Lincoln Educational Services Corp Q1 FY2022 Earnings Call

Good day, everyone and thank you for standing by, and welcome to the First Quarter of 2022 Lincoln Educational Services Earnings Conference Call. I would now like to hand over the conference over to your speaker today Mr. Michael Polyviou. Thank you. You may begin.

Thank you, Delphin, 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, 2022. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. Joining us today on the call are Scott Shaw, President and CEO; and Brian Meyers, Chief Financial Officer. Today's call is being broadcast live on the company's website, and a replay of the call will be archived on the company's website. Statements made by Lincoln's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as term is identified in Federal Securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as 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 expectation 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 the segment and 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 the annual report on Form 10-K and the quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to the 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 they're up. Now I would like call over Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

Thank you, Michael, and good morning, everyone. Thank you for joining us today to review Lincoln's first quarter performance and corporate developments. Our first quarter results continued the strong momentum we built during 2021 as both top and bottom line results met our internal plan. Despite the extremely tight labor market and resulting wage inflation, we continue to generate strong interest in our programs from prospective students while our graduates remain in exceptionally high demand with corporate employers. Our student start rate compared favorably to the levels during January and February but declined in March. As a result, total first-quarter starts were approximately 200 students less than last year. Moreover, we had a tough comp since we grew starts almost 31% last year in the first quarter. We did increase the total number of enrolled students as of March 31 over last year's total, and we believe we will return to student start growth in the second quarter. Brian will provide a little more color on student starts later during his remarks. We are excited about our new partnership with Ford Motor Company and are proud to have been selected to kick this program off for them. This is a unique opportunity for Lincoln as we will be providing specialized manufacturer-specific automotive training at our Indianapolis, Indiana campus. This is a four-week post-graduate training program designed to prepare eligible technicians for careers providing mobile repair and maintenance services on Ford cars, trucks, and SUVs. Our students will receive hands-on training specific to Ford's proprietary technologies and equipment as well as all the mobile repair services currently offered by Ford. These will include things such as tire rotation and replacement, oil changes, battery diagnostics and replacements as well as repairs and maintenance services related to wipers, fluids, and onboard computer software updates. Brake services will also be covered and students will receive training on performing mobile multi-inspections as well as repairs and replacements related to manufacturer recalls. This is an exciting and innovative opportunity, and the program is scheduled to kick off in July and will be open to automotive technology graduates from any of Lincoln's campuses. Moreover, tuition for the program will be paid for by Ford, and they will also help arrange employment opportunities for successful graduates at four dealerships. Currently, more than 204 dealerships around the country offer mobile services to their customers, meaning many graduates may be able to explore opportunities close to home. Ford's goal is to triple its available workforce of mobile technicians by the end of 2022. Graduate placement rates remain high as the demand for our highly skilled students remains extremely strong. In the 2020 report, which takes an in-depth dive into differences in lifetime earnings, ROI, costs, starting salaries, and more, it states that careers in skilled trades often yield an ROI much greater than many college degrees and also leads to higher lifetime savings. Our focus has always been on providing our students with the best ROI on their educational investment, while also providing the industry with work-ready talent that will help them thrive. According to data reported to U.S. News in its annual survey, a college graduate from the class of 2020 who took out student loans borrowed nearly $30,000 on average. That's around $5,000 more than borrowers from the class of 2010 had to shoulder, representing a 20% increase in the amount students borrow. 11% of new graduates default in the first 12 months of repayment and student loan defaults affect 9 million borrowers and their families. These are staggering figures. So a four-year college degree, once coveted, needs to be reconsidered for certain students with different career goals and ambitions. At Lincoln, we give these students skill-based learning with solid job opportunities and significantly less debt than a college degree. Our revenue for the quarter grew nearly 6% and is in line with expectations. As of March 31, our cash position was up significantly over the same period a year ago as it includes the net proceeds from the sale-leaseback transaction for the Denver and Grand Prairie campuses, which closed in Q4 of 2021. Our balance sheet will get stronger by another approximately $34 million when the sale of Nashville closes, which we now expect will occur in Q3. We will build a new Nashville campus, which will be funded from the sale of the existing campus, which we have previously said will cost approximately $15 million to $20 million. While the campus will be physically smaller than the campus currently under contract to sell, it