campuses, risk associated with the integration of acquired schools, industry competition, our ability to execute our growth strategies, conditions and trends in our industry, general economic conditions and other factors discussed in our annual report on Form 10-K for the year ended December 31, 2014.

For a discussion of such risks and uncertainty contained in the forward-looking statements with the risk factors in Lincoln agriculture annual Form 10-K for the year 0ended December 13, 2014. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to revise or update this news release to reflect events or circumstances after the date hereof.

And now I'd like to turn the call over to Scott Shaw, President and Chief Executive Officer of Lincoln Educational Services.

Thank you, Doug. Good morning, everyone, and thank you for listening on today's call. Joining me on the call is Brian Myers, our Chief Financial Officer. I will begin with a review of our progress so far in implementing our 100-day plan and then an overview of the second quarter. Brian will then provide additional color on segment performance as well as update our outlook for the remainder of 2015.

On last quarter's call, we announced that our team would be focused on three key initiatives designed to strengthen Lincoln. Our initiatives included securing a new credit agreement to provide us with the financial flexibility to execute our plans, implementing operational efficiencies across our campus and corporate organizations and increasing the awareness of the job opportunities from middle skilled employees amongst perspective students. As we close in on the 100-day mark, we have been able to make strong progress toward achieving each objective.

The first step of the plan was to replace our expiring credit facility and I'm pleased to report that we achieved our objective. As we reported yesterday, we have entered into a term loan agreement for a total of $45 million. The loan is set to mature in four years and in part was used to pay down our existing debt as of the closing date.

Our second initiative was to continue to transform Lincoln into a leaner, more nimble organization by implementing company-wide efficiencies that lower our cost structure to improving our profitable while maintaining our high standards. We have eliminated positions, consolidated resources, renegotiated leases, removed excess cost and streamlined operations.

Our focus on cost reductions and greater efficiency are ongoing. As we continue to operate in a challenging environment, we remain focused on our bottom line. Our second-quarter results demonstrate that we are successfully managing our expenses and we will continue to analyze the Company's cost structure for future opportunities to cut costs and increase efficiencies.

Our third and final action of the 100-day plan is to use the additional resources gained through the first two initiatives to increase the awareness among perspective students of employer demand for middle skilled workers. We continue to see the growing need for a skilled labor force as well as the significant market opportunities to fill that gap. Our objective now is to make students and their families more aware of our offerings. Making more people aware of the great opportunities that Lincoln offers is our greatest challenge and opportunity.

To accomplish this objective, we are complementing our advertising message by partnering with various perspective employers to better inform students of program offerings and employer demand. We believe there are long-term rewards to further increase our industry partnerships. By leveraging our employers and industry partners, we will strengthen our brand and reach a broader audience.

Each month we have been able to establish new arrangements with industry partners that assist in recruiting and retaining new students. Some of the employers with whom we have partnered with include Auto Nation, Carmacks, Hendrix Automotive, NAPA, caterpillar and FCA which is a Fiat Chrysler.

In addition, employers continue to come to us to establish specialized training opportunities that enhance our students' employability. I'm very proud to announce our new partnership with Audi of America to participate in their Audi Education Training Partnership Program. Lincoln is the first school group to enter into this new training program. We have identified four campuses for this initial launch and look forward to providing our students with this exciting opportunity. Students will gain specialized training in Audi vehicles, using Audi tools and diagnostic equipment which offers students the opportunity for advanced standing at an Audi dealership.

Another example of potential outcome from this effort was the announcement last week of our launch of the Miele Specialized Training Program at our Mahwah New Jersey campus. Miele is a leading global manufacturer of high-quality residential and commercial appliances and the program is a hands-on collective offered by Miele at no additional cost to qualified Lincoln students in the HVAC, in electrical and electronics technicians programs.

Selected students receive training focused on Miele systems and equipment and by the end of the program students will have developed the skills and hands-on experience that can open doors to careers working on a Miele appliances. Lincoln and Miele have worked together for a number of years and this program both extends and broaden that is relationship while creating additional potential employment opportunities for Lincoln students.

As part of our relationship, Miele is sponsoring a training room that is outfitted with various appliances giving students experience working with the full line of Miele products. In the past, Miele has hired numerous Lincoln tech grads and we anticipate the number to grow under this program.

A third example is our new partnership with F.W. Webb who is the northeast largest distributor of capital products that help build, maintain, repair and operate homes and facilities. They supplied us with the latest green technology for our HVAC program at our New Britain Connecticut campus.

