Universal Technical Institute Inc

Good day everyone and welcome to UTI's third quarter fiscal year 2020 earnings conference call. Should you need assistance please press the star key followed by a zero. At this time all participants are in listen only mode and after today's prepared remarks we'll open the lines for questions. As a reminder today's conference call is being recorded. A replay of the call will be available at www.uti.edu or through September 6, 2020 by dialing 412-317-0088 or 877-344-7529 and entering passcode 10146789. At this time, I'd 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 CEO Jerome Grant and CFO Troy Anderson. During the call today, we'll update you on our fiscal third 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 21 of the Securities Exchange Act of 1934 and Section 27 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 underlining 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 the campus was fully closed in July 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, Jodi. Good afternoon, everyone, and thank you all for joining us today. I want to begin today's call by thanking all our UTI team members for their heroic efforts these past months on behalf of our students and communities as we continue to manage through this difficult environment. Despite the many pandemic-driven challenges we face, we continue to provide the highest quality industry-aligned technical training for which we are known. I believe that the educational offerings and credentials that UTI provides to its students are even more valuable than ever right now, especially in the face of record unemployment across the nation. As the single largest provider of transportation technicians in the country, UTI's graduates service trucks that deliver groceries and essential supplies, keep EMT police and fire department fleets operating, repair and maintain equipment in essential industries including healthcare, energy, and manufacturing. We are proud that UTI graduates keep America moving forward. Since we were able to resume our lab work on our campuses in late May and into July, we've graduated over 1,300 students and we are seeing strong demand from employers. Job placement rates continue to be in excess of 80% for our graduates, with the 2019 grad cohort now at 82% and increasing. Those are impressive numbers, but they don't do justice to what UTI education is delivering to our graduates. One such graduate is a gentleman by the name of Corey. Corey had two courses and four weeks left in his diesel program when the pandemic hit. He was one of the students who made the transition from our purely in-person education model to a blend of online learning and hands-on instruction using CDC safety guidelines. He used the CARES Act emergency grant to help support himself and stay in school during this time and graduated from our Avondale, Arizona campus at the end of June. Now Corey told us he'd spent the last five years working, in his own words, in dead-end jobs going nowhere and that without UTI he'd probably still be in one of those jobs trying to make ends meet or more likely out of work altogether due to the pandemic. He says he pursued a diesel training because he knew there would always be need for people to work on diesel trucks and equipment. and his experience is proving him right. While more than 40 million Americans have applied for unemployment in the wake of the pandemic, Corey was hired immediately upon graduation and now, at 23 years old, makes more than $23 an hour in his entry level job at a machinery company in Portland, Oregon. Corey's story is not an isolated one. It speaks to the power of our programs and industry partnerships. and the work we've done to continue to provide a safe, quality education that delivers for our students. We're also continuing to move forward on a number of important strategic and operational fronts alongside the critical investments and actions we're taking to manage through the pandemic. In addition to advancing our online portion of our new blended education model, we expanded our welding program to a new campus this quarter, completed our headquarters relocation and finish the teach-out and closure of our Norwood campus ahead of schedule. As a company, we continue to invest in our students, facilities and partnerships. We're especially focused on supporting our students through this period of uncertainty and economic hardship. We work closely with students whose circumstances have become unpredictable and encourage them to take leaves of absences or LOAs rather than simply withdrawing. particularly given the many job opportunities that are available for our graduates now and in the nation's recovery. We've also been actively distributing CARES Act funding created through the Higher Education Relief Fund to provide much needed direct financial aid to our students. Ensuring that our students have the support they need to stay in school is paramount and these emergency grants have and will continue to cover living and other expenses for those facing financial difficulties and challenges during the disruption of the health crisis. We're grateful to the U.S. Congress and the Department of Education for supporting our students in their time of need, and we appreciate the opportunity to facilitate this process. To date, we've delivered over $13.6 million directly to more than 8,700 students, and the program and outreach continues. In addition, we recognize the acute need for many students to have the adequate technology infrastructure for the online portion of our blended learning model. To make the transition easier and more seamless, we're now providing laptops to all incoming students and those students with more than four course cycles remaining. All eligible students should have one of these devices by the end of August, and we expect to continue to distribute them free of charge to new students going forward. In total, we've earmarked almost $23 million of UTI's CARES fund allocation to be delivered directly to students in both cash and equipment. We also continue to invest in and evolve our new blended learning education model to better serve our students. The feedback's been very positive, and now that all of our campuses are open for students to complete their hands-on labs, we're seeing high levels of engagement. As of the end of July, over 90% of the enrolled students are active and this number is increasing with each course cycle. 