Universal Technical Institute Inc (UTI) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Universal Technical Institute first quarter 2004 conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone should need assistance at any time press the star 0 and an operator will assist you. This conference is being recorded today, Wednesday, the 11th of February 2004. I would now like to turn the conference over to Ms. Jill Fukuhara of Financial Relations Board.

Thank you, hello and thank you for joining us today for Universal Technical Institute's conference call. Management will discuss the results for its first fiscal quarter of 2004, which ended December 31, 2003; and then open the call up to your questions. By now you should have received a copy of the press release which was issued after the market closed today. If not please call my office, at 310-407-6555, and we will get a copy to you.

Before we begin we would like to remind everyone that, except for historical information presented, the matters discussed today may contain forward-looking statement under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and are subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements. Factors that could affect the company's actual results include changes in federal and state educational funding, construction delays for new campuses, possible failure or inability to obtain regulatory consent and certifications for new campuses, potential increased competition, changes in demand for the programs offered by the company, increased investment in management and capital resources, and the effectiveness of the company's recruiting, advertising, and promotional efforts. Further information on these and other potential factors that could affect the company's financial results may be found in the company's filings with the Securities and Exchange Commission. The company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events, or otherwise.

On today's call are Kimberly McWaters, President and Chief Executive Officer; and Jennifer Haslip, Chief Financial Officer. At this time I will turn the call over to Kim.

Thank you, Jill. Good afternoon, ladies and gentlemen and welcome to our conference call. On today's call I'd like to begin with a brief overview of the company and our business model. In addition I will review our first quarter performance, then I will turn the call over to Jennifer who will discuss our financial results in more detail and provide some forward-looking guidance. Following Jennifer's discussion I will comment on our business outlook and strategy, as many of you are still new to our story. Finally, we will be happy to take your questions.

Universal Technical Institute is a leading for-profit provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians. We offer undergraduate degree, diploma, and certificate programs at seven campuses. In addition we offer manufacturer specific, advanced level training at 22 dedicated training centers across the United States. Our mix of students is approximately 60% recent high school graduates and 40% adult learners, who are returning to school for a change in careers. Our revenue comes from tuition and associated fees. Approximately 68% of our total revenue comes from federally insured title IV funds to our students. Our expenses include the cost of our instructors, our admissions and administrative staff, marketing expenses, facilities, and supplies. We currently operate campuses in Arizona, California, Florida, Illinois, North Carolina and Texas; and have educational representatives in all 50 states. We are nationally accredited by the accrediting commission for career schools and colleges of technology. This is our first call as a publicly traded company and we are very pleased to report results for an outstanding quarter.

Net revenue for the first quarter was $59 million, which represents 30% year-over-year growth. Operating margin for the first quarter improved to 23.7% from 18.2% for the same quarter last year. For the first quarter of 2004 net income was $7.5 million, or 30 cents per diluted share; which is a 60% increase from $4.7 million, or 18 cents per diluted share for the first quarter of fiscal 2003. Our strong top line performance is primarily the result of higher student enrollment. We continue to see strong demand for all of our programs, and increasing interest in manufacturer specific advanced training programs. In the first quarter average undergraduate, full time enrollment increased almost 25% to 12,856 students compared to the same period last year. The student population growth is evident at both our new and existing campuses. We attribute these results to the continued strong demand for our unique training programs, and the effectiveness of our outstanding sales and marking team. At our NASCAR campus, which opened in July of 2002, we saw a 78% increase in end of period student enrollment year-over-year. Because the total enrollment at this campus has now reached 1,200 or 60% of capacity, we will no longer be reporting on it as a new location. The successful launch and ongoing operation of this campus has been particularly exciting for both UTI and NASCAR. We are NASCAR's exclusive education provider for technicians in the automotive industry, a distinction that we believe has further strengthened our competitive position.

Focusing on the quarter, we saw per student revenue increase by approximately 4.5% as compared to the same quarter in the prior year. This is primarily the result of a large number of new students beginning in the fall with higher tuition rates than the existing attending student population. A portion of the revenue growth can also be attributed to program extensions in both the automotive and collision repair program. While we steadily grow our revenues, we are maintaining close watch on costs to maximize margins and profitability. We significantly expanded our operating margins in the first quarter, effectively leveraging our infrastructure and benefiting from economies of scale. Our educational services and student services teams at all locations continue to share best practices across the organization, which continue to drive operating efficiencies system wide. Now I would like to turn it over to Jennifer Haslip, our CFO, to review our financial results in more detail.

