Hello, and welcome to the Universal Technical Institute Fiscal Second Quarter 2021 Earnings Conference Call. With us today are Jerome Grant, Chief Executive Officer; Tony Anderson (sic) [ Troy Anderson ], Chief Financial Officer. Please note, today's event is being recorded. I would now like to turn the conference over to Matt Kempton, Vice President of Corporate Finance. Mr. Kempton, you may please go ahead.

Thank you, operator. Before we begin, we want to remind everyone that today's call will contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Please carefully review today's press release for additional information and important disclosures about forward-looking statements. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. As a reminder, the section entitled forward-looking statements in today's press release also applies to everything discussed during this conference call. During today's call, we'll refer to adjusted net income or loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP financial measures. Adjusted net income or loss is net income or loss adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring operations, including the income tax effect on the adjustments utilizing the effective tax rate. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization and adjustments for items not considered as part of the company's normal recurring operations. Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures, adjusted for items not considered as part of the company's normal recurring operations. Management internally uses adjusted operating income or loss, adjusted EBITDA and adjusted free cash flow as performance measures, and those figures will be discussed on today's call. As a reminder, we have provided reconciliations of these non-GAAP measurements to the most directly comparable GAAP financial measurements in today's press release, and we encourage you to carefully review those reconciliations. It is now my pleasure to turn the call to our CEO, Jerome Grant.

Thank you, Matt. Good afternoon, everyone, and thank you all for joining us today. To begin, I'd like to again thank our faculty and staff for their tremendous work during this quarter and applaud the efforts of all of our students. As a company, we're proud to announce that we had a very successful quarter while executing on some of the first important steps in our growth and diversification strategy. All of our campuses were fully operational, and we started 2,405 students in the second quarter, which represents nearly 15% increase over the prior year quarter. Importantly, we maintain our focus on supporting our students, their families and our teachers as we emerge from the pandemic, and while maining strong educational and employment outcomes. We performed better than we expected during the quarter and remain confident in our previously outlined 2021 guidance, which will set us up exceptionally well for fiscal 2022. Troy will go into more detail on our quarterly performance and '21 guidance as well as give you some initial thoughts for 2022 and beyond in just a few minutes. As far as student demand, we continue to see strong prospective student interest in our programs, which both fueled our double-digit start growth in Q2 and provides critical insight into the projected performance for the balance of the year. We're also seeing tangible results from our more targeted advertising strategy that we discussed last quarter, with Q2 media inquiries growing 14% year-over-year. As a reminder, we've begun to allocate more resources towards advertising to potential students living within the commuting distance of our campuses. This strategy further drives the efficiency and effectiveness of our campaigns by reducing the number of students who must relocate to begin their studies. Mind you, this momentum I'm referring to, heading towards our…

Thank you, Jerome. As Jerome mentioned, we executed well operationally and against our strategy this quarter, and delivered results that surpassed our expectations. I'll spend a few minutes discussing the quarter results and then discuss our fiscal 2021 guidance and our strategic road map for the next several years. We continued effectively converting strong prospective student interest with 2,405 new student starts during the quarter. This marks the second consecutive quarter of double-digit start growth, a 14.9% increase versus the prior year quarter, with growth across all 3 channels. Show rate for the quarter exceeded our expectations by 50 basis points, but decreased 150 basis points year-over-year. Year-to-date, through the second quarter, the show rate is roughly flat year-over-year, a very positive outcome considering the show rate during the first half of fiscal 2020 was not impacted by the pandemic. We expect consistent year-over-year improvement in show rate as we move forward. Scheduled new student starts were 18.3% higher than the prior year quarter, the same increase we saw last quarter. Scheduled new student starts for the third quarter are currently pacing measurably higher year-over-year than we've seen in the last 2 quarters. Momentum continues to build for the fourth quarter as we refine our marketing messaging and high school access efforts, all of which further builds confidence for our fiscal 2021 expectations. Average active students increased 10.8% during the period as compared to the same quarter last year. Average active student year-over-year growth will be elevated the next few quarters given our front-end strength, combined with the COVID impacts we saw in the second half of last year. Our growing student base positions us very well to meet our fiscal 2021 guidance and for strong organic growth in fiscal 2022. For the second quarter, total revenue was $77.7 million,…

