Lincoln Educational Services Corp (LINC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Lincoln Educational Services Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to introduce your host today's conference, Michael Polyviou of the EVC Group. You may begin, sir.

Thank you, Amanda, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its release reporting the financial results for the second quarter and 6 months ended June 30, 2018. 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 be archived on the company's website.

Statements made by Lincoln's management during today's call regarding the company's business that are not historical facts may be forward-looking statements as the term is identified in federal securities laws. The words may, will, expect, believe, anticipate, project, planned, intend, estimate and continue 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 statements reflect 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 projections upon which statements are based.

Factors that 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 beliefs as of the 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 thereof.

Now I'd like to turn the call over to Scott Shaw, President and CEO of Lincoln Education Services. Scott, please go ahead.

Thank you, Michael, and good morning, everyone. Thank you for joining our call today to discuss our second quarter operating and financial results. With me is Brian Meyers, our Chief Financial Officer.

When we last talked with you in May, we reported that we believe that, for the first time in many years, overall starts for Lincoln's campuses operating as of January 1 would grow for the year. And we also stated that we believed that student starts would pick up in the second quarter as compared to the year ago period. I'm very proud and, needless to say, very pleased to report that, as they say in baseball, our student starts in Q2 knocked the cover off the ball. This morning, we reported student starts for the second quarter grew at an overall rate of 11.6%. The second quarter start growth represents a third consecutive quarter of student start growth for our company. Starts for the first 6 months, excluding Transitional, are up 6.8%. We have not experienced similar growth in approximately 10 years.

Our 3 consecutive quarters of student start growth, coupled with improved retention rates, has enabled us to grow our population for the first time since 2010. Overall, our ending population of about 10,400 students is up some 350 students from a year ago.

Growing our population and starting off 2019 with more students than we had in 2018 is central to our plan to return to profitability in 2019. While markets can change, our results to date clearly position us to achieve our goal of profitability, and I'd like to highlight that all this growth is happening without opening new locations.

As I mentioned, our student start growth for the quarter was 11.6%. This growth was driven by a 21.1% increase in student starts in our Healthcare and Other Professions segment as well a 7.5% increase in our Transportation and Skilled Trades segment.

In terms of curriculums generating the start -- the strongest start performance, our skilled trades, heavy equipment and allied health programs are leading the way, illustrating the benefits of our diversified curriculum. The growth in demand for these curriculums is due to a number of factors, including our high graduation employment rates for our students as well as investments in new marketing strategies and resources during the second half of 2017 and the first half of 2018.

The marketing investments are consistently being evaluated given that they are 1 of the few operating expenses that has actually increased year-over-year. However, our spend has been on plan. And importantly, we are generating our targeted returns from these investments. While historically high unemployment rate in many parts of the country continue to be an operational headwind for our company in terms of growth, 3 consecutive quarters of student start growth illustrates the real value we are creating at Lincoln.

Overall, only 5 of our 23 campuses experienced start declines during the second quarter, and 4 of these 5 were only single-digit declines, with a total increase of 136 student starts in our Transportation and Skilled Trades segment and a total increase of 165 in our HOP segment.

We continue to be excited by new opportunities with corporate partnerships. As I've mentioned on past calls, increasingly, companies are looking to us to help them solve their workforce needs, whether that is helping them recruit new trained technicians or upskilling their existing workforce. We continue to produce excellent results from these partnerships in the form of high graduation rates, high graduate employment rate and a high return on investment for our graduates, our partners and Lincoln.

During 2018, we expanded our corporate partnerships with the addition of Hussman, a Panasonic company and manufacturer of medium- and low-temperature display cases and refrigeration systems. The first Hussman TechX class graduated in July with graduates going to work for Hussman in Colorado, Georgia, North Carolina, Texas, Florida, Arizona and New Jersey. Being able to satisfy the workforce needs of national and large regional employers is a competitive advantage that Lincoln has developed over our 70 years of teaching.

In April, we announced a new partnership with Johnson Controls, a global leader in creating intelligent buildings and energy storage as being implemented at 10 Lincoln campuses.

In addition, we expanded our partnership with Bridgestone's retail operation to provide nationwide workforce development. Bridgestone operates some 2,200 tire and automotive service centers across the United States. The expansion occurred after Lincoln successfully supported Bridgestone through the training and professional development of technicians at our Denver, Colorado campus.

