Universal Technical Institute, Inc. (UTI) Q3 2016 Earnings Report, Transcript and Summary

Hello, and welcome to Universal Technical Institute’s Third Quarter 2016 Conference Call. [Operator Instructions] At this time, all participants are in a listen-only mode. And after today’s presentation, we’ll open up the lines for questions. As a reminder, today’s conference call is being recorded. A replay of the call will be available for 60 days at www.uti.edu, or through August 16, 2016 by dialing 412-317-0088 or 877-344-7529 and entering pass code 10090455. At this time, I would like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead.

Hello and thanks for joining us. With me today are Kim McWaters, Chairman and CEO; and Eugene Putnam, President and CFO. During today’s call, we will review the results of our third quarter and then open the line for your questions. Before we begin, we must remind everyone that, except for historical information, today’s call may contain forward-looking statements as defined by Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the amended Securities Act of 1933. I will refer you to today’s news release for UTI’s comments on that topic. The Safe Harbor statement in the release also applies to everything discussed during this conference call, including initial comments by management as well as answers to your questions. During today’s call, we will make reference to EBITDA, so non-GAAP measure representing net income exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure, net income or loss. And now I would like to turn the call over to Kim McWaters, our Chairman and CEO.

Thank you, John. Good afternoon, everyone and thank you for joining our call. In a moment, Eugene is going to walk through our quarterly results that were released earlier this afternoon. In light of those results, I would like to provide a few comments regarding the macro environment, as well as how it has shaped our outlook and help define our plan for the future. Then I’ll talk about specific events in the quarter that I believe are key drivers and enablers for our future. As you all are likely aware, the macro environment remains extremely challenging for these three reasons. First, the very long and slow economic recovery with continued strength in the labor markets makes it challenging for us to get prospective students interested in pursuing an education over a job, a job that they can get now even if it is a low or no skilled job with low pay. Second, the continuous negative news cycle against for-profit schools makes it extremely difficult to convince prospective students and their families as well as key influencers that there are in fact good for-profit schools that offer students a viable alternative to the traditional college pass and that will prepare them for good careers. And last, the lingering impact of the recession combined with a barrage of negative news has created hypersensitivity to price and a growing uncertainty about the real value proposition of education. Our third quarter results demonstrate the impact of these macro pressures on our business as reflected in lower student interest measured by the number of inquiries we generate and the lower conversion rates from inquiries to new student starts. We believe that we can change the course of our business by overcoming these headwinds and that continues to be our primary focus. There are significant operating leverage in this business when we can grow our new student starts and our average student population. During the quarter we changed our advertising mix and messaging to engage with students in a different way; shifting away from our traditional advertising channels and targeting our enthusiastic audience through digital and local channels. Our goal is to generate quality prospective students at a lower cost and we are encouraged by early results. We reduced our quarterly advertising spend by 28% or $3.4 million year-over-year. As we cut lower quality inquiry sources, we were also able to restructure our campus admissions organization, creating a centralized national admissions team. While we ultimately incurred some restructuring cost in the quarter, this restructure will drive annual savings of approximately $3.7 million in fiscal 2017. During the quarter, we also announced our new student success compensation plan for admissions representative. Effective October 1, we will return to a graduate-based compensation plan. This is the first time in about five years that we will be able to compensate our admissions representatives based on what matters most. Students who are successful in completing their education and graduating, the change will move their compensation from fixed to variable, and we believe it will play an important role in rebuilding our student population and graduate pipeline for our employers. Above all, it in lines our pay practices with our purpose, giving students a quality education that leads to good jobs in careers they love. As our admissions representatives head into the 2017 school year and our next fiscal year, they are better equipped to articulate and demonstrate UTI’s value proposition in a more clear and compelling way. They are armed with the government’s own data from the college scorecard and new credible and somewhat surprising independent research on the strength of our student outcomes compared to other educational choices, and just how well our student’s long-term earnings match up against their peers from liberal arts schools, research universities and community colleges. We’re also helping our team really leverage employer’s unprecedented support to reach out to perspective students giving them tangible real world examples of the opportunities available to them and how a UTI education can payoff. Our high school field reps have already been trained on these new tools and are ready to use as the new school year gets underway. As you know, the current environment requires us to achieve a balance between running this business as cost efficiently and effectively as possible while doing everything we can to rebuild our student involvement and make thoughtful strategic investments for our future. Given the significant pressures across the sector and specific to our business, it has been difficult to balance the requirements necessary to transform and grow our current business. To that end we were very excited to raise $70 million in capital this quarter. Coliseum’s capital investment in our business provides the capital to help us one more quickly expand into new geographic markets either organically or through acquisition, building on the success of both our Dallas and Long Beach campuses. It will help us to fix our core business by accelerating the addition of new skilled trades programs to make use of excess capacity at some of our existing campuses while working to rationalize the facilities in other markets. And the capital also gives us the ability to embark on this path while meeting the Department of Education’s financial responsibility requirements. As we head into our final quarter of the year and look forward to the next fiscal year, team UTI is excited to begin implementing our plans for the future. While we are not prepared to discuss our plans in detail on this call, you should know that we remain very confident about the long-term prospects of our business. For many decades we have been the leading provider of technician training for the transportation industry and we intend to strengthen our market leadership position. We are proud of our student outcomes and what that ultimately says about the quality of our education, the talent and integrity our people, and the success of our graduates. In speaking of our graduates, the demand continues to grow. In fact, at the end of the third quarter, we had more than 7,200 jobs available in a quarter where we had approximately 1,700 graduates. That is roughly four jobs for every graduate. As the need for skilled employees grow, and the call for the type of education that produces work-ready graduates gets louder, there is growing support for the kind of industry driven jobs focused programs we pioneered and continue to provide. As more and more students and parents take a closer look at their educational options and returns on educational investment, they are coming to the realization that many good careers do not require a college degree and that a technical education for the skilled trades is a very compelling alternative to the traditional path. We’re confident. We’re on the right path to profitable growth and believe that in the long run the investments we’re making today can help us rebuild and grow our student population and meet the ever increasing demand for our graduates, while creating value for all shareholders. And now I’d like to turn the call over to Eugene.

