Hello, and welcome to the Universal Technical Institute Fiscal First Quarter 2021 Earnings Conference Call. Please note today's event is being recorded. I now would like to turn the conference over to Jody Kent. Ms. Kent, please go ahead.

Before we begin, we want to remind everyone that today's call will contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Please carefully review today's press release for additional information and important disclosures about forward-looking statements. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes and circumstances that are difficult to predict and many of which are outside of our control.

Thank you, Jody. Good afternoon, everyone, and thank you all for joining us today. To begin, I'd like to once again applaud the tremendous effort of our staff and students during the quarter. We were able to make progress on a number of strategic initiatives while keeping all of our campuses fully operational starting 1,927 students, a nearly 21% increase over Q1 2020 and graduating 1,510 students despite a significant spike in COVID-19 cases throughout the country. As with most postsecondary institutions around the world, we did experience some temporary effects related to the pandemic this past quarter. Troy will share more of our metrics and full financial results with you a bit later in the call.

Thank you, Jerome. As Jerome outlined, we experienced growth across a number of our key performance indicators during the fiscal first quarter, and we are pleased with our operating performance in light of the broader macro environment. We started 1,927 students in the first quarter, an increase of 20.9% over the prior year pre-COVID first quarter with strengthened starts across all 3 channels. Scheduled starts increased 18.3% year-over-year in the quarter. As of the most recent data, students scheduled to start in the second quarter is currently pacing at an even stronger clip from a year-over-year perspective. Show rate improved 110 basis points year-over-year in the quarter. And notably, we achieved the fourth straight year of first quarter year-over-year show rate improvement.

Thanks, Troy. We continue to feel optimistic about the remainder of the year and the future for UTI and feel these short-term revenue pressures, primarily attributable to the current health crisis in America, are just minor bumps in the road on our path to success. We are seeing extremely strong demand at the front end of our lead funnel that we are more efficiently converting to scheduled starts and starts than we ever have. The job market for our graduates has remained resilient and is expected to see further expansion over the coming months and years. We're confident that our blended learning is the premier way to be educated within our field, and we're seeing tangible results from our ambitious marketing strategy. Our financial position remains rock solid, which offers us optionality moving forward. Our team has a clear vision of both how UTI must execute on the fundamentals in 2021, while aggressively pursuing the growth and diversification path to achieving our fullest potential in the future. I'd now like to turn the call over to the operator for Q&A.

And the first question comes from Austin Moldow with Canaccord.

You mentioned some negative impacts from COVID, but do you believe you're experiencing any improvements in demand from recessionary trends and high unemployment yet?

Yes. Austin, it's Troy. Thanks for the question. We've been talking about the front-end strength on our inquiry flow for a few quarters now. We were 25% both in the last 2 quarters of fiscal '20, 11.5% this quarter, and that includes a down month with October because of the election. So we're seeing demand. Clearly, unemployment rate in our primary demographic is very elevated, even with some of the more recent improvements. So, it's -- again, always hard to call. But clearly, the enrollments this quarter and the starts this quarter were very strong. We see, as I commented on, we see strength in our Q2 enrollments, which are actually pacing stronger currently based on current data than our Q1 enrollments and we continue to build the book for the back half of the year. So we're encouraged by the front end strength we see, and we'll continue to do everything we can to maximize the opportunity and support our prospective students.

Great. Can you go into a little more depth on the advertising environment? And I think you mentioned something about localizing ad messages. Can you just kind of go through that initiative?

Sure. Austin, thanks for calling in anyway. It's Jerome. So a couple of things. Number one, in terms of the environment as a whole. One of the alterations we've made is to start to more localize our advertising. Most of UTI's advertising over the last number of years has been sort of national brand awareness advertisement that would bring someone to inquire about what they may want to do. We're getting far more pointed in our advertising right now. You'll see social media ads in the New York area saying there are 66,000 open jobs. And in 51 weeks, you'd be certified to be able to apply for one of those. And we really believe that a little deeper mining in our local areas bring some of the results we've seen in the first quarter, a begin of a shift to more local enrollments, which convert at a higher rate and actually show at a higher rate. And then also a bit of a compressed time frame between enrollment and start, which sort of leads to your first question that you had to Troy, which is the compressed time frame, which usually is about 4 months between an inquiry and a start, is really indicative that you've got people who don't have jobs and are ready to get retrained right away. So a lot of that messaging is much more focused on being there for people. And then a significant amount of the focus is really reaching out to people who are local, therefore, they can make a decision quickly and start school right away.