will be more efficient and drive profitability. Plus, it will give us flexibility to add programs that will enable us to attract and better serve students and local businesses. With the same mindset, we will be adding programs at existing campuses, which will help us deliver greater operating leverage. This year alone, we plan to expand five programs in skilled trades and health care. One of these is the 12-month dental assistant career training program we recently launched at our Iselin, New Jersey campus. It's the fourth health care education option at this campus, which also has medical assisting, practical nursing, and patient care technician training. The program is designed to address the projected gap of more than 14,000 dental assistant job openings in New Jersey alone. We're pleased with the response to date, and Iselin is now the third campus in the Lincoln system to offer dental assistant career training. Along with the new purpose-built Nashville campus, we believe a bigger footprint remains critical to achieving our objective of broadening our business aspirations. We have demonstrated throughout our 75-year history that we successfully serve the national needs of the Fortune 500 as well as the local needs of your neighborhood automotive dealer, hospital, or electrical contractor. Working with our existing and potential corporate partners, we have identified several markets that are currently underserved from a skills training perspective. While a lot of planning goes into selecting new markets, we also evaluate student and employer demand along with competition since our goal is to be the market leader. Our current strategy is to open a new campus each year for the next several years. And as I stated earlier, we plan to announce the newest campus later this year. We have examined and continue to evaluate opportunities to expand Lincoln through the acquisition model. Almost all of our efforts to date have focused on opportunities that are not currently for sale, and we believe could strategically enhance our network of schools. However, convincing the owners to sell can take some time. Should we find the evaluations expected by sellers to present suitable shareholders' return opportunities for Lincoln, our strong balance sheet and access to resources enables us to quickly respond as developments merit. In addition to these initiatives, we are also looking inward to achieve greater efficiencies at the campus and corporate level. As such, we have already commenced the process to reduce the number of core start dates from 15 by the end of 2023. We are also building out our hybrid learning model, which we feel will streamline the learning experience at the curriculum and campus level. While nothing envisioned will replace the classroom and hands-on learning experience, which we believe will account for 70% of the curriculum, we are planning to implement an online element to achieve the remaining curriculum. The implementation of this new hybrid learning model has already begun at several campuses and is enabling Lincoln to enhance its program quality with new efficiencies that benefit both our facilities and our students. We are always focused on maximizing our students' return on their investment. We constantly strive to help a greater percentage graduate and find employment with their company of choice, and I'm happy to report we made good progress with both of these objectives. Both our retention rate and our placement rates improved in the quarter, once again demonstrating that our caring and supportive learning environment is making a difference in our students' lives. Our close collaboration with industry demonstrates and confirms our importance to our partners while emphasizing the value of developing innovative strategies to attract and train personnel to help their businesses grow. We firmly believe aligning our interest with that of our corporate partners gives us additional name recognition and a jump start on getting a foothold in a new market. Speaking of a strong partnership, fresh off the success of the first class we enrolled, we recently started our second class at Republic Services' 76,000 square foot training facility in Dallas, for which we are the training provider. As a reminder, the classes are staffed with instructors from our Grand Prairie, Texas campus, and the curriculum was developed in part by Lincoln's Diesel Technology Advisory Committee to meet Republic's needs for qualified diesel technicians. Additionally, our collaboration with the Food Processing Suppliers Association, or FPSA, continues to go well. Graduates of our food industry technician or FIT program continue to find success in new careers with food processing employers across the country with an average starting salary of $50,000. In fact, a year ago, we announced that nearly all graduates of the initial program offered exclusively at Lincoln Tech's Indianapolis campus were employed, and I'm pleased to say we are expanding this program and doubling the number of graduates to meet the growing needs of the industry. In summary, we remain poised to achieve our 2022 objectives. Without a doubt, industry needs us, and demand from employers across the country has never been greater. Additionally, the desire by the current generation to find alternatives to college that are cheaper, faster, and more certain to deliver skills and a job, makes it clear that the landscape for Lincoln to prosper is rich with opportunity. Our partnerships, including the new agreement with Ford demonstrate that we bring value to their businesses, and we continue to develop new relationships with employers and industry organizations. Having just celebrated our 75th year, I believe we are positioning Lincoln to achieve success for another 75 years as we graduate more students into high-paying and fulfilling careers that are helping American industries close the immense skills gap. I'd now like to turn the call over to Brian for a review of our first quarter financial highlights and outlook. Brian?

