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

Good day, ladies and gentlemen, and welcome to your Lincoln Educational Services Corporation webcast. At this time, it is my pleasure to turn the floor over to Scott Shaw, President and CEO. Sir, the floor is yours.

Great. Thank you very much, operator, and good morning, everyone. I hope you are well. I'm going to get into these slides. But in case you want to see them, you can go to our web, go to About Lincoln, go to Presentations or go to Investor Relations and then go into Presentations, and you can get a copy of this presentation there as well. So the next slide is simply safe harbor, which I'm sure you're all very aware of. Oops, and I clicked on the wrong thing, and here we go. So first of all, let me -- there are a lot of slides here, so I'm going to go fairly quickly. But let me highlight this slide. So we are a leader in solving the skills gap in this country. We've been around for almost 75 years, and we have great outcomes. Students come to us because we have a hands-on training, and we're very aligned with industry. And so we have great placement rates, around 80% or more, which is what really attracts students to come to us. From an investment standpoint, what's been exciting is that we've had 12 consecutive quarters of growth. The first quarter was a little wonky and that we had to shut down for the last 2 weeks in March. But if you factor in the starts that we had to move into the following quarter, we've had 12 consecutive quarters of growth. So 3 years of growth. And most of that growth has occurred during a period of time when unemployment rate was actually dropping to historic or 50-year lows. And the fact that we're able to grow in that environment speaks to some really strong underlying fundamentals that I'll get to shortly. Another aspect of our business is that we do have a lot of operating leverage. It's kind of like the airplane, you put more people into the seats and you -- a lot more revenue drops to your bottom line. We have a lot of excess capacity today, and I'll share with you just how powerful that operating leverage can be. We ended last year, we did a convertible preferred and solidified our balance sheet. And obviously, we came into 2020 with a lot of great expectations. And then when COVID hit us in March, we really weren't quite sure what was going to happen, but the organization has rallied tremendously, and our performance really hasn't missed a beat. And I'll share with you how our population's about 10% greater today than it was a year ago despite the challenges with COVID. Moreover, I think the COVID situation has opened our eyes to a lot of new ways that we're going to offer our curriculum going forward that students will find very attractive. And I'll touch on that as well shortly. So those of you who know the industry, the industry went through a lot of consolidation 5, 6 years ago. We ended up closing a number of campuses. And at that point, we said where are we going to go from here? We put out a new plan to start growing our business, increasing our marketing and that's what's led to these 3 years of consecutive growth. Now we're really well positioned to continue that growth. We're going to end up in a strong position at the end of 2020, which will -- with that carry-in, student population will really set us up well for 2021, where I see a lot of same trends that we've experienced this year continuing, which will be great for our students and for our shareholders. We put out some guidance pre to COVID and then we canceled our guidance just because of the uncertainty around the whole pandemic and how it was going to affect us. And during our last earnings call, we didn't reiterate guidance, but we basically said that we will meet to exceed the guidance that we have out there. And when I show you some of our 9-month numbers, you'll see why that is the case. So here, when COVID hit us, we had to really pivot rapidly. We were 100% on-ground school. We had to go to 100% online and now we're in a hybrid model. And I'd like you to focus on the student population. The key item there is 94% of our students remained with us, even through all this change and tumult. And I think that's a great testament to our faculty as well as a great testament to our students and how committed they are to their education. They did sign up for on-ground hands-on education, and yet we had to move to this hybrid model. And they're responding well and staying with us, which is great. Also, then, I'd like to just look at the bottom in the future. Whenever unemployment rates spike up, our enrollments tend to spike up. And so given the situation we're in today, I would anticipate that we should see strong growth continuing into 2021. And I'll show you again how powerful that is shortly. Also, just all this attention, because of COVID, is also driving increased awareness of our health care careers, which is great. And as I mentioned, we're going to evolve and offer a blended program going forward so that our students don't need to come to campus as often as they do today. So it will be about maybe 25% blended and about 75% on-campus hands-on training. And we think that will be a nice mix between the 2. This next slide just kind of highlights why Lincoln has, I think, been able to perform so well in this very challenging environment. One of the reasons is that we