Lincoln Educational Services Corp (LINC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2015 Lincoln Educational Services earnings conference call. My name is Dave. 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 this conference. (Operator Instructions).

As a reminder, the call is being recorded for replay purposes. I would now like to turn the call over to Mr. Doug Sherk. Please proceed, sir.

Think you, Dave, and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued a press release announcing its third-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, and a replay 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 indicators of the times at or by which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual results or -- excuse me, actual performance or results that differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, our failure to comply with the extensive regulatory framework applicable to our industry or our failure to obtain timely regulatory approvals in connection with a change of control of our Company or acquisitions; our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis; risks associated with changes and applicable federal laws and regulations, including final rules that took effect during 2011 and other pending rulemaking by the US Department of Education; uncertainties regarding our ability to comply with federal laws and regulations regarding the 90/10 Rule and cohort default rates; risks associated with the opening of new campuses; risks 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. Before discussion of such risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements, see Risk Factors in Lincoln's annual report on Form 10-K for the year ended December 31, 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.

Now, I would like to turn the call over to Scott Shaw, President and Chief Executive Officer of Lincoln Educational Services.

Thanks, Doug. Good morning, everyone, and thank you for listening in on today's call. Joining me today is Brian Meyers, Chief Financial Officer.

I will begin by discussing our recently announced plans to focus the Company's resources on our transportation and skilled trade segment and divest our health care and other professions operations. I will then briefly cover the quarter's operational and financial performance before handing off the call to Brian for a more detailed review of the results, as well as an update of our guidance for the remainder of 2015.

Last night, after the market closed, we announced that our Board of Directors has approved a plan for Lincoln to divest its health care and other professions business segment and focus solely on our transportation and skilled trade segment. We fully believe that this is the best strategy for the Company, its employees, our students and our shareholders. There is no doubt that the education industry is changing, and we will continue to evolve as technology advances, students and their parents seek a greater return on investment, on their educational dollar, and as industry's demand for skilled workers increases. By focusing on transportation and skilled trades, Lincoln is uniquely positioned to capitalize on its 70 years of hands-on training to better serve industry, our students and the communities in which we operate. Indeed, our pivot towards our transportation and skilled trade segment is an essential part of our plan to return the Company to profitability and maximize shareholder value.

I want to emphasize our decision does not reflect in any way a negative outlook for our healthcare and other professions segment. On the contrary, the Company is confident that our health care and other professions operations will provide a positive contribution to a company that is focused on this segment and who will provide the investment necessary to get them back to growth since there is significant opportunity to grow the operation as the population ages and the demand for workers in the healthcare sector rises. This was a particularly difficult decision as we have witnessed the level of effort and hard work that our faculty and staff puts in day in and day out at these schools. As an organization, however, we realized that we have to be diligent with our resources, particularly in this difficult operating environment and recognize that our transportation skilled trade segment presents all of our stakeholders with the greatest opportunity for success.

Our transportation and skilled trade segment continues to make progress in attracting corporate partners like Audi, BMW, Fiat/Chrysler, AutoNation, and Hendrick Automotive. At the same time, we are consistently building awareness among more students and their families of the opportunities that Lincoln offers. The skills gap in America continues to grow wider and wider each year. Our mission since 1946 has been to prepare our students for successful and rewarding careers by providing the in-demand, hands on skills to fill critical roles in industries like automotive repair, welding and HVAC.

Transportation skilled trade streaming training has been the cornerstone of Lincoln's success throughout our nearly 70-year history, and we are excited to return to our organizational roots.

The (inaudible) of our program also provides the Company with certain financial and operational capabilities. First, our organization will become much more streamlined as we focus on supporting a smaller number of campuses, and second, we expect our balance sheet will improve, only eliminate losses associated with the healthcare and other segment and by reducing our outstanding borrowings, which will reduce our interest expense. The entire Company's financials should be stronger, which further enhances our ability to meet and exceed all regulatory compliance measures.

Finally, our marketing and branding efforts will be more productive as we focus in on what most people familiar with the Lincoln Tech brand associate with us -- automotive and skilled trades. All-in-all, I am very encouraged by this transition as it represents the next stage after my 100-day plan for reinvigorating Lincoln to become America's technical institute.

Moving on to our third-quarter results, where we are beginning to see the tangible result of the structural changes we made last year during the fourth quarter and in May of this year. For the first time in three quarters, we are reporting positive operating income, which we believe is a direct result of our mission to be a leaner, more nimble firm that can perform and ultimately thrive in any operating environment.

