Lincoln Educational Services Corporation

Hello, and thank you for standing by. Welcome to the Q3 2022 Lincoln Educational Service Earning Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the conference over to your speaker for today, Michael Polivio. You may begin.

Thank you, Tawanda, and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the third quarter ended September 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, Chief Financial Officer. 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 a term is identified under 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. Overlooking 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 factor 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 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 to turn the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

Thank you, Michael, and welcome, everyone. Earlier today, we reported our third quarter results that were right in line with the expectations we laid out for you back in August. We continued to invest in the various components of our growth strategy and began to see the initial top-line contribution from our new hybrid teaching model. Our investments in growth opportunities along with wage and compensation inflation have impacted our earnings, but we do remain solidly profitable and expect this trend to continue. In addition, enrollment and graduation rates remain strong across our 22 campuses, and as we forecasted during our last call with you, starts during the third quarter did decline by 500 students as compared to a year ago period. Based on current trends and actual starts during October, we continue to expect fourth quarter student starts to increase at a solid rate. Brian will review all of our guidance for the full year during his remarks. Two major initiatives that we have talked about throughout 2022 are the centralization and automation of our financial aid process and the rollout of our new hybrid curriculum. Both initiatives will improve our students' experience and bring greater efficiencies to our company. For example, the centralization automation of our financial aid process should accelerate both the financial aid application and award process, leading to a better start rate and thus more students. The centralization automation of financial aid is an ongoing initiative requiring investment. However, it remains on schedule to be fully implemented by the end of 2022, and all signs are that we will realize a lowering of costs from this initiative during 2023. Our new hybrid teaching model provides greater flexibility for both students and faculty, while once fully implemented, lowering our operating costs. Not every program will be taught in the hybrid format, but all similar programs will be on a standardized calendar, which will assist with gaining efficiency across our campuses. We are not moving welding, culinary, nursing, and cosmetology to the hybrid model. We are on track for this year's conversions and expect all remaining programs to be up and running by this time next year. As we've discussed in the past, this new model enables our students to work part-time or manage other commitments while they pursue their Lincoln education, which will enable a higher percentage of students to successfully complete their education. When implemented, it will also reduce our complexity and allow us to reduce expense in several key operational functions. We do expect to have approximately 40% of our programs converted to this new hybrid teaching model by the end of the year and all programs left to be converted by the end of 2023. Once existing programs are concluded and a majority of students are in the new hybrid model, we should start to see additional savings and efficiencies in 2024 and beyond. During the third quarter, we began to see the first tangible contributions in our top-line performance from the new model, which provides certain classes and components digitally while others remain in the traditional classroom setting. Brian will provide a little more color when he reviews revenue during his remarks. During our last call, we discussed three new corporate partnerships with industry leaders in electrical vehicle, electric vehicle, automotive paints and coatings, and collision repair segments. We are especially pleased to be partnering with Tesla, the world's leading electric 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. The Tesla agreement has moved quickly to rollout. We are enrolling our first class with Lincoln Tech and Tesla employees and will commence training in mid-December at our Denver, Colorado campus. Our corporate partnership agreements help our partners fill the urgent skills gap they are experiencing in light of the nation's continued overall low unemployment rate and increasingly more difficult search for employee training solutions required to continue their respective corporate growth. While there has been much talk in the financial media and government circles of the negative impact on job creation from rising interest rates, there still is a shortage of workers for the type of essential skilled position Lincoln trains for. Our company 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. Case in point, we recently celebrated the 20th graduating class from the Hussman TechX Center located within our Grand Prairie, Texas campus, an effort to help fill a projected 385,000 HVAC job openings nationwide by 2030. Since 2018, Lincoln has helped Hussman hire more than 200 new technicians across the country. Another major component of our growth strategy is the initiative to identify and create new campuses and markets prioritized by our corporate partners as well as potential partners. During the third quarter, we announced the creation of a second campus in the metropolitan Atlanta area, one of the fastest growing metropolitan areas in the country. This new campus is strategically