are diversified. We have about 1/3 of our students in automotive, about 1/3 in skilled trade and about 1/3 in health care. So that's been good for us. Obviously, this -- all this attention on health care has caused the health care segment to grow faster in the first 2 quarters of this year. But as you saw, probably our third quarter, our automotive and skilled trades had a really nice, about 17% growth, which was great. Also, we had some experience, even though we were 100% on-ground, we did have some experience with online delivery. And we, at one point, had some online courses. And we had all the infrastructure in place to quickly expand and grow, and that's been very effective and enabled us to make this transition. And as you can see, the bottom bullet point, we basically, year-to-date, EBITDA has increased by about $8 million on revenue growth of 11.9%. And there's some anomalies in there just because of COVID, but again, very great incremental profitability that our business has. Typically, I would say that's 40% that drops to the bottom line year in and year out when we grow our revenues. Another interesting and great attribute of Lincoln is that 90% of our students are pursuing careers, which the federal government would deem as essential and critical infrastructure workers, and that's given them a lot of confidence to come to us because even during the pandemic, most of our graduates have remained employed because they're in health care, which has big demand. They're in transportation, keeping the trucks running. They end up being electricians and HVAC techs to keep our homes operating or offices operating. So these are all very key programs and everything that we're going to do going forward will fall in the same genre. There other courses that we could offer that might be very popular and get a lot of students in, but the outcomes aren't always so great, not the greatest paying jobs. We're really focused on giving students those middle class solid career jobs, and it's working out very well for us. This just happens to be a picture of one of our graduates, which was on the cover of the Chicago Tribune. He's a medical assistant graduate. He recently got out of our Melrose Campus and immediately went to go work on some of the testing sites, very exciting. Now let me just jump to the next slide. This doesn't really share anything more different than what you've had before, but I will focus on the third bullet point. And that is we do have strong student outcomes, graduation rates of around 65% or more, and 80% more in replacement rates. And just to make a distinction, most of accreditors or our accreditor has these 2 major guidepost of what we need to achieve in order to remain accredited. Typically, at the schools, the regionally accredited schools, these are not the guide, the outcomes that they focus on. They focus more on how many books you have in your library, what's your faculty, things of that nature. But our accreditor is very much focused on outcomes and, in our point, we're also keeping a very solid regulatory record, which is why we've been around for almost 75 years. I touched on this already, but about 2/3 of our students are in our transportation and skilled trades segment, about 1/3 are in the health care side. Both sides are programs that are in demand, growing with solid career opportunities, and we finished up with around 13,200 students at the end of the third quarter. This map just shows you where our 22 campuses are in 14 different states. And as an organization that started in Newark, New Jersey, we're heavily concentrated in the Northeast. So basically from the Baltimore up to the Boston Corridor, that's where the bulk of our campuses are and where a lot of our students are. But as we look to the future, we want to create a national training organization. And we think that gives us a lot of benefits because larger employers can basically work with us. And we can solve their needs across a much larger geography than just having them work with, let's say, 22 different community colleges in each of the markets where we are. So -- but you can also see, we're not in the south and the west, where most of the growth has been taking place. We only have one campus in Texas, in Dallas, Grand Prairie, right outside of Dallas, lots of room to grow in Texas, room to grow in Florida to South, Southwest, California. These are all areas that, over time, we would like to have campuses to build out our network. We serve what is considered the middle skills area, which is the largest sector of our employment market. Low skills would be students or individuals, employees that don't -- basically just got a high school degree or less. And those jobs are shrinking. High skills or those with the bachelor's degree or higher, and those jobs are growing. And middle skills is kind of hanging in there at around 50%. And so those are more than a high school graduation, but less than a bachelor's degree. It's the largest segment of the workforce. Now this slide is really kind of key to everything, and this is what gets me excited about Lincoln. And that is we are serving this need, and there's an imbalance that's taking place and it's been created, frankly, over decades, in our country, and we are there, positioned to help bridge that skills gap and solve this issue. So it's simple supply and demand. So from a demand standpoint, every