Earnings Call Transcript - UTI Q3 2021

Operator, Operator

Hello, and welcome to the Universal Technical Institute Fiscal Third Quarter 2021 Earnings Conference Call. With us today are Jerome Grant, Chief Executive Officer; and Troy Anderson, Chief Financial Officer. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Matt Kempton, Vice President of Corporate Finance. Mr. Kempton, please go ahead.

Matt Kempton, Vice President of Corporate Finance

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.

Jerome Grant, CEO

Thank you, Matt. Good afternoon, everyone, and thank you all for joining us today. First, I'd like to express my gratitude to our students and staff for their ongoing efforts and diligence during this quarter. All of our campuses were fully operational this quarter and have returned to normal class densities. It's my sincere hope that I'll be able to retire this particular reminder shortly as we emerge from the pandemic. You see, being fully open and operational is our natural state and not something I'd like to regularly update our stakeholders on going forward. Though it feels like a long time ago, it was just a little over a year ago that the COVID-19 pandemic basically shut down much of our economy and that of the world as well. As a reminder, a quick review, for most of this quarter, last year, all of our campuses were closed for hands-on instruction. Metrics such as student withdrawal rates, leaves of absence, CARES Act funds, and student progression rates were either introduced into our reporting or increased substantially, temporarily becoming the focus of our business health for some. For UTI and our management team, however, these were just short-term, though critical challenges to address. Our financial strength, track record for success, and industry-leading outcomes continue to be the foundational pillars we are building upon even through COVID-19. Our focus is and always will be on raising the bar for ourselves and our students.

Troy Anderson, CFO

Thank you, Jerome. As Jerome mentioned, we performed well this quarter and delivered solid growth across our key operating and financial metrics. While the year-over-year metrics benefit measurably from the prior year pandemic impacts, we continue to be very pleased with the underlying performance and trajectory of our business. I'll start with a discussion of this quarter's results and then move to our fiscal 2021 outlook and longer-term strategic roadmap before handing the call back to Jerome for closing remarks.

Jerome Grant, CEO

Thank you, Troy. Before opening the call up for Q&A, I'd like to again express my gratitude for the progress we've made as an organization and for what our students have been able to accomplish throughout the past year. Like all great organizations, our response to the unprecedented challenges of the past year was to view this as an opportunity, an opportunity to come out the other side stronger, raising the bar on our already industry-leading outcomes; an opportunity to accelerate innovation through our business, creating additional capacity and flexibility at a time when the demand for our services is growing in both importance and need. And finally, an opportunity to begin to execute on our growth and diversification strategy as we position UTI for the future; as I said, we feel the outlook for our business is bright and are very excited for what the future holds. We look forward to keeping the investment community updated on our strategy and initiatives and closing out the year with considerable momentum as we head into fiscal 2022. I'd now like to turn the call over to the operator for Q&A. Operator?

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question will come from Austin Moldow with Canaccord. Please go ahead.

Austin Moldow, Analyst

Can you walk through the puts and takes on average revenue per student and what that should look like through fiscal 2022 with MIAT baked in?

Troy Anderson, CFO

Thanks for the question, Austin. We indicated this quarter that we expected steady progress from earlier in the year towards pre-COVID levels, which was around $8,000 to $8,100 per quarter per student. We're on that path, and we anticipate reaching those pre-COVID levels as we close out the year. I expect that for fiscal year 2022 and in the longer-term outlook we provided, we will operate at those levels. We usually plan for a small annual price increase, so you might see a slight change there. We haven't included any potential variability from the different mix of programs from MIAT yet. However, as we approach the closing of that transaction, we will share combined metrics on what those might look like.

Austin Moldow, Analyst

Okay. And a two-part advertising question. Firstly, can you talk about how your localization efforts are going? And secondly, when do you typically begin to spend ahead of new campus openings like you'll have in Austin and Miami?

Troy Anderson, CFO

I'll hit the second part first. We can't market the campuses until we have all the appropriate approvals. We have begun marketing Austin, at least enrollment and some light marketing, I would say. We're still a good bit of the way, obviously, with Q2 fiscal '22 launch. But we are starting the efforts there and will be more aggressive in market as we get closer to that, but typically a few months out and after we get the approvals. Jerome, do you want to handle the localization?

Jerome Grant, CEO

Yes. Austin, Jerome here. The marketing efforts are actually going quite well. And we see the signs of that in the movement of our local adult population and show rates. Our show rates are favorable this year to our expectations, and a lot of that is attributed to less commuting, which is the aim of what we are looking at in this campaign.

Operator, Operator

The next question will come from Eric Martinuzzi with Lake Street. Please go ahead.

Eric Martinuzzi, Analyst

Just a clarification before my question. Jerome, in your prepared remarks, you talked about the MIAT acquisition closing by the end of calendar 2021. And then Troy, you talked about at the end of fiscal 2021. We're still talking about October 1 close. Is that correct?

Troy Anderson, CFO

So we don't have a specific date yet. I wish we did. We are working on it and have no indication that we are off track. We communicated this previously in a slightly different way and debated whether we should approach it that way. I mentioned that it would be by the end of the fiscal year or early in fiscal '22, which means before the end of the calendar year. As of now, we have no signs that it should take longer than that, but we still don't have a specific date.

Eric Martinuzzi, Analyst

Okay. I want to dive deeper into the new student starts, which is a fantastic figure for all channels, showing a 39% increase in new student starts. You mentioned 62%, and I would like to get more clarity on that. I assume it relates to the comparison between high school starts and adult starts from a year ago versus 2021. Can you clarify the 62% figure for adult starts?

Troy Anderson, CFO

Yes. We've seen strong performance in the adult channel throughout the year, and high school has also performed well. In this quarter, the adult sector experienced a larger increase, likely because Q3 is generally not a peak period for high school. Last year, the decline related to COVID was primarily seen in the adult segment. Overall, we continue to see robust strength in the adult channel and expect it to remain strong.

