Hello, and welcome to Universal Technical Institute's First Quarter 2018 Conference Call. [Operator Instructions]. 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 February 20, 2018, by dialing 412-317-0088 or 877-344-7529 and entering the passcode 10116512. 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 Kim McWaters, President and Chief Executive Officer; and Bryce Peterson, Chief Financial Officer. During the call today, we'll update you on our fiscal first quarter 2018 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. Before I turn the call over to Kim McWaters, I would like to inform you, UTI has provided a presentation that supplements today's first quarter 2018 financial results discussion. It can be accessed from the Investor Relations section of our website at uti.edu.

Thank you, Jody. Good afternoon, everyone, and thank you for joining us today. In our 50-plus years of operations, we have been committed to providing our students with a quality education that prepares them for a good career. It might particularly interest those that are new to the UTI story that, according to the government's college scorecard, our students median 10-year earnings are 46% higher than community college students and, in fact, even better than 4-year liberal arts colleges. Always striving to create these opportunities for our students, we have maintained our market leadership position for decades, graduating more auto diesel technicians than any other school in the country and having greater market share than our next three competitors combined. In our history, we have witnessed and thrived over the years in many different macroeconomic cycles and industry-specific trends. For the past 7 years and continuing today, lower unemployment and intense regulatory pressure have contributed to declining student enrollment at UTI and across the private education sector. In addition, today's prospective student is less inclined to take on heavy debt to pay for an education and desires to stay closer to home to reduce cost and work while attending school. UTI has adapted in the face of these macroeconomic conditions, first by cutting costs and streamlining our business and then transitioning to targeted investments aimed at building upon our leadership position in the market as well as supporting our long-term growth. By investing opportunistically in our strengths, we are focused on driving transformational rather than incremental change. This requires we take the necessary near-term actions to drive long-term growth and profitability, and ultimately enhance shareholder value. Our efforts in 2018 will be focused on 3 primary objectives, growing new student enrollment and driving top line growth, capitalizing on changes in…

Thanks, Kim. I'll start with a review of our first quarter business metrics and then discuss our financial results for the first quarter. Total starts were 1,300, down approximately 100 starts versus the prior year primarily driven by continued access challenges in the military channel. However, we exceeded plan by approximately 200 starts across all channels driven by the continued success of our various enroll-to-show initiative. Our average student enrollment for the first quarter was 11,300 compared to 12,000 last year. At the end of the first quarter, about 48% of the students in school were benefiting from a UTI scholarship, discount or institutional grant as compared to about 35% in the first quarter last year. The year-over-year increase was primarily driven by our institutional grant initiative. These scholarships and discounts reduced tuition revenue by an additional $746,000 this quarter as compared to the prior year. For the first quarter of fiscal 2018 compared to the same quarter last year, revenue was $81.2 million compared to $84.2 million for the prior year period. The year-over-year revenue variance resulted from a 5.8% decrease in our average student population. Total operating expenses were $84.8 million compared to $82.8 million for the prior year period. The increase was primarily driven by planned increases in advertising, contract services and professional services expenses and was partially offset by a decrease in compensation expense. Netting the decline in revenue with the increase in operating expenses, our operating loss was $3.6 million compared to operating income of $1.4 million for the prior year period. We also recorded a preferred stock cash dividend of $1.3 million in both periods, which was related to our $70 million capital raise in June of 2016. Net loss for the quarter was $1.1 million compared to a net loss of $1.7 million…

Thank you, Bryce. In closing, we were pleased with the progress made inside of the first quarter, especially in the improvements in the areas of the business at a level we've not seen in a few quarters, including the solid increase in the quality and quantity of increase, a key leading indicator of our business. We remain on track with our student metric outlook for fiscal 2018. So looking ahead to the rest of 2018, we expect to build on our first quarter success as we continue to execute on our 3 main objectives. And as a quick reminder, that's growing new student enrollment and driving top line growth, capitalizing on changes in the consumer marketplace and the evolving needs of our students, and rationalizing our real estate footprint across to support more profitable operations and better serve our students. And with that, operator, we're willing to take some questions.

[Operator Instructions]. The first question comes from Peter Appert with Piper Jaffrays.

Kim, you sounded, I thought, more encouraged on the start enrollment trends then we've heard for a while. So #1, I want to make sure that's true, I'm hearing correctly. And number two, more importantly, I guess, does that suggest that you think, as we look at for example the March quarter, we could get to positive start numbers?

Peter, thank you for your question. Yes, I am encouraged by the progress that we've seen. As I mentioned, the marketing initiative's specifically focused on driving a higher quality and quantity of increase. Those initiatives to optimize our media mix to build our new website have delivered the trends that we expected. In fact, it's better than what we expected. So I think that that is good. From an application standpoint, we're very encouraged that the adult channel saw positive growth from an application and a start standpoint, which suggests that perhaps those -- that population who's currently employed is starting to consider other alternatives for their long-term career. Last, on the enroll-to-show efforts, we implemented key strategies last year to improve the interaction and the contact strategy from student's point of application to the time that they show to school, and I think we're seeing good success there. We also offer the institutional grant to help those students who need it most, and we're pleased with those results. So last thing I would suggest is that the focus on graduate-based compensation is doing what we expected it to and that is for all of our employees who are involved in ensuring a student's ultimate success with their education is working to make certain that those who applied show to school and that they graduate. So as we look to the next quarter, while we don't give quarterly guidance, our goal is to certainly surpass last year. We're not at that point yet, but that remains our goal to continue to build starts as we work through the year. But as we said before, that is focused on the second half of the year.

