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

Good afternoon. My name is Greg Pendy. I'm an analyst here at Sidoti, and we're happy to present Lincoln Tech. The format of this is going to generally -- we're going to go through the slide presentation, and we'll have Q&A. So if you have any questions, just feel free to put them into the chat box there, and we'll, hopefully, I'll try to get to as many questions as I can. So with no further ado, I'm going to hand it over to Scott.

Thanks, Greg. Appreciate it. So we're going to go through this presentation. You can go to lincolntech.edu to our website. You'll see this presentation in the Investor Relations area as well because I'm going to go through it fairly quickly. Safe harbor, you're all familiar with that. But here, I just want to jump into really where you all should be focused on what the investment opportunity is. We are definitely a leader in the skills gap. And the skills gap is real. And I'll talk about the reasons why that is the case. But suffice it to say, there are just not enough people out there learning the skills that employers want, and that we have more job openings than we have students. And so that's a good thing for us. And we've been a leader in this. And we're very much focused on hands-on education, which, given the current situation, is kind of an interesting situation, but we pivoted very well to deal with being 100% online and now a blended format. And I'll talk a little bit more about that. The next bullet point is highlighting the fact that we've been growing now for basically 12 consecutive quarters for 3 years. And we've been doing that prior to COVID, in an environment where unemployment was dropping. And typically when employment is dropping, we're more challenged to find enrollments, but instead, we were growing. And I think there's some real solid foundational elements out there that are definitely going to ramp up again and continue once the economy goes back to a more normal state. But even in this un-normal state with more people unemployed, that's a good thing for us. And with more people coming into our campuses, we do have very significant operating leverage. We say at least about 40% drops to the bottom line as our enrollments grow and as our revenue grows. And we've been experiencing that, and I anticipate that going forward. We did raise some capital last year, which has strengthened our balance sheet. And this year, we're doing so well that we will end up the year with more cash than debt, so we're really well positioned. COVID is obviously something that does provide some disruption to all of our lives. Again, we were able to pivot. We lost very few students for being a hands-on organization. They stayed with us. Our faculty have responded. And now with the attention on health care, there's even more interest in a number of our programs that we're offering. And we're learning new skills that we're going to take with us post COVID to make us a more efficient operation and provide better service to our students. This is just a quick slide just saying that our industry went through a lot of change. We went through a lot of change. We then came to a period of time where we had to make our decision on how we're going to grow. We invested in our marketing and changed some of our management team around. And since then, we've had this 3 years of growth. And we ended the year with a very positive note with more students. And we're going to enter next year with more students as well. So we're really on a nice trajectory. We had this guidance put up pre COVID. We pulled the guidance. But during our last earnings call, we did -- without reinstating our guidance, we certainly said that we're going to meet or exceed all these metrics that are out there. So we're seeing nice solid middle revenue growth -- middle single-digit revenue growth, and we're seeing nice, solid double-digit EBITDA growth. And so that we expect to continue. We're seeing strong demand out there, especially as unemployment has increased, and we will continue to roll out new programs into our existing campuses where we see the demand by students as well as by employers. We rolled out about 4 programs this year. And next year, we have 5 lined up to roll out. So that will also help foster more growth. COVID has definitely been a big impact to all of our businesses. As I said, we had to move from 100% on ground to 100% online and then to a blended format. We lost very, very few students in this process, which is a testament to, frankly, also to our students, but also to our faculty and how they've been able to adjust. And as we ended up the third quarter with almost 10% more students than we had the prior year before having all this disruption, we continue to move forward in a very aggressive, positive way. We're also, as I mentioned, learning how to deal with students remotely, which is opening up new opportunities for us going forward. And as we look to the future, we will definitely be capitalizing on what we've learned, and we're looking to make of our curriculum a hybrid model, whereby students will do about 25% to 30% of their work online and the rest they'll come to our campuses. This is a very value-added situation for our students. Most of all, they love the hands-on, they are hands-on learners, but they also like the flexibility of not having to come to school every day. And so today, they come maybe 4 to 5 days a week. Going forward, they'll come maybe 3 or 4 days a week, which gives them an extra day to work or maybe an extra day to have -- not have to pay for childcare or commuting. It's a way to put more money in their pocket and enable them still to get the education that they need to launch their new career. Also, I think that we've responded so well because of our diversification. We're in 14 different states with 22 campuses and also 3 major segments. We're in the automotive skill trades and health care. All of those