Lincoln Educational Services Corporation

Good day, and thank you for standing by. Welcome to the second quarter 2022 Lincoln Education Services Earnings Conference Call. At this time, our participants are in the listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Polivia Yu. 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 Myers, CFO. Today's call is being broadcast live on the company's website, and 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. Total local 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 statement 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 Factor section of the Annual Report on Form 10-K, and the quarterly report from 10-Q filed with the Securities and Exchange Commission. Overlooked 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 overlooked statements are qualified in their entirety by this cautionary statement, and Lincoln undertakes no obligation to publicly revise or update overlooked statements, whether as a result of new information future events, or otherwise after the date they're up. Now, I'll turn the call over to 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 strategies. 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 23rd, we announced the creation of a second campus in the metropolitan Atlanta area, one of the fastest growing metropolitan areas in the country that is strategically located in an area to serve students within the city limits as well as Point South. The new campus is expected to open during the third quarter of 2023 and is designed to serve up to 700 students. Within four years of its opening, we expect the 56,000 square foot facility to be generating approximately $20 million in annual revenue and $5 million in annual EBITDA. The campus is being designed to be more cost efficient than our existing campuses both in reduced square footage and personnel as we plan to benefit from our new blended curriculum as well as centralized services. The campus will focus on providing training programs in automotive technology, electronic and electronic systems technology, welding, and heating, ventilation, and air conditioning technology. It is expected that these industries will create an estimated 84,000 new jobs in Georgia by 2028. Combined with our existing Marietta, Georgia campus north of Atlanta, Lincoln is positioning itself to be a major resource of trained students to meet this expected demand. The new Atlanta campus is the first result of a plan to develop a minimum of five new campuses nationally within the next five years. Each campus is designed to serve a local metropolitan market with the vast majority of the students coming from within 30 miles of the school. The curriculum will be blended and new technologies will be incorporated that enrich the learning environment and student experience while giving our highly trained faculty tools to better track and monitor student success, all to continue to increase our strong graduation and placement rates. Based on employer demand for skilled employees and job growth projections nationwide, we have currently identified 10 new markets where we can open new automotive and skilled trades campuses as part of our long-term strategic plan. Two major initiatives that we have underway that will improve our students' experience and bring greater efficiencies are the rollout of our new blended curriculum and centralization and automation of our financial aid process. Our blended curriculum provides greater flexibility for both students and faculty while lowering our operating costs. We are on track to fully transition 40% of our programs to this new model by the end of 2022. This new model provides our students with greater flexibility to work part-time or manage other commitments while they pursue their Lincoln education, which will enable a higher percentage of students to successfully graduate. When implemented, it will also reduce our complexity and allow us to reduce expenses in several key operational functions. By the end of 2023, we expect to have moved all programs at our 23 campuses to this new model and begin to fully realize all the efficiencies and benefits in 2024. At the same time, we've continued to implement the centralization of our financial aid services, which is a key component of our growth strategy. The COVID-19 pandemic shed light on some operating inefficiencies of our previously decentralized structure for this critical function. As a result, financial aid determination and qualification could be delayed, and this delay may have contributed to some enrolled students to push out the start of their program. Our new centralized approach is designed to speed both the financial aid application and award process and is streamlining the realization of financial aid. It is also lowering Lincoln's costs when it is fully implemented by the end of the year. Now let me transition and speak about our current results. and what we see for the remainder of the year and the impact of these changes on our guidance. We finished our first quarter on plan financially, but with lower starts than we had expected. However, we had strong enrollments for the second quarter that were trending up meaningfully. Based on these enrollments, if our start rate had matched last year, we would have achieved double-digit start growth in the second quarter, which would have brought our population back close to plan. Unfortunately, a lower percentage of enrolled students decided to start in the second quarter. We believe several factors contributed to the lower than expected start rate, including the macro factors of a low unemployment economy providing students with other opportunities, concerns over taking on debt in a rising interest rate environment, and inflation's impact on transportation costs. Drilling down a bit more with our starts, The second quarter shortfall from our double-digit expectations was due to both a shortfall in adult starts and high school starts. High school starts did increase compared to last year's second quarter, but