Lincoln Educational Services Corp (LINC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lincoln Educational Services fourth-quarter and full-year 2016 earnings conference call. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Doug Sherk with EVC Group. Sir, you may again.

Thank you, Kaylee, and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its fourth-quarter and full-year 2016 financial results news release. 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 made 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 in the 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.

The Company cautions you that these statements concern certain expectations of the Company's future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond the Company's control, but may influence the accuracy of the statements and the projects upon which the statements are based. Factors which may affect the Company's results include but are not limited to the risks and uncertainties discussed in the risk factors section of our annual report on Form 10-K and in quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.

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 for future events. 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 hereof.

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

Thank you, Doug, and good morning, everyone. Thank you for joining our call this morning to discuss our fourth-quarter and full-year 2016 financial results as well as our outlook 2017. With me today is Brian Myers, Lincoln's Chief Financial Officer. I'll again the call by reviewing our recent operational highlights and progress in achieving our corporate objectives. Brian will provide further details on the quarter's financials as well as our outlook for the current year, then we'll take your questions.

For the past several years, our organization has faced many challenges and headwinds as we've strived to achieve consistent profitability while continuing to enhance the student educational experience. Our team has been extremely focused on executing a strategy that enables Lincoln to capitalize on its transportation and skilled trades education roots, builds partnerships with corporations actively seeking trained employees with specific specialized skill sets, generates maximum efficiencies from our operations, meets or exceeds the evolving regulatory requirements, and finally, maximizes the asset value of our non-core operations for the benefit of our shareholders.

It's been a long road for both our organizations and our shareholders, but I believe the fact that we met all the guidance metrics we provided at the beginning of 2016 attests to our increasing consistency and positions us for further improvement in 2017. A key factor behind returning Lincoln to consistent profitability is to grow student starts. A relatively full employment economy has made that task especially difficult, despite the continued skills gap between the skills needed by employers who are searching for candidates and the skills of the unemployed and/or underemployed.

During the fourth quarter, our transportation and skilled trades operations increased starts by 2.3% and finished the year with approximately 100 more students than on January 1, 2016, which is a very positive step for our Company. Lower carry-in population has been one of the main contributing factors to the declines in our revenue over the past several years and so a modest increase is certainly a welcome sign. I'd also note that we generated a 6.3% increase in student starts at our health and other professions segment during the fourth quarter, which nicely positions this discontinued operation for 2017 as we continue to explore strategies to maximize the value of these assets for our shareholders. More on that in a few minutes.

A major driver behind the positive trends with student starts is that demand from employers in all segments remained strong and continues to lead to deeper conversations around solving workforce shortages through placement partnerships, employee training opportunities and enhancements to our curriculum with specific company and industry skills. During 2016, we rolled out advanced Audi training at six campuses and have already demonstrated to the Audi dealership network Lincoln's unique ability to provide high-quality technicians in large numbers to meet their strong demand.

In December, Audi recognize our Mahwah campus for providing more advanced Audi trained technicians to the field than any other school in the country. In addition, Fiat/Chrysler automotive ask us to upgrade our technician level training from 01 to Level 2, which also will enable graduates to start at a higher level with higher wages. Also, Volkswagen awarded Lincoln with our first contract which we hope to expand to multiple campuses, similar to Audi, and we strengthened our partnership with BMW with the award of the MINI brand STEP program. We are currently BMW's sole MINI STEP technician partner.

Moreover, graduates of our newly designed program will enter the workforce as BMW MINI Master Certified Technicians. While our OEM contracts takes longer than would like to establish, we are pleased by the positive feedback from both our graduates and the OEMs. Lincoln's footprint is unique and we believe our 70-year history and experience position us well to further expand our industry partnerships. We are currently having discussions with several other OEMs and industry leaders.

