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Lincoln Educational Services Corporation beats earnings expectations. Reported EPS is $0.32, expectations were $0.28. LINC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Lincoln Educational Services Fourth and Full Year 2023 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Polyviou. Investor Relations. Please go ahead.

Michael Polyviou: Thank you, Daniel. Good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the fourth quarter and full year ended December 31, 2023. 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 recorded and is being broadcast live on the company’s website and a replay of the call will be archived also 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 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 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 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 hand the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

Scott Shaw: Thanks Michael, and good morning, everyone. This morning we released our financial results for the fourth quarter and full year that reflect the strong operating and financial performance of our company. Our team is successfully executing our transformative growth strategies which has led to increased student starts, retention, graduation, and placement rates. At the same time, we are benefiting from the building interest in skilled trade careers despite continued record low unemployment, as well as the ever present skills gap impacting corporate America’s ability to grow. As a result of these dynamics, we achieved all of our objectives during 2023 and our momentum has carried over into the first two months of 2024.

For the full year, we achieved 10.3% same campus revenue growth and 11.4% same campus student start growth, which we believe exceeds our peer group’s organic growth rate. During the fourth quarter, same campus revenue was up 13.6%, while student starts grew 16%. We entered the new year with a student population as approximately 1, 000 students higher than at the beginning of 2023, which provides us with a platform for further growth in 2024. While we execute our capital investment strategy during 2023 to complete the build out of our new East Point campus in Atlanta, to begin the buildup of a new Houston campus, and to implement the relocation programs of the Nashville and Philadelphia campus as well as program extensions at four campuses, we finished the year with more than $80 million in cash and no debt.

In addition, we recently closed on a new expanded credit facility which can provide up to an additional $60 million of availability. Lincoln is in the best financial condition of the company’s recent history and extremely well positioned to execute our future capital investment plans for growth. Our exceptional fourth quarter top line growth is being driven by our strong student starts and the highest level of student retention in Lincoln’s recent history and 5.4% increase in average revenue per student. Our hybrid instructional platform or Lincoln 10.0 is a key driver of this increase in average revenue per student and has been incorporated into approximately three quarters of our adaptable programs. While it will be the first half of 2025 before Lincoln 10.0 is fully implemented, we do expect some bottom line efficiencies emerging during the second half of 2024 in the form of lower instructional costs as a percentage of revenue.

The new model combines hands-on learning and campus facilities with a greater component of classroom work delivered through online instruction. The model enables our students to work part-time or manage other commitments while pursuing their Lincoln education and is specifically designed to help a higher percentage of students to graduate. As I mentioned a few moments ago, during the fourth quarter Lincoln achieved our highest level of student retention in more than a decade and we believe the biggest contributing factor to this development is the implementation of Lincoln 10.0. Another key factor behind our student’s stark growth is the continued increase of leads generated by our marketing programs. This lead generation is occurring across the board both geographically and from a curriculum perspective and is accompanied by a healthy conversion rate of these leads.

In addition, we are achieving some lead generation leverage in markets where we have more than one campus. We recently began marketing for our new East Point Georgia campus and have not only been pleasantly surprised by the demand for the new campus but have also experienced an increase in interest in our Marietta campus which is approximately 45 minutes north of East Point depending on Atlanta traffic. The new East Point campus is the first result of our strategy to open one new campus per year offering hands-on training in the automotive and skill trades fields. The campus has 56, 000 square feet of training space including 15 automotive service space and up to 60 welding booths, labs, classrooms, and work areas. We are now enrolling students for training in four essential skills career paths with the first class commencing in March as planned.

We are proud of the campus and we will be showcasing the facility during our in-person Analyst Day on March 19th. We believe that the East Point campus is unique among trade schools. The facility capitalizes on the best ideas from all of our campuses while elevating the experience with its sleek modern design. The labs and shops have the latest technology with lots of opportunities for hands-on learning. We are also excited to be the first school in the nation to incorporate Electude training aids into our automotive program. We have partnered with Electude to develop our automotive curriculum since they are the world leader in automotive training education. The agenda for the Investor Day includes a debriefing of Lincoln 10.0 and how our transformative growth strategy positions Lincoln for increasing long-term returns.

