Q3 2019 Earnings Call

Good day and welcome to the U.T. <unk> fiscal third quarter 2019 earnings call should you need assistance. Please press the star key followed by zero.

As a reminder, today's conference call is being recorded and a replay of the call will be available at www Dot U.T. write down.

Do you work through August 22nd 2019 by dialing 412317, 0088 or 87734475 to nine.

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At this time I'd now like to turn the conference over to Mr. <unk>, 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, Yes, <unk> interim Chief Financial Officer, and you're wrong Grant Chief operating officer during the call today, well 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 21 E of the Securities Exchange Act of 934 and section 27 eight of the amended Securities Act of 1933.

I refer you to today's news release for your T. <unk> 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 losses loss from operations adjusted for items adjusted for items not considered normal recurring operating expenses. Adjusted EBITDA is net income before interest income taxes, depreciation and 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 the 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 nor what does 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, a 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 towards building a profitable business and our significant momentum is a direct result of U.T.I.s multiyear transformation plan.

Over the past 18 months, we have redesigned core business processes leverage technology and analytics to efficiently attract more qualified potential students successfully opened a new campus expanded our welding program 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 post secondary 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 store 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 in adult channels posted double digit growth in the third quarter with a high school segment up 20.2% and the adult segment up 13.3% year over year.

In the face of historically low unemployment would make which makes it easy to get a job without post secondary 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 200 and base 280 basis point improvement in the show rate, which met certain measures the percentage of students scheduled to begin school, who do in fact showed a class.

This is our fourth consecutive quarter of year over year growth in the show rate and were pleased to see that our work across marketing admissions 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 three 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've asked him to join today's call to discuss the plan and the result Jerome.

Thanks, Jim.

Let's start with marketing and generating student demand.

We continue to invest in national brand awareness campaigns that drive student interest and inquiries I'm pleased to report that we are exceeding our goal of generating more than 50% of those inquiries from sources that deliver the highest level of conversion rates, while driving cost efficiencies our year over year advertising costs decreased to 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 destroyed despite strong macro headwinds, which demonstrates the effectiveness of the transformation plan and the overall value our new campus in welding programs are given.

Applications, where 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 your Ti and raise awareness of the return on students' educational investment is driving strong growth in our high school segment, even as options for these students increase.

As high schools across the nation recognize the value of career and technical education, we're seeing an increasing number of articulation agreements.

These agreements allow students to earn your T.I. credits for classes they take in high school.

This summer more than 500 students participated lignite. That's our program that gives students opportunities to test drive Yutai education before they start their senior year.

Because ignite students take the first few CCI class for free and can transfer the credit when they finish school you come to you T I.

They pay less for school and they graduate faster.

They also become quite popular Yutai ambassadors and for trade education as they go back to 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 your Oh lets students learn.

Learn and apply jobs or excuse me less students learn about and apply jobs with participating employers as soon as they enroll at you at U.T.I.

Employers can screen and higher students before they start school and given the on the job experience while they complete their education students, who may be employers criteria for success have their tuition reimbursed and full time employment offer. This program is really a win win and less employers hiring great people at the front end of the funnel.

At a time when many of the students are skeptical about the value of the post secondary 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 programs garnered local and national media coverage, bringing greater visibility to UTI guy and the value of our education, we plan to roll out just the other campuses in the coming months.

When coupled with tuition reimbursement and incentive programs offered by the more than 4700 employer partners around the country. This exciting new program underscores our focus on leveraging our industry partners and employer partners and and show what it's been like to bring commitment and to the Yutai education.

I will turn it back to Jim.

Thanks, Jerome again, great job, we're 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 one 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 19 High school enrollments a 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 experience at Avondale in Rancho Cucamonga campuses student demand for the program is very strong.

We do believe several other yutai 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.

And our larger legacy campuses, we are consolidating or subletting excess space and or offering new program, where we can we are converting these campuses to our smaller metro model.

