Lincoln Educational Services Corporation Q1 2023 Earnings Call
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Good day and thank you for standing by welcome to the Q1 2023 Lincoln Educational services earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your <unk>.
Phone you will then hear an automated message advising that your hand is raised to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker to speaker today, Mr. Michael <unk>.
Go ahead.
Thank you Latonia and good morning, everyone before the market opened today Lincoln educational services issued its usually release reporting financial results for the first quarter ended March 31 2023.
The release is available on the Investor Relations portion of the corporate company's corporate website at Www Dot Lincoln Tech Dot E D.
Joining us today on the call are Scott Shaw, our 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 Lincoln's Spanish went on today's call regarding the company's business that are not historical facts may be forward looking statements as a term is identified in federal securities laws.
Words may will expect believe anticipate project plan intend estimate and continue as well as similar expressions are intended to identify forward looking statements.
Looking statements should not be read as 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 a number of uncertainties risks and other influences many of which are beyond the company's.
So that may influence the accuracy of the statements and the projections upon which the segment and statements are based.
Factors that may affect the company's results include but are not limited to the risks and uncertainties discussed in the risk factors section of the annual report on Form 10-K, and quarterly report on Form 10-Q filed with Securities and Exchange Commission.
Forward looking statements are based on the information available at the time 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.
It takes no obligation to publicly revise or update any forward looking statements, whether as a result of new information future events or otherwise after the date thereof.
Now I'll hand, the call over to Scott Shaw, President and CEO of Lincoln Educational services.
Please go ahead.
Thank you Michael and welcome everyone. We had a great start to 2023 with revenue growing nearly 7% starts from ongoing campuses growing six 4% and adjusted EBITDA from those campuses growing more than 15%.
We continued to make good progress on our key growth initiatives, including implementing our hybrid teaching model centralizing, our financial aid application process launching 10, new programs at our existing campuses and developing our newest campus in the Atlanta area.
The progress we made with starts in the first quarter follows the four 7% student start growth we generated in the fourth quarter. Moreover, our momentum continues in the second quarter and has increased our confidence and with its greater visibility we are increasing our revenue and earnings outlook for the full year, while still forecasting solid year.
Over year student start growth, Brian will review our guidance specifics during his remarks.
A few weeks ago I read an article in time magazine titled How America America, starting to fall out of Love with College degrees I encourage you all to read this article it's quite fascinating and I believe supports a view that college isn't for everyone.
We have discussed some of the dynamics mentioned in the article on prior calls however in 2019 American Bank preparing for college, 10th on the survey conducted by populous a nonpartisan think tank, which asks respondents every year to rank answers to the question.
Excuse me what is the purpose of education.
In 2022 respondents ranked at 47 out of 57 items.
We've seen both in terms of the financial meltdown in 2008, and the COVID-19 pandemic students are continuing to question the value of a college degree and even more so we are experiencing conversations at the high school level that were not happening 510, and 15 years ago.
This is good news for organizations such as Lincoln Tech.
No alternative to college and provide a faster more affordable way to start a career.
Leveraging this shift in growing our company and building returns to our stock shareholders is our new hybrid teaching model, which we began to implement at our campuses in 2022.
This model delivers our programs with hands on learning on campus combined with a greater component of class work delivered through online instruction it.
It enables our students to work part time or manage other commitments, while they pursue their Lincoln education, which will enable a higher percentage of students to graduate the model provides greater flexibility efficiency and overall capacity at our existing campuses and was a major factor behind our growing first quarter revenue from campus.
<unk> by more than $5 million.
Transitioning to our hybrid <unk> model is going well and as we forecasted it resulted in increased and structural costs in the near term, we will be transitioning campuses and programs to this new model for the next 24 months and as more and more programs complete their transition from being a 100% on ground into the hybrid model, we will increase.
And the gain leverage on the model starting with significant savings coming in the latter half of 2024.
Our second major growth initiative is centralizing our financial aid process once fully operational we believe centralizing. This critical function will accelerate financial aid applications and assist in our effort to build students starts actually with the hybrid model, we're making investments during 2023, but we will see improvements faster than with the <unk>.