job is coming more complex. Everything is involving technology. More and more jobs are going to require additional training. You just can't take someone off the street to do those jobs. So that's really good for us because that's what we provide, training and education. The second thing that's happening is the baby boomers are retiring and they're going to continue to retire. And as then different people move up within the organization, that creates this vacuum of entry-level positions. Companies haven't been very good, frankly, at preparing for this and training their individuals. So again, there's this huge demand. We have employers coming to us all the time, seeking our help to help them grow their business. And then thirdly, the segments that we serve have very attractive economics attached to them. Manufacturing has been growing again in the United States, especially as we look to bring more and more onshore. Transportation is obviously very robust. Everyone ordering things online, having trucks being there to deliver that. And construction and health care are both growing businesses. And if the infrastructure bill gets passed in our next administration, that will really help boost both the transportation and construction side. And naturally, health care is just a growing area of our whole economy. Was pre-COVID, it's now kind of accelerated even with the COVID. So the -- so that's on the demand side. The supply side is a challenge. Starting back in the late '70s, early '80s, we, as a country, made a commitment to send more and more students to college. And as a result, we started taking out vocational programs from a lot of the high schools to give people more time to work on getting the skills to be more successful in college. And we've been pushing everyone to go to college, go to college, go to college. And the reality is about only 60% graduate. And of those that graduate, a lot of them graduate with degrees that really aren't all that valuable. And so I think that people are finally realizing that and given the cost of college, it's a very expensive lesson to learn too late. And the fact that we offer very short programs, usually a year or less, that get people into the workforce very quickly, I think it's resonating more and more with people, which is why we have grown, as I said, over the last 12 quarters. And just the most recent statistics for the fall of 2020, enrollments across all post secondary are down 4.4% and yet we had about a 15.3% growth in our enrollment. Again, I think people are realizing, why take a bet on a long-term 4-year education when I'm not quite sure what I want to do, whereas I can, again, get skills very quickly, get in and out and get it in the workplace. And then frankly, you can always go back-to-school to get an associate's degree or bachelor's degree once you really figure out what it is you want to do. We operate in a very highly fragmented industry. And what this is showing you is this is all BLS data for the careers that we train for and how many annual job openings there are. And when we look at how many job openings are versus how many students we graduate, you can see that on the transportation and skilled trade side, we just have 1.5% market share, and we have less than 0.5% on the health care and other professions. So we have a lot of room to grow, opening up more campuses, get into new markets as well as gaining more market share on others. So how do we do that? One way that we do that is that we are very different from a community college, and community college is our #1 competitor. And what's so different about us is our approach. First of all, as I mentioned earlier, we have superior graduation rates and placement rates. Community college has 20% to 30% graduation rates. Ours are 65% and over and 81% placement rate last year, which is very, very respectable and again, audited from a third person. And so students come to us as they know that they can get in and get out and get a job. Our programs that are aligned with industry. We want to find out what the local employers want, what are the skills that they want. We make sure that we put in the right certifications so that the employers know exactly what the skills are that our students have. And the fourth bullet point is very key because we all know that people get hired for their technical skills and frankly, fired for their soft skills. And so we do try to develop our soft skills as much as we can in the short amount of time that we have our students. But we do ask that our students wear uniforms while they're on-campus. We do track their attendance. And if they don't show up, someone from the campus is calling them to find out why. Many of our employers, frankly, just look at what the attendance score is for a student beyond their grades. They just want to ensure that someone's committed to their job and their profession. We build really robust labs. And so when the student looks at our campus versus, let's say, the local community college, they see a lot more things for them to fix and touch and work on, which excites them. We've also incorporated, as much as possible, new technologies. And now with COVID, the pace of change is only going to accelerate. And whenever something new and really effective comes out, we will definitely embrace that. And as I mentioned, we offer an accelerated program. And so students are