Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Lincoln Educational Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your first speaker today, Michael Polyviou with EVC. Thank you. Please go ahead, sir. .

Thank you, Delan, 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 30, 2020, as well as recent corporate developments.

The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. .

Joining us today are 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 a replay of the call will be archived on the company's website. .

Statements made by Lincoln's management on today's call regarding the company's business 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 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 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 projections upon which the segment and the 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 the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission.

Forward-looking statements are based on the information available at the time of those statements are made and management's good faith belief as have 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 statements, whether as a result of information, future events, or otherwise after the date thereof. .

Now I'd like to turn the call over to Scott Shaw, President and CEO of Lincoln Education 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 have been impacted as little as possible by the ongoing COVID-19 pandemic, especially from a health care 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 II servicemen and women by providing them hands-on skills to support their families and build a better post-war world. This vision has remained with Lincoln for its almost 75-year history 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 are equally proud of this Veteran's Day -- proud on this Veteran's Day to recognize these veteran students as well as our veteran faculty members and staff, and thank you all for your service and contributions to our country..

I'm 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 continue 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 essential careers that remain in high demand and help bridge the nation's continuing skills gap during a time when other training 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 America's skills gap and provide our students with high-return careers that have a low probability of being outsourced or replaced by robots.

The flexibility, capability and diversity of our entire organization and programs continues to be a principal factor behind our success.

These qualities allowed us to first shift in the first quarter to largely a remote learning environment and then, as campuses began to reopen in July, shift again to a hybrid model that has 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 a 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 schools going forward. We know that students appreciate the flexibility of having some distance education.

By not having to come into school every day, 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 are 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 secure 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 a 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 a substantial 12.3% increase in average student population. And our population growth was primarily driven by a 15.3% increase in student starts.

While the substantial increase in unemployment since the beginning of the year is probably a contributor to our student start and population growth, we believe our strategic actions are bigger drivers. .

For instance, our focus on training and education for a diverse number of essential critical infrastructure careers is helping us. From our recent internal survey, we know that 1 of the top 5 reasons why students select Lincoln Tech is our high-demand program offerings.

Approximately 90% of our students are currently pursuing careers that meet the U.S. Department of Homeland Security definition for a critical infrastructure worker. These are well-paying, stable careers that are enabling our graduates to establish themselves soon after leaving Lincoln..

We also are proud of the continuing diversity of our student body, which is preparing students from a broad range of racial, ethnic, social and economic backgrounds for these well-paying, stable careers. As a result, we are helping expand the country's 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 student starts have grown each quarter for the past 3 years.

The success of our marketing and 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, and 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 5 weeks into the fourth quarter.

Anecdotally, leads appear 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.

Our 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 absences, which puts a burden on our revenues because when a student remains enrolled at Lincoln, but on a leave of absence, we aren't booking revenue during that leave of absence.

Moreover, the longer a student is on a leave, the greater the chance is that life might get in their way, and they might have to permanently drop from their program. In short, we have focused our efforts to shorten the LOA period as much as possible..

Earlier this year, with our campus closures, our leave of absence spiked as high as 1,100 in May. While this ratio to total enrollment remained 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 30, leave of absences declined to 696 students.

They further declined during the third quarter and stood at 104 students as of September 30. The majority of these students are awaiting externships to complete their graduation requirements..

The success we've had with leave of absences 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 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 IV 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 instruction.

Moreover, some students are more lacked with their payments as many institutions have relaxed their collection efforts during this pandemic. COVID is certainly throwing us curve balls, but our team is overcoming most challenges rather quickly..

Another factor contributing to our slowdown in drawing down on Title IV funds is also COVID-related. When we transitioned to the new remote learning environment in March, this led to an uptick in failure and incomplete grades during the second and third quarters, which delays Title IV disbursement for the affected students.

Many students retake the course and achieve the passing grade, but delays in doing so have recurred due to the availability of the course. Our team is squarely focused on these issues, and we expect to draw down past due Title IV funds in the fourth quarter, which will lower our accounts receivable balances and reserve..