In the quarter, revenues declined 8% to $79 million, primarily due to a drop in primarily average student population. Along with the rest of the industry, we see -- we continue to see the trend of declining starts, but we are successfully -- sorry. We have successfully managed our business to operate in this challenging environment, and we are able to generate a positive operating income of $4.6 million.

Total starts for the quarter were approximately 5,560, down 8.8% from the previous year. Starts were down equally in both segments but for very different reasons. Starts in the transportation skilled trade segment were down mainly due to last year's restructuring efforts around our high school sales team. Last September we decided that it would be more effective to serve certain regions of the country with a centralized call center, instead of having admissions reps visit students in their homes. This move has definitely improved the efficiency of our destination high school recruiting efforts as evidenced by improved conversion rates, start rates and a lower cost per start. However, it took us longer than planned to get the call center up and fully operational, which resulted in lost productivity and, thus, fewer starts. We are hopeful that our results should improve going forward since we have started this year's recruiting high school season with a fully staffed and functioning call center.

As for our health care and other segment, it appears that the disruption caused by our regionalization efforts from May measurably impacted many schools as new campus leadership and admissions leadership were put in place. Now that the changes are completed, again, we believe admissions productivity will improve.

On our first-quarter conference call in May, we announced a set of three initiatives that we believe would put us on the path to sustainable profitability. I discussed in detail the progress of each during our second-quarter call and would like to provide an update on the latter two initiatives, implementing operational efficiencies across our campus and corporate organization, and increasing the awareness of the job opportunities from middle skilled employees amongst prospective students. We continue to make strides towards each objective. Our performance is qualitatively better, and our operating income demonstrates our cost savings initiatives are working.

We are experiencing the benefits of implementing Company-wide efficiencies, not just on the bottom line, but also in our employee productivity and our ability to service our students more quickly and reliably. We have succeeded in bringing our centralized call centers and live chat processes to more campuses, which ultimately helps our admissions team engage efficiently with a higher number of prospective students.

This is only one aspect of our objective to enhance our outcome -- outcomes with students. Another facet is the implementation of our CRM system, which we recently rolled out and have already started to see the benefits. Our performance in converting leads to enrollments and then ultimately starts has improved. Though we are facing some challenges, particularly in generating starts in a tough environment, as well as double-digit price increases for Word purchases on Google and other search engines, we are confident that we are making significant progress in reaching potential students and their families. We continue to make ourselves available through social media as well as our enhanced website, demonstrating our ability to engage with prospective students over a variety of mediums.

In addition to increasing efficiencies, we are also working diligently on executing our plan to boost awareness around the scarcity of middle skilled workers by automotive technicians and welders. Our objective is to let prospective students and their families know about the job opportunities for workers with middle skills, as well as Lincoln's role as America's technical institute. We are continuing to strengthen our ability (technical difficulty) with local and national firms and the industry partners to raise interest among prospective students and provide them with the opportunity to engage with potential employers.

In return, our partners are able to interact with our students and can witness firsthand our hands on training techniques that produce exceptionally prepared employees that are ready to work day one on the job. These partnerships aid in both recruiting new students to Lincoln and placing our recent graduates with quality employers.

As an example of these partnerships, we announced last quarter a new education training partnership with Audi. We were the first school to enter into this program and, since then, we have been selected as a Premium Plus level partner. We will be providing manufacturer-specific career training to students across multiple campuses, allowing students the opportunity to build enhanced automotive career skills, while working closely with the technology and equipment used by one of the world's leading auto manufacturers. We will officially kick off the program in January and, by the latter part of 2016, we will have six Audi programs up and running. The program will provide Audi with a steady pipeline of well-prepared graduates with intricate technical skills required by the modern automotive industry.

We are currently in discussions with other OEMs for similar type programs. Again, the value to the students to fund these programs is to give them advanced standing and thus pay at the local dealerships while giving the employers a trained and productive workforce.

Another aspect of raising awareness about the widening skills gap in America is publicly shining a light on the issue. This means that beyond our partnerships with local and national employers, we have taken steps towards revamping our advertising message, most notably with the recent op-ed piece issued on industryweek.com and with the high-profile commercial during last week's Republican debate. The 60-second commercial not only raised awareness of the need to bridge the skills gap but also provided a solution to the problem. We highlighted the core of Lincoln's mission to advance the science, technology and application of trade skills to our students by providing them with the tools and hands on knowledge required to help overcome the technical skills gap now facing our country's most important industries.

