Lincoln Educational Services Corporation (LINC) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Lincoln Educational Services Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Shaun McAlmont, President and Chief Executive Officer. And you have the floor, sir.

Thank you, Jeff. Good morning, and welcome everyone. Joining me today here is Cesar Ribeiro, our Chief Financial Officer. Let me begin this morning by reading the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our statements in this presentation concerning Lincoln Educational Services Corporation's future prospects are forward-looking statements that involve risks and uncertainties. There can be no assurance that future results will be achieved and actual results may differ materially from forecasts, estimates and summary information contained in this earnings release. Important factors that could cause actual results to differ materially are included, but not limited to, those listed in Lincoln's annual report on Form 10-K for the year ended December 31, 2011, and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement. This morning, I'll provide an overview of our company's operations, and Cesar will then review our third quarter financial results and provide our outlook for the fourth quarter and the full year of 2011, and we'll then take your questions. Just as a quick overview of our company, that we're one of the largest vocational training institutions in the country and considered a leading provider of career-oriented postsecondary education. We offer recent high school graduates and working adults, degree and diploma programs in 5 areas of study and each one of those areas is specifically designed to appeal to and meet the educational objectives of our students, while also satisfying the criteria established by industry and employers. Now in more normal operating times, our program diversification limits dependence on any one industry for enrollment growth or placement, and it also broadens our opportunities for introducing new programs. We're in the process of rationalizing these areas of study to determine the best…

Thank you, Shaun. Good morning, everyone. The current economic environment, combined with the regulatory changes under the Consolidated Appropriations Act, 2012, signed into law on December 23, 2011, which eliminated the opportunity to enroll Ability to Benefit students and the closure of 7 of our campuses, continue to impact new student enrollments. We expect that theses campuses will cease all operations by December 31, 2012, at which time that will be reflected as discontinued operations in our financial statements. We anticipate that the company will incur additional pretax charges during the fourth quarter of the year of approximately $4.5 million. For the 3 months ended September 30, 2012, the company incurred $2.4 million of charges, of which $600,000 was a reduction of revenue to shut down these facilities. The company anticipates that the impact of this decision will be accretive to earnings in 2013 by approximately $0.21 per share. Student starts for the third quarter of 2012 decreased 16.7%, as compared to the third quarter of 2011. Student starts in the third quarter were impacted by the 7 campuses being closed, the elimination of the opportunity to enroll Ability to Benefit students and students who were scheduled to start in the third quarter but started in the second quarter of 2012. We started 2012 with approximately 7,500 less students than we had in January 1, 2011. This resulted in a decline of our average population during 2012. For the third quarter of 2012, our average population declined 19.7%, which led to a decline in revenue of 15.7% or approximately $19.3 million as compared to the third quarter of 2011. The decrease in revenue for the quarter was somewhat offset as a result of annual tuition increases, which averaged about 3%. The decrease in student starts also impacted our same school…

[Operator Instructions] Your first question comes from the line of Gary Bisbee with Barclays Capital.

I guess the first question, the cost for the campus closures is somewhat less than I think you'd led us to believe a quarter ago. Is that because some of that it's being pushed out in the first half of next year or are you just doing a more efficient job now that you -- or have a better handle on what it's going to cost now?

No, Gary we're doing a better job. All cost will be incurred by December 31. There'll no cost pushed out to next year. We just were able to be successful in mitigating some of those costs. So I think as we had told you in the second quarter, we were hoping to reduce some of the cash outlay and those costs, and we have been successful.

Okay. And then just on the starts, it was, I think a little weaker than what you'd thought a quarter ago. Is that just a continuation of the difficult environment or anything in particular you'd point to? And associated with that, I think there was some more positive commentary here, but yet, the fourth quarter implied starts, I think is a little weaker. So how do we think about that?

Yes, Gary, I'll say that Q3 and Q4 will be impacted the same way. I mean we -- the ATB students situation that we have, moving ATB students out of the third quarter, I think the continued lack of enrolling ATB students, et cetera, all affects us against prior year. And then we had some slow school starts in the third quarter that we're taking out and also the fourth quarter. But our confidence in what's happening in admissions really comes from improved conversions from inquiry to starts and then also within that large conversion enrollment to start. Now I'll say that our confidence is tempered by the fact that we spent less. I mean we essentially spent about 20% less in Q3 than we did prior year, and we'll probably spend less in Q4. And that reduction in spending attributed to 27% fewer inquiries. So although the metrics look good within our admissions process, we did have to manage our expenses overall. Now we look to fully ramp up our spending in December for our January starts in Q1. But that's essentially the added impact that we saw on starts.