Graduates from our programs are in high demand. When we speak to our partners as to why they have selected Lincoln, the three most common responses are, first and foremost, the quality and quantity of our graduates. Our students leave Lincoln with the technical skills needed to excel, but they also leave with the value-added life skills such as communications, professionalism, and critical thinking, and our partners recognize these qualities. Our partners also note the level of service our team provides their organizations in our campus's footprint as other advantages. Certainly we expect to maximize these advantages as we pursue other partnerships with corporate America.

We also have other program expansion plans underway outside of the auto industry. In Nashville, Tennessee, the latest addition to the welding technology program is now available, and the Grand Prairie, Texas, campus has expanded its welding program with the addition of pipefitting. Both programs will benefit from increased investment in infrastructure and manufacturing that is occurring in each of these markets.

Furthermore, with job placement opportunities in the welding field expected to grow by more than 100,000 throughout the United States over the course of the next eight years, these programs will help deliver a new generation of skilled, trained professionals to help employers fill the many available and high-paying career opportunities in industries such as construction, infrastructure, mining and manufacturing.

One of our key objectives in 2017 is to maintain these increased student population levels and to use them to build a larger and steady student population. We have continued to make quarterly progress on this objective. The programs we have implemented to retain students who are currently enrolled, bring previously enrolled students back, and enroll graduating students in advanced degree programs are all proving to be worthwhile endeavors. While we've done much to position Lincoln's continuing operations for growth, the strong employment market and continued student aversion to debt restrict our growth. In addition, redundant and unnecessary regulations have been shrinking our addressable market and increasing operating costs. We do believe that the change in administration at the federal level offers the potential to create a more favorable regulatory operating environment and reduce this growth inhibitor. Given the demand for our training by American employers and the success of our graduates in terms of gaining skills that result in stable, highly compensated employment, we look forward to regulatory changes that will benefit the creation and filling of American jobs.

We do intend to maintain our very high level of compliance in all aspects of our operations. Our programs to enhance our level of student service to drive higher retentions and even higher student satisfaction levels have already been noted. From a financial perspective, we continue to meet or exceed regulatory requirements. Our 90/10 ratio is 79% well below the threshold. Our composite score is projected to be above 1.5 and our three-year cohort default rates continue to decline with our most recent published rates well below 15% at 12.6%. The strength of these and other compliance ratios is reflective of Lincoln's long-term commitment to its students and to striving to provide each graduate with a strong return on their investment.

As we strengthen our operations we will seek alternative financing solutions that lower our operating costs while enabling us to meet the needs of our growing number of corporate partners and expand our opportunities. We took many steps to increase the efficiencies of our operations during 2016 and we will continue to ensure that our expenses are in line with our revenues. For example, in the fourth quarter, we did close our Green Valley, Nevada, campus which was included in discontinued operations. And we reclassified our Northeast Philadelphia campus into our transitional segment.

In addition, we are continuing to teach out our West Palm Beach, Florida, and Center City, Philadelphia, campuses and anticipate completing all teach-outs during the current year. This should significantly reduce our transitional segment operations and help simplify the presentation of our improving operating performance. Before I turn the call over to Brian, I'd like to provide an update on our efforts to rationalize our business by exiting the healthcare and other professions segment, which were classified in discontinued operations in November 2015.

It remains our objective to dispose of these assets through a single transaction, but that obviously has not happened as quickly as we had hoped. Uncertainty around what would happen with ACICS as well as the various new rules enacted at the end of the last administration has complicated negotiations. Our goal is to seek maximum value for our shareholders from these assets. I would note that we do continue to operate the campuses in an exemplary manner, as evidenced by the 6.3% increase in student starts at that segment's campuses during the fourth quarter. When we have definitive information about our transaction to disclose we will update you, but in the meantime I want to recognize the healthcare and other professions faculty and operating teams for their continued dedication and devotion to Lincoln and our students.

In summary, we are moving towards an operational and financial performance consistency that Lincoln has not experienced in years and we look forward to reporting on our progress as the year progresses. At this time, I'll turn the call over to Brian for a review of our financial results that merit highlighting.

Thanks, Scott, and thank you all for joining us this morning. I'll begin my comments with the highlights of our continuing operations financial performance. Continuing operations are comprised of our transportation and skilled trades segment, our transitional segment, and our corporate and other segment.