From a financial perspective, total revenue in the second quarter was down 1.2% as compared to the year ago quarter. However, I'd like to note that last year's second quarter included approximately $2.6 million in Transitional segment revenue. On a same campus comparison, our total revenue increased 3.2% over the second quarter of last year. Our Transportation and Skilled Trades revenue for the quarter was essentially flat with the year ago period, while our HOPs campuses revenue increased 12.6%.

We continued to diligently control costs during the quarter. Operating income for the Transportation and Skilled Trades segment improved almost $1 million, even though revenue was down $250,000. For our HOP segment, over 55% of additional revenue dropped to the operating income line.

Tapping into Lincoln's operating leverage is key to returning to profitability, and we will remain laser-focused on achieving this goal.

One contributor to our lower cost structure is our ability to reduce our facility costs. We have renegotiated leases, reduced square footage and closed underutilized facilities. While we have achieved a lot to date, we still have more opportunities to be achieved within the next 6 months.

As we look ahead to the remainder of 2018, we are encouraged by our success to date and the buildup for the next quarter. Our high school student start plan was achieved for the second quarter, and we are on track to achieve our high school start plan for the full year. High school student starts were an issue for us in the second quarter of 2017, so it is rewarding to see that the strategies and programs we've put into place are working.

We're also launching some new creative marketing for the HOP segment as well as for our automotive and diesel programs. And we are seeing an increasing level of website leads localized for each campus. The diversity of our offerings is helping us to generate student start growth. And of course, our strong exclusive corporate partnerships enhance our competitive positioning, especially to the prospective student.

I'm also pleased to announce that our student outcome showed strong improvement in the quarter. Key to our mission is helping as many students as possible find employment. We continuously review our curriculums, faculty and overall student satisfaction. When we notice a strength, we seek to replicate it across our campuses. And when we see a weakness, we take action to correct.

In the second quarter our retention rate, which leads to higher graduation rates, improved more than 1.4%, which is the largest quarterly improvement that we have achieved in recent memory. Several new initiatives around student engagement and faculty training have proven successful. Additionally, our placement rates also improved for the quarter as employers increasingly seek out our students to enhance their workforce. Employers compliment our students not only for their technical skills but also for their professionalism, desire to work and cooperative attitude. We remain committed to developing our students' soft skills as much as their technical skills. We are proud of our results and proud of the impact that we make in each and every community that we serve.

Before I turn the call over to Brian, I want to mention 2 last items. First, since our last call, we received written confirmation that all 7 of our ACICS schools have been fully recognized by ACCSC. The reaccreditation process is very time-consuming, and I thank everyone at corporate and at the schools for their excellent work. By completing this transition to ACCSC accreditation, it will now allow for those campuses to submit new programs and program modifications that we expect to launch late in Q4 or Q1 of next year.

Second, on July 27, we received notification from NEASC, the accreditor for our regionally accredited school, Lincoln College of New England, that their commission had placed LCNE on probation. The college will need to respond by September 4 as to why the school should not have its accreditation withdrawn. We are diligently preparing our response, and we'll appear before the NEASC Commission on September 21 to present evidence as to why our accreditation should remain intact. As a point of reference, in 2017, LCNE had revenues of $8.4 million and a net loss of $1.6 million.

In summary, for the first half of the year, our financial results are ahead of our internal plan. We made progress with our starts, our population, our retention rates and our placement rates. Costs are in line, and profitability is improving. There are still some heavy macro headwinds out there, but our team is dedicated to meeting these challenges head-on and focused on building on the emerging trends from the first half. Our main objective is to continue beating our plan and return the company to growth, while we continue to execute for our partners as well as our students.

Now I'd like to turn the call over to Brian for a review of our second quarter financial highlights as well as an update on our guidance for 2018.

Thanks, Scott, and good morning, everyone. I'd like to begin my comments with highlights from the second quarter of 2018. Later on, I will discuss the operating highlights for the individual segments and briefly review our updated 2018 guidance, including our improved outlook for operating income.

To begin, revenue and operating income on a same school basis was up approximately $1.9 million and $2.2 million over the prior year, respectively. We attribute the increase in operating income to the increased revenue and our ability to manage expenses in order to maximize profits.

