Lincoln Educational Services Corporation (LINC) Earnings Call Transcript & Summary

Good morning, and welcome to the 2020 Annual Meeting of Lincoln Educational Services Corporation. I am Barry Morrow, Chairman of the Board of Directors, and I'd like to officially call the meeting to order. Before we begin, we would like to note that due to the public health impact of the coronavirus and to support the health and well-being of our employees, shareholders and our community, Lincoln has decided to conduct the annual meeting in a virtual format this year. We anticipate that next year, we will be able to return to our in-person meeting, as has been our historical practice. Now I would like to take a moment to acknowledge the members of the company's Board who are in attendance remotely: Scott Shaw, CEO; Jim Burke, member of the Compensation and Governance Committees; Peter Burgess, Chairman of the Audit Committee; Celia Currin, Chairwoman of the Compensation Committee and member of the Audit Committee; Alvin Austin, Chairman of the Nominating and Governance Committee and member of the Compensation Committee; Ronald Harbour, member of the Audit and Nominating and Governance Committees; John Bartholdson, member of the Audit, Compensation and Nominating and Governance Committees; and Kevin Carney, a member of the Audit Committee. I would also like to acknowledge Jeff Minick, audit partner from Deloitte & Touche, the company's certified public accounting firm in charge of our account, who's also in attendance remotely. Now at this point, I'll turn the meeting over to Scott Shaw, our CEO.

Thank you, Barry, and good morning, everyone. I'd like to outline the format for today's meeting. First, I'd like to begin by calling your attention to the agenda for the annual meeting, which is available on this webcast screen under meeting information. The business of this annual meeting will follow the order set forth in the agenda. Alexandra Luster, our General Counsel and Corporate Secretary, will describe and then present for a vote each of the 4 proposals set forth in the proxy statement. The polls will be open for voting for anyone who wishes to vote electronically with respect to the matters presented. If you've not already voted your shares or wish to change your vote, you may do so by clicking on the Click Here to Vote button available on the webcast screen. The polls will remain open until all the proposals have been presented and I declare the polls to be closed. Second, I'd like to point out that shareholders may submit questions electronically during the meeting by typing a question in the Submit Question box on this webcast screen. Questions received will be answered following the meeting via e-mail to the shareholders submitting the question. Third, I will present management's report regarding operations and recent developments at Lincoln Educational Services Corporation. And now I will turn the meeting over to Alexandra Luster, Lincoln's General Counsel and Corporate Secretary.

Thank you, Scott. At this time, I'd like to address several procedural formalities. Notice of the date and time of this meeting was mailed to shareholders on May 11, 2020. An affidavit to that effect will be filed with the records of the meeting. We wish to remind everyone that only shareholders are entitled to attend the annual meeting or submit questions. As this is a virtual meeting, we would ask that only shareholders be given access to the webcast. Isaac Kagan of Continental Stock Transfer & Trust Company has been appointed Inspector of Elections for this meeting. And our CFO, Brian Meyers, will be reporting the preliminary results of the voting, which results will be finalized by Continental, subsequent to the meeting. Isaac Kagan has signed an oath of office to faithfully execute the duties of Inspector with strict impartiality and according to the best of his ability. We have available during the course of the annual meeting a list of the shareholders of record of the company as of April 27, 2020, the record date for this annual meeting, as certified by Continental Stock Transfer & Trust Company, the transfer agent for the company's stock. The certified list may be found in the meeting documents of this webcast screen. Only shareholders on this list are entitled to vote at this annual meeting. I have received from the Inspector of Election his report as to quorum. The report indicates that, according to the certified shareholder list, the number of shares eligible to vote, the number of shares voted constitutes a quorum for the purpose of transacting business at this annual meeting. Accordingly, the annual meeting is legally convened. For those who would like to vote or change their vote at this time, the polls are open. The polls will remain open until all items of business have been presented. At this time, I will now present the 4 proposals to be voted on at this annual meeting, all of which were described in the proxy statement furnished to the shareholders. We will now proceed with the first item of business, which is the election of directors. In accordance with the bylaws of Lincoln Educational Services Corporation, the number of directors to be elected at this meeting is 9. The Board's nominees for Director for the ensuing year, or until their successors are duly elected and qualified, are listed in the proxy statement provided to all shareholders. They are Alvin Austin; John Bartholdson; Peter Burgess; James Burke; Kevin Carney; Celia Currin; Ronald Harbour; J. Barry Morrow; and Scott Shaw. Biographies of the nominees were included in the proxy statement. The Board's slate of nominees for Director is now formally placed before this annual meeting. If you have not already done please vote on this proposal, or if you have already voted but wish to change your vote, please do so. The next item is a proposal to provide shareholders with an advisory nonbinding say-on-pay vote to approve the compensation of our named executive officers as disclosed in the compensation discussion and analysis and the disclosures contained in the company's proxy statement. The advisory say-on-pay proposal is now formally placed before this annual meeting. If you have not already done please vote on this proposal, or if you have already voted but wish to change your vote, please do so. The next item is a proposal to approve the company's 2020 Long-Term Incentive Plan disclosed in the company's proxy statement as revised and presented in a current report on 8-K filed with the company -- with the SEC on June 5, 2020, and available on this webcast under meeting documents. The approval for the 2020 revised Long-Term Incentive Plan proposal is now formally placed before this annual meeting. If you have not already done please vote on this proposal, or if you have already voted but wish to change your vote, please do so. The final item is a proposal to ratify the appointment of Deloitte & Touche LLP as Lincoln's independent registered public account firm for our fiscal year ending December 31, 2020. The Audit Committee of the Board of Directors has approved the selection of Deloitte & Touche LLP as independent auditors of Lincoln Educational Services Corporation for the fiscal year ending December 31, 2020. The selection of Deloitte & Touche is now formally submitted for shareholder ratification. If you have not already done please vote on this proposal, or if you have already voted or wish to change your vote, please do so. I will now turn the meeting over to our CEO, Scott Shaw.