Thanks, Kim. We ended the quarter with an operating loss of $5.5 million, compared to $4 million in the same quarter last year. During the first nine months of 2016, our operating loss was $13.4 million, compared to operating income of $4 million in the first nine months of 2015. Year-to-date, operating income was negatively impacted by initial operating loss for our Long Beach campus of $2.1 million. But for the third quarter, our Long Beach campus broke-even and it should be accretive to earnings going forward. We begin the quarter with approximately 1,200 fewer students than we had the same time last year. And with the decline in our show rate of 290 basis points, starts decreased by 300 students this quarter, compared to prior year. The combination of the lower beginning student population and lower new student starts, led to an overall decline in average student population of approximately 8%, compared to last year’s third quarter. The lower student populations partially offset by higher average revenue per student led the revenues of $88.3 million in the quarter representing a decrease of about 3% from last year. Average revenue per student was up from $7,000 to $7,400. And tuition excluded $4.2 million related to our proprietary loan program, compared to $5.1 million in the third quarter of 2015. Just as a reminder, we’ve recognized revenue from this program only when we actually receive payment. From the first nine months of 2016 revenues were approximately $260 million, down about 4% compared to $272 million for the same period last year. During that time period, tuition excluded $14.5 million related to our loan program, compared to $16.5 million for the first nine months of 2015. Advertising expense for the quarter was $8.7 million, which is a decrease of approximately $3.4 million, compared to the same quarter in the prior year. As a percentage of revenue, advertising expense was 10.6% for the quarter, compared to 14.2% in the same period last year. In Q3, EBITDA was negative $600,000, compared to positive $1.3 million last year. And for the first nine months of 2016 our EBITDA was $1.7 million, compared to just over $20 million in the first nine months of 2015. Our income tax benefit for the third quarter was $1.1 million or about 17% of our pre-tax loss, compared to $1.3 million or 30% of pre-tax loss for last year’s same quarter. During our previous quarter, we determined that it was appropriate to record a full valuation allowance on our deferred tax asset. This has resulted in an additional non-cash tax expense of $29.4 million year-to-date which just had a significant negative impact on both our net loss and our loss per share for the nine months ended June 30. We will maintain the valuation allowance against our deferred tax asset until sufficient positive evidence exists to support its reversal. Our third quarter net loss was $5.1 million or $0.21 per diluted share, compared to $3 million or $0.12 per diluted share last year. Our net loss for the first nine months was $38.8 million or a $1.60 a share, compared to $700,000 or $0.3 per share in the same period last year. Moving to our balance sheet, we had cash, cash equivalents and investments of roughly a $108 million at the end of the third quarter, compared to $59 million at the fiscal year-end. The increase was primarily attributable to the sale of our convertible preferred stock in June, which totaled a little under $69 million net of issuance costs. During the quarter, we invested $1.8 million in fixed assets, compared to $5.5 million last year. The decline was primarily due to significantly higher capital expenditures last year related to the construction of our new Long Beach campus. We also continue to offer scholarships, our loan program and are successfully approaching more employers and OEM partners to assist in sharing the UTI opportunity with potential students. This year we’ve extended approximately $13.5 million in loans under our program, compared to $14.3 million last year. The average individual loan amount under this program this year was about $4,700 and we’ve recorded approximately $5.3 million in revenue and interest this year from cash payments received, which was up from $4.4 million last year. In addition to offering this program, we also continue to offer both merit-based and need-based scholarships as well as tuition discounts for certain groups of students, mainly our military veterans. At the end of the quarter, approximately 35% of students in school were benefiting from a scholarship or discount. These scholarships and discounts reduced to issuance revenue by 3.4% in the quarter, compared to 3.8% in last year’s third quarter. Our consolidated employment rate is tracking slightly behind last year’s rate. While the demand for our graduates remains strong, the rate declined due to a previous internal operational challenge that resulted in an employment verification backlog which we’re making good progress working through. Manufactured competitions in the auto and diesel industry also served to highlight technicians who are outstanding in their knowledge and skill, and reward those with the drive to succeed. And we’re pleased that many of our graduates are top winners in multiple national and international skills competitions conducted by industry partners including Penske Elite Technician, Cummins Top Tech and Navistar Top Service Technician. I’d like to just quickly congratulate UTI’s grad Nathan Reed who won the Navistar Top Service Technician award, and Avondale graduate, Matt Johnson, who has named the Penske Elite Tech of the year. And just as a point of reference, five of the nine Penske Elite Technician finalists were UTI grads. I’m testament to the quality of our graduates in our curriculum. Finally, let me take a minute to talk about our outlook for the remainder of the year. For the year ended September 30, 2016, we now expect new student starts in our average student population to be down in the low double-digits as a percentage compared with prior year. While annual tuition increases will slightly offset this decline, we expect revenue to decline approximately 6% to 7% for the year leading to minimal levels of EBITDA. Accordingly we have also modified certain project timelines resulting in lower than anticipated capital expenditures and expenses, which are now expected to be in the range of $8 million to $9 million for the full year. And with that, Laura, I think we are ready to open the line for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question today comes from Barry Lucas of Gabelli & Company.

