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EDITED TRANSCRIPT
UTI - Q2 2016 Universal Technical Institute Inc Earnings Call
EVENT DATE/TIME: APRIL 28, 2016 / 8:30PM GMT
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APRIL 28, 2016 / 8:30PM, UTI - Q2 2016 Universal Technical Institute Inc Earnings Call
CORPORATE PARTICIPANTS
John Jenson Universal Technical Institute, Inc. - VP & Corporate Controller
Kim McWaters Universal Technical Institute, Inc. - Chairman & CEO
Eugene Putnam Universal Technical Institute, Inc. - President & CFO
PRESENTATION
Operator
Welcome to Universal Technical Institute's second-quarter 2016 conference call. (Operator Instructions). As a reminder, today's conference call is
being recorded. A replay of the call will be available for 60 days at www.uti.edu, or through May 12, 2016 by dialing 412-317-0088 or 877-344-7529
and entering pass code 10085599.
At this time I would like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute.
Please go ahead.
John Jenson - Universal Technical Institute, Inc. - VP & Corporate Controller

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 second quarter and then open the line for 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 and Exchange Act of 1934 and Section 27A of the amended Securities Act of 1933. I will 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 will 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 loss.
And now I would like to turn the call over to Kim McWaters, our Chairman and Chief Executive.
Kim McWaters - Universal Technical Institute, Inc. - Chairman & CEO

Thank you, John, and hello, everyone. While we continue to feel positive about our long-term outlook for our business, our second-quarter results
were not what we wanted and certainly don't reflect our work to combat the tough realities of the current operating climate.
UTI has been in business for more than 50 years. We have weathered many kinds of economic cycles and we know there is a direct correlation
between unemployment and new student starts.
This quarter we saw a further decline in the unemployment rate for males aged 18 to 24, which means many young men, the demographic we
primarily serve, are still choosing employment over education. The fact is that in today's job market most can currently get some type of job without
going to school.
Add that to the hostile and unprecedented regulatory environment and the constant barrage of negative news about our sector and you have a
set of challenges that are very difficult to overcome. But because we have been through these cycles before we believe that things will turn around.
We firmly believe that at some point people will tire of the low wage, low skill jobs they settled for as we came out of the recession and begin to
look for something more challenging and rewarding. At some point we believe the cycle will turn in our favor.
And at some point employers growing in systems on education that produces work ready graduates, combined with the glimmers of a positive
shift in public perception of technical careers and training, will translate into new student growth.
But we know we cannot simply wait for these things to happen. We must deal with the current reality while we continue to transform our business
for the future. That transformation has actually already begun with our move toward smaller metro model campuses.
In Dallas and Long Beach we have been able to capitalize on the strong and growing demand for our graduates. Students can easily commute to
campus and work while they go to school. Local employers and policymakers are actively supporting us and classes are full despite the economic
cycle.
It is clear to all of us at UTI that this new model is the path to profitable growth and where our resources and investments are best used. But it is
equally as clear that our work to fill our larger destination campuses hasn't produced the results we would like to see.
Over the past few years we tested and tried multiple innovative strategies to overcome market forces and fill our larger campuses. While we have
had some wins along the way, the reality is that in this complicated environment those strategies are not working as well as we would like and we
simply aren't seeing a return on the significant investments we've made to create greater awareness and interest in pursuing a UTI education now.
As a result, we've started to selectively scale back on our spending and marketing in admissions and this work will continue. At the same time we
remain focused on operating our campuses efficiently as possible and making the appropriate adjustments to our cost structure to better align
with student populations.
Our goal is to operate as efficiently as possible, to return to profitability without compromising the quality of our education, the service we provide
or our strong student outcomes. Students can continue to count on us for training that leads to good jobs and the transportation industry can
count on us for skilled professional technicians who are ready to go to work.
Going forward we will continue to evolve our business and support our campus network. As demand for our graduates grows employers continue
to step up to support our students and help them understand how a UTI education can pay off.
We are working to better leverage this exceptional industry support and we continue our efforts to shift perceptions and influence policy, which
are beginning to take hold.
It is taking longer than we would like for our work to translate to new student growth, but as industry and educators begin to sharpen their focus
on student outcomes and workforce development we believe these initiatives can make a difference.
More importantly, we believe in the future of UTI. The fundamental strength of our business is that our graduates are sought after and they get
good jobs, real jobs that pay well. That is not likely to change anytime in the near future as demand in the US auto industry for trained technicians
remains very strong.
The work we are doing today will help us manage through the current realities and get us ready to take advantage of what we expect to be a
coming turn in the market. Above all it will strengthen and transform our business model so we are better able to perform in all kinds of economic
cycles.
With that I will turn it over to Eugene for a closer look at our quarter results and our outlook for the remainder of the year.
Eugene Putnam - Universal Technical Institute, Inc. - President & CFO