Not only dot students have the opportunity to work on leading green refrigeration technologies but the lab also serves as a showroom which attracts potential employers throughout the region. By bringing employers on to our campus, they become exposed to our students and to our training. This helps with both recruiting new students as well as with placement of graduates.

These are just some of the new initiatives that we have launched in the past months. As demand for middle skilled workers continues to grow, and as more and more companies discover how Lincoln can become a key solutions provider for their hiring needs, we expect to announce more of these opportunities.

On to our performance. Similar to our first quarter, we saw a slight decline in our total revenue which totalled $72.4 million. As I mentioned previously, we realized the significant improvement in our operating loss which was directly related to our cost cutting and improved efficiencies.

In the quarter, our operating loss improved by nearly 34% over last year to $6.2 million. Our decline in revenue was due to fewer starts and a smaller population in the second quarter compared to last year.

Total starts for the quarter were approximately [3100], down 12%. One aspect as the client starts was a result of external factors discussed on previous calls, including the improved economy and employment rate.

Another component of the decline reflected strategic decisions we have made to rationalize our costs. In February, we suspended enrollment at our Fern Park Florida campus, which has had an obvious impact on our starts.

Additionally in the second quarter, we made the strategic decision to not initiate some smaller classes that would not generate appropriate returns for the Company.

Finally, we did experience some short-term disruption to our business as we executed on our rationalization plans. The vast majority of these efforts occurred in the healthcare and other profession segment and when looking at our reporting segments, there's a distinctive operational difference between the two.

Transportation skilled trade starts were down approximately 7% while healthcare starts fell by approximately 18%. Although we continue to focus on ways to improve our healthcare starts, the discrepancy between the two reinforces our strategy to focus on the greatest opportunities available to us.

Returning to profitable growth while enhancing our outcomes is our number one focus. Our marketing be department is continuously refining where and how we spend our dollars. We are decreasing the volume of lower converting leads to free up our admissions teams to spend more time educating and engaging with perspective students. We see improvements by expanding our centralized call center and live chat processes.

Today, only a handful of campuses are benefiting from these services and over the coming months we will be bringing more campuses online. We have just completed the rollout of our new sales for our CRM software which we expect will further enhance the experience in communication between our campuses, our admissions counsellors and our students. We have recently made investments to expand our social media presence and we continually look into enrich our website.

While the benefits of all of these initiatives are not immediate, we believe that the various people, process a partnership actions will result in better communication of our value proposition which we expect will result in growth. We will keep you apprised of our progress.

I'm very pleased to report that we continue to equal or outperform last year's results for outcomes. For the first six months, our retention rate is better and our placement rates remain strong. Our 9010 remains safely around the 80% level and our cohort default rates are tracking to improve from last year.

Qualitatively, we remain vigilantly focused on strengthening our outcomes across the board as we seek to maximize the educational return on investment for each and every student.

Turning to the future, to support our desire to return to growth, we continually seek new markets in ways to strengthen our programs. We have several exciting developments I'd like to share with you as we head into the second half of 2015 beyond those already mentioned. We have been awarded a multi-year contract with a potential to earn $4 million over five years by providing HVAC training with a government agency. We've engaged an individual to help us pursue various government contracts and we are optimistic about the opportunities for future contracts.

These government contracts allow us to leverage our training expertise with a multi-year potential revenue stream. In addition, we have established a relationship with the united association of steam filters, pipe filters, welders and HVAC technicians which will enable graduates of our welding program who take additional classes in pipe fitting to join the union at an advanced standing. We are currently waiting for the Department of Labor's final approval for this program. This new association should help encourage more students to enroll in Lincoln's welding program.

Furthermore, two weeks ago we hosted 11 Caterpillar dealerships representing 15 states at our Nashville campus. Over a two-day period, over 500 students were interviewed. This is the second year that we have hosted this event and the attendance was about 20% greater than last year.

As a result of the success found by the Caterpillar dealerships in hiring our students, Caterpillar Corporate included an article on Lincoln in their internal newsletter to encourage more dealers to partner with Lincoln schools to help solve their heavy-duty technician needs.

Finally we are working with numerous organizations such as hospitals that need certifications for medical assistance to other automotive OEMs who are seeking to attract more technicians to their dealerships. Industry employers are coming to us to help them solve their workforce needs. The success of our student over the past decade is our best marketing tool. We will continue to strengthen our programs, enhance the soft and technical skills of students and build long-term relationships with employers in order to secure our niche in post-secondary education.

