Lincoln Educational Services Corporation

Good day, and thank you for standing by. Welcome to the Q4 2022 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to Michael, Polly, you. Please go ahead.

Thank you, Lisa. And good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the fourth quarter, full year ended December 31, 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 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 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 in Form 10-K and the quarterly report in 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 call over to Scott Shaw, President and CEO, Lincoln Educational Services, Scott, please go ahead.

Thank you, Michael, and welcome everyone. Despite continued historically low unemployment and persistent economic growth, Lincoln established several positive trends throughout 2022 and generated 4.7% same-campus student start growth during the fourth quarter. We achieved strong financial results in the fourth quarter with both revenues and adjusted EBITDA growing in comparison to last year. For the full year 2022, we achieved all guidance targets as the team continued to implement the new hybrid teaching model, the centralized financial aid process, and our two major growth initiatives. We achieved a 500 basis point improvement in our graduation rate to 68.8% of students and increased the graduate placement rate to 81.6%. We enrolled the first class under our new partnership with Tesla, launched a new career pathways program with Johnson Controls, signed two new corporate partnerships, and are engaged in negotiations with two existing corporate partners to expand our programs with them. Despite the operating environment of high employment economy and rising interest rates, we grew revenues 4.5% and adjusted EBITDA by 7.4%. And we finished the year with significant debt-free, non-dilutive resources that are poised to grow in 2023 when we close the sale of our Nashville campus. These resources are enabling the implementation of our two major growth initiatives, as well as extending and expanding the size of our share repurchasing program to a total of $40 million. Over the past three years, we have transformed Lincoln's profitability and balance sheet. Now, with the success achieved to date with our hybrid teaching model, centralized financial aid, and program expansions, we have the opportunity to accelerate our investments to build a more scalable and higher return business. Key to this strategy is our new hybrid teaching model, which we began to implement at our campuses in 2022. This model delivers our programs with a hands-on learning on campuses combined with a greater component of classroom work delivered through online instruction. It 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 graduate. The model also standardizes our programs across campuses with on-campus time slots of morning, afternoon, and evening, and with consistent start dates that provides greater flexibility, efficiency, and overall capacity at our existing campuses. The rollout of our hybrid model at most campuses coupled with adding existing proven programs at select campuses will drive higher campus and company profitability. We have already started the process to have 10 new program replications across our existing campuses over the next two years. This results in organic growth with the fastest and highest return on investment as we leverage our existing infrastructure, campus management, and market knowledge. We anticipate that these 10 new programs will reach their full run rate after approximately three years of operation, at which time each is expected to provide an average of $1 million and added profitability annually. We expect to launch at least three programs before the year end, with the remainder opening in 2024. Programs we are focused on include electrical, HVAC, welding, automotive, and medical assisting, since these are all some of our most successful and in-demand programs. Pursuing this strategy requires a higher level of investment during 2023 in terms of both operating and capital expenditures. Completing the transition to our hybrid teaching model by the end of 2023 will result in increased instructional costs over the short term, but is expected to lead to greater efficiency beginning in 2024. Our investment in centralizing our financial aid process is extending into 2023, and we will also incur expenses associated with the initial launch of our new programs. We are forecasting modest revenue growth for the full year based on our forecast for an increase in new student starts of between 5 and 10% and higher revenue per student. Our efforts to roll out our hybrid teaching model, complete the centralization of our financial aid process, launch 10 new programs across our campuses, and increase marketing spend to maximize our students' start growth in a high employment economy will impact our profitability in the near term, resulting in a forecasted 2023 adjusted EBITDA of $19 to $24 million. We will also significantly increase our capital expenditures to $35 to $40 million to advance our growth plans, including our new campus in Atlanta. Balancing the capital expenditures spend will be the anticipated closing of the sale of our Nashville campus in the second quarter that is expected to result in approximately $35 million in gross proceeds and generate a significant net gain. We expect a successful execution of our business transformation plans will lead to significantly higher profit margins beginning in 2024 with a more efficient and scalable platform to drive sustainable growth thereafter. Continued strong demand for our programs, combined with the efficiency and growth from these investments, including the early contribution from our new Atlanta, Georgia campus, enable us to forecast that our adjusted EBITDA will approximately double from 2022 levels by 2025. We also continue to evaluate additional locations as part of the plan to open five new campuses optimized for our new hybrid delivery model in the next five years. Some of these new campuses may include the relocation of current Lincoln campuses, such as Nashville. The first new campus under development is our second location in Atlanta. The build out of this campus is progressing as planned, while some regulatory approvals are taking a bit longer than anticipated, and our first classes at this facility will begin by the first quarter of 2024. 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. We plan to replicate the cost efficient design of the new Atlanta facility into the new Nashville campus. The development of this campus will begin once the transaction to sell the existing Nashville facility closes, which we expect will be by the second quarter of this year. As outlined in the sale agreement, we can remain at our existing location for up to 18 months while we build out the new campus. I should note that all of our initiatives are predicated on the current environment of moderate economic growth, high employment rates, and no recession. With that said, we are benefiting from a positive trend of individuals considering careers in skilled trades. Our leads are increasing as are our enrollments, and once all the changes with our centralized financial aid processes are completed, we should be able to better capitalize on this increased demand with even more new starts despite the challenging environment. With economic growth deteriorating, we are poised to benefit from such macro-developments And with our new hybrid model, we can efficiently scale up to meet higher levels of demand. However, our strategies are designed to foster growth even in a growing high employment economy. At the top of this call, I mentioned the successful launch of the Johnson Controls Academy, a six-week intensive training program focused on developing the next generation of building technicians. The program, based at our Columbia, Maryland campus, was created to provide a pathway to employment at Johnson Controls locations throughout the United States. Johnson Controls supports the students with onsite housing and relocation packages and plans to onboard approximately 130 new technicians or more each year. The hands-on learning opportunity of the academy builds upon Lincoln Tech's electrical and electronic systems technician education for participants and prepares them for real-life experience in the field. The launch of the Academy follows a five-year partnership between Lincoln and Johnson Controls, and we are exploring other avenues through which we could expand the relationship. A new partnership with Tesla began operations quickly as we enrolled our first class in mid-December at our Denver, Colorado campus. We also launched the BMW Fast Track program in Mahwah, New Jersey, and Grand Prairie, Texas. A new corporate partnership was signed with Peterbilt Trucks, under which we will be offering a 12-week advanced training program for diesel students at our Denver campus. And we launched a partnership with Marriott International at our Marietta, Georgia campus to train HVAC and electrical students for careers with Marriott. These 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. Our company has paved the way in terms of creating innovative, customized training programs with our partners, and the percent of Lincoln students directly benefiting from our partnerships continues to grow. As we look to 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 rent, food, and transportation costs. As I noted earlier, we generated same-campus start growth of 4.7% during the fourth quarter, and overall, we believe we will grow student starts in the 5% to 10% range for the full year 2023. Demand for 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 the 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. Finally, I'd like to welcome Sylvia Young to our Board of Directors. Sylvia brings deep knowledge and experience with over 35 years in the healthcare industry. This week, she retires from HCA Healthcare after having been the CEO and President of HCA Healthcare's Continental Division since 2012. Her division generates over $3.6 billion in revenue and serves over 2,700 patients daily. Sylvia's insights will support our initiatives around expanding our nursing and allied health programs as we seek to lessen the skills gap in this important and growing sector of our economy. Now, I'd like to turn the call over to Brian for review of our fourth quarter financial results and 2023 outlook. Brian? Thanks, Scott.