Hello and welcome to the Universal Technical Institute’s Second Quarter 2015 Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. A replay of the call will be available for 60 days at www.uti.edu or through May 13, 2015 by dialing 412-317-0088 or 877-344-7529 and entering the passcode 10064029. At this time, I would like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead, sir.

Hello and thanks for joining us. With me today are Kim McWaters, Chairman and CEO and Eugene Putnam, President and CFO. During today’s call, we will review the results of our second quarter and then we will take 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 amended Securities Act of 1933. I will 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 the conference call, including initial comments by management as well as answers to questions. During today’s call, we will make reference to EBITDA, which is a non-GAAP measure representing net income exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure, net income. And now, I would like to turn the call over to Kim McWaters, our Chairman and Chief Executive.

Thank you, John. Hello to everyone on the call and thank you for joining us today. During the second quarter, our quality educational and student support programs, combined with the growing demand for well-trained technicians once again translated into more jobs, higher wages and more opportunities for our graduates to build rewarding careers. Our work to manage cost and improve operating efficiencies while rebuilding our student population continued to strengthen our bottom line. We are pleased that we are now beginning to see some positive traction with our marketing and admissions strategy and that in the month of March, our applications grew year-over-year for the first time in more than a year. While our new student starts remain behind last year as we expected given the previous quarter’s shortfall in applications, we continue to believe we are on track to see new student growth during the second half of the year as our inquiries and applications begin to grow and our show rates remained strong. Our strategy is aimed squarely at leveraging employer demand to enhance our student value proposition, to breakdown the barriers that stand between students and the UTI education and to rebuild our student population and ultimately the number of graduates who are trained and ready to go to work. We are clearly at a point where demand and competition for our graduates so far exceeds the supply of trained technicians that employers are increasingly willing to invest in our students and help pay for their education, their tools and even relocation expenses. To that end, we have launched a focused effort with our employers across the country to encourage their support for our students. Their response has been extremely positive. In fact, today, 8 of the 10 largest automotive dealer groups in the country, companies like…

Thanks Kim. Our continued efforts to control costs resulted in an operating income of $2.4 million for the quarter, which is a significant improvement compared to an operating loss of $1.6 million in the same period last year. We began this quarter with approximately 1,000 fewer students than we had at this time, last year. Our show rate was up 500 basis points, but new student starts were down about 13%. The decline in new student starts was not quite as large as anticipated and was due to a lower volume of new student scheduled to start in the quarter. The combination of a lower beginning student population and lower newer student starts led to an overall decline in average student population of approximately 8.8%. The lower student populations offset somewhat by higher average revenue per student led to revenues of $91.2 million in the quarter, which were down 3.7% from last year. Average revenue per student was up from $6,500 to $6,800 per student. Tuition excluded $5.7 million related to our loan program compared to $6.6 million in the second quarter of last year. For the first half of 2015, revenues were approximately $187 million, down about 2.5% compared to $191.8 million for the same period last year. Tuition for the six months excluded $11.4 million this year related to our loan program compared to $12.8 million last year. Advertising expense was $11.7 million for the quarter, which was down from $12.4 million last year. As a percentage of revenue, advertising expense was 12.8% for the quarter compared to 13.1% for the same period last year. Our bad debt expense decreased $1.3 million for the quarter. During the three months ended March 31, we reversed approximately $1 million of bad debt reserve recorded in 2011 and 2012 for processing…

