Lincoln Educational Services Corp (LINC) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Lincoln Educational Services second-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to turn the conference over to our host of today's call for Mr. Doug Sherk. You may begin.

Thank you Tonya. Good morning everyone. Before the open of the market today, Lincoln Educational Services issued via news release its second-quarter 2016 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 made by management of Lincoln Educational Services Corporation regarding Lincoln's business that are not historical facts may be forward-looking statements as that term is defined under federal securities law. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue and their opposites and similar expressions are intended to identify forward-looking statements. 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 which such performance or results will be achieved, if at all. Generally, these statements relate to business strategies and business plans, projected or anticipated benefits from acquisitions or depositions to be made by the Company or projections involving anticipated revenues, earnings or other aspect of the Company's operating results. The Company cautions you that these statements contained current expectations about the Company's future performance or event and are subject to a number of uncertainties, risks and other influences, many of which are beyond the Company's control that may influence the accuracy of the statement and the projects upon which the statements are based. The events described in forward-looking statements may not occur at all. Factors which may affect the Company's results include but are not limited to the risks and uncertainties discussed in the Company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission. Any one or more of these uncertainties, risks, and other influences could materially affect the Company's results of operations and financial condition, and whether forward-looking statements made by the Company ultimately prove to be accurate. And as such, the Company's actual results, performance, and achievements could materially differ from those expressed or implied in these forward-looking statements. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief of that time with respect to future events and are subject to risks and uncertainties that could cause actual results or performance to 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 for our students in a cost-effective manner or on a timely basis, risks associated with changes in applicable federal laws and regulations, uncertainties regarding our ability to comply with federal laws and regulations regarding the 9010 rule and cohort default rates, risks associated with 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 the Risk Factors section of our annual and quarterly reports. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward-looking statements whether as a result of new information, future events or otherwise after the date thereof.

Now, with that out of the way, I'd like to turn the call over Scott Shaw, President and Chief Executive Officer of Lincoln Educational Services.

Thank you Doug, and good morning everyone. Thank you for joining our second-quarter 2016 conference call. With me today is Brian Meyers, Lincoln's Chief Financial Officer. I'll begin the call by reviewing our recent operational highlights and strategic initiative progress. Brian will then walk through our financial highlights and details for the quarter as well as a review of our outlook for the remainder of the year. Then we will take questions from analysts and investors.

Overall, I would describe our operating and financial performance during the second quarter as very encouraging. Our organization made and continues to make one month into the third quarter solid progress towards achieving several key objectives and increasing the value of our enterprise.

Here are some of our accomplishments. Since we last spoke with you in early May, we have stabilized student starts compared to prior year and generated our first, albeit modest, student start increase during the past two years from our Transportation and Skilled Trades segment. Second, by managing our costs and lowering our fixed expenses, we have reduced our losses by 50% even with lower revenues. Third, we have unlocked value within our real estate by signing a definitive agreement to sell our primary Florida facility, which houses our healthcare and culinary programs. Fourth, we remain focused on our students' success and continue to make investments that will enhance their experience. We've completed the rollout of our new automotive and diesel curriculum, which incorporates videos, interactive exercises, and requires every student to have a laptop. And fifth, with strong demand from industry for our graduates, our placement rates are tracking ahead of last year. So despite the challenging economic and regulatory environment, and the distractions caused by our divestiture effort, we continue to move forward in a positive way. I am thankful to all the men and women at our campuses and corporate office who have remained committed to ensuring that Lincoln truly stands out from the competition and provides a superior experience and education for our students. All in all, a very encouraging quarter.

The development which our student starts certainly -- the development with our student starts certainly was one of the quarter's highlights. Those of you who have followed our company for a while know that a key focus of our strategy has been to regain student start momentum. We have reorganized our sales leadership, enhanced our marketing strategy and increased the efficiencies and effectiveness of our application and admissions process. Student starts is one of the building blocks to returning Lincoln to sustainable profitability by given that growing revenue is largely dependent on growing the number of students starting a program at our campuses.

We aren't declaring victory with the quarter's results, but we are encouraged by the progress. Student starts in our Transportation and Skilled Trades segment increased by six students as compared to the starts during the second quarter of last year. This is the first time in eight consecutive quarters that we have increased student starts in this segment, which, as you know, is the key component of our continuing operations.

