Good day and welcome to the Lincoln Educational Services' 2017 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doug Sherk of the EVC Group. Please go ahead, sir..

Thank you, Leanne and good morning, everyone. Before the open of the market today, Lincoln Educational Services issued its Second Quarter 2017 Financial Results news release. The release is available on the Investor Relations portion of the company's corporate website at www.lincolnedu.com.

Today's call is being broadcast live on the company's website and a replay of this call will also be available and archived on the company's website.

Statements during today's call made by management of Lincoln Educational Services Corporation regarding Lincoln's business that are not historical facts may be forward-looking statements as that term is defined in the federal securities law.

The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue and their opposites and similar expressions are intended to identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved, if at all.

The company cautions you that these statements concern 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 control, that may influence the accuracy of the statements and the projects upon which the statements are based.

Factors which may affect the company's results include, but are not limited to the risks and uncertainties described in the Risk Factors section of our 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 and/or management's good faith belief as of that time with respect to future events.

All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes 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 hereof.

Now I'd like to turn the call over to Scott Shaw, President, Chief Executive Officer of Lincoln Educational Services..

first again from employment status was postponed. Given our strong outcomes, this regulation wasn't expected to have a significant impact, but having less burdensome regulation is always a benefit.

Also, the delay in borrower's death for repayment is a positive since the rule as drafted was overly broad and could easily lead to unjustified lawsuits that could cause distractions and waste resources. Overall, we continue to push both individually into our industry association for more equal treatment across all regulations.

One of Lincoln's strength is our strong regulatory record, but having the fore profit industry singled out for additional regulations is certainly unfair. Finally, we've made significant progress with the sale of our West Palm Beach Florida properties.

For more detail on where that transaction stands, as well as a review of the key financial result, I'm going to turn the call over to our Chief Financial Officer, Brian Meyers..

Thanks, Scott, and thank you, all, for joining us this morning. I'll begin my comments with several highlights and updates from prior matters that have impacted the company during the quarter and then I will discuss some operating financial performing highlights, specifically from our operating segments.

First in the prior quarter, the company had entered into our purchase-and-sell agreement to sell two or three properties located at West Palm Beach Florida and subsequently executed a short term loan which was secured by two properties scheduled to sell. The sell process was progressing well and is scheduled to close August 14.

Under the terms of the transaction, the company has received in Escrow $3.2 million non-refundable deposit. We anticipate receiving net proceeds of approximately $15.2 million and recording a $1.4 million gain. We'll use part of the net proceeds to retire the $8 million short term secured loan.

Second, our net interest expense has decreased by approximately 55% quarter-over-quarter as a result of the new security revolving credit facility with Sterling National Bank, which became effective March 31, 2017. Now I would like review some of the segment operating financial highlights from our second quarter.

Our transportation and skilled trade segment revenue increase slightly to $41.3 million for the three months ended June 30, 2017 as compared to $41 million in the prior year comparable period.

Students starts for the three months ended June 30, 2017 were down 9%, primarily due to a lower start rate in our high school demographic, which Scott previously mentioned. However, I would like to add that often decline in student starts was an increase in revenue due to an increase in our carrying population quarter-over-quarter.

Operating income for the Transportation and Skilled Trade Segment decline to $0.9 million for the three months ended June 30, 2017 from $2.4 million in the prior year comparable period as a result of selling general administrative expenses, which increased by $1.8 million.

The increase in expenses was largely due to a $0.9 million of additional bad debt expense mainly driven by higher student accounts receivable balances. Higher accounts receivable write-off and the timing of Title IV receipts. The write-off mainly stem from students who have dropped from their program and failed to make payments for a period of time.

Additionally, sales and marketing expenses increased by $0.7 million, resulting from a strategic marketing initiative intended to reach more students. These initiatives resulted in a slight improvement in our start in our adult demographic quarter-over-quarter.

Our Healthcare and Other Professional Segment revenue was $17.9 million for the three months ended June 30, 2017 as compared to $18.7 million to prior year comparable period.

The decrease in revenue can mainly be attributed to a 3.4% decline in average revenue for student caused by shift in our program mix combined with tuition rate decreases in various programs. Slightly offsetting the decline of revenue was the 2.7% increase in student starts for the quarter compared to the prior year comparable period.

Operating loss for the Healthcare and Other Professional Segment was $0.6 million for the quarter as compared to the operating income of $0.9 million for the prior year comparable period.

The decline of $1.5 million was a result of several factors including a decrease in revenue of $0.7 million quarter-over-quarter which was mainly attributed to a 3.4% decline in average revenue per student, a $0.6 million increase in sales and marketing expense which has driven starts up by 2.7% for the quarter and a $0.3 million increase in administrative expenses primarily the result of increased bad debt expense.