We are excited to be on the vanguard of cackling tackling one of the most serious issues facing our nation's economy today and look forward to raising the public's awareness on this topic.

Lastly, before Brian details the financial results, I would like to touch on our outcomes in the quarter. Our cohort default rates significantly improved to 16.3%, and we expect it to continue its positive trend going forward. In general, we seek to be in the top quartile of our industry for all outcomes, measures, graduation rates, placement rates, CDRs and so on. The industry is changing, and we are rapidly changing along with it. Creating an exciting, engaging and supportive learning environment has always been at the heart and soul of Lincoln. We take the responsibility of positively changing lives very seriously, and we will continue to make our programs as robust as possible and as affordable as possible so that students receive the ROI on their investment that they deserve.

With that, I would like to hand the call off to Brian Myers.

Thank you, Scott. Given the information we have provided in our results released this morning, I will focus my comments on our segment performance for the third quarter, as well as our divestment plan, and, lastly, our additional financial guidance for 2015.

As mentioned, on November 3, 2015, our Board of Directors approved the plan for the Company to divest its healthcare and other professionals business segments. Due to this decision, beginning in the fourth quarter of 2015, this segment is anticipated to be classified as discontinued operation on the same statement of operation and has held for sale on the balance sheet. This decision will trigger an impairment test at the segment level, which may result in a non-cash impairment charge.

On a consolidated basis, we report operating income of $4.8 million compared to an operating loss of $0.2 million in the prior year third quarter, excluding goodwill and long-lived asset impairments. This improvement was primarily a result of our ongoing efforts to align costs with our student population.

Accordingly, our segments demonstrated better financial results for the third quarter compared to prior year. Our transportation and skilled trade segment realized significant operating income improvement over the previous year. Revenue decreased modestly to $49.7 million compared to the previous year, primarily due to an 8.2% decline in average student population. The revenue decline from the lower population was slightly offset by a 5.3% increase in average revenue per student, due to improved student retention and a shift in program mix. Operating income improved by $4.4 million to $10.6 million, driven by expense reductions to educational services and facilities as well as SG&A.

Our health care and other professional segment continued to be impacted by our lower student numbers and the lower student population, resulting in a revenue decline of $2.8 million or 8.7%.

Operating loss in this segment, excluding goodwill and long-lived impairment charges, remained essentially flat at $0.9 million. Included in the healthcare and other profession segment is our Hartford, Connecticut campus, which had a net loss of $1.4 million.

Finally, our transitional segment, which is comprised of our Fern Park, Florida campus, reported an operating loss which was essentially flat at $0.5 million compared to the third quarter of 2014. We have previously disclosed this campus is expected to close in March 2016 until student enrollment has stopped and current students are being toured out through March.

In looking at the cash flow and balance sheet statements, we generated cash from operations of $14.1 million, which, combined with our loan proceeds, resulted in approximately $55 million of restricted and unrestricted cash and cash equivalents.

Resources available to us have increased dramatically with the signing of our new $45 million loan agreement on July 31.

Now, turning to the 2015 guidance. Lincoln is reaffirming the 2015 guidance for the total Company as follows. Revenue is expected to be approximately $300 million, student starts are expected to decline approximately 10%, and net loss per share to range between $0.45 to $0.50.

Furthermore, reflecting the anticipated classification of the healthcare and other professions segment as discontinued operations, Lincoln is providing additional guidance based on continuing operations from the transportation and skilled trades segment, including corporate, while excluding the Fern Park, Florida campus and previously merged Las Vegas, Nevada and Hamden, Connecticut campuses.

Revenue was expected to be approximately $180 million, student starts had declined approximately 8%, and net income to be slightly positive.

With that, we are now opening to taking questions.

(Operator Instructions) Jeff Silber, BMO Capital Markets.

Typically, when you look at the seasonality of the business, I know it tends to be backend loaded, but usually your fourth quarter is a little bit better than your third quarter. By maintaining your guidance, despite the sizable improvement in the third quarter, it looks like you are looking for a down quarter sequentially, both in revenues and operating income. First of all, is that correct? And, if so, what is going on this year that is different than others? Thanks.

It is correct, Jeff. Revenues are expected to be slightly down, and also net income is expected to be slightly flat with the third quarter.