Thanks, Kim. We ended the quarter with an operating loss of $5.8 million as compared to operating income of $2.4 million in the same quarter last
year. During the first half of 2016 our operating loss was $8 million as compared to operating income of $8 million in the first half of 2015.
Second-quarter and year to date operating income was negatively impacted by initial operating losses for our Long Beach campus of $800,000
and $2.2 million respectively. We began this quarter with approximately 1,100 fewer students than we had at the same time last year.
And with the decline in our show rate of 280 basis points, starts decreased by 400 students this quarter as compared to last year. The combination
of the lower beginning student population and lower new student starts led to an overall decline in average student population of approximately
versus last year.
The lower student populations were partially offset by higher average revenue per student, but still led to a revenue decline -- to revenues of $88.2
million in the quarter representing a decline of 3.3%.
Average tuition per student was up from $6,800 to $7,200. And tuition excluded $4.6 million related to our loan program compared to $5.7 million
in the second quarter of 2015. Just as a reminder, we recognize revenue from that program only when we receive payment.
For the first half of 2016 revenues were approximately $178 million which was down 4.8% compared to $187 million for the same period last year.
Tuition excluded $10.3 million related to our loan program compared to $11.4 million in last year's first half.
Advertising expense was $11.7 million this quarter which is consistent with the same quarter in the prior year. As a percentage of revenue, advertising
expense was 13.3% for the quarter compared to 12.8% for the same period last year.
In Q2 EBITDA was negative $600,000 compared to positive $7.8 million last year. And for the first half of 2016 our EBITDA was $2.3 million compared
to just under $19 million in the first half of 2015.
During the quarter we determined that it was appropriate to record a full valuation allowance on our deferred tax asset. This resulted in an additional
non-cash tax expense of nearly $28 million which had a significant negative impact on both our net loss and our loss per share. We intend to
maintain the valuation allowance against that deferred tax asset until sufficient positive evidence exists to support its reversal.
Our second-quarter net loss, including significant tax expense resulting from that valuation, was $32 million or $1.32 per share compared to net
income of $600,000 or $0.02 per share last year. For the first six months of the year our loss was $33.7 million or $1.39 per share compared to $3.6
million profit and $0.15 per share in the same period last year. As mentioned, income tax expense for the second quarter was $25.7 million compared
to $1.6 million last year.
Looking at our balance sheet we had cash, cash equivalents and investments of roughly $50.6 million at the end of the second quarter which
compared to $59.2 million at year end.
During the quarter we invested $2.3 million in fixed assets compared to $12.5 million last year. The decrease was primarily due to significantly
higher capital expenditures last year related to the purchase of our Houston campus and construction of our new Long Beach campus.
Finally, we paid cash dividends of $0.02 per share on March 31 which totaled approximately $500,000. While we are continuing our efforts to
manage the business of efficiently and to reduce costs where appropriate, we believe our path to growth includes bringing our education to reach
more students and markets.
Our new campus in Long Beach, which opened in August is performing well with student enrollment ahead of pace to our original plan. We are
very pleased with the initial performance at Long Beach and expect it to be accretive to earnings within it 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 are also pleased to announce that in February we acquired BrokenMyth Studios
which is a full production studio that offers a variety of design, application and website development and digital technical training for diesel,
medical and industrial equipment companies.
Also in February we invested in [ProMech], a Company that provides comprehensive technician development programs and shop operation
services. And we also continue to offer scholarships, our loan program and are successfully approaching more employees and OEM partners to
assist in sharing the UTI opportunity with potential students.
This quarter we extended approximately $10 million in loans under our loan program compared to approximately $11.2 million in the same period
last year. The average individual loan under this program during the year was about $4,600. And we recorded approximately $1.8 million in revenue
and interest from cash payments received, which was up from $1.5 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. At the end of the quarter approximately 35% of students in school were benefiting from a UTI scholarship or discount and that represented
a reduction in revenue of about 3.3%.
Our consolidated employment rate is tracking slightly behind last year. And while the demand for our graduates remains strong, the rate declined
due to internal operational challenges that resulted in an employment verification backlog which we are currently working to address.
We have been addressing it through the first half of the year and as a result we have begun to see some improvement in the amount of the decline
from last year. We continue also to see growth in overall starting wages for our graduates reflecting the increased demand for our students.
Now let me finally take a minute to talk about our outlook for the remainder of the year.
For the year ending September 30, we expect new student starts and our average student population to be down in the mid- to high-single-digits
as a percentage compared with prior year. While annual tuition increases will slightly offset the decline in average students, we expect revenue to
decline approximately 5% to 6% leading to minimal levels of EBITDA.
Accordingly, we have modified certain project timelines resulting in lower anticipated capital expenditures which are now expected to be in the
range of $9 million to $10 million for the full year.
And as always, due to the seasonality of our business and normal fluctuations in student populations, we would expect volatility in our quarterly
results. And with that, operator, I think we are ready to open the line for questions.
QUESTIONS AND ANSWERS

