Universal Technical Institute, Inc. (UTI) Q3 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the UTI Fiscal Third Quarter 2019 Earnings Call. [Operator Instructions] At this time, I’d now 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; Scott Yessner, Interim Chief Financial Officer; and Jerome Grant, Chief Operating Officer. During the call today, we’ll update you on our fiscal third quarter 2019 business highlights, our financial results and our vision for the future.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 adjusted operating loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP measures. Adjusted operating loss is loss from operations adjusted for items not considered normal recurring operating expenses.Adjusted EBITDA is net income before interest, income taxes, depreciation, amortization adjusted for items not considered normal recurring operating expenses. Adjusted free cash flow is cash from operating activities less capital expenditures adjusted for items not considered normal recurring operating expenses. Management uses adjusted operating loss, adjusted EBITDA and adjusted free cash flow as performance measures internally, and those will be the figures discussed on today’s call.Starting with this third quarter and through fiscal 2020, we will report operating metrics such as student applications and starts, excluding our Norwood, Massachusetts campus. As we have shared previously, Norwood is no longer accepting new student applications and will fully close in the fall of 2020. So we believe it is appropriate to exclude its impact. It is now my pleasure to turn the call to Kim McWaters.

Thank you, Jody. Good afternoon, everyone, and thank you for joining us today. During the third quarter of 2019, we generated strong revenue growth, delivered our fourth consecutive quarter of year-on-year start growth. And for the second quarter in a row, our average student population was up compared to the prior year. We are making consistent progress toward building a profitable business, and our significant momentum is the direct result of UTI’s multi-year transformation plan.Over the past 18 months, we have redesigned core business processes, leveraged technology and analytics to efficiently attract more qualified potential students, successfully opened a new campus, expanded our Welding programs and further differentiated our industry-leading student value proposition. Even in a time of historically low unemployment when people are far less likely to consider postsecondary education, these initiatives are producing results. We do not know when the macro trends will turn, but it is clear that we are building a business that can thrive in any market environment.In the third quarter, new student starts grew 11.9% year-over-year, marking our fourth consecutive quarter of start growth. Our Bloomfield, New Jersey campus drove approximately 31% of the increase, with the remainder coming from strong same-school start growth. Both our high school and adult channels posted double-digit growth in the third quarter, with the high school segment up 20.2% and the adult segment up 13.3% year-over-year.In the face of historically low unemployment, which makes it easy to get a job without postsecondary education, our adult segment, new student starts have grown year-over-year for five consecutive quarters, demonstrating the effectiveness of our transformation plan.In our military segment, the challenges that come with an all-time low unemployment rate for veterans were compounded by base access issues and fewer transitioning service members due to sizable retention bonuses. As a result, and as expected, starts in this channel declined 8.5% or 19 total students.Building on last quarter’s progress, we generated a 280 basis point improvement in the show rate, which measures the percentage of students scheduled to begin school, who do, in fact, show to class. This is our fourth consecutive quarter of year-over-year growth in the show rate, and we’re pleased to see that our work across marketing, admission, financial aid and other support services is keeping more students engaged between the time they enroll and their first day of school.And sometimes, that can be a gap of up to nine months. As a result of better show rates and the corresponding increase in new student starts, we had 400 more students in school during the third quarter than we did at the same time last year. With the incremental margin on every new student being greater than 65%, there is tremendous operating leverage in this business. And as we continue to operate more efficiently and restructure our cost base, we can drive significant improvements in profitability.During the third quarter, we made meaningful progress against 3 primary objectives for 2019. Our first objective is implementing our transformation plan. Our success in this area is being driven by Jerome Grant and his team. And so I’d ask him to join today’s call to discuss the plan and the results. Jerome?