Okay. Can you remind me, you mentioned that military is 5% to 6% of the applications. What's the mix between adults and high school?

Right now, if you look at the quarter, and that's what I was referencing, Peter, of the student applications that we received during the quarter, 32% are coming from the adult channel, 62% from field and then the balance from the military. And to be specific around the military, this is the population that we are out on the bases trying to help as they transition. There is a larger population of students in school who are benefiting from G.I. Bill and Veterans Assistance.

Got it. Question for Bryce. You mentioned the increase in the proportion of students getting discounts or scholarships and yet, by my calculation, it doesn't look -- I think, like the revenue per student might have been up a couple of percent. So can you just talk about the -- it seems like a bit of a dichotomy there.

Yes. That's a good question. So as we look at the revenue figures for the quarter and how the various scholarships, discounts and grants played into that, certainly, it did help us to -- as I've mentioned, have a larger student population and a larger number of start than what we had planned for the quarter. But that -- the revenue associated with that increase was offset by a larger number of students utilizing the proprietary loan program. And without getting into the complicated mechanics of that revenue recognition change, ultimately there is a portion of that that does serve as a counter revenue. So it did offset some of that benefit from a larger student population. So you see that flow through into the revenue per student figures that you're looking at.

Okay. And presumably, that's something that will continue for the subsequent quarters?

Not necessarily. At least the last couple of years we have seen because of the large student population coming in the summer months, but by the time their proprietary loan applications are processed and recorded, we do see in the first quarter a larger utilization of that program. Because, again, you have a lot of relocating students coming in the summer months. And so it is -- it definitely varies quarter-to-quarter. So I would not use that as a flat trend throughout.

Yes, just to add to Bryce's point in terms of the relocating students. Remember that Q4 is predominantly high school students who have other financial means such as parental loans. And so there is a higher level of utilization for the adult population in the other quarters to use the tuition loan program.

Got it, understood. And then, just lastly, I guess. The welding and machining programs can be touched on these, but I'm wondering if any incremental color in terms of the -- your feeling about the momentum in those businesses, the scale of the opportunity associated with those. The timing of, maybe, additional rollouts beyond the couple you've talked about so far.

Yes. Let me start with welding first. I think there is very good student demand. And there's certainly considerable employer demand for those programs. And we're pleased with the initial trends with the 2 programs that we've opened in Rancho and Avondale. We have a full class at Avondale, just like we did when we launched the Rancho Cucamonga program. We are continuing to refine our marketing approach. And I was pleased this quarter with how we were able to build interest -- student interest for both welding and CNC. So I'm encouraged by welding. It is definitely an easier program to promote because there is a better understanding of what that job or career looks like. With CNC, we're working to educate the marketplace on what the opportunities are. And of course, the first program at our NASCAR tech campus is where we are continuing to refine that. There are certainly markets that can support the CNC program beyond North Carolina, but I will tell you, our priority is on the welding program expansion. And so we're looking, in the latter part of this year and perhaps inside of the first part of '19, for that next campus rollout of the welding program.

And Kim, is there any cannibalization when you roll out the welding program, students choosing that over the auto tech? Or do you think it's a different student population?

Well, that's another good question. We definitely see some interest in our current population for welding. And so we think that there is a little bit of crossover. But considering that these -- the students in the welding program are typically looking for a lower price point, a shorter program duration and perhaps something to supplement or build their skill set because they're already in the market, I think that it's minimized. So we don't see significant cannibalization, but we're sure that there is some that exists.

[Operator Instructions]. The next question comes from Barry Lucas with Gabelli & Company.

I was hoping you could provide a little bit more color on the expense variance and particularly with what went into G&A. I mean, you have a nice supplemental table on the education side. But without giving away the store too much in terms of advertising, could you talk a little bit about that and how much that was up along with the professional fees and services? Did those stay in there? Or at some point are they going to drop out of the expense line?

Yes, good question. So when we look at our quarterly opex, then I would kind of look at it from roughly -- a 1/3 of it was increased -- planned increase in advertising. The other 2/3 were related to professional services fees. A good portion of that is nonrecurring. It was related to our early adoption of the new revenue recognition standard, but some of that will continue on throughout the year.

And maybe just to add a little bit more color to that theory. In looking at our advertising expense, we did move some investment to the front of the year to capitalize on the changes that we were making to our website and knowing that it is a critical time of year where students are making education decisions. So we did increase our spend, I'd say, roughly $1.5 million in marketing for the quarter. And what is important to note is that we did increase the volume of increase by 14.5%. We also noted that the quality or the mix of those inquiries improved, with more of them coming direct to our website, and that is the highest converting source. So when you look at it just on a cost per inquiry basis, we were better than last year by about 5%, and we were pretty steady to the prior quarter when we started to make these marketing optimization changes.

And this concludes our question-and-answer session. I would like to turn the conference back over to Kim McWaters for any closing remarks.

Thank you. Thank you all for taking the time to hear about our progress inside of the first quarter, and we look forward to updating you on our second quarter in the near future. Thank you, and have a good evening.

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