Hybrid transition, we expect to see stronger start rates later this year, followed by cost savings in 2024.
The expansion of our corporate partnerships as a major factor behind the continued demand for Lincoln graduates. When we last talked with you in March we told you about the launch of the Johnson controls Academy at our Columbia, Maryland campus.
Creation of the Academy evolved from a successful five year partnership between our two companies and aims to onboard approximately a 130 or more new technicians each year for Johnson controls.
Meanwhile, the new Tesla partnership, which enrolled its first class at our Denver campus back in December is expanding to our Columbia, Maryland campus with classes. Starting later this year. We also established an advanced training program for Peterbilt for our diesel graduate and 100 Hunter Engineering and Hunter Engineering establish a training center at our Denver.
Campus with their most sophisticated alignment equipment, which are students will use as well as hunter engineering customers and professionals.
As I've said any number of times before our partnerships give our students greater career opportunities and help us enrich the education and training a Lincoln Tech student receives.
We're currently in discussions with some of our other corporate partners to expand their relationships our company Blaze. The trail in terms of creating innovative customized training programs for many corporations needing to add skilled talent to their workforce to meet growth objectives and our students are directly benefiting from the expanded lucrative career opportunities.
Created through these partnerships.
In recent months and additional potential driver of demand for our style of training and for our graduates is emerging at some of our campuses.
Local governments traditional nonprofit colleges and industry associations have begun approaching Lincoln to explore ways. We can provide training solutions to help meet the continued demand for a skilled workforce the realization that our country and our employers need more skilled hands on talent is growing and as it grows.
Lincoln's position as a leader with quality programs and graduates.
Continues to attract interest we will explore these opportunities and move forward with those that provide the greatest benefits.
As we mentioned back in March our objective is to add 10 programs at existing campuses by the first quarter of 2025. This organic growth generates the fastest and highest return on investment as we leverage our existing infrastructure campus management and market knowledge.
At which time each is expected to provide an average of $1 million and added profitability annually.
We've made solid progress on this initiative during the quarter due to the launch of a new medical assistant program at our East Windsor campus and electrical program at our Allentown, Pennsylvania campus. We are targeting one additional launch by the year end with the remainder opening in 2024.
In addition to the electrical and medical assisting programs I just mentioned, we are focused on adding HVAC.
Welding in automotive.
Combined these five programs are some of our most successful and in demand curriculums.
Our fourth growth initiative is to develop one new campus per year for the next five years. The first such results from the initiatives is our second campus location in Atlanta, the build out of this campus continues as we work through local regulatory approvals and are aiming for our first classes at this facility to begin by the first quarter of next year.
Continue to expect that within four years of its opening the 56000 square foot facility will be generating approximately $20 million in annual revenue and $5 million in annual EBITDA.
Even with the investments in our growth initiatives, our debt free balance sheet remains strong we continue to support our stock buyback initiatives and will increase our cash balances by the end of the second quarter with the expected sale of our Nashville property.
With this success, we have generated from our hybrid teaching model centralized financial aid and program expansion. We are building a more scalable and higher return business continued strong demand for our programs combined with the efficiency and growth from the investment in our operations, which includes the early contribution from our new Atlanta, Georgia campus.
Enable us to forecast that our adjusted EBITDA, while approximately doubled from 2022 levels by 2025.
I should note that our initiatives are predicated on the current environment of moderate economic growth high employment rates and no recession.
That said, we are benefiting from a positive trend of individuals' considering hands on careers.
Our leads are increasing as our enrollments and once all the changes with our centralized financial aid processes are completed.
We should be better able to capitalize on this increased demand with even more new starts despite the challenging environment. Good.
Good economic growth deteriorate and historic trends from such a condition repeat we are poised to benefit even more and with our new hybrid model can efficiently scale up to meet higher levels of demand.
