Good day and thank you for standing by, and welcome to the First Quarter 2021 Lincoln Educational Services' Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Polyviou with EVC Group. Please go ahead.

Thank you, Catherine, and good morning everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the first quarter ended March 31, 2021. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu.

Thank you, Michael, and good morning everyone. Thank you for joining our call to discuss Lincoln Educational Services continued progress with the reporting of another substantial quarter of growth and operating excellence. Our first quarter 2021 results compared very favorably with the first quarter of 2020 when we took the necessary precautions to close our 22 campuses towards the end of last year's quarter and swiftly transferred our operations to a distance learning model. Thankfully, we had no such disruption during the first quarter of 2021. And the Lincoln team has executed our strategies exceptionally well.

Thanks, Scott. Good morning and thank you for joining us. This morning I'd like to share some additional details behind our strong financial performance during the first quarter. Highlighting our performance, we generated over $4 million of net income during the first quarter. This result is particularly impressive given our seasonality, in which our financial results during the first quarter are historically the lowest for any quarterly periods during the year. The first quarter success was driven in part by the momentum we generated during Q4 of 2020 and carried into 2021. Our strong results last year enabled Lincoln to enter 2021 with a beginning population of approximately 1,000 students more than on January 2020, which represents an increase of around 9%. Now briefly revealing our top-line performance, revenue for the quarter was $78 million, up $8 million or 11.4% over the prior year quarter, mainly driven by a 9.8% increase in average student population. To be clear, this nearly 10% increase in average student population is net of approximately 100 students on COVID leave of absence or LoAs. As a reminder, most of these remaining LoAs are healthcare students that have been placed on COVID leave of absence as they could not complete their externships due to ongoing COVID restrictions. Our team has been diligently working with these students and at the end of April, the LoA student count is down about 30% from March 31 levels. We had 3,548 new students start at Lincoln education during the first quarter. This represents a stock growth of 30.6%, or an increase of 832 students over the prior year, an impressive achievement as both segments continue to produce double-digit growth. A portion of this significant percentage growth is the result of the impact of the onset of COVID-19 on last year's starts. If you recall last year, approximately 300 students had their start dates postponed from the first quarter to the second quarter of 2020. For comparison purposes, our student stock growth would have been approximately 17% had we included the students that should have started in Q1 of 2020. We attribute our strong growth to our enhanced admissions approach and our ongoing marketing initiatives. While our marketing spend may fluctuate between quarters based on opportunities, our overall student acquisition costs continue to decrease. This favorable trend has been occurring over the past several years and clearly demonstrates the efficiencies and effectiveness of both our marketing and admissions initiatives. The strong growth in Q1 starts continues our third consecutive year of student start growth for Lincoln, a milestone which our team is extremely proud of. Another positive metric during the quarter was our ending student population, which is 1,700 students or 15.5% higher than the 12,600 last year. These figures are net of students that are classified in COVID leave of absence. This is an important metric because the higher beginning population for the second quarter will help drive continuing revenue growth through the remainder of the year. Now I'd like to shift to operating expenses for the quarter. Education service and facility expense increased $2.1 million or 7% to $32.3 million, primarily due to continued growth in our student population. Selling, general, and administrative expenses decreased $2.6 million, or 7.8% to $30.4 million. The decrease was mainly due to a favorable variance in bad debt expense of $2.4 million quarter-over-quarter. This resulted from the new guidance published on March 19, 2021 by the Department of Education, clarifying previously issued guidance pertaining to permitted uses of the Higher Education Emergency Relief Funds or HEERF. We are providing financial relief to students who dropped out of school due to COVID-19 related circumstances and who had unpaid accounts receivable balances during the period from March 15, 2020 through March 31, 2021, resulting in a net bad debt favorable adjustment of approximately $3 million. This relief is being