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Universal Technical Institute, Inc. (UTI)

Q3 2018 Earnings Call· Tue, Aug 7, 2018

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Transcript

Operator

Operator

Good day, and welcome to UTI Fiscal Year 2018 Third Quarter Earnings Call. [Operator Instructions] At this time, all participants are in listen-only mode, and after today's prepared remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded. A replay of the call will be available for at www.uti.edu or through August 19, 2018, by dialing 412-317-0088 or 877-344-7529 and entering the passcode 10123024. 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.

Jody Kent

Analyst

Hello, and thanks for joining us. With me today are Kim McWaters, President and Chief Executive Officer; and Scott Yessner, Interim Chief Financial Officer. During the call today, we'll update you on our fiscal third 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. It is now my pleasure to turn the call over to Kim McWaters.

Kim McWaters

Analyst

Thank you, Jody. Good afternoon everyone, and thank you for joining us today. During today's call, we will discuss our third quarter results and provide an update on our multi-year Transformation Plan and other key strategic initiatives. But first, I would like to congratulate and thanks to many hardworking and dedicated UTI team members on the successful launch of our new Bloomfield New Jersey Campus. We are excited and ready to welcome our first class of auto diesel students next Monday, August 13th. Student interest in the new campus remain strong and applications to-date are tracking ahead of plan. Turning now to the third quarter, starts in the third quarter fell short of expectations in a quarter heavily geared toward the adult population, while we were disappointed, it is important to note that the impact of our Transformation Plan on students scheduled in the third quarter was relatively limited capping our ability to mitigate the effects of a tight labor market. In an environment, where unemployment is at historic lows results in Q3 demonstrated the importance of a Transformation Plan aimed at guiding the student journey and demonstrating the value of UTI education. Q4 is off to a healthier start as high school students making up a larger share of total starts in the quarter, continue to show improving trend. Moreover, this is the first quarter where we should see the impact of our Transformation Plan. I would now like to provide an update on our Transformation Plan, which will be integral to the UTI’s long-term growth and success. As a reminder, during the first quarter of our year, we engaged the top tier consulting firm to complete an independent review and diagnostic of our business. The conclusion was, there were significant opportunity for UTI to transform its business to…

Scott Yessner

Analyst

Thanks, Kim and good afternoon. Our operating results are primarily driven by investment in the transformation strategy and business expansion in the Bloomfield Campus. I’ll start with a review of our third quarter business metrics and then discuss our financial results for the third quarter. Total starts were 1,548 down 226 stats or 12.7% versus the prior year, driven primarily by declines in the adult channels. As Kim described in her remarks, the transformation strategy would have a limited affect in the third quarter and the low unemployment rate environment continues to pressure the adult student channel. Our average student enrollment for the third quarter was 9,484, compared to 9,990 last year, which represents a 5.1% decline. At the end of the third quarter, about 44% of the students in schools were benefitting from a UTI scholarship, discount or institutional grant as compared to about 40% in the third quarter last year. The year-over-year increase was primarily driven by our institutional grant initiative. These scholarships and discounts reduce revenue by an additional $285,000 this quarter, compared to the prior year. We have tested new grant and affordability programs during the initial stage of the transformation strategy and will be more broadly deployed in future quarters. For the third quarter fiscal 2018 compared to the same quarter of last year revenue was $74.9 million compared to $76.3 million for the prior year period. While the year-over-year revenue variance resulted from a 5.1% decrease in the average student population, the year-to-date average revenue per student of $22,804 is up 2.7% versus prior year, primarily driven by the 2017 tuition increase and improvements in our employer sponsored programs. Total operating expenses were $86.7 million, compared to $79 million for the prior year period. The increase was primarily due to planned increases in contract…

Kim McWaters

Analyst

Thank you, Scott. We are encouraged by our transformation work and the traction that we have seen in the past couple of quarters, building leading indicators such as more and better enquiries, higher conversion rates and application growth. We expect to build on this momentum in the fourth quarter, which is seasonally the strongest quarter for starts, and will be the first quarter where the positive benefits of our Transformation Plan begin to impact our operating results. And while we continue to face strong macroeconomic headwinds, I am optimistic that we are heading in the right direction with our transformation to deliver sustainable profitable growth for UTI. The fourth quarter will be a further proof point of the success of our go-to-market and engagement strategies, that will set the foundation for financial progress, starting in 2019 and beyond. I’d now like to open up the call for your questions. Operator?

Operator

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Peter Appert from Piper Jaffray. Please go ahead.

Peter Appert

Analyst

Thank you, good afternoon. Scott I think, I heard you say that the 44% discount rate might go up next year, did I hear correctly? And can you -- if so can you just expand on that?

