Universal Technical Institute, Inc. (UTI) Q1 2018 Earnings Report, Transcript and Summary

Hello, and welcome to Universal Technical Institute's First Quarter 2018 Conference Call. [Operator Instructions]. 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 February 20, 2018, by dialing 412-317-0088 or 877-344-7529 and entering the passcode 10116512. At this time, I'd like to turn the conference over to Ms. Jody Kent, Vice President of Communications and Public Affairs for Universal Technical Institute. Please go ahead.

Hello, and thanks for joining us. With me today are Kim McWaters, President and Chief Executive Officer; and Bryce Peterson, Chief Financial Officer. During the call today, we'll update you on our fiscal first quarter 2018 business highlights, our financial results and our vision for the future. Then we will open the call 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 Exchange Act of 1934 and Section 27A of the Amended Securities Act of 1933. I'll 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 questions. During today's call, we'll refer to EBITDA, which is a 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. Before I turn the call over to Kim McWaters, I would like to inform you, UTI has provided a presentation that supplements today's first quarter 2018 financial results discussion. It can be accessed from the Investor Relations section of our website at uti.edu.

Thank you, Jody. Good afternoon, everyone, and thank you for joining us today. In our 50-plus years of operations, we have been committed to providing our students with a quality education that prepares them for a good career. It might particularly interest those that are new to the UTI story that, according to the government's college scorecard, our students median 10-year earnings are 46% higher than community college students and, in fact, even better than 4-year liberal arts colleges. Always striving to create these opportunities for our students, we have maintained our market leadership position for decades, graduating more auto diesel technicians than any other school in the country and having greater market share than our next three competitors combined. In our history, we have witnessed and thrived over the years in many different macroeconomic cycles and industry-specific trends. For the past 7 years and continuing today, lower unemployment and intense regulatory pressure have contributed to declining student enrollment at UTI and across the private education sector. In addition, today's prospective student is less inclined to take on heavy debt to pay for an education and desires to stay closer to home to reduce cost and work while attending school. UTI has adapted in the face of these macroeconomic conditions, first by cutting costs and streamlining our business and then transitioning to targeted investments aimed at building upon our leadership position in the market as well as supporting our long-term growth. By investing opportunistically in our strengths, we are focused on driving transformational rather than incremental change. This requires we take the necessary near-term actions to drive long-term growth and profitability, and ultimately enhance shareholder value. Our efforts in 2018 will be focused on 3 primary objectives, growing new student enrollment and driving top line growth, capitalizing on changes in the consumer market place and the evolving needs of our students, and rationalizing our real estate footprint and costs to support more profitable operations and better serve our students. I'll walk through each of these objectives before turning the call over to Bryce for the financial review. First, growing new student enrollment. Last quarter, we discussed our engagement of a top-tier consulting firm to evaluate our marketing, admissions and enroll-to-show functions. The diagnostic phase of the engagement concluded at the end of the quarter. We're pleased that several areas of opportunity have been identified, and we are currently evaluating potential next steps and related incremental investments. As we make decisions regarding the next steps, we'll keep you informed of our progress and expected outcomes. Meanwhile, we continue to make solid progress on several key initiatives. And while student starts were down year-over-year, as expected, they were better than planned due to show rates improving almost 500 basis points over the prior year. We're gaining traction with the marketing and admissions initiatives identified last year to, one, optimize our media mix; two, improve our website to drive search engine optimization; and three, to create a greater brand awareness and to generate higher quality increase. These actions resulted in improvements to both the quality and quantity of prospective student inquiries, a key leading indicator for our business, which grew 14.5% year-over-year. For the first time in more than 2 years we have seen application growth in our adult channel, with new student applications increasing by almost 4% over the same period last year, which was supported by the introduction of new programs such as CNC machining and welding. We're continuing to develop our mission's team's efforts to drive increased conversion rates as we seek to cultivate these inquiries. Applications in our high school field channel were down 1%, however, as we continue to see lingering effects of the hurricanes in the Southeast and Puerto Rico in the fall. Absent the hurricanes, we believe we would have experienced modest new student application growth year-over-year in this channel as well. New variations on recruiting events and marketing content for the high school channel produced positive results in fiscal '18. Over 2,100 students attended open houses and other types of events at our campuses during the quarter, and many of these students heard directly from employers about the strong demand for technicians, their earnings potential and why employers prefer to hire UTI graduates. We're pleased with the growing support from industry partners and employers in the student recruitment process. Employers continue to validate the technician career path with prospective students, and they clearly articulate the value and ROI of a UTI education. We're on a mission to educate students, parents, teachers and counselors about the viability of a career in skill trades. Today's high school counselors tend to encourage students to research post-secondary education and career information via software and technology solutions. We found that most of the content is focused on traditional 2- and 4-year degree paths rather than on career and technical training. Last summer, we set out to change that. In partnership with Roadtrip Nation, UTI sponsored a documentary film called Changing Gears, about a cross-country road trip for three young adults exploring the possibility of becoming transportation technicians. The students interviewed luminaries in the transportation industry, including Roger Penske, an icon in racing, and the CEO of the world's second-largest automotive retail group. Sarah, also known as Bogi Lateiner, UTI graduate and host of the Velocity television series, All Girls Garage, as well as Dennis McCarthy, Picture Card Coordinator for the Fast and Furious film franchise. Thus far, the documentary has been broadcast 130 times on 93 PBS channels in 56 markets, touching 43 million households. A link to the documentary and its trailer is available on our Investor Relations website. Even more important