Good day and welcome to the UTI Fiscal Second Quarter 2019 Earnings Call. [Operator Instructions] As reminder, today's conference is being recorded. A replay of the call will be available at www.uti.edu or through May 24, 2019, by dialing (412) 317-0088 or (877) 344-7529 and entering passcode 10130240. 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 Scott Yessner, Interim Chief Financial Officer. During the call today, we'll update you on our fiscal second quarter 2019 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 and 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 this conference call, including initial comments by management as well as answers to questions. During today's call, we'll refer to adjusted operating loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP measures. Adjusted operating loss is loss from operations adjusted for items not considered normal recurring operating expenses. Adjusted EBITDA is net income before interest, income taxes, depreciation, amortization, adjusted for items not considered normal recurring operating expenses. Adjusted free cash flow is cash from operating activities less capital expenditures adjusted for items not considered normal recurring operating expenses. Management utilizes adjusted operating loss, adjusted EBITDA and adjusted free cash flow as performance measures internally, and those will be the figures discussed on today's call. It is now my pleasure to turn the call to Kim McWaters. Please go ahead, Kim.

Thank you, Jody. Good morning, everyone, and thank you for joining us today. I'm pleased to report another strong quarter of solid year-over-year start growth. During our second quarter fiscal 2019, new student starts grew 11.2% compared to the prior year. This is the strongest growth in Q2 starts that we've seen since 2016. Total new student starts were 2,022, an increase of 203. The start growth was driven by the continued and consistent progress made under our multiyear transformation plan and our new campus and program growth initiatives. Approximately 50% of the quarter start growth was attributable to our Bloomfield, New Jersey campus with the remainder coming from our same school campuses. After 3 consecutive quarters of strong start growth, in March, we achieved another major milestone when our average student population grew for the first time in 8 years. This is a key inflection point that we have been working toward. Growth in our average student population is a key driver of revenue growth and profitability as the incremental margin of each additional student is better than 65%. There's tremendous operating leverage in this business as the student population grows. You may recall that last quarter, I shared 3 primary strategic objectives for fiscal '19. I'd like to remind you of these important objectives and share our progress year-to-date. Our first objective is to leverage the implementation of our 2018 transformation plan to grow new student starts across our campus footprint into 2019 and beyond. Let's first talk about what we are doing to improve the quality and commitment level of our student. First, in marketing, we have continued to invest in national brand awareness campaigns to generate student demand from the highest converting media channels, such as our website, uti.edu, and paid brand search. We are now…

Thanks, Kim. In the second quarter, we continued strong performance towards our 2019 financial and operating performance objectives. As Kim highlighted, we achieved an important milestone in the multiyear transformation strategy with the average student population growing in the second quarter and for the first half of fiscal 2019. We produced $2.9 million of cash flows from operations and $3 million in adjusted free cash flow in the first half of fiscal 2019. We improved operating loss more than $3 million in the second quarter and grew adjusted EBITDA to $819,000 for the quarter and $2.1 million for the first half of 2019. In addition, we executed another step in building long-term profitability and cash flows with the Norwood campus exit announced in February. My remarks will provide more details on the campus exit and financial performance for the second quarter and the first half of fiscal 2019. In February, we announced the Norwood campus is closing by the fall of 2020, which will improve pretax income, EBITDA and cash flow by $4 million to $5 million in 2021. We structured the campus exit with no lease termination cost and an immediate $80,000 a month facilities cost reduction through vacating 88,000 square feet in February. These cost savings and other cost reductions are offsetting the estimated GAAP net restructuring charge of $1.9 million, inclusive of broker’s fees, moving costs, personnel termination costs and leasehold improvement write-off and a deferred rent liability elimination for the campus exit. We recorded $1.25 million in net restructuring costs in the second quarter. After completing the exit, the long-term expense reduction is expected to range between $11 million and $12 million and revenue reduction is expected to range between $6.5 million and $7.5 million. Thus far, the Norwood teach out and migration of students is…

Thank you, Scott. I'm pleased with our progress for the first half of 2019 and our ability to deliver to our students the quality education needed to prepare them for careers that are in high demand. This work is grounded by our strong balance sheet and supported by the hard work done every day by the UTI team, our industry partners and employers. I look forward to working together as we continue to build on our first half successes and reporting back to you on our progress. And now operator, I think we're ready to open the call for questions.

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

Scott, just following up on your Norwood comments. I want to make sure I've got the numbers right on this. So the restructuring charge in the quarter was offset by the rent reduction. So thinking about next year then, for fiscal '20, does the teach out cause a slight negative impact on earnings next year? Or are the savings sufficient to offset the shutdown cost?

