Good day and welcome to the UTI Fiscal Second Quarter 2020 Earnings Call. [Operator Instructions] And after their each prepared remarks, we'll open the line for question. [Operator Instructions]At this time, I would 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 our CEO, Jerome Grant and CFO, Troy Anderson. During the call today, we'll update you on our fiscal second quarter 2020 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 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.During today's call, we'll refer to adjusted operating income or loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP measures. Adjusted operating income or loss is income or loss from operations, adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring cash operating expenses.Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization and adjusted for items not considered as part of the company's normal recurring operations. Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures, adjusted for items not considered as part of the company's normal recurring operations. Management uses adjusted operating income and 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 the third quarter of fiscal 2019 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 stopped accepting new student applications in the second quarter of fiscal 2019 and will fully close before the end of fiscal year 2020, so we believe it is appropriate to exclude its impact.It is now my pleasure to turn the call to Jerome Grant.

Thank you, Jody. Good afternoon, everyone and thank you all for joining us today. First, I want to acknowledge that our thoughts are with those most affected by the pandemic; including first responders and medical professionals working on the front lines. I'd also like to thank our team for their tireless effort to continue to provide the highest quality technical for which we're known during this crisis.Finally, I'd like to welcome to the call a notable number of new investors who have joined us since our last update. We sincerely appreciate your interest and investment in UTI and look forward to working with you in the future. As many of you know and for those of you who are new to the call, UTI is the nation's leading provider of technical training for automotive diesel, collision repair, motorcycle and marine technicians and we also offer welding technology and computer numerical control, CNC machining programs. We have a nationwide network of 13 campuses, where we offer hands-on training in state-of-the-industry labs, complemented by our new online training, which allows us to offer quality education during the COVID-19 pandemic and will serve UTI and its students going forward.Our newly assembled executive management team is leading that charge and is supported by a solid balance sheet and excellent financial flexibility. In our 54-year history, UTI has proven its ability to adapt to changing financial and regulatory landscapes and has seen increased student demand in times of economic hardship.I'll add more on that later, but first, I'd like to discuss the recent quarter and review how we're approaching the COVID-19 crisis, preparing for the near-term and positioning the company for the future.In the second quarter, results were positive and we demonstrated continued momentum. New student starts were, up 6.6% year-over-year, excluding our Norwood campus,…

Thank you, Jerome. Before I jump into details, I'll note that we've created a financial supplement that is posted to our investor website, along with our standard investor presentation, that provides additional details to our prepared comments in the press release.As Jerome noted, we performed well for the majority of our fiscal 2020 second quarter and posted solid results, but they were impacted, starting in mid-March by the COVID-19 pandemic, which lowered our revenue approximately $2.5 million to $3 million from our pre-COVID expectations for the quarter.The revenue impact is primarily a timing differential, due to the temporary student leaves of absence, or LOAs, we have discussed. We partially offset the revenue impact on profitability by taking steps to mitigate costs, such as the employee furloughs and reduced variable and discretionary spend across the enterprise for categories like travel, contract services and campus supplies, so that the profitability impact in the quarter was approximately $1.25 million to $1.7 million.As students on LOA return to continue their education, we fully expect to recover the associated revenue and profit. We're also stringently managing payment terms with our vendors, working cash optimization opportunities on a number of fronts. I'll cover this in more detail later in my prepared remarks, but first, let me cover our second quarter and first half student metrics and financial results.For student metrics, new student starts in the second quarter increased 6.6% year-over-year and were 2,093 in the quarter. In the first half of 2020, starts were higher by 7.1% year-over-year. We saw start growth across all three channels in the quarter and year-to-date. This is all same-store growth and is driven by enrollments, which were higher by 4.5% in Q2 and 5.1% year-to-date and show rate improvement of 100 basis points in the quarter and in the first…