Looking ahead to the remainder of 2023, the headwinds of the low employment economy are tempering somewhat although the demand for highly skilled students remains strong as I mentioned earlier, we are well positioned to achieve all guidance metrics for the full year, which would position us to generate long term growth for all of our stakeholders in the years ahead.
Now I will turn the call over to Brian for a review of our first quarter financial results and 2023 outlook Brian .
Thanks, Scott Good morning, I'll review, a few operational developments before turning to our first quarter financial results and outlook for 2023.
First during the first quarter the company repurchased 104000 shares at an average price of $5 34.
The share repurchase plan that was extended and expanded by our board of directors earlier this year.
Since may 2022, we've repurchased 10 million shares of stock buying back one 7 million shares.
Lincoln is $30 million remaining under its current share repurchase authorization available through May 2024.
Second we continue to make progress towards the opening of our new Atlanta campus, which will welcome students in early 2024 during the first quarter, we incurred approximately 250000 of startup cost at $1 5 million of capital expenditures.
Turning to our financial results.
First effective this quarter, we updated our segment reporting structure, we now have a simplified structure with one segment containing all our active campuses, our transitional segment and cooperate.
The campus operations segment includes all our all of our campus to accept the single campus reported under the transitional segment.
The transitional segment includes any campus approved for closure. It includes our Summerville, Massachusetts campus, which will close this year I'll note that we have no plans to close any additional campuses.
Corporate which includes unallocated expenses incurred on behalf of the entire company.
Due to changes in student demand more and more of our campuses already or in the near future will offer a combination of automotive skilled trade and theyre seeing programs as a result, our historical segment reporting and which each campus was placed at either the transportation and skilled trades or healthcare and other professional segment no longer.
It reflects the way in which we operate the business.
New simplified reporting represents our current operations.
I will note that our press release does provide information regarding students starts and population at our active campuses based on programs.
With the categories being transportation and skilled trades and healthcare and other professions.
This breakdown is now based on the actual programs rather than the old campus segment basis that better reflects the trends at our student population.
Now I'll review, our first quarter, excluding the transitional segment with our Summerville campus closure.
Revenue during the first quarter increased six 9% or $5 6 million to $86 4 million. The drivers of this increase was one 9% increase in average revenue per student.
Two a six 4% increase in student starts which improved our population as the quarter progressed and three higher revenue from our corporate partnerships.
We are very pleased with our solid organic growth in Q1, and the student demand seen so far during the second quarter.
The robust average revenue per student growth over prior year was driven by both tuition increases at our new hybrid teaching bottle, which increases program efficiencies and accelerate the daily rate, particularly our evening programs.
Consolidated operating expenses were at 87 3 billion up seven 7% over the prior year, including several onetime costs such as our new Atlantic.
Our new Atlanta campus startup costs severance and other nonrecurring expenses, excluding one time expenses total operating costs would have been approximately $86 million in line with our expectations.
As a side note on January one 2023, Lincoln adopted a new accounting pronouncement, commonly referred to as seasonal under the <unk> standard companies are required to develop develop an expected credit loss methodology based on historical data the buyer with both current conditions and anticipated future.
Developments accordingly, the cumulative impact from the seasonal adoption was recorded as a reduction to retained earnings of $7 9 million net of tax impact.
Outside of this entry on our balance sheet. The change in methodology did not have a material impact to our first quarter income statement.
Our adjusted EBITDA for Q1 was two two.
$2 1 million at the add back of Dodd cash and non recurring items.
Please refer to the adjusted EBITDA detailed in our non-GAAP disclosures.
non-GAAP scheduled reflected our Q1 earnings release.
Due to the previously mentioned robust growth in revenue per student and effective expense controls. This profitability was slightly ahead of our internal plan for the quarter.
We are very pleased with the financial performance of our campuses and adjusted EBITDA increased by $1 5 million compared to the prior year, representing a 15% improvement while revenue grew nearly 7%.
Shifting to our strong balance sheet at quarter end, we had total cash of nearly $60 million and continued to have no debt outstanding.
While our cash flow profile operations was essentially flat we consider this to be a strong performance.
