Q2 2019 Earnings Call
I would now like to turn the conference over to Michael Polyviou. Please go ahead.
Thank you Liz and good morning, everyone before the market opened today Lincoln educational services issued a press release reporting financial results for the second quarter ended June 32019.
The release is available on the Investor Relations portion of the company's corporate website at Www Dot Lincoln Tech Dot Edu.
Joining us today on the call are Scott Shaw, President CEO , and Brian Meyers Chief Financial Officer.
Today's call is being broadcast live on the company's website and a replay of this call an archived on the company's website statements made by management today during today's call regarding the company's business that are that are not historical facts may be forward looking statements as the term is identified in federal securities laws.
The words May will expect believe anticipate project plan intend estimate and continue as well similar expressions are intended to identify forward looking statement.
Forward 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, where events and are subject to a number of uncertainties risks and other influences many of which are beyond the company's control and may influence the accuracy of the statement in the projections upon which the segment or the statements are based.
Factors that may affect the Companys results include but are not limited to the risks and uncertainties discussed in the risk factor section of the annual report on Form 10-K , and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.
Forward looking statements are based on information available at the time those statements are made in our management's good faith belief as of the time with respect to future events. All forward looking statements are qualified in entirety by this cautionary statement and Lincoln undertakes no obligation to public revise or update any forward looking statements, whether as a result of new information future events or otherwise after the date they are up.
Now ill 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 joining our call today to discuss the progress our team continues to make towards consistent growth and profitability.
The favorable operating trends, we discussed during our Q1 call in May including consistent same school student start growth, increasing student graduation placement rates, increasing operating leverage and strong cost containment continue to the second quarter and when combined with our outlook for the remainder of the year enable us to reaffirm all of our guidance for the year with a key objective to achieve GAAP profitability in 2019.
Earlier. This morning, we reported our seventh consecutive quarter of student start growth starts were up 3.6% and the growth was balanced with the transportation skill trade segment up 3.5% and our healthcare and other professions segment growing 3.7%. Despite the low unemployment rate, which typically can mean a downturn in our enrollments. We are achieving consistent growth for a number of reasons first we continue to invest in productive marketing channels, which expand consumer awareness and attract interested students second more and more students and parents are questioning the value of an expense of four year degree with a lot of debt and maybe not great job prospects more importantly, some guidance counselors or even becoming more receptive to directing students to career technical training over a four year school. This shift I assure you is still in its infancy, but I'm encouraged nonetheless finally, the demand by employers for skill.
Technicians remains as robust as we have seen and I believe that our partnerships with fortune 500 companies and others is also helping us to grow over the past two weeks I attended three different events with three different partners and the message was loud and clear we need more skilled employees and we've come to Lincoln Tech to help solve our problem for the second quarter revenue from the continuing operations grew 6.6% with a strong 11.3% increase from our healthcare and other profession segment and a solid 4.6% growth rate from our transportation and skilled trade segment. We also continue to maintain a strict focus on our cost control efforts during the second quarter and as a result, we had a double digit percentage gain in operating income from the healthcare and other profession segment, while the transportation and skilled trade segment grew more than 40%.
As we expected we reduced our facilities cost for same school operations by approximately 400000 on an annualized basis as compared to the prior year second quarter, and we're continuing to evaluate opportunities to lower our lease costs to further benefit our bottom line in 2019 and the ensuing years. In fact, we just signed a new lease at our Melrose campus, which will lower our fixed costs at the campus by approximately 200000 a year starting this month.
Lowering our fixed costs, while cost effectively driving higher revenues has been our focus and is the reason why we will return to profitability. This year now let me share some of the highlights that help us measure our progress and success to begin our student graduation, and placement rates, which are a priority for us continue to improve in order to meet industry demand and to ensure as many students as possible complete their education, we are constantly evaluating faculty enhancing our curriculum tracking attendance grades and other metrics. So that we can provide assistance and guidance to students before they drop as a result of these measures. We have improved our graduation rates for <unk> for the last three years and are on track to do it again this year as for placement rates with the healthy employment market. We continue to find strong career opportunities for more of our students and employers continue to offer more and more incentives to our graduates to attract them to their companies from signing bonuses to two two.