Thank you, Troy. As we continue to support our students and team through this uncertain time, we remain confident in our ability to attract and train the technicians this industry needs. In times of weak economy, like what we are facing today, there will be fewer jobs available that offer competing entry-level wages, which drives interest in the technical trade skills education and the student value proposition that UTI provides. We have the campuses, the financial resources and the infrastructure to serve this need and grow rapidly and profitably, thanks to the leverage in our fixed-cost structure, where each additional student has 60% to 70% incremental margin.Thanks to the work we've done recently, we have a more dynamic and flexible business model that could drive further upside. We anticipate seeing benefits gained by the new marketing and admissions and blended learning approaches we are using, which have potential to accelerate timelines and speed and increase capacity.Online instruction is more efficient in terms of number of students per teacher and the format could help reach new students, for whom the program format, in particular the length, did not work for them in the past. The new blended learning offering would help increase capacity, for example, at Dallas and Bloomfield and will help us allow to have staggered lab starts. It can also help us reevaluate our real estate footprint moving forward, as a significant space is currently used in in-person classroom instruction.We are moving ahead, while deliberately being cautious on identifying longer-term organic and inorganic growth opportunities. Now, the lead times on these opportunities vary in length, none with an immediate turnaround and some that can be very long. We look forward to providing updates as appropriate on those.I'd now like to turn the call over to the operator for Q&A. Operator?[Operator Instructions] First question comes from Eric Martinuzzi of Lake Street. Please go ahead.

Thanks. Appreciate the level of detail you've provided and it's good to see a couple of the campuses back open. I actually want to start there and get a little bit more detail about what you're doing in Dallas and Houston that's different than the way you used to do it before. I understood you mentioned something about the student -- the teacher-student ratios, but what specific operational changes have you had to make, at least at those two campuses, to get back in the in-person teaching?

All right, thank you very much. Great question. It's Jerome here. First of all, let me put some context around this, about 50% of our auto diesel curriculum is in-classroom instruction, where a teacher is at the front of the class, either doing a demonstration or talking about concepts associate it and the other 50% is in the lab, hands on, working on engines, transmissions, etc, the hands-on work that's so very important. And so, it's important first to understand that what we took online was the 50% that was in the classroom, leaving open the opportunity to get back into the labs.And so, our campuses will all be opening, first Dallas and Houston and then the ones I'm talking about will be opening next week, to serve the need of all of that hands-on lab instruction. Our normal lab instruction is a teacher-to-student ratio of 1:27. Generally speaking, what you'll have is a teacher in a lab with three students at an engine, working on a project together, etc. We've modified that to stay under the CDC guidelines of not having more than 10 people in a room to a 1:9 ratio. So, you'll have one student at each of the engines and the instructor in the class.In order to create the capacity to be able to do that, we're starting to run our labs at about 6'o clock in the morning and we're running through midnight to get the throughput to be able to -- until we're able to bring more people together in a certain lab. And so, we expect that all the students that were online for the last seven weeks will catch up on their labs no longer than three weeks and then they'll move along in the normal curriculum, with take your concepts online and when you're finished, come in and do the lab.

So, for instance in a normal curriculum, I think 51 weeks, if I'm correct, on the auto side. You're saying that 51 weeks becomes 54 and we're still graduating in 54 weeks?

No, we're saying you still graduate in the regular timeframe. What we've done -- so three week course sequences, about a week and a half of that course sequence is in a classroom, listening to someone talk, taking notes, quizzes, etc. That's what we've replicated online, right? And so, students have progressed through three or four of those in the last seven weeks as they've moved through the curriculum. Now we're bringing them back in to go through their three or four lab sequences and we expect them to be completely caught up within three weeks. But the same classroom, same face time, whether it's virtual or in the labs and it will all be caught up in that three week timeframe.

Yes. Eric, this is Troy. The other beauty of having the online component is that, throughout that, while they're doing the lab catch-up, they'll also be able to go back and reference the virtual curriculum throughout that entire time, so they really can be fully immersed in all the content, both in the lab and online, throughout that timeline and going forward.