Overall, our organization is performing exceptionally well. We have continued to strengthen our partnerships as employers increasingly turn to us to help them solve their skills gap challenges. As companies reopen during the third quarter, are conversations around how we can help solve their training needs picked up.

I'm pleased to report that we have been selected by Republic 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 non-hazardous waste management company in the country.

They are headquartered in Scottsdale, Arizona, with over 35,000 employees and thousands of trucks. We've created for them a 12-week, 100% employee paid, medium to heavy truck training program to assist Lincoln Tech graduates transition into their organization and to up-skill their existing employees.

This is another example of 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 to 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 replications 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 also continue to take measures to lower our operating costs, especially our corporate ones. We are taking advantage of employees working remotely and have entered into a short-term lease for a much smaller corporate office, which will save over $200,000 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 and uncertainty caused by the pandemic.

We've returned to profitability while significantly lowering our debt and increasing our cash position. We've had some nasty curve balls thrown at us this year, but overall, have managed them well. Back in March, we provided guidance for 2020 that included student start growth of between 3% to 5% over 2019.

Through 9 months, our student start growth has been 9.8% and starts increased during October. We also provided a guidance of 3% to 5% overall revenue growth. And through 9 months, we have achieved 6% revenue growth. We also provided expectations for EBITDA, operating income, and capital expenditures that Brian will address in his comments.

However, overall, we believe that at this point, all this original guidance will be exceeded..

I'm quite, quite proud of the effort made by this entire organization that has put us in a very positive position.

However, while we're remaining extremely positive about Lincoln's long-term trajectory and opportunities, I know that in any day, a dramatic ramp-up in COVID cases may force a state or local authority to close any of our campuses and thus slow our progress.

However, where we are today, we have 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 in 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 Lincoln's operations, we have seen increases in leads enrollment in student population during rises in unemployment and economic downturns.

For example, during the last recession, between 2007 and 2010, we saw consistent increases in leads enrollment to student population that peaked 2 years after the recession started. However, given the dramatic and unprecedented rise in unemployment during the past 8 months, we continue to imagine a strong ramp-up in our student population.

Remember, the same 22 campuses that we have today had approximately 18,000 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 essential career with a lifetime of opportunity. .

Now I'd 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 their service to our country. I am 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 continues to be the major factor behind our success..

Starting with the top line. Revenue was $78.8 million, up 8.5% or $6.2 million, driven by our significant student stock growth that Scott highlighted, and our success at delivering education to our students when they were online and returning them to in-person instruction.

We had approximately 5,500 new student stocks during the third quarter, representing a 15.3% increase over prior year. The stock growth consisted of 17.2% in our transportation and skilled trades segment and 10.6% in our health care segment..

Let me take a moment to highlight that this quarter marks our second consecutive quarter of double-digit stock growth in 2020 despite the challenges from COVID.

Also, it is worth noting that while our stock growth has recently accelerated, quarterly starts have now been consistently growing for almost 3 years with only one exception, which occurred in the first quarter of 2020 when the pandemic interrupted student starts in March.

As a result, our average population increased 8.1% or about 900 students compared to the prior year, net of students on leave of absence due to COVID. Moreover, our quarterly ending population reached nearly 13,200 students, representing an increase of about 1,200 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 due to COVID..

Turning back to revenue. The impact of the pandemic during the quarter was limited, consisting of $400,000 of revenue deferred to the fourth quarter from the extension of graduation dates for certain nursing programs and approximately $500,000 decline in non-tuition revenue. Now I'd 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 and tools 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 investment, which were partially offset by savings in sales and student services.

Our bad debt expense went up by $2.8 million as we increased our reserve amount in connection with our higher accounts receivable balance. The rise in accounts receivable was driven by a delay in Title IV disbursements to the company, as Scott mentioned earlier..

Let me reiterate, our team is really focused on improving our Title IV disbursements and 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 $600,000, which was a shift from the second quarter to the third quarter as a result of COVID-19.

However, despite the increased investment, our course per started in the third quarter and for the full year have decreased when compared to prior year, demonstrating our strong return on our investment. Our sales expense decreased since travel-related expenses were reduced due to COVID-19 restrictions.

