Q3 2020 Lincoln Educational Services Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Lincoln Educational services earnings Conference call. At this time all participants are in listen only mode. After the speaker presentations that will be a question and answer session to ask a question. During the session you would need to press star one on your telephone please be advised that today.
This conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your first speaker today, Michael Polyviou with NBC. Thank you. Please go ahead Sir.
Thank you Glenn and good morning, everyone before the market opened today Lincoln educational services issued its news release reporting financial results for the third quarter ended September 32020, as well as recent corporate development. The release is available on the Investor Relations portion of the company's corporate website at Www Dot Lincoln Tech Don.
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Joining us today on the call are Scott Shaw, President and CEO, and Brian Meyers Chief Financial Officer.
Today's call is being broadcast live on the company's website and replay of the call will be archived on the company's website.
Statements made by Lincolns management on today's call regarding the company's businesses that are not historical facts may be forward looking statements as it turns densified Federal Securities laws words May will expect believe anticipate project plan intend estimate and continued as well as similar expressions are intended to identify forward looking statements.
Forward looking statements should not be read as a guarantee of future performance or results.
The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to the number of uncertainties risks and other influences many of which are beyond the company's control that may influence the accuracy of the statements and projections upon which segment and the statements are based.
Factors that may affect the Companys results include but are not limited to the risks and uncertainties are discussed in the risk factors section of the annual report on form 10-K, and the quarterly report on form 10-Q filed with the Securities Exchange Commission.
Forward looking statements are based on information available today. Those statements are made and management's good faith belief as of the time with respect to future events. All forward looking statements are qualified in their entirety by this cautionary statement that Lincoln undertakes no obligation to publicly revise or update any forward looking statement, whether as a result of information.
Sure events or otherwise after the date thereof now.
Now, let's turn the call over to Scott Shaw, President and CEO of Lincoln Educational services Scott. Please go ahead.
Thank you Michael and good morning, everyone. Thank you for participating in our call to discuss the continued consistent operating and financial progress of our company during the third quarter of 2020.
We hope that you and your families had been impacted as little as possible by the ongoing COVID-19 pandemic, especially from a healthcare perspective.
In addition, I'd like to wish everyone, a happy veterans day in 1946, our founder Warren Davies had a clear vision to serve our returning World War, two servicemen and women by providing them hands on skills to support their families and build a better postwar world. This vision has remained with Lincoln for its almost 75 year history.
Three and is why veterans day is an exceptionally important one for our company today veterans make up about 10% of our student population and we are proud to provide them with the skills and training needed to thrive in our economy. We're equally proud of this veteran's day proud.
Proud in on this veterans day to recognize these vendor in students as well as our veteran faculty members and staff and thank you all for your service and contributions to our country.
Im going to focus my opening remarks. This morning on how Lincoln has been able to successfully manage a wide range of operational challenges emerging from the pandemic as well as the resulting economic recession.
Our navigation through these troubled times has led to increased enrollment as well as what is shaping up to be the best year from a financial performance perspective in Lincoln's recent history.
Our strategies and actions continued to be developed and executed with the safety of our students Faculty administration and management as our primary priority.
This focus has enabled Lincoln to increase the number of students pursuing training for central careers that remain in high demand and help bridge the nation's continuing skills gap during a time when other trading methods and processes have been either inhibited or limited.
We view ourselves as a critical positive force in each of our communities as we constantly strive to eliminate Americas skills gap and provide our students with high return careers that have a low probability of being outsourced to replace by robots.
The flexibility capability and diversity of our entire organization in programs continues to be a principal factor behind our success.
These qualities allowed us to further shift in the first quarter to largely a remote learning environment and then as campuses began to reopen in July shifted again to a hybrid model does curriculums delivered through classrooms labs clinical settings and via live distance learning.
Most importantly, we continue to offer robust in person hands on training something we are known for and perform and preferred form of learning for most of our students.
While our organization certainly cannot wait to return to the day when we no longer have to worry about social distancing. The current situation has forced us to grow and has opened up new opportunities that will benefit our students and our stool schools going forward we.
We know that students appreciate the flexibility of having some distance education.
By not having to come into school everyday students can work more lower their commuting and child care costs, and even better manage the challenges of learning while their daily lives with their daily lives and responsibilities for Lincoln, We're looking for ways to leverage distance learning to enhance student comprehension and engagement we have.
Improved our ability to recruit students remotely and to help them through the financial aid process, we are utilizing new software systems and processes to better help our graduates secured their new careers.
