Universal Technical Institute, Inc. (UTI) Earnings Call Transcript

Okay. Good afternoon. Today, we have -- we're proud to present at the Sidoti conference, Universal Technical Institute. And with that, I'm going to hand it over to Troy Anderson to learn more about his company.

Thanks, Greg. Thanks to you all for participating here today. It's a pleasure being here. Our company -- the last conference we participated in was in 2017 at Sidoti conference. So we're happy to be back on the conference circuit. We were added to the Russell 3000 yesterday based on market cap change and broadening our investment. Community engagement has been a key element of our near-term activity. And so we're happy to be here and happy to be talking to all of you. Before I start, I'll just do a quick safe harbor. I'm going to do a slide flip for maybe 10 minutes or so, hit some of our background and some of the things that have been going on here and then try to leave as much time as possible for Q&A. Here's the safe harbor forward-looking statements, but just briefly, all statements made during this presentation, other than statements of historical fact are forward-looking statements under federal securities laws. Because historical -- forward-looking statements relate to the future, subject to inherent uncertainties, risks, et cetera, you should not rely on any of these forward-looking statements. You should review our SEC filings for more information on these and other factors that can affect our business. And these forward-looking statements are based only on information currently available and as we speak today. We will not update any forward-looking statements, whether written or unless required by law. Thank you for entertaining that. And now to the company. Before I jump into specific facts here that are on the page, the company, again, I'm Troy Anderson, CFO. I joined the company in September of 2019. I came from a global business process outsourcing company, publicly traded and been spun out from Xerox back in 2017, as a stand-alone public company, and have the breadth of experience across public accounting and various progressive financial roles, largely in a public company environment. The company is led by Jerome Grant, who joined the company back in 2017, as part of its transformation efforts and after strategic investment by Coliseum Capital. I'll talk a little bit about that in a bit. He succeeded -- he became the CEO in November of 2019, succeeded Kim McWaters. Kim had been CEO since early 2000s, and has been with the company -- had been with the company her whole career. She's still on the Board. In fact, was elected to the 3-year term here in February. We are a leading provider of skilled transportation technicians in the transportation industry. You can see we've been around a very long time. We're entering year 55 here. We tend to average around 11,000 students at our current levels. And again, there's various elements of everything we'll talk about here that are affected in varying ways by COVID, and I'll touch on that towards the tail end of my comments. One of the key differentiators for us is the breadth of our industry relationships. You can see the data point here about maybe 35-plus brand partners. That's really critical from that advanced training program perspective, as well as from a job placement perspective. We also have employer partner relationships. We have a significant number of relationships there that afford our students excellent opportunity center in the marketplace with incentives and just jobs overall, which leads to our 86% job placement rate, which is a very high outcome and is something that we've consistently been in the mid-80s and really, frankly, probably higher than that when you factor in that there's a number of students who get jobs in other industries because of the training they got here, but we aren't able to count them in the employment rate based upon the Department of Education guidelines. Our trailing 12-month revenue of $336 million. Again, that's through March 31, and we had $118 million in liquidity as of March 31. And we have no debt. We're traded on NYSE. Just 2 quick pictures for those of you that aren't familiar with the story or haven't had a chance to look at the website. But this is one -- inside of one of our lab facilities, and again, with COVID, we've now introduced social distancing and smaller group, individual workstations, things like that. But you get a sense for the breadth of what one of our labs looks like. We have auto diesel. We have motorcycle. We have Welding. We have collision programs, marine programs. So all of those labs geared toward -- that's for a specific curriculum, but it gives you a sense for the breadth of what it looks like. Our buildings range from 100,000 square feet all the way up to 280,000 square feet. And we've been going through a real estate rationalization -- footprint rationalization over the last number of years and have some opportunities ahead. And again, I'll touch on those in a bit. And these are the facilities. We have 13 campuses nationwide. You can see that there's actually 16 pictures on this page. Two of our campuses, we have both motorcycle as stand-alone building. So we -- those are the 2 other MMI buildings, Motorcycle Marine Institute and then also our home office location, which actually we have a new picture that we need to add here. Because we just moved in the last month. We're no longer based in Scottsdale, we're in a nearby location in Phoenix. Pivoting to our -- the investment thesis. As I mentioned, we've had some -- obviously, some leadership change. We've done some other management team strengthening. And the company had been through a number of years of transformation. And we've carried a lot of momentum coming out of our fiscal '19, where 9/30 year-end into the first half of fiscal '20 pre COVID. And again, we'll talk about that in a little bit. But overall, the student value proposition, what I talked about with graduation rates with employment rates with our industry and brand partnerships, the strategy that we've been deploying, we've been growing -- we grew revenue for the first time. And since 2011 in our fiscal '19, we grew average enrollment. We've had 6 straight quarters of student start growth, significant profitability cash flow growth. So we have had a model in place coming into COVID that was really optimized for any macroeconomic cycle, significant improvements in operations and we have investment opportunities ahead. We were in the market right before COVID hit in mid-February. We raised $49.5 million. That's included in that $118 million I mentioned before. That was really raised with the idea of moving more on a pivot to growth with some investment opportunities that I'll talk about in a bit. When you think about us, it's important to understand our student life cycle. It starts with our marketing efforts, our sales and marketing efforts, a lot of that comes through digital media, TV brand advertising, our website. We also have reps that are out in the field primarily geared toward the high school segment of our population, which is a little bit over half our student body. But it starts with leads that come through various channels, roughly 240,000 of those, that's on a trailing 12-month basis. That turns into 24,000 enrollments. So those are students that actually sign an agreement to attend our school at a targeted start date and then turns into about 12,000 starts. And those are students that, again, now actually start in engaging the program, then about 8,000 graduates and then 7,000 employed in the field. So you can see we have some breakage in each of those steps. So every opportunity we get to optimize those steps gives us incremental leverage out of our existing operations to advance those. But those are the -- almost 70% graduation rate in the mid-80s job placement rate are both very strong outcomes in the education industry overall and in the for-profit education industry as well. Student value proposition starts with where are the jobs? Well, the industry supply and demand is -- has been out of balance and continues to be out of balance. There's Bureau of Labor Statistics data that says there'll be 1.1 million job openings over the course of the next 8 to 10 years. There's hundreds of millions of vehicles on the road in the U.S. alone. The industry prints 50,000 graduates a year on average, and there's more than 2x the demand for jobs. So the supply/demand imbalance is very strong. And even in an environment like now, if there was some kind of pullback from a job perspective that there's still quite a bit of room to work with there. But again, there's hundreds of millions of vehicles on the road that need to be serviced. The industry partnerships, again, you can see some of the brand names here. We have student elective programs, Ford, GM, Chrysler, Toyota, Nissan on the auto side. We have Daimler Trucks, on the diesel side we have Mercury and Harley-Davidson and all the foreign motorcycle brands on the motorcycle side. And then we have advanced programs, where the manufacturers actually pay for the students to attend. It's an interview process. They have to be selected. These are the top students, Peterbilt, BMW, Mercedes, Porsche, and so those are programs where we actually get paid by the manufacturer to train the students. And then those students are essentially guaranteed a job at a dealership of one of those brand manufacturers. So it's a full breadth of relationships and is very valuable in terms of the breadth and depth and, again, a key differentiator.