As far as state-by-state, is there any reason to believe that what you're doing in Texas can't be replicated across the campuses in the other states?

Well, the campuses that will open next week in Arizona, California and North Carolina are all going to be following the exact same format. We've redesigned our labs to get some of our machinery a little further apart from each other. Every one of them will be following the same cadence, as will our motorcycle campuses in Orlando when we can get it open and we believe that will be within a week or two and then our Arizona campus that will open next week.

Okay. Right and then, as far as the students, who are on LOA, what are you doing to engage them, beyond just kind of a email, email campaign or something like that? Is there an active outreach effort for those LOA students?

So, there's been an ongoing active outreach effort throughout the time period that they've been on LOA. So, first, yes, there have been texts and emails that have been exchanged with each and every one of them throughout the six or seven week period. We've also reengaged the salesforce, which brought them in to contact them individually. And also, our student services people on each of the campuses have been assigned the LOAs for each of their campus and are helping them reschedule their reentry into the school. And it's going pretty well.

Okay. All right and then, I wanted to go back -- circle back to the prepared remarks regarding the scenarios. So, I'm not going to confuse the scenario with the guidance, but your comment about potentially flat revenues versus FY '19, assuming we're able to, sort of trough the negative impacts in Q3 and then come in strong on Q4, what are the barriers to having that kind of robust traditional Q4 start?

Well, we're still actively engaged from an enrollment perspective. We've moved our entire admissions process virtually. Jerome touched on that. And so, we're still highly engaged, with prospective students, as well as students, who have already enrolled, but on a future start date, to continue keeping them up to date on what's happening with the online curriculum, what's happening with our campus openings, etc.So, certainly, getting the students who have already enrolled, but on a future start date, comfortable and keeping them engaged is a critical element and then finishing our enrollment activity for the remainder of year. And, really, it's time. I mean, as we said, we're essentially -- we're slightly ahead of where we were at this time last year and we don't finish our enrollments, really. We can still be enrolling people now, in fact, for even a Q3 start, let alone Q4 start. So, we've got a little bit of time to -- and we did have, a disruption there, call it mid-March through the first or second week of April, probably a little bit more on the admissions side than the inquiry side, just because we had to convert everything to virtual and it was a very face-to-face oriented process previously.But both aspects of the admissions and the marketing side have tremendous momentum coming out of April and I think we just need to execute. And I think having the campuses open, resume operations here for the labs, is only going to help us. And then, just keep progressing.

Okay, that covers it for me. I'll release the microphone. But I appreciate the level of detail you provided, as well as the amount of effort that you've had to go through, sort of, on the fly, rewiring decades-old habits and taking a good chunk of this business virtual. It had to have been a substantial challenge and it looks like you've executed well.

Thank you. Thank you very much, Eric.

Thank you. [Operator Instructions] Our next question comes from Raj Sharma of B. Riley FBR. Please go ahead.

Hi, good afternoon, guys. I have a couple of questions on the revenues, just a few clarifications. We had assumed that the LOAs were around 2,500 and we only missed about two weeks in the March quarter. And I guess we were thinking of mid-May of a return back to. Is that still a good timeline, a mid-May return back to all the campuses being open and in-class instruction that starts? And that, I guess that impacts how many of these LOAs come back online -- come back and revoke the LOAs and are fully on. Is that a good timeline, mid-May, still, for all the campuses?

Yes, can you hear me?

Yes, can you hear me?

Yes, go ahead, sir.

[Technical Difficulty]

[Operator Instructions]

We've rejoined the line. We lost our connection for some reason. This is Troy and Jerome. Can you hear us?

I can hear you. Raj has dropped off. If you would like to make final remarks, if he does join back in, I will let you all know. But at this time, he is off the line, so go ahead with any closing remarks, sir.