These adaptations have provided increased efficiencies to the students the faculty and our company and we believe have contributed to our recent student growth rate as well as the significant reduction of our students whose training has been put on hold by leave of absence.
Additionally, the lessons we are learning in the form of greater flexibility, even more engaging training and even possibly lower expenses are being applied to the creation of our new delivery model, which we continue to move through the development stage.
Our revenue growth over last year's third quarter of 8.5% was driven by substantial 12.3% increase in average student population and our population growth was primarily primarily driven by 15.3% increase in student starts.
While the substantial increase in unemployment since the beginning of the year is probably a contributor to our students start and population growth. We believe our strategic actions are bigger drivers for instance are focused on training and education for diverse number of a central critical infrastructure careers is helping us from our recent internal survey we know that.
At one of the top five reasons why students select Lincoln Tech is our high demand program offerings approximately 90% of our students are currently pursuing careers that meet the US department of Homeland security definition for critical infrastructure worker.
These are well paying stable careers that are enabling our graduates to establish himself soon after leaving Lincoln.
We also are proud of the continuing diversity of our student body, which preparing students from a broad range of racial ethnic social and economic background for these well paying stable careers. As a result, we are helping expand the country skilled workforce, while expanding the participation in our country's long term economic growth.
This diversity is helping set historically underrepresented groups on a path to economic success, which we view as a key component in narrowing the wealth gap that different groups in this country currently experience as well as rebuilding the country's middle class.
Our marketing and admission strategies have also demonstrated their role as key contributors to our start growth with the exception of the first quarter of this year. We had when we had to close all of our 22 campuses with the advent of COVID-19, our students starts have grown each quarter for the past three years the success of our marketing admissions.
Efforts extends beyond the start growth while our starts have increased our acquisition costs on a per start basis have declined in essence, we are getting even better at targeting potential students, reaching out to them in attracting them to Lincoln.
At the same time, we are continuously evaluating the data from our marketing investment and are constantly evolving our efforts for further efficiencies and effectiveness.
The success of our marketing strategy seems to be continuing five weeks into the fourth quarter anecdotally leads appeared to be building as compared to a similar point in the fourth quarter of last year more students are enrolling and more employers have reopened operations stimulating demand for our graduates are marketing also appears to be differentiating Lincoln.
In the broader marketplace as we see other education skills training program enrollment growth rates lagging behind ours, if not in some cases declining.
Our team has proven to be excellent at identifying issues created by the operating environment, we've been dealing with for most of this year and then finding solutions a case in point is student leave of absence is which puts the burden on our revenue is because when a student remains enrolled at Lincoln, but on a leave of absence, we are booking revenue during that leave of apps.
Since Moreover, the longer a student is on a leave the greater the chances that life might get in their way and they might have might have to permanently dropped from their program in short we have focused our efforts to shorten the low a period as much as possible.
Earlier this year with our campus close.
Closures are leave of absence is spiked as high as 1100 in May while this ratio to total enrollment remain quite favorable to our publicly traded peers. It was high for our company.
Our team set to work on the underlying issues and you may recall as of June Thirtyth leave of absence is declined to 696 students.
They further declined during the third quarter and stood at 104 students as of September Thirtyth. The majority of these students are awaiting extra shifts to complete their graduation requirements.
The success, we've had with leave of absence is as well as other challenges thrown at us by the pandemic gives us confidence in our ability to successfully address other issues as they develop for example, some health care programs have mandatory pre clinical rotations for graduation in certain parts of the country finding clinical sites for these students to perform their requirements.
Has been a hurdle that our team is focused on resolving.
The same is true with our bad debt expense, which has increased due to higher accounts receivable and lower than historical repayment rates accounts receivable are up largely due to the delay in title for drawdown payments, resulting from some of our students not having the ability to provide their financial aid documentation electronically in a timely manner prior to beginning of and.
Destruction.
Moreover, some students or more lax with their payments as many institutions have relax their collection efforts during the this pandemic.
Cobot is certainly throwing us curve balls, but our team is overcoming most challenges rather quickly.
Another factor contributing to our slow down and drawing down on title for funds is also coated related when we transition to the new remote learning environment. In March this led to an uptick in failure, an incomplete grades during the second and third quarters, which delays title for disbursements for the affected students. Many students we take the course and achieved the passing.
Great, but delays in doing so have occurred due to the availability of the course art team is squarely focused on these issues and we expect to drawdown past due title for funds in the fourth quarter, which will lower our accounts receivable balances and reserve.