Thank you, Troy. Before we address your questions, I'd like to quickly discuss our recent announcement appointing Congresswoman Loretta Sanchez to our Board of Directors, which became effective May 4. We're very excited to welcome Loretta to the Board. She's a former democratic congresswoman that represented a majority Republican county in Southern California for 10 consecutive terms. That achievement alone should tell you something about Loretta, the tenacity, passion, creativity and innovative approach she brings to her work. She held numerous important committee assignments during her years in Congress, including senior member of the House Armed Services Committee, the Joint Economic Committee, and as a founding member of the House Homeland Security Committee. She also served 5 years as a member of the House Education and Labor Committee. Loretta is a passionate advocate for higher education, working to ensure that access to all types of quality higher education is available for students and returning adults. She believes that people need choices to be able to prepare for their future job opportunities. Loretta has also had multiple family members who work as auto technicians and has seen firsthand the value of schools such as UTI. She's excited to be part of the company and to engage in our efforts to help address the growing skills deficit we face in this country and the important work that our programs, educators, business partners and others play in providing opportunities to meet critical needs. We look forward to working with you, Loretta. In closing, we're pleased with the solid results we delivered this quarter and are even more excited about the momentum we're taking into the back half of the fiscal year and beyond. Our students are doing a fine job of navigating the new normal and making good progress towards reaching their career goals. We are proud of their dedication and resiliency. Our growth and diversification strategy has now taken flight with the pending acquisition of MIAT and the announcement of 2 new campuses in 2022. But the most important message you need to understand regarding our strategy and the steps we've taken so far is that we're just getting started. I'd now like to turn the call over to the operator for Q&A. Operator?

[Operator Instructions] Our first question comes from Steven Frankel with Colliers.

A lot to unpack here. And I had trouble keeping up. So could you start with the comments on fiscal '22 in terms of growth rate and margin profile? I know it's not guidance, but again, repeat what the overall feel should be for '22?

Yes. Steve, this is Troy, and thanks for the question. The -- when we think about '22, we carry a lot of momentum out of '21 with our start performance through the year, our improving metrics overall. And we get the full year benefit of operating in a more, in my words, pre-COVID-like environment. And so that, combined with the campus launches and the MIAT acquisition that's successfully closing by the end of the year, we believe we should see growth rates in the low to mid-20s and margins in the low teens for next year. And that's again on a preliminary basis, but that's how we see it shaking out so far.

Okay. Great. That sounds pretty good. And could you remind us what the EBITDA margins look like at MIAT?

Yes. For calendar '20, they're a calendar year company, they had $3.5 million of adjusted EBITDA on $25 million of revenue, it's about 14%. And again, our number too, by the way, just for clarification, was -- the margin I was referencing was adjusted EBITDA.

Okay. And were their margins materially different in '21?

Well, they've been -- their growth has been driven by both program expansion as well as marketing, improved marketing efforts. And so the programs come with some cost to implement. So they've been expanding their margins over the last several years in conjunction with their growth trajectory and as the programs they've launched over the last few years have matured.

Okay. And then on the show rates, we would have thought by now we would have been seeing a material improvement over last year, and you didn't seem to imply that in your comments. What's going on in the show rates? And when do you think that starts to normalize?

Sure. Yes. When we projected this year originally, we started -- we looked at '19 and '20 -- first half of '20. The first half of '20 was not affected from a show rate perspective, was not affected by COVID. And so when we looked at this year, we had to start with, well, how are we jumping off from the latter part of last year. And then we looked at '19 for the back half of the year and more '19 and '20 for the front half of the year. But we were pleasantly surprised. Q1 was much stronger than we expected. I think we talked about, it was 350 basis points better. And so we were actually better this quarter by 50 basis points on our expectation, while still down year-over-year. Our assumption was show rates would gradually get better throughout the year. We started off strong in Q1 because of the carryover of students who deferred out of Q4, but we think we're on the right trajectory, and we see continued positive momentum through the rest of the year.

Okay. Perfect. And one of the issues you had brought up last quarter was not just students being behind, but being failing their coursework. How have you done in mentoring these students and getting them back, passing their courses?

Yes. We talked about that in the context of the quarter ended 12/31. And with the COVID spike going on and some of the churn we were seeing in the student base, and we talked about the many initiatives we have underway. I've referenced those in this quarter as well. We're seeing the yield, frankly, from those initiatives, the mentoring, the conversion to blackboard for our curriculum delivery gives us more integrated way to manage student performance, monitoring our students, 5-day labs, a lot of different initiatives where we're really heightening our student engagement model in bringing them through the curriculum. And we're seeing benefits of that. We've had much lower leave of absence. We've had much lower withdrawals. So we think we're definitely on the other side of some of the challenges coming out of the latter part of last year and the first part of this year. And again, that gives us a lot of confidence as we look at the back half of the year and achieving our guidance.

Okay. Great. And one last one. How many of your current or projected campus locations are reasonably close to a regional airplane -- or airline hub where MIAT could make a difference in filling that skills gap?

