Good day, and thank you for standing by. Welcome to the Second Quarter of 2022 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. . Please be advised that today’s conference is being recorded. I would now like to hand over the conference over to your speaker today, Michael Polyviou. Your line is open.

Thank you, Catherine, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the second quarter ended June 30, 2022. 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. 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 expectation 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 would like call over Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

Thank you, Michael, and welcome, everyone, to our call today to review Lincoln's second quarter financial performance and recent corporate developments. Since we last talked to you in May, our team has made significant strides implementing our five-year growth plan strategy. Over the past three months, we’ve entered into three new corporate partnerships with industry leaders in the electric vehicle, automotive paints and coatings, and collision repair segments. We are especially pleased to be partnering with Tesla, the world's leading electrical vehicle manufacturer, as we help them meet their growing technician needs, as well as potentially work with them in other areas of their organization. They like the quality of our students and the breadth of our program offerings and locations, especially our electrician program, since they view themselves as much more than just a car company. These new agreements will help our partners fill the urgent skills gap they are experiencing in light of the nation's overall low unemployment rate, and increasingly more difficult search for employee training solutions required to continue their respective corporate growth. Lincoln has paved the way in terms of creating innovative, customized training programs with our corporate partners, and each year, a larger and larger percent of our students directly benefit from our partnerships. Furthermore, we recently increased the size of several of our company paid partnerships, as demand for skilled technicians continues to remain strong. We also executed on our strategic initiative to identify and create new campuses in markets prioritized by our corporate partners, as well as potential partners. On July 23, we announced the creation of a second campus in the metropolitan Atlanta area, one of the fastest growing metropolitan areas in the country that’s strategically located in an area to serve students within the city limits, as well as Point…

Thanks, Scott. Good morning, everyone. I'll start with a few key operational developments, followed by our second quarter financial results, and conclude with our updated 2022 guidance. As Scott mentioned, our new campus in Atlanta, Georgia, is expected to open in about a year. For the buildout of this new campus, we plan to invest approximately $12 million in capital expenditures, net of $2 million allowance from the landlord. We will completely renovate the interior of the facility, offering students a modern learning environment with advanced technology, which will allow us to maximize the efficiencies of our new hybrid learning model. Construction is scheduled to start this year, resulting in CapEx of approximately $1 million in 2022, with the remaining balance incurred during the first nine months of 2023. In terms of its impact on the 2022 financial results, we anticipate that the Atlanta campus will incur approximately $600,000 of expense related to rent and other startup costs during the second half of the year, with the majority recognized in the fourth quarter. As previously announced, we project that the new campus will contribute approximately $20 million in revenue and $5 million in EBITDA within four years of opening. Another highlight during the quarter was the Board Directors approval of the share repurchase plan of up to 30 million of our common stock. Through June 30, we repurchased approximately 400,000 shares for $2.5 million. The repurchase plan was authorized for 12 months, and additional purchases may be made during the second half of the year and into 2023. Our strong balance sheet, solid cash flow generation, enables us to undertake this repurchase plan. At the same time, we are able to fund all our growth initiatives, including new campuses. And lastly, we have two real estate developments to update you…

Thank you. Our first question comes from Alex Paris with Barrington. Your line is open.

Hi, guys. Thanks for taking my questions. I just have a couple of follow-ups related to things that you had put in the press release and said in your prepared comments. With retention up, graduation and student placement rates improved, the issue is starts conversion, and I think you were clear there. and it's not unlike your peers in the space. It looked, though, that the greater impact was on transportation and skilled trades versus the healthcare and other professions segment. Transportation skill trades were up 3%, I think, and starts were - HOPS was up 6%. I was wondering if you can give us a little bit of color there by program - or by segment, by program, by geography, by channel. And I know you touched on some of this, but maybe just go over it again for me, please.

Sure. Thanks, Alex, for the question. So, transportation has much more of an impact from our high school marketplace. And while high school was up, we were anticipating that would be, frankly, up even more, given some of the indications that we saw. We did see particular softness at our Nashville campus, which is really very much dependent more so on high school than our other campuses. Otherwise, there really isn't any kind of consistent trend that I would highlight that points at any one campus or program as far as being weaker than anything else.

And then, just a reminder, what percentage of your transportation and skill trade students come from - directly from high school as a percentage of the total.

Yes. about 30%.

About 30%. Okay. All right. And then guidance midpoint to midpoint, I think you noted this in the prepared comments, but the reduction in revenue is nearly the same as the reduction in adjusted EBITDA on a dollar-for-dollar basis. And I think that you attributed that to additional expenses, like rent for example, and things like that. Just a little bit more color there, please.

Yep. No problem. So, definitely, with the shortfall in revenue, there's definitely a lot of profitability that is lost there with that incremental revenue, but we're also seeing some increased costs beyond what we anticipated, especially let's say around faculty costs. Our whole intention is to ensure that the quality of our education remains as high as possible in order to get the faculty that we need in the timeliness that we need, we did have to pay more than anticipated. And then we also were experiencing, I think, like a lot of maybe companies, more employees going back to get their healthcare than they did pre-COVID. I guess they're catching up and were kind of self-insured. So, we're seeing an impact in those costs. And then, while we budgeted for increase in costs due to a number of the initiatives we have underway, we are seeing some increases in those areas as well, but those will be one-time costs that will go away once we complete the centralization of financial aid and the completion of the rollout of the blended learning. So, those are kind the biggest buckets.

Right. And Alex, if you remember, in the beginning of the year, we mentioned that those - I'll call it the efficiencies initiatives, would be approximately $2 million. It looks like we're running at almost double that now. And as Scott mentioned, it is all one-time.

Yes, I got you. Just - it's just bad timing, of course, the slowdown in starts conversion. At the same time, you have increased investments in the future, right?