First in line. Thanks very much and good afternoon. Couple of quick ones. You touched on the change in compensation, Kim. And I’m just wondering about what type of Safe Harbor provisions you might have received either got or given all the same note of variety but controversy about incentive payments for recruiters.

Thanks, Barry. This is Eugene, I’ll answer that. Just to be clear, there are no Safe Harbors. The Safe Harbors were eliminated by the Department’s negotiated rule making several years ago, but they didn’t come out and clarify their language that incentive compensation can be based upon success in graduates. So we have obviously as we put our program in place, spend a lot of time and effort to make sure it is compliant and we believe that it fully is compliant, not only compliant with the law but with the spirit of what the Department wants in terms of compensating people, our mission’s people on finding quality applicants that will succeed in school and succeed in graduating and getting good jobs and benefiting our industry customers.

Great. Thanks, Eugene. Maybe you could talk about the complimentary verticals if you will that where you could introduce courses to existing campuses relatively quickly and get capacity utilization up?

Sure. We have two programs that we’ve talked about that are new programs to UTI, specifically welding and CNC machining. Both of those have – are ready to go from our standpoint. The curriculums are ready. They have been approved by the States and they’ve been approved by the creditors. We are awaiting final approval from the Department of Education which knock on wood, we will receive pretty soon. Once that is received, we will move to actually open up the enrollment process for those and we expect to teach both of those at our initial campus hopefully in the first quarter – the early first quarter of 2017. And then assuming that those go according to plan, we would then roll them out to some of the additional campuses. I don’t want to leave the impression that we will roll them out to all campuses, but we certainly intend to teach them beyond the single campus where they will each be starting.

Okay. Thank you. Last one for me is you’ve sort of modified the investment program for the balance of the year, but you’ve also talked about smaller campuses, metro areas which support the smaller box. How are you thinking about cap spend and number of campuses you’d like to or think you could open either in fiscal 2017 or 2018 or however you want to describe that?

Well, what I could do and what I’d like to do are two different things. We’d like to wave a wand and have at least three or four more campuses that are reasonably in line with the size of the Dallas campus and the Long Beach campus. We have geographies, and in some cases specific sites identified for those locations, but I think in reality from a de novo standpoint, and Kim mentioned that there’s always the opportunity to be opportunistic and look for properties that are available from an acquisition standpoint. But assuming that those don’t materialize from a de novo standpoint, I think we will clearly identify and announce in the later part of 2016, openings for 2017 certainly one campus potentially, a second campus; and as we spoke about with our investment from our friends at Coliseum, I think there is a great deal of belief in the Long Beach and Dallas models. And clearly there’s a desire to get the curriculum closer to our potential students were we already are advertising. We already have goods on the ground to try to enroll students. And to the extent that we can put campuses in high density areas where we can draw it very well either on existing students and/or from some of our competitors, that’s a model that has worked very well for us in the past, and that we intend to pursue aggressively in 2017.

Great. Thanks very much for that.

Thank you, Barry.

[Operator Instructions] And with no other further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Kim McWaters for any closing remarks.

Thank you, Laura, and thank you Barry for your questions. We appreciate everyone tuning into our quarterly results and we look forward to sharing our next quarter and year-end result at the end of November. And at that point in time, as Eugene mentioned, we will provide greater clarity around our business plans for the future. Thank you and have a great evening.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.