segments are growing, but they also have different dynamics around them. And certainly, there's been a lot of attention in the first 2 quarters of this year. We certainly had really strong growth in our health care sector. In the third quarter, you saw that we had really strong growth in our automotive sector. So having these different sectors and their inherent demand has really helped us. We also had some experience in online prior to this all starting, which is why we were able to so quickly pivot and move online. We already had a learning management system. We did have a few programs that were blended, so we knew what we had to do. We just had to scale it up. And again, we really haven't missed a step in this whole process. And as you can see, Q3 revenues increased 8.5% for the quarter, which is nice. So again, we have a nice, strong base. We're leveraging with our operating leverage, our profitability. And I foresee that certainly going well into 2021, if not beyond. Another aspect, I think that is very important and what's led to our success is that 90% of our careers are what the government would deem essential critical infrastructure workers. And I think that's important. Our students have been employed throughout this pandemic, and more of them need to get employed. This is one of our medical assisting students here. This was on the cover of the Chicago Tribune. Again, our students are excited to get out there and work. We actually are just launching new ads, which kind of reemphasize the fact that our students are on the front line, staying engaged, staying employed during these very difficult times and helping all of us with our lives on a day-to-day basis. So let me quickly go over some items here on [Lincoln] We've been around for 75 years. I apologize for the dog barking, but that's part of now working from home these days. I'm sure that's not the first time you've heard that. But we have this growing middle skills gap out there, and that's something that's been taking place, and it will drive growth for us certainly over the next 4 to 5 years. We have this high operating leverage that I've spoken about. And as you'll see, we have an opportunity to grow our footprint. I truly want to become this national provider of skills. There's really no one out there better positioned for us to do that, and that will be a really good asset, I think, for these larger employers that are looking for a consistent product, knowing what our -- what skill sets our students have and knowing how we offer our education. It will be valuable, I believe, going forward. So we have the 22 campuses in 14 states. We ended the quarter with about 13,200 students engaged with us. About 2/3 of those students are in transportation and skilled trades and about another 1/3 are in health care and other professions. And all of these sessions are growing with good demand up there at the top. That's our Denver campus, our Queens, New York campus as well as our Columbia, Maryland Campus. Here's a map of our footprint. We started in Newark, New Jersey. So we're heavily concentrated kind of in that Baltimore to Boston Corridor. We do have schools in other markets, but we're really not in the south and the west and the southwest. And that's where employers are growing, that's where employment is growing, and that's where we will look to grow in the future to help capture more of the marketplace as well as to help build out this national platform that, I think, will add a lot of value to us and to our employers. Middle skills is that -- is the largest sector of our workforce, and middle skills are more than a high school education but less than a bachelor's degree. And if you look at this chart, the low skills, those are really people that just have a high school education. And that part of the workforce is shrinking in time. Those are the types of jobs that are most easily replaced by robots or other forms. And the high skills are those with a bachelor's degree or higher, and that area of the workforce is growing. But the middle skill still represents that nice solid 50% middle, and that's where we serve. As I mentioned, we were growing even while unemployment was declining, and that's really attributable to a lot of just basic supply and demand imbalance. And from the demand side, as we all know, everything is becoming more technical, more complicated. You can't open a hood now and you can't even almost find where to put the oil. Things are just more compact and put in there with more computers everywhere. So you just need to have training, no matter whether you're installing HVAC systems or you're electricians or you're nurse, you need training in order to do your jobs. Coupled with the fact that the baby boomers are all retiring, it means that there are these gaps in the workforce, people being promoted up. There's not a new young early stage workforce out there. And companies, really, frankly, haven't done a good job preparing for this. And so that's what's causing this dislocation and opportunity, frankly, for us. And needless to say, the companies or the industries that we're serving are all growing nicely and will continue to grow. I mean, health care is definitely a growth industry. Now with the issues around the pandemic, it's even more so. We just had a new [Audio Gap] With the infrastructure bill that so many prior administrations have been talking about. So if that happened, that will be a good sign for us and really help accelerate this demand side as well as serve us. Now on the supply side, the issue is really around this decision by us as a country, really starting in the '70s or early '80s, to really push to send everyone to college. We eliminated vocational schools. We've actually -- lots of people think of a lot of these blue-collar jobs in a negative light, and that's not helping and trying to force everyone to go to college with only 60% graduating. And of those that are graduating, I think we all