Thanks, Eugene. Let’s look at our key performance metrics for marketing and admissions and the work we are doing to build on some early momentum that we are seeing. Growth inquiries were down in the second quarter 13.4% year-over-year, reflecting the complex, competitive and certainly more costly environment. Given the increasing cost in advertising, we were careful where we invested our resources, testing and building confidence that there was an acceptable return on our investments. While the cost of certain advertising created some limitations on our ability to grow the volume of inquiries this quarter, we made good progress determining what types of advertising were worth the investment. During the quarter, we launched new advertising creative and tested different spot formats. We optimized our media mix and improved our website landing pages to better serve prospective students on mobile devices. Although marketing costs more and is less efficient in this environment now that we know more about what is working, an increased spend is warranted during the second half of the year. The increased spend will help us grow inquiries in applications this fiscal year and new student starts in fiscal ‘16. We now estimate that our advertising expense will be 13% of revenue during the second half of the year. Advertising expense for the full year is estimated at 12%. During the quarter, new student applications were down 12.5% year-over-year due to fewer inquiries, the elimination of certain underperforming territories, and a difficult comparison to a period with lower registration fees. As we gained some momentum with our marketing efforts and lapped the anniversary of the registration fee change in March, we saw 5% growth in applications compared to the prior year. What was most promising is that our adult channel grew 18% in the month with fewer inquiries…

Thanks again, Kim. While we are also continuing our efforts to manage the business efficiently and to reduce costs where appropriate, we believe our path to growth includes bringing our education to reach more students and markets. Construction is well underway and on schedule for our new campus location in Long Beach, which is scheduled to open later this summer. We have begun enrolling students to start upon opening and we are currently on pace to our plan. To-date, we have received the necessary approvals from both our accreditor and the State of California and are in the process of obtaining the final approval necessary for our new collision repair program. Pre-opening costs have impacted operating income in the first half of the fiscal year by approximately $700,000 and we anticipate operating income to be impacted in the second half in the range of $3.9 million to $4.3 million. We are also teaching our new state of the industry blended learning curriculum at our campuses in Avondale, Dallas, Sacramento, and now in Orlando and we have completed our expansion in Orlando to include diesel. And with limited marketing, the first two diesel programs are already at capacity. Our industry relationships continue to be a very important market differentiator for us and are becoming even more important in assisting students financially in the pursuit of their education particularly as demand for professionally trained technicians intensifies. As Kim mentioned, our newest agreement with Roush Yates reflects our ongoing work to expand, renew and extend these relationships. In response to the increase in demand for skilled CNC machinist, we are partnering with Roush Yates to develop a comprehensive machining and manufacturing technology program. CNC machining is widely used to make high precision parts for the transportation industry, but also in industrial applications such…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jason Anderson of Stifel. Please go ahead.

How are you doing guys?

Good.

Good morning.

Just a question on the guidance then, so I think it’s pretty clear, but just the way it’s framed, we should probably see second half operating income, am I correct in thinking that should be down probably $8 million at the least, because it looks like your first half is up above that, so the second half should probably be down, I mean that would be including your investment costs?

Are you saying down from last year?

Yes, versus prior year, year-over-year?

Yes, if you included the Long Beach costs today laid out there of call it roughly $4 million that would be correct.

Great. Okay. Just want to make sure on that. I am intrigued by the employer outreach that’s going on and them getting involved in the front end of the process and you mentioned you are seeing some results there, is that impact – was that impacting the March start at all or the March numbers or is it still pretty early or do you see that having tangible benefits to actually getting seeing the starts or at least registrations happening?

I think it is very early in the process and did not necessarily drive the increase in the March applications. I do expect that it will help our students who are scheduled to start in the latter part of the year because employers are participating in the future Tech events and mid-year meetings and open houses and talking to students with their families’ presence – with their families present about the opportunities we discussed in the prepared remarks. So early on, excited about what’s to come and we will likely see some benefit of it in the starts in the second half of the year.

Okay. And then also on the machining program, can you give us any maybe flavor of like what’s the market opportunity look back there, I mean trying to get how big that that program area is and maybe what the competition is like or if there is much of it or not, I don’t know if you could maybe go into that at all?

Well, it’s a little premature to talk about that and in terms of where we expect to expand into. But I think, clearly kind of in line with what we have done historically, employer demand is driving the need for this. And in fact, that’s why we want to open it in North Carolina because that’s where the early demand is. But I think there are clearly other parts of the country that need machinists. And I think the numbers are in the hundreds of thousands over the course of the next decade. So yes, there is competition out there. But I think with the Roush Yates name and more importantly with the level of precision that their programs lead to, that we think is a competitive differentiator.

