Q2 2022 Universal Technical Institute Inc Earnings Call

Including our two new campuses those rollouts are scheduled to begin in 2023.

With supply chain related delays behind US we are set to welcome our first cohort of students in Austin in the next few weeks moving.

Moving forward just like the rest of our system a new cohort will begin their coursework every three weeks. We're also making great progress on our new campus at Miramar, Florida, which is on schedule to open in the fourth quarter of this year.

And finally, we continue to successfully expand our welding programs with two new additional programs launched in fiscal 'twenty. One in the current fiscal year, a new program launched at our NASCAR Tech Morrisville, North Carolina campus in January and the latest expansion of our welding program is scheduled to launch at our Exton, Pennsylvania campus in.

The fourth quarter, bringing the total number of welding programs offered at the legacy UTI campuses to nine <unk>.

As we move forward and look to the future growth opportunities are consistent guiding principle will be our ability to have extraordinary outcomes in terms of student performance and employment, while focusing in areas that are major imbalances in supply and demand in the workforce are growth and diversification strategy is focused on preparing <unk>.

Students for in demand careers that require highly trained professionals. We are continuing to put more and more students are positioned to succeed by expanding our program offerings as well as growing our campus footprint.

We remain confident by consistently achieving high quality outcomes for students peer.

Paired with training them for in demand jobs, we will continue to drive growth moving forward.

Year to date, we've graduated 4400 students and we're on track to have another year with very strong overall infield employment rates.

It is our mission to provide individuals with an education for in demand careers that requiring highly trained professionals and we are addressing a substantial gap in the labor market.

I'll now hand, the call over to Troy for an in depth discussion of our operating performance and outlook into the second half of the fiscal year.

Right.

Thank you Jerome.

As Jerome mentioned, we delivered positive financial and operational performance for the quarter.

I will spend a few minutes covering our quarterly results and then I'll comment on the Concord acquisition will close out by reviewing our fiscal 2022 guidance and longer term strategic roadmap expectations.

Second quarter total revenue was $102 1 million compared to $77 7 million on the prior year's second quarter.

Representing a 31, 4% increase.

The growth reflects a 13, 6% increase in average students, including in IEP and also on approximately 16% increase in average revenue per student, which was 7900 in the quarter.

Both average students in revenue per student were better than we expected for the quarter.

Our second quarter, adjusted EBITDA was $10 9 million versus $2 8 million a year ago.

The year over year increase in adjusted EBITDA was driven by the increased revenue per student as well as our continued focus on cost efficiencies across our operations.

Adjustments for the quarter were mostly consistent with the first quarter and primarily reflect our new campus startup costs, along with acquisition and integration related costs and.

A new item this quarter with lease accounting adjustments related to our facility optimization projects, including the Lisle campus purchase. These are mainly noncash adjustments other than a lease termination payment during the quarter related to our Orlando campus.

On the student metrics perspective, we continue to see growth in the front end of the business with media inquiries up year over year and non media field inquiries up significantly given the much improved high school access this year.

For new students starts in the quarter, we were down five 4% versus fiscal 2021.

So we expected lower year over year performance this quarter versus last quarter.

That said the omicron impacts in November through February both in terms of delayed decisions by students as well as lower conversion rates, primarily due to outages with our admission staffing.

More than we expected.

We also had another quarter of tough prior year comparison.

As a reminder, we saw 17% year over year growth in the first half of fiscal 2021, which included students who have delayed starting in fiscal 2020 due to the pandemic.

Additional context looking at years prior to 2021 and excluding them IAP we.

We have started more students so far this year and we have since the first half of 2016.

For the second half of the year, we expect double digit year over year growth with our new campus launches benefits from MIP and strong high school performance.

Finishing my review of our second quarter financial results, we continued to see measurable growth on our bottom line was $7 4 million of net income and adjusted net income of $6 4 million.

Both compared to net losses in the prior year, while diluted earnings.