know plenty of students that are kind of directionless or have degrees in unproductive areas that it's definitely not working for everybody. And so we really sit in the middle there, trying to find people that want to go and work with their hands and go into these very rewarding careers, and it's proving to be very effective for us. Again, just to reemphasize the fact this is BLS data. So what it's doing is looking at all the jobs that are needed on an annual basis for all the specific fields that we trained for. And then we look at how many graduates we provide. And you can see that it's a very highly fragmented area, and we only have 1.5% market share on the transportation skill trades and less than 0.5% on the health care side. So lots of room for us to grow and continue to grow. And one way that we are growing is that we are different than a community college. Community colleges are basically our #1 competitor in each of our markets. We have superior graduation and placement rates. We graduated over 65% of our students. On average, community colleges are 20% to 30%, even when you factor in students that are transferring to 4-year degrees, we're still meaningfully higher with our graduation rates. Our programs are definitely tied to employment outcomes. And we work closely with all the local employers to ensure that our students are getting the skills that these employers want to be successful in their careers. And we also look to provide whatever certifications we can that employers find valuable, again, to give greater credibility to our students. We also, though, are a training organization, and soft skills are growing in importance, frankly, from an employability standpoint. We all know that people get hired for their technical skills and, frankly, fired for their soft skills. And we want to make sure that our students have the right set of soft skills to be successful. Part of that is also just training them to be good workers. And we do track attendance. And if students don't show up, someone from that campus is calling them, and the attendance score is part of what's on their resume. And many employers just look to see that a student is showing up day in, day out, as that usually tends to be a better employee down the road. Again, compared to community colleges, we have very robust labs and shops, lots of equipment, lots of things for students to work on. It really makes them much more comfortable for when they join the workforce. We look for new ways to engage the students with technology and using videos, and that's also one of the reasons why we were able to pivot so quickly to distance learning, by capitalizing on a lot of the technology that we've deployed and we will continue to deploy. And students like coming to us because we have an accelerated program. We don't have a lot of breaks. Students are coming to school more hours in a week than you would at a community college, which means you can get out into the workforce that much more quickly. And needless to say, we provide a lot of support for our students, both in the enrollment process, the financial aid process, mentoring throughout the education process and then definitely working with them to get placed. We are #1 in the East. When you look at the number of students graduating with an automotive and skilled trades degree at a post-secondary campus, and we look to eventually become #1 across the campuses. One way we are doing this is building our base of industry partners. Industry partners are great. They help with donations. They also help by giving us equipment. And most importantly, they give our students great careers and opportunities, and that's why they come to us. In every quarter, frankly, we're almost adding 1 or 2 more partners out there, and I anticipate that trend to continue. We just announced in the last quarter the partnership with Republic Services, the second-largest waste disposal -- nonhazardous waste disposal company in the United States, 35,000 employees, thousands of trucks. They're building a state-of-the-art training facility near our Dallas campus, and they selected us to provide the training there for both their employees as well as graduates of our program who will then become Republic Service employees. We're very excited about that opportunity. This is just to show everyone really how much operating leverage that we have. What we've done is we look back at 22 campuses that we have in operation today and look to see what was their performance back in the peak during the last Great Recession. And you can see from this chart that in these the exact same 22 campuses we had almost 18,000 students, $414 million of revenue and $80 million of EBITDA. And this year, we're certainly on the track to earn $19 million to $20 million more in EBITDA and going from $20 million to $80 million is a big leap. But as you look at 40% drop into the bottom line, and if we continue to get nice good enrollment growth, it's certainly something that is a possibility. In order to achieve this, we do -- I do rely on my management team. As you can see here, lots of people with lots of experience within Lincoln. And that's good for a highly regulated industry, which we are as that keeps us safe. But I've also added to our management team, senior management team. Chad Nyce there on the upper right came to us, he was COO at Strayer. He's our Chief Innovation Officer. He's come to us at the right time as we've pivoted to online learning. He's helped us with a number of initiatives. And is adding some new insights and thoughts. And he's a welcome addition to the team. So now there are a bunch of financial slides. I'm not going to go through all these. Suffice it to say, everything is moving in the right direction, everything is positive. Everything is growing, our revenue, our average population, our starts. And as our average population grows, that's what provides the strong revenue growth and the strong operating income