Hello, everyone, and welcome to Universal Technical Institute's Fourth Quarter 2017 Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded and a replay of the call will be available for 60 days at www.uti.edu or through December 8, 2017, by dialing (412) 317-0088 or (877) 344-7529 and entering the passcode 10114297. At this time, I'd like to turn the conference call 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 Kim McWaters, President and Chief Executive Officer; and Bryce Peterson, Chief Financial Officer. During the call today, we'll update you on our fiscal fourth quarter and full year 2017 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 taxes, 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 President and Chief Executive Officer.

Thank you, Jody. Good afternoon, everyone, and thank you for joining us. In 2017, we successfully executed against our key strategic objectives, creating the foundation and momentum for investments in 2018 that we believe will support growth and profitability for UTI. In 2017, our main objectives were to, one, restructure our cost model through successful implementation of our financial improvement plan. Two, optimize our marketing mix and address affordability concerns to drive new student start growth in the second half of the year. Three, to improve our business model to better match our students' needs through smaller, commuter-friendly campuses and expand course offerings that better utilize our existing capacity; and last, to strengthen our relationships with employers and industry partners. I'll run through the accomplishments and future plans specific to each objective, then turn the call over to Bryce for review of fiscal fourth quarter and full year 2017 financials along with our fiscal 2018 outlook. First, our financial improvement plan. In 2017, we restructured our cost model with the intent to create a more efficient operating structure and to cut between $25 million and $30 million of operating expense. As a credit to our great people, we identified and successfully implemented additional initiatives to achieve $39.7 million or approximately 11% in cost savings as compared to fiscal 2016. Because of our efforts in 2017, we are a much leaner organization. Approximately 70% of the compensation expense reductions will carry forward as our campuses are operating more efficiently. However, we are making additional investments in our operations to fund future growth. As such, we expect to increase our future annual compensation expense by about 5% as compared to 2017. Looking at the big picture, our 2017 successes enable us to make strategic investments in 2018 that are necessary for the…

Thanks, Kim. I'll start with review of our fourth quarter business metrics and then discuss our financial results for the fourth quarter. Total starts were 5,600, flat to Q4 of last year. Our average student enrollment for the fourth quarter was 10,700 compared to 11,700 last year. At the end of the fourth quarter, about 41% of the students in school were benefiting from a UTI scholarship discount or institutional grant as compared to about 35% in the fourth quarter of fiscal '16. The year-over-year increase was primarily driven by our institutional grant initiative aimed at improving student starts. These scholarships and discounts reduced tuition revenue by an additional $643,000 this quarter as compared to the prior year. For the fourth quarter of fiscal 2017 compared to the same quarter last year, revenue was $81.3 million, excluding $2.9 million in tuition revenue related to students participating in our proprietary loan program. This compares to $86.9 million in revenue for the fourth quarter of 2016, which excluded $4.2 million in tuition-related revenue. The year-over-year revenue variance was attributed to an 8.5% decrease in our average student population. Total operating expenses were $82.4 million compared to $92.1 million for the prior year period. The $9.7 million improvement is largely due to a lower compensation expense and improved operating efficiencies pursuant to the implementation of our financial improvement plan. Our operating loss was $1.1 million compared to an operating loss of $5.2 million for the prior year period. The improvement reflects the significant cost reductions previously mentioned and $900,000 in incremental operating income from the Long Beach campus, which opened in August of 2015. To put this improvement into perspective, even with year-over-year revenues down $5.6 million for the quarter, we reduced our operating loss by $4.1 million over the same time frame.…

Thank you, Bryce. While our efforts in fiscal 2017 generated positive results in second half start growth and significant cost savings, we know that much work remains to build on these successes. We are focusing on the following 4 objectives that we expect will grow starts for the full year in fiscal 2018. First, continued optimization of our marketing and admissions efforts to build upon our accomplishments of fiscal 2017. Second, the opening of our new Bloomfield, New Jersey campus to better serve students and employers in the New Jersey, New York metro markets. Third, the expansion of our welding program to our Avondale campus and one other campus later to be disclosed, fourth, continued optimization of our footprint by shrinking excess square footage at our larger campuses. We are focused on driving transformational rather than incremental change and that requires a level of dedication that I know is shared by everyone at UTI, and I'd like to take the opportunity to thank them for their hard work and their commitment to providing a quality education to all of our students. Operator, we are now ready for the question-and-answer session.

