Lincoln Educational Services Corp (LINC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Lincoln Educational Services 2017 Fourth Quarter and Full Year Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Doug Sherk of the EVC Group. Please go ahead, sir.

Thank you, Teecee, and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its fourth quarter and full year 2017 financial results news release. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. 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 Lincoln's management regarding the company's business that are not historical facts may be forward-looking statements as that term is defined in the federal securities laws. 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. The company cautions you that these are statements -- excuse me, the company cautions you that these statements concern current expectations about 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, that 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 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 to 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, Chief Executive Officer of Lincoln Educational Services.

Thank you, Doug, and good morning, everyone. Thank you for joining our call to discuss our fourth quarter and full year operating and financial results as well as recent corporate developments. With me today is Brian Meyers, Lincoln's Chief Financial Officer.

I'm pleased to report that we had a very successful fourth quarter. As we strive to return to consistent profitability, our #1 goal is to increase our student population. And in the fourth quarter, we achieved strong growth in both segments. Our Healthcare and Other Professions segment generated a 16.1% increase in starts; while the Transportation and Skilled Trades segment, with an average student population nearly double the size of Healthcare and Other Professions, rose 7.1%. More encouraging is the fact that last year's fourth quarter starts were also positive and so we're building on strength.

2 quarters ago when we talked with you about our second quarter results, we noted the unexpected decline in high school starts, which primarily impacted our Transportation and Skilled Trades segment. We noted at the time that we had implemented actions designed to address the factors behind the decline. Given fourth quarter results and the trends that we are seeing in the first quarter, we believe that our actions are working. We have changed certain vendors, increased investments in strategic areas and improved our systems and processes. We currently believe that for the first time in many years, overall starts from our campuses operating as of January 1 will grow for the entire year.

In addition to our solid student start performance, our management team did an excellent job of managing our resources during the fourth quarter. And we generated $7.7 million in net income as compared to an $18 million loss in the prior year period. A significant reason why our profitability has improved is because our transitional segment operations were winding down during the fourth quarter. This segment was comprised of campuses that we had decided to close and were teaching out. And as of December 31, 2017, all of the campuses in the Transitional segment were closed.

For the first time in several years, as of January 1, 2018, Lincoln has no operations in the Transitional segment. As a result of this achievement, Lincoln is positioned to focus our energies on new programs and the expansion of existing programs that are in high demand. And our operating performance in 2018 should be positively improved over last year.

Again, the single most important metric towards a growing and consistently profitable Lincoln is student starts. And during the fourth quarter, overall same school starts grew 11.2%. Same school starts eliminate the negative impact of the Transitional segment, which by design had no student starts during the fourth quarter.

One of Lincoln's strengths is our ability to achieve growth without having to spend millions of dollars to expand physical capacity and cannibalize our existing campuses. Moreover, our program and geographic diversification are a strength, which better enables our campuses to achieve growth in a negative operating environment.

For example, in 2017, we achieved higher growth in our skilled trades programs than in our automotive and diesel programs. We know that the growth in the construction and manufacturing sectors is driving increased demand by employers for new talent. And it appears that increasing awareness by this need -- by industry could be encouraging more students to pursue a career in one of these sectors. Given Lincoln's 70-year history of training and serving these sectors, coupled with the near-term increase in infrastructure spending constantly discussed by politicians and business leaders, we believe Lincoln is positioned to generate growth in our skilled trades programs for some time.

Similarly, with our Healthcare and Other Professions segment, our licensed practical nurse program, which is a more expensive program that leads to a better outcome in the form of a higher salary, performed much better than our allied health programs. In fact, every HOPS campus that has a nursing program experienced an increase in student starts in that program during 2017.

While the high employment rate continues to present challenges to our growth, we are also benefiting from the difficulty employers are having recruiting trained employees. As a result, employer interest in partnering with Lincoln continues to forge new relationships, which lead to new opportunities for Lincoln and our students. For example, a few weeks ago, we entered into a partnership with Hussmann, a Panasonic company and a manufacturer of medium and low temperature display cases and refrigeration systems.

As part of the partnership, Hussmann is building an advanced refrigeration training center on our Grand Prairie campus. Our HVAC graduates from around the country will be trained for Hussmann careers, and Hussmann will cover not only the tuition, but also the room, board and transportation. This will be a significant investment by Hussmann and it highlights the growing need by employers to find solutions to their aging and retiring workforce. We are in discussions with several other companies facing similar challenges.