Thanks, Scott. Good morning, everyone. This morning, I'll review our key financial results and operational highlights for the first quarter of 2022. In addition, I'll provide some color on our second quarter start trends and briefly discuss our 2022 guidance. Starting with our top line. As reported, we achieved revenue growth of 5.8% or $4.6 million to $82.6 million during the first quarter. The main driver of this growth was our higher average population, which increased by 4.4%. This was the result of our strong 2021 performance, which delivered a beginning population that was higher by 6% or 740 students over the prior year. As Scott had mentioned, during the first quarter, new student enrollments increased year-over-year, but we experienced a lower-than-expected start rate, which reduced starts. Student starts for the quarter were approximately 3,400, a decrease of nearly 200 from the prior year. One of the factors that led to the slight decline was the transition of several programs to Lincoln's enhanced hybrid teaching model. Under this new model, we are aligning the academic calendar across the organization, which reduces the number of student entry points and shifts some start dates when compared to prior periods. While the new model impacts the timing of starts quarter-over-quarter, once fully implemented, the net effect will be neutral and the new model will deliver operating efficiencies translating to future savings. Also, as Scott highlighted, last year's first quarter start growth was the highest of the year at 30.6%, which set a high benchmark for start growth in this year's first quarter. In terms of starts, as we move through the second quarter, we anticipate having a strong quarter with low double-digit growth, resulting in total growth for the first half of the year in the mid-single-digits, in line with our internal plans. Now turning to our consolidated operating expenses. Total operating expenses for the first quarter were $82.9 million, representing an increase of 15.1% over the prior year. This increase is in line with our expectations and our outlook for 2022, which we shared in February. The first quarter has the largest planned increases in expenses, partially resulting from the one-time $3 million benefit to bad debt expense in 2021 from the forgiveness of student accounts receivable for students that were impacted by COVID-19. This was enabled through the funding provided by last year's federal CARES Act. Our adjusted EBITDA was $2.4 million compared to $5.4 million after adding back non-cash stock compensation in both periods and the bad debt benefit mentioned in 2021. For more detail, please refer to the non-GAAP schedules in our Q1 earnings release. Adjusted EBITDA of $2.4 million includes the impact of additional expenses above our normal operations, which should translate to higher growth rates in the future. Specifically, during the quarter, we invested approximately $850,000 related to the development of direct pay non-Title IV shorter-term programs and initiatives to further streamline operations, creating long-term efficiencies and savings. We anticipate realizing the benefits of both of these expenditures in 2023 and beyond. An additional one-time item in this year's first quarter was $150,000 of severance expense. When compared to the prior year, adjusted EBITDA also included $800,000 of additional rent expense associated with the sale-leaseback transaction entered into during the fourth quarter of 2021. As a reminder, I'll briefly revisit the sale leaseback transaction, which closed last year, providing over $45 million of net cash, further strengthening our balance sheet. Prior to the sale, we owned the two related properties and therefore, had no rent expense but recorded depreciation, which did not have an EBITDA impact. Now we account for the properties under the operating leases and recognize rent expense of $3.2 million for the full year. Our real estate monetization plan continues with the pending sale of our Nashville, Tennessee campus, as Scott outlined in his remarks. I'll add that during the quarter, we received a non-refundable deposit and granted an extension on the due diligence period through July. Also, on a smaller scale, we are working to complete the sale of our Suffield, Connecticut property, which was a former campus. The net proceeds from this transaction are expected to be approximately $2 million and is also expected to close during the third quarter. In addition to generating net proceeds, as seller Suffield will also allow us to save approximately $250,000 of facility costs annually. Now a brief overview of our balance sheet. Our balance sheet remains very strong. Our net working capital is nearly $58 million as we finished the quarter with $65.6 million in cash and remain debt-free. Due to our seasonality, we generate the majority of our cash from operations in the second half of the year. During the first quarter, as expected, we utilized cash for operation activities, but we continue to expect to generate positive cash flow from operations for the full year. There were no changes to our credit facility during the quarter. We continue to explore and pursue new financing opportunities to further increase liquidity and financial flexibility as we pursue future organic and inorganic growth initiatives. We're making progress and anticipate providing more color during our next call. Finally, to conclude on our first quarter results and our current trends, we remain confident in our financial outlook and are reiterating our previously communicated full year 2022 guidance as follows: revenue between $350 million and $365 million, adjusted EBITDA between $35 million and $40 million, net income ranging from $17 million to $22 million, student stock growth of 5% to 10%; and lastly, capital expenditures between $7 million to $9 million. Thank you to our entire team for their outstanding efforts. We look forward to communicating our further progress following the second quarter. And now I'll turn the call back over to the operator so we can take your questions.