Okay. Thanks a lot, operator. Unfortunately, we have some technical difficulties. I think a lot of the conference lines tend to get overwhelmed during this virtual commuting timeframe. But I think I'll just go ahead and close and if you have any -- I'm sure we're going to have time to talk to a lot of you individually and we will take questions then as well.So, in closing, we're pleased with the progress we made in the first half of fiscal 2020 and proud of our response to the COVID-19 crisis. We're encouraged by the interest we're seeing today for our blended learning platform and we're excited about resuming hands-on lab instruction at all of our campuses, so our instructors and our students can get back to work safely as soon as possible.Leading indicators show that we're doing very well generating interest in leads through our revised marketing and admissions strategy. However, that's only part of the puzzle and we continue to track how we're capturing this interest, demonstrated by enrollment starts and how our students progress through the high-quality technical trade education for which we're known.One final note: we do intend to host virtual investor and non-deal road-shows and fireside chats, with support from our covering analysts, throughout the fiscal third and fourth quarter and look forward to reporting on our progress and successes as the year progresses.Thank you, everyone, for joining us and have a great rest of your day. Oh and Raj may have joined.

Yes, we do have Raj back on the line.

Yes, can you hear me now?

Yes, sorry, Raj.

SO no worries. Hey, how are you. Good afternoon. So, the two areas I wanted to just touch upon, one is revenues. so I know that my question was, what is -- what timeline are you expecting all the campuses to be fully open and functional, even, with COVID restrictions? Is that -- initially, we were talking about somewhere in mid-May. Is that still a good timeline?

Well, clearly, we're dependent upon the various states and jurisdictions and their approaches to reopening businesses as they address the specific situations in their geographies. But, through next week, we'll have about 60%. We have a table on our website. We actually added the percentage of students for each. We hope to have Florida shortly thereafter and then, really, that leaves us primarily with New Jersey and Pennsylvania and Chicago, which are some of the harder hit areas. So we -- and we also have Sacramento and Rancho in California. So we probably expect those sooner and then the first three I mentioned are probably looking more like an end of May or sometime early June. But, again, we're [Technical Difficulty] and we don't think there'll –

And just to be clear, those are -- those expectations of, through May and into June are baked into the models that Troy has been talking about.

Yes, right. So, I guess it's related to two things. So the key gating item for these LOAs to come back is the fact, when these campuses reopen, the chances go up dramatically that they'll come back. And that is my understanding, that is -- is that correct?

Yes, I would say the two gating factors are when we get the campuses open and resume the hands-on education. And the second gating factor is people's perception of the health risks associated with going out into the world and reengaging, right?

Right, exactly.

Those are the two big issues.

Right. So now, you said that the labs would be open from 6:00 in the morning to 12:00 midnight. That's relative to -- what were the timings prior to COVID? In other words...

Depending on the campus, if we were running -- if we were running two sessions or three, they were either 8:00 in the morning until about 5:00, or 8:00 in the morning until about 10:00, so depending if they were a three-session campus. We've also reconfigured the campuses to, move equipment around to places so that we can do more labs simultaneously with nine people in a lab. We've got all that classroom space that was not being used, because that's what we've gone online with. Well, we brought some of the equipment into there so that we can execute on labs in spaces that previously wasn't designated for a lab.

Right, so out of what we can control, you're saying that as and when these students return, if they return, then they could be complete -- they could complete their lab work within three weeks.

Yes, they can get caught up. All of the tools -- and again, the asterisk on that is, depending on when we get it open, because, New Jersey, Pennsylvania and Illinois, if we don't get them open until June or -- into June, you're talking about more like nine to 12 weeks of online before they can start, so it may take them four or five weeks to get caught up. Right now, all the schools that are opening in the month of May, we feel very, very confident that we can get all the students caught up within three weeks.

Got it. So, on the revenues, I know, Troy, you mentioned that, the revenues for this fiscal might be flat to last. And the assumption underlying that is that we don't open until the end of June, or?