In addition, student service expense went down as busing and transportation services has been significantly reduced due to COVID. We anticipate the travel savings to continue for the next several quarters..

And finally, our corporate expenses increased $100,000 over prior year.

This was attributed to several factors, including stakings provided to all employees in connection with COVID-19 related expenses, noncash stock expense from the acceleration of vesting related to 2 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 onetime corporate expenses and the timing of marketing and bad debt expenses, as discussed earlier.

In terms of segment, our transportation and skilled trades segment had operating income of $9.1 million, an improvement of 35% from a year ago, and its operating margin improved to 16% compared to 13% in 2019. In addition, our health care segment also demonstrated operating income of $1.7 million, representing a slight improvement from prior year.

We believe there is opportunity for greater margin expansions 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 quality EBITDA has improved meaningfully over prior year results in each of the first 3 quarters, our 9-month EBITDA stands at $9.2 million compared to $1.2 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 $500,000 of interest savings as a result of more favorable terms under our current credit agreement.

You may recall that we entered into this new credit agreement in November 2019, and we anticipate interest savings of approximately $1 million. However, we are now projecting interest savings of $1.5 million for 2020 compared to 2019..

In terms of the balance sheet highlights, I'll begin with cash. As of September 30, we had approximately $37.1 million in liquidity as opposed to $11.8 million in the prior year, representing an increase of $25.3 million even after paying $1.1 million in preferred stock -- preferred stock cash dividend during the quarter.

We had $21 million availability under our current credit facility, and $16.1 million in cash and cash equivalents, excluding the CARES Act funds. Subsequently, our cash balance continues to increase, and we anticipate ending the year in a net cash position, meeting our unrestricted cash balances expected 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 to 2 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 15,000 students, and we expect to distribute the remaining funds over the next few months. The remaining $1.1 million balance of student 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 increased costs associated with significant changes to delivery of instructions as a result of the pandemic or to be used towards an additional 82 students for the purpose I just described.

Following the DOE guidance as permitted uses, we utilized $3.3 million of these funds that cover eligible expenses as of September 30, 2020. Most of these funds were for uses that directly benefited our active students. We anticipate having reimbursable expenses in the fourth quarter..

Now regarding cash used and financing activities. And as mentioned during the quarter, we paid $1.1 million cash dividend, the first payment pursuant to our preferred stock agreement covering the period from November 2019 through September 30, 2020.

We have the option to accrue additional preferred value and this conversion shares in lieu of paying cash. Since at the time of the dividend payment, our stock price was significantly higher than the conversion price, and we had ample liquidity. We felt making the payment in cash was in the best interest of our shareholders.

Going forward, the dividend will be approximately $300,000 per quarter and the dividend payment day falls at the end of each quarter. We will continue to consider market conditions and liquidity to determine the most appropriate form of dividend payment..

And lastly, regarding our 2020 guidance. Although we have not -- although we have today successfully navigated what has been a challenging business environment in 2020, some of the uncertainty related to COVID-19 continues. As a result, we are not providing new guidance for the remainder of the year.

However, we can say that we believe our fourth quarter will demonstrate our typical seasonal trends with our strongest financial results of the year.

The continued momentum we are experiencing through October, combined with what we have already achieved in 2020 puts us in an excellent position to exceed our original pre-COVID financial objective for 2020. .

Thank you for your time today. And with that, I'll turn the call back over to the operator so we can take your questions.

Operator?.

[Operator Instructions] I show our first question comes from the line of Alex Paris from Barrington Research. .

First question, I just want to talk about the very strong starts, starts growth of 15.3%, driven by transportation and skilled trades up 17.2%. That's the highest that I've seen as long -- as far back as my model goes, looks like a decade or so. I know you touched on this a bit, but maybe some additional color to what do you attribute that growth.

You mentioned internal execution, marketing, et cetera.

And then to what extent do you see some of the strength coming from higher rates of unemployment, especially among younger individuals, younger male individuals?.

Sure. Well, I think it definitely is a combination. It's probably too early, I think, in the cycle for unemployment to necessarily have driven a lot of the third quarter opportunities, simply as we know that people were receiving additional benefits and the other things that were probably holding them back from looking for something new.