than the broadcast's reach is that the film's interview content is now available via the largest online career archive in the country, giving over 10,000 schools and 14 million students access through their school's counseling departments via Naviance and the college board. This provides a potential to reach and influence prospective students during their education and career decision making that we may not have the opportunity to touch otherwise. Technology platforms continue to play an increasingly important role in our recruitment efforts, and strategic alignment of high schools and guidance counselors are increasingly relying on technology to provide planning advice. Moving to our field military channel, which accounts for about 5% to 6% of our applications, were down 8.5% year-over-year, reflecting continued challenges to base access and the fact that fewer troops are exiting the military, due in part to enlistment and reenlistment bonuses discussed on prior earnings call. We continue to work on addressing base access issues by educating Congressional leaders and policymakers on UTI's impressive student outcomes and the thousands of good jobs for trained technicians across the country as well as our industry and employer partner's strong preference for hiring veterans. I'm pleased to share, over the past 2.5 years, over 30 members of Congress have toured our campuses, including chairs and ranking members of key communities such as education and veteran's affair. At our request, three bipartisan congressional letters have been sent to the Department of Defense asking for a reexamination of the base access policy, specifically to prevent veterans from missing out on training and job opportunities as they transition out of the military service. We were encouraged in December of 2017, when President Trump signed the 2018 National Defense Authorization Act, which included bipartisan language from the Senate, strongly encouraging the Department of Defense to ensure information on technical schools and institutes to be offered to service members as they transition from the military. While we're proud of our recent efforts, much hard work remains. We're optimistic that the Department of Defense will implement changes in base access policy in compliance with this new law, and we continue to evaluate opportunities to build our student pipeline in the military segment. We're pleased to report, this month we're launching a program, in partnership with BMW, for transitioning service members on Camp Pendleton in California. This program is the first of its kind on a Marine base and is fully funded by BMW of North America. The program enables us to expand our exposure to prospective students who are in the process of transitioning out of the military and to give them the opportunity to train to work with BMW. Our first classes are set to begin on February 26. We're extremely honored to continue our support of the brave men and women who serve this country and very proud of our more than 20-year partnership with BMW. Our industry partnerships are a compelling competitive advantage. And in December, we signed a contract extension with Porsche Cars of North America. Porsche is the first of our industry partners to now offer sponsored housing for students, along with paying all program costs while they're in the Porsche Technician Apprenticeship program. We also signed a contract extension with Volvo for its Volvo Service Automotive Factory or SAFE program. At the end of the first quarter, over 3,734 employer locations throughout the U.S. offer tuition reimbursement programs, and a total of 3,324 employers are offering some sort of incentive to the UTI graduates they hire. Demand from industry remains strong for our graduates. In fact, it far outpaces supply. The Department of Labor has projected more than 100,000 auto diesel technicians will be needed each year from now through 2026. In 2016, however, the public and private sector combined only graduated 50,000 technicians. UTI continues to be the market leader, graduating more auto diesel techs than any other school in the country. Our second objective is to capitalize on changes in the market environment and changes with our prospective student population. It is imperative that we adapt both our operating footprint and program offerings to speak to a new generation of future technicians and help meet our industry partners' demand for skilled workers. The market and students we serve has evolved. Students wants -- needed an education to find a job in a tough economy. Today, they're less willing to give up a job to go to school. Competition in the education space has increased dramatically, giving students more choice. The current average salary of prospective students presents a high hurdle to relocation, compelling prospective students to evaluate options closer to home. As a result, 53% of incoming college freshmen are enrolling in programs within 100 miles of where they live, according to the 2016 CIRP Freshman Survey. Several years ago as these trends began to take root, we aligned our strategy and near-term investments toward commuter campuses, such as Dallas and Long Beach, a strategy UTI knows how to execute profitably. We look forward to taking one more step toward this goal, opening our third metro campus in Bloomfield, New Jersey during 2018, pending regulatory approval. These campuses feature a blended learning curriculum that provides students with greater flexibility with classroom work schedule and reduces the overall cost of education by enabling them to live at home rather than relocating to attend another of our campuses. Bloomfield is expected to have a comparable investment profile to our Long Beach campus and that was accretive to earnings within the first 18 months of operation and is on plan to be cumulative cash flow break-even by year 4. In response to our investors' request for more detail on our growth initiative, we've made more detailed information on our commuter campuses' financial performance and projections on the supplemental presentation on our website. We're expanding the KPIs we provide to now include items such as EBITDA contribution and IRRs to demonstrate greater transparency and provide more data for investors to track our progress on our growth initiatives. Our third objective is to rightsize our larger destination campuses to drive efficiency across our footprint. We review opportunities to divest real estate and/or not renew leases and explore subleasing options for existing capacity. In fiscal 2017, we optimized 54,000 square feet, generating $700,000 in annualized cost savings. By the end of fiscal 2018, we expect to optimize an additional 156,000 square feet, with annualized savings growing to $3 million to $4 million beginning in fiscal 2019. We've also taken steps to enhance the utilization of existing spaces with new programs such as welding and CNC machining. Our first welding program launched in Rancho Cucamonga is tracking to our internal return expectations, with a payback of roughly 2.5 years and a projected IRR over 80%, given efficient utilizations of our excess space at that campus. We expect welding at the Ranch and future program launches to be cumulative pretax cash flow positive by year 3. We also have more detailed information on our welding program's financial performance and projections on the supplemental presentation on our website. And now, I'd like to turn the call over to Bryce for a review of our financials. Bryce?