Thank you, Alex. Now that all of the proposals have been presented and shareholders have had an opportunity to vote, I declare the polls are closed. And now I will turn the annual meeting over to Brian Meyers, Lincoln's Chief Financial Officer, who will provide a preliminary report on the voting.

Thank you, Scott. We will now proceed with the reporting of the preliminary results based upon the report of the Inspector of Elections delivered this morning, which show that: Proposal 1, the Board slate of 9 director nominees has been approved, with each director having received no fewer than 15,640,000 votes in favor or 65.7% of the votes cast; Proposal 2, the advisory nonbinding say-on-pay vote to approve the compensation of our named executive officers has been approved, with 18,797,000 votes in favor or 79% of the votes cast; Proposal 3, the approval of the company's 2020 Long-Term Incentive Plan, as revised, has been approved with 18,781,000 votes in favor or 78.9% of the votes cast; and lastly, Proposal 4, the Board's request for the ratification of selection of Deloitte & Touche LLP has been approved, with 23,794,000 votes in favor or 99.8% of the votes cast. That concludes the report of preliminary voting results. The final results will be reported in our next Form 8-K. I would like to reintroduce Scott Shaw, who will give Lincoln's management presentation with respect to the company's operations and certain recent developments.

Thank you, Brian. I'll start the presentation, which begins on Slide 2. And then if we can actually go to Slide 3, that's a safe harbor presentation, which you all will have a chance to review. These slides will be posted up on to our website, so you can have more time to look at them. But I will be going through them rather quickly. So if we go to Slide 3, please. Lincoln serves the largest sector of our workforce. And that is the middle skill sector of the workforce. And these, just to remind you, are jobs that require more than a high school education but less than a 4-year degree. And they represent about 50% of the U.S. workforce, and that's the market that we serve. And to give you a little more flavor of who we serve, we will go to Slide 5. We have always known at Lincoln that who we serve are very important individuals to our country and to our communities. And now it's official because 90% of Lincoln students are pursuing careers that the government now deems essential critical workers. And this is a photo of one of our graduates from our Melrose campus. This was in the Chicago Tribune. And he recently graduated from us and is already on the front lines, helping to test people for the COVID virus, just one of many of our essential workers. If we go to Slide 6, please. Lincoln has been experiencing good growth organically over the last 9 quarters, and that's driven by the fact that there's a simple supply and demand imbalance. So from the demand side, we have more employers coming to us than we have graduates because of the marketplace that's out there. The marketplace was strong prior to COVID and lots of employers are looking for new employees. Now from a supply standpoint, this is being driven by the fact that the baby boomers are retiring in larger and larger numbers. We, as a country, have told people that they should go to college, so there are fewer people pursuing the types of opportunities that we trained for, and that's been exacerbated by the fact that we've declined -- there's been a decline in the number of career technical education programs that are high schools. So fewer students are even exposed to these opportunities to know if they have a skill that they could better utilize or an inclination to follow these pursuits. And then lastly, the demand. Industry is growing, the professions that we serve are all growing. And now even with everything that's been happening with COVID, to add to the growth in the transportation and construction and health care will certainly be a growth in the manufacturing sector as more people talk about bringing more of our manufacturing back to the U.S. shores. So the next slide, please. So we have these great drivers giving us good opportunity going forward, and it's a very highly fragmented market that we serve. In this next slide, when it appears, we will show you what, from the BLS, what the annual new hires are for all the programs that Lincoln offers. And then when we look at how many graduates we provide, you can see at the bottom that in the Transportation and Skilled Trades, we only have about 1.5% market share. And on the Healthcare side, it's 1/3 of that at less than 0.5%. So we have a lot of room to continue to grow our business, and I'll talk more about that. So if we could now skip 2 slides ahead, please. And these are some of the basic facts that I think that you all know. So we're on Slide 9. Lincoln is obviously a national leader out there in technical training. Next year, we'll be celebrating our 75th anniversary. We've always been focused on hands-on training. That's one of the things we're very proud of and it's a great opportunity for us. We've always focused also on having a strong regulatory record and doing the right thing for our students. So for the last 3 years, we've had an improving graduation and placement rate, and we have a goal set for ourselves to get up to a 70% graduation rate and an 85% placement rate. Just to remind you, last year, we finished at around 68% graduation rate and about an 81.5% placement rate. As I mentioned, we're serving the middle skills gap, which is a growing part of the economy, and is a rich place for us to be participating, and we've had 9 consecutive quarters ending the year of start growth, which has led us to being able to return to profitability in 