Universal Technical Institute Inc Q1 FY2023 Earnings Call

Good afternoon, and welcome to the Universal Technical Institute First Quarter Fiscal 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Matt Kempton, Vice President, Corporate Finance. 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 first quarter 2023 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're 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, 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 on the adjustments utilizing the effective tax rate. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization, adjusted for items not considered as part of the company's normal recurring operations, along with non-cash stock-based compensation expense. 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 measurements to the most directly comparable GAAP financial measurements in today's press release. 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 begin by thanking our faculty, staff, and students for their continued hard work and commitment during the quarter. Before we get into discussing any results for the quarter, I'd like to take a moment to orient you on our new multi-divisional reporting structure following the acquisition of Concorde Career Colleges in December. Along those lines, please also note that our results for the first quarter include one month of results for Concorde. Post-acquisition, we now report our results in two business segments: UTI, which includes the transportation, skilled trades, and energy offerings, and Concorde, which is the acquired Concorde Healthcare Education business. You will see this reporting structure reflected in our press release and our 10-Q filings. Troy will get into more details around the financial results in a moment, but I'll provide a brief overview of some of the key updates across the two segments. Now let's turn our attention to the business. First, we're pleased with the results of both segments during the quarter, as each division performed in line with our expectations and reflects solid overall operating performance, diligent expense management, and execution against our key priorities. Our consolidated first quarter revenue was $120 million, adjusted EBITDA of $14.4 million, and new student starts were 2,310, all of which were consistent with our expectations for the quarter and our guidance for 2023. While there have not been significant changes to our business since we last spoke just two months ago, our team has been busy as we focus on executing the initiatives currently in place. Within UTI, overall interest in our programs has continued to be strong. However, as we've noted previously, the dramatic change in inflation in the second half of our last fiscal year had a significant impact on our adult population. While the rate of inflation appears to be normalizing, which is encouraging, this continues to impact our prospective adult student population. We are, however, seeing signs of moderation in the levels of decline in this channel relative to what we experienced in the second half of the last fiscal year. We're optimistic that this improving trend will continue due to both stabilizing macro factors and more pointedly, the proactive actions we are taking internally to drive performance improvements across the activities that are within our control. We continue refining our program offerings and identifying further opportunities to mitigate some of this impact. Examples of such actions we are taking include establishing dedicated teams focused on supporting both local and relocating students for the adult channel, assisting prospective students through an enhanced call center team, as well as continuing to refine our financial and overall support for both local and relocating students. Turning to our high school and military channels, as previously mentioned, over the last several quarters, we've been strategically investing in these channels, adding more admissions resources and enhancing our tools and processes to better serve these market segments. We're broadening our reach and more deeply penetrating the better-performing markets with the intent of improving the overall performance of both of these channels. These initiatives and additional resources are now in place and operating well, and we expect that these actions will begin to yield improved performance over the coming quarters. As mentioned last quarter, we are initially targeting to launch 15 new programs, most of which came to us by way of the MIAT acquisition, beginning in 2023 and continuing into 2024. The first launch of wind and energy programs at our Rancho Cucamonga campus is in the coming months. The programs remain on track to launch as planned, subject to regulatory approval, and we are encouraged by the level of interest we're seeing as we begin to more actively market these programs. These new programs will have a modest impact on student starts and revenue in fiscal 2023, and we expect that they will have a greater impact in fiscal 2024 and beyond. We continue to see enrollment growth at our new campuses in Austin, Texas, and Miramar, Florida, which opened in May and August of last year, respectively. The two campuses now have over 650 students combined, and we remain optimistic that both markets will meet the expectations we have set before their openings. Moving to our Healthcare Education division, Concorde’s performance for December was in line with our expectations. The integration of Concorde continues to progress as planned since the acquisition closed on December 1 of last year, and it has been great to meet and work with the Concorde students and staff over the last few months. We continue to see high levels of engagement and talent across the team and great enthusiasm for them with respect to being a key part of the strategic plan of our combined companies. Concorde also has a number of program expansions and new programs in the works, all of which will further broaden its educational offerings to provide promising career paths for students and provide workforce solutions to help meet the job demand needs across the healthcare industry. While we're focused on the integration of Concorde in fiscal 2023, our first priority is ensuring that this process is smooth and seamless from a student perspective, making sure that there are no disruptions to Concorde's operations. Therefore, as we've indicated last quarter, our initial focus will be in critical areas to meet the requirements of being part of a public company, such as financial reporting, interim controls, compliance, and IT security. We intend to be cautious with broader integration activities and ensure that any steps we take will bolster operational efficiency, student experience, and/or our financial performance. As for our 2023 guidance, the positive performance in the first quarter bolsters our confidence in delivering on our expectations for the full year. We are reiterating our full-year guidance with revenue from $595 million to $610 million, adjusted EBITDA from $58 million to $62 million, and total new student starts between 22,000 and 23,500. As a company, we are in a much different place than we were a year ago in terms of how we’re strategically approaching and executing through a fluid macro environment. As I noted earlier, we’ve taken several actions to mitigate the impact that specific economic headwinds like inflation are having on our student population. We expect gradual improvement in performance in the near term with acceleration in the back half of the year as we begin to see the benefits of the initiatives we put into place. We believe the continued growth from our expanded core business, along with the benefits we will see from strategic investments we've made and initiatives we have put into place, will allow us to accomplish the objectives we have set for this year and set us up to drive further growth in 2024 and beyond. As a reminder, by delivering on our plans for fiscal 2023 and with the decisions we’ve made and the pieces we’ve put into place to date, we expect to deliver in excess of $700 million in revenue and adjusted EBITDA approaching $100 million in fiscal 2024. I’d now like to turn the call over to Troy to discuss our results from the quarter in more detail.