growth that follows. This is just looking at the starts on a quarterly basis and year-to-date. Again, nice, solid double-digit growth in our year-to-date for transportation and skilled trades, 8.5%, 8.4% growth in our health care profession. For starts, population then follows a similar trend. Again, everything is moving in the right direction as we continue to build our population base that will again drive more and more profitability to the bottom line. Again, this is revenue, and I just want to get to some other slides that will be more impactful here. This one is just [indiscernible] is showing you this operating leverage and how our operating margin is increasing. I would anticipate that we should get back up to about a 15 mid-teens operating margin on an EBITDA basis as we look forward. This is just looking, again, that's just the transportation and skilled trade side. You can see that this side of our business has a bit of a healthier margin than our health care side, but both are moving in a positive direction, which is what I like and what we're pushing for. This is just looking at our trailing 12-month EBITDA, and last year was the first year that we were profitable in a number of years, and we're now on that positive trajectory with 3 years of consistent growth where we've now built a nice solid foundation for ourselves and have now capability to move forward, hopefully, in a more aggressive way. CARES Act. One thing that was really nice. The government did provide our students and ourselves with some funding. We distributed about 90% of the funds to our students, and we will distribute the rest -- actually, I think it's already distributed at this point. We also received some money from the government, $13.7 million that we could use directly as a company. And so far, we used about $3.3 million of that. We're being very cautious on how we use this money. It really can only be used for really any additional costs that we've incurred because of COVID. And even if we have incurred some additional cost because of COVID, we're making sure that it's very well documented because we know that the government will come back and audit this. We'd rather err on the side of using less rather than more. To the extent we don't use all this, but we are able to distribute more of it to our students, and if there's more left over after that, we'll just return it to the federal government. This is just another shot, just looking again the high metric variables of revenue, EBITDA and net income. And again, the quarterly growth and the year-to-date growth. You can see on an EBITDA basis, we're $8 million higher for the first 3 quarters of the year than we were last year. And with the fourth quarter, as I'm about to show you our strongest quarter, that certainly positions us very well. So here we are, again, looking at the quarterly financial numbers as well as the starts down below. You can see the first 3 quarters, nice incremental improvement quarter-to-quarter over the prior year, and we would anticipate the fourth quarter to remain our strongest quarter and very robust, which will lead us to an nice healthy total year number. And then that's being driven, as you can see down below, by the incremental growth that we're receiving quarter-over-quarter. Again, the third quarter is our strongest quarter, and we finished out that very large quarter with 15-plus percent growth in starts, which was great. From a liquidity standpoint, we're in also in a very good position. We will finish up the year with more cash than debt, and that's excluding whatever cash we received from the CARES Act. So we're generating cash in a good position. Have $21 million of availability under our credit facility as well as all of you know that we do have an -- we do have a shelf out there. We had to do that for our convertible preferred, but we also figured we'd take advantage of having it out there if we see a really great opportunity, both -- either from an acquisition standpoint or from a greenfield standpoint, and we feel that we need additional wherewithal, we do have that shelf. We also own $60 million of real estate. It's on the books for about $30 million, and we have a small property that we're looking to sell, I think, Connecticut for a few million dollars, and we'll continue to work on that. We are also always looking at our real estate to figure out how we can become more effective with it. We're about to sign a new lease. And we downsized the amount of space we're taking for that lease, which shall save us currently about several hundred thousand dollars a year, simply because we do anticipate more and more people working from home versus a need to come into a corporate office. As I said, we had pulled the guidance earlier due to COVID, just not knowing how things were going to be impacted, but we did say in our last third quarter earnings that we certainly expect to exceed -- meet or exceed those prior guidance that we've given. So in summary, we are a national leader in hands-on training. We've been growing prior to this hot spike in unemployment. But now with spike in unemployment, we should grow even faster. Our skills that we offer are in good demand, and I anticipate will be in demand for a long period of time. We have opportunities to expand our footprint into new markets, which will add more growth. And we have this great operating leverage that we're taking advantage of. And given the fact that we have $66 million in tax loss carryforwards, we certainly will be able to shelter a lot of our cash over the next 24 months or so as we generate these higher profits, which is a good thing for us. And Lincoln is around and has been around for almost [ 75 ] years because we truly are focused on our students in ensuring that we're as regulatory compliant as possible as well as giving our students the highest return on investment. And with that, Greg, I'll turn it over to you to see if there are any questions.