2019 and has set us up for good opportunities going forward. As you know, our business is -- has a lot of operating leverage. Just to highlight this, in 2010, which was 2 years after the last recession, the exact same 22 campuses that we operate today had about 18,000 students, with about $400 million in revenue and generated about $80 million of EBITDA. And last year, we finished the year with around $13 million of EBITDA. So we have a lot of opportunity to take advantage of, especially with the high unemployment rate that's now occurred over the last 3 months. We have a good solid balance sheet. We did the financing at the end of last year and we'll talk about that later, and we have opportunities for expansion. Our industry partners are asking for us to go into other markets as well as, just in general, the marketplace is so rich with opportunities, and we'll be looking to expand our footprint. And at the bottom there, I'll just highlight, we ended the year with the stock price at $2.70. Yesterday, the stock was at $4.19, about a 55% improvement. We like the way that that's going. The next slide, please. So on Slide 10, this just highlights for you where our campuses are, but more importantly, where they are not. And I'd like to call it the smile because we're basically in a lot of the growth areas of the country -- I'm sorry, we're not in a lot of the growth areas of the country, and that's where we're going to expand to, places from the Northwest to California to the Southwest. We only have one campus in Dallas, Texas, lots of opportunity in Texas for us to expand in. We're not in Florida. We just have the one small campus in Atlanta, Georgia. So in a lot of the Southern states and Western states where the populations have been growing, we really don't have a presence, and that's where we'll be expanding to. Obviously, in the Northeast where we are located, our headquarters and where we started, we have a good penetration there. Next slide, please. So we've been having a great run, and we continue to expect to have a good run going forward. This next slide just gives you a highlight of lots of key metrics, and they're all -- everything is pointing in the right direction. 3 years of consistent growth in revenue, average population, starts, and it's been growing in both of our segments. The blue is Transportation, and the green is HOPS. And so if we could go to the next slide of pro forma operations. This, again, is just looking at the 22 campuses that we have with 11,300 students. Again, we had 9 consecutive quarters of growth. We would have had 10 consecutive quarters of growth in this year, but we know COVID interrupted us, and I'll be talking about that. But the underlying fact of the matter is, we have good momentum and things are moving in the right direction. You can see how revenues have been growing, and our profitability has been increasing, as I talked about, with the operating leverage. We go to the next slide, which talks about our Transportation and Skilled Trades. And this just breaks down the slide that we just saw. We'll go over Transportation and Skilled Trades and then the Healthcare. And again, you can see with our 7,400 students at our 13 campuses, we're serving great hands-on, in-demand careers in automotive, diesel, HVAC, CNC, welding and electrical. And you can see that from 2018 to 2019, we had great margin expansion as we continue to grow our revenue. If we go to the next slide, which is our Healthcare and Other Professions, you'll see a similar trend: revenue increasing, margins increasing, good demand. Our largest program on the Healthcare side is our licensed practical nursing program, and we see lots of opportunity. As we've mentioned in the past, we are seeking to get degree granting in New Jersey with the hope and expectation to then apply to have an RN program. And as you may know, RN is the largest segment of the healthcare workforce, lots of demand. All of our LPNs would like to become RNs, and so we're really excited about this opportunity, and we continue to move forward with that process to become regranting and then have an RN program. If we move to the next slide, this is a simple depiction of what our trailing 12-month EBITDA has been. And you can see, now that we've stopped closing schools and shutting down operations and continue to grow our business, we're in a nice upswing with our EBITDA, and we expect that to continue going forward. If we go to the next slide. Again, this breaks down the information, showing you the increasing revenue by segment, the increasing EBITDA by segment. But also this one is about net income. And you can see that we've gone from having negative net income to positive net income, and we expect that again to continue going forward. If we jump to the next slide, this really highlights the fact of where our EPS has gone, and we expect that trend to continue throughout 2020. Obviously, there's been some disruption because of COVID. But again, the underlying trends are very positive for us. And if we go to the next slide, just to give you some highlights of our balance sheet and cash flow. The highlights here is that we did issue some convertible preferred stock in November, which I'll talk about in the next slide. But the thing to highlight here are that we ended December 31 with a net cash balance versus a net debt balance, which we had last year. And when you look at our cash flow, if you look at net cash provided by operating activities, you can see, again, a very nice trend as we've stopped closing schools and are investing in our business and growing our business. You can see that we went from having negative net cash from operations to having positive net cash from operations, and that will continue going forward. So if