If it’s helpful, there are about 397,000 machinists employed in the U.S. today and growth is expected of 9% between 2012 and 2022, to Eugene’s point.

Great, that’s very helpful. Thank you for taking my questions.

Thank you.

Our next question comes from Jeff Silber of BMO Capital Markets. Please go ahead.

Thank you so much. I know it’s still a bit early in the process, but wondering if you are seeing any impact from the issues that Wyotech has been going through over the past few weeks and months?

Well, I think it’s certainly got people’s attention. We have felt it in the field, particularly in terms of access out at high schools as people react to the negative news and make certain that they are protecting their students. I think what we have been continuing to do throughout the last 5 years in this negative cycle is focus on building the relationships, encouraging people, whether it’s teachers, counselors, parents, administrators to come out to a campus, experience it, to talk to employers, to talk to graduates. And although it takes longer, typically we discover and they discover that we are different. And so I think what it’s done is just it slows things down and makes it more difficult, but ultimately, I believe we will stand apart.

Okay, great to hear. You mentioned your confidence that starts would be up in the fall because of the strength in your high school channel. Can you just remind us of your fall starts, roughly what percentage of your students come from that channel and roughly what you are expecting this year as well?

Well, in the fourth quarter, it’s predominantly high school students. So, I’d say probably in the 70% to 75% range. We do expect that we will see a higher percentage of the adult population given the traction that we are gaining with some of the marketing and efficiencies recently, but that is our strongest quarter in terms of starts and significantly higher. It’s typically more than double the size of another quarter starts. So, does that help?

Yes, no, it does. And then just a quick numbers question for Eugene, you mentioned I think it was the $1 million reversal in bad debt expense. I just want to double check that, that $7.8 million that you recorded in EBITDA, that’s including the benefit of that $1 million reversal, is that correct?

Yes, it is.

Okay, great. Thanks so much.

You are welcome.

Our next question comes from Peter Appert of Piper Jaffray. Please go ahead.

Thanks. Good morning. So, Kim, just having a really hard time getting my head around the disconnect between this very robust employment environment you described of the demand dynamic you see in terms of the enrollment trends. So, is it about pricing? You think that’s the biggest issue in terms of your ability to overcome this issue?

I do not think it is about pricing. While certainly affordability is always a concern for students and families as they consider their educational investment and return on that investment, I think it is about access overcoming the negative headlines and trying to stand apart from the others. I think that is the biggest contributor to it from the high school side. And I think on the adult channel, it’s been complex and costly. And we have been trying different things to grow the number of inquiries. If you look at our conversion rates of the inquiries we are getting, it’s improving. And we are really focused on the things that we believe will drive a higher conversion rate to again translate student interest into student action. And that is helping the students understand that there are options in terms of paying for their education and that walking away from a low skill, low paying job is worth the risk. And that’s why getting the employers in front of students and their families is really important, because what students and their families want to hear, we can’t necessarily say. We are very careful to ensure that we stay within the compliance requirements and believe it’s probably best for students and their families to talk directly with employers in terms of the opportunities available for trained technicians. So, it’s just a more complicated environment and it takes longer. That’s it.

Okay, fair enough. And then is it possible at all to quantify the financial support that employers are willing to give? So, for example, just any metrics you have percentage of students that are getting some assistance from employers, the order of magnitude of that assistance, something along those lines?

Well, let me just give you an example of what they are doing, because again it’s just getting off the ground in terms of the number of students, but some employers are taking the approach that they will make the student loan payments, let’s say, up to $300 a month and it will cap out at a certain amount over time. Others are willing to pay the entire tuition, provided the student is working for the employer and in good standing. So, it really does run the gamut depending on what the employer’s needs are and what the students’ loans are relative to their training. But this is just beginning to take off even though we have a number of examples where this has always been the case. Again, as we said earlier, it’s been marketed as students were coming out of school versus as they were considering schools and career paths.

And would these programs be more applicable then to like a military person coming in or an adult rather than the high school student?

No. I think they are – in terms of the tuition reimbursement, it is more applicable to high school students and adults and relocation assistance and perhaps tools and those types of things are more applicable to the veteran population.