Our first question is from Raj Sharma from B. Riley. Your line is open. Please go ahead.

Good morning, guys. Two sets of questions. One is on the starts. Could you give us some more color on how they were amongst high schoolers and young adults? And how do you see that going?

No problem, Raj. Most of our high school student starts will occur in June, with the majority starting between June and the first week of October. During this time, we are focusing on securing the interest we have generated from high school students so far this year. There aren’t any significant high school starts in the first quarter, making it primarily an adult market. We observed positive developments in January and February, and March was also showing promise, although we did experience a decline in our start rate in March, which was disappointing but not entirely unexpected. Our students are expressing increased concerns about transportation and gasoline prices, which may be causing some hesitation, alongside the robust job market. Looking ahead to the second quarter, we anticipate stronger momentum compared to the first quarter. We are optimistic about achieving growth in the second quarter, which we hope will contribute to overall growth in the first six months of the year.

Got it. Can you provide details on the current percentage of the coursework that is online compared to in-class? I thought we emphasized blended learning during COVID. Is that being reconsidered or expanded? When do you expect to see that? Additionally, will there be any effects on contribution margins moving forward?

Yes, no problem. So I'll start with the last part. So there will be some maybe impact in the near term on margins as we transition. We've kind of already highlighted at the beginning of the year that we could have about $2 million worth of additional costs due to this transition as well as some other one-off activities that we're doing. To your question on what percent is blended, yes, during COVID, we had to go 100% online to then a blended model. But now that our campuses have reopened, we're more or less almost 100% doing things on-ground where we haven't switched the program over to the new model. And when I say the new model, I mean during COVID it was a reaction to the circumstances that we had to go blended. Obviously, we were able to deliver on that very well and give the students the education, and we ended up with more students enrolling and more students graduating, which is great. But it wasn't the level of blended learning that we wanted as an organization, and we knew we could do better. Now that we are in this world and understand that our students enjoy the blended opportunity, we figured out, okay, how do we create from scratch the best blended opportunity possible for our students? And so when we're talking about the blended opportunity today, that's what we're talking about. So we launched our first program, which was medical assisting. All of our campuses that have medical assisting have moved over to the new blended version of this, and we've gotten really positive reviews from that. We'll be rolling out more programs this year. Just to give you an idea, we would expect about 40% of our students by the end of 2022 will be moved over to our new fully engaging blended model with the remaining students being moved over next year. I hope that helps.