40% of those students have now fully caught up on their hands-on labs with another 47% in progress. The majority of those needing just one or two more labs to catch up. This leaves 13% still pending in terms of in-person lab engagement. While we're very encouraged by this progress, we're finding that a number of our students are balancing their desire to complete their education with COVID-19 safety concerns, work demands, and other personal matters. These students are setting their own pace for their catch-up process, which is elongating the programs and requires us to revise the recognition of their tuition revenue accordingly. We've accelerated the transformation of our marketing and admissions program during the pandemic, quickly moving shift our admissions model, which prior to COVID-19 was almost exclusively face-to-face, and we're now connecting with students and parents through online meetings, virtual tours, and other virtual events. Our admissions reps have told us that there's a substantial increase in the number of people that want to talk and meet with us virtually. With respect to marketing, we're continuing to invest aggressively in our digital and social platforms and are seeing improved effectiveness and productivity, as well as significant savings. Media inquiries are up double digits year on year, and we saw accelerating trends across the quarter and through July. In times of economic hardship, we have found that the interest and need for skilled technicians across the transportation industry and other markets for our students remains strong. One sign of this is that our fourth quarter enrollments so far are running above our pre-pandemic targets for the period, and right now the enrollments for 2021 are accelerating. However, despite the strong interest we are seeing, I do want to remind investors and analysts that this recessionary environment, which does generally help our business, is a very different setting than we saw in 2008 and 2009, the Great Recession. This pandemic-induced recession will provide us with many opportunities, but there are also numerous unique challenges that our students, instructors, and company must navigate until we're on the other side of this crisis. These challenges are rate limiters in the short term, but most of which will be turned into positives going forward. Results for the third quarter reflect the mixture of cross-currents I just summarized—strong and growing interest in our programs combined with the challenges of adapting and shifting our educational delivery model in this environment. Let me briefly touch on a few high level results of the quarter and Troy can cover these in more detail in his prepared remarks. New student starts were up 8.4% year over year and contracts for the quarter grew 20% year over year as we experienced acceleration through the quarter in these metrics. July results indicate that these trends are continuing into the fourth quarter. However, our show rate in the quarter did decline year over year. As we have previously noted, LOAs were well above historical levels following the need to suspend in-person classes at the end of Q2. As a result, total revenues decreased 31.3% versus the prior year quarter to $54.5 million. Our net loss was $13.3 million and adjusted EBITDA was an $8.8 million loss. Now, it's critical to note our results for the quarter, particularly revenue, are subject to important timing effects as we manage through the period with our students. The resumption of labs later in the third quarter, variability in student progression through the catch-up process, and revised graduation dates all affect when we can recognize revenue. but it's important to note that this is merely a shift in when this revenue gets recognized and not a loss of opportunity. Case in point, we deferred approximately $11 million in revenue out of Q3 to better align the recognition of revenue with when students will complete the curriculum. This revenue will be fully realized over the coming quarters. As I've indicated already, our focus is to support students and be flexible as possible through the period. As a result of this approach, we believe we mitigated a significant number of student withdrawals that would have resulted from the pandemic. This posture will ultimately allow the vast majority of the students enrolled to complete their education and go on to successful careers in many essential industries we serve. Despite all the changes, challenges, and actions we've taken during this unprecedented time period, We continue to move forward on the initiatives and strategic actions we had in place and were considering prior to COVID-19. The strategic direction we previously outlined in conjunction with our successful capital raise in February remains in place and we continue to pursue the growth and diversification initiatives that form the foundation of the strategy. These include program expansions and extensions where appropriate New campus locations as needed and selective acquisitions when they meet our financial criteria and demonstrate a clear fit to our business. During the quarter we successfully launched our new welding program at our Houston campus and are on track to open our next location in Long Beach campus this month. Interest in these programs is gaining momentum and we're excited to expand this program to our Lyle, Illinois campus just outside of Chicago in early calendar year 2021. We also recently announced two additions to our leadership team in support of the company's work to accelerate its growth. Bart Fesperman joined the company in the newly created role of Senior Vice President Chief Commercial Officer, while Sonya Mason has been named our Senior Vice President and Chief Human Resource Officer. These additions help round out the new and dynamic leadership team that we've built at UTI over the past year, putting in place the organizational strength to help us deliver on UTI's significant potential. We're also evaluating cost efficiency opportunities in the future as we look to adopt and advance changes that we've already made to create the blended learning environment. This management team's excited about the bright future and the opportunities ahead, but we're also focused and determined to support our students, our team members, and their families as we all manage through these challenging times. I'd now like to turn the call over to Troy for a deeper discussion of our financials and student metrics, after which I'll return to provide some closing thoughts. Troy? Thank you, Jerome.