Members of my management team will present an overview of operations and actions to drive growth and even better outcomes. I highly encourage you to attend. We have timed the event so that analysts and institutional investors can fly into Atlanta that morning, attend our event, tour the new facility, and fly home in the late afternoon. For those that are unable to attend in person, we do anticipate webcasting some of the presentations. We’ll provide that information as we get closer to the event. A key component of our growth strategy is to develop one new campus per year. And as we announced last year, our second greenfield site is in Houston, Texas. We remain on schedule to welcome our first classes at this campus, which is our second in Texas in the first quarter of 2026.

The campus is located in the heart of one of Houston’s busiest commercial corridors and is strategically located for both student convenience and maximum graduate exposure to area hiring managers. The new campus will feature an approximately 100, 000 square foot training center offering career opportunities in the auto, diesel, welding HVAC and electrical fields. Of the 2.4 million jobs that are expected to become available nationwide in these industries by 2032, over 290, 000 of those jobs are projected to be in Texas. In addition to new campuses in Atlanta and Houston, we are relocating existing campuses in Nashville and Philadelphia to new locations that facilitate existing programs expansion and our replication strategy. Over the next two years, as we layer on new campus openings in the program replication strategy, we consistently expand our opportunities to increase overall student starts while we remain focused on continuing the impressive organic start growth at existing programs.

I’m pleased by all the progress we have made and will continue to make the need for our programs by employers has been with us for years and it now appears that student demand is growing to meet this need. From a new campus and program replication perspective, our biggest obstacle is receiving regulatory approvals in a timely manner. It seems that many governmental agencies, whether at the state or national level, are understaffed, and the delay from one organization then creates a cascade of delays along the way. We have taken this new reality into our planning, and so let me summarize for you the timing of our growth opportunities. In 2023, we replicated four programs. In 2024, we will replicate six programs and open the East Point campus.

And in 2025, we will replicate six aid programs. In the first quarter of 2026, we will open the Houston campus with a possible other new campus by the end of 2026. As other opportunities arise, we will certainly look to take advantage of them, but as of today, these are our program and campus openings. And just to reiterate, we expect each new program to generate annually, on average, $1 million of additional EBITDA and each new campus, on average, to generate at least $6 million of EBITDA after being opened for 36 months. During the fourth quarter and during the first two months of 2024, we continue to learn of studies and surveys questioning the value of a four-year degree and the accompanying debt. Many students that eventually graduate from a four-year degree don’t have the marketable or applicable skills that today’s employers demand.

At Lincoln, we strive to provide strong ROI programs that lead to solid in-demand careers, and we deliver these programs in a supportive environment that focuses on graduating and placing students. Also, the careers we offer will most likely not be replaced by artificial intelligence or moved offshore, adding security to a student’s career decision. We continue to expand our corporate partnerships that play a key role in our graduate placement rate. Most recently, Peterbilt Trucks signed on to expand our partnership at the Nashville campus to our Denver campus, and we are in active negotiations with several existing corporate partners to expand their programs to additional campuses as well. Additionally, we have established a partnership with Hyundai Genesis and we offering students at six campuses opportunities for this advanced level training.

Also, to further expand our reach into the HVAC industry, we participated in a panel discussion at the recent AHR Expo, which brings together manufacturers and suppliers of all sizes and specialties to share ideas and showcase the future of HVACR technology. We discussed how Lincoln helps attract and train people for the industry and how we have partnered with major corporations to provide specialized training that meets their specific needs. The AHR Expo is the HVAC industry’s largest place for OEMs, engineers, contractors, facility operators, architects, educators, and other professionals to experience everything new and build the vital relationships that grow businesses and careers. We are discussing with several partners ways to build enrollments in their programs through student debt at management, scholarships based on metric achievements, and higher skill level programs.

