Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Lincoln Educational Services Earnings Conference Call. My name is Lisa, and I'll be your operator 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, Chief Executive Officer. Please proceed, sir.

Thank you, Lisa, and good morning, everyone. Joining me in the room today is Scott Shaw, our President and Chief Operating Officer; and also Brian Meyers, our Senior Vice President and Controller. Brian is acting as our Principal Accounting Officer today in the absence of our CFO, Cesar Ribeiro, who's on medical leave. Let me begin this morning by referring to our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, which specifies that statements in this presentation and earnings release concerning Lincoln Educational Services' future prospects include 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 our earnings release and this presentation. Factors that could cause actual results to differ materially are included but not limited to those listed in our company's annual report on Form 10-K for the year ended December 31, 2013, 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 some general opening remarks, and Scott will provide a more detailed overview of our company's operations. Brian will then provide a financial review for the quarter and provide a forecast for the year and then turn the time back to me. After a brief summary, we'll take your call to questions. As outlined in our press release, in the third quarter, we achieved some positive milestones for the company, which included positive cash flow from operations, significant annualized expense reductions, year-over-year improvement in our key student outcome metrics, and we also launched our third industry partnership, CNC Machining program, in Mahwah, New Jersey. Scott and Brian will go into more detail about some of these…

Good morning, and thank you, Shaun. I'll spend my time sharing with you the progress that we have made in the third quarter as well as highlight challenges and opportunities that we see as we approach the end of the year. In short, we have continued to achieve improvements in all of our outcomes, namely graduation rates and placement rates, while we continue to face an environment in which some parents and students are questioning whether or not they should take on debt to fund their education. Moreover, the recovering economy provides more opportunities for some individuals to find immediate employment, which further delays their returning to school to obtain the skills necessary for a long-term career. However, as Shaun pointed out in his review of the skills gap, the message from the employers remains strong and clear. They need more skilled employees today, and they see their need growing as their workforce retires in greater numbers over the coming years. We also have more employers asking us to create specialized training that enables our graduates to more seamlessly integrate into their companies. The challenge is enhancing our programs without increasing the cost to the students. We view these requests by industry as a further validation of what we do and the need for what we do. By partnering with employers and creating programs that better meet their needs, we will enable our students to differentiate themselves, which will lead to greater success for them and for Lincoln. As I mentioned during our last call, we will continue to grow our business by strengthening and expanding our relationships with employers and industry. As Shaun also mentioned, we opened our third CNC Machining program, which is our second school affiliated with Haas Automation, which is the nation's largest CNC machining manufacturer.…

Thank you, Scott. Good morning. I'll begin by reviewing our financial results included in our press release this morning as well as provide more financial insights on the quarter and for the remainder of 2014. Student starts declined 5.9% from continuing operations for the third quarter of 2014 as compared to the third quarter of 2013. However, these results were better than our previously issued guidance. We began the first quarter of 2014 with approximately 1,800 less students than we had on January 1, 2013. This led to our average population declining 4% for the third quarter of 2014. As a result, revenue declined by 4.4% or $3.9 million as compared to the third quarter of 2013. Average revenue per student for the third quarter of 2014 was $5,895, essentially flat compared to the third quarter of 2013. The decrease in student population during 2014 also impacted our capacity utilization, which decreased to 36% for the third quarter of 2014 from 37.1% in the third quarter of 2013. Other key highlights of the quarter included loss per share from continuing operation was $1.67 for the third quarter of 2014 as compared to breakeven for the same period in 2013. Excluding the impairment, we had a loss per share of $0.12, which met our third quarter guidance. Free cash flow for the third quarter of 2014 was $14 million as compared to $3.3 million in 2013. We finished the quarter with $12.7 million in cash and cash equivalents and $7.5 million of borrowings outstanding under our credit agreement. Subsequently, we repaid the $7.5 million and have no debt outstanding as of today. We paid a $0.02 quarterly dividend on September 30, 2014. Total dividends paid year-to-date were $3.8 million. Bad debt for the quarter was 5.1% of revenue as compared to…

Thanks, Brian. So let me quickly summarize what you heard from us on the call today before we get to your questions. There's stability returning to our industry, and opportunity exists for Lincoln to be a more significant skills gap solution from an addressable market and employment demand perspective. Industry partnerships will play a more prominent role in our operations. Our business fundamentals are getting stronger after our retrenchment efforts. Although onerous and detrimental, we feel that the federal rule-making process is at least complete, which provides a more clear regulatory runway for us to operate. Our balance sheet is strengthening and will get incrementally stronger as we finalize our real estate monetization processes. We will aggressively launch our brand in the new year to better identify Lincoln's role in the skills gap. And finally, we'll adjust our business model to benefit students in a variety of ways to achieve necessary employment-related training. At this point, I'll turn it back over to Lisa, and we'll now take your questions.