Overall, our organization is performing exceptionally well we've continued to strengthen our partnerships as employers increasingly turn to us to help them solve their still skills gap challenges as companies reopened during the third quarter, our conversations around how we can help solve their training needs picked up Im pleased to report that we have been selected by republics.
Services to provide training to their employees at their state of the art New training facility that they are building in Dallas, Texas Republic services is the nation's second largest nonhazardous waste management company in the country. They are headquartered in Scottsdale, Arizona with over 35000 employees and thousands of trucks, we've created for them.
12 week, 100% employee paid medium to heavy truck training program to assist Lincoln Tech graduates transition into their organization and to Upskill. Their existing employees. This is another example, how we seek to eliminate the middle skills gap, while providing our graduates and others with exciting career opportunities in.
The transportation industry.
In addition, we continue to explore other partnership opportunities. For example, we are in discussions with various companies provide different forms of middle skills training as well as shorter forms of training that could expand the target markets, we serve and provide for longer term growth opportunity.
We have also begun implementing our plans for program replications in markets, where we see unmet demand or where corporate partners are requesting our presence. These rental patients are being established at several existing campuses around the country and will commence during the summer of next year. We will of course keep you updated on this progress.
We've also continued to take measures to lower our operating costs, especially our corporate bonds. We are taking advantage of employees working remotely and have entered into a short term lease were a much smaller corporate office, which will save over 200000 a year.
We also continue to evaluate our existing footprint with several projects underway that will result in lower fixed costs in the future.
In summary, Lincoln is performing well our student starts are rising student populations are increasing student outcomes remain high feedback from our students about their experiences at Lincoln remains extremely strong despite the disruptions that uncertainty caused by the pandemic we.
We returned to profitability, while significantly lowering our debt increasing our cash position. We've had some nasty curveballs thrown at us this year, but overall have manage them well back.
Back in March we provided guidance for 2020 that included student start growth of between 3% to 5% over 2019 through nine months. Our students start growth has been 9.8% and starts increased during October.
We also provided guidance of 3% to 5% overall revenue growth and through nine months, we've achieved 6% revenue growth. We also provide the expectations for EBITDA up operating income and capital expenditures that Brian will address in his comments. However, overall, we believe that this point all this original guidance will be exceeded.
Gripe quite proud of the fact quite proud of the effort made by this entire organization has put us in a very positive position. However, while I remain extremely positive about Lincoln's long term trajectory and opportunities I know that in any day, a dramatic ramp up in Cobiz cases May force us state or local authority to close.
Many of our campuses and the slower progress however, where we are today weve come through a lot of uncertainty and now in a position to provide some look into the short term future.
We continue to believe that with the continued high unemployment rate and the increasing realization that many of the unemployed, especially.
Hard hit industries, such as hospitality and lodging.
Won't have jobs to come back to once the nation's economy is fully reopened and thus enrollments will increase in macro environments. Like this demand for our programs have increased even further as the unemployed seek new paths to better careers.
Throughout the nearly 75 years of Lincolns operations, we've seen increases in Leeds enrollment in student population during rises in unemployment and economic downturns. For example, during the last recession between 2007 in 2010, we saw consistent increases in leads enrollments in student population that Pete two years after the recession.
And started however, given the dramatic and unprecedented rise in unemployment during the past eight months, we continued to imagine a strong ramp up in our student population remember the same 22 campuses that we have today had approximately 18000 students and generated over 80 million of EBITDA in 2010 at the peak of the last recession.
We are ready to serve the needs of any displaced worker looking to secure solid skills, which can provide a rewarding a central career with a lifetime of opportunity.
Now I would like to turn the call over to Brian for a review of our third quarter results Brian.
Thanks, Scott Good morning, everyone and thank you for joining us similar to what Scott said earlier I also want to thank our veterans and those still serving today for the service to our country.
Im very pleased to share with you the financial overview of our strong third quarter performance in doing so I'd like to thank the entire Lincoln team for their hard work and dedication, which continued which continues to be the major factor behind our success.
Starting with the topline revenue was $78.8 million up 8.5% or 6.2 million driven by our significant student start growth as Scott highlighted in our success at delivering education to our students when they were online and returning them to in person instruction.
We had approximately 5500, new student starts during the third quarter, representing a 15.3% increase over prior year. The start growth consisted of 17.2% and our transportation and skilled trade segment and 10.6% in the healthcare segment let.
Let me take a moment to highlight that this quarter's marks our second consecutive quarter of double digit start growth in 2020, despite the challenges from Covance.
Also it is worth noting that while our soft growth has recently accelerated quarterly spots have now been consistently growing for almost three years with only one exception, which occurred in the first quarter of 2021 depend demick interrupted students starts in March.