Great. That's really helpful. And if I could sneak in one quick one, you mentioned computer skills. Any thought around leaning further into that kind of computer science or coding, short-term type boot camp, coursework?

We have not really gone deep into the notion of coding and boot camps. What we have been doing is we have been looking much more deeply into how the evolution of digital literacy starts to apply to ongoing continuing education, the B2B markets as well as the transition from combustion to hybrid to EV. We think that those digital skills are going to become much more at a premium, and therefore, we're leaning in on them.

And the next question comes from Raj Sharma with B. Riley.

So I just wanted to understand, last call, the regular -- the students on regular coursework were 80%, and that has improved to 84% now, what was the differential? So the number of -- there are also the number of graduates around, I think, Jerome mentioned 1,500. What was the normal number that we would have expected during this quarter? In other words, is the delta, unless he is graduating, not enough progressing, that has caused the shortfall in the revenue. Just trying to understand that better, the pace of the course completion.

Yes. Sure. Thanks, Raj. Appreciate your question. A few comments. This is Troy. I'll make a few comments. First, as you look at Q1 -- our Q4 to Q1, we always have a seasonal effect of this holiday closure. We're closed a week in the latter part of December. And so that always -- we always have a lower revenue per student in Q1 than we do in Q4, and our revenue was roughly flat, even though typically, we have higher students in Q1 than Q4. So everything, as you look at this last Q4 to this Q1 looks very similar to exactly what happened last year, which was a pre-COVID environment. What didn't happen, which we were counting on or expecting to some degree was some improvement, as we talked about in the last call, as we brought more students back in getting caught up on their labs and things of that nature, because we saw some spike activity with the LOAs, with some withdrawals, with some retakes that basically counter set against the improvements we were trying to make. And we had progress making -- leading into the last call. So we see those improvements happening. And we can point very specifically to, clearly, the effect that happened really the last 5 to 6 weeks of the quarter. And then we also see the first 5 weeks here of this quarter a reversal. And so that's really the long and short of it. I didn't get quite the lift we were hoping for. But we didn't go backwards, is really how we're looking for it. And we see that improvement. Again, the front end strength was tremendous. We see that strength continuing into Q2, and we're going to continue working on everything that we can within our control to keep driving the performance improvements, which we have confidence we can achieve.

Any sort of -- was it regional specific at all these sort of delays and the reticence in wanting to complete the coursework?

There are definite variances across the campus footprint. I mean, we have a -- and the -- a campus doesn't turn overnight, right? If a campus was -- has a higher LOA rate than the other campuses, it takes longer to bounce back. So we definitely have some regional variation. Off the top of my head, I mean, I know there's 1 or 2 of our California schools have been behind throughout. We've seen Arizona. Some of the hot spots are -- where we've seen some of the most pressure. But it's not 100% consistent. So there's some puts and takes around there, keeping in mind. Again, we have a younger demographic in our schools, than broadly speaking, is most affected by COVID. So again, I wouldn't point it to any one specific thing. I think it's just what you see out in the macro headlines. We saw some effect from that, but we also see that the actions that we've been taking will continue to drive improvement.

So just one last question on that. I see that you reiterated the guidance. Obviously, you guys are doing well on the starts and the interest and the continued -- the show rates are improving. But the revenue -- the yearly revenue guidance would have to be met only if there was obviously a pickup in the pace of this revenue recognition. So are you expecting this more to be the back half? When are you expected -- when do you expect the pace of completion of coursework to have caught up entirely?

Yes. It's -- the make ups are a piece of it, right? Having a more normalized LOA rate, having a more normalized retake rate. So all of those things contribute. And so we do expect to see improvements -- that guidance contemplates improvement throughout the year. Certainly, it is back -- it was back-end loaded when we gave it. It's a little more back-end loaded now. It is a range. So I want to emphasize that it's a range. And we're comfortable with the range, with the initiatives we have in place, the front-end strength that we see and the expected improvements throughout the year.

And the next question comes from Steven Frankel with Colliers.

I wonder if you could just dig in a little bit on exactly what the LOA number was, what the -- and what happened to that sequentially and where you think that goes this quarter.