Thank you, Jerome. We reported positive financial and operational performance during the quarter, delivering on our expectations for both the top and bottom lines and exceeding analyst expectations. Before I start, I will reiterate that all of our results include Concorde for one month, and unless stated otherwise, the year-over-year comparisons are on an as-reported basis. Thus, the prior period does not include Concorde. As we referenced on our last call when we set our guidance, and as Jerome indicated in his comments, with the Concorde acquisition closed, we now have two reporting segments, UTI and Concorde, along with a corporate unallocated cost reporting unit. Jerome previously described the makeup of the two segments. The corporate unallocated costs reflect certain resources and third-party costs that are generally not directly controllable or in support of the segments. Moving to our performance in the quarter, as far as student metrics, total new student starts were 2,310. UTI starts were consistent with the prior year period, and Concorde delivered 336 starts in December. Overall, UTI starts reflect growth in high school, offsetting a decline in military, with adult enrollment roughly even versus the prior year. Concorde had one core program start in December, which is measurably lower than you’ll see in subsequent quarters. For reference, core starts occurred each month, and most quarters have one large clinical start with some smaller clinical starts in between. Revenue on a consolidated basis increased 14.2% versus the prior year quarter to $120 million, primarily driven by Concorde’s $14.4 million contribution. UTI’s revenue of $105.6 million was slightly above the prior year period with a 2% increase in average revenue per student offsetting a 1.6% decrease in average undergraduate full-time enrollment. Please note that December is one of the lowest revenue months of the year for Concorde due to seasonality and phasing of their clinical programs, and the lower revenue had a negative impact on profitability in the month as well. Consolidated net income during the quarter was $2.6 million, and adjusted net income was $5.3 million, which is down approximately $10 million versus the prior year. The year-over-year decrease in adjusted net income was in line with our expectations as UTI produced exceptionally strong profitability in the prior year period, given timing and mix of revenue and cost. The slower growth in UTI’s adult channel in the back half of fiscal 2022 pressured revenue and thus profitability in the quarter. Other factors impacting profitability included planned increases in expenses for UTI in corporate unallocated costs associated with the new campuses and programs launched last year, investments in the admissions channels, and other areas as part of our growth and diversification strategy, a measurably higher effective tax rate due to the valuation allowance reversal last year, and increased net interest expense. Finally, the lower profitability also reflects the negative contribution from Concorde for December. Diluted earnings per share was $0.02 in the quarter versus $0.25 in the prior year period. Total shares outstanding as of the end of the quarter were 33.925 million. Adjusted EBITDA was $14.4 million, down $6.2 million overall versus the prior year. UTI contributed $23.3 million in the quarter, which was partially offset by $8.8 million of corporate unallocated costs and a slight loss from Concorde. UTI decreased by $5.3 million year-over-year, while corporate unallocated costs are up $0.8 million. The reasons are similar to those I outlined for adjusted net income. Our adjustments are similar to prior quarters with the addition of stock-based compensation as I explained on our last call with our 2023 guidance moving to the balance sheet and cash flow. As of the end of the quarter, the company’s total available liquidity was $162.2 million, with operating cash flow of $2.8 million, which is an increase of $0.3 million over the prior year, and adjusted free cash flow of $2.6 million, improved by $6.1 million versus the prior year, driven primarily by lower capital expenditures. CapEx in the quarter was $6.8 million and mostly for UTI for the final phases of the build-outs of the new Austin, Texas, and Miramar, Florida campuses and the initial stages of this year’s new program rollouts. I also want to briefly recap the balance sheet impacts of the close of the Concorde acquisition. The base purchase price was $50 million. There were $1.3 million of net adjustments, with a total net cash consideration paid at $48.7 million. Additionally, Concorde had $31.8 million in cash on its balance sheet at the closing for a net cash outlay of approximately $17 million. In conjunction with the acquisition, we recorded goodwill of $10.1 million and intangible assets of $4.8 million. Currently, and as of the end of the quarter, we maintained the previously disclosed $90 million draw from the revolving credit facility, which we established in November of 2022. We also used $1.8 million of revolver capacity for a letter of credit, leaving approximately $8 million of additional liquidity available to us. Please be sure to review our press release, financial supplement, and investor presentation, which have all been updated with the most current consolidated and segment details about our actual results, our strategic roadmap, and our guidance. We continue to make significant progress as we execute on our growth and diversification strategy and are building for the future of the company. We believe we have set ourselves up well to drive increased shareholder value in 2023 and beyond. And as Jerome stated, we are reiterating our fiscal 2023 guidance across all key metrics and continue to be confident about our 2024 expectations. I would also add that we don’t see any material change to our pacing expectations for 2023, with growth in new student starts, revenue, and profitability all skewed to the back half of the year. With that, I want to thank our team, our students, and our partners for their efforts and ongoing support, and again, welcome the Concorde team to the company. I’ll now turn the call over to Jerome for closing remarks.