[Operator Instructions] And your first question comes from the line of Jeff Silber with BMO Capital Markets.

In looking at your guidance for the year and reaffirming that, it implies a pretty sizable increase in revenues in the fourth quarter and some operating income leverage. Let me focus on the revenues first. I think you mentioned that you expect starts to be down about 3%. Are you expecting the remainder of the benefit either in retention and/or revenues per student increasing?

Well, let me just take a shot at that. I mean, I don't necessarily see the acceleration that you do. I mean, essentially, we feel that retention remains strong for the company. We expect that to follow through. We feel that we'll be at the 3% for the year in terms of start decline. And with that said, I mean, we end up the year where we end up. I can't really respond exactly to what you're saying, because I don't necessarily see what you see. I don't know, Brian, if you want to jump in.

We are expecting the fourth quarter starts to be slightly down, so it's not too aggressive, our fourth quarter revenue, to make the guidance.

All right. How about on the operating income line then? Where are you expecting the leverage relative to the current quarter if we're not going to see the benefits from all the cost cutting you had mentioned until next year?

Well, for the fourth quarter, we did do many of the cuts in August. So it will be in the fourth quarter. You will be able to see a lot of the benefit in the fourth quarter.

So yes, I said that we'll get the full impact, Jeff, next year, but starting in the fourth quarter, we do start receiving some of the benefits from the cost reductions that took place, as Brian said, at the end of summer.

Okay. My bad, I misunderstood you. And specifically, which line item? Is it on the educational services line item or the SG&A line item?

It will be on actually all the line items. So, I mean, there are people out of administration, there are people out of the -- fewer faculty members. Just because if their populations are down, we constantly readjust. So you'll see it in -- also, you'll see it in the sales side. So you'll see it in SG&A and in the education side.

All right. And then one more quick numbers question. What kind of tax rate are you expecting in the fourth quarter?

The tax rate will be similar to what we show for the 9 months, which is 7.3%. So it'll be -- it'll be based on our income. It will be 7.3% of our income, will be a tax provision.

Your next question comes from the line of Trace Urdan with Wells Fargo.

For what it's worth, I have the same issue that Jeff has. It's very hard to get even to the bottom end of your revenue guidance range on a full year basis without a pretty significant increase in either revenue per student or persistence or both based on the numbers that we've got so far. So I don't expect you to say anything else, but I'm just throwing that out there, because he's not crazy. So what I did want to ask, Shaun, was that last quarter when we spoke, you were a bit apprehensive about what was happening at Corinthian Colleges and Everest. And the potential, I think you had more of a cautious view on what kind of impact that might have in the market. It doesn't seem as though it's impacted your starts at all, but I just wondered if you could address that, the impact of that event in the market either positively or negatively on your campuses.

Yes. I'll say that early on, we felt the instability come from a lot of the bad news, and that was right at the time that our last call was happening. Since then, I feel that -- essentially, the industry stabilized. And with the new rule being finalized, a lot of the noise around some of the industry challenges being settled, we feel that we're looking at a smoother path forward. So that's externally. And then, internally, we just feel that we know what the playing field is at this point in time. Based on the regulatory rules, we feel that we've made the right amounts of moves to stabilize our company. And moving forward, we essentially know what we need to do to foster long-term growth. So I just think that the industry stabilized. Our company has stabilized, and it's just a much smoother path forward, Trace.

Yes. I'm just more interested in what the impression is in the market among students. I mean, are you picking up any of the Everest students in any of your markets? Are you hearing them talk about that or mention that at the admissions point of contact?

I'll just say this. Everest continues to advertise at a pretty heavy rate. And so, yes, our admissions people hear things. We've had some students come through our schools, but students continue to make the same on-the-ground decisions that they've made over the years. And we have not seen a significant number of those students come our way. I think not -- unless a school actually goes out of operation and a teach-out is complete, I think that's the time that the market will shift and we'll start seeing our market dynamics change. To this point, they're still operating and still marketing so.

And your next question comes from the line of Alex Paris of Barrington Research.

So a couple of follow-up questions. What was the tax accrual in the third quarter, excluding the intangible goodwill write-off? In Q1 and Q2, you had a dollar amount of $431,000 exactly in Q1 and Q2. And then in Q3, you had a tax credit of $5,666. So excluding it, was the tax in dollars a similar amount as it was in Q1 and Q2?

It was. It was for $430,000.

Okay. And then, second, with regard to monetizing some of those assets. When can we expect some movement on that? You talked about it last quarter. I think you said by year end, you maybe even said by Thanksgiving. Are we still on track for an announcement in that regard?