Thanks, Kim. Let’s start with marketing and generating student demand. We continue to invest in national brand awareness campaigns that drive student interest and increase. I’m pleased to report that we are exceeding our goal of generating more than 50% of those increase from sources that deliver the highest level of conversion rates, while driving cost efficiencies.Our year-over-year advertising costs decreased 11.6% in the third quarter and are down 4.5% year-to-date. Our admissions team is focused on converting inquiries into new student applications on a consolidated basis, new student applications grew 2.9% in the third quarter. This is the sixth consecutive quarter of growth, despite strong macro headwinds, which demonstrates the effectiveness of the transformation plan and the overall value our new campus enrolling programs are giving.Applications for our high school segment grew 7.2%. Adult applications were just shy of last year by 2.7%, and our military applications grew 2.8%. Our work to differentiate UTI and raise awareness of the return on student’s educational investment is driving strong growth in our high school segment, even as options for these students increase as high schools across the nation recognized the value of career in technical education, we’re seeing an increasing number of articulation agreements.These agreements allow students to earn UTI credits for classes they take in high school. This summer, more than 500 students participated in Ignite. That’s our program that gives students opportunities to test drive UTI education before they start their senior year. Because Ignite students take the first UTI class for free and can transfer the credit when they finish school and come to UTI, they pay less for school and they graduate faster. They also become quite popular UTI ambassadors and for trade education as they go back for their senior year. They also show at a higher rate than the general population.Our early employment initiative, which we launched at Avondale, Arizona campus in July, allow students about to – lets students learn and apply jobs – excuse me, lets students learn about and apply jobs with participating employers as soon as they enroll at UTI. Employers can screen in higher students before they start school, and given the on-the-job experience, while they complete their education.Students who meet employers’ criteria for success, have their tuition reimbursed and full-time employment offered. This program is really a win-win and lets employers hire great people at the front end of the funnel. At a time when many assumes are skeptical about the value of the postsecondary education, the program gives students a tangible experience of what’s possible for them, with employers investing in them from the very start. Already, we’re seeing strong interest from students and employers and the program’s garnered local and national media coverage, bringing greater visibility to UTI and the value of our education. We plan to roll out this to other campuses in the coming months.When coupled with tuition reimbursement and incentive programs offered by the more than 4,700 employer partners around the country, this exciting new program underscores our focus on leveraging our industry partners and employer partners and show what it’s been like to bring commitment into the UTI education. I’ll turn it back to Kim.

Thanks, Jerome. Again, great job. We are very pleased with the results of our transformation plan. And now I’d like to shift gears to talk about our second strategic objective, investing in highly accretive new campuses and programs. August 13 marks the 1-year anniversary of our newest metro campus in Bloomfield, New Jersey. Today, we have more than 380 students in school, and the campus is exceeding our pro forma for fiscal 2019. High school enrollments at Bloomfield are exceptionally strong, and we expect this strong start to the high school season to continue into late summer and early fall.We are also quite pleased with the performance of our new Welding program. Across the system, Welding starts grew 84.5% in the third quarter as we opened our third Welding program in Dallas in January of 2019. And just as we experienced at Avondale and Rancho Cucamonga campuses, student demand for the program is very strong. We do believe several other UTI campuses can support this high demand program, and we have begun the licensing and approval process to bring Welding to more students in more locations. On our next call, we will share more details on the timing and the rollout.Our third strategic objective is rationalizing our national footprint, which is an important piece of our work to restructure our cost base and to operate profitably in any economic cycle. In our larger legacy campuses, we are consolidating or subletting excess space and/or offering new programs, where we can, we are converting these campuses to our smaller metro model.In August, and following successful rightsizing initiatives in Houston, Texas and Rancho Cucamonga, we signed a new 8-year lease extension that will reduce the size of our Exton, Pennsylvania campus by approximately 71,000 square feet. The rightsizing, which we expect to be completed in November, will generate meaningful operating efficiencies and $1.8 million in annual cost savings by 2021, without compromising our ability to serve students and the industry partners in Pennsylvania and surrounding states.In