Troy, just on what causes about half the enrollees not to start the actual program?

Yes, that's a great question. I mean, again, if you think about -- and maybe I could have worded the slides a little bit differently here, but quickly, our student mix is, again, roughly half high school, about 10% military veterans and about 39% adult learners. Also within that, you have -- we have the 13 campus footprint around the country. But -- so about half our students -- a little bit more than half students relocate to our campuses. So you take into the account we're dealing with students who are just -- many of whom are signing up for the program in the fall or winter before they graduate. So there's a lag, a 6 to 9-month lag on those students in particular, and then you throw in the relocation element, there's just a number of students who decide there's something else that they want to do. No different than a student who's applying to a 4-year program is going to apply to multiple schools and then only, obviously, attend 1. So we get a little bit of that same effect. These students tend to work or community college is probably more of an alternative than a 4-year program. They may just decide that the need to work is more important at that time. Could come back later as an adult learner or they just -- their financial need, maybe they can't just meet the financial requirements in the program. So it could be any number of reasons. But that's an area we've driven significant improvements. We had 160 basis points, what we call our show rates. So this number of students that start versus those that enrolled is the show rate. And we drove 160 basis points improvement in that in fiscal '19. We were 100 basis points improvement year-to-date through '20 on a year-over-year basis. So it's an area, again, where we continue to focus and optimize, and as you think about the economy and where it is today and where likely it is going to be in the near term, many of these students probably don't have as many job alternatives to distract them from pursuing their career here. So we would expect that we could get some benefit from that.

