Universal Technical Institute Inc (UTI) 2016 Q1 法說會逐字稿

Hello and welcome to Universal Technical Institute's first-quarter 2016 conference call.

(Operator Instructions)

As a reminder today's conference call is being recorded. A reply of the call will be available for 60 days at www.uti.edu or through February 15, 2016 by calling 412-317-0088 or 877-344-7529 and entering the passcode 10079751.

At this time I'd like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead.

Hello and thanks for joining us. With me today are Kim McWaters, Chairman and CEO, and Eugene Putnam, President and CFO. During today's call we will review the results of our first quarter and then we will take 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 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 your questions.

During today's call we'll make reference 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 net loss.

And now I'd like to turn the call over to Kim McWaters, our Chairman and Chief Executive. Kim?

Thank you, John. Hello everyone and thanks for joining us on the call today. In a moment Eugene will walk you through the details of our first-quarter results but first I'd like to provide a bit of context for the quarter.

As we mentioned on our last earnings call we operate in a very difficult environment with continued economic and regulatory headwinds. This is clearly apparent in our enrollment trends and business results for the past several years as external forces have proved stronger than our internal forces.

While we know that 2016 financial results will reflect the cumulative effect of these negative forces from prior years it also reflects our belief in our future and the essential investments required to create it. For the quarter, we had an operating loss of $2.2 million driven by lower student populations at our campuses as well as the opening of our new Long Beach campus which accounted for $1.4 million of the loss. Clearly our financial results were not what any of us would like but they were in line with our expectations given our commitment to invest in the business and grow our student population despite depressed student enrollment and revenues at this time.

Against that backdrop we are focused on implementing the strategies we believe can return us to growth while managing the business as cost efficiently as possible without negative consequence to our educational quality, our student outcomes and new student growth. To that end we continue to partner and align our educational programs with leading OEMs to strengthen the overall value proposition for our students.

Last quarter we renewed agreements with four of those OEMs including BMW, Ford, Porsche and Volvo. We are so pleased that many more of our industry partners and employers are helping prospective students and their families recognize the value of a UTI education and manage the affordability concerns and debt aversion that can keep them from coming to school.

Nissan North America pledged an additional $250,000 in scholarship funding to the UTI foundation to support our Nissan automotive technical training program. And more than 2,400 UTI employer locations throughout the country are now offering tuition reimbursement and/or other incentives to UTI graduates that they hire. We've increased the number of participating tuition reimbursement and incentive program employers by 209% year over year.

Through testimonials, student outreach and participating with us at on-campus events and career fairs our industry partners and employers continue to work directly with us to promote the good jobs and career opportunities available in the transportation industry. While we believe we are gaining some traction with these initiatives, we have yet to reverse enrollment trends. The trends are certainly less worse than we saw year over year but we've seen that we have not been able to reach the goals we have set for ourselves in terms of new student applications and new student start growth.

During the quarter our advertising initiatives drove a slight 2.5% year-over-year increase in the number of inquiries. This is positive given that multiple industry sources reported double-digit declines in inquiries for career school brands during the quarter. Still our new student applications were down 3% for the quarter, reflecting either a lack of willingness or the ability of adult prospective students to act on their interest in pursuing UTI education over a job or simply sitting on the couch.

This decline also reflects the challenges we have faced with our military and veteran recruitment efforts. Overall base access and declining numbers of transitioning service members are the primary drivers behind fewer military applications and military new student starts. Regaining full base access is likely to be a long road but we're making progress working with key congressional leaders and committee members.

We believe several of them are beginning to understand the strong demand for our graduates and how a UTI education can help veterans transition to successful civilian careers. We're seeing increasing support from both sides of the aisle and that support is starting to translate into action.

This week several of our advocates in Congress sent a bipartisan letter to the Department of Defense asking that the Department allow schools with strong ethics, regulatory compliance and student outcomes to get back on military bases to give us the opportunity to educate veterans about the career opportunities available in the transportation industry. We want our nation's heroes to be able to make educated and informed decisions about their future.

In addition to our progress on the military front, our work with high school teachers, administrators and counselors is beginning to shift perceptions in some districts once closed to all for-profit schools have opened their doors to UTI. I want to be clear that building these relationships is a long-term investment but we believe that we are on the right track as gaining access to students is of critical importance to all of our stakeholders.

There is no doubt that we will be operating in a tough environment throughout 2016 but know that we are laser focused on reversing the trends as quickly as possible. We continue to believe that we will not only survive this cycle but we will be stronger for it and positioned well for the future.