At the same time, student starts in our Healthcare and Other Profession segment, which have been classified for accounting purposes as discontinued operations since November 2015, also stabilized during the second quarter. Starts for the second quarter of 2016 for the Healthcare and Other Profession segment were essentially flat, an improvement from the past several quarters.

Another key component to moving Lincoln to sustainable profitability is maximizing the return from our assets and lowering our fixed costs to levels appropriate for our student population. Our team has done an excellent job in this area for the past several years, and made yet additional progress during the second quarter. Wherever possible, we are renegotiating leases and, where it makes sense, reducing our square footage. We are centralizing functions in ensuring that costs are aligned with student population. Yet, while unnecessary services are being eliminated, we continue to invest to make the student experience as robust as possible.

Another major focus has been the planned divestiture of our Healthcare and Other segment. Last November, our board set in place actions to move this segment of our operations to discontinued status for accounting purposes, as we initiated a strategy to divest these operations and focus on Lincoln's core for the past 70 years to the Transportation and Skilled Trades segment. Our intent was to sell the Healthcare and Other Profession segment in its entirety, but it appears that our exit will be achieved by several transactions.

We have entered into a definitive agreement to sell for $15.9 million of gross proceeds of our primary Florida facility, which houses our healthcare and culinary programs. We intend to use the proceeds in part to reduce the current outstanding balance of our term loan, thus greatly strengthening our balance sheet. This transaction, which remains subject to certain conditions, is expected to close during this current third quarter of 2016.

As part of the definitive agreement, we intend to enter into a short-term lease agreement through March 2017 to permit the teach-out of the majority of the currently enrolled students. We will continue to enroll students into our automotive and HVAC programs at our other Florida facility located down the street in Mangonia Park.

I'd like to acknowledge the dedication and exceptional execution of our Healthcare and Other Professions team during this period of transition. An excellent example of the team's focus and dedicated effort is the stabilized student starts achieve for this segment during the second quarter as well as the segment's overall improved profitability. I could not be more pleased by everyone's professionalism and effort. The senior leadership of Lincoln as well as our Board of Directors thanks this team for their outstanding achievements.

Turning to some operational highlights from our Transportation and Skilled Trades campuses during the quarter, we celebrated Lincoln's partnership with NASA and their HUNCH program, which is an acronym for High school students United with NASA to Create Hardware. Students enrolled in our computerized numerical control program based at the Mahwah, New Jersey campus created unique parts for a specially designed NASA storage locker that will eventually be launched into space and used on the International Space Station.

Speaking of CNC, I also want to congratulate one of our CNC students from our Indianapolis campus who won the Bronze Medal at the Skills USA National Competition. Skills USA is a partnership of students, teachers and industry working together to ensure America has a skilled workforce by providing educational programs, events and competitions that support career and technical education in the nation's classrooms. Over 300,000 students participate in Skills USA and we are proud that a Lincoln student earned third place in the CNC competition.

We continue to advance our partnership with Audi in that four more campuses during the quarter were approved to offer the program. We are seeing strong interest and excitement for this program. In addition, we have begun the approval process to launch our new VW program in the first half of 2017. Given our experience with Audi, we would then expect to expand the VW program to additional campuses throughout the year. In addition, we are having conversations with other OEMs who have strong demand for our graduates and who value the location of our campuses.

While we execute on our 2016 initiatives, we are also building for the future. We already have a number of new initiatives underway for 2017. We are expanding our high school admissions team to increase our reach into new and existing markets. We have received good results from our high school team so far this year and we believe, with more representatives coupled with new and enhanced materials, we can better educate prospective students about the rewarding career opportunities in the Transportation and Skilled Trades sectors.

It's clear to us the general public is less aware of and less inclined to pursue careers that involve working with one's hands. Consequently, we see great value in going into high schools and sharing our message.

The wave of retiring Baby Boomers coupled with rapid changes in technology are creating increased demand for technicians of all types, and while we communicate this opportunity on our website and in our marketing materials, we see a need and benefit to speak openly and directly with high school students. Even if they don't enroll with us immediately upon graduation, we often have students who enroll later in life, tell us that they first heard about Lincoln while in high school. Additionally, over the next 12 months, we will be launching several new and revised programs which should appeal to more students, and thus also assist with growing our population.