But overall, we just had a really great execution. Frankly, our high schools team did exceptionally well. We had nice growth in our high school marketplace. And obviously, to get the volume that we had, we obviously had to get more adults. But they -- I can't say yet definitively, Alex, if it's due to the unemployment rate.

Again, I think that we're just working on so many different initiatives from a marketing standpoint..

And I think that the fact that our campuses were open and that people are realizing that maybe college isn't the right thing for them, that more and more people are more receptive. I'll say to our messaging today, and see the fact that our students are working even throughout this pandemic, that that is encouraging them.

Hey, why don't I give this a shot? This is a short term, fast return on investment opportunity. And I think that our messaging of that to students is resonating more and more. But with that said, I think that the unemployment environment certainly will be a nice driver for growth into 2021. .

Great. That's helpful. So it sounds like that lift is most likely ahead of us based on past experiences with rising unemployment and then the positive impact on enrollment with the lag.

How about demand indicators, inquiries, conversions, show rates, any color there?.

Yes. I mean, again, we've been experiencing, as we've said, 3 years of quarterly growth. It has picked up over the summer. So -- and those trends seem to be continuing into the fourth quarter. So, yes, all indications are that things that have occurred in past recessions may also occur again this recession. So, we're very optimistic. .

Okay. Great. Then moving on, I was hoping to get some additional color on your new program replications.

What can you tell us there? You said several campuses, where are they? What sort of programs are you replicating?.

Yes, we're replicating a welding program into one of our campuses. I don't want to disclose quite yet where they are for certain competitive reasons. But we'll be replicating a welding program, we have a revamped IT program that's going into certain campuses. We have a dental assisting program that's going into campuses.

We have a medical assisting program as well as expansion of welding into another campus. So basically, what we've been constantly doing is evaluating the local marketplace, seeing where there's opportunity for further growth, as well as our employers are coming to us in certain marketplaces, demonstrating increased interest in certain programs.

So, we follow where the demand is, and we'll continue to serve it as best we can. .

So of your 22 campuses, how many campuses are getting new programs over the next 12 months?.

So 4 of them, I believe. .

4 of them, okay. And then….

5 programs in total. .

4 campuses, 5 programs in total?.

Yes. .

Okay.

And then what's the cost associated with rolling out programs to campuses?.

You said the process of how we go about it, or the cost?.

Just the cost associated. .

Yes, it will vary by a program. A welding program to launch it could be $1 million, a medical assisting program would be a couple of hundred thousand, so it varies. .

Okay. That's helpful.

The decline in revenue -- the average revenue per student in the quarter, is that attributable primarily to the LOAs? Or was there some discounting going on or scholarships?.

Right. It was attributed to the LOA slightly, because even though we finished with only 100, the average for the quarter was a little bit higher than that. But if you do it on a tuition basis, actually, revenue per student went up. When you look at pure tuition, what hurt us was some of the ancillary revenue.

If it is clinic revenue from industry partners, some of that was poor during the quarter, which hurt our revenue per student. .

So speaking of which, you kind of called out that about $400,000 of revenue was deferred from the third quarter to the fourth quarter. But also, there was an impact on non-tuition revenue of $500,000 in the quarter. So we would expect to get that $400,000 in the fourth quarter, but the $500,000 in non-tuition revenue is simply loss revenue. .

Correct, correct. Yes. .

Okay. I have a bunch of questions, but I'm going to just kind of cut to the last one here in the interest of time, and we can follow-up on some of the others.

A general question I've been asking my post-secondary-education-related companies is, what are your thoughts about the outcome of the election? I know it's not completely settled, but assuming a Biden presidency, what are your thoughts with regard to the positioning of Lincoln, and expectations going forward?.

Sure. You must be reading my closing remarks, but I'll jump to them now. I mean, obviously, with the change in administration, there'll be more regulatory scrutiny. But at the end of the day, Lincoln fared very well in the past administration when these regulations were being rolled out. I believe we'll continue to fare very well.

The nature of our programs and the way we deliver them, and the fact that they are short-term, high-return type programs, I feel very good about where we stand, as long as the administration is fair and equitable. But all in all, I think that Lincoln will end up showing very well. .