provided from the company's financial resources combined with the HEER funds. Excluding this one-time adjustment, bad debt expense as a percentage of total revenue would have been comparable to prior year Q1 bad debt expense. Other reductions during the quarter included a decrease in sales expense driven by continuing travel restrictions resulting from COVID-19 during the current quarter. The same travel restrictions did not occur until mid-March of 2020 at the onset of COVID-19. Corporate expenses for the quarter increased $1.1 million or 3% to $9.3 million. The growth in this expense item was primarily driven by an increase in salaries and benefits expense driven by our strong financial results and the centralization of certain administrative functions. Turning to our bottom line, our consolidated operating income improved by $7.4 million to $6 million compared to an operating loss in Q1 of 2020. Adjusted EBITDA increased $8.4 million from $800,000 in the prior year, and the improvement in profitability was achieved due to the revenue growth of $8 million and the significant operating leverage we are generating on revenue growth. For the quarter, this leverage amounts to approximately 93% of our revenue growth dropping to EBITDA. We believe certain extenuating circumstances contributed to this very high leverage rate and expect to see a more normalized operating leverage of approximately 40% on future revenue growth. Our pre-tax income was $5.7 million compared to a pre-tax loss of $1.7 million, an improvement of $7.4 million. Our income tax provision for the quarter was $1.2 million, or a 21.7% effective tax rate compared to less than $100,000 last year. The significant change year-over-year is because a year ago, our deferred tax assets were under a full valuation allowance, resulting in a minimum state tax provision only. Now, since we no longer have that valuation allowance, this quarter's tax expense reflects normalized federal and state tax rates. This quarter's income tax provision was made up of two components: $1.6 million based on our annual effective tax rate of 27.9% offset by $0.4 million discrete tax benefit, with the discrete item relating to restricted stock tax benefits, which is not expected to be material for the remainder of the year. Now, let me clarify what I just described. Our book income tax expense, which is different from our estimated tax cash payments. This is because we expect to utilize our federal NOLs of $43 million and our state NOLs of $77 million to offset taxable income in 2021. As a result, we do not anticipate paying any federal income taxes and only nominal state income taxes this year. Lastly, I'll share the balance sheet highlights followed by an updated 2021 guidance. At March 31, 2021, we had approximately $47.7 million in liquidity, including $21 million in availability under our current credit facility and $26.7 million in cash and cash equivalents. This represents a substantial 55% increase in liquidity compared to March 31, 2020. We had a net cash balance of $10 million for the current quarter compared to a net debt balance of $8.8 million at March 31, 2020. Now I'd like to provide a recap of the CARES Act funds utilized. In total, Lincoln was allocated $27.4 million in two equal parts. The first part equaled $13.7 million to be utilized for direct distribution to students in order to offset additional expenses they incurred in connection with a disruption of school operations. As of March 31, 2020, this full amount has been distributed to our students. The second part, also equaling $13.7 million, was available to either offset Lincoln's increased costs associated with significant changes in the delivery of instruction as a result of the pandemic or to provide additional aid to students. As of the quarter, we utilized the full amount which includes approximately $10 million that provides direct financial benefits to our students. Finally, due to our strong first-quarter performance, which puts us ahead of our plan for the full year, we are increasing some of our annual guidance metrics. Adjusted EBITDA is now expected to be between $32 million and $37 million for the year, an increase of $3 million over prior guidance. Pre-tax income is now expected to be between $22 million and $27 million for the year, which is also a $3 million increase over our prior guidance. In addition, we are reaffirming the following prior guidance: annual revenue growth of between 7% and 12% over the prior year, student start growth of 5% to 10% over the prior year, with growth in each of the years remaining quarters compared to the respective prior year period. And finally, we continue to expect our capital expenditures to be approximately $7.5 million. We look forward to communicating our progress towards these goals throughout 2021 with you. Thank you for your time today. And with that, I'll now turn the call back over to the operator so we can take your questions.

Thank you. Our first question comes from Alex Paris with Barrington Research.