Finally, we have maintained our dedicated focus to remain well within the regulatory requirements and guidelines established at the national and state level for our industry. One regulatory area that has our attention is the recent decision that could possibly result in the Accrediting Council for Independent Colleges and Schools losing its ability to accredit schools. While ACICS is one of three organizations that accredit Lincoln schools, all of the Lincoln programs that fall under this accrediting body involve campuses that are included in our discontinued operations. Nevertheless, we have started the process of having these campuses re-accredited by another accrediting agency.

In summary, as I said at the beginning of the call, we are encouraged by the various achievements during the quarter. We still have a lot of work to do, but the fruits of our efforts are beginning to generate results, and if we can continue the initial momentum, we are well-positioned to move toward sustainable profitability while enhancing student outcomes.

At this time, I'll turn the call over to Brian for a more detailed review of our financial performance.

Thank you Scott, and good morning everyone. I'll begin my comments this morning on the financial performance of our continued operations, which is comprised over our Transportation and Skilled Trades segment, our Transitional segment, and our Corporate and Other segment. The Transitional segment refers to operations that closed or are being phased out. As so, it consists of our Fern Park, Florida campus, which was fully toured out as of the end of the first quarter of 2016, and the Hartford, Connecticut campus, which is on schedule to be fully toured out by the end of this year. Each school previously mentioned employs a gradual teach-out process that enables the school to continue to operate while current students complete their course of study. And it is important to note that the Hartford campus is no longer enrolling new students.

Revenue from continuing operations for the quarter was $41.9 million versus $44.7 million in the prior-year comparable period. The decrease was a result of starting 2016 with approximately 800 fewer students than on January 1, 2015, which led to a 9.6% decline in average student population to approximately 6,600 as of June 30, 2016 from 7,300 for the prior-year quarter.

As a side note, our Transitional segment accounted for approximately 50% of the revenue decline from the prior-year period. This decrease in revenue was partially offset by a 3.5% increase in average student revenue per student for the three months ended June 30, 2016, due to a shift in program mix.

As Scott mentioned, we did have a slight increase in student starts from our Transportation and Skilled Trades for the second quarter. Student starts appear to have stabilized with the increase to 1,936 versus 1,930 for the second quarter of 2015. With that in mind, we are expecting to finish the year with approximately the same student population that we entered the year with.

As noted earlier, we continue to implement efficiencies and cost reductions across the entire organization through consolidation and streamlined operations. For example, education service and facility expenses from continuing operations decreased by $0.8 million, or 3.7%, to $21.7 million for the quarter from $22.5 million in the prior-year period. General and administrative expenses for continuing operation decreased by $3.5 million, or 13.2%, compared to $23.1 million for the three months ended June 30, 2016 from $26.6 million in the prior-year period. These reduction -- reduced expenses were driven by a variety of factors, including a reduction in salaries and benefits mainly due to lower healthcare claims, the closure and consolidation of certain facilities and a decrease in bad debt expense from improved historical collections and a shift in student population.

Net loss from continuing operations for the second quarter was smaller by over 50% as compared to the second quarter of last year, the $2.7 million or $0.12 per share. Excluding the Transitional segment, the second quarter's net loss from continuing operations decreased to $1.6 million as compared to $3.4 million in the prior-year period. In addition, the net loss from continuing operations includes $0.2 million of additional depreciation from the reclassification of a campus held for sale and $0.3 million of additional rent from the modification of a lease. Both of these costs were not incurred during the comparable period in 2015.

Now, moving on to the second-quarter segment results, our Transportation and Skilled Trades segment revenue was $41 million for the three months ended June 30, 2016 as compared to $42.4 million the prior-year period, primarily driven by a 7% decline in average student population. Average student population decreased to 6,500 from 7,000 in the prior-year period. However, operating income only decreased by $0.4 million to $2.4 million versus $2.8 million as a result of general cost reductions such as administrative salaries and benefits.

As previously mentioned, this quarter's operating income of $2.4 million includes $0.2 million of additional depreciation expense from the reclassification of a campus that was held for sale and $0.3 million of additional rent from a modification of a lease which was not present in the comparable period of 2015. Excluding these expenses, operating income would have increased slightly to $2.9 million compared to $2.8 million in the prior period.