With that I will turn it over to Eugene for a closer look at our first-quarter results.

Thanks, Kim. We ended the quarter with an operating loss of $2.2 million as compared to operating income of $5.6 million last year. First-quarter operating income was negatively impacted by initial operating losses for our Long Beach campus of $1.4 million.

We began the quarter with approximately 1,300 fewer students than we had at the same time last year. With a slight decline in our show rate of 120 basis points, starts decreased by 100 students this quarter as compared to the prior year but were higher than our plan for the quarter. The combination of a lower beginning student population and lowered new student starts led to an overall decline in average student population of approximately 8% versus last year.

The lower student population partially offset by higher average revenue per student led to revenues of $89.8 million for the quarter which were down 6.2% from last year. The average revenue per student was up from $6,600 to $6,800.

Tuition excluded $5.7 million related to our proprietary loan program during each period. As a reminder we recognize revenue from this program when we receive payment.

Advertising expense was $10.4 million for the quarter, up slightly from $10.1 million last year. And as a percentage of revenue advertising expense was 11.6% for this quarter versus 10.6% last year.

We generated $2.9 million in EBITDA in Q1 compared to $11.1 million last year. Our first quarter net loss was $1.7 million, or $0.07 per diluted share compared to net income of $3.1 million or $0.12 per diluted share last year.

The income tax benefit for the quarter was $900,000 or roughly 36% of pretax loss compared to a provision of $2.2 million or 42% of pretax income last year. The impact of non-cash adjustments to the deferred tax asset related to stock-based compensation this quarter was less than $100,000.

It's likely we will continue to experience variability in income tax expense depending on the price of our common stock and the timing of the expiration, exercise and vesting of past stock-based compensation awards. Assuming our stock price remains relatively consistent with its current trading range, the impact of any adjustments to the deferred tax asset and related income tax expense for the year is expected to be in the range of $1.4 million to $1.7 million.

Moving to our balance sheet we had cash, cash equivalents and investments of roughly $52.5 million at the end of the first quarter compared to $59 million at year-end. During the quarter we invested $2.6 million in fixed assets compared to about $3.7 million last year. During the quarter we paid cash dividends of $0.02 per share on both October 5 and December 18 so it totaled about $1 million during the quarter.

While we are continuing our efforts to manage the business efficiently and to reduce cost where appropriate we believe our path to growth includes bringing our education to reach more students in markets. As Kim mentioned, we opened our new campus in Long Beach, California in August and student enrollment is ahead of our pace and ahead of our original plans.

We are very pleased with the initial performance at Long Beach and expect it to be accretive to earnings within this fiscal year. This reinforces our strategy to open more locally focused campuses in select markets in the coming years.

As part of our commitment to dealer and industry training we're pleased to announce that we have acquired an investment interest in a company that provides comprehensive technician development programs and shop operation services. This investment completed earlier this week also includes a license to certain intellectual property including learning system infrastructure, training curriculum and content.

We also continue to offer scholarships and a proprietary loan program and are successfully approaching more employers and OEM partners to assist in sharing the UTI opportunity with potential students. This quarter we extended approximately $8.3 million in loans under our program compared to $7.2 million last year. The average individual loan amount under the program during the quarter was about $4,700 and we recorded approximately $1.5 million in revenue and interest from cash payments received which was up from $1.1 million last year.

In addition to offering this program we continue to offer both merit-based and need-based scholarships as well as tuition discounts for certain groups of students, specifically our military veterans. At the end of the quarter approximately 35% of students in school were benefiting from a UTI scholarship or discount and these scholarships and discounts decreased revenue by 3.4% during the quarter.

Our consolidated employment rate fell slightly during the last year at this time. The rate has improved slightly for our marine program while the rate has declined for auto and diesel and collision repair. While demand for our graduates remains very strong the rate decline is due to some internal operational challenges that resulted in an employment verification backlog as opposed to students actually getting jobs and that backlog is currently being worked through.

We continue to see growth in our overall starting wages for our graduates, reflecting the increased demand for students. Of the first-quarter 2016 graduates approximately 53% of students in auto diesel programs had manufacturer-specific training. As many of you know, typically these students with manufacturer-specific training find employment quicker and have the potential to earn a higher starting wage. Additionally, our employers and industry partners benefit by hiring grads with higher levels of training and who are better equipped to go right to work.