We are also talking with institutions outside corporate America to determine the feasibility of applying skilled trade training programs to non-corporate organizations. Any students start to achieve over the long term from these discussions will layer on to the high single digit organic growth rate we believe we will achieve during 2024. 2023 was an excellent year for Lincoln. We exceeded all of our financial goals. Starts were up double digits, revenues were up double digits, and EBITDA exceeded the top end of our guidance. We rated a new Greenfield campus, increased graduate placement rates, and continue to have more demand from employers than we have students as our strong graduation placement rates provide excellent reference points. Our balance sheet which has never been stronger is enabling Lincoln to expand our programs and locations which will create long lasting benefits to our students, our graduates, our instructors, our corporate partners, and increasing returns to our shareholders.

We finished the year in excellent financial shape and are very well positioned to continue both our operating and financial momentum in 2024. Now I’d like to turn the call over to Brian Meyers so he can review some of our recent financial highlights and present our guidance for 2024. Brian?

Brian Meyers: Thanks Scott. Good morning and thank you for joining our fourth quarter earnings call. As Scott mentioned, 2023 was another successful year. We exceeded all guidance metrics and achieved an impressive double digit growth in both student starts of 11.4% and revenue of 10.3% year-over-year. We finished the year with over a 1, 000 more students than last year and $80 million in cash with no debt outstanding after investing over $40 million in total capital expenditures. Our momentum has continued into 2024 and current visibility calls for continued growth which is reflected in our guidance for 2024. To start, I’d like to recap our top five growth initiatives in 2023, which are shaping our operational landscape. While all these initiatives are significant in that they each entail an investment of over $10 million, we believe that each will deliver a strong ROI and advance our progress toward achieving our long-term strategic goals.

We are determined to drive innovation, greater efficiencies, and higher financial returns. Our first two initiatives expand our footprint to 23 locations. First, in our new East Point campus in Georgia, which is set to welcome its first class in the coming weeks. In 2023, we incurred capital expenditures in excess of $10 million to build a new state-of-the-art facility providing students a superior educational experience and training. This campus, as in all our new locations, was designed from the ground up to take advantage of the efficiencies of our new hybrid learning model. This allows us to deliver four-hour core programs out of our 56,000 square foot facility. We will incur losses as the population ramps up in this first year, but expect the campus will be accretive to earnings in 2025, its second year of operations.

Second, in our new Houston, Texas campus, which is in the beginning pre-construction phase and likely to open to students in early 2026, offering career opportunities in auto, welding, HVAC, and electrical. We estimate that we’ll incur capital expenditures of approximately $15 million in 2024 for the build-out of this 100, 000 square foot campus. Our third initiative is our national campus relocation to a newer, more efficient facility. The new 120, 000 square foot facility will enable us to add two new programs, electrical and HVAC, while also expanding our industry partnerships. In 2024, we expect to invest around $20 million in capital expenditures to build out this new location, which is expected to open in late 2025. The fourth initiative is our Philadelphia campus relocation to nearby Levittown, Pennsylvania.

As discussed, we purchased this facility in September of last year and subsequently entered into a sale-leaseback agreement announced in February this year. The sale and purchase transactions were essentially cost neutral. Our new campus will significantly expand our market present from our only single program campus of 30, 000 square feet to a 90, 000 square foot, modern, multiprogram campus. Accordingly, we expect to invest approximately $15 million of capital expenditures to prepare this new location to open during the second half of 2025. Lastly, the fifth initiative is the expansion of our program offerings at our existing campuses to drive organic growth. In 2023, we initiated the build out of seven program replications, mostly within the skill trades, and we expanded the capacity of two of our welding programs.