Thank you, Kim. Since this is our first earnings call, l will provide some additional detail of our quarterly results. Our recent IPO, including the sources and uses of cash related to the transaction, as well as areas that may be unique to our business. We will not provide this level of detail on future calls, but we thought it would be helpful to ensure our business complexities are fully understood. Revenues for the first quarter of fiscal 2004 were $59 million, up 30.1% from the $45.4 million reported in the same quarter of last year. Revenues increased 7.6% from $54.9 million in the fourth quarter of fiscal 2003. As Kim mentioned earlier the growth in revenues were driven by higher student enrollment, modest tuition increases, and program extensions through new or expanded electives. Income from operations for the first quarter was $14 million, a 70.1% increase from $8.2 million for the first quarter of fiscal 2003. On a sequential basis operating income increased 51.3% from $9.3 million in the fourth quarter of fiscal 2003. Operating margin for the first quarter was 23.7% up from 18.2% for the same period last year, and 16.9% from the September 2003 quarter. The margin expansion was primarily driven by economies of scale, certain compensation savings, and lower bad debt expense.

Educational services and facilities expense for the quarter included a reduction of approximately $800,000 in estimated student tool set expense. The reduction resulted from several refinements in the accrual calculation utilizing data available on our newly implemented student management and reporting system. Given that this is a nonrecurring item we thought it would be helpful to separate the amounts to allow better comparability of ongoing results. In addition selling, general & administrative expense for the quarter included approximately $700,000 of cost associated with the start-up of our new Pennsylvania campus, excluding corporate allocation. The new Exton (ph) campus scheduled to open late 2004. Interest expense for the quarter was approximately $815,000 compared with $1.2 million for the same period last year. The decrease was primarily due to a lower average balance of total debt, and lower average interest rates on outstanding debt. A portion of net proceeds from our initial public offering, which was completed on December 17th 2003, was used to repay the majority of our outstanding debt obligations. In the near term we have no plans to relever our balance sheet and expect to incur minimal interest expense.

Our effective tax rate for the quarter was 40.2%, higher than the 35% reported for the same quarter last year, and the 39.4% for the quarter of fiscal 2003. The lower effective rate, for the comparative three-month period in 2002, is attributable to the favorable impact of increased deductions for tax purposes, not allowed for book purchases, related to a recapitalization transaction completed in April 2002. In the near term we expect our tax rates to approximate 40 to 41%. Net income for the first quarter was $7.5 million or 30 cents per diluted share, a 60.4% increase from $4.7 million or 18 cents per diluted share for the same quarter last year. Net income increased 42.2% sequentially from $5.2 million or 16 cents per diluted share. Net income margin improved to 12.6% from 10.2% in the first quarter of fiscal 2003, and 9.6% in the fourth quarter of fiscal 2003.

Now turning to our balance sheet, we had $28.8 million in cash and cash equivalents at December 31,2003, compared with $8.9 million at September 30, 2003. As I mentioned earlier we completed our initial public offering in December, raising approximately $59.2 million in net proceeds. From those proceeds we repaid the majority of our long-term debt including a $31.5 million loan outstanding with our primary lender. The remaining total debt on our books of approximately $244,000 represents capital leases on equipment which will expire over the next few fiscal years. Proceeds from the IPO were also used to redeem our preferred stock and pay outstanding dividends in the approximate amount of $13 million and $12.6 million respectively. All outstanding preferred stock was redeemed, exchanged, or converted into common stock during December 2003. The excess cash of approximately $2.1 million will be utilized for general working capital needs. As a result of the offering, debt repayment, and conversion of our preferred stock, we had shareholders equity of approximately $31.5 million at December 31, 2003; compared with a shareholder deficit of approximately $83.1 million at September 30, 2003.

At December 31, 2003 we had weighted average shares on a diluted basis of approximately 25 million and 24.9 million for the comparable quarter a year ago. As a result of our offering, we issued 3.25 million shares, and those shares were outstanding for 15 days of the quarter, which will also factor into the weighted average going forward. In addition, the company granted employees options to purchase approximately 1.5 million shares of common stock at the IPO price of $20.50, which will also factor into the diluted share count for prospective periods. We generated $21.3 million in cash flow from operations in the first quarter compared with $13.2 million in the same period last year. The increase in cash flow from operations was attributable to higher earnings and the timing of tuition funding which resulted in a decrease in accounts receivable of $5.8 million, and an increase in deferred revenue of $4.4 million. Timing of cash receipts related to students’ receivables vary due to volume of students reaching the matriculation point that allows access to financial aid funding. Because we start students every three weeks, the timing does not always correspond to the end of the quarter; and as such our day sales outstanding calculation can fluctuate at quarter end.