<unk> two to tuition reimbursement plans. These additional benefits further improve the return on investment a Lincoln Tech student receives we also measure success by a growing number of corporate sponsors partnerships provide excellent employment opportunities for our students and a qualified labor pool for our partners. In addition to offering students attractive compensation packages. Our students can enhance their skills using equipment donated by our partners and I can tell you first hand their students appreciate this competitive edge.
Our partners allow us to leverage their brands to drive awareness of the various industries that we serve and the opportunities available during the second quarter, we added Mazda as a new corporate partner and Lincoln is one of only two schools in the world to have this partnership with milestones we were able to work with Mazda to create a program that truly benefits them and our students besides offering a good wage and tuition reimbursement students will also be paired with a mentor for three to six months, we'll have subsidized car lease payments if they need a car to get to their job. We encourage mozza do include the mentor and lease subsidy after surveying students to find out what attributes appeal to them in selecting an employer. We are in advanced discussions with other new corporate partners and we're expanding existing partners two additional campuses.
So it's working closely with large national companies, we're constantly surveying each of our local markets to understand employers' needs. As a result, we will be launching our seventh welding program and to hospitality programs. This fall.
In addition, we are finalizing our research to launch three to five more skilled trades programs in 2020, new programs enable us to further leverage our facilities and improve profitability, while increasing our impact on the local employment workforce. Finally at the end of the second quarter, we submitted our application for degree granting in New Jersey, while we cannot be sure. If our request will be approved we know we have a strong application and expect to hear back within a year with six campuses in New Jersey degree granting is in the state will enable us to expand some of our current programs as well as offer new programs, which would further support our employers and Lincoln's growth.
As a valuable contributor to the communities in which we operate we are constantly reaffirming our positive impact with potential students faculty business and community leaders, while it's too early to gauge the reaction from our first ever skills gap summit, we held in May at our Columbia, Maryland campus I do believe the events like this are required and will help demonstrate the importance of our educational platforms for students and employers. It's estimated that the skills gap could possibly cost the us economy up to 2.5 trillion dollars over the next decade with as many as 2.4 million jobs being unfilled over this period local and regional economies rely on healthy small businesses and if companies cannot find new talent. Their businesses are negatively impacted we plan on holding several more of these forums in other locations and I would expect the reception to be positive from an accreditation perspective, we had three planned visits during the quarter. These were all successful and our creditor.
Commended Lincoln for the long average tenure of our faculty exceptional student support and very strong student surveys. We believe the positive reaccreditation visits will help Lincoln expand and launch new programs more easily.
In summary, our second quarter and six month results continue the positive trend that started nearly two years ago. Our key performance indicators revenue student starts graduation, and placement rates and improving bottom line position us for success throughout 2019 profitable. We will be in addition, as we look to the next year and beyond we see strong bottom line results. We are at an inflection point as we continue to grow our revenues through marketing and new programs. We will see our net income continue to increase as a result of our strong operating leverage. Moreover, with 60 million in net operating loss carry forwards to shelter our earnings almost all of our operating leverage will drop to the net income line for a while we look forward to delivering strong results to our shareholders as we better serve students employers and our communities now I'd like to turn the call over to Brian for a review of our second quarter results, Brian . Thanks, Scott and good morning, everyone I would like to begin.
My comments with highlights from our second quarter performance or for some comments regarding our segment performance during that period, and then conclude with a review of our 2019 guidance, which as Scott noted we are reiterating this morning.
To begin revenue for the quarter improved $2.5 million or 4% over the prior year and on a same school basis revenue was higher by 3.9 million or 6.6%.
Our students starts in average student population on a same school basis were up 3.6% and 5.8% respectively over the prior year.
Successful actually execution of our strategies to drive growth have now led to seven consecutive quarters of student start growth.
This is a very important accomplishment for the company given the challenges in the industry and is reflective of the strong commitment and effort by our team to revise exceptional educational experience for our students while improving the company's financial strength.
We continue to make additional marketing investments during the quarter.
Which we believe will continue the favorable student start trend for the remainder of the year.