While a couple of programs have been rolled out with a small number of starts in 2023, we continue to make progress with the remaining programs. Accordingly, we expect to see a benefit in students starts in the second half of 2024, and see the new programs make a positive contribution to our bottom line in 2025. In total, during 2023, we invested close to $10 million in capital expenditures to implement these new programs, and we’ll continue to expand new programs in the current year. In summary, we are well into executing our growth strategies and have set out aggressive goals. Our team is working efficiently to execute on these projects simultaneously. Thank you to everyone for your hard work and commitment. Now turning to our fourth quarter performance.

Please keep in mind to discuss financial results, exclude pre-opening costs on our new East Point campus, our campus pre-relocation expenses, and nonrecurring expenses in the transitional segment. The Transitional Segment is made up of a single campus in Somerville, Massachusetts, which was successfully tore out at the end of October and will no longer be part of our financial results going forward. Starting with the top line, revenue grew an impressive 13.6% or $12.3 million to $102.5 million. The increase was due to growth in both average student population, up 7.8% and average revenue per student of 5.4% compared to prior year. We are very pleased with our organic new student starts growth for the quarter, which increased an impressive 16% outperforming our initial expectation.

Our students starts last year has positioned us to deliver strong revenue growth in 2024. We are entering the new year with a 1, 000 more students than we had in the prior year, which will continue to the revenue acceleration in 2024. Operating expenses were $89 million after adjusting for nonrecurring items detailed in our adjusted EBITDA calculation reflecting on our Q4 earnings release. While expenses came in above our internal plan, the overage was mainly driven by instructional expenses resulting from population growth. In addition, performance-based incentives increased based on our approved financial results. In terms of EBITDA, we ended the fourth quarter with an adjusted EBITDA of approximately $16 million after adjusting nonrecurring items detailed in our Q4 earnings release.

Now, turning to our balance sheet and cash flow, we continue to have a very strong balance sheet, which benefited from our business earning more than $22 million cash flows from operations during the fourth quarter. As mentioned earlier, our yearend cash balance was over $80 million, compared to $65 million in prior year. Over our yearend, we have working capital in excess of $60 million. Capital expenses for the full year were $41 million, including the purchase of a Levittown, Pennsylvania facility for $10 million. The net total of $31 million excluding Levittown is consistent with our guidance. Approximately 75% of the net $21 million CapEx related growth initiatives. In terms of liquidity, we now have more flexibility as we recently entered into a new three-year $40 million credit facility with Fifth Third Bank.

In addition, the agreement includes a $20 million accordion option, which provides greater financial flexibility and funding should a company decide to pursue a sizable inorganic growth transaction. While we do not anticipate any reasons to draw on the credit facilities in the near term, access to the credits facility further enhances the company’s financial strength, stability, and ability to execute on growth opportunities. Lastly, in terms of the key regulatory compliance metrics, we project to be in very good standing with both our financial responsibility ratio and our 90/10 ratio. We project our 2023 financial responsibilities composite score to be 3.0, the maximum achievable score, and project the 90/10 ratio to be approximately 81% compared to 75% in the prior year.

The increase is the result of the new calculation rules, which became effective for 2023. The main rule change relates to veteran affairs benefits, which are now treated as federal funds and counted in a 90% side along with Title IV. While the change in calculation methodology resulted in our ratio increasing by several percentage points, we expect it to continue to be well under the 90% threshold. Now as we turn to 2024, the positive momentum generated during 2023 has carried over into the first two months of the new year. Our full year guidance for adjusted EBITDA and adjusted net income will exclude the impact from one, new campus and campus relocation costs, two, program expansions, and three, non-cash stock-based compensation. We are forecasting 2024 revenues to range between $410 million and $420 million, adjusted EBITDA ranging between $35 million and $40 million, adjusted net income ranging between $10 million and $15 million.