Our Transitional segment, which for the quarter ended June 30, 2016 consists solely of our Hartford, Connecticut campus, had revenue of $0.9 million for the three months ended June 30, 2016 as compared to $2.3 million in the prior period, mainly attributed to the closing of our Fern Park campus during the first quarter of 2016, and the suspension of new student enrollments at the Hartford campus effective during the fourth quarter of 2015.

Our Corporate and Other segment expense decreased by $1.1 million to $4.1 million for the three months ended June 30, 2016 from $5.2 million for the prior comparable period. The decrease in corporate expense was primarily the result of lower salaries and benefits mainly due to lower healthcare costs and management efforts to meet our long-term student and financial objectives.

And lastly, our Healthcare and Other Professional segment under discontinued operations significantly improved its operating loss results for the second quarter of 2016 compared to the same period in 2015. Accordingly, the operating loss decreased by $1.4 million to $0.4 million from $1.8 million for the second quarter of 2016 and 2015 respectively. As Scott mentioned earlier, as a result of selling our primary Florida facility for $15.9 million of gross proceeds, we intend to use approximately $10 million of the proceeds to reduce our term loan and the remaining will increase working capital.

Let's now turn to the balance sheet and cash flow for the quarter. We finished the quarter with $37.8 million of cash and cash equivalents and restricted cash. Of this total, $26.8 million is restricted cash.

During the quarter, we used in operating activities $9 million in cash and $18 million for the six months. The utilization was comprised of our net loss of a $2.9 million lease termination fee in connection with our Fern Park, Florida campus, a $0.7 million lower modification fee paid to the Company's lender in relation to an amendment of our term loan agreement, and $0.7 million of severances paid during the six months ended June 30, 2016.

In addition, the decrease in the Company's cash position is reflective of the seasonality of the business, the reduction of revenue and the timing of Title IV funds received. Due to the seasonality of the business, the Company expects to increase its cash position during the second half the year to a position in excess of our term loan repayment obligation by year-end.

Finally, we are reiterating our previous provided guidance for 2016 as follows. First, we are reaffirming our expectations to fully exit the Transitional segment and reduce the losses incurred through the timely closure of the Hartford, Connecticut campus by year-end.

Second, we continue to expect revenue from Transportation and Skilled Trades segment to decline by low to mid single digits on a percentage basis compared to 2015's revenue from this segment. Lincoln anticipates ending 2016 with approximately the same student population level at the beginning of the year in our Transportation and Skilled Trades segment.

Third, we continue to anticipate generating slightly positive net income for the year from continuing operations, excluding the Transitional segment. The profitability outlook includes a non-cash gain in 2016 of approximately $6.6 million relating to a lease amendment.

Fourth and lastly, we anticipate year-end cash position net of our term loan repayment obligation, a positive cash position.

With that, I'll turn the call back over to the operator so we can take your questions.

(Operator Instructions). Alex Paris, Barrington Research.

Good morning guys. Congratulations on the quarter. It's nice to see that Transportation segment make the turn. I had forecast a slight decline. You had a very, very slight increase. But still, do you think that will be sustained going forward that you -- I mean I think, almost mathematically, it has to be sustained in order to get to the 6,600 students that you started the year with, right?

Yes. I guess the question is though timing and those quarters. It's tough to know exactly what will happen in the next two quarters, but yes, you are right. We are anticipating some growth overall as well as just some improved retention and other things that will help get us to that population number.

Okay. You mentioned, Scott, one of your initiatives for 2017 is to expand the high school admission team because you've had good results so far this year. I realize this is sort of the prime recruiting time for high school, the summer leading up to the fall. How do you measure those good results at this juncture? Is it leads? Is it conversations? Is it conversions? Is it applications? And then also related to that, what is the size of the high school admissions force this year versus last year?

Sure, good questions. So, we've had some high school starts already in the second quarter, and the starts that we've experienced have been greater than the prior year as we look to basically our largest starts coming August and September, and we are seeing some good indications there. So when I say that it's performing well, I'm looking at something that's going to be -- that's a flat overall for the year. But when I look at what our opportunity is and how we have new markets to go into, I can increase our rep force, which we've already hired up for, and go into new markets and grab more market share and get greater penetration. And basically we have increased the rep force from about 75 reps up to about 85 reps for next year, so that should give us a good bump, given all the other changes we've made in our high school sales force. So I think that will be a good source of opportunity for us. Just put it in context, as just the Transportation and Skilled Trades segment, the high school represents about 30% of our total starts in that segment.