Got it.

Sure. Quickly, market share. Again, we're the largest provider in this space, more than double our next largest competitor, Lincoln Tech. You can see the big pie there, which is community college, but those are -- that is hundreds of individual programs spread around throughout the country tend to be more of a basic -- just kind of a base certification type program, not really an opportunity for an advanced training type certification. And then there's some other smaller players, Wyo Tech and others that are out there. But you can see we have the largest share in this space. I talked about our transformation efforts. It's started really around 2016. As I mentioned, the company peaked back in 2011, coming out of the last recession. At over 20,000 students, we're at around 10,500 to 11,000 now. And so it's really just a steady decline from that 2011, early 2012 peak down into 2016, the strategic investment by Coliseum Capital, $70 million preferred investment. And then significant effort around rightsizing the footprint, improving our go-to-market strategies, adding new programs. We launched Welding. We have 4 up and running now. We just launched Houston last month. We have 2 more coming online before the end of the year. We added CNC Machining, for example, another program adjacent to our NASCAR Tech program in North Carolina. So a significant amount of effort to shift toward more of a high school mix versus an adult mix. So focus on the students before they get into the workforce, when they have now more commitments, financial commitments and other commitments so that they can get started on their career path right out of high school versus trying to make a change a few years down the road, where it becomes more difficult. We added a new campus in Bloomfield, New Jersey, that opened in August 2018 and is our -- actually reopens tomorrow for in-person labs as the last of our campuses to reopen after having to pause in-person instruction during COVID here. And again, you can see the results. I mentioned, first year of growth, both in average students and revenue since 2011, we had double-digit start growth in fiscal '19. We've now had 7 straight quarters of growth through Q2 of this past -- this current fiscal year start growth. And it's not just the new campus. It's the show rate improvement I talked about earlier. It's the new program launches. It's the new campus so same-store growth as well as new campus growth. The significant reduction, over 500,000 square feet out of our real estate footprint, including our home office move that we just did, and we still have opportunity ahead with over half our footprint coming up for renewal over the next few years. And reduction, better leverage out of our workforce from an efficiency and optimization perspective. Significant year-over-year profitability improvement, cash flow improvement. And we carried that momentum into the first half. This year, revenue growth at 3%, which was impacted by 1 point to 1.5 points on COVID in the last few weeks of March there. Start growth at 7% and operating income up $60 million year-over-year through the first half of the year.

Can you just remind us how long the programs go? And then what are certificates or degrees? Or the end programs?