Hi, guys, congratulations on the strong start to the new year. And I have a few questions, but I'll just knock it down to one. You had announced a couple of investments planned for 2021, one of which you called out on the last call, centralizing financial aid? Where are we now and is that complete? In what did that essentially entail?

Sure, it's not complete yet, Alex, we're still underway, it won't be complete really until the first quarter of next year. And what it entails is simply moving the function out of the 22 campuses and regard it into a centralized call center where we think we can better serve the students and give them better access to their financial aid in a more timely basis. So we're right on track with what our plan is and for our budget for the year.

Great. They said one question, but I'll just sneak one other in here, if you don't mind.

It's okay. We have got time.

I guess just on starts. Starts obviously an eye-popping 31% growth year-over-year. And then I heard the breakdown. What you had said this morning was similar to what you had said in remarks on the last quarter call that high school is going to be a bit of a challenge this summer. I've heard that from others in the space. But strong demand from adult students could lead to upside surprises. Over the course of the year, has adult men holding up as well as you had hoped?

Yes. I mean, certainly our guidance we gave just a couple of months ago shows that we have nice, strong enrollments. And that seems to be continuing. And we'll just have to wait to see how it all plays out for the full year. But yes, that's a very positive trend.

Thank you. Our next question comes from Steven Frankel, Colliers.

Good morning, Scott, thank you for the opportunity to ask some questions this morning. To dig a little more into that adult population in the pipeline. Now, all of us on this side of the table, continue to wonder, when are you going to see some kind of benefit from all this economic dislocation? What do you see? What can you do from a marketing point of view to maybe stimulate some of that demand?

Sure. Well, we are getting some of that demand. As you can see from the last several quarters of growth, we're going to continue to do some additional marketing efforts to reach individuals. We definitely, though, it's more anecdotal, but we know that the increased amount of employment assistance that people are getting are causing people to delay certain decisions. And I say that simply because we've been looking to hire some additional people, especially in some of our call centers and frankly been told that they're going to wait until the fall before they make a decision. So I assume that that same thought process is probably trickling through to some of our students. So long story short, we've seen some good growth we've achieved good growth with our adults and that momentum seems to be playing out for the near future at least.

Okay. And how are things on the cost of acquiring leads? Have you seen your digital marketing costs decline now post collection?

We have seen our actual cost of leads increase by low single digits, but we are becoming better at acquiring leads and better at dealing with the leads. So our overall cost per start is actually down meaningfully in the first quarter.

What's going on, at least qualitatively with start rates?

The start rates are holding. They're staying about the same. Our conversion rates of leads into enrollment is definitely stronger than it's been. And overall, as I said, our lead to start rate has been improving and the cost has been dropping.

Okay. And when do you think you clear this healthcare backlog? And what is the pipeline look like for the healthcare side? Do you think you'll see an acceleration once this clears that there's still good demand for those programs?

Well, it hasn't slowed down our demand. We've kind of gone through that bump on the healthcare side. These are students that we are trying to get graduated by completing their clinical work. And given all the talk, at least here in New Jersey and New York, where these students reside, things getting back to normal in the next couple of months, or at least things more open, I'm anticipating that the clinical sites will be available for these 80 or so students to complete their education and move on. As far as new students coming, we definitely see strong growth on the nursing side. And as of right now, we haven't had to push off or don't anticipate certainly in the next quarter, pushing off any of the starts in our healthcare sector.

Okay. And any update from the state of New Jersey on your desire to run a new program there?

The only update is, wait. They haven't come to an agreement on how they are going to allow schools like ours become degree granting. When we submitted our application, it will be two years, the September, they had rules and regulations of how that process would be. And then in the midst of that decided to change the process, and they still have not yet finalized the rules around that simply because I guess they've been distracted with COVID. But, we are told we are at the top of the list. And so we anticipate or are anxious for them to come up with these new rules and regulations, at which point, we'll just modify our application to be in accordance with what they are.