Okay, good. So 75 going to 85 for next year. How does that 75 compare to last year? Is it a similar number?

It's down a little bit.

Okay. Thank you for that. And then a question on the sale of the Florida facility. Florida is one of 17 facilities, 17 schools, but as I recall, it's the only one that you own. The rest are leased. Is that correct?

That's correct, within that segment.

Yes. And then given your comments that you had been hopeful to sell them in one transaction, this transaction obviously suggests that it's going to be, as you said, more than one transaction. It's taken eight months to get to this point, or since you announced it.

Yes.

Is part of the length of that trying to get it done on a one transaction now coming to the realization that is going to be more than one transaction? And then would that signal maybe a faster closing of the balance of the schools?

It's really hard to predict, but certainly your first statement is correct in that when we were trying to sell it is one property, one group, it was more challenging. And as we kind of got indications of interest back, we could sense which campuses were most in demand.

As you know, there's some difficulties out there in the financing market. There still remains good interest. Most of all, though, the good news is that segment is performing better than it performed last year, so we continue to deliver and find ways to attract more students and create value there. So the good news, from my perspective, is that whole segment is performing a lot better than it did last year, and we'll continue to look at opportunities to figure out ways to maximize the value.

And how large was the Florida facility in terms of enrollment? Healthcare in total, you had about 3,700 students at the end of last year.

Yes. So that facility currently only has about 400 students, and probably about 100 and -- am I looking at the wrong one, Brian?

No, no, you're right.

So 400 students. And probably about 125 of those are in the automotive HVAC programs, which is what we are keeping.

All right. So where will those automotive students be taught after your lease term expires mid-next year? Do you have another facility for them to move to?

They are already in another facility. We have multiple facilities at that location. And we own the other facility as well. It's a smaller facility.

Okay, got you.

So basically what we are doing is teaching out some programs and keeping other programs but at the same time selling off some of the real estate affiliated with those programs that we are teaching out.

And then I would assume the balance of the schools, the other 16 which are not owned but leased, will either be sold as a business or taught out because of no reasonable buyer for that business.

That is all a possibility.

Okay. That's helpful. Thank you very much. I'll get back in the queue.

Douglas Ruth, Lenox Financial Services.

Brian and Scott, congratulations on getting the student starts to increase. That was a tremendous achievement for you.

Thanks Doug. We appreciate it.

The Indianapolis campus was really challenged last quarter. How is that doing at this time?

It's still a little bit challenged. We have new leadership in the admissions area which is providing some stability, but obviously it's tough to turn things around within three months. But I think that we are certainly on our way in the right direction.

Okay, so it's moving in the right direction.

Correct.

The term loan that you have, what is the size of that?

Right now, it's approximately $44 million.

Okay. So it will drop down to $34 million if the real estate sale goes through.

Correct.

And then can you give us -- I think you gave us a little bit broad, but could you maybe give us a little more color on what is the interest in the other healthcare properties, and what is sort of the general status of the state of the industry?

Sure. I don't want to go into too many specifics, but what I can tell you is that, first of all, the schools are performing well, which you can see from the results. There's definitely interest in the schools, but I think, as you also can be aware of, the ability of individuals to get financing is challenging. And therefore things take a little bit longer than maybe we originally thought. But again, they are good schools, good assets, performing well, and so I am confident of their long-term value and viability.

Okay. When you look at the Skilled Trade and Transportation segment, do you see any pockets of strength there, any area that you seem to be having more success with?

No, there's really nothing that really stands out as far as really dragging it down or making it more successful. The areas that do poke out are really all around I think management and making sure we have the right teams in place. But I can't say there's one pocket of the country performing particularly better or worse than another, or one program particularly performing that much better or worse than another.

Okay. You made really good progress. Congratulations on that, and thank you for hosting the call today.

And I am showing no further questions at this time. I'd now like to turn the call back over to management.

Great. Thank you all for your continued interest and support in Lincoln. We continue to manage to maximize our results in the short-term while laying the foundation for long-term growth. I thank all of my fellow employees for their dedication and determination to serve our students and deliver the quality education and opportunity that has sustained Lincoln for more than 70 years. I'm sure that there will be bumps in the road ahead, but I'm confident that Lincoln is positioned to stay on course. Thank you again and I look forward to updating you during our third-quarter call. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.