Second, as Scott discussed, total student starts were up 11.6% over the prior year, including a 21.1% growth in our Healthcare segment and a 7.5% growth in our Transportation and Skilled Trades segment. Both segments have demonstrated remarkable improvements and continue to exhibit a positive start momentum.

Third, although we started 2018 with approximately 130 fewer students than in January 2017 as a result of our sales team's efforts and marketing initiatives, we have not only eliminated the carry in population deficit, but we have exceeded last year's population at this time by almost 350 students.

We are thankful to all -- to our entire team for continuing to improve our stock performance and for achieving stock growth for the last 3 consecutive quarters, resulting in an overall 8% increase in stock growth. We are very pleased with our performance and considering the reports from our peers and challenges presented by the ongoing low unemployment rates.

Lastly, I'd like to mention that on July 9 of this year, we entered into a sales agreement with -- for our last property located in West Palm Beach, Florida. This sale is anticipated to close at the end of August for a cash purchase price of approximately $2.6 million. The net proceeds received from this transaction will be remitted to Sterling National Bank to serve as additional security on loans. However, the proceeds may be released with Sterling's approval for working capital needs.

Now turning to our segment performance for the second quarter of 2018. Our Transportation and Skilled Trades segment revenue was $42.1 million as compared to $42.3 million in the prior year. The slight decrease was a result of starting the year with a deficit of approximately 300 students compared to the prior year. However, during the last 6 months, we recovered approximately 80% of this deficit. Much of this success is attributed to the strong start growth of 7.5% experienced during this quarter.

Operating income increased $1 million to $1.7 million for the quarter. This increase is directly a result of our ability to manage expenses.

Now turning to the strong results from our Healthcare segment. Revenue increased by $2.1 million or $12.6 million to $19 million for the quarter as compared to $16.9 million in the prior year comparable period. The increase in revenue was mainly due to a 21.1% increase in student starts during the quarter, resulting in a 7.6% increase in average student population. Further contributing to the growth was a 4.4% increase in average revenue per student primarily due to tuition increases and program mix.

As a reminder, the Healthcare segment started 2018 with approximately 150 more students than the prior year and has continued to perform very well during the first half of 2018. This segment finished the quarter with almost 400 more students compared to the prior -- compared to the same period in 2017. This notable growth in population demonstrates our team's success in executing on our growth strategies.

Operating income was $600,000, representing an increase of $1.2 million from the prior year, which incurred an operating loss of $600,000. This increase was driven by the growth in revenue of $2.1 million in operating efficiencies. As population grows, we gain operation efficiencies, which results in a greater percentage of revenue flowing through the operating income line.

Lastly, the Transitional segment, as mentioned earlier, did not have any operating activity during this quarter. However, revenue and operating loss for the second quarter of 2017 was $2.6 million and $800,000, respectively.

Corporate and other costs increased by $500,000 to $5.9 million for the quarter from $5.4 million in the prior year. The increased cost was driven by administrative expenses resulting from the new marketing initiatives.

Finally, our 2018 guidance. We are updating our guidance today to reflect the solid financial performance generated during the first half of the year. First, we continue to anticipate revenue increase by low single digits compared to the prior year, excluding the 2017 Transitional segment. Second, we continue to anticipate student starts will increase by low single digits compared to the prior year, excluding the Transitional segment. Third, we now expect, due to the first half operating performance, operating income to be between income of $1 million and a loss of $2 million. Fourth and last, we continue to expect our 2018 year-end population to be greater than prior year.

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

(Operator Instructions) And our first question comes from the line of Alex Paris of Barrington Research.

So way to go on the third consecutive increase in starts, obviously, a strong leading indicator for total student enrollment down the road. The -- I got a number of questions, and I might be a little bit all over. But -- so it looks like Healthcare and Other Professions had a 55% contribution margin to the operating income line on the incremental revenue. Would you expect the same contribution margin on Transportation and Skilled Trades once that turns positive year-over-year, greater or less, and why?

It's probably in line with that. I mean, typically, Alex, we see 40% to 70%. It all kind of depends on local issues or where those individual campuses are, but definitely something around the 50% or a little bit north of that, I think, is very consistent to what we've done in the past.

Okay. Then it looks like -- with regard to the increased investments in marketing, were those primarily focused on Healthcare and Other Professions? Or were they balanced between the 2?