Student starts growth ranging between 7% and 12% and capital expenditures ranging between $65 million and $70 million. Our capital expenditures plan underscores the confidence we have in our growth initiatives. The largest components of the CapEx plans are the build-out of the Houston, Texas campus and the relocation for Nashville and Philadelphia, which pull around $50 million for all three projects. We expect to fund these significant capital investments through the combination of our cash liquidity of $80 million cash flow from operations generated in 2024 and $10 million of proceeds associated with Levittown, Pennsylvania, facilities sale and leaseback completed in February. In terms of net interest expense, while we do not expect to have interest expenses associated with borrowing, we project net interests expense of approximately $700, 000.

Total interest expense is projected to be $2.7 million. Lincoln, similar to other measure all new leases to determine the appropriate accounting treatment. As such, we have two new finance leases in 2024, resulting in $2.2 million of interest expense. The remainder relates the fees associated with our new credit facility. This expense will be largely offset by approximately of $2 million of interest income. With that, I’ll conclude my remarks by thanking our entire team, including our faculty and students for their outstanding efforts during 2023. We look forward to communicating our progress throughout 2024. And now I’ll turn the call back over to the operator so we can take your questions. Operator?

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Operator: [Operator Instructions] Our first question comes from Alex Paris with Barrington Research.

Alex Paris: Good morning, guys. Thanks for taking my question and congratulations on the big beat and the guidance above consensus expectations for 2024. I wanted to dive into the starts momentum a little bit because that was a significant outperformance in the quarter. I think starts were up 16% year-over-year excluding the transition segment came out at close to 3, 200 new students versus [inaudible] of 2, 850. And then if you look at it by field of study, transportation and skill trades led it up about 21%, where healthcare and other professions were up 10%-11%. You did a pretty good job, in my opinion, covering it in your prepared comments. But what other color could you offer us in terms of that just great momentum that leads us to above average guidance in 2024?

Scott Shaw: Sure. Thanks, Alex. Well, we constantly daily are monitoring our leads that are coming in. And we did strategically invest more in marketing in the fourth quarter because we constantly are just managing what’s the cost per start. And whenever we see opportunity to invest more, then we take advantage of that. And so we did spend more in marketing in the fourth quarter than the prior year. And I think that frankly benefit us in the fourth quarter and frankly seems to be also generating increased demand in the first quarter. So that’s one thing that we’re doing and we’re constantly refining our marketing. We’re constantly looking at getting out of lower return investments in marketing areas so that we can hopefully get the best returning leads as possible.

And we have a new partner that we started with last year which has certainly helped us achieve those objectives. And we anticipate frankly even more efficiencies in 2024 now that we’ve been working with them for a year. And then as we’ve mentioned it does seem as if the world is waking up to the fact that these are great careers and there certainly is a lot more anecdotal evidence to suggest that. With that said though, we look at all of our starts in any number of ways and I can’t say that the younger people are coming to us in any greater number than I’ll say the older people. The average age of our student is around 25, 26 years old. And if I look at the makeup of our starts over the last 12 months, the percentage of each I’ll say age from 18, 19, 20 to 21 hasn’t changed year-over-year.

So while we know that high school students and parents are talking a lot more about, oh, maybe I don’t need to go to college, we’re kind of seeing that benefit across the board frankly.

Alex Paris: That’s very helpful thank you. And then let me just ask a quick question about guidance too before I get back in the queue. Guidance was better than expected versus consensus expectations. It looks like in that guidance if you use the midpoint of guidance, we’re expecting revenue acceleration and adjusted EBITDA margin expansion. But even at that the adjusted EBITDA margin guidance is about 9% versus 7% in 2023, 200 basis points. But haven’t you said in the past that you thought mid-teens is a good target for adjusted EBITDA and when do you think you’d get there?

Scott Shaw: Yes, absolutely. We should be able to get to that 15% EBITDA level, and we anticipate, as you’re seeing, some acceleration in some of that expansion of our profitability, and we think that as these new programs roll out, as we get the benefit of Lincoln 10.0, as we continue to refine our marketing, you will see hopefully an acceleration of that increase. So to get to 15%, it’s not going to be in 2024, 2025, but I would anticipate shortly thereafter.