Earnings per share was <unk> 11.

Versus a loss per share of <unk> in the prior year period.

One item of note in our net income is the reversal of the valuation allowance.

During more challenging times in 2016, UTI was required to establish a valuation allowance to offset the deferred tax asset on the balance sheet.

Given the financial and operating improvements. Since then we are now past the point, where the valuation allowance is necessary.

There was no impact on our tax rate in fiscal 2022, but we expect a higher tax rate in fiscal 2023 and beyond more reflective of the U S. Federal tax rate plus the effective rate of the states we operate in.

From a liquidity perspective, we finished the quarter with $61 $5 million in cash and cash equivalents.

This reflects sequentially stronger operating cash flow and increased capex versus the first quarter as we continue the investments in our growth and real estate optimization initiatives at all.

Also reflects the approximately 28 million net cash outflow from the Lisle campus purchase that was completed in February .

Purchasing the campus allows us to measurably improve EBITDA net income and cash flow.

While also giving us direct control over one of our largest campuses, where we had a significant lease commitment remaining.

Subsequent to the quarter end, we completed financing for their purchase generating a net cash inflow in April of approximately $20 million after retirement of the debt we assumed with the purchase in.

And resulting in an overall net outflow of $9 million to acquire <unk>.

I would now like to offer a few thoughts regarding our Concord acquisition.

I want to reiterate drones comments regarding our excitement around the acquisition, having the <unk> team and their health care offerings become part of the Universal Technical Institutes educational brand portfolio.

<unk> will be a sizable addition to our business.

In calendar 2021, they delivered approximately $180 million in revenue, representing 5% year over year growth as.

As well as $13 million and adjusted EBITDA.

The addition of <unk> academic offerings diverse student mix will provide us the opportunity to accelerate revenue profitability and cash flow growth over the next several years and over the longer term.

We expect the transaction to close during the first half of fiscal 2023 subject to regulatory approvals and other customary closing conditions.

The purchase price for Concord was $50 million in cash, which we expect to fund from cash on hand.

It represents a quite compelling enterprise value to EBITDA.

There are some key differences in terms of how we're thinking about the addition of Concord versus PMI acquisition.

Mic's programs, the focus across different industries, and the UTI as legacy transportation programs.

Our broadly aligns with UTI and their focus on skilled training and generally targeted similar student demographic.

With us from a strategic perspective, the ability to cross marketing programs and broadly leverage them across the UTI campus footprint is fundamental to our acquisition rationale strategic integration planning.

Also given our small size integrating most of their systems and back office processes was a high priority.

Simply put it represents a classic tuck in acquisition.

Conversely, we see Concord as more of a bolt on acquisition and thus our initial thinking on the integration strategy is quite different.

More specifically the acquisition of Concord, as a whole new brands to our family of education brands, serving as a foundational step towards expanding our presence into the sizable and growing U S health care sector.

Therefore from a structural and operational perspective, Concorde will operate more independently and back office integration will likely be more limited.

That said as we get further down the path, we expect there will be some operational efficiency and integration opportunities beyond the initial critical financial HR and IP type items.

It will be evaluated over time versus being a heavy focus on day one.

I'll now wrap up with the updated view of our fiscal 2022 guidance and an update to our longer term outlook taking into account the pending Concord acquisition.

For fiscal 2022, we are raising the bottom end of our revenue guidance to $410 billion plus the range is now $410 million to $420 million, reflecting the favorable first half performance and our current second half expectations.

Similarly, we are raising the bottom end of our adjusted EBITDA guidance as we are now expecting a range of $50 million to $55 million.

Our adjusted net income guidance is revised to 32% to $35 million.

And our adjusted free cash flow guidance is now $35 million to $40 million.

For new students starts given the first half softness in our continued expectations for strong performance over the remainder of the year.

We are adjusting our guidance to 8% to 12% year over year growth versus the previous 14% to 19%.

As far as pacing for the remainder of the year. There are no major changes from my comments last quarter.