Couldn't agree with more.

And then based on the color commentary that Brian provided, third quarter starts down, fourth quarter starts up, to get us to the full year target number. What gives you the confidence that fourth quarter starts would be up when you're expecting third quarter starts to be down?

Sure. Well, we frankly planned for the third quarter to be basically flat to maybe slightly down, just given the way the starts were falling. And we have a number of our new programs that will be coming online by the third quarter. So, we're hoping that those will help us with the fourth quarter growth that we're anticipating.

And just remind me, what are the new programs coming online in the fourth quarter?

Sure. Well, we have medical assisting at a campus, and we have an electrical program, which is, frankly, one of our strongest programs coming out on another campus. And we've rolled out two other programs earlier in the year that will have more momentum, and we're increasing the capacity of our welding program at two campuses, which should all help us in the fourth quarter.

Great. And then I'll just finish with a question, on a very positive note, I was very impressed and excited to see in early August, the announcement of the Tesla agreement. Very exciting to be teaming up with such a high-profile EV manufacturer. And I think you mentioned in your prepared comments that the fact that you offer electrician programs, were an attractive component to Tesla making that decision. And I think, correct me if I'm wrong, is Lincoln the first for-profit post-secondary education school to do a formal agreement like this with Tesla?

Yes. Well, I'll answer the last part first. Yes, we are the first. And so, we're very excited by that. And while still electric cars remain such a small percentage of the cars sold, we all know the expectations that are out there for that to increase dramatically. And when we were touring the Tesla folks through our facilities, it really was amazing to see how the students would see the Tesla logo on their shirts, and immediately start gravitating towards them. So, there is definitely a lot of interest in demand in electric vehicles. And we were surprised, frankly, as we were showing them around the campus and showing them HVAC and welding and other things, how you could see their minds starting to spin about how else we might be able to partner with them in the future, because I guess we learned along the way that they view themselves as much more than just an automotive company. They're looking to build these very large batteries to help solar and wind farms store the energy, and they're looking at other initiatives that some of our programs piqued their interest. So, we look forward to getting back to the discussions with them on that. But yes, it will be very exciting for us. And also, we already have an enhanced electrical curriculum in our new automotive curriculum that we've started rolling out through Electude. But we anticipate, and Tesla has said that they will work with us on refining our overall electrical vehicle program, hopefully to make it as robust as possible. So, yes, it's a very exciting initiative for us.

Well, congratulations on that win, and I'll get back into the queue. Thanks.

Our next question comes from Eric Martinuzzi with Lake Street. Your line is open.

Yes. Curious to know if you've made any changes in your marketing outreach as you parse through the enrollments to starts conversion data, if there's lessons learned here about the students you're going after.

Yes, it's a good question. It certainly is something that we're focused on trying to understand what is it that we can alter to help drive that start rate back up. There are certain areas that we are looking at scaling back where the start rate per student is definitely not as attractive in some of our third-party leads, which we've been scaling back anyway. We’re looking for other ways and channels to, frankly, get more interest out there as well, to drive more into that - into the front channel, knowing that maybe the start rate will be lower. But also, we think that operationally, Eric, there are things that we can do to, on the margin, make things more efficient. We certainly have the switch taking place with financial aid, and have more bodies in financial aid today than we did a year ago. But as we're switching from operating at the campus level and at the corporate level, always there are some, I'll say challenges in getting that executed. We definitely got more students through financial aid this year than last year, but as a percentage of the opportunity, we got a little bit less. So, I'm looking to get that project behind us and make sure that we can be as efficient as possible, which should also help us marginally on that start rate.

What about adult versus high school learner? If I look at your student body wide, what is the - I know you just answered the question in transportation and skilled trades as 30% high school, but what is high school for the total?

Yes. overall, it's about 20% of our students. And again, we were seeing some high school enrollments that were greater than what we had last year, but the start rate wasn't nearly as strong as it was last year. And we're seeing a somewhat similar trend. We also have students that come to us that are not high school students, but adults who relocate to go to our campuses. And we definitely saw a downturn in those students, probably because of either transportation costs or other economic factors driving them not to want to relocate to get an education.

Okay. And then on the financial aid centralization effort, do we have lessons learned here, or is it just - it probably wouldn't have even been - that it was just a marginal issue with the consolidation effort that got exposed with the reduction and with the improved unemployment figures, or is it something that - an operational issue that we- the opportunity to do it over again, we would've changed how we did it?

No, I think that your discussion of the fact that unfortunately without the growth at the topline, we're just looking at every item of impact to our business, and I just highlighted that more. Otherwise, the transition from what we anticipate to where we are, it's not exactly where we want to be, but it's also not a huge negative, but it's something that we know will get better and it will be executed on over the next quarter. So, by the end of the year, we should start moving in a much more positive direction with it.

Okay. And then last question on the - just as you looked at the figures month by month, start by start, did you notice things worsening in kind of a June or July versus April and May, or was it pretty challenged throughout the last four months?

Yes. No. So, that's - it hasn't been a steady state. It was obviously - when we spoke with you all back in May, we were seeing some positive momentum. Then throughout the quarter, while there was some softening in the intake of leads, we still had a nice pool of candidates that were going to help us achieve our results. We did see some softening in the month of June, but to confuse matters more, we’re 10% up for the last four weeks in our enrollments. So, it's up and down, but given that we've been, I guess, negatively surprised for two quarters, we think it's prudent to factor all that in for the rest of the year.

And also, one of the things that led to it was for the quarter, the more - I guess, the starts were weighted a lot more towards June. So, that added to the little bit of the surprise in the reduction in start rates.

Understand. Thanks for taking my questions.

Thank you.