As we historically see negative cash from ops during the first quarter due to our seasonality. The first quarter includes the benefit of the receipt of title four funds that were delayed at year end, which we discussed on the last call.
We continue to explore securing a new credit facility to expand our financial resources as we identify and pursue additional growth initiatives Lincoln strong financial position has attracted to lenders and we look forward to providing an update as soon as we as negotiations are completed in the near future.
Finally, given our strong start to the year in Q1, and the current outlook for the remainder of the year.
We're making an upward revision to our previously financial guidance.
For the first for the full year of 2023, our current outlook for revenue adjusted EBITDA. Adjusted net income is as follows.
Revenue in the range of $355 million to $365 million adjusted.
Adjusted EBITDA in the range of 21 million to $25 million adjusted net income in the range of $9 million and $12 million.
The outlook for students starts of 5% to 10% and capital expenditures in the range of $35 million to $40 million remain unchanged.
Change.
With that I'll conclude my remarks by thanking our entire team, including faculty and students for their outstanding efforts, we look forward to communicating our progress following the second quarter now I will turn the call back over to the operator, So we can take your questions operator.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question.
And our first question will come from Alex Paris with Barrington Research. Your line is open.
Hi, guys. Thanks for taking my questions and congratulations on the beat and raise.
Thanks, Alex and good morning.
Couple of questions.
First off.
Yeah.
Uh huh.
It looks like starts were strong.
In both programs, meaning transportation and skilled trades healthcare and other professions up six 2% and up six 7% respectively.
Respectively.
Is there anything you want to call out about that strong result, it was obviously better than I had forecast.
I think you said in the prepared comments that headwinds are capery.
With regard to this full employment economy have you gotten any lift from rising unemployment I don't know if that rising unemployment is really hit your target market yet at this point.
Yes, I would say that we've got nothing from rising unemployment with certainly the ones that I've heard that I've been unemployed or high tech individuals and as far as I know none of them have come to us to get a good solid career, but maybe they should.
But I think that what we're seeing is maybe some of the comments I referred to just to this greater awareness I think that people are looking for alternatives and there is certainly a lot of discussion out there in the public domain about the shortages for electricians and other such people that I think that that is making people more receptive.
There that.
Should look at these careers and as a leader that someone that's been doing it for so many years, we're a natural place for people to turn to so we're seeing that we are spending more in our marketing initiatives, but theyre proving fruitful.
The unemployment rate is still very very low yet we're seeing much greater success, frankly than I would have anticipated and as we alluded to.
Second quarter, it all seems to be continuing quite nicely.
Great and then and then I appreciate the shift towards the more streamlined reporting.
Given the changes as a result of.
<unk> our programs to the campuses and so I did appreciate the starts average population in end of period population.
By program within campus operations is that is that something that you'll be giving on a go forward basis as well or is that just a transitional thing that you are giving us.
Yes go ahead.
We plan on doing that each quarter going forward as well.
Okay. Good thanks.
It's a pure read too Alex because we are kind of grouping like programs, whereas as we are starting to make this transition and start blending more and more of the programs, even though we said automotive and skilled trades. There was some health care in that and vice versa. There were some skilled trades in our hops before so now youll have a much clearer picture at least from a.
Population standpoint.
Where the demand is.
Great and then moving on.
The 10, new programs that you are going to launch over the next 2021 months.
That included two programs launched in Q1 medical assisting in electrical.
And then the balance you'll only have one more before year end and then the remainder in 2024. So really changing is there has there been any change to that rollout schedule at all.
Well it is a little bit delayed where to be honest, hoping to have more this year, but what we're finding is the regulatory bodies. The state agency, everyone seems to be understaffed and things that should take three months take 456 months to get approvals. So it has delayed some of our.
Rollouts, but just delayed by a quarter engine to be more in the first quarter of 2024, otherwise you know things are certainly on track to get the 10, new programs up and running.
Okay and then the same question on the Atlanta campus you expect your first class in the first quarter of 2024.
Just remind me is that the same as the most recent guidance or has that been delayed.
