Hello, and welcome to the Universal Technical Institute's Third Quarter 2017 Conference Call. [Operator Instructions] 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 for 60 days at www.uti.edu or through August 15th, 2017 by dialing 412-317-0088, or 877-344-7529, and entering pass code 10110803. 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 thank you for joining us. With me today are Kim McWaters, Chairman and CEO; and Bryce Peterson, Chief Financial Officer. During the call today, we'll update you on our fiscal third quarter 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 21E of the Securities Exchange Act of 1934 and Section 27A of the amended 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, including initial comments by management as well as answers to questions. During today's call, we'll refer to EBITDA, which is a non-GAAP measure representing net income exclusive of interest, income tax, and depreciation, and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure, net income or loss. Now, I'd like to turn the call over to Kim McWaters, our Chairman and Chief Executive Officer.

Thank you, Jody. Good afternoon everyone, and thank you for joining us today. Since we last spoke on our Q2 earnings call, in May, I'm pleased to share that we have made meaningful progress on our initiatives to drive new student start growth to optimize our business in light of continued macroeconomic and regulatory challenges, and to maintain a streamlined cost structure. In the third quarter, student starts grew 12.5% year-over-year driven by increases in both the adult and high school segments. Our show rate improved 180 basis points over the prior year quarter due to the successful implementation of our show rate initiatives, and the initial rollout of our institutional grant program. Earlier this year, we introduced a series of initiatives to drive new student start growth and to increase our show rates. We have been working to improve our recruitment processes to increase our visibility with potential students, and to leverage our industry partnerships to demonstrate to prospective students what is possible with training from UTI. In January, we began hosting a number of open houses at our campuses. These events included campus tours, scholarship competitions, financial aid workshops, OEM partner discussions, and UTI graduate testimonials. Thus far, we are seeing very positive results from these initiatives. Overall, we are reaffirming our commitment to grow student starts in the second half of fiscal 2017. In support of our long-term goal to increase enrollment, and to achieve profitable growth, we continue to move forward with our smaller campus strategy. Our Dallas and Long Beach campuses demonstrate the effectiveness of this model where we establish smaller campuses in commuter-friendly locations that better serve students with a blended learning curriculum that provides them greater flexibility with class and work schedules, and reduces their overall cost of education by enabling them to…

Thanks, Kim. I'll start with a review of our business metrics and then discuss our financial results for the third quarter. Total starts were 1800 compared to 1600 in Q3 of last year, our average student enrollment for the third quarter was 10,000 compared to 11,100 last year. On a year-to-date basis, average student enrolment was 10,900 compared to 12,200 for the prior year period. At the end of the third quarter about 40% of the students in school were benefiting from UTI scholarship or discount as compared to about 35% in the third quarter of 2016, these scholarships and discounts reduced tuition revenue by 3.8% this year compared to 3.6% in the third quarter of last year. For the third quarter of fiscal 2017 compared to the same quarter last year, revenue was $76.3 million excluding $4 million in tuition revenue related to students participating in our proprietary loan program which will be recognized as revenue and the payments are received, this compares to $82.3 million in revenue for the third quarter of 2016, which excluded $4.2 million in tuition related revenue. The year-over-year revenue variance was attributable to a 9.9% decrease in our average student population, total operating expenses were $79 million compared to $87.7 million for the prior year period, the $8.7 million improvement was largely due to lower compensation expense and improved operating efficiencies pursuant to the implementation of the financial improvement plan. Advertising expense was $9.3 million for the third quarter compared to $8.7 million for the prior year period, the $0.6 million increase is due to a year-over-year increase in spending on digital sources and local television advertising to align with our strategy. Operating loss was $2.8 million compared to an operating loss of $5.5 million for the prior year period, the improvement reflects…

Thank you, Bryce. Over the last several quarters, we have been providing you with updates on our strategies to drive new student start growth, expand our course offerings, open additional smaller campuses, optimize our marketing mix, and maintain a prudent cost structure. While we are encouraged by the new student start growth recorded in Q3, we know how much hard work remains. We believe our strategic priorities and the dedicated and passionate team at UTI position us well to persevere through the macroeconomic and regulatory headwinds to execute on our growth goals, and to support a path to profitable future. Operator, we're now ready for the Q&A.

All right. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Barry Lucas with Gabelli & Company. Please go ahead.

Thank you, and good afternoon.

Good afternoon.

Kim or Bryce, I was hoping maybe you could dive down a little bit and see what is driving the improvement in show rate? I know you mentioned the show rate initiative, but where are you getting the juice on the improvement?

I think it is attributable to both of the show rate initiative and the institutional grants, as you just mentioned. The institutional grants impacted about a third of our starts during the quarter, and for that population, and in the campuses offering grants to these students we did see significant improvement in our show rate. With the initiative that we spoke about earlier and on previous calls, this is really focused on ensuring that we are helping our students through all phases of the educational cycle. And to ensure that they understand what is necessary to accomplish the major milestones in preparation for starting school. It is a cross-functional effort across multiple departments to ensure that nothing or no one is falling through the cracks. With the high level of accountability across all teams responsible for our students' success. So I think those two are the key drivers for the success that we saw inside of the last quarter.

Okay. And just two other, in your mind or explaining to students, what do you think the difference is between a reduction in tuition versus a grant that effectively reduces the cost?