Sure. We have associates degrees in a number of our campuses. So you can actually graduate with a -- an Associate's degree as well as the core ASE certification. So we are accredited by the ACCSC as an accrediting agency. We offer the auto diesel ASE certification, and then you can get advanced certificates by the manufacturer programs. Again, you can do a Ford, a GM, a Chrysler, and you get certified in their warranty programs. So you can graduate out of our program and go right into warranty work at a dealership, which is a higher value work and allows it to start you at a higher salary. The diesel programs have different certifications as well, as do motorcycle and Marine. But in addition to just our technician certifications you can graduate from a number of our campuses with an actual Associate's degree. And lengths are -- can range from Welding program is 36 weeks. It's our lower cost program. It costs you something in the low 20s. And then our core auto diesel program is 51 weeks. It's going to cost you somewhere in the mid- to upper 30s. And then if you do an auto diesel, maybe an elective, a manufacturer elective, that's going to get you up into the 40s and maybe up to 75 weeks. Anywhere from 60 to 75 weeks. And then if you -- you could do an auto, diesel and an elective, and that's probably going to cost you in the 50, low-50 range and be 90 weeks. But, obviously, be a very highly skilled technician coming out of that program. I mentioned this slide already. So this just gives you the student mix. And again, just to demonstrate, we had growth across all 3 channels and starts in fiscal '19, and we continue to see strength across all 3 channels, and each of those have targeted go-to-market strategies, we can get an overarching brand strategy and then reps that are either ground-based or more centralized inbound targeted at the 3 segments. In the military, I'll just highlight, too, we have partnership programs with them focused on Camp Pendleton, we have a transition program, where they can come out with BMW training and Fort Bliss, we have a program, Penske trucking on a diesel program. So it allows transitioning military vets to come out with a certification. Quickly just highlights what we call our metro campus strategy. I mentioned Bloomfield, New Jersey. We started with Dallas in 2010, Long Beach in 2015, and Bloomfield. This is now a smaller footprint, roughly 100,000 square foot footprint, targeted at around 750 students $10 million to $15 million capital investment, maybe a 14 to 18-month implementation time line, but immediately accretive to revenue and cash flow and EBITDA in the first year of operation and about 4-year payback, a 35% IRR. So a good investment opportunity, and it's something that we're considering as we think about growth strategies going forward. All 3 of them are performing at or better than the original pro formas. And then this just gives you the pictorial on the 3-year results from the transformation, again, coming out of '18 into '19, our trailing 12 months across our key metrics, revenue, profitability, EBITDA, cash flow and starts in student population. And the average year took a debt at the end of Q3 because of COVID with some of the student participation going on in LOAs, leaves of absence. So I'll talk about that in a minute. This just shows the continued momentum, again, going through the first half of the year, 7% student start growth. The revenue growth of 3%, we have with an impact from 1 on 1 and impact from COVID. And you can see the profitability improvement on a year-over-year basis and cash flow improvement on a year-over-year basis. And then the growth opportunities. So we've raised capital, as I mentioned in February, we have -- we've created a sustainable platform with ongoing enhancements from a cost efficiency perspective. And sort of core growth perspective. Now it's the pivot to growth. We're well capitalized. And as we think about new campuses, so geographic expansion, we think about program expansion. So the Welding expansions. We have 2 more programs coming online. Another one, I mentioned the one we launched in May. We have another one coming on in August and another one at the end of the year. That are on track to deliver, despite the COVID disruptions. Business model extension. So I mentioned that manufacturers pay us to train technicians. They also pay us to do dealer training where they -- it's in our site and also where we go to their sites. And so we have B2B revenue that's about 5% of our total revenue. Our Title IV revenue, the Department of Education, Title IV revenue, it's about 70% of our revenue stream. And there's a metric there that they measure in for-profit ed which is a 90:10 ratio. So it says you can't have more than 90% of revenue from Title IV. We're at 70%. So we're well under that threshold, but we'd like to see some diversification away from that as well. And we can accomplish any and all of that through inorganic opportunities and via geographic or program expense, et cetera. So we have a platform that we would think of as an ability to then plug-in additional, whether it's industry training or other educational type offerings. That we can plug into the platform and also think more about different delivery models online and other delivery models.

And just, I guess, one question, having gone through some of the financials, do you think with some of the low-hanging fruit on the cost side cut, is there room for margin improvement on a single-digit revenue growth?

Absolutely. I mean we've kind of flatlined our SG&A. We continue to get better leverage out of that. We have continued efficiencies on the campus side. We still have opportunities for centralization. I mentioned our real estate footprint, roughly half of which is coming up. We can see substantial reductions in costs there. For example, I mentioned the MMI buildings, which are adjacent to what we call our UTI, our core auto diesel. We have opportunities to consolidate there, take out measurable amount of footprint. So there's a whole number of things that we're looking at, continue to automation and efficiencies that we believe will continue to get margin expansion out of. And then just growth in general, I mean, adding another student into our existing footprint, can bring 65% to 70% incremental margin, it could even be higher than that, right? If I have a classroom capacity of, 25, and I only have 22 students there, I drop 3 more students in there. They're almost 100% margin, right? Obviously, if we have more substantial growth then we have to add staff and things like that, then even within the existing footprint that would bring that margin profile down. But with even low single-digit growth, plus continued cost improvement, you could see accelerated margin expansion.