Gentlemen thank you for standing by and welcome to the Q4 2019 Lincoln Educational Services Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Michael Polyviou. Thank you. Please go ahead.

Thank you Jimmy and good morning everyone. Before the market opened today Lincoln Educational Services issued its release reporting financial results for the fourth quarter and full year ended December 31, 2019. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu.Joining us today 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. As a result of not having campus closures during 2019, the 2019 results being discussed today by Scott and Brian are based on the combined continuing of campus operations of the company's Transportation and Skilled Trades segment and its Healthcare and Other Professions segment.To remain comparable financial information discussed will exclude the 2018 Transitional segment. The company's corporate operations will be discussed separately. 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 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 those statements are made and management's good faith belief as of the time with respect to the 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 thereof.Now I'd like to turn the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

Thank you Michael and good morning everyone. To begin, let me state that 2019 was a solid year for Lincoln Tech as we met or exceeded our previously disclosed key metrics guidance such as revenue same-school student start growth and EBITDA, while also continuing to generate increases in student graduation and placement rates. Overall our performance continues to demonstrate our consistent growth.Lincoln has achieved starts in revenue growth for nine consecutive quarters dating back to fourth quarter of 2017. I believe our efforts over the past few years to increase awareness among our various target audiences is paying-off and our message of providing career-focused education is increasingly resonating with potential students.Most importantly, we have returned to profitability and see opportunities for our earnings to grow meaningfully. Lincoln is now poised and ready for the next chapter of growth in our nearly 75-year history. Our network of 22 campuses are well positioned with in-demand programs and room for additional offerings which will further strengthen our profitability.Our marketing and sales efforts are clearly achieving the goals that we have established and we continue to find new opportunities to enhance what we are doing. We have achieved three years of improvement in graduation and placement rates and we know we can achieve even more.Our employers give us frank, honest feedback about our students and the education they're receiving and I could not be more proud of the positive response our graduates receive once they've become employed in the marketplace.Finally I know that we are just scratching the surface of what we can potentially do in helping to solve the skills gap challenge facing our nation's companies and industries. Just within the disciplines currently offered at our campuses, the need for skilled employees that is being expressed by employers continues to grow rather than…

Thanks, Scott, and good morning, everyone. I'd like to begin my comments by repeating a point Scott made during his comments. We achieved or exceeded all of our 2019 operating and financial targets.From a financial perspective, the year was an exceptional one for our company as we consistently achieved our goals and milestones resulting in our return to profitability. In prior years we faced a challenging environment, in which we had to consistently manage our cash operations to find the appropriate balance between growth initiatives, enhancements to the student experience and employee retention.Our strategic initiatives over the past several years including exiting underperforming campuses while adding high-demand programs positioned us to achieve our solid performance in 2019 and we'll continue to -- continue the positive operating and financial trends going forward. We will continuously evaluate and execute on strategic opportunities to enhance our future growth and achieve an even stronger 2020.I'll now review some of our fourth quarter and full year financial highlights. First in mid-November, we entered into a new $60 million credit facility with our prior lender, of which $50 million is cash collateralized. In addition, we raised $12.7 million in proceeds through a private placement of convertible preferred stock. These two actions strengthened our balance sheet and we ended the year with cash and cash equivalents of $23.5 million, as well as availability under our credit facility of over $20 million.Together the new credit facility and private placement increased our liquidity by more than $30 million and it's projected to yield at approximately $1 million in annual interest savings. The additional liquidity we generated will be used to accelerate our growth and increase shareholder value through the expansion of existing high-demand programs into additional campuses, the introduction of new program offerings and the potential expansion of our…

Thank you. [Operator Instructions] Our first question comes from Alex Paris with Barrington Research. Your line is now open.

Good morning, guys. Congratulations on the strong finish to the year.

Thanks Alex. Appreciate it.

I have a – just a clarification question. If you look at your net income in the fourth quarter and you look at the diluted shares outstanding in the fourth quarter it might not suggest EPS were $0.37 yet – the press release says $0.33. What am I missing there?

Right. Hey, Alex, we're probably going to need a follow-up call on this. Now with our preferred shares, we have to do that on a converted basis and we have to allocate percentages of income on a weighted average shares, outstanding between preferred and our common. So, some of the income gets moved between the common and the preferred shares. So that's why it can't be calculated right on the face of our income statement any longer.

I see. So – however with that said, for the full year the $0.08 the math works. So what I'm assuming from what you're saying is there's two ways to calculate this. One on an as-converted basis and one pre-converted. Pre-conversion would have been non-dilutive to dilutive earnings per share. So you use the other method as if it were converted right something along those lines?

That is correct. Due to some provisions in our preferred agreement, we have to – due to a two-class method. So we do have to allocate income, but what you said was correct.