Scott Yessner

Analyst

Yes, so this is Scott. Just to characterize it that as Kim described in her remarks we have been testing out different programs to support our students in enrollments, students that would normally enroll. The relative amount of our grants and support programs differs widely. And so, at this time we couldn’t project that it would go up, but it is part of our strategy to help our students enroll in school and be supported in that process. So, Kim do you have anything to add?

Kim McWaters

Analyst

Yes, I just wanted to clarify that the 44% is in reference to the percentage of students in school receiving a scholarship or grant, not the percent of the grant or scholarship. And that has increased from 40% to 44% on a year-over-year basis.

Peter Appert

Analyst

Right, understood. Okay. So how do I think about that in terms of implications for revenue per student going forward?

Scott Yessner

Analyst

Yes, this is Scott. So, just to provide a directional comment on that. Our scholarship and grant strategies are incrementally beneficial to the company. And so we do analyze each of our programs for efficiency for our student and for our investors and company. And so in -- while I can’t give a specific answer on that we do expect appropriate return to the company and an appropriate for the student.

Kim McWaters

Analyst

Yes, and I think we can give you a little more color at the end of Q4, as we have seen all of these various programs take root. But, -- I think that we have got -- I am trying to think of the best way to articulate it with the balance in terms of increased start growth, the right program mix, new programs that it will not be significantly different than what we are seeing. But we will give you more information to help on your models, once we have the fourth quarter behind us.

Peter Appert

Analyst

Okay, thanks Kim. And then on the -- so the application flows is encouraging for sure, in terms of the better numbers and obviously flowing through to the expectation around starts for the fourth quarter. I guess, military continues to be relatively weak, anything specific you can talk about there that’s relevant?

Kim McWaters

Analyst

I think it’s kind of the same story, in terms of access on the basis as well as fewer students or perspective students to talk to, given reinvestment and bonuses being offered. I will say that we have -- we continue to gain ground in terms of military starts. So some of the enroll-to-show efforts are helping with this channel in terms of show rate and start growth. But we still felt pressure from an application standpoint inside of the quarter.

Peter Appert

Analyst

Right. Okay. And then Kim, can you talk a little about the non-auto programs. Remind me how big they are at this point, and how you view them in the strategic evolution of the company?

Kim McWaters

Analyst

Yes. So I need to follow-up with you on the specifics in terms of size. I can't recall if we disclosed that, but I will verify that. But just they're relatively small and that CNC is a 200 students. The welding campus programs can accommodate that amount of students on an average basis. So they're ramping up and they're performing well. So currently we have two welding programs one at Rancho Cucamonga, one an Avondale and we are targeting our third to open in January at Dallas. And we've been very pleased with the welding growth. And actually have been pleased with the show rate and interest more so for our CNC program. So I think the strategy in terms of program diversification is definitely helping in terms of excess capacity and attracting a new student mix. But they are relatively small in comparison to -- for auto and diesel programs.

Peter Appert

Analyst

Got it, understood. And then can you remind me how big is Bloomfield at capacity?

Kim McWaters

Analyst

Bloomfield I'd say it's roughly going to be 650 average students when it’s fully ramped. And so the capacity is probably slightly higher than that especially if we can fully optimize the space and sessions. But that's what we would project in terms of a run rate once it is up and running.

Peter Appert

Analyst

Got it, understood. And then I know you obviously haven't given any guidance for fiscal 2019 at this point. But given the trajectory and the application flow the expectation of a inflection to positive starts in the fourth quarter are you comfortable enough at this point to talk about the possibility of getting back to positive enrollment growth in fiscal 2019?

Kim McWaters

Analyst

Well, I think we're comfortable stating that we would expect to see start growth in 2019 given the combination of our new campus, the new programs and certainly all of the efforts around our Transformation Plan. So we would expect to see start growth in 2019 absolutely.

Peter Appert

Analyst

Okay. But no comment yet on enrollment growth.

Kim McWaters

Analyst

I'm sorry, in terms of the average population?

Peter Appert

Analyst

Yes.

Kim McWaters

Analyst

I think we should get back to you in Q4. Because it should -- I mean, that should grow based on our starts, but I think we can be more specific as to when we expect that in Q4.

Peter Appert

Analyst

Yes, great. Alright. I think that covers it for me. So thanks very much.

Kim McWaters

Analyst

Thank you.

Scott Yessner

Analyst

Thank you.

Operator

Operator

[Operator Instructions] Seeing that there are no further questions in the queue. This concludes the question-and-answer session. I would now like to turn the conference back to Kim McWaters for any closing remarks.

Kim McWaters

Analyst

Well, I just like to thank everyone for tuning into our call today. We look forward to updating you for our Q4 and year-end results late-November early December. And have a great day. Thank you.

Operator

Operator

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