As always we will continue to evaluate our guidance expectations over the coming quarters and provide any necessary updates at the appropriate time.

From a longer term strategic roadmap perspective.

Assuming the successful close of the Concord acquisition in the first half of fiscal 2023.

We now estimate fiscal 2025 revenue to exceed $700 million.

With an adjusted EBITDA margin of approximately 20%.

Versus our fiscal 2020 baseline the estimated revenue CAGR would be approximately 20% and revenue would more than double by fiscal 2025%, while adjusted EBITDA would increase by a factor of 10 by 2025 <unk>.

These will be truly impressive results and we are well on our way to achieving them.

Finally, consistent with our prior commentary, we expect to continue exploring incremental growth opportunities beyond our currently announced initiatives, both organic and inorganic that will enable us to exceed our current expectations as we strive to expand our role as a leading workforce solutions provider.

I want to thank the <unk> team and our students for another quarter of great outcomes hard work and positive results I'd now like to turn the call over to Jerome for closing remarks.

Thank you Troy in closing we're pleased with the strong results. We've delivered this quarter and are excited about the momentum we're taking into the back half of fiscal 'twenty two and beyond.

Our family of brands is expanding and we're thrilled to have the opportunity to impact the lives and careers of more students than ever before while providing workforce solutions to some of the most in demand industries of the 20 <unk> century.

We will remain acutely focused on positive student outcomes and setting our students up for meaningful careers.

We've been executing consistently against our growth and diversification strategy with several significant moves over the last year. However, the addition of Comscore is the first move to diversify our business beyond transportation skilled trades and energy and a likely not be our last the most important message.

Need to understand regarding our strategy and the steps we've taken so far is that we're just getting started.

Financially, we remain well positioned to capitalize on opportunities we find to continue to execute on our growth and diversification strategy and we'll be ready to do so.

Now I'd like to turn the call over to the operator for Q&A.

Operator.

We will now begin the question and answer session.

Ask a question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

Any time your question has been addressed and you would like to withdraw your question. Please press Star then two.

We ask that you limit yourselves to 2% to three questions. If you have more you can rejoin the queue.

Again, if you have a question. Please press Star then one.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Raj Sharma with B Riley. Please go ahead.

Hi, Thank you for taking my questions and congratulations on a really good quarter and also this acquisition.

I haven't I have a couple of questions first starting with the <unk>.

The starts.

Second half starts how do you how do you.

Foresee them and if you could kind of.

Give some color on the current quarter.

Was it purely COVID-19 or was it also an impact of a very tight labor market.

And.

College enrollment has dropped.

In four year colleges.

For the last quarter.

Could you give some color on.

How the high schoolers versus young adults were impacted as well.

Factors are.

And how that impacts you in the second half.

Sure Yeah. Thanks Raj this is Troy and.

We feel really good about the second half of the year.

Two new campuses coming online high.

High School you talked about we have seen as we commented on last quarter significantly improved access and are looking at we feel like a pretty strong bounce back in high school.

In the fourth quarter in particular were actually up on high school, even even on a year to date basis.

All numbers again, a lot of our high school coming in the fourth quarter.

So look we feel very positive double digit in the back half of the year. The guide it at 8% to 12% on a full year basis.

And a lot of confidence around that.

Far as Q2 again, we knew that we were we would see lower performance in Q2 than we saw in Q1, we were seeing some of the leading indicators for them on the crowd in particular picking up.

In the December and into January and at the time, we did our last calls first week of February It continued through February a bit.

In terms of delayed decisions and as well as.

We saw some conversion rate impacts with staff availability and.

Being able to respond to leads and inquiries in a timely fashion. So it was just a little bit of a bit of everything in there that.

Put some downward pressure on our expectations, there, but we've seen.

Continued front end strength with media inquiries and again.

I have a lot of positivity about the back half of the year.

Yes. Thank you for that and then can you talk a little bit about <unk>.