in school with us much more intensely than they are at traditional school. Traditional schools, students are basically interacting with a faculty member maybe 15 hours a week, and there's lots of breaks throughout a calendar year. Our students are interacting 25 to 30. And, in fact, one course is 40 hours a week, and we don't have breaks. They're coming 5 days a week, week in, week out. And we provide our students with good support to help them because, again, the average age for our students is around 25 or 26. We serve a lot of adults as well as serving about 20% of our high school students. And those adults are usually a little bit nervous about coming back-to-school. So we need to give them that support. Again, when you look at our graduates, we're #1 on the east as far as students that have gotten in automotive skilled trades, certificate or diploma through a Title IV school, and we're #2 in the West. One of our drivers, again, is also our partnerships with industry. We partner with major companies. This is a great way to give our students good outcomes, great jobs. Really, they're getting careers and not just jobs. And we're trying to bring in as many Fortune 500 companies as possible. Just in the last earnings call, I mentioned how we just formed this partnership with Republic Services, the second largest waste disposal company in the United States. 35,000 employees, thousands of trucks. They're building a state-of-the-art training facility in Dallas, and we're going to manage that training facility for them. Very excited about that opportunity. Now this is a slide that usually gets a lot of attention. And what we did is we looked at our 22 existing campuses and then looked back what did these campuses do at the last peak of our population during the last great recession. And we had about 18,000 students back then, about over $400 million in revenue and about $80 million in EBITDA. Last year, we ended up with $13 million of EBITDA. I said, this year, we're on track to exceed a $19 million of EBITDA. So you can see that we were able to build our population back up to those types of levels of 17.9. I can't say that we'll definitely earn $80 million of EBITDA, but we're certainly going in that direction in, hopefully, a very robust way. This is the management team. Again, lots of experienced people that have been with us a long time, which is great, especially since we're highly regulated. It's good to know -- have people know how to operate in such an environment. But I did add a person, Chad Nyce, on the upper right-hand corner, just joined us last February, came from Strayer, was COO. He's our Chief Innovation Officer, really good timing. He's helping us as we've gone to this blended format and has really brought a lot of excitement. Now I'm going to go into some financial slides and I'll go through some of these quickly because basically, it's just showing you that everything is moving in the right direction. And there are a few key slides that I'd like you to see. But again, our starts are growing both in our health care and transportation side, both quarterly and year-to-date. Our population is therefore increasing, and that's what drives revenue. And we'll end the year with more students than we started the year to carry into next year, which sets that 2021 up to be a strong year for us. Obviously, as I said, as population increases, so does revenue. And I want to get to -- and as revenue, as I was talking about, will be a good operating leverage. So our margins are increasing for our overall company, and we expect to get up to eventually a margin around 15% EBITDA margin for us overall. This is our Transportation and Skilled Trades segment, a healthier margin than in our Healthcare segment, as you can see, but both are increasing, which is a good sign. This slide just simply shows you that on a trailing 12-month basis, we've turned that corner and are now just growing our EBITDA and we're on a nice trajectory going forward. Next slide is just talking about the CARES Act. This is money that we received from the federal government. We basically distributed all of the money to the students they'd allotted to us. And frankly, we've been very efficient, I'd say. We've only used $3.3 million of the $13.7 million that they gave us to help us offset our costs due to COVID. So we have still 12 -- I'm sorry, $10.4 million left and we can either use that to offset any additional cost that we incur over the next 6 months or if we don't incur additional costs, we can use it and apply to our students to help them out or return it back to the government. Really nothing new to show on this slide. I want to get to this next slide, which is more impactful. So this is quarterly information. As we are a seasonal business. So on the top, you can see our EBITDA, and you'll see that in the Q3, we had nice growth. And throughout this year, we've had nice higher EBITDA than the prior year's quarter. So you can just add that up. We're running -- we're $8 million, $9 million ahead of last year for the 9 months. And you can see that the fourth quarter is always our strongest quarter. It will again, be our strongest quarter. And so that will set us up for a nice EBITDA for the whole year. And the reason why we've had such success is, down below is the starts. And as you can see from a quarterly basis, the Q3, the one -- the quarter we just finished, is