[Operator Instructions] And our first question today comes from Peter Appert from Piper Jaffray. Please go ahead with your question.

Thank you. Kim or Bryce, do you have any estimate of what the impact was from the Florida and Texas hurricanes in terms of the start number in the quarter?

Yes. So as far as the impact from the hurricanes, we estimated about 41 students for the quarter. P&L impact was a negative hit to revenue of just over $0.5 million.

Thank you. And then, Kim, I mean, you said in the thought process basically behind opening a new campus, given what are frankly still pretty challenging operating results. I guess the question is, does it make sense to make this investment in the context of still soft operating results within the core business, would it might not make more sense to focus on writing the business before investing in expansion?

I appreciate the question, Peter, and it is a good one, and I think it is something that we have clearly focused on in the last several years and trying to grow enrollment at the destination campuses and we will continue to do that as we implement some of the square footage optimization efforts in new programs. But the reality is, there is such a stark difference between what is happening at the smaller metro campuses with Dallas and Long Beach and we know that, that is the future of this business and what our students prefer that we are much better off making some of the more difficult decisions now to invest in that growth and accelerate it because that model is working and the bigger boxes are the drag on the overall business. So the more quickly we can transition to opening the new, small campus model as well as converting our existing big boxes to that same model, the faster we create value for shareholders.

Okay. Fair enough. Any specifics can -- you can share in terms of the volumes you're seeing in terms of inquiry and trends and conversion rates recently?

Yes, we are seeing especially -- there was a little noise during the September, October time frame with the hurricanes. But recently, we've seen our inquiry volume continue to increase and we're pleased with the results over the last 60 days, for sure. If you look back over the last quarter, it was up slightly from a growth inquiry standpoint and that continues to be an area that we are very focused on in terms of optimizing our advertising spend and our media mix to create greater awareness as well as improved conversion. So I think in our conversion rates for -- I'll say inquiries to applications, again, the first quarter was a little muddy and less than the prior year, and I think the hurricanes did have some impact there in terms of activity, for sure. So we'll continue to report on that. It's not a significant decline. It just was off from the trend. We definitely saw some variance in that quarter.

Okay. And the changes in the recruiter compensation, do you think that's causing some disruption as well in terms of things like conversion rates?

I don't believe that it is causing problems from a conversion rate. I do think that there's probably a sorting out of different types of representatives who are more comfortable in this type of compensation plan than those who are more comfortable in a fixed compensation. So we are seeing some turnover in that regard but it is expected, and we are working to ensure that our representatives have the training and tools necessary to be successful, and I think that, that might be contributing to it in terms of some of the turnover but I don't believe that the plan per se is driving decreased conversions.

Okay. And then, just last question. The consulting firm you're hiring, Kim, what is the specific focus? Are they working on -- with you on the cost side of the equation, on the marketing side, can you give us any more color on that?

Yes, at this point, it is very much focused on revenue growth and front-end optimization. And I think, as we talked this past year, we really focused on improved efficiencies, which we did make a lot of progress. But we realize that there is much more efficiencies to be gained and at the same time, taking those efficiencies and investing in the opportunities for growth, we want to make certain that we are turning over every rock and that we are ensuring that we have the capability to execute. Because, as Bryce said, we believe the time is now, and we see that opportunity and want to make certain that we are focused on building it. This business changes significantly for the better with an improved pipeline of students and that's where our company is focused on.

Okay. Thanks, Kim.

You’re welcome.

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

Thank you. And good afternoon. Kim, I was hoping you could update us a little bit on any graduation statistics that you have and starting salaries and...

Yes, our graduates for the year were down slightly, given just the population decline, but our persistence throughout the year, leading to graduation rates, it's been -- it was probably the strongest rate we've seen in 7, 8 years. So the team is very -- has been very focused on improving persistence and helping our students to come to school, actually graduate. So I'm very happy with the success there. The demand has continued to be extremely strong for our graduates and our graduation rates are in the 86% range. And in terms of our compensation, we see -- starting wages, we see a slight improvement in the starting wage. But we also see significant bonuses, commitments to tuition reimbursement, toolboxes and other sort of compensation and benefits that doesn't necessarily show up in their starting wage. So hopefully, that gives you some color that the demand on the back end continues to be extremely strong.