Yes. The next -- yes. The savings, it'd be -- we think it'll be positive, slightly positive between $250,000 and $500,000 in 2020. So the rent reduction and the personnel reductions are offsetting the reduction in students as -- and as we migrate students to other campuses, there's an offset to those balances. So we think we're about neutral to slightly positive for the Norwood exit next year.

That's great. That's definitely not the way it usually works in a teach-out mode. So congratulations on that. Kim, you mentioned, and you've mentioned before, other markets where there might be opportunities for resizing the campuses. Can you give us any color in terms of when we could see that, which markets might be relevant, what the economic implications could be?

Sure. Well, we are looking at a number of markets where we have expiration dates on the horizon and probably, most notably, we're looking at the Exton market. We have a lease set to expire here in the not-too-distant future, and so we're looking at options as to whether to resize or relocate. We want to make certain that we are aligning our facilities with the student demand and employer demand in that market. We continue to look at all of our campuses in terms of opportunity to repurpose the space for programs such as welding and have identified the next couple of campuses for that program. It's premature to comment on it now. But just like we've identified areas for new campuses in the future, we have those markets identified. And we'll speak to those as we near the end of this year and move into fiscal '20.

Okay. And then Kim, I think you've said no new -- no further new campuses in fiscal '19 or '20. Maybe you could share with us your thought process beyond that in terms of sort of the cadence of what you'd like to see in terms of new campus opening.

So again, I think we'll talk more about that as we get through the end of this year and at the beginning of '20. We should just note that we're seeing very good returns on the metro campuses that we have in Dallas, in Long Beach and, most recently, Bloomfield. We're seeing similar sorts of returns on those campuses that we have downsized and rationalized. So it's a two-pronged strategy: to find new markets to open those new campuses and to rightsize those that are existing. So without giving the specific markets away, I would think about it in terms of large metro markets where UTI does not have a presence or perhaps markets where UTI could have additional presence where there's both strong student demand and employer demand. And so there are a number of markets, and we're in the process of ranking those markets for the future.

Okay. Fair enough. And then Kim or Scott, can you talk a little bit about the trend in revenue per student and how that should go going forward? I think it's been trending a little bit lower, which I assume is mix and scholarship-driven. But just thoughts on what the revenue per student could look like going forward.

Yes. I think so. Yes. Peter, that's accurate. We provide support to our students through a number of different mechanisms, and that does flow through our -- a good portion of that flows through our revenue line. That's something we manage to the needs of the students, that we manage that up and down as the circumstances support it. It's fairly stable. We think we have a pretty good mix with some of the other programs we have in -- like welding. The sequence of -- the actual tuition rates are a little bit lower. But we also have other programs that are offsetting it with that -- that go into auto/diesel and then move into the OEM programs that sort of offset it to the other side. So we think it's the -- the average revenue per student is fairly stable. We'll fluctuate near and around it, and there's factors that are going to both pull up and pull down on it from time to time.

Got it. Fair enough. And then lastly, Kim, I don't know if you're comfortable with this. But given the very good progress you had in the turnaround efforts, I'm wondering if you're comfortable at this point talking about longer-term financial targets in terms of, I don't know, sustainable enrollment or revenue growth rates, where you think margins can get to as you continue to execute on the turnaround strategy.

Sure. I appreciate the question, Peter, and we're certainly looking forward beyond '19 and see a very strong 2020 on the horizon. So we believe that our margin should improve significantly. I'm not going to give you a number per se, but it should get into the high single digits, low double digits and continue to grow from there as a result of much more efficient operation and -- from a campus footprint and greater efficiencies achieved from a student acquisition standpoint. I'd rather hold until later in the year to talk about specific guidance for fiscal '20. I would expect that our start rate will -- our start growth, excuse me, will start to moderate. But I think mid-single-digit start growth looking forward is something very realistic as we begin to anniversary our transformation and new campuses. So I think you should focus on a mid-single-digit start growth in the outer years. And certainly with new campuses and new programs and those sorts of things, that will bolster that even higher.

Yes. And I think I would just add to that with the comments we provided earlier in our communications. We do have significant leverage in our system and a very, very scalable platform. And so we do see a significant portion of the next student revenue fall into the bottom line, and you'll see that in 2020 without giving any specifics around numbers. Adding to -- further to the standpoint, I think our operating fundamentals across UTI, both financial and nonfinancial, are in the trajectory where we want them to be where we can continue to grow, invest. We're not distracted by other matters. We're not in a transformational process. We're really moving the company forward, and we have the cash and the balance sheet to support the things that the company needs, our students needs, the UTI team needs to reach greater financial objectives in the future.

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

Thanks, operator, and thank you to all of you for joining us on our call today. We look forward to providing you an update on our third quarter, and we'll do that late summer. Meanwhile, have a great day today. Thanks again.

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