Thanks, Kim. I'll start with a review of our first quarter business metrics and then discuss our financial results for the first quarter. Total starts were 1,300, down approximately 100 starts versus the prior year primarily driven by continued access challenges in the military channel. However, we exceeded plan by approximately 200 starts across all channels driven by the continued success of our various enroll-to-show initiative. Our average student enrollment for the first quarter was 11,300 compared to 12,000 last year. At the end of the first quarter, about 48% of the students in school were benefiting from a UTI scholarship, discount or institutional grant as compared to about 35% in the first quarter last year. The year-over-year increase was primarily driven by our institutional grant initiative. These scholarships and discounts reduced tuition revenue by an additional $746,000 this quarter as compared to the prior year. For the first quarter of fiscal 2018 compared to the same quarter last year, revenue was $81.2 million compared to $84.2 million for the prior year period. The year-over-year revenue variance resulted from a 5.8% decrease in our average student population. Total operating expenses were $84.8 million compared to $82.8 million for the prior year period. The increase was primarily driven by planned increases in advertising, contract services and professional services expenses and was partially offset by a decrease in compensation expense. Netting the decline in revenue with the increase in operating expenses, our operating loss was $3.6 million compared to operating income of $1.4 million for the prior year period. We also recorded a preferred stock cash dividend of $1.3 million in both periods, which was related to our $70 million capital raise in June of 2016. Net loss for the quarter was $1.1 million compared to a net loss of $1.7 million for the prior year period. Please note that due to the Tax Cuts and Jobs Act passed in December, we recorded an income tax benefit of $2.8 million as compared to income tax expense of $2.6 million for the prior year period. Net loss available for distribution to common shareholders was $2.5 million or $0.10 per diluted share for the quarter compared to $3 million or $0.12 per diluted share for the prior year period. EBITDA was $800,000 in the quarter compared to $6.3 million for the prior year period. From a liquidity perspective, we had cash, cash equivalents and investments of roughly $93.3 million at December 31, 2017, compared to $97.9 million at September 30, 2017. The decrease in cash was primarily attributable to planned CapEx investments. We don't have any updates to report at this time to the previously provided fiscal 2018 outlook, which is included in our press release we reference. Before I turn the call back over to Kim, I would like to provide an update on the accounting change we announced last quarter. We early adopted the provisions of the new accounting standard on revenue recognition using the modified retrospective method as of October 1, 2017. This approach was applied to all contracts not completed as of that same date. In addition to the enhanced footnote disclosures related to customer contracts, the most significant impact of the new standard related to the timing of revenue recognition for our proprietary loan program and the accounting for student program changes. The impact of this change required a noncash increase to equity of approximately $37 million in fiscal 2018. The impact of the change to revenue within the quarter was immaterial. Please see our 10-Q report for more details on this change. With that, I'll turn it back over to Kim for a few final thoughts.