Finally, let me take a minute to talk about our outlook for the remainder of the fiscal year. For the year ending September 30, we expect new student starts to be down in the low to mid single digits and expect our average student population to be down in the mid to high single digits as a percentage compared with the year ended September 30 of 2015.

While annual tuition increases will slightly offset the decline in average students we still expect revenue to decline approximately 3% to 5%. To support future student growth we will continue to invest in growth opportunities during the year which will result in lower operating income and minimum levels of EBITDA this year.

Capital expenditures are expected to be in the range of $19.5 million to $20.5 million during the year. And as always we will remind you that due to the seasonality of our business and normal fluctuations in student populations we would expect to see volatility in our quarterly results.

With that I think we're now ready to open the line for any questions that might be out there. Operator?

(Operator Instructions) Peter Appert, Piper Jaffray.

Thanks. Good afternoon. So I think, Eugene, last quarter you had talked about expectation of minimal levels of EBITDA this year.

You didn't mention that in terms of your guidance. Is that still how you're thinking?

Yes, actually, Peter, maybe I ran through it too quickly but I think I did say that and it's in the press release. Yes, we still expect minimal levels of EBITDA for the full year.

Okay. So in terms of the sequential change in terms of your expectations around start growth, I think you were talking about up low single digit last quarter, now you're talking about down low to mid single digits. Anything you'd call out in particular in terms of changed dynamics that might account for deterioration in the outlook?

Yes, I think since we spoke last quarter we have seen continued pressure in our military channel. That impacts us in a couple of ways. Obviously it takes longer for military students now to start school.

Anytime you have a longer period between the signing of an enrollment agreement and a student starting school, that creates pressure on show rates because we know life events happen and the commitment is not as strong as it is when there's a shorter period of time. And I think the other factor is as our military enrollments stabilize in terms of their percentage, when they had been growing in the past what that has caused is they have been the greatest, the highest rate of show rate and as that mix changes a little bit that put some pressure on show rates.

So I think since 60, 90 days ago we've seen two changes that have led to the softening of the guidance. One is some pressure on that show rate specifically within the military channel and two, the enrollments as Kim spoke to, while doing better than last year, have not risen to the level that we wanted in the first quarter of this year. Now there's still opportunity for us to recover some of that but as we look at our crystal ball right now, we haven't seen the building in the pipeline to the extent that we had hoped to 90 days ago.

And then I know I should know this but I've forgotten. In terms of the access to military bases, what's changed there?

Well, what changed, there was some guidance that came out relative to one of our not direct competitors but let's just say the largest for-profit institution in the country. And that caused a tightening through executive order and Department of Defense regulations and interpretations of when and how you can get on military bases.

Now we have worked diligently to overcome some of that and we've had success with some of that but it is still on a year-over-year and even quarter-over-quarter basis a struggle to get our ability to explain the potential careers and the value of those careers to students -- the potential students that are exiting the military. It's a shame but that's the way the regulations are right now.

Right. So you're interpreting it as it's a blanket ban as opposed to something specific to UTI?

It is clearly not something specific to UTI. In fact, as I said I think we are through our good outcomes having some success in getting some access but it just -- it's not as good as it was.

Okay, thank you. And then last thing, in terms of the plans beyond Long Beach, what's the timeframe in terms of your thought process on another new location?

Well, I think the earliest it would be would be the summer -- in terms of an opening would be the summer of 2017. Obviously depending upon what state you're going through and what the regulatory process is for approvals, some states take longer than others. But from a whiteboard planning purposes I'd say summer, late summer of 2017 with some type of an announcement from us given guidance to that in summer of 2016.

Okay. And should we assume that you would need to see some better stabilization in terms of the underlying fundamentals of the existing business before you would go forward with new locations?

Not necessarily. I think if we continue to see what we're seeing with Long Beach which is our most recent one, that would prove out the hypothesis that getting education closer to the students and closer to employer demand continues to work. We continue to believe that that's the case, so while I would certainly like to see stabilization and growth in kind of the legacy campuses, I wouldn't necessarily say that that's an absolute requirement prior to moving forward.

Got it. Thanks, Eugene.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Kim McWaters, Chairman and CEO, for any closing remarks.

Thank you. Thank you, Peter, for your questions.

And to all of those listening we appreciate your time and interest in Universal Technical Institute. And we look forward to our second-quarter earnings call which is currently scheduled for April 28 and we will update you then.

For now have a great day. Thanks.

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