Yes, sure. We -- when we talked last quarter, we said we were expecting to run 1 to 2 points above pre-COVID levels. That could -- and it varies. We get spikes, as we've talked about in the past around, say, spring break, we get spikes around the holidays, anyway, just normal course. Because our program doesn't have breaks other than this 1 week that we've referenced in December. Other than that, it's straight through from start to finish. And so 1 to 2 points above a normalized level, that would be roughly 600 to 800 LOAs, again, depending upon the time of the year. We were in the 700 at the time of the last call, so we were in that range. We spent much of December over 1,000, and we had 2 really strong LOA return cycles, both with our January 11th cycle as well as just this past Monday. And we're much more normalized so far this quarter, get back to where we would have thought to be, if not even a little bit better on that.

So now you're back to somewhere around 700 again?

Yes. In that normalized range. Again, it's going to vary month by month, but definitely something in a more normalized range of what we would expected.

And how challenging is this failure rate issue? Is this -- maybe how many students are affected? And how long does it take you to get your arms around that and get those students back on track before they drop out?

Well, it's a few cycles. I mean if a student is unable to complete a course within 2 or 3 tries, they're typically not going to make it past that course. So we've, as I mentioned, have a number of initiatives, mentoring, identifying. And again, not all this is new. It's evolving, right, in this newer environment that we've been operating in the last number of months. But we had put even more incremental emphasis and do have some new programs. The mentoring is a newer program for us, but identifying at-risk students earlier, the efforts around our transition from Google Classroom to Blackboard, so we'll have a fully integrated suite of student curriculum and student management support. So all of those initiatives, we see when we pilot them, improvements and now we're rolling them out more broadly. So really, again, we didn't -- I would emphasize, we didn't go backwards. We just didn't move forward as much as we would like to have seen because we were going into a headwind there in the latter part of the quarter on some of these metrics.

Yes. Steve, one of -- it's Jerome here. I mean, one of the challenges and giving you a definitive answer on the withdraw thing is also the notion of -- we have a number of students who either get sick or have to quarantine, don't call us, just miss a couple of weeks and then come back for the third week and fail the course. And think, oh, you know what, I better try a retake or maybe I'll just pause for a little while, along those lines. And so, it's not unrelated to COVID in and of itself. There are other factors involved with that, too, but it's not unrelated to COVID in and of itself. And so what we've been seeing so far in the second quarter is a significant re-enrollment rate, which again gives us confidence in reiterating our guidance for the balance of the year.

Okay. And with the high rate of unemployment, have you seen a significant mix shift more towards 18- to 24-year olds than you had pre-COVID?

Yes. That's a really great question. There's a couple of ways to answer that. One, we've seen a mix shift in our major metropolitan areas where a lot of the service jobs went away with the closing of restaurants, closing of retail things, et cetera, along those line. We've seen a compression. In the number of days, it takes someone to start from when they inquire. Again, something that's indicative of people who are readily available to start work. And more than the 20- to 25-year olds, I think there are a lot of 18-, 19-year olds that graduated from high school last year who didn't find that job they thought they would find when they decided they weren't going to go to school. And so if anything, what we saw in this last quarter was a more pronounced number of that 18-, 19-year old who left school last September, but didn't find anything to do, right? And so if we look at what sort of stacks up in terms of the last quarter, we had some pent-up demand. Remember, when we talked to the quarter before, we had said that there are a number of students who were fearful of starting in the back-to-school season. That came through in November and December of more of those starts, and those are the younger students. And then also, we saw more local students, again, people who were readily available. And then the lead volume, I think that it also fueled that as well. So we're -- as Troy said, it's hard to say, yes. This is all unemployment because there still was the notion of a delay because of COVID. But I think they're -- anecdotally, we're seeing a lot of students that just weren't able to find that unskilled labor job when they left high school last year.

Okay. And then one more. What changes are you making to your high school recruitment efforts, given the challenges of COVID?

Yes. We've -- that's a great question. One, we are getting more access to the high schools than we originally expected when we thought through the year of how we were going to -- of how we're going to navigate. So one, we're actually somewhat pleased with the amount of high schools we are getting access to, either virtually or in person. That's great. But we've also started much more events-based outdoor, events-based recruiting efforts on weekends, et cetera, car shows, bringing people to our campuses and the parking lot, socially distance, of course, all that sort of stuff. And we're seeing really our virtual events with -- whether they're racecar drivers or whether they're people that are in the employment community. And that events-based approach is actually bringing more people to us as they think through. We also think things are -- if you look at the FAFSA data in the United States, we think that things are just a bit delayed as well. The early FAFSA numbers were double digits down early on in the year, and we're beginning to start to see a bit of a catch-up, I think, as students were just sort of surviving in that September, October time frame, not thinking about what I'm going to do next year, but how I'm going to learn online or with hybrid or what this all means. But whereas by March or April, pretty much everyone's decided what they're going to do. We really don't see the year going that way this year. We think that the decisions are going to go a little later as people pivot from surviving their senior year to thinking about what I have to do next.