As a result, the cost per start was up slightly during the quarter. However, the cost for soft for the first half of the year is down which is demonstrating both marketing effectiveness and improve returns on our marketing investments.
Also we improved our cash flow as we were cash flow positive from operations for the quarter and increased cash flow from operations for the three and six months ended June 32019 by approximately 2.4 million and 1.5 million respectively compared to the same period of prior year.
Historically, we have generated strong cash flow in the second half of the year and we anticipate the same trend to occur this year, which led us to forecast positive cash flow from operations for 2019.
Now turning to our segment performance for the second quarter of 2019.
Our transportation and skilled trade segment revenue increased by $1.9 million or 4.6% to $44 million for the three months ended June Thirtyth 2019.
The increase in revenue is due to continued stock growth, which drove a 3.6% increase in average student population quarter over quarter.
Operating income increased 700000 to $2.5 billion for the three months ended June Thirtyth 2019, the operating income improvement were primarily driven by evaluating implementing efficiencies where needed as well as continuing expense controls.
Our education services and facility expenses for the quarter remained essentially flat while sell it while selling general and administrative expenses increased by approximately $1 million, primarily due to increased investments in marketing during the quarter.
Now turning to our hop segments.
Revenue increased by 2 million or 11.3% to 19.5 million from a 17.6 million in the prior year similar to our transportation and skilled trade segment. The revenue increase was mainly driven by a 10.3% increase in the average student population, which is attributed to our continuing stock growth.
Operating income increased by 300000 to 1.8 million from 1.5 million in the prior year quarter.
This increase was primarily driven by higher revenue, which was partially offset by an increase of approximately 600000 in our education services and facility expenses and a $1.1 million increase in selling general administrative expenses. The increase in education services and facility expense was a direct result of our growing student population, while the increased selling general and administrative expenses increased were due to additional bad debt expense in combination with the increase in sales and marketing expenses.
Corporate and other costs were $6.4 million for the three months ended June Thirtyth 2018, as compared to 5.9 million in the prior year.
Now, let me review, our 2019 guidance our second quarter results came in as expected. So we are reiterating our previously disclosed guidance, which includes the following first we anticipate revenue in student starts to increase by 3% to 5% excluding the transitional segment in the prior year.
Second we expect to achieve approximately 2 million in net income and finally, we expect 2019 EBITDA to be approximately 12 million.
With that I'll now turn the call back over to the operator, so we can take your questions operator.
Ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the queue. You may do so by pressing the pound key.
Again, that's star then one if you'd like to ask a question at this time.
Our first question comes from the line of Alex Paris with Barrington Research. Your line is now open.
Good morning, guys congratulations on the beat.
Thanks, Alex Good morning, good morning Al.
So I have a couple of questions based on your prepared comments first of all with regard to student graduation in placement rates can you quantify those a bit I mean.
On a percentage basis do you.
I think at one time, you at least gave placement rates.
Yes, basically the graduation rates are around.
65% to 66% and our placement rates are 80% to 81%.
And those are improvements over last year.
Yes, yes, we will be increasing them anywhere from 50 to 150 basis points it varies quarter to quarter.
Alex, but thats or in the range.
Got you.
And then.
Congrats on a growing number of corporate sponsors. The addition of Mazda.
Would you mind, just as a review kind of rattling some of those off for us at least maybe by segment transportation and then hospitality.
Sure.
Unfortunately, I can't rattle off any major ones in the hospitality side, so that right now the <unk>. The major ones are all in the transportation skilled trades, we ivaldi VW.
Johnson controls hussmann.
Chrysler.
Mazda.
Those are the those are the major ones Bridgestone Firestone.
See the.
Mercedes we're doing some work for as well as we're doing things with the Penske automotive in the trucking side.
And a number of others.
Great and then we are in advanced discussions with more new partners that I presume Oh, you hope to announce before year end.
Absolutely.
Okay.
And then.
The.
You said that this while you're going to introduce ace.
Welding program to Southern campus and then if I got this right to hospitality programs. This fall.
Yes, the hospitality programs or just to massage therapy programs hand in stone and massage envy come to us in local markets looking for.
Massage therapist, and so they'll be smaller programs maybe.