Thank you, Troy. To briefly summarize, we are pleased with the performance this quarter. Interest in our programs across transportation, skilled trades, energy, and healthcare remains high. The macro environment continues to create challenges for our adult job-changing population, but we are taking proactive steps to mitigate these headwinds. Both UTI and Concorde are performing to our expectations, and therefore we’re reaffirming our guidance for the year and continue to see 2024 as a step-change year for the company. And finally, while our primary focus this year will be on execution of our existing initiatives and effectively integrating Concorde, we will remain opportunistic and continue to research and explore new potential growth avenues as they arise. I’d now like to turn the call over to the operator for Q&A.

We will now begin the question-and-answer session. Our first question is from Eric Martinuzzi with Lake Street. Please go ahead.

Congratulations on the – I guess, one partial quarter for Concorde under your belt and one full one for UTI into the new fiscal year. It looks like good results. I’m curious to know just a couple of questions on Concorde. You’re two months in here in the ownership, you had talked about an expectation of 5% to 10% growth at Concorde on a 12-month pro forma basis. Is that still the assumption?

Yes. Hi, Eric, it’s Troy, and thanks for your comments and your question. Yes, I’d say it's in the mid to upper single digits on a like-for-like basis, and everything has been proceeding as expected. Our engagement with them is very high, and we’re happy to have them part of the team. They’re performing well.

Okay. And I noticed you didn’t include the new student starts at Concorde. Obviously, you didn’t own them in the month of December of 2021, but do you have that available? How does the 336 new students compare to the year prior?

I actually do not have that in front of me, Eric, but we can follow up if needed.

Okay. No problem. And then for the investments at UTI, obviously, we’ve got a couple of things we’re focused on the discretionary side. You’ve invested in advertising, you’ve invested in your admissions resources. Can you comment on those two areas? Are we getting the advertising we want at the price we want? Are we getting the admission resources at the campuses?

Well, let me break it into two pieces. Number one, from a marketing standpoint, one of the comments we made was that interest remained quite high. We’re thrilled with the inquiry volume that we’ve seen to date coming in the right timeframe from the right sources. So we think we’re getting the best return from our marketing investments. As far as the admissions investments, much of that ramping up, whether it was adding additional resources to high schools or in the military, all happened towards the end of the summer. And we see from leading indicators in terms of the number of presentations and leads generated that they’re operating quite well. So we’re feeling good about what we’ve done in those spaces.