In August and following successful Rightsizing initiatives in Houston, Texas in Rancho Cucamonga, we signed a new eight year lease extension that will reduce the size of our Exton, Pennsylvania campus by approximately 71000 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 Yutai 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 base 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 technician, while they are still on active duty.

We also signed an agreement with Penske is Premier truck group for an on base program. Both military base training programs are scheduled to launch in fiscal 20, and we should be able to tell you more about them on our next call.

With four they signed a one year workforce training agreement to provide dealer technician training at U.T.I. campuses, we expanded our partnership with Mercedes Benz USA and we'll be opening a new Mercedes Benz Advanced training program, and our Lisle, Illinois campus.

This program is planned to open for the second quarter of fiscal 20.

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 here.

Before I turn it over to Scott, who will give you the details on our raised the 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 you T.I. 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 counter cyclical business should benefit student recruitment and 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 are all delivering results and while our 2020 plan assumes we'll continue to operate in this challenging macro environment, we fully expect UTI I'd be profitable and generate significantly more cash than we've had in the <unk> in 2019, and now I'd like to turn the call over to Scott, Yes, near 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 and the most challenging macro environment.

Fiscal third quarter is seasonally our lowest of the year for student population and for revenue with more than half of our students enrolled to begin school in the fourth quarter.

Despite seasonality, we're almost breakeven on a GAAP operating performance.

We generated 4.4 million in EBITDA.

4.5 million in adjusted EBITDA in the third quarter.

And efficiently used our working capital.

Our 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 supper surpassed that of a year ago and in the third quarter, we averaged 4.2% more students in school then 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 four quarters are also maturing and being realized in Q3.

Third quarter operating expenses have decreased 7.8 million compared to third quarter 2018.

And decrease 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.

Align with driving profitability in a challenging macro environment and will carry into 2020.

Headcount has declined 126.

From 1807 in October of 2019 to 1681 at the end of June .

2019.

A 7% reduction.

The head count reductions were part of the transformation strategy and achieve through attrition along with specific actions, including those around the Norwood campus teach out an exit.

As a reminder, in the first half of 2019, we had $5.6 million of one time expenses for the Norwood exit and transformation consultant.

Furthering our cost structure efficiency work, the Exton campus Rightsizing, we share today, well deliver $1 million in cost savings in our next fiscal year, 2020, and 1.8 million annually in 2021 and beyond.

Our cash flow from operations, our cash flow from operations improved significantly this quarter compared to 2018 as well.

We are 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 a student population is at its lowest this is mostly related to tuition funding deposits that tracked 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 would like to summarize the third quarter and nine months 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 our 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 $400000 increase indirect cost from the Bloomfield campus.

Operating loss and net loss or 455003 hundred 65000, respectively.

Each improving nearly $11 million compared to last years third quarter.

Our adjusted operating loss was 292000.

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 Thirtyth 2018, compared to the same period in 2018.

Revenues increased 3% to $243.8 million compared to 236 million. The revenue improvement reflects multiple quarters, a start growth and a higher average student population over the first nine months.

So operating expenses were 257 one.

257.1 million compared to 260.9 million.

On adjusted 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 32019, excluding restricted cash.

The cash position and operating cash flows are providing good capital liquidity for the business.

Yes, how bank borrowings or banking bank borrowing facility at this time.

Now I'd like to share our revised 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 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 eight and $12 million.

Compared to 10 and $15 million previously guided.

Adjusted operating loss is now expected to range between three and $7 million compared to six and 11 million as detailed in the company's prior guidance.

Operating cash flow is expected to be positive 12 12 million or greater.

And adjusted free cash flow is expected to be $10 million or greater in fiscal 92019.

And the ending cash balance to grow 2 million or more.

At year end.

Net loss is expected to range between eight and 12 million compared to between 10 and 15 million. Adjusted EBITDA is now expected to range between 14, and 17 million compared to between nine and 15 million as detailed in the company's prior guidance.

Capital expenditures are expected to range between six and 7 million.

We look forward to updating the full year results, ensuring 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 and 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 result.

Thank you and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines at this time and have a wonderful day.