Capital expenditures for the quarter were approximately $3.5 million compared with approximately $1.3 million for the same quarter last year. Capital expenditures typically vary with our student population; as well as with plans, program enhancements and expansions. Assets are placed in service slightly ahead of when they are required for training purposes. We expect capital expenditures to increase over the coming quarters as we upgrade current equipment, expand existing facilities, and open new locations. We believe that we will be able to adequately fund these activities with cash generated from operations. Next I will spend a few minutes to clarify the student statistics, which we are reporting on a quarterly and year to date perspective. The first student statistic we are providing is average undergraduate students in school. This statistic is a key driver of our business. We use this statistic when we prepare models of perspective revenue, to determine costs that fluctuate with our student population, to determine vacancies at our locations, and to evaluate progress on efficiency.

The second enrollment metric we are providing is the total enrollment in our undergraduate programs at the period end. We are providing this statistic as a supplemental measure to give the most recent view on enrollment. However, it must be considered in the context of trends in average enrollment and take into account the impact of variable periodic starts and natural seasonality of our business. Because we start and graduate students every three weeks there are times when the comparable start or graduation falls into the following quarter. This is particularly volatile during our peak periods which occur from July through November. If we have anomalies in the statistics, we will report the most comparable period; which may occur beyond the quarter end and note the adjustment accordingly. Average students are calculated the Friday following each start. There are 17 start dates per year. We create a simple average of the number of students in each of the measurement periods during the quarter. As a result, quarterly averages include four or five measurement periods. The population of student includes active students, including those that are retaking the course at no charge.

Due to our strict academic and attendance criteria, it is our policy to allow students to retake a course at no cost up to two times during their entire program. Last fiscal year we had between 6 and 7% of our population of students, at any given time, who were retaking courses. This practice is common, particularly in the technical or trade areas of study; and enhances persistence and total cohort success. Historically we had reduced the retake percentage, however, we believe it has stabilized. We expect stability in the percentage going forward. Point in time student data is reported on the last earning day of the quarter, and includes active students at that date. Students enrolled in our manufacturer’s specific advanced training are not included in the student enrollment statistics reported. The manufacturer pays for these courses and the course length is much shorter than the undergraduate program. The manufacturer specific courses typically range from 11 to 27 weeks, and the programs are not eligible for Title 4 aid.

The primary driver of this revenue is contract based. For example we typically are paid on the contract regardless of the student density in the class. Approximately 80% of the students in the manufacturer’s specific training program come directly from our undergraduate program. The other 20% are recruited from feeder schools. This allows the manufacturer’s access to a larger population of potential students. Manufacturer specific training accounted for approximately 7% of our net revenues for the 2003 annual period; and it's anticipated that this percentage will decrease over time as these programs are not expected to grow at the same pace as our undergraduate programs. This break down is provided in our segment disclosure. In the event that we are not required to disclose these revenues separately in the future, we will not provide this break down.

Now I'd like to read you our forward-looking guidance which is comprised of the following five components: Our next quarter expected revenue growth and net income margin, seasonality in the business, long-range revenue growth targets, our new campus model, and future operating margins. Based on the current market environment, we expect year-over-year revenue growth in the 26 to 29% range for the second quarter. This is consistent with the company's internal growth plans. In light of the company's strong first quarter performance the company is targeting net revenue growth of approximately 26% for the fiscal year ended September 30, 2004. This target is slightly higher than the company's previous guidance. The company also expects improvement in net income margin, as a result of lower interest expense related to the repayment of long-term debt. The company is targeting net income margin growth of 100 basis points for the fiscal year ended September 30, 2004. Future year improvements are expected to be more modest.

The company has typically experienced seasonality during the year. From a historical perspective the company has experienced its highest revenue during the fourth quarter of the fiscal year. The student population typically reaches its highest point during the first quarter. School is not in session during the one week holiday break which occurs in December. As a result, first quarter revenue does not correlate to the peak in student population. Operating income typically is the lowest during third fiscal quarter, ending June 30; due to a lower population of students. The company's costs do not vary significantly with changes in student population. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. These patterns may change, however, as a result of new school openings, new program introductions, and increased enrollments of adult students.

Looking further ahead, we expect to sustain revenue growth over the next two fiscal years in the 20 to 25% range. We anticipate that this growth will come from three primary sources: Increased enrollment growth of 15 to 20% per year, program extensions and new elective growth, and tuition increases of approximately 3 to 5% per year. As Kim mentioned earlier, our key growth initiative is to open new campuses. To meet demand from both our industry customers and students, we plan to add one location per year for the next two fiscal years. We may also consider launching two locations in certain years.