The transitional segment refers to operations that are closed or currently being taught-out. For the fourth quarter this segment consisted of four campuses: Fern Park, Northeast Philadelphia, Center City Philadelphia, and our West Palm Beach, Florida, campuses. It is important to note that we closed two campuses during the quarter, Hartford and Henderson, which for the quarter was included in discontinued operations. The remainder of these schools in the transitional segment are expected to be closed during 2017.

Revenue from continuing operations for the quarter was $50.3 million versus $52.6 million in the prior year comparable period. The decrease in revenue of $2.3 million was mainly due to our transitional segment, which accounted for approximately 91.2% of the revenue decline. Further, as Scott mentioned, lower carry-in population has been a contributing factor to the revenue decline over the past few years and, excluding our transitional segment, our continuing operations started 2017 with slightly more students than we had on January 1, 2016. We believe this positive momentum will help us achieve the 2017 guidance that I will review in a few moments. During the quarter, student starts remained essentially flat with a modest decline of 0.8% versus prior year period. Excluding the transitional segment, our student starts were up 2.3% for the quarter.

Turning to operating expenses. We continue our efforts to implement efficiencies and cost reductions across the entire organization. Education, service, and facility expenses from continuing operations decreased by $800,000 to $22.5 million for the quarter from $23.3 million in the prior year period. The decrease in costs were the result of lower instructional expenses primarily resulting from a reduction in the number of instructors and other related costs resulting from lower student population primarily attributed to the teach-out of our Fern Park campus, which was completed in the first quarter of 2016, as well as reduced costs attributed to the planned closure of our Northeast Philadelphia, Center City Philadelphia, and our West Palm Beach campuses, which are expected to be taught-out during 2017.

Selling, general, and administrative expenses from continuing operations increased by $1.7 million to $23.5 million for the three months ended December 31, 2016, from $21.8 million in the prior year period. The increase was primarily the result of favorable workmen's compensation adjustment made in the prior year resulting from better claims history and increased legal expenses. Net income from continuing operations for the fourth quarter was approximately $100,000 or $0.00 per share as compared to net income of $3.9 million or $0.17 in the prior year period. Excluding the transitional segment losses, a gain resulting from the restructuring of our finance obligation in 2016, and a non-cash impairment charge, we would have reported income of $3.7 million in the fourth quarter as compared to net income of $4 million in the prior year period.

Now, focusing on the fourth quarter segment results, our transportation and skilled trades segment revenue was $46.6 million for the three months ended December 31, 2016, as compared to $46.8 million in the prior year comparable period. This slight decline mainly stemmed from lower carry-in population into 2016. However, I would like to mention that student starts for this segment were up by 2.3% for the quarter compared to the prior year comparable period and I would also like to highlight again that we are starting 2017 with approximately 100 more students than we had on January 1, 2016.

Operating income from transportation and skilled trade segment increased by $1 million to $9.4 million from $8.4 million in the prior year comparable period. Our transitional segment, which for the quarter ended December 31, 2016, had revenue of $3.7 million compared to $5.7 million in the prior year period. The decrease was due to the closing of the Fern Park campus and the suspension of new student enrollments at the remaining campuses during 2016.

And lastly, for our healthcare and other professional segment, which is classified under discontinued operations, I would like to highlight this segment's full-year results. Net loss from discontinued operations was $23.8 million for the year ended December 31, 2016. Excluding the $17.5 million impairment charge and the $6.9 million in losses incurred for closed campuses, the Company would have reported net income of $0.5 million for the year ended December 31, 2016.

In 2015, the Company reported net loss of $3.5 million. Excluding the $2.6 million of losses incurred for closed campuses, the net loss would have been $0.8 million. This represents a $1.3 million increase in net income year-over-year which reinforces management commitment to invest in assets classified as discontinued operations and to strategically continues to maximize shareholder value.