We appreciate the confidence demonstrated by our partners in supporting Lincoln as an organization at the forefront of preparing students for a mutually productive careers. The Company is committed to both maintaining and expanding that standard of excellence while returning to profitability.

Now I'll turn the call over to Brian to review our financial results. Brian?

Thank you, Scott. Given the information we've provided in our results release this morning, I'll focus my comments on the segment performance for the second quarter as well as some key financial metrics and our revised financial guidance for 2015.

Our transportation and skilled trade segment showed significant operating income improvement over the previous year. Revenue decreased slightly to $42.4 million compared to the previous year primarily due to a 3.2% decline in average student population. The revenue decline from the lower population was slightly offset by a 1.4% increase in average revenue per student due to improved student retention. Operating income improved by $1.9 million to $2.8 million driven by expense reductions, education services and facilities as well as SG&A. These results reflected our cost-cutting efforts as Scott mentioned.

Lower start numbers in the second quarter continue to impact our healthcare and other profession segment. Revenue decreased $2.7 million or 8.4%, primarily attributable to a 9% decrease in average student population. Excluding the merged campuses, revenue decreased 6.6% to $29.5 million in average student population declined by 6.3%. Operating loss in this segment improved by 10.7% to $2 million as a result of efficiencies and expense reductions.

Operating loss excluding the merged campuses increased by $800,000 to $2 million versus the prior year. Including in the healthcare and other professional segment is our Hartford Connecticut campus, which is physically our largest facility at approximately 367,000 square feet including classrooms and student dorms.

As part of our plan to return the profitability, we are working aggressively with the landlord to find other options for this property in an effort to reduce our building costs at this campus. We are still in the process although we feel we have made some progress toward achieving some relief. During the second quarter, the Hartford campus had a net loss of $1.6 million.

Finally our transitional segment which is only comprised of our Fern Park Florida campus saw a revenue decrease by 53.6%, attributable to a 52.9% decrease in average student population. I would like to remind everyone that student enrollment has stopped at this campus and current students are being toured out through March 2016.

Corporate operating loss decreased by 13.3% to $6.4 million from $7.4 million. This decrease was primarily a result of the ongoing cost restructuring efforts since the second half of 2014. The financial performance of the total company without the transitional segment, the two merged campuses and the Hartford campus would have been an operating loss of $4.3 million versus the reported $6.2 million.

In looking at the balance sheet, we used $11.6 million to fund operations during the second quarter. As a result, we finished quarter the quarter with a cash balance of $4.9 million. Resources available to us increased dramatically with the signing of our new $45 million loan agreement on July 31.

In terms of guidance, as a result of the external factors Scott mentioned as well as our strategic decision to reduce cost and increase efficiencies, we are updating our 2015 revenue guidance to approximately $300 million based on a decline of approximately 10% in overall stocks for the year. Additionally, we are now projecting our net loss per share to be in the range of $0.45 to $0.50. We still anticipate generating positive cash flow through the year.

With that, we are now open to taking questions. Operator?

Thank you. (Operator Instructions) Please stand by for your first question, which comes from the line of Joe Janssen at Barrington Research. Please go ahead.

Yes, good morning, Scott. Thanks for taking my question

Yes, good morning, Joe.

Hey, just on the Audi, congratulations. I think that's a nice win. Let me just -- the decision on how that gets rolled out with four campuses versus more campuses and then secondly just kind of refresh my memory. How many other agreements do you have with others -- car manufacturers?

sure. Well, we have the [Al Tego] in reverse order. We have a BMW step program in our Grande Prairie facility but we also have a Chrysler Mopar program that is at four facilities, I believe, as well as we do some GM training at another four or five of our auto schools.

As far as the Audi, we're very excited by this. It was obvious -- Audi is a great brand and we're the first school that they've partnered with this new program. And basically what they're looking for is what all the OEMs are looking for. They're looking for a diversified platform that could find skilled technicians around the country to meet their local needs. And over time, they will be having, I'm not quite sure the number of these programs in total, but they basically came to us and looked to see where their needs were greatest.

And to be honest with you, it started off with one week with one program and within three or four weeks, they had increased it up to four of our locations with a possible fifth location that we're still in discussions with.

And this program won't begin until January because we're still developing the curriculum with them, but it will be a really great add-on program that will help attract students but also give students some enhanced skills which will make them much more employable going forward. So we're very pleased with the opportunity.