A couple of things that they talk about or they speculate about under a Biden administration is 90-10, potentially really reducing it to 85-15 and including military and the numerator. What are your thoughts there? I think your 90-10 is less than 80% now.

Is that correct?.

Correct. It's right around 80%, 79-80%. So, if you factor in military, last time I looked, I haven't looked at it most recently, we're around 85% to 86%, when you factor in military. So if it did drop to 85-15 with military included, we'd have to make some adjustments, but not meaningful adjustments, I don't think.

But most of all the conversations I've heard is maybe focusing on 90 10 with military included, in which case we'd be perfectly fine. .

Great. And then last question on the same topic, gainful employment. Last time, gainful employment was -- in the Obama years, gainful employment. .

Yes. .

Today, today, do you have any programs that violated the previous definition of gainful employment, or were in the zone?.

We definitely had some programs that were in the zone. We've gotten rid of most of those programs, and we've made some adjustments to others. For example, we still have 2 culinary programs out there, but we've shortened the program to help lower the cost to give a better return on investment.

I mean, the challenge is, the income data that we have is 5 years old, so it's tough to know exactly where we stand. But given the changes that we've taken based off of the past information, I feel very good about where we should stand, as far as all the other programs, given the demand we continue to hear from employers.

And given I know where I'm seeing salaries, we should be fine. .

Our next question comes from the line of Steven Frankel from Colliers. .

Scott, could you talk a little bit about what the employment rate looks like for recent graduates in this COVID environment, and what are you hearing from employers? You've made some comments that they're encouraging you to add programs and add students, I wonder if you could give us some additional insight into that. .

Sure. So as of right now, we're running about 3 percentage points below where we were last year in total employment, but we're making ground on that. We were a little over 4.5% at the end of the second quarter. So as more and more I'll say, companies are re-engaging with their workforce needs, we're seeing improvement there.

Just in general, I mean, the people that are speaking to us from a training perspective are looking beyond just November and December, but also looking down the pipeline for what their needs are going forward as they look at their workforce and see all the baby boomers who are retiring.

And so a lot of our conversations are much more focused on those longer-term objectives that these companies have. But needless to say, employment is picking up kind of across the board for us as well as we just see strong demand going to the future. .

Okay. And then, where is high school as a percentage of the mix? And you've mentioned it was up year-over-year, kind of tell us where it is now, where it was a year ago.

And are you doing anything to drive that up further?.

Yes, it's around 20% of our population is the high school marketplace. And it's been plus or minus a few percentage points over the years, and we'll probably stay at that level, in the low 20s.

Again, high school recruiting efforts are very expansive in that we send reps, we have about 90 of them, around the country to go and present to students, and then they meet with the students and the families to enroll them into school.

We had a very successful program, as I said last year, even though we were basically shut out of the high schools as of March with the COVID situation.

But again, we were able to stay intact and in contact with the high school prospective students and keep them engaged, which is what resulted in a strong showing for high school students this past summer..

I will say, though, as a caveat, this year will be a little bit different. A lot of high schools are closed to us, and so we're having to do things more remotely, which is more challenging. There's no doubt about it.

So, we're still working on adding even additional new ways of reaching our high school students with a lot more videos and informational information that we're sending out electronically. But this year's high school marketplace for us -- and I would imagine, frankly, for every school is more -- much more challenged. .

And going back to those few remaining LOAs, especially the ones that have clinical elements they need, how many quarters do you think it will take to clean that up given the recent COVID spikes?.

Well, it's hard to say, but I mean, we seem to always make some progress on it. I mean, we're down to just, whatever, 104, and that's spread out over a number of campuses. So, as of right now, while COVID is top-of-mind with a lot of people, I haven't heard necessarily as of yet, more clinical sites closing.

And so it really becomes a scheduling issue of just getting them through the ones that are open. With that said, if more clinical sites did close, it would back up our population. But as of right now, I'm seeing more progress than a negative response. .

Yes, where we are today, we would anticipate all those 104 students -- or a majority of them come back in the fourth quarter and have, unless something changes, almost zero at the end of the year. .

Great, that's what I was looking for.