Okay. And where would you put placement rate of your 86% graduation rate?

86% is a couple percentage points behind last year. I do not think that, that is a reflection of the demand in the marketplace. I think it is a reflection of execution from our team, given some of the structural changes and distractions in the year. It's -- I would attribute the decline entirely to UTI in execution, not the market demand.

Okay. Any further color you can provide for competitive purposes, it's may be an issue, but you did change the media mix a bit back to more, what do you want to call, a traditional channels and just wondering if you could add to that and give us an idea of what's working and what's not?

Sure. Through the last fiscal year, we've talked about trying to find the right balance between local and national advertising as well as, I'll say, traditional and digital. And throughout the year, we have continued to optimize our digital investment. But I do believe that area has tremendous potential for further optimization but we've taken some of those resources and reallocated to, what I'll call, top of funnel or brand awareness, and that has largely been put back into television. So as a comparison, a year or so ago, roughly 10% of our advertising budget was in television. If you look at this past quarter, roughly 25% of it was in television. And so we've seen improvement in our cost per inquiries this quarter on a year-over-year basis and it's growing. And so far into the new fiscal year, we've been pleased with what we're seeing and again, I feel like we're just scratching the surface there.

Okay. Last one may be for Bryce. If there is a hit to the equity line as a result of a shift in to the new revenue recognition requirements, how might that or does it not impact the financial responsibility requirements that you have?

Yes, so it wouldn't be a hit. It would actually be a benefit to the equity line. The amount is north of $30 million and the answer is yes. That does -- in the algorithm that does help with the financial responsibility calculation.

Thanks, Bryce.

Yeah.

[Operator Instructions] We do have an additional question. This comes from Justyn Putnam from Talanta Investment Group. Please go ahead with your question.

Hi, good afternoon. Bryce, just a quick question for you. You gave us a good guidance on your new campus model. This is actually, again, cash flow positive after 4 years. What's the cash flow potential of those campuses once they get fully ramped up?

So effectively, when we get these new smaller campuses fully ramped, then standalone contribution, you're looking at that revenue right around $20 million and you're looking at an EBITDA contribution of $5 million to $6 million.

Okay. And then in that 4 years while you're ramping up, what kind of operating losses that you're anticipating?

Yes, so from the -- when you look obviously at the first year, that's when you're going to absorb the majority of it because you've got a tremendous amount of the capital investment to get it up and running with very little revenue to offset. And so ultimately, we're going to take a pretty significant hit from an EBITDA perspective within the first year, and then years two and three, effectively, kind of offset each other, and then in year four, you get to the -- you start going towards the positive side. So ultimately, at some point in year four, we're cash flow breakeven, going positive.

So those operating losses are not included in the initial investments that you used to say, it's like $11 million [inaudible] New Jersey.

I'm sorry, I lost the second half of your question.

Yeah, those operating losses that you just mentioned, they are not included in that $11 million additional…

The $11 million is the CapEx investment that we're making in the campus, and so obviously, there is a portion of that which hits '18 and then the other portion of it is going to hit in out-years. And so effectively, when you look at from an operating loss perspective, we've got our nonrecurring charges and then it's $10 million to $15 million captures the P&L investment of the new campus and those two new welding programs.

Okay. And summing it all up, would you say that IRR is on those campuses?

So from that perspective, I would stick with the EBITDA and the cash flow guidance that we've given. We generally have not spoken to IRR on individual campuses. We feel like the EBITDA and the cash flow contribution and those KPIs are more effective in that area.

So is it higher than new cost of capital?

I'm sorry, I missed that.

Yes, it's higher than the cost of capital.

Oh, absolutely.

All right. Thank you very much.

Yeah.

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Kim McWaters for any closing remarks.

Thank you. We appreciate everybody's time today, and thank you for your interest in Universal Technical Institute, and we look forward to reporting our first quarter results at the end of February. Have a great day.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.