Thank you. Our next question comes from Austin Moldow with Canaccord.

I'm wondering if you're seeing any meaningful expense benefit from what you're doing with blended learning?

Yes, I mean, as of now, we are not. Because we're still in the development stage, it'll eventually, I think, be more effective and efficient for us. But as we make the transition, we still look to make the programs as robust as possible and frankly, fully figure it out. I would not say that we're receiving any kind of meaningful savings from our blended program at this time.

So what would be the timeline on that kind of development stage?

I'd say like 18 months from now.

Just to add, one of the benefits of the blended learning, we think, is favorable for our students. So it should help our retention rates and other things, giving students more flexibility. That's one of the main reasons we're doing it even more so than the cost savings.

Got it. Okay. And then, given some consolidation in the industry on both the healthcare and technician sides, can you walk through Lincoln's M&A philosophy and strategy?

Sure. I mean, we look at properties that are on the market or reach out to those that aren't on the market. And we will continue to do so. And when we find the right mix at the right price that we think is advantageous to us, we will certainly move forward on that account. As you may or may not know, certainly, previous history, we made many acquisitions. And so we are certainly not adverse to making acquisitions and we continue to look for attractive accretive opportunities to buy.

Our next question comes from Raj Sharma with B. Riley.

Hi, good morning, congratulations on the really solid results. I had just wanted to dig in a little bit more on the start something last four quarters, you had much higher starts in and the guidance is for 5% to 10%. Is there any sort of degree of conservatism? Or is it just tougher comps? Or could you help talk about that and just maybe also break it down of the starts of between high school and young adults? And I know that you mentioned High School is tougher. Just a little bit more color on that?

Yes. So in general, about 20% of our starts are from the high schools in the full year. And as we look at it going forward, we view that to be down several hundred starts. So that's just the reason why the last half of the year, the start growth rate is less than in the first half of the year. But we will certainly revise or relook at that at the end of the summer if need be. But as of right now, since our window for us, most students start within about 30 to 60 days of reaching out to us. It's only our high school market that we have a longer window of seeing what the demand is. And again, based off of what we see, we see that the high school market will probably be down for us this summer. And then the question is, how strong will the adult market be to compensate for that? And that's how we've come up with our projections for the rest of the year.

Got it. And I know that you already kind of mentioned before, the show rates are better than the last few quarters, or just the bottom line. And also just can you talk about the interest levels, the initial interest levels?

Yes. The show rates are steady. They can fluctuate quarter-by-quarter. There's nothing dramatically going positive or negative on the show rates. Demand overall is strong or leads. But actually, if you look at our total leads, our total leads are down. But that's only because we've gotten out of third-party leads. So we're getting a much better lead. And so our lead to start rate has been increasing over the last three years. And we anticipate that that trend will continue, frankly.

And just lastly, I know that this has also been kind of asked earlier, perhaps just wanted to understand your growth plans for the next few years. Do you see growth coming entirely from rising enrollment on existing programs, existing campuses or any sort of desire appetite for starting more programs/acquire schools?

Yes. First of all, we definitely have an appetite to acquire schools as well as open schools. And so while we anticipate that we'll still continue to have growth in our existing core 22 campuses, our desire and expectation is that we'll have more campuses than we have today in a few years. And that it'll probably be a combination of organic growth as well as acquisitions.

Right. Great. So thank you so much again, stellar results. Congratulations.

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

Thank you, operator. As always, I want to thank our shareholders for your continued interest and support. We had an excellent start to 2021, which has bolstered our growth outlook for the remainder of the year. Lincoln's financial condition and our operating leverage have improved dramatically. And we are now able to make the investments needed to expand our opportunities for both our students and shareholders in the years ahead. Brian and I look forward to sharing our 2021 second quarter results with you in August. Until then, stay safe. Thank you. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect everyone. Have a great day.