Thank you, Bryce. In closing, we were pleased with the progress made inside of the first quarter, especially in the improvements in the areas of the business at a level we've not seen in a few quarters, including the solid increase in the quality and quantity of increase, a key leading indicator of our business. We remain on track with our student metric outlook for fiscal 2018. So looking ahead to the rest of 2018, we expect to build on our first quarter success as we continue to execute on our 3 main objectives. And as a quick reminder, that's growing new student enrollment and driving top line growth, capitalizing on changes in the consumer marketplace and the evolving needs of our students, and rationalizing our real estate footprint across to support more profitable operations and better serve our students. And with that, operator, we're willing to take some questions.

[Operator Instructions]. The first question comes from Peter Appert with Piper Jaffrays.

Kim, you sounded, I thought, more encouraged on the start enrollment trends then we've heard for a while. So #1, I want to make sure that's true, I'm hearing correctly. And number two, more importantly, I guess, does that suggest that you think, as we look at for example the March quarter, we could get to positive start numbers?

Peter, thank you for your question. Yes, I am encouraged by the progress that we've seen. As I mentioned, the marketing initiative's specifically focused on driving a higher quality and quantity of increase. Those initiatives to optimize our media mix to build our new website have delivered the trends that we expected. In fact, it's better than what we expected. So I think that that is good. From an application standpoint, we're very encouraged that the adult channel saw positive growth from an application and a start standpoint, which suggests that perhaps those -- that population who's currently employed is starting to consider other alternatives for their long-term career. Last, on the enroll-to-show efforts, we implemented key strategies last year to improve the interaction and the contact strategy from student's point of application to the time that they show to school, and I think we're seeing good success there. We also offer the institutional grant to help those students who need it most, and we're pleased with those results. So last thing I would suggest is that the focus on graduate-based compensation is doing what we expected it to and that is for all of our employees who are involved in ensuring a student's ultimate success with their education is working to make certain that those who applied show to school and that they graduate. So as we look to the next quarter, while we don't give quarterly guidance, our goal is to certainly surpass last year. We're not at that point yet, but that remains our goal to continue to build starts as we work through the year. But as we said before, that is focused on the second half of the year.

Okay. Can you remind me, you mentioned that military is 5% to 6% of the applications. What's the mix between adults and high school?

Right now, if you look at the quarter, and that's what I was referencing, Peter, of the student applications that we received during the quarter, 32% are coming from the adult channel, 62% from field and then the balance from the military. And to be specific around the military, this is the population that we are out on the bases trying to help as they transition. There is a larger population of students in school who are benefiting from G.I. Bill and Veterans Assistance.

Got it. Question for Bryce. You mentioned the increase in the proportion of students getting discounts or scholarships and yet, by my calculation, it doesn't look -- I think, like the revenue per student might have been up a couple of percent. So can you just talk about the -- it seems like a bit of a dichotomy there.