Well, it's May and June. I mean, we obviously have line of sight to the campuses, that we're opening here this week and next week. We have certain expectations around the others. So, essentially, the timeline we've been talking about here the last few minutes is what that assumes, that those last handful of campuses go into June. We do -- when a student takes a leave of absence, it's an exit date and a return date. It's part of the process, so we do have direct visibility into the currently scheduled return date. Now, they can always change that, but we do have visibility into that.And again, the significant majority of those have return dates in May and June. And we're also, as we talked about earlier, in a significant outreach effort ongoing with them to make sure, we have -- are getting them back and understanding, kind of when to schedule them for their labs, etc. So, all of that assumes, we've essentially got whoever we're going to get back by the end of June. We have campuses open by the end of June and Q4 looks, more normal.

Right. Well, that's very helpful. So, just my next couple of questions is around the cost cuts. Obviously, I know that you've talked about quite a bit of the cost cuts and the employee furloughs. Can you kind of give a sense of what the run rate -- how much of that is impact -- how much of the cost -- quarterly run rate is impacted and how much are you driving down, in this quarter or the next quarter?

Yes, I mean, the -- our labor cost is, like we said, about 52% of revenue in the quarter. Jerome mentioned the 280 employees furloughed, 1,645 employees in total. Now, again, they were skewed more toward our campus operations, just given the variability more in the operations there. So you're talking about 20% or so of the cost from a campus perspective, 20% to 25% of the cost at the campus level. We have a lot of variable spend --- travel's a few hundred thousand a month, right, has essentially gone away.Supplies, think about all the things you've got to buy to have 1,000 people your building every day, doing the work that we do with our students, so there's a lot of variable expense as well. So, we have quite a few levers, I think, to try and align better the cost side with the revenue side. But we don't have a lot of it depends on the timing, right? If you asked me that question [Technical Difficulty] I would have given you a different number than today, because now I'm opening four campuses on Monday that I wouldn't have thought of, a week or two ago.

Alright and I know that there were some cost increases with, COVID-related, with you bringing them online. And I know that some of those are expected to be, or hopefully, offset by the CARES Act. Is there any more thinking around that, or update around that?

Yes, we're being advised that the Department of Education will be coming out with some pretty significantly enhanced guidelines, imminently. And so, at this point in time, there are some very broad guidelines that were issued at the time of the initial CARES Act and then in subsequent communications by Secretary DeVos. But there's a lot of grey in between what was clearly, explicitly allowed and explicitly not allowed. So, we're a little bit in pause mode on that. We're obviously working through the process of getting the funds and then, for the student grants, being able to issue those, potentially as soon as next week. And then, on the institutional funds, again, we're collecting all the data, based upon what we believe will be eligible. But the definition around that, we're kind of paused, waiting for further guidance.

And so and just this last question. The $10 million of the benefit, that's outside of the CARES Act. That's just the NOL -- well, it's related, but that's the NOL carryback that the IRS has allowed, right?

Correct.

That's not part of this.

That's correct, yes. So, $4 million of that was the 2018, tax year '18 carry back to '17 and '16 and the other approximately $7 million is -- will be the '19 carry back, which we haven't filed yet. But we'll be filing that in June and we'll be able to carry that back to the tax years '14 and '15.

And when do you expect to get that?

Well, we actually already filed the refund for the '18 carry back at the end of April and so we –

That's helpful.

We expect to get both of them by the end of the fiscal year, but a little bit of that obviously depends on the IRS and its backlog and its ability to process...

Right, so whenever that wire hits your account, it is.

Yes.

Got it. Okay [indiscernible].

[indiscernible] We're expediting what we control and then we'll facilitate what we don't control.

Great. Thank you. Thank you. I'll be offline.

Great.

Thanks.

Thank you.

That concludes our question-and-answer session. I'll turn the call back over to Mr. Jerome Grant if there's any other closing remarks.

Thank you, operator. A little anticlimactic. I feel like I've already made them. So, I will just say, thank you all for your patience through some of the technical glitches here. We look forward to answering more questions for those who have been kind enough to call in and we'll talk to you all again soon. Thank you very much.

Conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.