were not as high as we expected despite the solid enrollment indicators. We expect that these challenges will continue, and as a result, although we still are experiencing strong enrollments for the second half of the year, we believe that start rates are likely to remain depressed throughout the rest of the year. Typically, during low unemployment periods, we first see a softening of interest in enrollments rather than a decrease in start rate, which typically happens subsequently. This year, start rate has declined first, and frankly, we have not seen a decrease in enrollments. Specifically, as we look to the next two quarters, we expect these challenges to result in our starts being down from last year in Q3, but then ahead in Q4. The reduction in starts as compared to our original plan results in lower population and a decrease in revenues for the year. We will experience an almost dollar-for-dollar decrease in our profitability during the second half of the year given we will continue to invest across all of our initiatives. As we have mentioned previously, we have numerous initiatives underway this year to both create future efficiencies and to increase our non-Title IV revenue. Additionally, with regard to our expenses, We've had an uptick in wages for new employees, especially faculty, and in our medical costs. Our transition to the new blended learning model has higher temporary expenses as it requires additional faculty to complete the education of students that are operating under the old model while the new model has started. In addition, centralizing and adding some automation to our financial aid process has also temporarily required additional people to be added to ensure no interruption to our business. While both initiatives are progressing very well, they are incurring additional one-time cost and some minor temporary inefficiencies to our business. As the initiatives come to completion, the one-time cost will go away and further efficiencies should be achieved. Our financial aid initiative will be completed by year end, and our blended curriculum rollout should be done by this time next year. As for non-Title IV initiatives, both our KINDIG rollout and exploration into shorter non-Title IV training opportunities are both progressing but short of our plans, which has also increased investment in these initiatives prior to them making a contribution. We are very disappointed that as the environment has changed, we have been unable to convert the strong interest in our programs and our double-digit enrollment growth into corresponding growth in our starts and revenues. At the same time, we are very encouraged by the early results that we are getting from our campuses who have transitioned over to the new FA process and blended learning programs. The student experience and our operating efficiency both improve these initiatives, and Lincoln's ability to scale more rapidly will be increased. We are fortunate that because of the growth and improvements that we have achieved over the past several years, we are able to continue to invest in our initiatives even as the environment has become more challenging. While these decisions will result in a reduction in our profitability below our original financial projections for the year, We are highly confident that these efforts will lead to higher growth and profitability in the future. Once students do start, we've done an excellent job at retaining them and placing them in high-paying, rewarding careers. Lincoln's overall student retention rate continued to advance during the second quarter, and graduate placements also increased. As I noted in the beginning of my remarks this morning, demand for our highly skilled students remains extremely strong. This demand, along with our growing number of programs and corporate partnerships, continues to generate strong interest in LinkedIn training from prospective students. Our challenge during the second half of the year will be to regain momentum from this interest in the form of student start growth. We are cautiously optimistic that our programs and strategies will have a positive impact, but we also want to be prudent in our outlook. Despite these short-term challenges, we are quite optimistic that our strategic growth initiatives will generate consistent long-term growth for all of our stakeholders. Without a doubt, industry needs us, and demand from employers across the country has never been greater. In fact, we recently launched a podcast series to bring attention to career opportunities in some of America's most critical hands-on industries, where according to the U.S. Department of Labor's Bureau of Labor Statistics, Jobs are projected to surpass 1.1 million across the country by 2032. The first two episodes, computerized manufacturing and computer networking, were made available, and in July, episodes examining the diesel technology and collision repair industries were made available. Response to this has been overwhelmingly positive, and you have not viewed these. I encourage you to visit our website to experience it for yourselves. Furthermore, the current generation continues to seek alternatives to college that are cheaper, faster, and more assured to deliver skills and not just a job, but a rewarding career. We firmly believe that the operating environment presents Lincoln with substantial opportunity to prosper. Our new partnerships demonstrate that we bring value to their business, and these new partnerships present opportunities to expand to multiple campuses and with related industries. Before I hand the call over to Brian, I want to conclude with the board's authorization to repurchase up to 30 million of Lincoln shares. The initiative reflects the confidence the board has in our ability to execute our growth strategy, in addition to the achievements we have and will continue to make in the coming quarters. Now, I'd like to turn the call over to Brian for a review of our first quarter financial highlights and outlook. Brian? Thanks, Scott.