each of our campuses, our work with industry partners helps us give students a relevant education and the soft and hard skills employers want. This is not a 2019 strategic initiative, it is a fundamental part of the UTI model, a strong differentiator and an ongoing focus for our leadership team. In the third quarter, these partnerships continue to grow.In July, we extended our partnership with BMW for three more years, expanded program offerings at our campuses and added another on-based program, which much like the BMW program we launched last year at Camp Pendleton will prepare members of the military for civilian careers as BMW automotive technicians, while they are still on active duty.We also signed an agreement with Penske’s Premier Truck Group for an on-based program. Both military based training programs are scheduled to launch in fiscal 2020 and we should be able to tell you more about them on our next call. With Ford, they signed a 1-year workforce training agreement to provide dealer technician training at UTI campuses. We expanded our partnership with Mercedes-Benz USA, and we’ll be opening a new Mercedes-Benz advanced training program at our Lisle, Illinois campus. This program is planned to open for the second quarter of fiscal 2020.We added a fourth location of the Peterbilt manufacturer specific program at our Rancho Cucamonga campus, which launches later this month. And along with celebrating the 20-year anniversary of our partnership with Porsche, Porsche renewed its contract for another year.Before I turn it over to Scott, who will give you the details on our raised outlook for 2019, I want to share some broader perspective on the future. As the 2020 presidential election heats up, we are receiving questions about what a different administration might mean for our sector. At the end of the day, regulators and lawmakers regardless of their party or ideology, want what UTI has always stood for, a quality education that prepare students to go to work and good jobs and to be able to build rewarding careers.This company has been around for more than five decades and has successfully navigated all kinds of political climates by maintaining strong regulatory compliance and getting students a high-value education that sets them up for success. And that is exactly what we will continue to do. As we build a stronger, more profitable business, we are also gaining the strength and flexibility to adapt to regulatory change.As we look forward, we do see some signs of an economic slowdown, which in our countercyclical business should benefit student recruitment in our top line. But I want to be clear, we’re not relying on the change or waiting for it to come. The transformation plan, our metro campus, our new programs, they’re all delivering results. And while our 2020 plan assumes we’ll continue to operate in this challenging macro environment, we fully expect UTI to be profitable and generate significantly more cash than we had in 2019.And now I’d like to turn the call over to Scott Yessner, our Interim Chief Financial Officer, for a review of our financials. Scott?

Thanks, Kim. We are very pleased with our fiscal third quarter and year-to-date operating performance. Our results are meeting or exceeding our expectations for the year. And as a result, we are raising our full year guidance, which I will detail at the end of my remarks.The third quarter results show the positive turn in our financial trajectory and progress made in building a cost structure that supports profitability in the most challenging macro environment.Fiscal third quarter is seasonally our lowest of the year for student population and for revenue as more than half of our students enrolled to begin school in the fourth quarter. Despite seasonality, we were almost breakeven on GAAP operating performance, generated $4.4 million in EBITDA, $4.5 million in adjusted EBITDA in the third quarter and efficiently used our working capital.Our marketing and admission strategies have resulted in four consecutive quarters of start growth. Progressively, over the past four quarters, average student population has been growing. Last quarter, our average student population surpassed that of a year ago, and in the third quarter, we averaged 4.2% more students in schools than 2018 for the same period. You can view this progression through the increasing trend of revenue growth, where revenues grew $4.2 million in Q3 compared to revenue growth of $3 million over the first six months of 2019.Our cost structure strategies from the past 4 quarters are also maturing and being realized in Q3. Third quarter operating expenses have decreased $7.8 million compared to third quarter of 2018 and decreased $7.8 million from Q2 of 2019 and $10.8 million from Q1 of 2019. We have made durable cost reductions that have lowered our base operating expenses, aligned with driving profitability in a challenging macro environment and will carry into 2020.Headcount has declined 126 from 1,807 in October of 2019, 2018 to 1,681 at the end of June 2019, a 7% reduction. The headcount reductions were part of the transformation strategy and achieved through attrition, along with specific actions, including those around the Norwood campus, teach-out and exit.As a reminder, in the first half of 2019, we had $5.6 million of onetime expenses for the Norwood exit and the transformation consultant. Furthering our cost structure efficiency work, the Exton