Well, I think it could -- this is Jerome here. Good to hear from you, Steve. First of all, it's important to understand that MIAT as an organization is about 1/3 airline mechanics and 2/3 in the other skilled areas. Just to understand, name aside, they have a broad set of skills that they engage on, on their campus. And we're proud to have them heading towards being part of the family. We have a number of locations in mind for aviation, where aviation demand is high. And it isn't necessarily how close they are to an airport is -- of what city they're in, which has airports in it, both private airports as well as commercial because, of course, turbine technicians work on both kind. So there -- a number of our major cities have quite robust opportunity in aviation, but it's important to understand also that other skills in the MIAT group would be also great high demand skills. You've heard the government talk about the infrastructure plan, adding wind farms off the coast in Florida and California. They're a large supplier of wind technicians on their 2 campuses, and we can see that moving very, very quickly into our campuses as well, especially in the areas of high demand. Robotics, HVAC, there's a number of very high demand areas that we're keen to bring across our footprint.

Our next question comes from Raj Sharma with B. Riley.

I just wanted to hit the fiscal '22 numbers that you just talked about, they seem very -- they seem exciting. So I guess there's a lot of interest there. But I missed some of it, and I'm glad that Steve repeated those earlier. So fiscal '22, you're looking to low to mid 20s growth rate and then low teens margins. And these -- are these -- do they -- these don't include any cross-selling of MAIT (sic) [ MIAT ] programs across your 12 campuses?

In fiscal '22, we would -- we don't assume we're -- we'll probably be -- our baseline assumption, let me start there, for MIAT is close by the end of this fiscal year. And again, that is subject to Department of Ed approval. And then most of '22, if not all of '22, would be getting the appropriate approvals and doing implementations and things like that. So the yield from -- there may be some minimal cross-sell yield, but really, it starts primarily in '23 and beyond.

Right. And so -- and what gives you confidence on the EBITDA margins? Is that just -- and so are those EBITDA margins, low-teens that you're talking about in '22, they're exclusive of any operational losses for the 2 new campuses, right?

Correct. It's adjusted EBITDA. We did -- I will point you to, we provided some additional clarification on the guidance in the non-GAAP schedules. So you can see the impact of the FY '21 campus implementation costs, acquisition costs, that we've adjusted out, things like that. So you would see a similar format for '22 once we roll that out.

Got it. And so -- and this year's guidance of $30 million to $35 million also excludes any operational losses from new...

That is correct.

Campuses/programs. Got it.

Yes. It's just the campuses. The welding programs that we roll out are absorbed in our EBITDA results. We're not adjusting those out, and that's not significant. The campuses is really what we're adjusting out.

Right. And then on the remaining half of this year, clearly, you're maintaining guidance. You had mentioned what the Q3 and Q4 numbers you're looking at. Are you -- could you repeat those, again? You were thinking greater than $80 million?

Correct. Greater than $80 million and greater than $95 million. Those get you to the low end of the range. And so obviously, we have a range. But third quarter will start with an 8 and fourth quarter would start with a 9 and be above $95 million.

Got it. And then just one last question. If you could -- when you look at the average quarterly tuition per student. And I know that sequentially, it's improving -- it has been improving. Can you kind of talk about where do you expect this number to go to? Because the high was around -- the high back in the fourth quarter of 2019, the trend is definitely looking up this quarter and hasn't quite made it back to the pre-COVID level, clearly. When do you expect that? Do you expect that the second half of this year to have been totally caught up?

Yes. I think Q4 will look a lot more like pre-COVID level, and then we'd be, again, absent some major setback, the -- we would expect '22 to be pretty much fully normalized at that point at pre-COVID levels. And then we -- basically, what you would see in our revenue per student pre-COVID was a modest increase each year, low single-digit increase each year, just tied to more of our tuition pricing changes on a year-to-year basis. And so we would -- we left off at $8,000, $8,100 a quarter. I think we'll probably get pretty close to that, if not there, by fourth quarter this year and then be there and beyond in '22.

Got it. Got it. And any update on the share buyback that you had mentioned you might implement?

Well, we did -- yes, we did get the authorization from the Board back in December, refreshed authorization, if you will, for $35 million. We -- that's certainly a capital allocation option as we evaluate our go-forward plans. I think clearly, from the announcements over the last few months and what we've talked about today, we've been prioritizing growth and diversification investments, but there is an authorization out there, and it's something for us to continue considering.

Right. So I mean this is in line with whatever projects are higher IRR. And that's how you're making the decisions? But otherwise, you could implement a share buyback if you saw it fit?

We could. It is subject to the Series A preferred shareholder consent. So that is still one step we would have to go through to execute any buyback. But yes, we could.

Our next question comes from Jacob Stephan with Lake Street Capital Markets.

This is Jacob on for Eric Martinuzzi. Just wanted to start with the welding program that's -- what kind of demand are you seeing?

We've seen very consistent results each time we've launched a welding program. We just launched our Lisle campus here in this quarter, in February. We launched Houston in May of last year, Long Beach in August of last year. And we pretty consistently filled those or near filled them after we start. And we built them at a specific size, roughly 20 to 25 students can start every 6 weeks. And we generally are 75%, plus or minus, full on any given start date. So we see good demand there.