Encore.

Their EBITDA margins currently I know that you mentioned was 5% year on year growth last year.

But when you project out fiscal 'twenty five.

The overall EBITDA margins, you're assuming 20% is that an improvement we were expecting on the Concorde side any you Didnt mentioned any significant cost synergies.

On the Concorde.

And where is this overall is EBITDA improvement coming from.

Sure Yes.

There is opportunity to drive some margin improvement over the next several years.

Concord in their modeling shows that we think.

There is some opportunity to even enhance that further both with growth.

They have some program expansions currently underway.

<unk> been making some investments for the last two years and including this year.

We will see benefits of that over the coming years.

As well as you know, we do expect to see some cost efficiency, but again, we're we're very they will operate very independently and maintain.

The majority of what they have today and.

We will be very.

Purposeful to the extent that we look at anything that we integrate beyond some of the have to haves around financial reporting and.

Security.

Security some of those types of things.

So it's a combination of I would say growth and.

And just some leverage on costs and maybe some additional efficiencies.

Our prior UTI only longer term view was in excess of 20% margin. So we don't think we will get all the way to 20% on Concord, Standalone, but we do think measurable improvement over current levels.

And then any sort of indications on what you should think of ongoing revenue revenue growth four Concord and sort of starts and you sort of.

Color on that.

Starts have been last year.

What should be.

Baked in going forward.

Yes, I think well hold on getting into a lot of details on that until we get further down the path.

<unk>.

<unk> made some investment here the last few years driving some program expansion.

<unk> model not dissimilar.

From what we've been saying about UTI, there as theres opportunity for steady consistent organic growth given the this the growth in the health care sector overall, where they're focused in the health care sector by the way, which which are growing areas.

And are not impacted by some of the macro factors or is heavily impacted by some of the macro factors we're seeing at other.

Nursing in particular, but.

So.

Reasonable kind of steady growth on an organic basis, and then opportunities for incremental growth from program.

Spansion and optimizations.

Great.

Thanks.

Congratulations again on a very discount multiple paid for <unk>.

Acquisition.

Take my questions offline. Thank you.

Great. Thank you Raj Thanks Raj.

Again, if you have a question.

Please press Star then one on a touchtone phone.

The next question comes from Mark Hagan.

Lake Street capital markets. Please go ahead.

Hi, guys. Thanks for taking my questions while market in Sydney for Eric Mike Lindsay I know you mentioned it.

But I was wondering if you had any more details you could provide around staffing and equipment sitting there going into two new campuses in Austin at Miramar.

I'm sorry, how the agnostic.

I missed the question how the campuses are progressing with Austin Amir Horowitz.

As we said, where we did as we said last quarter, we did have a delay due to some supply chain issues with Austin.

Getting the campus opened which pushed it from last quarter to this quarter, which by the way had.

The effect on last quarter starts.

We are ready to open our next core cycle and.

We're happy that the students that were delayed have stuck with us.

And are moving forward and so.

Going forward, we will have starts every three weeks just like the rest of the UTI system and.

It's full speed ahead and often.

As far as.

Miramar Miramar continues to be on track to open in the fourth quarter.

And.

We have high confidence in that as well.

The demand we've seen down in South Florida has been strong and we are.

Really excited what we're seeing there. We're also excited to start thinking about.

Bringing some of the MAA T programs into both Boston and Miramar in 2023 not.

Not originally in the plans that we had out because we were doing the planning around that but we.

We saved space in those locations for those programs as well so we see two really.

A really successful launches there.

Great. Thank you that's it for me welcome.

Alright, Thank you very much.

This concludes our question and answer session I would like to turn the conference back over to Jerome Grant for any closing remarks.

Well just briefly everyone. Thank you very much for your time and attention. This concludes our conference call for this quarter and we look forward to speaking with you all over the next couple of days and into the next quarter. Thank you.

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

Got it.

[music].

Yeah.

Yes.