Okay. And then I am sorry, just two more. One, do you have a number in terms of what the average starting salary is currently?

It obviously differs by curriculum and whether or not a student has had manufactured – specific training. And so rather than getting all those specifics, I will kind of use the BLS day, the BLS day would suggest for our auto, which is our largest curriculum that those wages range from $28,000 to $32,000.

Okay. And then Eugene, one more thing, in terms of the economics of Long Beach you gave us the start up costs this year, can you give us the roadmap to breakeven and profitability in Long Beach?

It will be – from an accounting standpoint, it will be accretive to earnings next calendar year, I am sorry next fiscal year, 2016.

Okay, alright. And then you had mentioned Allied – there is one more question. I think Kim had talked about new campuses plural, so what’s on the agenda beyond Long Beach in terms of timing and anything else you can tell us?

Yes, she did say that and that was intentional. We were going to open Long Beach this summer with the first teach I think in late August. I would – we are doing some preliminary work for the next campus. I would expect further commentary on that towards the end of this calendar year. I don’t think it would open until late 2016, probably more likely 2017.

Got it. Thank you.

You’re welcome.

Our next question comes from Corey Greendale of First Analysis. Please go ahead.

Hi, good morning.

Good morning.

Hi Corey.

So I have a few questions, I think since nobody had questions on your last call, we are all making up for it this time, so I apologize. So first of all – and also, I apologize I missed the beginning of the call, so if any of this is redundant, my apologizes, we can follow-up offline. But first of all, did you give the change in applications for the quarter as a whole?

We did. Our applications for the quarter were down 12.5% across all channels – I am sorry, that was our – yes. I want to make sure I wasn’t giving starts. Applications down 12.5%, starts were down 12.9%.

Okay. So and I gather, if you just look at the application trend over the last four quarters, that’s actually the best I think in the past four quarters, but it’s bad, it’s negative at 27%. So it’s not intuitive from looking at that actual starts are going to go positive in a couple quarters, so – and you have commented on the high school, but can you just comment a little bit more on kind of the level of confidence given the data that you are seeing that, that will happen?

Yes. And if you missed the first part of the call Corey, maybe I could just reiterate that as we move through the quarter, we started to see even better momentum. And in March, we actually saw 5% growth in applications. And what we were most, I guess excited about was the growth in the adult channel, it was up 18% year-over-year on fewer inquiries and with 27% fewer people, which gives us confidence that our marketing is working, as well as the productivity and efficiencies with our representatives. So now we will continue to invest in the marketing that is working to grow that. And if you think about the adult channel typically they tend to start sooner within a couple of months versus the high school that could take up to nine months. When you look forward to the fourth quarter and the students that have already registered that are high school graduates that we feel strongly about that especially given the strong show rates and the continued improvement we have seen throughout the year. So, it’s a combination of high school students on the books as well as the momentum being gained with the adult channel.

Okay, that helps. Thank you. And then in the interest, I don’t know if you are willing to elaborate on the guidance at all, but in the interest of trying to set expectations, looking at where the applications have been over the last few quarters, that would suggest you have a similar negative, I would think, start number in Q3. On the other hand, the year ago start was particularly negative, negative 24%, I think so you have an easy comp. Could you just help us think through those things? Just set order of magnitude of what you expect the decline to be in Q3?

Well, I am not going to give you order of magnitude, Corey, but Q3, I would expect to be down a little bit and Q4, up a little bit percentage wise, but obviously, with Q4 having a much heavier load starts, the net of those two is if you saw in the second half together is positive growth.

Okay. And given….

But just to give you some level of magnitude, I don’t want anybody walking out thinking that we are going to see double-digit growth in the second half of the year, that’s not what we are forecasting, but we do expect to see year-over-year growth.

Okay. Now, I do appreciate that. And if that plays out as you expect and let’s just say, Q1 of fiscal ‘16 is also slightly positive on starts. Does the math suggest that you should get back to total average enrollments in positive territory by Q1 or Q2 of next year?

We are not quite that far yet.