And the next question comes from Eric Martinuzzi with Lake Street.

Yes. I wanted to drill down on one of the segments in the channel, the new student starts by channel. It looks like the military has been pretty strong here the last 2 quarters. Could you explain what's behind that trend?

A couple of things. One, we're anecdotally hearing that a number of the people who are enrolling and starting are people who may have wanted to go directly out into the workforce, but the job market just isn't robust enough for them to do it. So I would attribute some of that to the unemployment rate that's out there that folks are thinking more about that. I'd also -- when we look at where our enrollments are coming from in the military channel, our on-base programs are generating more leads and more enthusiasm towards UTI. Therefore, we're doing our part with the military to train people on their bases or their camps. But the folks that aren't able to participate in that, those are great leads for us to bring into our campuses once they rotate out. So we're starting to see some movement off of that as well.

I didn't understand your first comment about the unemployment versus military. Could you recap that for me?

Well, so when someone is rotating out of their service, there's a number of things they can do. They can take advantage of the GI Bill and they can go on to higher education or they can go out into the job market. And a significant portion of them don't take advantage of the higher education benefit that they get and go out into the job market. And I think what we've been seeing is a number of people who are rotating out of the military aren't finding jobs. And therefore, they then choose to exercise their GI benefits to learn a skill and move forward.

Got you. Okay. Troy, I wanted to ask about the operating expenses in the business. What should we anticipate? Are we kind of level set here as we go into Q2, Q3? Or is there a step up as the business comes back?

No. I mean, I think we'll see some trending up within the guidance. If you do the math around there, you'll get to some higher expense levels as we get into the back half of the year. We have obviously the higher students as we get into the back end of the year with the start strength. And as we stabilize, the student base will add students particularly heavily in the fourth quarter as usual. So definitely a spike up there. You'll see a little bit of some investment in a few areas that may show up in the SG&A side. Not significant, but that will trend up a little bit. So I think, generally speaking, you would model that increasing throughout the year.

Okay. But some -- if we were $75 million, I think that was the number in which you...

$75 million, yes.

$75 million in Q1. Does that -- you're saying it might trend up into the $80 million to $82 million range over the year, or is it something bigger than that?

Yes, probably something in the low 80s by the time you get to the end of the year.

Okay. All right. And then last question, use of cash here. Obviously, you guys made a big decision to go ahead and buy the facility. That's $45 million that went to own it versus lease it. Just wondering the logic there versus maybe keeping more dry powder for acquisitions of other education-related businesses. What was the thinking at the Board level on that one?

Sure. I mean, we are -- as we've been commenting this call, last call and since last year, I mean, we're aggressively pursuing our opportunities for growth and diversification. So I think we've also talked about -- there's timing around that, right? Even if we announced an acquisition today, it would not -- the money would not leave our hands given the diligence process, the preacquisition review process, the Department of Ed, the ACCSC, the various steps we have to go through for 6 or 9 months. And so -- we're of, say, a new campus or even the welding. We made a welding announcement last week, well that's '22, 2 programs in '22. But we have to announce it now because we have all that lead time to implement, and those are relatively shorter lead time-type initiative. So as we were looking at opportunities, we think of ourselves as opportunistic in the real estate side. We own Dallas and Houston. We've owned other campuses in the past and then done sale leasebacks when the company needed cash. Avondale, there was a great opportunity there. We're clearly making a huge strategic commitment to that site. And we were able to negotiate what we felt was a pretty good deal. And we are -- you'll see in the Q, which will be filed tomorrow. We are looking at our financing options there, so we can replenish that cash at a pretty low rate, I think as you probably know. And so we don't think of it as limiting at all. We think we have plenty of options. And again, we'll have more to talk about as we go forward here as we get further down the path on our strategic options.

Yes. I appreciate the explanation. I have to be reminded about the timelines in education-related M&A. So I appreciate the color.

And that does conclude the question-and-answer session. I would like to return the floor to Mr. Grant for any closing comments.

Thanks a lot. Well, so as we've consistently underscored in the past, Troy and I believe in a very open and transparent partnership with the investment community. To that end, we look forward to meeting with as many of you as possible over the coming days and months. So thanks, everyone, for joining us, and that concludes our call for the day. Thank you.

Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.