Yes. That's a good question. So as we look at the revenue figures for the quarter and how the various scholarships, discounts and grants played into that, certainly, it did help us to -- as I've mentioned, have a larger student population and a larger number of start than what we had planned for the quarter. But that -- the revenue associated with that increase was offset by a larger number of students utilizing the proprietary loan program. And without getting into the complicated mechanics of that revenue recognition change, ultimately there is a portion of that that does serve as a counter revenue. So it did offset some of that benefit from a larger student population. So you see that flow through into the revenue per student figures that you're looking at.

Okay. And presumably, that's something that will continue for the subsequent quarters?

Not necessarily. At least the last couple of years we have seen because of the large student population coming in the summer months, but by the time their proprietary loan applications are processed and recorded, we do see in the first quarter a larger utilization of that program. Because, again, you have a lot of relocating students coming in the summer months. And so it is -- it definitely varies quarter-to-quarter. So I would not use that as a flat trend throughout.

Yes, just to add to Bryce's point in terms of the relocating students. Remember that Q4 is predominantly high school students who have other financial means such as parental loans. And so there is a higher level of utilization for the adult population in the other quarters to use the tuition loan program.

Got it, understood. And then, just lastly, I guess. The welding and machining programs can be touched on these, but I'm wondering if any incremental color in terms of the -- your feeling about the momentum in those businesses, the scale of the opportunity associated with those. The timing of, maybe, additional rollouts beyond the couple you've talked about so far.

Yes. Let me start with welding first. I think there is very good student demand. And there's certainly considerable employer demand for those programs. And we're pleased with the initial trends with the 2 programs that we've opened in Rancho and Avondale. We have a full class at Avondale, just like we did when we launched the Rancho Cucamonga program. We are continuing to refine our marketing approach. And I was pleased this quarter with how we were able to build interest -- student interest for both welding and CNC. So I'm encouraged by welding. It is definitely an easier program to promote because there is a better understanding of what that job or career looks like. With CNC, we're working to educate the marketplace on what the opportunities are. And of course, the first program at our NASCAR tech campus is where we are continuing to refine that. There are certainly markets that can support the CNC program beyond North Carolina, but I will tell you, our priority is on the welding program expansion. And so we're looking, in the latter part of this year and perhaps inside of the first part of '19, for that next campus rollout of the welding program.

And Kim, is there any cannibalization when you roll out the welding program, students choosing that over the auto tech? Or do you think it's a different student population?

Well, that's another good question. We definitely see some interest in our current population for welding. And so we think that there is a little bit of crossover. But considering that these -- the students in the welding program are typically looking for a lower price point, a shorter program duration and perhaps something to supplement or build their skill set because they're already in the market, I think that it's minimized. So we don't see significant cannibalization, but we're sure that there is some that exists.

[Operator Instructions]. The next question comes from Barry Lucas with Gabelli & Company.

I was hoping you could provide a little bit more color on the expense variance and particularly with what went into G&A. I mean, you have a nice supplemental table on the education side. But without giving away the store too much in terms of advertising, could you talk a little bit about that and how much that was up along with the professional fees and services? Did those stay in there? Or at some point are they going to drop out of the expense line?

Yes, good question. So when we look at our quarterly opex, then I would kind of look at it from roughly -- a 1/3 of it was increased -- planned increase in advertising. The other 2/3 were related to professional services fees. A good portion of that is nonrecurring. It was related to our early adoption of the new revenue recognition standard, but some of that will continue on throughout the year.

And maybe just to add a little bit more color to that theory. In looking at our advertising expense, we did move some investment to the front of the year to capitalize on the changes that we were making to our website and knowing that it is a critical time of year where students are making education decisions. So we did increase our spend, I'd say, roughly $1.5 million in marketing for the quarter. And what is important to note is that we did increase the volume of increase by 14.5%. We also noted that the quality or the mix of those inquiries improved, with more of them coming direct to our website, and that is the highest converting source. So when you look at it just on a cost per inquiry basis, we were better than last year by about 5%, and we were pretty steady to the prior quarter when we started to make these marketing optimization changes.

And this concludes our question-and-answer session. I would like to turn the conference back over to Kim McWaters for any closing remarks.

Thank you. Thank you all for taking the time to hear about our progress inside of the first quarter, and we look forward to updating you on our second quarter in the near future. Thank you, and have a good evening.

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