Let's now turn to the balance sheet and cash flow for the quarter. We finished the quarter with $47.7 million of cash, cash equivalents, and restricted cash. This was compared to $61 million of cash, cash equivalents, and restricted cash in the prior year comparable period. The decrease in our cash balance was mainly the result of our net loss and $11.5 million of school closing costs. As Scott mentioned -- also as Scott had mentioned earlier in his remarks, we have met all of our 2016 guidance metrics as disclosed in the beginning of 2016. And I am pleased to take a moment to walk you through those accomplishment and the related results reported at year-end.

First, planned closing of our Fern Park and Hartford campus were completed. The Fern Park campus was closed in the first quarter of 2016 and the Hartford campus was closed in the fourth quarter of 2016. Second, the transportation and skilled trades segment was expected to realize revenue declines in the mid to low single digits. For the year, this segment was down 3.2%. Additionally, we expected to end the year with approximately 6,600 students and our year-end population for this segment was 6,700 students.

Third, we anticipated our cash position to be in excess of our term loan repayment obligation at the end of the year. The amount of cash in excess of our loan obligation was $3.4 million for the year ended 2016. Lastly, we expected to generate positive net income from continuing operations excluding our transitional segment and any impairments. Net income for the year, less our closing schools and the non-cash impairment charge, was $3.3 million.

Let's now turn to our 2017 guidance. First, the Company expects to achieve positive operating income companywide, including discontinued operations, with the exceptions of the closed campuses. Second, the Company expects to achieve low single-digit revenue growth in the transportation and skilled trade segment. And lastly, we expect to complete the planned teach-outs of our Northeast Philadelphia, Center City Philadelphia, and our West Palm Beach campuses in 2017.

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

(Operator Instructions). Alex Paris, Barrington Research.

Good morning, guys. Congratulations on a strong finish to the year and hitting all your guidance metrics. I have a few questions. First of all, just a strategy question. November 2015 you announced you were going to sell healthcare and other professions. You've been working at it for 14 months or so and things have changed dramatically in for-profit post secondary education. I got to imagine, whatever price talk that was going on over the last 14 months, multiples are higher today. Is that part of what's been holding it up?

And secondly, I would think if you are still going to sell these things -- and I think you should consider keeping them, particularly since you seem to have them turned -- if you are still considering selling them, I would think that you'd want to start the process all over again. What's your big picture thoughts with regard to that segment?

Sure. Good question. Certainly a lot has changed and also, needless to say, with the election things have changed. And as Brian has highlighted, we've continued to invest in those schools for their long-term health. We are focused on what we can do to maximize shareholder value, so we will continue to be focused on that. And as far as the negotiations, they have been challenging. There's lots of different pieces that have been moving around both positively and negatively. The change with ACICS is a somewhat complicating factor, but we are in the process there of switching over accreditation. But it's a jump ball, it's a live ball. We're trying to figure out what the best way is to maximize shareholder value. And we will just keep you all posted, but that is what we are focused on. And so to your point maybe it might be best to hold onto it, but again, we'll update people when we had more definitive answers.

Okay. Any thought as to timetable? Do you think we'll know one way or another by midyear, by the end of the year, or --?

We'll definitely know by midyear. Because I think all parties involved, it's to our best interest to make a decision and move forward.

With regard to the ACICS switch, have you said who you are switching over to? ACCSC? And where do we stand in that process?

Sure. We haven't said, but we are switching over to ACCSC. And we've been in that process and everything is on track to have those schools switched over to them by year-end.

Okay. And then while staying on the big picture, it was nice to see starts growth in both transportation and in the discontinued operations. What's been the big -- and I think you touched on this a bit in your prepared comments -- what's been the biggest challenge? I think you said job market and debt aversion, but what are you doing to overcome that? Or are things just starting to improve because the year-ago number is so low?

Well, your latter point could be part of it, but I hope that the efforts that our teams are making are actually leading to our growth. We're just focused on making sure that that message is communicated properly both at the high school level and the adult level of what the job opportunities are. I think there is more general conversation about the value of what we do. It's still -- we have a long ways to go, but I think that more people to question do they really need to spend a lot of money and four years of their lives to go get a degree when they see their friends not being employed?