They're definitely bounced between the 2. I mean, we're constantly looking, trying to find how -- where these students are and how best to communicate our message and how best to reach them as well as constantly enhancing the sales efforts of our teams to make sure that students and their parents know the full value of what a Lincoln education can provide. So it's constantly changing, constantly being evaluated, and it's just very rewarding to see the results kick in as strongly as they did in the second quarter.

And then, where did you say...

And one thing to add on the marketing side -- I'm sorry, the one thing to note -- to add on the marketing side is the quest for students is actually going down, so it's actually the incremental more spend is working.

So the cost per incremental student, the recording cost is lower?

Correct.

Correct, yes.

And then, where did you say the strength was? I think you said that from a curriculum standpoint, it was skilled trades and heavy equipment within...

Heavy equipment and also in allied health programs for the quarter.

Allied health. Okay. How did nursing do in the quarter?

Nursing, actually, was down a little, but that's only just because of timing of when the starts are. I feel very confident about nursing demand. That's definitely not an issue.

Right, right. So we would expect to see better growth in nursing in the third quarter then due to the timing shift?

Yes. But some of the timing shifts are also on an annual basis just given the class sizes and how they flow through depending on the campus. Oddly enough, certain campuses have, let's say, 1 more start in 1 year than they do the other, so it's really a mix of different timings of the quarters and the years. But again, nursing remains very robust.

We do lose 1 nursing start for 2018 versus '17. It'll come back in '19.

I see, okay. And then, what did you say about high school student starts? It was a better result this year versus last year?

Yes. Last year, I think you'd probably recall in the second quarter, we came up short with our high school destination plan, which was disappointing to us, and we made some adjustments and changes. And this year, the plan executed for the second quarter and seems to be on track for the third quarter, so that's very good as well. It's nice to see that the changes are taking place, and we're getting more high school students as well.

Is there anything unique -- or uniquely different that you're doing in high school than last year? Are you getting more cooperation from guidance counselors? Are you making more presentations within the high school? Give me a little bit more color there, if you don't mind.

Yes, no problem. I mean, it's really hard, really, Alex, to pinpoint it down to 1 thing. You -- for high school, you really need to execute on everything. And everything means making sure that you have as many presentations in high schools as possible, you have the right people giving those presentations, you're following up as quickly as possible with those individuals and you're providing them with the right information so that their parents -- and they can make the right decision. And I hate to say it, but we -- basically we've improved on all those things, provided more marketing materials, providing faster response times, providing more training, and everything just clicked.

Great, and then switching to a financial question, it looks like on a free cash flow consumption basis, you burned less cash in the first half than you did in the first half last year. But more importantly, the first half is usually a cash usage period, and the second half, you generate cash. Would you expect -- where would you expect cash to be at year-end versus year-end last year?

Alex, so I'll call it a net of the loan because you understand we do that borrowing at the end of the year. So where it is for last year, I'll talk about we're not anticipating cash flow from operations to be positive this year, and that'll be the first time in a number of years. If you remember last year, we lost over -- cash flow from operations, we lost $11 million. This year, we're expecting it to be slightly positive. Our capital expenditures are going to be around $6 million, so our free cash flow, so our cash position will be down about $1 million from last year. We should still finish out with more cash than our debt at the end of the year. But as far as cash, it's probably roughly about the same as last year, we should finish out.

Okay. And then -- I guess, last question, then I can get back in the queue. Within Transportation and Skilled Trade, you called out skilled, and you called out heavy equipment. How about auto diesel? And I'm assuming that was not as robust, and why?

Yes, and that is correct. And I don't have the answer, frankly, as to why that is the case. Again, it's difficult to pick which segment is going to be the most robust any 1 period. We just do -- continue to see strength across our Skilled Trades segment or program offerings. And in certain markets, auto and diesel are definitely not as strong. However, with that said, the placement rates are still doing exceptionally well, and the partnerships are still coming in that area. But it does remain more of a challenge compared to other programs to attract students into those programs. But again, I'm not worried about that in the long term in the least either.

And when they went down, they were only slightly down.

Correct.

Less than 50 students in auto.

Correct.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Scott Shaw for any closing remarks.

Thank you very much, operator. And again, thank you all for joining us this morning. We're really pleased with our results. We feel like things have started to turn the corner for us, and we look forward to updating you in November with our third quarter results. Have a great rest of your summer, and thanks, again, for joining us. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.