Okay. And then just one last one. I know you guys have a big basin in the New York and northern New Jersey area. First of all, I hope, personally you and all your employees are dealing with this storm fine. But how should we think about any temporary disruption or were any of the campuses hurt? Any thoughts on that?

Thank you for your comment and your concern. We're always amazed at the resilience of our personnel and our students, and we had about 20 campuses that were impacted, that were in the path of the storm in a 5 state area. Now I'm happy to report that there was no significant damage to any of our facilities, and our staff and students are fine for the most part. But like everyone else, everyone in the area is struggling with power and fuel issues, but all of our campuses are with power today, and having classes. Now I will also say that attendance was low last week in some of our schools that were open, that had power in the area. We'd see somewhere about 60% attendance, which we expected but that attendance has improved each day since the storm hit. But again, thanks for your concern, and we don't see any long-term impact from the storm on our schools.

Our next question comes from the line of Kelly Flynn with Credit Suisse.

Just a couple of questions. Can you just clarify the per share impact from the school closures for the fourth quarter? And also what's implied for the year?

Well, for the year, the per share impact from the school closures and the impairment write-downs of both goodwill and fixed asset is about $1.28.

Yes, that I understand but I'm trying to decouple them. That's actually why I asked the question.

For the school closures, there's about $4.5 million built into our fourth quarter estimates, which translates into somewhere around $0.13 a share.

Should we use the corporate tax rate on that?

Well, taxes have been a bit convoluted because of the non-deductibility of goodwill and other items. So fourth quarter taxes are going to continue to be convoluted. We hope to have everything sitting in discontinued ops. The rate on discontinued ops should be somewhere around the 35% rate, but the effective rate for the company should be around the 26% rate. So it's a little bit convoluted because of the nondeductibility of certain items.

Okay, great. And then, just a couple of follow-ups to Gary. Just on your comments about kind of spending less on marketing. Are you trying to say that the delta between what you expected the starts to be and what your new guidance calls for all relates to just spending less on marketing? I just want to make sure I understood that correctly.

Well, for the most part, it does, and I think that our individual schools will tell you the same. We have to manage our expenses in a certain way. In addition to that, Kelly, we're battling with just a barrage of political ads. And so at some point, for us, there is a diminishing return on spending at the levels we expected or spending up. And so in addition to managing that expense overall, we saw that as a prudent way to go. We feel that we can spend up and generate more inquiries, and we can convert them at better rates, but we will do that after the election time frame to prepare for our Q1 starts.

Okay, great. And then just a last quick one going back to Gary's question about Hurricane Sandy. Just to clarify, your guidance excludes all impact, potential impact from that, is that right?

That is correct. We don't expect to have any impact from Hurricane Sandy in our financial results.

And Kelly, just a point of clarity, in the case of the student misses some class work, in many of our schools we track the hours that students are actually being instructed. We provide makeup hours for them within the same period and so all of the schools have done it in the past. They're doing it now and so we don't see any impact.

Our next question comes from the line of Jeff Meuler with Robert W. Baird.

I guess if we look at the Q4 starts guidance, if you factor in the campus closures, as well as the ATB loss of Title IV eligibility for new students, on a same campus basis x the ATB impact, are starts running roughly flat year-over-year?

I'm sorry x ATB and...

x ATB and x the closure on the same campus basis. X ATB, are starts running roughly flat year-over-year in Q4. Is that what's implied by your guidance?

Well, close to flat, but I will say to Kelly's question earlier, that there is a delta there caused by reduced spending. So yes, if spending was at its last year's levels, we think that we would be flat.

Okay. And then as you look out to 2013, do you expect spending to be up, year-over-year? Just wondering given obviously, where cap u [ph] is, as well as where your conversion rates have been improving to, I guess why not philosophically spend more and try to drive more inquiries?

I'll just say this, we expect to spend at levels necessary to get hit our 2013 targets. And so in essence, we will spend up from current levels. I will say though that whenever we talk about spending up incrementally, there are some natural issues that we've got to be careful of. The types of inquiries that you typically get, the geography of where they're coming from, those kinds of factors have just limitations on them in terms of conversions. And so this is the natural balance to spending and conversions, and we'll always try to manage around that balance. But yes, that's the way we look at it. We try to consider where can we spent to have the best impact on our student population, and we'll do it. In some areas, we just can't.