It's been delayed a little bit again, we were anticipating at the fourth quarter of this year. There is still an opportunity potentially to have it opened in the fourth quarter of this year, but it's just taken us much longer to get a sewer permit than one ever thought possible.
And Thats whats delayed data opening otherwise construction is moving well we've purchased equipment in advance. So we don't have those delays.
It's at these local levels in different communities and advisory boards that seem to be slowing things down so it.
It could be.
We safely say it will be the first quarter of next year right. We did communicate that as well at year end that was going to be in the first quarter of.
2024.
Okay, Great that's what I thought.
Last question as to timing you still expect the Nashville sale to close here in Q2.
Yes, we do.
Okay, great. Thank you very much for answering my questions I'll get back in the queue.
Great. Thanks Allison.
A moment for our next question.
Okay.
And our next question will come from Steven Frankel of Rosenblatt Securities. Your line is open.
Hi, Good morning. Thank you Scott could you give us some color on your incoming high school class, especially given the comments, you're making about still feeling like everybody doesn't have to go to college.
Sure well, we definitely are seeing more receptivity, obviously high schools are open again, so we're out into more high schools. This year than we were last year and we're seeing certainly anticipating strong high school starts in the second quarter and we continue to see strong interest in the third.
So we anticipate that our high school program will certainly be greater this year than it was last year, which is positive.
And just remind me in a normal year with pullout COVID-19, but in a normal year or kind of what percentage of students come directly from high school and given the dynamics Youre seeing today, what do you expect it to be this year.
It's still around 20% of our population is from the high school marketplace. So I'm not anticipating frankly dramatic increases there.
Oddly enough, we're seeing stronger increases in our adult market, even though unemployment is so low.
But we're seeing good solid interest from our high school market.
Okay.
That's great and as you look at that pipeline for the rest of the year any color on how that breaks down between her.
Health care and skilled trades.
Yes.
We don't get it nearly as many students going into health care from the high school market.
Don't have it in front of me, but I would guess, it's probably easily 75% or 80% in the transportation skilled trades is where our high school students come from and that there are some that go into health care, but not nearly as many.
I'm sorry, I was I was talking about in general if you step back and look at your your full pipeline.
Oh, the full pipeline model and those working through it.
Yes, we're continuing to see growth on both sides just like we did this quarter without <unk>.
Any any discipline really.
Taking the lead over the other.
We continue to see stronger lead growth in enrollment growth.
Frankly in the second quarter than in the first quarter.
So beyond that it's still too early for me to predict our adult market going into third and fourth quarter.
Great. Thank you.
No problem statement, one moment for our next question.
And our next question comes from Eric Martin Newsy of Lake Street Capital markets. Your line is open.
When does the tuition increase go into effect.
<unk> have any impact on the conversions.
But I don't think it had any impact on conversions eco we usually put it in the beginning of the year.
So last year's tuition increases they went in towards the second quarter. That's why in the first quarter 2023, we're seeing the 2022 increases in that quarter.
Similar to this year's increases, we'll start seeing that as well as in the <unk>.
Second quarter, but second quarter should start having the prior year tuition increases.
Okay, and then the centralized financial aid effort I think you said you had seven of the 22 campuses.
How are we doing.
Bring it on board the rest of them.
Yes, we anticipate bringing them on board before the end of the second quarter, so that there'll be in before the financially.
Year completes in June 30th.
Okay, I'm not sure about that.
Thank you.
You too.
It'll be done by the end of Q2 right.
Okay, alright, they all should be on their do swap where I think the exact date might be July but they all should be ended.
The new software by July .
All schools.
Alright.
And then excuse me.
The outlook for the full year I appreciate the raise to always good to see a beaten guide up but I was surprised it wasn't a little bit more incremental adjusted EBITDA in the $7 $5 million of revenue bump up is there a expense category.
Turning out to be a little bit more stubborn than you originally thought.
Yes, some of it is within instructional as well as books and tools.
Some increases.
Higher than our budget, but as well as when you have the better performance pay its.
Does get increase as well.