And so, there are a lot of small things. I can't say that there is a tidal wave change yet, Alex, but I think that we will continue to drive home that message that we offer great opportunities. Our graduates have great career potential, and we at Lincoln provide people an opportunity to advance themselves. So we'll just continue hitting all those marks and I am confident that, given the demand out there and what we offer, things will turn.

All right. On the regulatory front you mentioned your 90/10 ratio at 79%. Your composite ratio projected, your CDRs. I forget, but where do you stand on gainful employment both within the transportation segment as well as the discontinued operation?

Sure. I think that in the last call we mentioned that -- I guess it was fewer than, like, 1.5% of our students would be negatively impacted. And a lot of those -- some of those were in some of the discontinued operations. As far as on the auto side that we really have no challenges as of right now with any of our programs. We had an issue maybe with our collision program, but we've addressed that through offering a new program that's at a -- it's a shorter program at a lower wage. And actually we're seeing some nice growth in that segment, so it's probably been a really positive change. But all in all, gainful employment at this stage is not an issue for us.

And the challenges that we did have in the discontinued operations were in the schools that we closed or are in the process of closing.

Got you. All right. And then one last question and it leads into a related question on guidance. The transitional segment, you said whatever is in there now will be out of there this year. Am I remembering right? You'll be done with the last of them by midyear. Is that right or does it go beyond the second quarter?

I think it goes into the third quarter.

Yes, West Palm Beach goes into the third quarter.

(multiple speakers) Okay. And then any other -- is there the real potential of any other schools going into that line item?

I'd say anything is possible; it's not planned at this time.

So by the fourth quarter we're going to have a pretty clean quarter, it's just going to be transportation and skilled trades. There would be nothing really coming in on the transitional line, and then you'll have the discontinued operations if you still have the discontinued operations?

That's correct. Our accounting people won't know what to do with all this free time once it becomes simplified.

Me neither. So then that brings me to the last question about guidance. You said that you expect to achieve low single-digit revenue growth in transportation and skilled trades. What revenue would you expect from transitional in 2017 between now and the time that they are all complete?

Under $4 million. Between $3.5 million or $4 million.

Okay. And then you expect to achieve operating income companywide, including discontinued operations. That mean including transitional also, right? You said companywide?

Yes, but I backed out closed schools and transitional will be closed, so it includes transportation and our continuing HOPS schools, healthcare schools. That's already in discontinued ops, just backing out the losses from the schools that are closed, the four schools.

Got you. Okay. Well, that helps. Thank you very much and good luck in 2017.

Douglas Ruth, Lenox Financial Services.

Good morning. Congratulations to you on the progress and that you did achieve the goals that you had stated. How about the line of credit, the revolver? Is there any opportunity here to refinance that?

We are always looking to see how we can optimize and reduce that. Right now that term loan we have -- as you know, we have a facility up for sale and where there is currently interest in that, so that would help it. We're trying to pay down the line of credit, which we did pay down during the year some of the restricted cash already in 2017. So we are working towards that. As the results improve it makes that that much easier to do.

Okay. And in the past you had talked a little bit about specific schools and some of the struggles with the marketing. Is there any update as far as how these schools -- you had talked about some personnel changes. Is there any kind of update as far as what's been happening since you made the changes?

Sure. I'll just say that we constantly are evaluating each of the campuses and their teams and we'll make the changes as necessary. As of right now, I can't say that the changes have materially changed their financials. But I can tell you that changes that have been made, and from all of us looking at our different departments, feel very good that they are moving in the right direction. It just sometimes takes a while to start seeing the impact at the bottom line. But as far as where we've made the changes, we are definitely seeing progress as we would like.

Okay. What about the marketing initiatives? Is there any plan or anything that you are doing different for planning to do different for 2017?