our strongest quarter. We had over 15% growth in that quarter. Again, that will set us up nicely for Q4 and carry into next year. But you can see that things are all moving in a very positive way for us. This next slide is just to share our liquidity. Basically, we will finish the year with more cash than debt. As it was at the end of 9/30, we had about $26.5 million of cash, but $10.4 million of that's for the federal government. So around $16.1 million of our own cash and at that point, we had about $17.7 million of debt outstanding. As I said at the end -- by the end of the year, we would anticipate having more cash than debt. And we do have a lot of liquidity out there, about $21 million available under our credit agreement. And also we did file an S-3 out there. So we are interested growing our business, as I said. That could happen through greenfield, which would take 18 months from announcement. We haven't announced anything or through an acquisition. We're certainly open to making acquisitions, but we see lots of opportunity for Lincoln to grow and that would be our plan over the coming years. We also just -- this slide shows you, we do own about $60 million worth of real estate. It's 3 properties, and we have a small school up for sale. That will net us under $3 million. As I said earlier, we pulled the guidance like someone gave some direction of where we're going. Next year, we hope to provide guidance as we have greater clarity. But this is where I'd like to end up on the investment merit. We are a leader in the skilled trades area. We've been experiencing organic growth pre-COVID. Now that unemployment is higher, we should experience accelerated growth. We are solving the skills gap, as I laid out for you, is very real, and companies are coming to us to help solve that issue and that -- this next bullet point says, as we grow our student body, we'll grow our revenue and we'll grow our profitability nicely. We have lots of room for growth to enter new markets and to expand within our existing markets. We also have $66 million of tax loss carryforwards. So as you start generating all this cash, moving forward, we'll be able to shelter a lot of it until we use up those tax loss carryforwards. And hopefully, we'll use them up quickly as that's a good sign for us. And we have strong student outcomes, both graduation placement, and we're very much focused on maintaining a strong regulatory record. And so that's really all I have to share. I don't know if anyone has any questions.

I see there is one question here. Will the Biden administration revert to Obama era policy that's calling for the end of for-profit education? How will this impact you? Good question. Yes. Well, I would certainly expect that the -- given where we are today and what will happen, certainly, Biden will be putting more regulation back into place, which we were operating in that world before. And as I mentioned earlier, the careers that we offer are all in demand with good returns. And so while the information is not available to us, if they haven't updated it recently, we believe that our programs are well positioned, whereby students will earn a good income. Our average student leaves with about $13,000 worth of debt, not a huge number, but nothing to sneeze at as well. And the jobs that our students are getting, they're coming out making day 1, $25,000 to $40,000 with the ability to ramp up. I mean, most employers today really want to see that students engage and going to stay with them, and then they're more than willing, because it's a competitive environment, to start increasing their salaries after that. So I do anticipate more regulations coming down the path. The statement, as calling for the end of for-profit education, there might be some voices that claim that. But again, I think that given who we serve and what we do, we should be well protected. When you look at the for-profit space, we are -- first of all, in general, for-profit schools only represent about now 6% of all students out there. At the peak, I think we were up to 12%. So it's a much smaller piece of the pie. And also when you look at for-profit schools, we serve a different student. The largest sector for profit schools are doing online bachelor's degrees, and those schools, frankly, have lower outcomes than their nonprofit peers. As I highlighted, we have greater outcomes than our nonprofit peers. So if anyone is really looking at the data and looking at the information, they'll see that we provide a good product and do a good service and getting rid of us, frankly, wouldn't be a wise move. So I feel very good about where we stand and what our opportunities are going forward. Any other questions? [Operator Instructions]. Maybe I need to refresh? No, I think that's it. So again, I appreciate everyone's interest. Again, you can go to our website. You can get this presentation. If you go to lincolntech.edu, click on About Lincoln Tech, go down the Press Room and click on Investor Relations and then go on to Webcasts and Presentations. And this presentation will be there, along with a little video that's embedded in it. I didn't include that here, given time and maybe some technological challenges. So I hope you all have a great day. Stay safe. And I wish you all well.

Ladies and gentlemen, this concludes the webcast. We thank you for your participation, and have a great day.