Operator
(Operator Instructions). Peter Appert, Piper Jaffray.
Unidentified Participant
Hi, this is actually Stephen in for Peter. I just have a quick question about enrollment and pricing. It seems that the labor market in general has been
getting better, can you give us any color on why the weakness for UTI? And secondly, what is the Company doing in terms of pricing? And what is
the outlook for revenue per student in the future?

I will take the first part of the question, Stephen. The reality is this business is countercyclical. So as the labor market improves that creates a
headwind and makes it more challenging for students to consider training and its career path at this time. And it has been a trend that we have
been experiencing for the last five years I would say coming out of the recession.
So, a way that we are trying to counter that is by engaging employers out in the field in and around our campuses to bring the opportunities that
this career path offers students and help them understand what this type of training will yield for them as a technician in the short- and the
long-term.
What is better is that the need for technicians is so strong that employers are willing to participate and help cover the cost of education for our
students, which is a good transition into the second part of your question around pricing.
We have continued to look at our programs and the pricing relative to others in the environment and we have also looked at our students' preference
for programs. We do have quite a wide range of programs offered at various price points and yet our students still choose to take the more
comprehensive programs at a higher cost.
To help students counter the challenges and obstacles that they have to overcome in the -- just in the transition -- [light] transition to get an
education, we have targeted scholarships that are based on need and merit to help those students who need it most.
So I'd say the combination of offering a wide variety of programs at different price points, targeted scholarships to help students most in need,
and certainly the engagement of employers and industry in supporting the cost of education through tuition reimbursement is something that
we believe is addressing the cost and affordability issues that continue to be top of mind for students.
Great. And I just have another question. In the past UTI has been expanding by opening new campuses. I assume is that currently on hold right
now?
Eugene Putnam - Universal Technical Institute, Inc. - President & CFO

I wouldn't say it is on hold, Stephen. We have not -- as we have talked about in the past, we expect to announce a new campus sometime in calendar
year 2016. Obviously we have not done that yet, but we are continuing site selection and evaluation of some sites, it is just a tad premature. But I
would hope within the next six to nine months that we do announce where our next location will be that would hopefully open sometime late
2017.
Great, thank you.
Operator
(Operator Instructions). At this time we are not showing any additional questions. So I would like to turn the conference back over to Kim McWaters
for any closing remarks.

Thank you. 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 August 4, 2016. Have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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THOMSON REUTERS STREETEVENTS

EVENT DATE/TIME: APRIL 28, 2016 / 8:30PM GMT

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

John Jenson - Universal Technical Institute, Inc. - VP & Corporate Controller

Kim McWaters - Universal Technical Institute, Inc. - Chairman & CEO

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

Eugene Putnam - Universal Technical Institute, Inc. - President & CFO

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

QUESTIONS AND ANSWERS

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

Kim McWaters - Universal Technical Institute, Inc. - Chairman & CEO

Eugene Putnam - Universal Technical Institute, Inc. - President & CFO

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

Kim McWaters - Universal Technical Institute, Inc. - Chairman & CEO

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

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