Yes. I mean, those processes continue. I think in Brian's prepared remarks, he talked about the fact that we're looking at a combination of mortgages and sale leaseback and also the sale of a unused facility up in Connecticut, and they're all in process. So we've -- we're going back and forth pretty aggressively on one of those, which is a sale leaseback that has a longer runway. But we expect that all of those could be completed by year end.

Okay. And then, the -- back to the guidance again. We're all a little troubled with that, I think. What I'm trying to do is do the math, on Q -- on full year guidance minus 9-month results. Can you help us out and give us guidance on Q4? It's just the basis of which is 9 months. I know what the 9-month revenue was. But are you excluding any items from that full year loss per share like the intangible write-off, things like that?

We are excluding the intangibles for the EPS line item, yes.

And is there anything else excluded from the first 6 months in that full year target?

No. Just, really, we're just excluding the impairment write-off.

Okay. The...

I mean, Alex, we'll probably have to sort of work on this offline. We can go over the detail later on.

Okay. That's fine. And then just I guess a bigger-picture question. Recently there's been some movement on the part of the Department of Education with regard to PLUS loans. I recall a couple of years ago when the Department of Education increased the credit underwriting standards. It had a negative impact on Lincoln. Lincoln was one of the companies that singled that out as a negative impact on enrollment. Now according to the Department of Education, the credit standards being eased are going to result in 370,000 more applications approved each year. Do you anticipate a benefit from that? And when might we see that in enrollments? Is that really a high school-related thing?

Yes, it's a high school-related thing only because the PLUS loans relate to dependent students primarily. But we expect to see a big benefit from that. I don't know, Scott, if you want to jump in.

Yes. Whatever benefit from that when that gets rolled out, I think you'll see it much more towards next summer, when we have more of the high school students with the PLUS loans.

[Operator Instructions] Your next question comes from the line of Bill Nasgovitz with Heartland Funds.

So just, you said your placement rates were up 2.5%.

Correct.

What is that rate?

We're now around 77.5%.

Is what we're projecting for 2014.

That's your projection?

Yes. Year-to-date, it's up on a year-to-date basis, and that forecast looks forward at a placement rate of about 77% versus 74% to 75% prior year.

Okay. What was the all-time high for Lincoln in terms of placement?

I would say that it's -- on a blended basis, it's probably in the high 70s all time.

Okay, so we're close.

Yes, we're close. The auto and skilled trades are always a little higher. The allied health has been probably lower 70s. And so we're tracking close to all time.

Those partnerships with the Hurcos and Haases and so forth seem to be pretty unique. Do you anticipate that to be a major driver going forward?

I would say so. I'll start on this, and I'll have Scott jump in. But I believe that when we have an employer who has a significant demand in terms of their employment force come to us and ask us to provide a program that helps them meet that demand, I think it's a huge positive. In addition to that, they're willing to do whatever they can to help us on the front end in terms of promoting the program. And so it ends up being a win-win. And all they ask for is first shot at the best grads that come out of those programs. And so this Hurco-Haas partnership has really taught something about the role of an employment partner. And we're seeing just great results from the students as well. Scott?

Yes, so I think that the concept of the partnerships is definitely where we'll be going more and more. The absolute numbers of the Machining program, though aren't as, let's say, big as automotive per se, but we'll certainly add about 100 students per campus, where we roll it out. But the benefit is -- of the partnership is, as Shaun was saying, they're really bringing in the employers to help us educate people about the need for these programs. And so that helps on the marketing front, especially in areas whereby people just really aren't quite sure what a particular career opportunity is. So by partnering with these industry people, we really get the best of both world, someone will help and hire our graduates, but also someone who's helping us on the front end drive demand.

Okay. That's sounds great. And just for me, to be clear, I guess, what is your top line guidance for all of 2014, top line sales?

Revenue range is between $330 million and $340 million.

Okay. All right. Terrific. Well, that does imply a pretty good quarter. So keep it going. You mentioned remaining goodwill of $23.5 million. How many locations are we operating today?

We have 31 operating...

31. And how many of those are profitable?

When we look at the 4-wall level, at EBITDA, about 21 of those.

And you maintain that you're not going to have any additional impairment charges in the year ahead?

At least for the fourth quarter, we're not anticipating any.

When do you expect starts to turn positive?

Well, I mean, Bill, that's a tough question. It really also relates to how we budget our year and how we look at our branding campaign, marketing sales force, et cetera. We're in the middle of doing that for 2015. And so I won't jump out right now and give you a date. We've done that before, but we'd rather talk about it at the appropriate time, when we've got the details under our belt.

And when might that be?

We'll do that specifically on our next call when we look at what we forecast 2015.

I would now like to turn the presentation back over to Mr. Shaun McAlmont for closing remarks.

All right, thank you, everyone. I think you get a sense for how the company's positioned and where we're going in the future. And I appreciate your time today. We look forward to updating you on the year, early in the new year. Thanks very much.

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