As a result, our average population increased 8.1% or about 900 students compared to the prior year.
Net of students I'll leave of absence due to coded.
Moreover, our quarterly ending population reached nearly 13200 students representing an increase of about 1200 students over prior year on a same school basis. This is the highest population we had in our schools since 2012.
Please note. This any population number excludes 104 students on leave of absence to decode it.
Turning back to revenue the impact of the pandemic during the quarter was limited consisting of 400000 of revenue deferred to the fourth quarter from the from the extension of graduation dates for certain nursing programs and approximately 500000 decline in non tuition revenue.
Now I would like to review expenses for the quarter Education service and facility expenses increased by approximately $1 million to 34.3 million driven primarily by additional instructional expenses and books until the expense related to our larger population.
Selling general and administrative expenses increased $3.2 million to $40.7 million largely as a result of higher bad debt expense and increased marketing investments, which were partially offset by savings in sales and student services.
Our bad debt expense went up by 2.8 million as we increase our reserve amount in connection with our higher accounts receivable balance.
The rise in accounts receivable was driven by a delay in title for disbursements to the company as Scott mentioned men.
As I mentioned earlier.
Let me reiterate our team is squarely focused on improving our title for disbursements, we have taken several steps to address this challenge.
Our marketing investment increased during the quarter over prior year.
In part due to production costs of approximately 600000, which was a shift from the second quarter to the third quarter. As a result of COVID-19. However, despite the increase investment our course for the start of the third quarter and for the full year have decrease when compared to prior year, demonstrating our strong returns on our investments.
Our sales expense decreased since travel related expenses were reduced due to COVID-19 restrictions. In addition student service expense went down as bussing, a transportation services has been significantly reduced to the cobot, we anticipate the travel savings tweaking to continue for the next several quarters.
And finally, our corporate expenses increased 900000 over prior year. This was attributed to several factors, including stipend provided to all employees in connection with COVID-19 related expenses non.
Noncash stock expense from the acceleration of investing related to two participants under special circumstances, and an increase in accrual for incentive compensation, resulting from our strong financial performance.
Now turning to the bottom line results first operating income improved nearly 80% to $3.8 million from prior year. Despite one time corporate expenses and the timing of marketing in bad debt expenses as discussed earlier in.
In terms of segment, our transportation and skilled trade segment had operating income of $9.1 million and approved a 35% from a year ago and its operating margin improved to 16% compared to 13% in 2019. In addition, our healthcare segment also demonstrated operating income of $1.7 million.
Representing a slight improvement from prior year.
We believe there is opportunity for greater margin expansion going forward from continuing to grow our top line as well as our cost efficiencies.
Second EBITDA improved by 36% to $5.6 million compared to $4.1 million in the prior year since our quarterly EBITDA has improved meaningfully over prior year results in each of the first three quarters, our nine month EBITDA stands at $9.2 million compared to one point.
The $2 million last year.
And finally net income more than doubled to $3.5 million compared to prior year. In addition to the improved operating performance net income benefited from approximately 500000 of interest savings as a result of our favorable terms under our current credit agreement you may recall that we entered into this new credit agreement in Nova.
Number 2019, and we anticipate and we anticipate interest savings of approximately 1 million. However, we are now projecting interest savings of $1.5 million for 22008 compared to 2019.
In terms of the balance sheet highlights I'll begin with cash as of September Thirtyth, we had approximately $37.1 billion liquidity as opposed to a 11.8 million in the prior year, representing an increase of $25.3 million, even after paying $1.1 billion in preferred stock.
Preferred stock cash dividend during the quarter.
We had $21 million availability under our current credit facility at $16.1 million in cash and cash equivalents, excluding that cares Act funds.
Subsequently, our cash balance continues to increase and we anticipate ending the year in a net cash position, leading our unrestricted cash balance.
Balance is expect to exceed our debt.
Our cash provided by operating activities was 6.8 million net of the cares Act funds impact. This is an improvement of nearly $1 million from a year ago.
As a result of the cares Act funds, we have received a total of 27.4 million split into two parts.
For the first part we received $13.7 million, which was earmarked for direct distribution to students in order to offset their additional expenses related to the disruption of school operation to date, we have distributed 12.6 million to more than 15000 students. We expect to distribute the remaining funds over the next few months.
The remaining $1.1 million balance of sooner funds is presented as restricted cash on our balance sheet.
For the second part we received $13.7 million, which may be used to offset Lincoln's increase costs associated with significant changes to delivery of instructions as a result of the pandemic or to be used for.