Switching to outcomes overall. I'm very pleased that Lincoln continues to provide our students with a strong ROI. Our graduation rates held relatively constant, while our placement rates increased 400 basis points compared to prior year. This speaks to the increasing value that employers place on a Lincoln education as they seek to find the best talent in the marketplace. A higher percentage of students are finding employment. And more and more employers are providing incentives, ranging from signing bonuses to student loan repayment programs, in order to attract our graduates.

On the regulatory front, our 90/10 remains comfortably at 79%, and our cohort default rates remain more than 200 basis points below the national average. We recently closed out our only program review with no material findings. We have one regionally accredited school, which had a reaccreditation visit last year, and we are responding on schedule. Similarly, we have met every deadline for submission of all 7 applications for our ACICS schools, which are -- and we are responding to requests for more information.

To recap, we executed on several major initiatives in 2017. We successfully closed 5 campuses and will, for the first time in a while, have no schools in the Transitional segment. We successfully closed on a new credit facility that provides greater flexibility at a lower cost, which has lowered and will continue to lower our interest expense. We sold our West Palm Beach facility, but still own more than $60 million in real estate. We successfully met all deadlines for the expected transition of the ACICS schools to ACCSC. We renegotiated leases and rationalized square footage to reduce our fixed costs by over $1 million annually.

In response to lower-than-expected starts from our high school representatives, we restructured their reporting and enhanced their materials and processes, which is leading to a positive outlook from this important start resource for 2018. We enhanced our marketing channels and increased our investment to drive greater population, and we are seeing at least 4 months of positive trends. We strengthened the Lincoln brand with existing employers and new employers, which lays the groundwork for greater and richer future collaboration.

Looking forward, our plans are straightforward: grow our population while being true to our values. We have launched new TV advertising that we anticipate will resonate better with millennials with inspirational, informative and humorous themes. We will continue to invest in our marketing to drive more interest and new students. We will expand successfully proven programs such as welding and CNC into markets where research tells us there should be strong demand from both students and employers utilizing existing campuses. And once we achieve new accreditation for our ACICS schools, we will launch a new IT program in several of them.

Our current momentum has us optimistic for the year, as does the simplicity of our plan. We will continue to make incremental improvements to bring growth to the bottom line, while carefully listening to the marketplace to act on new opportunities.

To give you more insight on our fourth quarter financial results and to introduce our 2018 guidance, I'd like to turn the call over to our CFO, Brian Meyers.

Thanks, Scott, and good morning, everyone. I'd like to begin my comments with a review of the fourth quarter financial performance highlights. Later, I'll review our guidance for 2018.

First, as Scott had previously mentioned, on a same school basis, our students starts as a company have increased by 11.2% quarter-over-quarter. Leading the way was our Healthcare and Other Professionals segment, which boasted a 16.1% increase in student starts, while our Transportation and Skilled Trades segment increased by 7.2% for the quarter.

Second, we achieved net income of $9.2 million and adjusted EBITDA of $11.5 million for the quarter, excluding our Transitional segment. In addition, when compared to the prior year, excluding the Transitional segment and impairments, both net income and adjusted EBITDA increased $2.2 million quarter-over-quarter.

Third, I would like to highlight again that the company has successfully closed all the campuses classified in the Transitional segment and is entering 2018 with no operation in this segment. I'm happy to say that when we report numbers for the first quarter of 2018, it will be the first time in 5 years that we will not have any campuses making preparations to close.

Lastly, we have achieved all of our previously disclosed guidance for 2018 (sic) [2017].

Now regarding the segment operating performance highlights. Our Transportation and Skilled Trades segment revenue decreased to $45.9 million for the 3 months ended December 31, 2017, as compared to $46.6 million in the prior year comparable period. The decrease in revenue was primarily driven by a 4.3% decline in average student population, slightly offset by a 2.8% increase in average revenue per student compared to the prior year comparable period.

As previously mentioned by Scott, student starts for the quarter increased by 7.2% compared to the prior year comparable period. The majority of the additional revenue generated by the increased student starts during the fourth quarter will be realized during 2018.

Operating income for the Transportation and Skilled Trades segment decreased by $500,000 to $8.9 million compared to $9.4 million in the fourth quarter of 2016.