Yes. And then just lastly, on the interest in the programs currently that you're seeing to your advertising pipeline. And also, you commented that your show rates were better than last year. Could you comment on that, please? How do you see those interest initially?

Sure. The interest remains steady, with nothing significantly outperforming the rest. We're seeing strong interest overall as individuals seek shorter, faster, and more affordable ways to enter the workforce. As mentioned earlier, the start rate declined in late March due to higher costs, prompting students to rethink their return to school, especially with attractive job opportunities available. Last year’s first quarter saw an impressive 31% growth, making this year’s slight decline of a few hundred less concerning. Given these factors, I am quite pleased with our performance.

Thank you. Our next question is from Alex Paris of Barrington Research. Your line is open. Please go ahead.

Thank you. Thanks for taking my questions. Just got a couple. I wanted to dive into starts again. We did expect them to be up low single digits. They were down low single digits. It looked like the decline versus my expectation was greater in transportation and skilled trades. Do you have any color there?

Yes, I believe part of that is related to the timing of when the starts occurred during the quarter. We experienced good momentum in January and February, and it was really after the first week of March that we noticed a decrease in the start rate. However, I don't see anything significantly different between the two lines of business.

Okay, fair enough. You had a shortfall in the first quarter, but you expect low double-digit growth in starts in the second quarter and mid-single digits for the first half, which aligns with expectations. Since there was a slowdown in the start rate in March, could you share any insights on your experience in April?

Sure. Well, we're seeing good inflow coming in and the way it's trending, things are looking positive. Things change and can change. But as of right now, things are looking positive.

Okay. New campus is going to be in early 2023, that's still the expectation. It's a new state, but the market has been selected, but just not announced, right?

That is correct. It won't be early 2023; it will probably be later in 2023. Unfortunately, we had a location we were very optimistic about. However, when it came time to finalize, the landlord’s expectation that he could get an HOA to approve the transaction was mistaken. This has delayed us by about four or five weeks in our process. We have identified another location and are in the process of negotiating the lease, so we hope to announce that soon.

And when you say later...

But then it would take about 12 months.

Okay, I understand. If you're able to announce it in the next couple of months, you might expect a new campus by mid-2023. And if it does...

Yes, correct.

You're seeing later in '23. You're saying later in 2023.

Yes, that's correct.

Five new programs. You mentioned dental assisting this year. What are the others?

A couple of welding and a couple of medical assisting. I'm sorry, one welding, two medical assisting, and one electrical.

And one dental assistant.

Yes.

Got you. And then just a bookkeeping thing here. $150,000 in severance in the quarter, what is that attributable to?

An executive that moved on. So it is a one-time cost.

With that, I would like to turn the call over to Mr. Scott Shaw for some closing remarks.

Thank you, operator. As always, I want to thank our shareholders for your continued interest and support. I also want to thank all of our employees for their dedication and commitment to serve our students. Last week, we were finally able to celebrate our 75th anniversary, and the energy and emotion in the room were electrifying. In attendance were graduates from as far back as 1955 and from states across the country. We also had keynote speeches from students, graduates, employers, business partners and politicians. Those who could not attend sent video greetings, including one from our most accomplished graduate, Mr. Pat Gelsinger, the CEO of Intel. It was clear that the evening, just as it's clear today, that while Lincoln's past is rich with success and accomplishment, our present and future have never been better in my estimation. The industry is desperate for solutions to their workforce needs, and we are that solution. Today, there are more job openings than ever before, and we have the talent, desire, capability and capacity to help America close its skills gap and put people's potential to work. Our performance in Q1, along with the continued interest and demand from students and employers gives us the confidence that we can achieve our 2022 goals both operationally and financially. We will be attending the Sidoti Virtual Conference later this week and the B. Riley Conference being held in Beverly Hills on May 25 and 26. Brian and I look forward to sharing our 2022 second quarter results with you in August. Until then, please stay safe. Bye-bye.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.