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

The final item is a proposal to ratify the appointment of Deloitte & Touche LLP as Lincoln's independent registered public accounting firm for our fiscal year ending December 31, 2023. The Audit Committee of the Board of Directors has approved the selection of Deloitte & Touche as independent auditors of Lincoln Educational Services Corporation for the fiscal year ending December 31, 2023. The selection of Deloitte & Touche is now formally submitted for shareholder ratification. If you have not already done so, please vote on this proposal, or if you have already voted but wish to change your vote, please do so. [Voting]

I will now turn the meeting over to our CEO, Scott Shaw.

Thank you, Alex. Now that all 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 -- of the voting.

Thank you, Scott. We'll now proceed with the reporting of the preliminary results based on the report the inspector of election delivered this morning, which shows that: Proposal 1, the Board's slate of 9 director nominees has been approved, with each director having received no fewer than 18.8 million votes in favor, 68% of the votes cast. Proposal 2, the nonbinding advisory say on pay vote to approve the compensation of our named executive officers has been approved with 17.9 million votes in favor or 86% of the votes cast. Proposal 3, the proposal on how often the nonbinding advisory vote on executive compensation should be held in the future has been received, 75% of the votes in favor of 1 year. Proposal 4, the proposal to amend Lincoln Educational Services Corporation 2020 Long-Term Incentive Plan to increase the number of shares under the plan has been approved with 20.7 million votes in favor or 75% of the votes cast. And lastly, proposal 5, the ratification of the selection of Deloitte & Touche LLP has been approved with 27.5 million votes in favor or 99% of the votes cast. That concludes the report of preliminary voting results. The final results will be reported in our 8-K to be filed in the next few days. I would like now to reintroduce Scott Shaw, who will give Lincoln's management presentation with respect to the company's operation and certain recent developments.