Education services and facility expense decreased by approximately $700,000, primarily due to a reduction in our facility expense as a result of fully depreciated assets and more favorable lease terms at one of our campuses. Partially offsetting these cost savings are increased selling, general and administrative expenses of approximately $500,000. These additional costs are due to several factors, including increased administrative expenses resulting from slightly higher bad debt expense and increased investment in marketing, which is directly tied to our start growth in the fourth quarter.

Our Healthcare and Other Professions segment revenue increased by $1 million to $21.1 million from $20.1 million in the prior year comparable period. The increase in revenue is mainly due to a 3.4% increase in average student population in combination with a 1.4% increase in avenue -- average revenue per student.

Student starts for the quarter increased 16.1% compared to the prior year comparable period, which we have attributed to the increased marketing spend. I would like to reiterate once again that the majority of revenue to be realized from increased student starts in the fourth quarter will occur during 2018.

Operating income for the Healthcare and Other Professions segment was $3.4 million versus an operating loss of $13.5 million in the prior year comparable period. Included in the prior year comparable period is a noncash impairment charge of $16.1 million. Excluding the noncash impairment charge in the prior year, operating income would have increased by approximately $800,000 quarter-over-quarter.

Education service and facility expense increased slightly by $200,000, the majority of which was a result of increased instructional expenses and book and tool expense. Selling, general and administrative expenses remained essentially flat at $7.8 million.

Operating loss for the Transitional segment was $1.5 million, down significantly from $8 million in the prior year comparable period. The change is primarily attributed to the closing of campuses within this segment during 2017. In addition, I want to note again that in 2018, we'll no longer have any campuses categorized in our Transitional segment.

Corporate and Other costs decreased to $3 million from $16.5 million (sic - see press release, "$6.5 million ") in the prior year comparable period. The decrease was primarily driven by a $2.6 million reduction in salary and pay incentive expense quarter-over-quarter as well as a $1.4 million impairment charge booked in 2016. Partially offsetting these costs are $400,000 in higher closed school costs incurred in 2017 related to our Hartford, Connecticut, campus, which closed on December 31, 2016. The additional expense related to the Hartford, Connecticut, campus will expire with the apartment lease, which ends in September 2019.

Let's now turn to the balance sheet and cash flow for the quarter. As of December 31, 2017, the company had net cash of $1.2 million compared to net cash of $3.4 million as of December 31, 2016. The decrease in cash position can be attributed to several factors including a $2.8 million in fees paid for the early termination of our prior term loan as well as fees incurred in the implementation of the new credit facility; a $1.5 million lease termination fee paid in relation to our Center City Philadelphia campus; and over $5 million in closing costs associated with the Transitional segment.

The net cash balance is calculated as cash, cash equivalents and restricted cash, less long-term debt, including the current portion. Further, with the implementation of our new credit facility in the first quarter of 2017, we believe the company has adequate resources in place to execute the 2018 operating plan. In addition, we anticipate interest expense savings under the new credit facility of approximately $3 million annually.

Finally, I'd like to mention again that we met all our previously established guidance for 2018 (sic) 2017 and offer the following guidance for 2018, which we present excluding the 2017 Transitional segment. First, we anticipate revenue to increase by low single digits over 2017. Second, student starts are also expected to increase by low single digits. Third, we expect 2018 operating income to be in the range of breakeven and a loss of $3 million. And lastly, we expect 2018 year-end population to be greater than prior year.

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

(Operator Instructions) Our first question is from Alex Paris from Barrington Research.

Your starts in each case were much better than my estimate. Starts in Transportation and Skilled Trades were up for the first time in several quarters. And Healthcare and Other Professions were up 16% versus a decline in the third quarter. So my question is, based on your guidance, a year-end population greater than the year-end population in 2017, does this mean you expect new student starts to remain positive in each of the 4 quarters of 2018?

We -- Alex, it's Scott. We definitely believe that for the full year, they will be positive. Projecting quarter by quarter, I don't want to go into that detail. But certainly, the momentum that we have ending 2017 is carrying into 2018 so far.

First quarter.

And I know you said -- you discussed this in your prepared comments. But what were the biggest drivers of that student start growth? The increase in advertising? It wasn't an easy comp, as you said, because you were up in the fourth quarter of last year.