campus right-sizing we shared today will deliver $1 million in cost savings in our next fiscal year 2020 and $1.8 million annually in 2021 and beyond.On our cash flow from – our cash flow from operations improved significantly this quarter compared to 2018 as well. We’re on track to exceed our year-end cash flow objectives. As a reminder, the seasonal operating patterns of the business results in a use of working capital during the third quarter when the student population is at its lowest.This is mostly related to tuition funding deposits that track closely to the student population. Those tuition funding deposits are recorded on the balance sheet and cash flow statement as deferred revenue. We are revising our guidance on cash flow upward, which I will share at the end of my remarks.Now I’d like to summarize the third quarter and 9-month operating results. For the third quarter fiscal 2019 compared to the same quarter last year, new student starts, excluding the Norwood, Massachusetts campus, were up 11.9%. New student starts, including Norwood campus, were up 8.7%.Revenues increased 5% to $79 million compared to $74.9 million the previous year, driven by higher average full-time enrollment. Total operating expenses decreased 8.3% to $79.5 million compared to $86.7 million, primarily due to lower contract and professional service expenses and advertising expense, which was partially offset by a $400,000 increase in direct costs from the Bloomfield campus.Operating loss and net loss were $455,000 and $365,000, respectively, each improving nearly $11 million compared to last year’s third quarter. Our adjusted operating loss was $292,000 compared to an adjusted operating loss of $8.4 million in 2018 third quarter.Adjusted EBITDA improved to $4.5 million in the quarter compared to a negative $4.0 million. For the nine months ended June 30, 2019, compared to the same period in 2018, revenues increased 3% to $243.8 million compared to $236 million. The revenue improvement reflects multiple quarters of start growth and a higher average student population over the first nine months.Total operating expenses were $257.1 million compared to $260.9 million unadjusted for onetime costs for the Norwood exit of $1.4 million. Improving $11 million, operating loss was $13.2 million compared to $24.2 million last year. Our adjusted operating loss improved $9.6 million to a $7.5 million loss compared to a $17 million loss last year.Adjusted EBITDA improved to a $6.5 million gain compared to an EBITDA loss of $3.7 million. On our balance sheet, we had cash and cash equivalents of $42.7 million at June 30, 2019, excluding restricted cash. The cash position and operating cash flows are providing good capital liquidity for the business. We don’t have bank borrowings or banking – bank borrowing facility at this time.Now I’d like to share our raised outlook for 2019. New student starts, excluding the Norwood, Massachusetts campus, is expected to grow in the high single digits in fiscal 2019. Fiscal 2019 average student population is anticipated to be in the low single digits.Full year 2019 revenue is expected to range between $327 million and $331 million compared to $317 million in fiscal 2018, reflecting the increase in average student population. Operating expenses are expected to range between $336 million and $341 million compared to $352.2 million in fiscal 2018.Operating loss is now expected to range between $8 million and $12 million compared to $10 million and $15 million previously guided. Adjusted operating loss is now expected to range between $3 million and $7 million compared to $6 million and $11 million as detailed in the company’s prior guidance.Operating cash flow is expected to be positive $12 million or greater, and adjusted free cash flow is expected to be $10 million or greater in fiscal 2019 – 2019. And the ending cash balance to grow $2 million or more at year-end. Net loss is expected to range between $8 million and $12 million compared to between $10 million and $15 million.Adjusted EBITDA now expected to range between $14 million and $17 million compared to between $9 million and $15 million as detailed in the company’s prior guidance. Capital expenditures are expected to range between $6 million and $7 million.We look forward to updating the full year results and sharing more on our 2020 outlook in our next earnings call. With that, I’ll turn it back to Kim for a few final thoughts.

Thank you, Scott. As you heard, based upon our top and bottom line success, we are raising our fiscal 2019 guidance range across the board. In 2020, we believe we will increase revenue through growing new student starts and our average student population. We also expect to drive further efficiencies in our operating model, building on the durable cost structure reductions executed in 2019. The combination should drive significant improvement to cash flow and operating results in 2020.I’d like to close the call by congratulating Peter Appert on his retirement. We will miss our thought-provoking conversations held throughout the years. As we no longer have analyst coverage with his retirement, we will not be conducting a Q&A session today.We thank you all for your continued support and look forward to our next call with you on our fourth quarter and full year fiscal 2019 results. Thank you, and have a great day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time, and have a wonderful day.