Good day, and welcome to the Universal Technical Institute's Third Quarter Fiscal 2022 Earnings Conference Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Matt Kempton. Please go ahead.

Hello, and thank you for joining us. With me today are our CEO, Jerome Grant, and CFO, Troy Anderson. During the call today, we'll update you on our third quarter fiscal year 2022 business highlights, financial results and vision for the future. Then we will open the call for your questions. 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 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, relevant factors that could cause actual results to differ materially from the forward-looking statements are listed in the press release and our SEC filings, and 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 will 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 of the adjustments utilizing the effective tax rate. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation and amortization, adjusted 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 net 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 financial measurements to the most directly comparable GAAP financial measurements in today's press release. 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. I'd like to start by expressing my appreciation to our students and staff for their hard work and commitment during the quarter. We are pleased to deliver another quarter of impressive results, while most importantly, achieving strong student and employment outcomes, including graduating 2,800 students in the quarter, enabling them to join the workforce in high-demand career fields. While delivering these results, we also had a busy quarter executing on all facets of our growth and diversification strategy. We opened the doors of our new Austin, Texas campus, finished the implementation of the Exton, Pennsylvania welding program, expanded the BMW FastTrack program to an additional 2 locations, completed the consolidation of the Phoenix MMI campus into the Avondale, Arizona location, announced our initial MIAT program expansion plans. And finally, we signed a definitive agreement for the acquisition of Concorde Career Colleges. Needless to say, I'm extremely proud of what our team has accomplished in the quarter. Moving on to our results from the third quarter. Revenue and adjusted EBITDA exceeded our expectations for the quarter. Revenue was $101 million, reflecting a growth rate of 21% compared to the year-ago period, and adjusted EBITDA was $11 million, which represents growth of 53% year-over-year. Given our year-to-date results and our outlook for the fourth quarter, we now expect to come in, in the higher range of our guidance for revenue and adjusted EBITDA, which are $410 million to $420 million, and $52 million to $55 million, respectively. Troy will go deeper into the context for our strong revenue and EBITDA results in just a few minutes. New student starts were roughly in line with our expectations and grew 25% versus the prior year quarter. As far as new…

Thank you, Jerome. We are fortunate to have delivered another quarter of strong financial and operational performance despite an increasingly challenging macro environment. I'll spend a few minutes covering our quarterly results, before I give a brief review of our balance sheet and liquidity, and then we'll close out by reviewing our fiscal 2022 guidance, some early thoughts on 2023 and our longer-term strategic road map expectations. Total revenue for the third quarter was $101 million compared to $83.8 million in the prior year quarter for 20.5% year-over-year growth. The growth was driven by an 11.4% increase in average undergraduate full-time active students, which resulted from new student demand paired with more campus and program offerings across our ecosystem, including the addition of MIAT. Our revenue growth also benefited from higher revenue per student, which reflects continued normalization to pre-COVID operating levels. Adjusted EBITDA was $11 million compared to $7.2 million in the year ago period. The increase in adjusted EBITDA was driven primarily by the increased revenue and revenue per student. We continue to drive operating efficiencies in our cost structure, but we are seeing some inflation and tight job market impacts to our labor cost in certain variable expenses like welding supplies. Net income for the quarter was $0.8 million compared to $3 million in the prior year quarter, while adjusted net income was $5.7 million compared to $3.3 million. Our adjustments in the quarter are consistent with prior quarters, primarily reflecting onetime costs associated with acquisitions and integration and the start-up of our new campuses. Loss per share for the quarter was $0.01 versus $0.03 of earnings per share in the prior year period. Our ending share count was 33,767,000, which includes 724,000 common shares that resulted from the conversion of approximately 24,000 preferred shares by one…

Thank you, Troy. As we discussed, we are pleased with our operating results from the quarter and are very optimistic about the future. We are in the beginning stages of our growth and diversification strategy and our early initiatives on this front helped contribute to the strong results for this quarter, providing us with momentum, which we believe will carry into 2023. Delivering strong student and employment outcomes remains our core focus as we provide opportunities for individuals in markets that have substantial and growing opportunities for well-trained skilled workers. I'd now like to turn the call over to the operator for Q&A.