Well, I think, this grant program we talked about, we were testing for a number of different variables. One, in terms of the word scholarship and the qualifications necessary to earn that, the other, in terms of grant that is largely based on need in which the students are just eligible. And then the third that we have considered is where we should be pricing our tuitions and, again, talking about pricing elasticity, we are testing that. One thing that I think we've been very focused on is making certain that we are targeting those students who benefit from this sort of help, whether it's scholarship or institutional grants, versus broad-based tuition reductions, because there are a number of students who do see the return on investment and are capable and willing to pay the tuition that is asked for our core programs and MSAT programs. In addition, we are testing variations of program length with our new products that we're offering that are roughly six months in length compared to some of our programs that may be a year-and-a-half. And so we have a lot of things that we're testing, but we're not inclined at this point in time to make broad-brushed or across-the-board reductions to our retail price, if you will.

Okay. Last one for me, and I know that there are competitive issues here, but what do you think is working better in the media mix that's also helping to provide the -- that appears to be providing a bit of a lift?

I think there are a couple of things. One is when I mentioned the traditional forms. I think we moved too far into the digital realm, and just thinking that our generation of students would naturally be in that environment. And yet, some of the basic, the most traditional forms, direct mail, television, very basic contact strategy is working, and so moving more of our investment back into the traditional forms, direct mail, television. And from a television standpoint I'll say national cable and local marketing we believe is driving a lift. And we can see that based on conversion rates with our campus admissions team. So we pulled out a lot of the social media type advertising forms. And I think previous calls we've talked about lead aggregators, we've reduced that significantly, again with those resources reallocated into more traditional forms of advertising.

Great. Thanks for that, Kim.

You're welcome.

[Operator Instructions] At this time there are no more questions in the queue. I'd like to turn the conference back over to Kim McWaters for any closing remarks. Sorry, Kim. We have another question from Jeffrey Matthews, Ram Partners. Please go ahead.

Okay.

Please go ahead.

Hi. Thanks very much. Can you hear me?

Yes.

Great. Just curious, we're six months into a new administration, a new education secretary, a stronger economy, lower unemployment -- kind of record low unemployment. What do you see out there today versus, say, six, nine months ago as far as the environment you're operating in? And is there some wind at your back now or is the wind still coming at you?

That's a great question. I think it's a mixed bag. When you look at the regulatory environment, your mention of the new administration, we're certainly encouraged by DeVos and her commitment to student choice, and making sure that many options are available for students to be able to get the skills they need for a good-paying job. We're also encouraged by the administration's decision to delay enforcement of the defense to repayment and in certain aspects of the gainful employment rules. We're certainly not against regulation, but we fully support and believe that the regulations ought to apply to all schools, so the top schools are rewarded and recognized and the lower performing schools are weeded out. So those are certainly things that we're encouraged by. As you all know, strong employment is something that creates a challenge for us as we're looking recruit students. But at the same time, the incredible employment demand from our employers and their willingness to step up and help with affordability and to help students feel comfortable about the great future that lies ahead of them, that becomes a great benefit for us. So, again, we're really encouraged by the industry employers stepping up and really making a big splash as far as making great offers to our students, both in the form of wages as well as incentives, and encouraged by some of the regulatory changes.

If I could add one thing on to what Bryce said relative to our high school market. I think we are seeing the national sentiment begin to change. And the national or public comments that are being made, that college is not for all, is very encouraging. I think people are taking a serious look at the skills gap that this country faces, and the need to develop a workforce that best serves a country, and its changing workforce. And to the point that Bryce just made, what has been very encouraging here is that employers are partnering with our representatives in the high school market, not only showing up to the campus events that I mentioned earlier in the prepared remarks, but opening their place of employment for prospective students, and their families, and teachers to attend our Future Tech event, as well as participating in field trips to listen first-hand to employers, their technicians, many of whom are UTI graduates, speak about the opportunity to work in the transportation industry. So I am encouraged by the progress that we're seeing there, and the way that we have been able to innovate around reaching the high school student population in light of some of the state restrictions limiting access to high school students.

Okay, thanks. That's very, very helpful. And if I could just ask one follow-up, I wondered if you've seen any change in the competitive landscape of note, either getting tougher or not?

I think when you look at direct competitors it's been relatively stable. Certainly community colleges are a strong competitive force, and we do fight that sort of "College for all" mentality when students, parents, teachers, and counselors are considering whether or not to pursue a community college and/or a UTI education. So I think over the past several years we've seen community colleges increase their advertising and marketing efforts, and in fact have taken market share over the last couple of years. But I think our tools that are directly comparing outcomes in terms of graduation rates and the return on investment as provided by the college scorecard using the government's own data puts us in a very strong position relative to direct competitor as well as community college. I think our biggest competitor right now is the workforce itself. And that is why it's so important for us to get employers out in front of prospective students so that they can see the long-term opportunity and the really short investment required to get a UTI education, and the benefits working for them will bring to them.

Okay, thanks for that. I appreciate it. Good luck.

Thank you.

Thank you.

[Operator Instructions] At this time, there are no more questions in the queue. So I would like to turn the conference back over to Kim McWaters for any closing remarks.

Thank you very much, and thank you all for joining our third quarter update. We look forward to updating you later this fall on our fourth quarter and full-year results. Have a great evening.

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