Yes. No, I -- exactly. So it's a number of things. And if I could actually pinpoint exactly what's causing the increase, I'd be -- if I told you something, I'd be not telling you the full truth. So it's a lot of different things that we've been working on. We definitely have some new vendors that we're working with on the website. So we think we're getting better leads, which is helpful. We continue to focus with our admissions people to make sure that we're fully staffed and have the right processes in place and the right people in place. And as you can see from the financials, we are investing in this segment. I mean, we are fighting low unemployment. And during this time, I think we just need to put some additional resources into the marketing. And what's encouraging is that we seem to be getting some good results from that. So it's a number of things, and we're just very pleased that our efforts seem to be moving us in the right direction.

Yes. So obviously, you faced a pretty tough headwind with the economy and the employment market. You're obviously generating more leads through advertising. How has your conversion rate been with those leads, converting leads to applications?

Sure. The conversion rate's actually been doing well. The challenge we've had more has been on the start rate, so converting those applications into starts. And that comes down to a lot of affordability issues as well as additional training to make sure that students know the real value of a Lincoln education. So we are making some adjustments with regards to making affordability less of an issue for students, and that really hasn't started to kick in until 2018. So the benefits of those efforts are really not reflected in the numbers that we have shown you to date.

What could some of those initiatives be in terms of making it more affordable? Increased use of scholarships?

Exactly. We had cut back on our scholarships last year. Again, just trying to figure out what that right balance is between scholarships and marketing dollars, and try to understand what is really driving students to come to Lincoln and to start. And I think we clearly demonstrated to ourselves that by having some more scholarships in certain programs in certain markets would definitely be beneficial. And so we are enhancing those efforts for 2018.

Can you quantify that at all? What were scholarships in dollars in '17 versus '16? And what do you forecast them to be in 18?

Sure. Brian?

Right. Overall, the scholarship grants were -- well, scholarships issuing granting to students, they're increasing approximately like $3 million [call them] year-over-year. But now they're more focused. We're actually -- we're giving it to the students that really needed a grant. So it's more targeted, our scholarships now, to more of a need base. Some of them are more of a need base that we didn't have in the past.

It was up $3 million year-over-year or it was $3 million in 2017?

No. I don't have the -- actually, the scholarship, how much the P&L was -- the P&L impact. Scholarships going into 2018, the grants -- the new grants that we're giving to our students is going to be up about $3 million year-over-year.

So in 2018, we're anticipating to spend $3 million more in scholarships.

I got you. Okay, that's helpful. Second question related to average revenue per student, up 2.8% on the transportation segment, up 1.4% in HOPS. What's driving that? Is that mix? Were there tuition price increases, more credit hours taken? How do you explain that?

Sure. It's a little bit of both. I mean, there is always some mix change going on. And we did have tuition increases that kicked in in the second half of last year.

Okay. With regard to your ACICS campuses, when do you expect to find out that you got a new accreditor, ACCSC? Is that a first quarter event, a first half event? Obviously...

It's definitely in the first half. And whether it happens in March or in their May meeting, we're not sure as of yet.

And then with the new accreditor, does that place restrictions on introducing new programs or opening new campuses -- not that you have any plan -- but for a period of time?

Well, we have restrictions today that we can't open any new -- or should just -- should say start a new program while we're going through this process. So what we anticipate is once we get through this process, we will be able to launch some new programs. And in those campuses in particular, we've been upgrading our IT program which has, frankly, become a little outdated and we're not getting the results that we believe we can get with the new program. So once we get that reaccreditation, we'll then launch that new IT program. At least 3 of the HOPS schools and several of the other schools are asking for it. So that will be a plus to them.

Right. And to be clear, the limit today is just focused on our HOPS campuses. We have no limits on opening up new programs in our Transportation and Skilled Trades segment. As well as I just want to mention, in my prepared remarks, I might have said that we met -- we achieved all 2018 guidance numbers. It was actually 2017.

You're jumping the gun.

Yes, yes. Hopefully, we will.

Got you. You'll do that next year. So the -- within HOPS, just a question that I had, somebody asked, how big are the nursing programs as a percentage of revenue or a percentage of enrollment on the HOPS side?

Well, the nursing, it's the largest program that we have in that segment. And it represents around -- just doing some math in my head, but I'll say around 30% of the population.

Great. And then, I guess, my last question is, did you say that all -- in your prepared comments, all campuses will grow in 2018 (multiple speakers)?

Yes. No, I said that as a company as a whole, we will grow in 2018. Didn't go by campus by campus.