Today's first question comes from Eric Martinuzzi with Lake Street.

Yes. Congratulations on the Q3 results and the outlook for the remainder. I wanted to dive into the new student start, the pressure here and the reset to the low to mid-single digits. As we go back to -- as we entered the year with kind of an outlook for, I think it was in the 10% to 15% range now, we're low single digits. And that low to mid-single digits pretty big reset here. You talked about the headwinds in the adult section and the adult part of the student by -- are we seeing kind of as expected in high school. Is that -- should we take that for granted?

Yes, it's a good question, Eric. Thanks. And when we look back at the original guidance, which was 14% to 19% growth, and then we dropped to 8% to 12% last quarter. And of course, as you said, now low to mid-single digits. We really attribute that entirely to the adult channel. We had some challenges in the latter part of Q1 and early part of Q2 with Omicron as we talked about in the prior quarter, which again was primarily adult. Keep in mind that first, second and third quarter, primarily where we get most of the adult students and then the high school kicks in more in the latter part of the third quarter and then the fourth quarter. So we've had strong inquiry flow all year. We commented on some conversion rate pressure last quarter as well, again, which we thought was more attributable to Omicron as we transitioned into May, June, July, frankly. We've seen that conversion rate pressure continue and frankly, pick up a little bit, again, in the adult side. The high school side is pretty much on budget, pretty much as we expected. We were hoping, frankly, we could do a little bit more. But that work largely is done in the first and second quarter with the lead generation with the high school students. And then really the third and fourth quarter is finishing -- bringing those students to enrollment. So the pipeline build was before we really had the insight that we have now and to how the adult channel was performing, thus, it was really, frankly, too late to really move the needle too much on high school to offset that.

And where's military at?

Military is off a bit. I mean those numbers are much smaller. I mean they're 10% to 15% overall. And you can get some other volatility in military tied to, for instance, there's recent headlines about all branches being short of their recruiting goals. So they may go a little heavier on reenrollment incentives and things like that. So you can get a little bit of the economy in there. You could get just the factors affecting military specifically, but we're -- we've seen strong growth factor. We're expecting growth in military in the fourth quarter. So it's a little bit up and down quarter-by-quarter, that'll be down a little bit this year overall.

Okay. And then you've got the insight on the adult conversion. What does it boil down to as far as leverage you can pull to improve the conversion?

Well, we're looking at some optimization in terms of how we do lead routing and how we treat local students versus relocating students. Again, keep in mind, about half our students overall relocate and on the adult side, we have certain programs that are national-only programs like the MMI programs, for example, marine and motorcycle. So we want to make sure that we start tailoring our lead flow and rep engagement to really those specific students with students who are local, get them into the campus, do a tour, work with the rep on campus, spend less time trying to pre-enroll the student. Just get them into the campus, do the tour. And we think things like that, which we've done a bit of here and there, but we're going to do more consistently in more -- in a more focused way will help offset some of the near-term pressure.

Okay. And then Jerome, you talked about kind of the impact, not immune to -- or maybe it was Troy, I can't remember -- being not immune to the inflationary pressures. You're still talking about, though a big picture, we're $700 million and around 20% adjusted EBITDA margin. What specifically is your 2 or 3 points of pain on inflationary pressures?

Well, are you talking about on the cost side? Or are you talking about on the demand side?

On the cost side.

On the cost side. Well, I mean, obviously, we're not immune to wage pressures ourselves in terms of -- although we are doing better this year in terms of overall attrition of our instructor and support population, we are finding it a little more difficult to find people, paying a little more money for people when we bring them in. So on that side of the equation, we're seeing probably the same kind of pressure a lot of people are seeing out in the market. And then as Troy said, there are some materials, part of supply chain issues and inflationary issues in there, welding materials, some of the petroleum materials, things along those lines that are tied to gas prices and things like that, that are bringing some price pressure. I've got to give our team some great praise for really looking at the offsets that we can make. So we really haven't seen net-net a lot of pressure there. But we're not immune to some of those things that you're reading about in the paper as well.