And how does a student get, you know -- I know that one's still kind of up and running. You're still working on the curriculum.

Yes.

But for BMW and GM, are there certain enrollment caps on those? Or they're probably taking the best of the best of your student population. I'm just curious how that works.

Yes. Well, there are a lot of different models. In the case of BMW, those are students who have graduated who then applied to it and based off of their grades and attendance and other selection criteria, BMW selects those individuals.

The Audi program will be different. The Audi program will be one in which students will be enrolling from day one into the program and then will follow through and take our normal program plus some additional courses with Audi. And then it will be up to their -- just like in any kind of program, depends on their grades and attendance as far as which dealers would select which candidates to hire.

Does Audi subsidize any of that in terms of, like, tuition for the student?

Not for the students as far as the subsidies that way but they do provide us with equipment, cars and other tools and things of that nature to make the program as robust as possible

Got it. And then jumping around here. You talked about that multi-year program, I think $4 million with potential to five years potential with a government agency --

Yes.

I think, that was around HVAC.

Yes.

Are you -- is that on title IV?

Yes, 100%

Okay. And then a couple -- some number questions here. Any color you can get -- you've kind of given color on previous calls around campus footprint. Any significant changes in terms of ones that were starts versus negative starts and more importantly I guess profitability or ones that are unprofitable?

Yes. No, actually --

From the absolute numbers

Yes, the -- it really hasn't changed from last time. I think that we've shared with you in the past on the automotive side. We have 12 campuses of which we're expecting 11 to be profitable. One we had some management changes and I expect that to be profitable again next year.

On the healthcare side, there's the same -- 11 that are profitable and seven that are not.

Okay.

Which we try to think is consistent with we said in the past

Okay and then one last and I'll jump back in queue. Actually I have more but I'll be respectful.

Thank you.

Healthcare. Just kind of update me on your thought process there. Obviously it's performing a little bit what your expectations are. Thoughts in terms of -- it doesn't sound like you're reinvesting into those platforms. Either selling it or shutting it town or just some general color and that would be helpful. Thanks.

Sure. It's definitely more challenged in our automotive side. We're seeing more strength on the transportation and skilled trades over I mean -- obviously different markets do have strength in the healthcare side and that will be a long-term opportunity. As far as whether we're making the investment, we're just getting so much traction right now on the transportation skilled trade side that we are paying more attention to that as we speak. But as I also mentioned we're finding some additional hospitals and others coming to us looking for training opportunities. Definitely in the healthcare sector they're looking for higher level of certificates it seems across the board and that will hopefully provide us with a future opportunity there.

Great. Thank you.

If you'd like to go ahead with another question, Joe, we do have time.

Sure. Let me just follow up one on the cost take-out side of it. I think you had quantified that last quarter, I think in 2014 -- you said $12 million to $14 million, you've taken costs out. You expected obviously to take costs not 2015 I think you said to a lesser magnitude. I'm thinking we're three months past since we last talked. Any thoughts on maybe that number? Any increase/decrease, kind of the same commentary. Any color would be helpful. Thanks.

Yes. It -- I don't know, Brian. Anything different?

Great. No, really nothing different. We did have some more cost cutting through this year later on top of what we did for 2014 with salaries, benefits and travel. It was an excess of -- to those areas, over $5 million.

I mean I'll just make a general comment. Obviously our business is smaller than what it has been in the past. We had to be very mindful of the bottom line. And frankly we're looking at expense -- continue to look at expense savings across the board frankly from the very top of the board of directors down to the campus level. So we'll continue to look at those things and manage the business accordingly.

Okay. And then just curious. You've gone through this -- you're going through this transition. It's been ongoing here for a number of quarters.

Yes.

Just in terms of retaining good educators, morale, I'm just curious any color around that what you're seeing and how you're keeping obviously people motivated and more importantly happy and staying and keeping the ones that you want to keep in the organization?

Sure. That's a very good question. Naturally the whole industry is challenged at this time. And it's really just trying to reinforce what the message is in what we're doing.

I mean the good news about our business is that people that are in our business are doing it because they enjoy the excitement of helping the students. And so that excitement still exists. At the same time, they obviously see challenges out there and maybe populations aren't where they would like them to be so it's a constant communication with the field and making them aware of the successes we're having as well as being realistic about what our challenges are so it's something that we pay a lot of attention to.

Great. Thanks for taking my questions.

Yes. Appreciate it, Joe.