Okay. I -- do you want to -- were there laggards within each group in the fourth quarter or in 2017?

No, I would anticipate, frankly, that all campuses do grow. But I just know life doesn't always go the way that I'd like it to go. And so some will overperform and some will underperform. But overall, we're looking to be positive for the year.

In the fourth quarter, majority of our campuses did grow.

Yes.

Not all, but a majority of them did grow.

Correct.

Last question then and I'll get back in the queue. You said you had $60 million worth of real estate. Where is that? Is that -- is it you own the ground under certain automotive campuses? You got some real estate down in Palm Beach, I believe. And then what are your thoughts in terms of monetizing that $60 million?

Sure. Well, we constantly look at it. I mean, it is all at the transportation side. It's Nashville; it's Denver; it's Grand Prairie, for the most part; and then some smaller assets. It's just something that we look at to determine what's the best way to capitalize on those assets. As of now, needless to say, the bank credit facility is being secured by them. But we look at and get proposals for different forms of financing from time to time.

So nothing material is held for sale in that portfolio?

Correct, correct. Only 2 small properties that are under, in aggregate, under $8 million of value, which are not being utilized today.

There are 2 vacant for sale that we've got today.

Vacant, I got you. And those could be sold this year?

Yes, it could be. I'm hoping.

We're anticipating at least one of them being sold, but we're hoping both are sold this year.

(Operator Instructions) At this time, I am showing no further questions. I would like...

Actually, Teecee, we do have a -- we do have a new question. Can we take it?

Okay. All right. Our next question is from Bill Nasgovitz from Heartland.

So could you discuss the credit facility? Who's it with, and what's the max? And what are the terms? And throughout the year, there are seasonal needs. So what might be the maximum that you will draw on it -- you anticipate drawing on it?

Sure. Our credit facility -- our credit facility is with Sterling National Bank. It goes through 2020. There's 3 different facilities with it. The main facility is facility 1, which is a $25 million credit facility that we use for operations. There's 2 other facilities that we'll draw down from time to time. But mainly, it's -- it would help us with some year-end borrowings. But mainly, the main credit facility is a $25 million credit facility that we use towards funding operations. And we're very seasonal. This time of the year, we draw a majority from that credit facility for quarters 1 and 2. And then in quarter 3 and 4, we tend to pay it back.

So the max on all 3 is what amount?

The max on all 3 is, I think, $65 million.

Okay. And what's the interest makeup?

The interest rate is prime plus 2.35.

Okay. And then just on the HOPS again. So nursing is the largest component, about 30%. What did that grow last year? And what do you foresee in the future? We keep hearing about nursing shortages.

Sure.

Excuse me, I just want to correct myself. It's actually prime plus 2.85. I'm sorry.

So to answer your question, last year, nursing grew by 30% or 300 students.

And what's your outlook for nursing? Is there continued pent-up demand or...

It -- yes. There's definitely -- there's long-term demand for nursing going forward. I can't say that's going to grow by that same percentage again this year, simply because there are -- we have some capacity constraints in the number of class starts we can have. But nursing for the long term, long term being over the next 5 years, is expected to be in high demand. It's the largest profession within the Healthcare segment.

Okay. So you estimated 2 properties for sale, less than $8 million; one might sell this year. Which one is that? And what might -- and what's the value of that property?

That's a property in West Palm Beach, Florida. We had 2 properties. If you remember, we sold 1 in 2017, I believe, for like $16 million. The smaller property, its appraised value and book value is roughly $3 million. And there is some interest in there where we had some low offers, but there is interest in that facility.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Mr. Scott Shaw, President and CEO, for closing remarks.

Thanks, operator. So in summary, Lincoln remains a leader in each of our communities, and we are working diligently to solve the middle skills gap. Our revised marketing strategies and additional investments implemented since last summer have started to yield returns. Since we started the year with a slightly smaller carryover population, we don't expect to see increases to our revenues and earnings until the second half of the year. However, as we discussed earlier, given the trends over the past 4 months, we are optimistic about finally achieving start growth for the entire year. Our 70 years of experience and diversification remain a strength, and employers continue to partner with us to solve their workforce needs.

Finally, I want to thank our faculty and staff for their tireless commitment to the success of our students. Thank you for participating on our call today. We look forward to updating you on our progress in early May. Have a great week.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.