Capping at around 50 to 60 students each one in the Austin market and one each in the New Jersey market.
Great and then.
For next year right that you are just kind of going fast for me three to five more skilled trade programs and 25.
Additional programs or just transplanted programs into additional campuses.
Transplanted programs with maybe one new additional one we're evaluating plumbing.
Basically in a campus, where we have electrical and HVAC plumbing is kind of a natural.
We're still trying to evaluate to find out how incremental plumbing would be or would cannibalize some of our programs, but that would be the only new one, but we're looking to replicate DH back electrical in welding programs, we see opportunities frankly in several markets for those.
And then.
You submitted the degree granting application in New Jersey, you got six campuses in New Jersey.
Realistically how long is that approval process I realize there are moving parts and then once received what do you think this allows you to do specifically.
Sure.
It will definitely take us a year to get it and assuming we get it the big thing that we are driving for is to launch an RN program in New Jersey, we have three hospitality campuses in order to offer our end you need to be degree granting.
99% of our LP ends all want to become our end. So we have a great base of people that want to become our ends that we can reach out to but also it's just it's the largest portion of the health care field.
New Jersey needs more nurses, so we see a great opportunity. If we can launch that in addition, we would then be able to offer degree granting to some of our automotive diesel and skilled trades programs as we do in certain other states and there is always a segment of the population that does prefer to earn a degree so that would just help us again gain more market share in those areas as well.
Okay understood.
And then as we enter the third quarter here, obviously, a big primary intake for high school related to what has been the trend in high school enrollments over the last couple of years and what are your expectations for this year and then what percentage of new student enrollment in the third quarter.
On the transportation side comes from from High School Grads.
I'll have to get back to you on that last point just to make sure I give you the factual in general I know high school overall is about 20% of our population.
For the full year thought to get back to you for specifically what it will be in the third quarter, Alex but basically the high school for US has been incrementally growing for the last 24 months and so it's in the low single digits.
And thats, mainly from penetrating some new markets and having some greater productivity. The high school market is a challenging markets are very expensive market to reach but it's also very important market for us.
As I said about 20% of our students come from that market and what we are seeing as I mentioned in my.
Prepared remarks.
And again, it's very very preliminary and then certainly the ship hasn't changed but I am hearing more of our high school guidance counselors talk about the fact that they are seeing some positive.
Momentum as far as people being more willing to consider a career technical education, because as you know one of the reasons why we have the skills gap is everyone's been pushed to go to four year schools and as that has been proven to be the panacea for every one people are giving career technical education. Some second thoughts so I am very optimistic about where that will go in the future.
But overall as I said the high school market remains about 20% of our population.
Great.
And then lastly, I just wanted to talk a bit about free cash flow I think you said in the prepared comments you expect positive free cash flow for the year.
And that would.
Be an improvement year over year. We move this is correct you use cash in the first half you generate correct in the second half generally how is how it works with third quarter I believe being the most significant producer of cash flow from operations and then the fourth quarter, you know maybe a slight decline from the third quarter, but still quite robust is that expectation. The same and do you expect to generate more cash flow from operations in the second half a 19 versus the second half of 18.
Yeah, I'll, let Brian address that so Alex this year, we are forecasting they have actually slightly higher cash flow from operations in the fourth quarter versus the third quarter and as I mentioned in my prepared remarks, we actually slightly cash flow positive for the second quarter. This year.
A few hundred thousand but it was slightly positive which is a significant improvement to the $2.3 million in the prior year in that in that quarter. So.
In the second half of the year we are.
Dissipate as strong cash flow last year, we use cash flow from operations about $2 million. So we should have significant improvement over that.
Okay, and then will the 10-Q will be filed today or tomorrow, it will be filed today.
Okay. Good I'll look for that thank you very much and again congrats on the strong quarter.
Great. Thanks, Thanks for your questions.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Shaw for closing remarks.
Oh, Thank you all for joining our call today and learning more about Lincoln for over 70 years, we've been a leader in career technical education and training and we believe our best years are to come to all the Lincoln employees, who are on the call I. Thank you for your tireless supportive our students and to our shareholders. We look forward to updating you on our progress after the third quarter have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect everyone have a great day.