Understood. And then just one last housekeeping question. There is a $2 million range in the revenue guidance for Q4 and a $6 million range for the full year, even though we're 3 quarters through. Just wondering if there's some sort of reason for that difference in terms of campus closures and they're not apples-to-apples? Or just as we do our model, which number we should we be shooting for?

I think that could be an oversight. I think you should be looking at that number we gave you for the full year.

For the full year, not for the fourth quarter?

Correct. I think the fourth -- well, there's a $2 million range and what we give you for the full year, I think that was...

$412 million to $418 million, which I think would imply $102.6 million to $108.6 million for Q4.

Yes, I would go with the fourth quarter guidance that we provided you.

With the fourth quarter guidance?

Yes.

Our next question comes from the line of David Chu with Bank of America Merrill Lynch.

Just alluding to the last question. Can you quantify what starts would have been on an underlying basis in 3Q x the school closures and pushing forward of ATB students?

Well, we have guidance of 10% down, so we were -- the impact of ATB and the closed schools would have been down 10%. So obviously, we came in 6.7% worse than that.

Okay. And in terms of cost, you guys have done a good job at bringing down cost considerably on a quarterly basis for several quarters. Just wondering how much more room there is along that front?

It becomes more difficult as we move forward. We were at the point where we still need to provide services to students that are there. So to take out more cost out of the business, we don't think is doable as it was in the past. However, with that said, I think what we said with our comments is, I think we've seen the worst is behind us, and we are in the rebuilding mode. And I think that the staffing level that we have still have ample room for growth and student starts. And so we are comfortable with those levels.

[Operator Instructions] Up next, we have Alex Paris with Barrington Research.

A couple of questions. First off, on plus loans, I think we talked about that before, that, that was having an impact either on affordability or ability to start. Did that continue into the third quarter? And a competitor of yours mentioned on their call last week that the department has encouraged those that have been turned down on plus loans to reapply. Your thoughts there as well.

Yes, it did continue into the third quarter. We still continue to see significant rejections on plus loan applications, which, obviously, greatly impacts our high school population or high school starts. Without those plus loans, a lot of students just can't come up with the financial aid to be able to attend the school. So that did impact us significantly in the third quarter. As far as reapplying, obviously, we will be reaching out to all of those students and asking them to accept a paid-in start, to try to reapply to see whether or not we can pick up some of those high school students into our fourth quarter. But as of now, we have not done so.

Okay. Did it affect starts more or did it impact your institutional starts more -- or institutional loans, I'm sorry?

No, it did not. It impacted starts more because our institutional loans have limits about what we will advance a student. And if a student applies for a $20,000 plus loan or $18,000 plus loan and that loan is denied, there just isn't -- we're not willing to provide those type of institutional loans, to provide that type of financing to our students. So it does impact starts when the students aren't able to obtain financing.

Okay. And then one question on the closed campuses, in your discussion of cohort default rates, in your discussions of 90/10, what was the 90/10 rate across these 7 schools? Were they at the higher end of range that you had given earlier, Shaun?

Well, a couple of them were, but I'll let Cesar talk more about the details.

Yes, there was about 2 or 3 of them that were at the higher end of the range, but again, these are part of other -- in other words, there's other campuses within that institution. Some were not. The primary reason why we closed these campuses was because of the fact that the loss of ATB students, or the opportunity to no longer enroll ATB students, combined with the current economic environment, really just made these campuses unattractable from a financial point of view. And so that's how we made that decision. It wasn't -- obviously, there was consideration given to 90/10 and cohort default rates, but I would tell you the primary reason we closed these campuses is we just did not see a way forward with these campuses would start producing positive returns under the current economic environment.

Ladies and gentlemen, since there are no further questions in queue, I'd now like to turn the call over to Mr. McAlmont for closing remarks.

Thanks, Jeff. In closing, let me reiterate our vision, which is really squarely focused on becoming the leading provider of skilled training in the country. Our mission is based on our students' career success and our strategy includes 3 key components to achieving the mission and vision. First, it's improving our student outcomes; second, maintaining a strong record of regulatory compliance; and third, returning to sustained new student start growth. As long as there are students seeking careers in the skilled trades and as long as traditional nonprofit educational institutions continue to ignore this need, there will be a segment of the population generating sustained long-term demand for the programs that Lincoln offers. Thank you, everybody, and we look forward to updating you on our next call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.