Operating loss for the transitional segment decreased to $0.8 million from $1.5 million in the prior year comparable period. The decrease is primarily attributed to a decrease in expenses due to the suspension of new student enrollments and declining student population.

Corporate and other cost increased by $0.3 million to $5.4 million for the three months ended June 30, 2017 from $5.1 million the prior year comparable period. The increase in our corporate and other expenses was driven in part by a $1 million increase in medical cost as compared to the prior year.

During 2016, the company experienced historically low medical claims compared to this year, resulting in this significant increase quarter-over-quarter. Partially offsetting the increase was a reduction in salaries and benefits of $0.7 million.

I would also like to note that including corporate and other expenses for the three months ended June 30, 2017, there's approximately $0.3 million of additional dormitory request directly relating to the closure of over the Hartford Connecticut campus which occurred on December 31, 2016.

Let's turn now to the balance sheet and cash flow for the quarter. As of June 30, 2017, the company had net debt of $19.6 million compared to net cash of $3.4 million as of December 31, 2016. The net debt balances calculated as the total long term debt including the current portion less cash, cash equivalents and restricted cash.

Their increase in our net debt was mainly the result of the net loss during the six months ended June 30, 2017 in combination with the seasonality of the business. Now, let's turn to the guidance.

We are modifying our previously disclosed guidance due to the lowered unexpected high school starts on our Transportation and Skilled Trade Segments which resulted in a decrease in this segment's student population.

The modified guidance includes first for the full year the company expects revenue to range from essentially flat to a low-single digit revenue decline in Transportation Skilled Trade Segment; second, the company expects to range from essentially flat to low single digit declines for Healthcare and Other Professional Segments; third, for the full year, the company expects to break even or incur a slight operating loss excluding the impact of closed campuses; fourth, we anticipate to break even or incur a slight net loss for the remaining nine months of the year; and lastly, we anticipate the complete teach out of the remaining campuses classified on our transitional segment.

With that, I'll now turn the call back over to the operator so we can take your questions.

Operator?.

[Operator Instructions] And your first question is from Alex Paris with Barrington Research. Your line is open..

Alex, are you there?.

Hi. I'm sorry, I had it on mute..

No problem..

Yes. We can hear you now. Good morning..

Good morning, transportation and skill trades, down 9%. I expected a slight gain. You kind of went through what the issues were. It was primarily three schools you say.

Question, the aggregate of the others were up in terms of starts?.

They were probably flat the aggregate of the others, but we saw the biggest decline. Basically we have five destination of high schools, Alex, and of those five, three of them is where we saw the most significant softness..

Was it those schools also that kind of pulled back on scholarships?.

Yes, that's what was the interesting aspect of it. We're looking at it and trying to understand the rationale for why the start rate was lower. Those were the campuses that had the biggest decrease in the scholarship dollars.

We've made a strategic decision to cut back on some scholarships and put some more money into marketing and we did that in different markets and we can see now what the result of that is.

So we're quickly changing our approach and realizing that students, when they're given a scholarship, almost regardless of what the dollar amount is, it just makes them, for say, feel good as well as ties them closer to our campus. We think that we can turn around going forward, part of that decline..

And what was the nature of the scholarship before you scaled it back? What was the range of scholarship available and how was that awarded with it?.

Sure..

Based on high school grades, or what have you?.

It's really based on that they apply for it, they write an essay and the dollar amount range from I think maybe a $1,000 to $3,000 in total. So up to maybe 3% - I'm sorry, up to about maybe 10% of the program. So we gave them out judiciously, but it wasn't based off of their financial needs.

It's strictly based off of their demonstration of their interest in coming to Lincoln..

As well as we had housing scholarships and some nursing scholarship as well for a particular program..

Okay.

Was it that you just eliminated these scholarships last quarter?.

No, we didn't eliminate them, but when you look at the volume that were handed out, it became a lot less. I mean the one school; they reduced the volume by 80%. So it's a very simple correction that needs to be made.

But probably the bigger point, Alex, is we could start packaging these students earlier in the year than we could last year because of some changes that they could use last year's tax numbers and so, we had people package sooner in the process and I guess long story short, we may be a lost sight of that and then keep them as engaged as they should have.

In the past, they were packaged much closer to the start so our representatives were more engaged with them closer to when they were actually going to start.

And since we're able to get frankly ahead of the game this year, we probably didn't keep the students as engaged and given the strong economy and we went back in Kansas students, 'Why did you not come?' a percentage may be 10% or so, decide, 'Well, I'll just go right into the workforce.' Again, going forward, we just need to stay more engaged with the students throughout the whole process..

Okay. And then you noted then [indiscernible] were there changes in processes, but change in the organizational structure.

What did you mean by that?.