located in an area to serve students within the city limits as well as points south of downtown. We've begun the work to open the new campus and remain on schedule to do so during the third quarter of 2023. We expect to invest around $600,000 this year into the new campus and a total of $14 million in capital expenditures by the time we open in about a year. We continue to expect that within four years of its opening, the 56,000 square foot facility will 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 hybrid 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. As we previously noted, 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 based on our new hybrid teaching model 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 drive our strong graduation and placement rates. Based on employer demand for skilled employees and job growth projections nationwide, we have already identified 10 new markets where we can open new automotive and skilled trades campuses as part of our long-term strategic plan. We plan to replicate the cost efficient design of the new Atlanta facility into the new Nashville campus. As we have previously reported, our current facility in Nashville is under contract to be sold. Once that transaction closes, we will begin the process of transitioning our current operations to a new campus. We've identified a new site, but are awaiting the closure of our current campus' sale before solidifying that transaction. Once we do close on our current campus sale, we will lease back the current facility until the build out of the new one is completed. As we discussed on the last call, the buyer of the Nashville property continues to pursue local agency approvals and continues to make the monthly non-refundable payments to Lincoln under the purchase contract, which as of today total approximately $400,000. At this point, we believe the transaction will close during the second quarter of 2023 for a purchase price of $34.5 million. Our efforts to identify new campus locations has led us to identify some new opportunities to enhance value at some of our existing campuses. In fact, We are working on a new lease that will enable us to add automotive, electrical, and HVAC to our Lincoln, Rhode Island campus. We are very excited by this recent development, which will enable us to leverage our existing management team and market presence with three strong programs and give us our 14th auto program. The Lincoln, Rhode Island location not only serves the state of Rhode Island, but also the greater Boston metropolitan region. In addition to Lincoln, Rhode Island, we will also be adding skilled trades programs into other existing campuses, further leveraging existing management teams and market presence. We will share numbers and locations during our year-end earnings call next year. Meanwhile, our constant evaluation of campuses has led us to closing our Somerville, Massachusetts facility at the end of next year. We were recently made aware of the building owner's decision to demolish the building and subsequently conducted a search in the Boston metropolitan region to move the campus, but were unsuccessful in finding the right location. As we've done in the past with campus closures, we are providing our current students with the opportunity to complete their program of study through December 2023. and our staff will deliver all the necessary student services, including employment assistance, to graduates, even after closing. The campus offers medical assisting, dental assisting, and massage, and serves approximately 250 students. Brian will share some of the financial impact of this closing during his remarks in a few minutes. As we look to the end of 2022 and into 2023, we continue to face the headwinds of a low unemployment economy that is providing students with other job opportunities, concerns over taking on debt in a rising interest rate environment, and inflation's impact on transportation costs and our operating expenses. As I noted earlier, we generated growth in starts during October and expect positive growth for the fourth quarter. However, the decline in Q3 starts and earlier softness in Q2 means our performance will be soft in the first half of next year, but as we open the new campus and replicate programs, our second half should show much better in performance. We will share much more detail during our year-end call next year. Our transition to the new hybrid teaching 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. Also, centralizing and adding some automation to our financial aid process also has temporarily required additional people to be added to ensure no interruption to our business. In addition to incurring additional one-time costs, these two initiatives do generate some minor temporary inefficiencies in our business. As the initiatives come to completion, the one-time costs will go away and further efficiencies should be achieved. Our financial aid initiative will be completed by year end, and our hybrid teaching model rollout should be done by this time next year. We are very encouraged by the early results that we are getting from our campuses who have transitioned over to our new financial aid process and hybrid teaching model. The student experience and our operating efficiency both improve with these initiatives, and Lincoln's ability to scale more rapidly will be increased. 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 third quarter, and graduate placement rates also increased. As I noted earlier, the 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 Lincoln training from prospective students. Despite these short-term challenges, we continue to be quite optimistic that our strategic growth initiatives will generate consistent long-term growth for all of our stakeholders. I'd like to turn the call over to Brian for a review of our third quarter financial results and outlook. Brian?