Well, we're always looking to change things up; you don't want to keep doing the same thing. So we're definitely focused a lot more on social media and expanding our opportunities there. That's both a financial commitment as well as just getting more people engaged at the campuses, whether it's employees or students or alums. We have a unique opportunity that we have with Schmidt Peterson racing that we are doing this year, whereby not only are we coordinating a lot of marketing efforts with them but we have a unique mentorship program set up. So that a student and a faculty member from six of our campuses will get to go and work in the pit with them. And we're hoping that's going to drive a lot of excitement both at the campuses but also in the high school market, and frankly should also lead to some interesting social media as well. So it's got to be a continued focus of ours and we'll continue to look at ways to enhance what we're doing, but it's really a long litany of changes without any major global changes that I can share with you, Doug.

Okay. All right. Well, thanks for answering the question. We're looking forward to the clean accounting quarter.

Yes, we all are.

Thank you for doing what you're doing.

(operator instructions). Eric Landry, BMO Capital.

Good morning. So, there's two buildings for sale in West Palm, and I think if I remember correctly you owned three there. Is that correct?

Correct. All three are for sale.

Okay. And that's a change from last quarter, correct?

That is correct.

All right. The two that fell through in September, do you off hand know the book value or the carrying value of those buildings?

Well, the book value of those buildings are approximately $19 million, including the improvements, and the appraisal value is slightly higher.

Okay. You said $19 million?

Correct, for the three buildings.

All right. And are those in disc ops or are they back in transitional now?

No, it's included in held for sale, the assets. And the buildings are included in held for sale, and the schools themselves are included in transitional, which is continuing operations.

Okay. So do I have this correct, that the book value of those two buildings is higher than the book value of the entire held for sale assets?

No, because the held for sale assets -- let me think. I don't think that is correct.

It's $13.2 million now, right, after the impairments?

Right, $13.2 million. Yes, held for sale is $24.7 million. You're looking at the -- the assets held for sale are $24.8 million, and you are looking net of our -- the liabilities.

I got you. Okay. So an overwhelming majority is those two buildings?

Three buildings, correct.

So the carrying value of the three buildings is $19 million, or the (multiple speakers)?

Yes, the three buildings are $19 million.

The three buildings.

Okay. All right. But the two buildings are almost 100,000 square feet, correct, and the last one is small?

The last one is smaller; I'm not sure of the square footage.

Okay. All right. Do you have the depreciation for the disc ops segment for the year and the quarter?

Right. For the disc ops segment, because we classify them as held for sale, there's no depreciation for the disc ops segment.

Okay. And there hasn't been for the entirety of its being in that?

That is correct. The only time that we have depreciation if we decide to close them and move them to transitional, and then we do the catch up depreciation.

I got you. Okay. And do you know what percent of the disc ops is in the hospitality field, culinary and what have you?

A majority of it -- all of it.

Well, there's medical, though. I would say maybe as we've been shutting down a lot of that, I'd say maybe 20%.

And then the other 80% is the nursing stuff?

Correct. Medical.

Got you. Okay. So 80%. And that's the more desirable school to any type of buyer, am I correct in that assumption?

Well, beauty is in the eye of the beholder, but I would say yes, in general certainly nursing is a very strong program.

Right. But also our culinary school in that segment is performing very well.

All right. But at least one of your competitors has their culinary school in either runoff or for sale, so --

Correct. In general, they grow challenge with gainful employment.

Right. Got you. Okay. Now, the $6.7 million gain in other income, is that done now, that we're in 2017 (multiple speakers)?

Yes, that was from changing -- we had a sale-leaseback that we converted basically over to an operating lease, so it does not go into 2017.

Got you. And the $9.4 million in transportation and skilled trades op income, that's -- are there any one time gains in that?

No.

Okay. That's it. Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Shaw for closing remarks.

Thank you, operator, and thanks to everyone for participating in our call this morning. We continue to channel our efforts towards establishing sustained profitability while offering the high quality educational experience to our students that results in our graduates mastering marketable skills across a range of in-demand industries. We are continuing to advance in the direction that supports these objectives and we look forward to updating you on our progress as developments occur and talking with you again in May. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.