Great. Switching over to the MIAT acquisition. Are you guys seeing any challenges with the closing time line, I believe September? What's kind of a target for that?

No. We don't anticipate any roadblocks or hurdles in finishing in that time line.

Okay. Great. So student makeup labs, I know that was a big point in the last quarter. Are you -- have you guys recognized all of that revenue? Or can you just give a little bit more color on that?

Yes. The deferral as of the end of the quarter was $800,000. We had $2 million last quarter. Our original deferral was $11 million. So we have cleared, obviously, the vast majority of that, and I would expect, based on the progress we've continued to make even since the end of the quarter, we would likely see that go away here at the end of this quarter, certainly by the end of the year.

[Operator Instructions] Our next question comes from Austin Moldow with Canaccord.

Given that the scheduled start growth rate was flat from Q1, even though it was very impressively high, can you just talk to the trajectory of those scheduled starts throughout the quarter?

Within the quarter, you mean? Or over the remainder of the year? I'm sorry, could you clarify?

Yes, within in the quarter.

Trajectory within the quarter.

We're going to need you to clarify that just a little bit more. Sorry, Austin.

Well, from last quarter, I think you said that Q2 was pacing ahead of Q1. And so the fact that it's now flat from Q1, I was just looking for a little color on what happened over the -- from month to month, I guess.

Got it. Okay. Yes. So that was the beginning of February. And we had postpones, we have -- we also -- it's a pacing, right? So at that time, the number of enrollments we had and then extrapolate it out through the remainder of the quarter based on historical pacing arrives at a number. It's a standard pipeline reporting mechanism we have internally. So we started off the quarter faster. And so that contributed to a more favorable pacing. And then we do implement, by the way, price adjustments typically in this quarter. And so that can contribute a little bit to some of that pacing, but it slowed down a bit after that point, and back to only 18%. And we're seeing, again, even stronger, at this point in time. It's a leading indicator, Austin. I guess, we've been trying to be fairly transparent on some of the leading indicators given all the noise over the last few quarters, but it's directional. It's not -- it's by nowhere near baked at that point.

Got you. Can you speak a little bit to the different channels within that? And then particularly how your outlook factors in high school contracts?

Yes. I mean we're seeing strength across all...

I guess what you are seeing for high school.

Yes. Yes. We're -- I mean, we're seeing strength across all the channels. High school has been surprisingly strong in the first half of the year. Some of that was carryover out of last year. Some of that is just delayed decisions. We're seeing good strength in adult, good strength in military, and our overall mix, I would say, we're not expecting dramatically different. We are assuming a little bit more adult than maybe we normally would, just given some of our current trends. And again, some of that delayed behavior that we're seeing out of high school. But I wouldn't say it's dramatically changed. Jerome, would you add anything to that?

No. I think you're right on.

Okay. And then last question on MIAT. Can you talk a little about what marketing looks like once you complete that acquisition sort of in terms of how your total advertising spend will be augmented. And I'm a little curious if MIAT was able to achieve even more attractive cost per start, given they're in some really high-growth fields or just kind of what their cost per start is anticipated to be under your roof?

Yes. I mean, we're not going to get into too many details just yet on some of the underlying metrics on MIAT. I would say, broadly speaking, they do market more locally to their campuses. They don't really have a relocation program. They accommodate it on more of an exception basis. And so that's one of the opportunities for us from a marketing perspective, is to bring them into our broader marketing footprint in the broader channels that we have access to, the price points we have access to given the scale that we have relative to them. And we'll continue -- we're excited about driving more students into their campuses, right, as well as, as Jerome talked about, bringing those programs into our campuses, potentially putting diesel in their Michigan -- Canton, Michigan campus. And all of that will fold into our overall marketing strategy as we go forward.

I also want to make -- just one comment would be, I mean, we have a significantly more developed high school channel even though the demographic of the student that would take one of their programs is the same as ours. And as I've said in the past, when we talked about acquisitions that would bring more skilled trades into our footprint as well as potentially accentuate what they could do on their campuses, is that we're collecting nearly 0.25 million leads from high schools a year and a lot of those 18 to 24 year olds just aren't car people, but they may be interested in renewable energy, robotics, nondestructive testing or HVAC. And it gives us more of an opportunity to convert those leads with their 2 campuses and then also, as we bring their programs across our footprint. So we see some upside there.

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Jerome Grant for any closing remarks.

Thank you, operator. I appreciate your help today. And thank you, everyone, for dialing into this quarter's earnings call. We, as a management team, look forward to continue to execute on our strategy and share our progress with the investment community. So thanks again for joining. I hope you have a great afternoon or evening, wherever you're calling in from. And this concludes our call. Thank you.

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