Thank you, Brian. Before I begin my remarks, I'd like to remind everyone to read the disclosure at the bottom of today's agenda that addresses any forward-looking statements that I may make during this presentation. Operator, please go to the first slide. Our country has a huge skills gap as a result of 4 decades of societal pressure to push students to go to college at the expense of vocational technical training. Today, students do not know if they want to pursue a technical career or even if they have an aptitude for such work simply because they have never been exposed to them. This shortage in supply is coming during a time that baby boomers are retiring in growing numbers, that the pandemic has encouraged others to retire early or change careers, and due to technical advances, the majority of jobs require some form of training. To add to the imbalance, the huge infrastructure bill will exacerbate the shortage. Lincoln is working every day to help employers find and develop their entry-level workforce needs. Due to the pandemic and frankly, due to the general realization that our country needs technicians to maintain our day-to-day lives, a new category of workers has arisen, essential workers. I'm proud to say that 90% of our students are deemed essential workers. Next slide, please. The labor market that Lincoln supports is the largest segment of our workforce, the middle skills. These are careers that require more than a high school education but less than a 4-year degree. As student debt loads dramatically rise, more and more individuals are seeking shorter, cheaper and faster means to enter the workforce, and this is why Lincoln Tech was growing prepandemic even as the unemployment rate reached a 50-year low. We continued to grow during the pandemic, while community colleges shrank enrollment for the simple reason that we kept our schools open and figured out how to continue to serve our students while keeping everyone safe. We are now in a post-pandemic period when unemployment is back to 50-year lows, and there are 2 jobs available for everyone who is unemployed. The shortfall in talent for automotive, skilled trades and health care workers has not abated. And from our conversations with hundreds of employers across the country, the gap is expected to get worse. Next slide, please. So how have we performed given our opportunities? Here, you can see our performance from 2019 prepandemic through 2022 post pandemic. Over this period, our revenues have increased 27%. Our adjusted EBITDA is up 93%, adjusted starts are up 15.8% and average population is up 17.4%. Adjusted EBITDA and starts exclude our Transitional segment. Next slide, please. On this slide, you can see how we performed year-over-year. Revenue increased almost 4%, but starts and average population declined 2.8% and 0.2%, respectively. The decrease in starts, coupled with rising costs, resulted in our adjusted EBITDA decreasing from $37.4 million in 2021 to $28.2 million in 2022. As with most companies, we have been negatively impacted by the effects of high inflation and labor shortages driving up salaries and operating costs. We also have incurred some short-term additional costs as we standardize our campus operations and transition to hybrid learning across our campuses. Both of these efforts will make us more profitable in the future but are negatively impacting us in 2022 and 2023. I will speak more about that shortly. Also on a financial note, we ended the year with a very strong balance sheet with $65 million of cash and short-term investments and no debt. Operationally, our graduation rates improved as did our placement rates. We entered 2023 with strong momentum, which is continuing, and employers continue to seek to partner with us to solve our workforce needs. Next slide, please. I want to ensure you that your company is well positioned for growth, and we are ready to move forward. I've already touched on the tremendous need for essential workers. As you know, we are a leader in the industry with over 75 years of experience and knowledge. We have demonstrated that we are able to grow in any economic cycle, whether it is a pandemic or low unemployment environments. Moreover, when unemployment increases, so do our enrollments. We have a profitable model with strong operating leverage, and we have a strong balance sheet with more than $65 million of cash at year-end with no debt. Finally, we are in the midst of a transformation of our operations to drive greater profitability, scalability and efficiency for our students. Next slide, please. Lincoln Tech's big opportunity is that our country is in desperate need of trained people from each of our programs, and that need appears to be growing. Our country's leaders, with a desire to become more competitive in the world, focused in on creating a more educated workforce by simply pushing for more people to go to college regardless of where they go and what they study. In order to achieve this goal, they systematically eliminated votech programs at our high schools and created a culture and reward system that almost ensures that the only opportunity presented to a high school senior is a college degree. As a result, we have young adults with debts that they are unable to repay, no skills to enable them to land a job and not enough trained people that can work with their hands. Our opportunity is to eliminate this last problem by producing as many skilled, hands-on workers that our country needs. Next slide, please. To give you a sense of the scale of our opportunity, just for those programs that we offer today, our market share of new graduates is less than 2.5% for transportation and skilled trades and less than 0.5% for health care and other professions. Next slide, please. While we have a small overall market share, we are the largest provider of automotive and skilled trades graduates in the eastern half of the United States. Our industry is highly fragmented, which provides us with a tremendous opportunity for growth. Next slide, please. We are focused on 3 key growth drivers over the next 24 months. The first is creating a more efficient business model by standardizing our campus operations, centralizing certain administrative functions and converting to hybrid programs that give students greater flexibility and opportunities to work. The second driver is replicating existing successful programs into existing schools to drive greater campus profitability. Campuses will be offering multiple disciplines to gain greater penetration in each market, which results in our eliminating our segment reporting in 2023. Third, we will open new campuses, with our Southern Atlantic campus opening by Q1 2024. Our goal is to open at least 1 new campus each year for the next 5 years. A fourth driver of growth is acquisitions. Acquisitions need to be strategic in that they would either accelerate our entrance into a market or expand our offerings into a related industry. Next slide, please. For those of you who are more visual learners, here's a map of the United States showing where our campuses are today. As you can see, we have lots of opportunity in the south and the west where the populations are growing the fastest, but we also see opportunity in markets near some of our existing campuses. Next slide, please. We believe that we can double our adjusted EBITDA from last year by the end of 2025 by executing on our growth drivers that I just outlined earlier. Next slide, please. With so much recent attention given to the potential dramatic increase in funding to make community colleges better or even free, I want to remind you of why students select us today even though community colleges are a cheaper alternative. First, you often get what you pay for, and our graduation and placement rates are clearly 2 to 3x better than the average community college. Second, our programs are developed with the input from local employers, and we seek their advice and guidance every 6 months to ensure that our programs are as current and relevant as possible. Third, we strive to offer industry licensure and certifications so that employers know the true capabilities of our students. Fourth, and maybe most importantly from the employer's perspective, we teach hard skills and soft skills. Employers value the fact that we take attendance and post attendance on our students' transcripts. I'm unaware of any community college that does this. Demonstrating one's commitment to their education through strong attendance gives our students a clear advantage in the hiring process. Fifth, we build our shops, labs and classrooms with industry equipment so that the students have a rich learning environment to develop the skills needed to be productive on the first day at their job. Sixth and seventh, we incorporate cutting-edge education technology to make learning active and engaging. With our accelerated programs starting monthly, students can enter quickly and graduate quickly. Finally, our culture and people are fully dedicated to serving our students. That was clearly demonstrated in how we responded and performed during the pandemic, and it continues to this day. Suffice to say that the majority of our students do not have a strong support structure, both financially or emotionally, and we view it as our obligation to assist them in graduating and finding a career. Next slide, please. Given our 75-year history of strong outcomes, coupled with a high level of client service, we are constantly growing our list of industry partners who support our efforts with donations and provide our students with excellent employment opportunities. Strengthening and increasing these partnerships is a key goal for our company going forward. In 2022, Tesla became one of our partners at our Denver campus, and we just expanded that partnership to our Columbia, Maryland school. Our graduates are hired by Tesla, trained at 1 of our 2 locations and then upon successfully completing the program, are placed in a Tesla dealership, all at no cost to the student. Next slide, please. I'm equally proud of Lincoln Tech's strong regulatory record. We understand the importance of maintaining excellence in compliance at all times. We are safely below the 90% threshold at 82% for the 90/10 rule, and that factors in all VA funds as per the new regulations. Our cohort default rate is better than the industry average and safely below any threshold, and our strong financials enable us to have a very impressive 2.9 composite score out of a possible 3.0. As I mentioned earlier, our graduation rate at 65% is more than twice the level of the typical community college, and our placement rate for last year was 81%. Our goal is to achieve a 70% graduation rate and 85% placement rate in the next few years. Next slide, please. I'm fortunate to have a strong and experienced management team with an average tenure with the company of almost 18 years. Next slide, please. Along with a talented and committed Board of Directors. And 5 of the members have recently joined the Board over the past 3 years, bringing fresh ideas and perspectives. Next slide, please. In conclusion, Lincoln Tech is ready to benefit from the opportunities in front of us. Strong demand for trained technicians appears to be growing. We have programs that are clearly in demand. We are making changes to our operations that will make us more profitable and scalable. We will utilize our strong balance sheet to foster our growth and continue to maximize shareholder value. Finally, we will continuously improve our student experience and outcomes to ensure that we maintain a strong ROI for our students. All of us at Lincoln Tech are excited to find more ways to help our country solve the skills gap to allow our economy to reach its potential, just as we strive to unlock the potential in each and every Lincoln Tech student. And with that, I conclude my remarks and declare that the 2023 Annual Meeting of Shareholders is concluded, and hereby adjourned. Thank you all, and have a good morning.