Okay. And then just on the UTI business, one of the major headwinds you had in 2022 – FY2022 was a double-digit decline in your new student starts for adult learners. I saw that that was – it looked like it was relatively flat. I think that was in Troy’s prepared remarks. What’s the expectation for 2023 for adult student starts?

Well, as we said when we started the year, we still believe that the adult channel will be down this year. As we said, as reported, the last half of last year it was down significant double-digits due to the high inflationary period, etc., and those economic headwinds. We are seeing moderation in that, which is really great to see. It’s not down in that double-digit range anymore. But we’re not projecting that it will come back to a positive sense in 2023. But our expectations for the year, while we budgeted, reflect that we believe that this segment would still be down.

Yes. And just a point of clarification, Eric, the financial supplement indicated that roughly flat adult was all in, so that the double-digit decline was same-store. But when you put in MIAT and the new campuses, it’s roughly flat.

Yes. I’m glad you’ve reminded me of that. And then last question, we saw a pretty strong employment numbers in the most recent jobs reports. Those employment figures have been relatively encouraging. Are you seeing any change in kind of the pipeline just across the board on the adult side, the inflationary pressures, the employment environment, wage inflation? Some color there would be appreciated.

Well, let me break that into three buckets. Number one, we are seeing moderation in the macro environment in terms of inflation, etc. We think that’s contributing to an uptake in the adult population. Secondly, in terms of unemployment, the population we target is 18 to 24 year-old males, and that unemployment number has been on the rise over the last few months. I think it’s around 7.8% right now, which is actually higher than 2019 pre-pandemic levels. We don’t know if that will hold, but we think some individuals in our demographic are looking for more stable, long-term careers, and that’s affecting us as well. As we said in the statement, we’ve taken quite a few steps in terms of mitigation of the issues to address it, whether it’s how we work with adult job changers through the enrollment process, setting up a call center to stay with them through that process, and looking at how we can support those who need to relocate in an enhanced way. The combination of these three factors is why we’re beginning to see that positive movement in the adult sector.

Got it. Thanks for taking my questions and good luck in Q2.

Thanks. Thanks, Eric.

The next question is from Steve Frankel with Rosenblatt. Please go ahead.

Good afternoon, Troy and Jerome. Can we get a little more color on your high school recruiting pipeline and kind of your confidence level in being able to execute on that growth plan for the back half of the year?

It’s a great question. I mean, we watch a lot of leading indicators when it comes to that right now. Most of the students are making their decisions into February, March, and April of what they’re going to do when they graduate in May, June, or May and into late June on the East Coast. With more resources in there, we’re getting to more schools. The indicator around that is the number of presentations we’re seeing. Our reps do presentations which are digital, and we can track their locations and how many of those presentations are happening. It looks great from a presentation standpoint, and the corollary is the number of interested students they have in leads, which are on the rise as we would expect with the resources that we added.

Okay. And then by the time we get to the next conference call, will you have a pretty good handle on what the enrollment looks like?

Yes. Yes, we will. And again, you’re hitting right in the hot period here. There are a lot of presentations occurring as schools help their students consider what they’re going to do when they graduate in May and June. So the setup is looking good. In about three months, we’ll have a pretty clear picture of the high school pipeline.

Okay. And just if you may, a little more clarity on kind of the slope of the decline in the same-store adult pipeline. Where are we now versus three and six months ago in terms of the slope of the decline?

Yes. Steve, this is Troy. We were seeing – it wasn’t consistent quarter-to-quarter, but in the back half of the year, we were about a 20% same-store decline. We saw some pressure in Q2 as well coming out of Omicron last winter, which seems like a long time ago. We were in the teens for starts, but enrollments were also down in that same range, 20-plus percent. The Q1 starts were better; our mitigations, which have been working, will help us moving forward. More importantly, enrollments were more in the single digits of year-over-year decline. This is a measurable improvement, and we’re encouraged by what we’re seeing as we continue to work at it.

Okay. And just to drill down on the first MIAT program and one of your legacy campuses. When do you expect that to begin enrolling students?