And have show rates improved throughout the year?.

For us, again, getting into the granularity, show rates have not improved, but our lead to start has improved. So we're gaining a lot more interest in leads, converting them into enrollments at much greater numbers, and that has diluted a little bit the show rate. But overall, the lead to start rate has improved. .

[Operator Instructions] Our next question comes from the line of Raj Sharma from B. Riley. .

I wanted to touch upon the inquiries, I know you've been asked that question again. So the lead to starts have improved, your interest versus last year has gone up, and your show rates have gone up too.

Could you give us some color on that, you are seeing increased interest versus last year?.

Yes, we're definitely seeing increased interest versus last year. I won't go in any more specifics, frankly, beyond that. But certainly, more people are reaching out to us. We're connecting with more people.

As I said, we're getting more people are signing up for enrollments because, again, they see the value in what we're offering and the opportunity to kind of go through a quick accelerated program to get out in the workforce sooner rather than later. And so, again, it's all very, very positive for us. .

And the increase in the show -- the decrease in the show rates, is -- you think that should come back to some sort of a normalized level?.

Yes, certainly. .

And it's highly related to the COVID situation and response?.

Yes. It's really tough to know what is driving it. I don't know if it's just the larger volume that we're getting through that's leading to a lower show rate. But again, just like I look at the overall cost per start, I look at overall lead to start.

And as long as we continue to manage the business and improve that metric, I feel that we're being very successful. So I'm less concerned about a show rate returning to a historical level as long as we continue to drive greater efficiencies overall. .

And that shouldn't affect the drop-off rates going forward, right?.

No, no. .

And then I have another question on -- so you talked about the cost of acquisition. The overall marketing costs have gone up, but your cost of acquisition have gone down for this quarter.

Could you just provide some color on that and your efficiency, marketing efficiency in this quarter and the following quarter?.

Sure. So again, it's really 2 components that are -- makeup, obviously, the cost per start. There's the marketing efficiency and then there's also the effectiveness of our admissions team. And I'll just start with the admissions team first.

The admissions team has been very effective in educating students on the opportunities and having them enroll, so that's helping us.

On the marketing side, we're definitely moving more and more away from third-party activities or lower-converting activities and getting better responses on our activities around adult website interaction, partially due to increased engagement with social media, partially due to better engagement with our website..

So, again, it's -- you can't stand still when it comes to marketing. It's constantly evolving and changing and what works one quarter doesn't necessarily work the next quarter, but I'm very pleased with our teams and how they're responding and how they're staying ahead of changes that occur to give us the good results that we're getting. .

Great.

So the cost of acquiring these clients went down, but the overall increase in the marketing cost, that was -- that went up, and that sort of is what the starts number is about?.

Sure. .

Am I getting-- you got more efficient, but you just spent a lot more or you spent more to get more?.

Yes, I wouldn't say we spend a lot more. Again, we are spending more. Also in this quarter's number was about $600,000 that we spent to create some new TV ads. So those are kind of an investment in one quarter that will last, frankly, for the next 8 quarters. So again, overall, it's -- we're getting nice efficiencies out of our marketing. .

Right. And then just lastly, you mentioned SG&A cost savings and moving your headquarters. Is that -- can you quantify that number again? I'm sorry, I'm sure you mentioned it. .

Yes. It's around a $200,000 savings that we'll get on an annual basis. To be honest, we have a really good rent where we are today, simply because our building is going to be torn down, and we've just been staying on until the developer gets to all the right permits and such -- he's given us a very attractive lease.

But we'll able to move to something that even has a more attractive lease going forward, which will benefit us by, as I said, the tune of about $200,000. .

Our next question comes from the line of Austin Moldow from Canaccord. .

The first one is on the Republic Services partnership.

Is that the first of that kind of program? And did you say that was employee paid or an employer paid?.

Employee -- I'm sorry, I might have said employee, I meant employer. Thank you for that correction. So Republic is paying for this. And it's similar to our Hussman program. So in Hussman's case, they built a training facility on one of our properties, and it's -- our graduates who are going into that program.

The students don't pay anything, and they get trained to be Hussman technicians in an advanced level..