Thank you. The next question is from the line of Douglas Ruth of Lenox Financial Services. Please go ahead

Hi. Thank you for hosting the call and answering questions. Could you give us some color about what happens when you have the corporate sponsored events, how the interaction seems to work between the faculty and the people that are coming to visit the schools?

Sure. Good morning, Doug. We have a lot of different models out there. We have some models frankly where we host events at the corporate site itself. For example let's say an auto dealership, where we might host aspiring be high school students and their families to come and learn more about Lincoln as well as learn more about the automotive industry. So that's one way that we do it.

Other times, let's say we have events. We have the new CNC program up in Mahwah and there we constantly are having industry people come in either just to meet our students, or to interact with our faculty, understand what we're teaching as well as having advisory board meetings to find out what would help them in that local market to have successful students.

The Caterpillar example that I gave is kind of a different one but the same idea. Two days we're dedicated whereby no one else was invited on to our campus besides these Caterpillar dealerships and we have banners, we have events going on and it really gives the dealerships a great opportunity to interact with our students as well as with our faculty and see what we do and see the shops and hear what's going on.

So it's really a broad array of opportunities that we have with industry and we're open frankly to all their ideas. And as we said earlier, the frustrating part is we're getting more and more interest from our employers to help them. The challenge that we have and the challenge that they see is that there is challenges in attracting more people into their respective industries. But given the need and demand, I'm very confident that we'll work out a way to make people aware of what the opportunities are which will hopefully benefit us as well as our employers.

It sounds like this experience that you're getting much better at doing that when you're doing it, it just seems like possibly there's more interest and there's more people coming to each of the events. Is that true?

I certainly hope so. I certainly believe that we have a much greater focus on this type of event. We realize that the old days of being able to run TV ads and attract your audience, they've gone away so we definitely need have more local presence, more interaction with our local communities and more involvement by our employers. And we see that as a great strength and something that frankly differentiates us from some of our competition but also enables us to serve our students and our employers a lot better. So yes, we will continue to put focus on this. And I think as you just said, every time we do it, we come up with new ideas and we get better at that so that's always a plus.

I think that's impressive. Is there -- do you feel like there's any pockets of strength in the transportation and skilled trades segment, anything where you feel like you're maybe gaining some traction?

No. I really don't see anything that's really standing out above all others, to be honest with you.

Okay. How about you mentioned possibly you felt like something -- you were moving forward with the Hartford campus. Is there -- do you feel like -- is there a resolution in sight to the situation?

I can say that we're getting closer to a resolution. I feel more confident about where it's going. The owner of the property has two initiatives underway which he's very confident about will end up in a positive outcome for us. So certainly the light at the end of the tunnel is getting bigger but that's about all the specificity I can really give to it but it's really in his control as far as what happens.

The other thing that you've commented on a little bit in the past but what about any kind of pending asset sales, is there anything new on that initiative?

Well, there's nothing new to report on that. I mean again we continue to look at our portfolio. We continue to look at opportunities to create greater liquidity, to rationalize our business and so we will continue to pursue those initiatives but nothing new to report on that.

Okay. And how do you think the nursing program and the medical assistant program, how are those two programs performing according to your expectations?

Well, according to our expectations, they're performing below our expectations. Both were down and that's unfortunate and somewhat a little perplexing to us a times given all the talk that everyone has about the demand for healthcare.

But I think that we are looking at putting in some different plans in place, increasing a scholarship here if New Jersey for nursing to help drive more demand. So I think that we can address the situation but it is kind of odd given all the talk about the huge growth in healthcare, why those programs would not be performing better.

Do you feel like you have your arms wrapped around what the challenges are in recruiting people for these programs?

Yes, I think that we do have our understanding of what's required for each of these programs. It's just that in each market, there are different constraints coming into play. But I think we definitely have an idea of how to address that.

Okay. I appreciate you answering the questions. Congratulations on getting the line of credit and I think that you folks at Lincoln are doing good things for the students and you're making good decisions for the shareholders.

Thank you, Doug. Appreciate that.

Thank you. (Operator Instructions) We do have no further questions so I would now like to turn the call back to Mr. Scott Shaw for closing remarks

Thank you, Dave. Thank you all for participating on our call today and we look forward to keeping you informed on our progress. In addition, we will be at the BMO Back-to-School Conference in September and look forward to seeing some of you there. Have a great day.

Ladies and gentlemen, you may now disconnect. Thank you for your participation in today's presentation. Good day.