Alright. Well, you can’t ding me for trying. And then a couple of other quick things, on the military and again I apologize if this was covered. I heard today that you are going to the military bases to kind of build the relationship. I seem to recall there was a time when access to the military bases wan an issue, not just for you, but for everybody, but where does that stand?

Well, the access is still an issue. There have been rules put into place in terms of the frequency of visits, but again I think that the relationships that we have our longstanding.. For example, in Fort Bliss, we have a representative who has been out there nearly a decade and at Fort Hood, 5 years. So, they know these people out there and they are working with them to help the veterans. So, it may not look exactly like it did a couple of years ago, but the partnership is there and I think the relationships with the military is improving. We are excited about an articulation agreement that we are working on with them to recognize the veterans who are coming out with diesel training and to articulate with them so that they can test out of some of the courses being school for shorter period of time and of course lower their tuition costs and get to work. So, the thing that I described with the employers being engaged, taking these employers out to the bases and getting them in front of the veterans who are transitioning out is so needed. So, many of our veterans are unemployed. And today, we have got 5,000 open jobs and a lot of veterans without a job. So, they are interested in talking to us.

Alright. It makes a lot of sense. And actually my last question is similar, which is in the employers the fact that they were able to help more, so I understand you are going to the military bases and that makes a lot of sense, because the veterans are leaving active duty and there is an opportunity to go to UTI. I just want to understand a little bit better. How the message about employers being willing to help is getting to potential students? Is it like people already employed and there is a note in the break room saying if you can get a degree or is it – are you telling people already in the pipeline that it’s an opportunity so it’s improving conversion rates or how is the message getting conveyed?

Sure. That is a great question, because what you described is what had been happening previously as students were nearing graduation. Of course, employers would come on campus and talk about the opportunities available for them upon graduation. Now, they are out in the field with our representatives, whether it’s at high schools, military bases or events being held at their dealership or place of work to talk about the opportunities that are available and what their commitment is. So, we now have formal marketing materials that they are using to get into the hands of prospective students and their families about what they will do as an employer to support them getting a UTI education and coming to work for them. So, it’s far more formalized. They are being more open in terms of putting that in writing. Again, the materials that can be given to students and they are willing to be on camera and give testimonials about what it is they are looking for and how willing they are to support them. So, it’s a dramatic difference inside of the year with the focus on employers and their needs.

It makes a lot of sense and thanks for taking all my questions.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Barry Lucas of Gabelli & Company. Please go ahead.

Thank you. Good morning. Eugene, not to quibble here, I just want to understand. I think you said you are still waiting cost approval for collision program at the new school. Is there something new there or why wouldn’t that have been granted with the other programs?

So, it was at the state and accreditor level. Since it’s a new program in that OPID, it needs – even though we teach it in other locations, it needs Department of Ed approval, where the auto and diesel programs did not meet an approval. They just need accreditor and state.

Okay, thanks for the clarification. I would say little more generally, but understanding all the negative publicity that this industry has gotten and the press reports about the demise of Corinthian, and including Wyotech in California. Why wouldn’t you go out and be a little bit more proactive and to some extent capitalize on being the good citizen and trying to make some accommodations for those students that have suffered a terrible dislocation?

Well, I think we are being a good citizen and offering to help where it makes sense for these students. Certainly, some of the locations that we are speaking about are not within close proximity to our campuses, but to the extent we can help them. We have certainly made the offer and have reached out. I think we are doing all that we can and should in this environment to help.

Yes, just to add to that, we were, this week, asked to be present and we are present at the two Wyotech California campuses, not in a way to recruit students, but to provide where our locations are, what our programs are just as informational as they go through their process of determining what to do with the continuation of their education. So, we are there, shared our information with them and made ourselves available to them should they want to follow up.

Great, thanks very much for that.

You are welcome.

Showing no further questions, I would like to turn the conference back over to Kim McWaters for any closing remarks.

Thank you, Dan and thank you all for joining us today. We appreciate your questions and your time and interest in Universal Technical Institute. We look forward to updating you on our third quarter, the first week of August. Have a great day and a nice weekend.

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