This is similar, but the only difference is instead of taking place on our facility, they're building out a new training facility and we'll provide the training within their facility. But again, students pay nothing for it. It gives them advanced standing, additional skills.

And what's different is that we will be also upskilling some of their existing employees. It just won't be entry-level Lincoln Tech students that are receiving the training. .

Got it.

And how does the enrollment in those programs work? Are those students sort of fed to you from those employers, or do you still -- are you still spending marketing dollars to acquire them into that track?.

Well, again, one of the, I'll say, benefits that employers have by working with us is that we have a nice pipeline of students. So these are students who will have graduated from our diesel program, who will then get placed into the Republic Services program.

So, it's kind of a double benefit for the employers that partner with us, not only do they get individuals with good skills that make them productive in their workplace, but we're also helping them find these students, which helps them build their workforce. .

Got it.

Is there any push within Lincoln to expand these kind of programs from the 2 you have to many, many more?.

Yes. Oh, yes. We have others besides the one that I mentioned, and we're constantly out there speaking to employers all the time. And we're in discussions with probably 3 or 4 of them right now for different types of programs, similar to what I just described.

Despite their great challenges in finding people, it takes them a lot of -- it takes them a long time to actually make the decision to move forward. But the ones that we've moved forward with are very pleased with what we're able to offer them. .

Okay. And my last question is on the healthcare and other segment. So, the start growth decelerated there.

Can you provide some color on that trend and whether the turmoil and the healthcare industry as a whole from the pandemic is impacting starts in that segment for you at all?.

No. I mean, I think it's just these things vary from quarter-to-quarter. If you look at year-to-date numbers for the health care side and the average increase in population, it's quite robust. We're actually seeing more demand and interest because of COVID, frankly, on the health care side, sometimes it's just timing of when classes can be offered.

And there's strong demand, I'd say, kind of across the board for most of their programs. So, I wouldn't view the lower double-digit growth that they had in the third quarter as anything negative. .

I show we have time for one final question from the line of Justyn Putnam from Talanta. .

I just had one quick question. A year ago, last November, you raised some capital, improved your credit facility, cited a number of reasons for doing that, but one of them was potential for maybe strategic transactions.

And I was just curious to know as you sit today and you look out, how do you view the relative suitability of any potential strategic transactions today?.

Sure. While we continue to look and investigate them and are completely open to them, certainly, the pandemic kind of put a hold on a lot of different activity in the second and into the third quarter.

But I'm seeing activity increase, and it remains a -- definitely an opportunity that we will continue to pursue to find additional ways for Lincoln to grow beyond opening up our own campuses or replicating programs within our campuses. .

Any potential chance that the Department of Education changed that view?.

No. Because, again, the areas that we're focused on are high-return types of investments. I mean, it's a high-return programs. So I mean, I think that definitely, as I mentioned, the regulatory environment will become certainly more challenging than it's been.

But if you look at Lincoln and our outcomes and compare us to our nonprofit peers, we performed quite well. Not everyone in the for-profit sector can say that. But I feel very comfortable saying that.

So, while it will be more challenging, frankly, to me, for those that are stronger, both financially and from a regulatory standpoint, that should provide us with, frankly, more opportunities in the future, I would think. .

This concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Scott Shaw, CEO and President, for closing remarks. .

Thanks, operator, and thank you all again for joining our call. And to all the veterans, thank you for your service to our country. We remain very confident Lincoln Tech's future is bright. As we prepare to celebrate our 75th anniversary, we are reminded of what has enabled our schools to thrive. It is our focus on student outcomes and achievement.

By developing programs that have a strong connection to industry and having them -- having those programs delivered by passionate, caring, battle-tested professionals, we have created a supportive, engaging learning environment that lifts students up while giving them the skills and confidence to enter the workforce..

While we expect the regulatory environment to heat up with the change in administrations, we remain confident that Lincoln Tech will continue to outperform. By offering high-demand programs with outcomes that exceed our not-for-profit colleagues, we believe that we are well positioned to further aid our country as we seek to build the middle class. .

I look forward to speaking with you again earlier next year to review our year-end results. Thank you all again, and please stay safe. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..