Say that last part again.
So pay incentives as we.
Sure.
As EBITDA increases and revenue increases paints at this does increase as well.
Gotcha.
Okay. Thanks for taking my questions.
No problem. Thank you Eric.
Again, if you do have a question. Please press star one on your telephone and wait for your name to be announced again press star one one.
And our next question will come from Raj Sharma of B Riley Your line is open.
Hi, Thank you for taking my questions I have.
A couple of just sort of clarification as a so you're still you still expect.
<unk> to close in me any additional color there.
Do you still expect that to the same terms as you have agreed on.
Any change there.
Well, we expect it to be very similar what we're still frankly, having some.
Say final discussions with them, but yes, it should be closing in the next 30 days or so more or less around the same terms.
Not the same terms got it alright, great and then you just mentioned you talked about these local government programs. In addition to the Tesla. The Johnson <unk> Johnson controls can you talk about the magnitude or just.
Little bit more color on what kind of programs this would be entirely corporate paid.
And not entitled.
Yeah actually a good question it definitely is not involving title four but its frankly.
Some local high schools coming to us looking for building their skilled trades programs for their students because they realize that not everyone is going to go to college and so now they want to increase the opportunities for those students.
So it's a totally different market than what we serve today and if we're successful in landing one of these it also as it becomes a great feeder for our programs. So what's most exciting to me is just as greater realization.
We need more skilled trades people and people at all levels of education are starting to realize that more and more people that do realize that that will certainly benefit Lincoln both in the short term and the long term.
Got it.
Just sensing from the commentary it seems like there is incrementally positive.
Results sort of expected you, obviously changed the guidance expenses are little higher too but.
The starts what do you attribute.
The 5% to 10% ryzen starts.
In a still.
Low record low unemployment.
Environment.
Well I have to give how great. It has that changed.
Right yes.
Yes.
I think that.
Again since we did raise guidance certainly holding in if not getting a little more robust I think we are getting our message out I think that our admissions folks are effective in conveying that message as we look to become more streamlined and efficient hopefully that's adding to our ability to communicate to our students as well and again.
I think there is this general greater awareness that skilled trades in these hands on careers are alternative to going to college again, it doesn't have to be everyone that thinks this way nor should everyone think this way, but incrementally I think more people are realizing that there is a faster cheaper way to get a job and Lincoln.
Helps to provide that and that's the message we're trying to convey to the public when trying to convey to the people that reach out to us.
<unk> had strong results in good outcomes, we have more companies coming to us because of the dire need for people. So everything is really moving in our direction, which is a positive change.
Yes.
On the high school fronts, just seems to be a really positive development are in high school is coming and asking you to have a program for skilled trades when was the last time a high school did that.
Never.
<unk>.
So.
Is it fair to say to this.
5% to 10% growth in starts actually improves if unemployment.
Rises from here or things get.
That will work on.
Worse in the economy.
Given history I would say yes.
Should get better.
Alright.
Also I know last call you had talked.
A lot about the results in fiscal 'twenty four being impact.
Knowing the real run rate of the business.
This rise is it fair to say it flows through into fiscal 'twenty four as well.
Certainly as we continue to build momentum and have a larger carry in population that will only help us accelerate our progress.
And that that will bode well for us.
Hey, Brian .
Great great. Thank you.
Taking my questions I'll take it offline. Thanks.
Thanks, Raj and I look forward to being at your conference later this month yeah. Thank you yeah same here.
Alright.
Again as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
And I'm showing no further questions.
I'd now like to turn the call back to Scott Shaw for closing remarks.
Great. Thank you all for joining US today I also would like to thank the hundreds of men and women of Lincoln Tech, who strive each day to better serve our students.
Our motto is put your potential to work and it is the care and support that our employees provide that brings this motto to reality for thousands of graduates every year 2000.
<unk> three is an exciting year for Lincoln Tech as we transition our company for the future and as our strong results in the first quarter demonstrate we are on our way. Thank you again and we look forward to sharing our continued progress later in the summer have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
Yes.
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