Operator: Our next question comes from Steven Frankel with Rosenblatt Securities.

Steven Frankel: Good morning, and very impressive metrics all the way around. Could you detail for us what the graduation and placement rates were in 2023?

Scott Shaw: Sure. So placement rates were around, let’s say, 82%, and our graduation rates, as we tracked them across the 70% threshold, so just around 70%, as we look at how we’re managing that. Our actual ACCSC graduation rates could be slightly less because they look at a different timeframe than what we’re looking at, but anyway, we ended up at the 70% number, which is, as you may recall, a goal that I’ve set out for our company is to get 85% placement rate and 70% graduation rate.

Steven Frankel: Okay, that’s great, and the starts are very impressive. What do you think you’re doing differently from a marketing perspective that enabling you to gain this efficiency?

Scott Shaw: Sure, well we know that as I said with this new partner we seem to be not seen, we are achieving better I’ll say purchasing of keywords and we’re also kind of narrowed down the scope of the number of keywords that we’re buying which is creating some efficiency. So we’re in constant dialogue with our partner on this and we’re looking at metrics all the time and we’re also testing but that’s kind of the beauty of the internet marketing you can test different words or different styles of presenting things in one market to see if it’s creating a difference and then when it does then we look to replicate that at other markets. So it’s working with a strong vendor and constantly being on top of things.

Operator: Our next question comes from Eric Martinuzzi with Lake Street Capital Markets.

Eric Martinuzzi: Yes, I know we’re not disclosing kind of a forecast on the new student starts by trade group, whether it’s transportation and skilled trades or healthcare, but just curious to know if you’re seeing the same demand trends, the two historic sides of the business. I think it’s been about a 70/30 mix between transportation and skilled trades versus healthcare and other.

Scott Shaw: Yes, I would say that transportation skilled trades still tend to be slightly stronger for us than healthcare. And I mean, one of the exciting parts is, I’ll just throw this out, our automotive business grew by 11%, and we have an open A in new auto programs. So that kind of shows you the underlying strength in these core careers that we’re offering. But overall, to your point, automotive and skilled trades is definitely slightly better than the healthcare sector at this point.

Eric Martinuzzi: Okay. All right. And then your forecast for 2024, what’s kind of the macroeconomic assumptions built in? Because historically, we’ve faced headwinds around interest rates, inflation, unemployment. Is it an assumption that the status quo persists for the rest of the year?

Scott Shaw: Yes. We’re basically based off of what we’re seeing already in the first quarter. And yes, we assume that the economy will be the same. Obviously, I think many people have been surprised at the strength of the economy. Unemployment still remains very low. So if that were to change, I could see that only benefiting us, meaning that unemployment increases. But again, what’s so exciting is the fact that we’re able to get this type of growth in this low unemployment market, which to me suggests there’s been a fundamental shift to our benefit taking place out there.

Operator: I’m showing no further questions at this time. I’d now like to turn it back to Scott Shaw, CEO, for closing remarks.

Scott Shaw: Thank you all for joining us today to listen to our strong performance and progress today. At Lincoln, we all could not be more excited about all of our opportunities and our leadership position to continue to eliminate the skills gap. This most exciting could be what I will refer to as a renaissance of skilled trades. After decades of societal pressure to only go to college, we are seeing and hearing that more and more people are becoming aware of the robust and enduring careers available by working with your hands. For more than 75 years, Lincoln has been solely focused on providing the best hands-on training possible and it’s increasingly feeling that America is getting on board. I want to thank all of our instructors and staff for their steadfast commitment to our students and to our mission of changing lives.

And I hope that you will join us on March 19th at our East Point, Georgia campus for our first ever Investor Day. I’m confident that you will walk away from the event with as much excitement as we have for Lincoln’s future. Thank you all and have a great day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.