Historically, when you look at 2014, it was up slightly. That was due to our carry-in population. But if you look back historically, it does tend to go down from third quarter to fourth quarter because third quarter does have our prime starts, and then through attrition, we lose some of that. And through graduations. But with that said, we do have a lot of graduations in the fourth quarter, which is driving the decrease in both population and revenue.

Okay. So what type of starts growth are you embedding in your guidance for the full year, at least starts for the fourth quarter?

Well, like we said in the guidance, we are expecting to be down about -- approximately 10%. So we are roughly, for the year, still a slight improvement, but roughly at that level.

Okay. We can back into that. I appreciate it. Just moving on to the health and other professions divestiture, you mentioned that you are going to be able to reduce your campus footprint. Can you remind us of what percentage of your campuses do you think you will be able to close or divest?

Sure, Jeff. It is Scott. We have 12 automotive campuses or transportation skilled trades campuses and 18 campuses that are in healthcare and other segment. So we would be looking to divest the 18 that are in that health care and other segment.

And then, in the 12 auto campuses, do you teach any healthcare or other professions classes, or are they completely separate?

In one campus -- in our Chicago campus, we do teach a medical assistant program, but that is the only campus that has that curriculum.

Okay. Great. Just one more question. One of your competitors announced this morning, with one of their planned divestitures, they are actually going to have to pay a cash payment to the buyer. Is that something that might occur with your divestiture as well?

I mean, I can't really say at this time. We are just starting the process. We have some very attractive assets and some very attractive schools. So while that might be possible, that is not what our expectation is.

You have no further questions at this time. (Operator Instructions)

Without any further questions, then, operator, I am just going to have some closing remarks. To conclude our call, I would like to summarize the key highlights.

We have made substantial progress in repositioning and realigning our Company's financial and operating model through the implementation of our 100-day plan. For the quarter, after excluding all impairment charges and despite our revenue being down, we increased our income before taxes by 127%. We continue to be cash flow positive, and our total cash exceeds our bank debt by $10 million. Industry demand remains robust. Our efforts to make new partners aware of our training capabilities and our pipeline of ready to work graduates are reaping rewards. Each quarter, we expand our list of employee partnerships, and we believe that we have just scratched the surface in this area.

Our decision is to focus the Company on our transportation skilled trade segment positions us to leverage our 70-year heritage as a leader in hands on skills training and will better position us to capitalize on the growing skills gap facing these industries.

For the third quarter, all of our transportation and skilled trade schools were profitable on a four-wall basis, and all are projected to be profitable for the full year. As always, we remain committed to our students, providing them with strong return on their educational investment, all while striving to be 100% regulatory compliant.

We thank you all for your time and interest in Lincoln, and we look forward to updating you on our continued progress to become America's technical institute.

We do have one question. Operator, why don't we take that question, if they are still there.

Doug Ruth, Lenox Financial Services.

How are things progressing with Audi, [MELA] and FW Webb?

Sure. Thanks for the question. They are all proceeding as planned. I will just kind of go backwards. I don't know if I have the exact order, but with MELA, we have that up and running in our mile-wide campus, and our students get free additional training, which positions them into good careers with MELA. They have become a great partner up there.

FW Webb, that classroom and all the equipment has been in place, and students are going through that program. And so that partnership is moving forward.

And, as I mentioned, we have solidified now with Audi six campuses that will be offering the programs, and for those six campuses, we are waiting for approval on the curriculum and building out the space. But that will start rolling out in the first quarter of next year.

Okay. What is happening with HVAC training contract with the US government?

That is continuing to move forward as well. That program, again, is waiting for some regulatory approvals, but that should be starting in the near term. So there is no -- that is moving forward.

Okay. How is the live chat feature on the website working?

It is working great. I mean, we find that not everyone wants to use the live chat, but for those students that are interested in it, our call center is able to answer their questions and, frankly, able to redirect them to the campuses to have more specific questions answered on a much more timely basis. So it is working well for us.

Okay. And one final question. Would you consider buying some stock?

That is something that is always being reviewed and considered.

There are now no further questions, so I would like to turn the call back to Mr. Scott Shaw.

Sure. No problem. I have given my concluding remarks. I think everyone can see that we are making good progress in all the initiatives that we have laid out. The opportunities for our Company remain very strong, and we look forward to continuing to execute and delivering for our shareholders.

So thank you all for your time and attention.

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