Yes. In Jerome’s remarks, he commented that we’re preparing to launch as soon as towards the end of Q2, if not early Q3. We are waiting for regulatory approval for all of them, but we're moving forward as if we'll get the approvals in time and make adjustments as needed. We'll be ready to launch as quickly as we can late in Q2 or early Q3. That’s the first program. The rest are scheduled for Q4 and beyond.

Thank you.

Welcome, thank you.

The next question is from Raj Sharma with B. Riley. Please go ahead.

Hi, thank you for taking my questions. I wanted to kind of go back to the starts projections for the year. And I just wanted to understand, so the guidance that you've given for starts for fiscal 2023, if we kind of – if I take out the core UTI and MIAT of up around 5% plus starts year-on-year, how does – how are you building that? I mean, I know that it's back half – kind of back half loaded.

Okay. Yes, thanks, Raj. This is Troy. We do have a bridge in our investor presentations with the same material that we had last quarter, with starts in revenue and adjusted EBITDA. High school and military will drive the bulk of the growth, which will ramp in the year. We are still ramping the new campuses launched last year. Military, we added reps in the first part really throughout Q1, so the benefit hasn’t materialized yet in the numbers. As you noted, it can be volatile quarter-to-quarter based on the flow of prospective students. But having more reps in that space will certainly help as we get into the back half of the year. The program expansions are pending regulatory approval, but we assume a lift in our guidance based on those launching in the fourth quarter. High school will contribute as well from the number of high school students coming out.

Right. So I see the bridge, Troy, and the bridge doesn't give numbers, but I just kind of wanted – I see that, if the core UTI and MIAT are going to be up 5%, you're saying that despite the unemployment situation staying bad for the adults, you see all these programs helping the declining young adults and the balance of growth in starts is coming from high school and military. What does that represent in terms of Concorde's year-on-year growth?

Yes. I'll work it backwards. Concorde is similar to the revenue question earlier, mid to slightly up or mid-single-digit growth on a like-for-like basis, again, for a partial year. So the 7,500 to 8,000 range that we're referencing there is representative of having just 336 in December. You'll see 2,000 plus in the next two quarters and 3,000 in the fourth quarter. The new campuses are a factor as we didn’t get a full high school benefit of the new campuses in 2022. Miramar's first class was in August, so we missed that high school season. Austin launched in May as well and didn’t build as much enrollment as we would expect normally. There are several factors at play that differentiate 2023 from 2022, and the broader macro environment is at least stabilizing.

Thank you. So on the interest that Jerome was talking about, how does that compare to last year? And is that higher in any particular segment versus the other?

Most of our lead generation for the high school market is driven by presentations done by the high school reps. They aren't media-driven. Media leads in the high school are a very small piece, and they tend to be students who are in class on their phones during the middle of our presentations. One thing I mentioned is that our presentations and therefore the leads associated with them are up nicely. We don’t usually divulge specific lead generation numbers, but we’re seeing positive trends. On the adult side, where leads are primarily media-driven, we're seeing them go according to our models to achieve the outcomes we're looking for. Our improvements in conversion rates and show rates among that demographic are positive signs.

Got it. That's very helpful. Can you talk and give any color on the cadence for the second quarter, the March quarter, the seasonality in terms of expectations of a similar sort of performance on starts?

We expect some building as we get through the year. Again, the back half is where you'll see a notable difference. I’m speaking of the UTI business. Concorde, with one month’s numbers, is not meaningful for comparison quarter-over-quarter. There should be around 2,000 for Concorde and some modest growth versus the flat performance we saw in Q2 for UTI.

Got it. And just lastly on the military, it seemed weak in the first quarter. Any sort of color there?

It's the timing of the investment. That channel is more of a ground game like the high school channel. The difference is that typically, we hire experienced military recruiters who already have base access and know whom to talk to. It’s just a matter of training them on our offerings. The high school ramp process is different as there’s more relationship building that occurs. We should see improvement; the timing of those investments will play a role in the results. It can be a little volatile based on decisions made ahead of transitioning out of the military, and others may be adults leveraging G.I. Bill benefits for education.

Great. Thank you for taking my questions. I'll take this offline.

Thank you, Raj.

Thank you, Raj.

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

Thank you, Operator, and thank you, everyone, for joining us today. We look forward to speaking with you all in about three months and answering any questions you have between now and then. So thanks a lot for joining us, and have a great evening.

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