we go to the next slide, as I mentioned, we did do a financial transaction at the end of last year. While this did provide -- does lead to some dilution, we're very excited by this opportunity. It solidified our balance sheet, strengthened us from a regulatory standpoint, but also put more cash on our balance sheet. And especially now that we're in these uncertain times with COVID, having more liquidity is a great asset for our company and gives us a lot of assurance and their ability to manipulate -- I'm sorry, to manage our business going forward. And again, we increased our liquidity by about $30 million because of this new investment that came in, but al we were able to increase our credit facility size as well as the interest rate on our credit facility. If we go to the next page, one of our strengths is our relationships with industry, and we are continually investing and growing our industry partnerships. In 2019, we added Mazda and Volvo to our list of industry partners, and we're in discussions with several other major OEMs as well as other businesses that we anticipate we'll add in 2020. The industry partners are just a great resource for us. First of all, they validate the education we provide. They're great partners. They make wonderful donations. They provide wonderful job opportunities for our students. And we will continue to grow our partnership base going forward. If we go to the next slide, this is when we entered 2020, this is how we kind of laid out what the plans were. And as you know and if you've been a long-term investor with Lincoln, we had to go through some difficult times back in 2015 to 2017. But then we changed our business, restructured things, and we set ourselves up for a new path, and we had a nice turnaround from 2018 to 2019, with consecutive quarters of growth and then becoming profitable in 2019. And now we are looking to the future and growing our business and taking advantage of all the opportunities that we have going forward. If we go to the next slide, this is what we had laid out for ourselves prior to COVID-19, and these were the revenue goals that we had established. We did pull back on our guidance for the year. That's simply because of there's just a little uncertainty as we all adjust to the new world with COVID-19. But the underlying trends, there's no doubt that we have great momentum. And now as I mentioned earlier, with the fact that unemployment is so high, we have even greater opportunities going forward. So again, the plan was to continue to invest, replicate programs, have nice single-digit revenue growth with nice double-digit operating income and EPS growth, and we anticipate that that's going to happen and, frankly, may accelerate given the unemployment situation. But in the near term, as we reopen our campuses and deal with social distancing, it will be a little bit muddy for the next probably 4 to 6 months until we get back to a truly more normal state. So we go to the next slide, this does tell you what we've done. And I'm very excited and very pleased and it shows you the strength of our organization that, in a very short amount of time, we were able to move from an on-ground institution to being 100% online. And more importantly, when we did that, we only lost about 3% of our students that just said, "Hey, I came here to do an on-ground education, I'm just not comfortable doing an online education." But the vast majority of students wanted to stay engaged, wanted to move forward and have remained with us going forward, which is great. Our average population today is higher than it was last year at this time, even with all this disruption. Again, showing you the great solid strength underlying our business. We've moved everything online from our student services to our enrollment, to our education, and this is really going to open up new opportunities for us as well when you look -- as we look to the future. We're going to be able to operate differently, more effectively and provide better services for our students, and we're very excited by that opportunity. So the next slide is my last slide. Again, just summarizing all these opportunities that we have. We are a national leader. We're in 3 great sectors: the transportation, skilled trades, healthcare. We've had organic growth consistently over the last 9 quarters. And even -- we've grown our average population over the last 10 quarters. We're in a wonderful segment of the economy. There's a skills gap out there. We are ready to serve and help bridge that skills gap and help companies and help people find new opportunities. We have great opportunities to further expand our footprint to be truly a national organization and better serve our industry partners. We have excess capacity today in our facilities. So with the anticipation that enrollments will increase with unemployment, we will be there and ready to serve those people. We also have an asset that's not -- certainly not on our balance sheet because of the losses that we incurred in the previous years. We have $66.7 million of tax loss carryforwards, which will certainly enable us to generate good cash flow going forward to further reinvest in our business. Obviously, in the down economy, we grow that much more, and it's exciting for us as we look to the future, and we will always be focused on ensuring that our students are getting the best education and return on their investment while being 100% compliant with all rules and regulations. So with that, I thank everyone for their attention. We go to the last slide. And at this point, I declare that the 2020 Annual Meeting of Shareholders is concluded, and I thank you all for joining us, and I look forward to hopefully seeing you all in person next year. Thank you all very much.