Sure. We'd centralize more of the whole high school recruiting up at the corporate level and while we're going to keep certain aspects that are working quite well like using our call center out in Denver; we're going to move back to having the five destination campuses more in control of the oversight for the high school program..

Okay. These changes were made immediately. They were made real-time.

So all of the things being equal, you would expect a better outcome in the third quarter for transportation and skill trades in terms of starts?.

Well, yes and no. Everything is being put into place, but we have students that are starting last week this week. August is a big month for starts. Some of these students, we may not be able to reach. So I wouldn't say that this is a turn on a dime, but I certainly would say that with each passing month, our level of improvement gets better..

So these changes were made post Q2 and have been kind of been implemented during Q3..

Correct. It wasn't until we were able to see the results of June, which was the first time of the high school starts we take place and then when we start seeing some of those results, that's when we start to dig in, to understand why it was happening..

All right. The other national competitor in the space reported results last week and they had a much better start within their automotive schools than I think analysts were expecting. I don't cover the company.

But I don't know if they gave this any credit, but one of the things that they've done that is pretty unique to the post-secondary education sector is they adapted a new incentive compensation structure for their enrollment councilors which allows for some incentive pay based on the headcount of graduates as supposed to the headcounts of enrollments.

Have you considered that? Are you considering doing something like that?.

Yes. We've looked at that and I guess just from competitive standpoint. All I will say is that we will be addressing our salary compensation plans for our high school reps in the next year, but we've been making adjustments throughout the period.

I frankly didn't hear anything on the call that suggested that they were attributing any of their success to that plan. I guess I'll have to go back and may re-listen to it, but it's something that we are constantly engaged with..

I didn't mean to suggest that they said anything about it. I don't know if they did or something, but I know that they implemented that; I know they had a stronger result in a similar macroeconomic environment.

Different locations, different geographies, but it's challenging at this end as opposed secondary spectrum where you have a strong job market..

Correct..

All right, just a couple of small ones. Looks like you're on target to close the sale of the West Palm Beach properties, August 14, having non-refundable money in Escrow makes it you're pretty certain that it will close.

Of that $15.7 million, you'll have a gain, but what is your intent in terms of debt reduction?.

We will be going to be paying off that closing, the $8 million short term loan that we took out for those two facilities and then I would say during the end of the third quarter and then going into the fourth quarter, we'll be paying down our debt. We're hoping to finish out the year with a little or no debt.

I would say we should finish out the year with no debt outstanding..

Great.

And then the interest expense during the quarter of roughly $700,000, is that the run rate? At least until you make these debt reductions under the new revolver?.

Correct and it should even go lower in Q3 and Q4 as we start paying down our debt and we will finish out the year with a nice cash balance with no debt outstanding..

Okay. Good. That's helpful for now. I'll be talking to you later. Thank you..

Sure. Thank you..

Thanks, Alex..

[Operator Instructions] Your next question is from Justin Putnam with Talanta Investment. Your line is open..

Hey, good morning. Just real quick, a kind of a higher level, a 30,000-foot level here. 2017 is obviously a transition year for you - closing campuses, bringing the HOPS back in.

How does where we are so far this year fits your outlook, made you a little bit further past end of the year according next year both from profitability and from a growth standpoint?.

Sure. Well, the short fall starts is putting us a little bit behind the [indiscernible] here.

We'll end up the year probably a little bit down in population than we were anticipating, but as we mentioned earlier, we do have a number of initiatives under way to hopefully turn around things in the remaining basically at this point, about five months of the year. It has probably maybe delayed things by a quarter or so, but again, I'm optimistic.

As I said overall, if you're looking at the bigger picture, again, more and more companies continue to reach out to us to figure out how they can in scale get more entry-level people. So these conversations take time to come to fruition, but the challenge that they face isn't going away.

How they solve that challenge is what they're trying to work on and we're trying to work with as many companies as possible. So while that we're having a little softness right now, again, looking towards the future, all systems are really pointing our way so we just have to get in front of all of that..

And the one thing I'll add, Justin, is depending on where we finish out with our population at year-end, we'd look to be profitable at 2018. We're not anticipating to close any more schools as of today, so we won't have the transitional segments that we're hoping to be profitable in 2018 [indiscernible] what comes out..

Well, my next question is about your confidence underlying your call structure beyond the end of the year. Obviously that's a little bit more in your control than perhaps enrollments on the macro issues..

Correct..

All right. That's it for me. Thank you..

Yes..

Thank you, Justin..

I'm showing no further questions. I would now like to turn the call back to Scott Shaw, President and CEO for any further remarks..

Thank you, all, for joining us today. We appreciate your interest and as I said, we're quite bullish on the future that Lincoln has and we'll continue to address our current short fall and continue to enhance the assets that we think are unique to the industry and we look forward to updating you all in our progress in early November.

I hope you all have a great week. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone, have a great day..