Yes. And some of it, Steve -- sorry, Eric, is as we look at different categories. So for example, coming into last year, early part of this year, PCs, we were buying well in advance to secure better pricing and that we're already seeing the PC constraints lift. We give each new student for most of our programs a Chromebook laptop. And so I think some of this just again, as the headlines say, where we overcorrected in some areas and things have flared up in some areas that we think will come back over time, and we're just trying to be transparent about some of the things that we're seeing.

Today's next question comes from Steve Frankel with Rosenblatt.

So to go back to the starts issue again. Does this make you want to pause or pull back on adult recruiting in the short run as another way of saving money? Or do you just keep plugging at it, assuming that if the economy starts to tip, then more people than want to change jobs?

Well, as Troy outlined, it has us fine-tune or hone the way we look at adult job changers, #1. Those who don't have to relocate convert at a higher rate than those who do have to relocate. So if you're coming from Seattle to Avondale, it's a much bigger decision financially than if you're coming from Glendale to Avondale and making it. So we've been sort of honing and pointing our adult recruiting in a more local fashion. And we've been seeing some benefits and some blunting of the headwinds out of that. We're evolving the way we do adult admissions to make it more flexible and scalable as the market comes back. And I think the more important issue is we believe we can pull the lever harder in high school, where we can add resources into the high school, go deeper into the high school and bring that population that's significantly less affected by the inflationary pressures to the school. You'll note high school had a very good year this year and better access. We've done some refinement to our territory alignments now that we can bring more people into the organization through that refinement. We're going to pull those levers for the fall. So we have -- we're anticipating a very strong high school performance when we step off in the fall this year.

And speaking of that, so one of the things you talked about when you bought MIAT was that they were less mature in high school recruitment process. Are you fully ramped up now so that when the school year starts up in September, they're going to hit the ground running?

Yes. And again, number one, because many of them may be listening, they have some really great high school reps at MIAT. They just didn't have very many of them, right? And whereas we have nearly 150 reps around the country for their two campuses, I think they had reps that were selling into it. So we're ramped up now as we go into this school year. Remember, we closed in the middle of the school year last year -- for high school year last year. As we ramp in this year, our reps are fully trained, they understand the product line. They understand it very well because we're putting over a dozen MIAT programs on the UTI campuses through 2023. So that product line has been fully embraced by our high school channel, and we expect to see the results of that in the '22-'23 school year.

Steve, one other point I would make back on adult real quick is on the media side, right? So most of the lead generation on the adult side is through media spend. And so we continue to optimize the media spend as well. So we're not, to your point, just throwing money into the market that's not going to be productive. So making sure we're getting the optimal return on the media side and then trying to refine on the rep side to get the conversion rates back to where we'd like them to be.

And given where we are in terms of the online ad market, I assume you've seen much better rates for the online need that you've been buying, right, for these campaigns?

Yes. I think we've done a combination of things. I mean, obviously, the market itself fluctuates up and down depending on time of the year and who the buyers are. And of course, now people are pulling back a bit as you've heard from some of the larger players in that space on recent earnings reports. We also are looking at different lead sources. We've looked at agencies that we work with, enhancing our analytics so that we can get better, more real-time data on responses and conversions and the like. So it's all facets of it beyond even just looking purely at the cost itself.

Okay. And then just remind me where and when will the first MIAT class open on your -- in the UTI footprint?

Where -- well, when is probably Q2 of fiscal '23, latter part of Q2 fiscal '23, but I don't remember...

Actually not -- yes, it's the Q2 fiscal '23, but there are three or four programs across campuses that are all sort of neck and neck vying for first opening right now. So we'll -- as we get closer to that date, we start recruiting into the specific campuses, then we'll be able to let you know where that is.

There's a bit of variability because all of them are going through the same approval process, but a different pacing because of our structure with the Department of Ed and they have to typically go through the state and ACCSC first and then go to Department of Ed. So we're just now getting the Department of Ed submissions done. And so we're confident that it will be early '23, but it could vary a little bit depending upon when we clear that, and then we need time to market -- market the programs and do the lead generation once we know we have the approval and a start date confirmed.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for final remarks.

Thank you very much, everyone, for joining us today. This concludes our conference call for the third quarter 2022. We look forward to talking to you again next quarter. Thanks, and have a great day.

Thanks, everyone.

This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.