Okay. Good. And we'll have a follow-up call anyway. But, thank you for that. I just wanted to make sure it wasn't a typo. Second, thank you for the 2020 guidance. It's in line with our expectations which are the consensus I guess. However, given that revenues and starts were up 5% and 10% respectively in the fourth quarter and average enrollment topped our expectations. It seems to me your revenue and starts guidance at 3% to 5% for 2020 is conservative. Do you have any additional color there? Is that what it is conservative? Or this is...

You could be very correct.

I got you.

Yeah. So yeah, we view – we're entering 2020 in a much stronger position. We see good things ahead of us. But we just want to remain prudent in our assumptions. And as things evolve we will gladly evolve with them.

But you are right. With our strong carry in population of 750 more students along with what we're seeing in January and February, yes it could be a little bit on the conservative side.

Okay. That's better than the alternative. Speaking of your guidance, your guidance at the midpoint suggests the contribution margin of about 24% to EBITDA, 26% to operating income. I know, we've talked before given your capacity utilization at 35% or something like that. Your incremental contribution margin target would be higher than that say 40%. So what's the disconnect there? I'm assuming these seven new programs have something to do with it.

Right. So it is like when we roll-out new programs in the year we roll it out. It's not really hurting our bottom-line but it hurts our margins a little bit. But going forward like for instance in 2020 rolling out several new programs. It's not really going to help our margins for 2020, but 2021 it really will see a significant growth in our operating margins. As well as -- as I mentioned our bad debt expense --we think did help increase some of our revenue but did hurt our margins slightly.

Got you. And what were those -- what are those seven programs? Are they all welding? Or is any of them new?

It's a mix. They're not new programs they're replications of programs. So we have two welding programs that are rolling out. We have two of our IT programs which are rolling out. We have an electrical program. We have a dental assisting program and then at our cosmetology school we have a makeup program.

Okay. Good. That's helpful. So at the previous peak two years after the recession began perhaps in the early 2010-2011 time frame, obviously, you had much higher capacity utilization. You had an EBITDA margin of over 20%...

Correct.

And the EBITDA margin in this -- based on your guidance is 5.6% up from 4.9%. What's a reasonable target and time frame to get to significantly higher margins?

Well, I think, that -- well definitely you must be reading some of my closing comments, but we are definitely going to continue to move forward with getting a ratcheting up of our margin as Brian said in 2021 as we get the benefit of these new programs that we're rolling out. You'll see a more, I guess, impactful increase we would hope in our margin. Just to kind of put it in perspective, we expect to be spending at least on the CapEx side about $4 million for these new programs and we would expect that those programs should generate $4 million to $5 million of EBITDA in 24 months to 30 months. So all that will help again continue to leverage our existing fixed costs to drive up those margins.

All right. Let me transition to that then $4 million in new programs is that in 2020 or over the next couple of years?

Yes.

Okay.

It's in 2020 in our CapEx budget.

So of the $7 million -- $6.5 million to $7.5 million $4 million is on new programs?

Correct.

Correct.

And the new programs should over time generate $4 million to $5 million annually in revenue?

No, in EBITDA.

I'm sorry EBITDA. Okay. Good. And then Scott, did you disclose what those new programs were?

It's -- once I just mentioned the two welding the two IT programs the dental assisting, electrical and the makeup.

Okay. The replication of those programs yes for $4 million of CapEx. Is there some build out associated with them and things like that for the campuses or equipment that needs to be purchased?

Absolutely. Yes.

Okay. All right. Just to follow-up -- and then you mentioned graduation and placement rates of 67.9% and 81.7% for 2019. The other numbers you mentioned were those 2018 – 2018, 65.4% and 74-point?

No, they were three years prior.

About three years prior. And your targets are 70% and 80% by 2023 if not sooner?

70% and 85%. So it's 70% graduation 85% placement for the whole company. We obviously have schools that perform much higher than that as well.

Great. And then -- just one last question. It's your commentary with regard to the Department of Education in your composite score which was less about 1.5 in 2017 and 2018 not surprisingly. So you're on Heightened Cash Monitoring in 2020 until at least the Department of Education has a chance to review your 2019 numbers which are above 1.5.

Correct.

Yes. Okay. Good. So that's really a nonissue. How does that -- you've been on Heightened Cash Monitoring before. How does that affect cash flows or margins or -- I realize it's not going to be material, but what should we know about that?

Right. It won't affect any of our margins. Under the new HCM 1, it's slightly different from last time we're in there. We were on it. So, there's a little more administratively items that we have to do. So, it will slow down our cash but only by a couple of days. So it's not going to really have a major impact.

Great. And -- okay that’s very helpful. Thank you, very much and I'll talk to you soon.

Thanks, Alex

Thanks, Alex

Our next question comes from Bill Nasgovitz with Heartland Advisors. Your line is now open.

Well, good morning guys.

Good morning, Bill.

Good morning, Bill.

Congratulations on the strong finish and year. It's terrific to see. So just a question in terms of -- and thanks for fleshing out that where we're going to spend roughly $7 million. That's good to hear. So, new programs -- can you say that again, new programs you're going to invest $4 million and what sort of return do you expect and time?