Yes. Thanks a lot, Scott. So the first question, I think that's on people's minds is, just given the change in government here, can you talk about the middle skills market and how that's different from what a lot of people, I guess, focus on the 4-year degree market from a potential regulatory change where you're positioned differently?

Sure. Well, well, certainly, there is a change of administration, and we would anticipate that there'll be more regulation than less. However, we've successfully dealt with that regulation. There will probably be a lot like what was during the Obama administration. And to your point, all for-profit schools aren't the same. Those of us, certainly at Lincoln, we're very much focused on short-term career training. And when you look at our outcomes are 65% or plus graduation rate, 80%-plus placement rate and compare that to our nonprofit peers, namely the community colleges, their graduation rates are 20% to 30%. And even when you add in transfer rates, maybe another 10 or 20 percentage points to that. We're still meaningfully better than they are. As a comparison, to the extent that there are for-profit online bachelor's programs, their graduation rates tend to be lower than their nonprofit peers. So it's a very different dynamic. Also, a lot of things that we offer are very hands-on and expensive. And so a lot of community colleges have kind of steered away from these to offer, I'll say, lower-cost associate's degrees, whether it's in business or other areas where you just need a blackboard versus shops and labs. And given the constraints that are out there, especially with the state dollars given, decreased tax revenues, we provide really a great asset for many states because we use those state dollars in our education. In fact, we generate state dollars. So all in all, I think that Lincoln is well positioned and should be looked at favorably if everyone is truly objective.

Great. And then, I guess, you mentioned that the health care sector earlier was going well. Can you -- there's been 2 large deals in the space that I'm sure you're aware of, not too long ago. Can you just talk about maybe does that change the competitive landscape in health care at all and just kind of where you feel you're positioned right now?

No. I don't think it changes our competitive landscape at all. I mean, we have good market share in each of the markets we're in. I think that there's lot of opportunity for us to grow. The acquisitions that have taken place don't impact us directly, certainly not yet. And I think that our product offering, again, is pretty strong. We have a good culture of customer service. And so I think that just as we compete very well with the community colleges, if someone were to come into our marketplace, I feel very good about our position.

Great. And can you talk -- I mean, there's just so many changes going on in the auto side of things with the technology. How is that an opportunity and a threat, I guess? So what are the puts and takes? How should we look at that?

Yes, it's a really good question. Some things we always look at, and it's really too early to tell. I can tell you right now, certainly, Tesla hires our graduates just as easily as BMW and Mercedes or anyone else. So they're definitely a market for them. A lot of people talk about, well, isn't there less repairs and things of that nature that take place with electric cars? That may be the case. It hasn't really been proven out to me as of yet, but also electric cars still are less than 2% of the cars that are out there. The average age of cars has never been greater. So there's a large infrastructure today that will probably remain for a long period of time. So I'm not really too concerned, and new opportunities will arise. I firmly believe, if nothing else, cars are going to require even more training and technology in order to work on them. So I feel good about where we stand with regards to what we can do for the transportation industry going forward.