Eric Martinuzzi, Analyst

Okay. And lastly, regarding the MIAT, I understand the transaction has not yet closed, but has there been any discussion about your high school outreach? Are there individuals on high school campuses already expressing interest in programs beyond auto and diesel mechanics that could lead to increased engagement with UTI?

Troy Anderson, CFO

We're doing all the planning that we can. I mean we are separate companies. And until we close, we're technically competitors. We're in the same market in Houston. So at this point in time, all we're doing is planning work. There's no cross-pollinization of any of our activities.

Jerome Grant, CEO

And to get to your question about high school interest, one of the reasons that a first priority of our growth and diversification plan was to look for a school like MIAT that brought nine new programs into our family that we can then spread across our campuses as quickly as possible. One of the main reasons is just what you brought up there, which is our high school reps talk to somewhere near 250,000 kids a year. And the interest isn't always exclusively in the transportation and welding area, which is where we play right now. And so we think we have a great opportunity to take advantage of the interest that varies beyond transportation from high school kids. MIAT does not have a large high school presence in either Michigan. They have high school reps who are really quite good but not a large high school presence in Michigan and Houston, nor do they have a relocation program in place the way we do. We see the ability to leverage the relationships we already have in high schools with a broader product set.

Operator, Operator

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

Raj Sharma, Analyst

Stellar numbers. I had a couple of just questions on the 3Q starts, the apples-to-apples sort of comparison, any different number of start dates last year to this year, and does that impact 4Q? Because you are still sticking to the 10% to 15% student start growth; I just wanted to understand that a little better.

Troy Anderson, CFO

Yes. Raj, by the way...

Jerome Grant, CEO

This is much higher...

Troy Anderson, CFO

That's a great question. I addressed that briefly in my opening remarks. The start dates are consistent, with no differences from last year to this year. We're currently following the same start cycle this quarter. Since the beginning of the year, we've anticipated stronger starts in the first half, especially in Q3, followed by a more typical pattern in Q4. We are still considering that. We've noticed some shifts; for instance, high school starts were very strong at the beginning of the year compared to previous years, even pre-COVID, but they've been a bit less in the fourth quarter. Adult education has been strong and is continuing to grow, while military enrollments have remained steady. Overall, although we expect a more normalized growth rate in the fourth quarter, it has still been a very robust year.

Raj Sharma, Analyst

Great. I understand. You recently announced the Rancho Cucamonga Toyota-Lexus program, which is a valuable approach to addressing the labor shortage. I'm curious if you anticipate any changes in how tuition will be managed. Will there be any alterations in the mix of Title IV or corporate funding, or is it business as usual? Additionally, what is the size of these programs, and how many students are involved? Could you provide some details about that?

Troy Anderson, CFO

Yes, this is Troy. I'll begin, and then Jerome can provide additional insights. We have a long-standing relationship with Toyota, and we recently launched the program at our Rancho Cucamonga campus. It's a student-paid elective, and it has been well received with significant employer and industry engagement. We also have similar student-paid elective programs with Ford and other manufacturers, as well as manufacturer-paid advanced programs such as those with Mercedes, Porsche, and BMW. Currently, we do not anticipate any changes to the student model. We are always reviewing our partnerships and considering adjustments, whether it's transitioning between student-paid and manufacturer-paid programs or deciding to maintain or introduce new programs. Overall, there are no immediate changes in mind, but we continuously explore opportunities to enhance our B2B relationships with manufacturers as part of our growth and diversification strategy.

Raj Sharma, Analyst

It's clear that there is significant demand from employers, and the approach you're taking to involve both sides is commendable. Do you believe it's beneficial for employers to actively contribute and pay for tuition, or is their financial involvement not crucial?

Jerome Grant, CEO

We clearly see that most employer-paid programs involve a loyalty agreement for graduates to work with that brand for a specific period. There is a lot of variability across the more than 30 OEM relationships we have regarding the support provided. We notice higher employment rates for graduates when the employer funds the program. The launch of this initiative was driven by a strong dealer community that wanted us to be more strongly endorsed. Moreover, the difference between graduating with a core certification and adding a dealer program speeds up the graduate's ability to do warranty work, which is where dealers generate significant revenue. We are evaluating opportunities to implement major programs in various locations around our campus. As mentioned, we are consistently engaging with dealer networks and manufacturers about sponsorship and funding for the programs. Currently, most are still operating with tuition reimbursement models. We have over 4,000 incentive and tuition reimbursement programs in place, with most Toyota dealers offering some arrangement where if you complete the program and work for us, a substantial portion of your student debt will be covered. However, not all have transitioned to scholarships or sponsorships yet.

Raj Sharma, Analyst

Right. Well, you might not need to because there is enough demand, so employers are actively reaching out to say that they have job opportunities available for you or that there is a strong possibility of that happening.

Jerome Grant, CEO

And we've worked really, really hard at illuminating what these incentive packages are to go to work for each of the employers. And then also, through our Early Employment Program, one of the things we're doing basically is those who are participating actively by giving jobs and internships are getting earlier access to our students to bring them on in either part or full-time capacity. And that's actually starting to get people to compete with each other for our kids, which is really what we want because what we're interested in them getting good, solid, high-paying jobs. And the more the employment community competes for them, the better off they'll be.

Operator, Operator

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

Jerome Grant, CEO

Thank you very much for joining us today. In closing, I want to emphasize that we are committed to being accessible to the investment community as much as possible. We would be glad to discuss our insights on the results from the recent quarters and next year if we have the opportunity to speak further. Thank you again, and have a great rest of the afternoon. Goodbye.

Operator, Operator

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