We would -- basically, I would expect those programs to generate about 500 students which should translate to $10 million to $11 million in revenue, which should translate to $4 million to $5 million of EBITDA. And that would be in the 24- to 30-month period.

Well that sounds like a pretty good return on investment.

We think so.

So do I. Happy execution. So, here we have a market cap I guess with the preferred of something around call it $70 million. And there's a huge disparity between Lincoln and just about every other publicly traded company. Why do you think that is?

Yes. It frustrates me and the team for sure. We feel like we're making great progress. And I think that the reason is to be honest, I just haven't been out there telling our story enough to people, which is why over the next 45 days, that's all going to change. There's so much positive in what we've accomplished over the last couple of years and so much more for us to achieve and everything is working very well for us right now. So, I am hoping and anticipating that once people truly understand the potential of what we offer and where we're headed that will change. You're the investor if you can give me more guidance I'd love to take it because we want to move the needle here for sure.

Yes. Well that's good to hear that -- and you're conservative in terms of your forecast. But could you just walk through -- if we achieve -- if you achieve a 10% EBITDA margin on -- what could that mean in terms of the profitability of the company? And when might that be reached?

Well I mean you can do the -- yes you can kind of do the math on what that would mean for the bottom line. I mean today we're around $270 million in revenue. I would anticipate that if -- once we get up to -- I haven't done the math on that Bill. But I'd imagine once we get up into $325 million to $330 million, we could maybe be at that level that you're talking about.

And within the same schools.

Yes.

And when might that be?

I would say that would be by in three years or less. It all depends on how quickly we're able to ramp these other programs up.

Okay. All right. Thank you, very much and good luck.

Thanks Bill.

Thank you

Thank you. Our next question comes from Justyn Putnam with Talanta Investment Group. Your line is now open.

Hey good morning. Congratulations on a good year and quarter. I just had a quick follow-up on the cash monitoring situation. I just want to be clear that that's not having any impact on your operations or strategic initiatives such as opening programs and stuff like that, right?

Right. I think our programs are all in process of the approvals right now, so it has no impact on those programs that we mentioned. And going forward, we're hoping by the end of the year -- as was mentioned, we're hoping that, when the department gets to review our financials, before year-end. Hopefully, we'll be removed from Heightened Cash Monitoring.

And you mentioned possibly, using some of your new whether it be purchase, I guess new campuses or something like that, possibly. Does that impact that strategic goal?

I don't think. So, because as of right now, there is nothing identified. So, again, we're not anticipating to, be on, HCM1 for, any length of time.

Okay. And then, Brian final question for you. You have a consolidated balance sheet here. And this question will be answered in the Qs filed. But I don't believe it's been filed yet, right? So,...

It is soon to be filed. Yeah.

Well, I was just curious if there was a restricted cash balance that you might break out for us.

So the restricted cash balance was $15 million. It was not included in that -- in my prepared remarks of the $23.6 million. So that did not include the restricted cash. It was $15 million. And it was paid back in the first week of January.

So your cash balance, at the year-end, including the restricted cash, would be the $23.6 million plus, the $15 million?

Correct. And we still had another availability to borrow if needed to be over another $20 million.

Right, right, right, so including the cash you raised from the preferred issuance, it looks like your net debt did still creep up, what it was at $5 million $7 million? Does that sound about right, year-over-year?

Our net -- yes, yes, because we were in a cash deficit prior to that correct a much greater.

What do you mean?

We were -- before we did it -- yes it improved our net debt position. But year-over-year when you look at it from December-to-December, it got slightly worse. So I think we're in a net debt of last year of negative 2%. And now we increased slightly.

Okay. Got it, okay right, that's my questions. I appreciate that.

Thanks, Justyn.

Thank you. [Operator Instructions] Speakers, I'm showing, no questions in the queue, at this time. I'd like to turn the call back to Scott Shaw, for any closing remarks.

Thank you all for joining us today. I hope that you can clearly see that Lincoln is extremely well positioned to capitalize on numerous industry trends and opportunities, as well as better serve our increasing population of talented skilled students, who eagerly seek to enter the workforce.Our solid balance sheet ability to consistently grow our population in an extremely low unemployment environment, increasing profitability, in our industry-recognized brand for high-quality hands on and caring students, sets us up for an exciting 2020 and long-term success.In closing, I will remind you that our 22 existing campuses generated $85 million of EBITDA back in 2010. And my entire management team is focused, on bringing linking back to that level as quickly as possible.Thank you again for your time and interest. And I look forward to seeing you, out on the road. Have a great day.

And I'm sorry, I would just like to correct myself to answer, Justyn's question, actually we have positive cash. Our net debt was approximately $32 million. And including the $15 million of restricted cash we had cash of $38 million. So we're slightly positive, where prior year we were slightly negative. Sorry about that.

No problem. Good news. Thank you all for listening. Have a great day.

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