As these campus openings are an integral part of our growth plan, I'd like to spend some time now to walk you through major cost and spending patterns associated with them. A new location typically requires approximately $7 to $8 million of cash outlay over a two-year period. The target seating capacity of our new locations is approximately 2,000, which can vary depending upon number of programs offered and manufacturer specific sponsored training programs offered at that site. We incur sales and marketing costs during the first nine to 12 months prior to opening the new location. This allows our sales force to create a backlog of students that will begin starting on three-week increments once the site opens. Several quarters before the launch of a new campus, we also recruit and hire the management team and instructional staff. Many of these key positions will be filled by people who already work for UTI and share our core values and collective culture. In preparation for opening new locations, we first look for internal candidates to fill key positions that are willing to relocate to the new campus once the site is identified.

For instance in Pennsylvania we have identified internally three of the seven campus leaders with tenure at the company to head departments. They have recently relocated to the Exton area, or will relocate within the next quarter to help develop the campus. The school director, who is trained for over six months at our UTI Phoenix campus, is currently providing oversight of the construction process; as well as preparing for the new opening. We have found it works best if we seed new locations with our top performers so they can help hire, train, and ultimately build infrastructure necessary to run a large business unit. Capital expenditures for new locations can vary depending on whether the building is a build to suit, or a retrofit of an existing building. We do not require overly specialized buildings and, as a result, either type of building can be utilized. The -- historically we have incurred approximately $2.5 million of capital outlay in preparation for the opening, and into the first quarter of operation. In the first full year of operations, another $1.5 to $2.5 million dollars is also spent for capital equipment needs as the campus matures. These costs can vary on the programs that are taught and the specific location of the school.

Several quarters prior to opening, the operations team begins to ramp up. Instructors and student services staff are hired, and are provided training in our existing schools. Through the first quarter of operation, including the pre-opening costs we typically see approximately $4.5 to $5 million of losses associated with the new launch. Typically schools are cash flow break-even within a year of operation, and at that time they will have 500 to 700 students attending. Our target is to recoup the entire outlay within a three to four-year time frame, and achieve in excess of a 50% internal rate of return. Most recently we have realized internal rate of returns in excess of 70%, however, our future results could vary depending on the costs and locations we select. At the three-year mark, capacity utilization typically reaches the 60 to 70% range, at which point we consider the location mature.

Turning now to margins, we expect to improve operating margins over the next two fiscal years in excess of 20 basis points annually. The margin improvement is expected to come from efficient capacity utilization, combined with constant attention to cost control. As we build the infrastructure, we must balance margin improvement with the need to build bench strength from internal development of our leadership, as well as augmenting our team with new talent. As new locations are added the rate of margin improvement may slow, and we may see slight margin compression as we incur initial investment costs associated with planned new openings. In the event that two campuses are opened within a 12-month period, margins may be lower than the comparable quarter for several quarters as the new locations ramp up. Now I'd like to turn the call back over to Kim for her comments on our long-term growth strategy.

Thank you. Our long-term growth strategy is comprised of four main parts, the first being opening new campuses, increasing recruiting sales and marketing efforts, establishing new industry partnerships and deepening existing relationships, and expanding our program offerings within our automotive, diesel, collision repair, motorcycle and marine end markets. On the first objective, our number one growth initiative is to extend our national presence to meet increasing demand. The statistics on market needs for technicians specializing in automobiles, trucks, motorcycles and marine equipment are very compelling. The most recent data at the Bureau of Labor Statistics estimates that these markets will grow at an annual rate of 10 to 20% by the year 2010. The largest end market is the automotive industry with more than 840,000 working technicians. The National Automotive Dealers Association sites a 60,000 technician shortage, and the Department of Labor indicates there will be approximately 30,000 new openings each year in the automotive industry through the year 2010. To take advantage of this rapid growth, the growing needs of our industry customers, and favorable student demographics we have mapped out a national expansion plan. We use a highly defined set of criteria for the selection of the school sites.

We identify new markets by evaluating both the demand dynamics of industry and students which include factors such as local population demographics, student psychographic data, housing and part-time job availability, and proximity to manufacturing facilities and dealerships. In January, we announced the signing of a lease in Exton, Pennsylvania for a new UTI campus. Just outside of Philadelphia, this location is our first school in the northeast and is close in proximity to four of our existing advanced training sites with Audi, Volkswagen, Mercedes-Benz, and Volvo. Although we have recruited in the northeast for many years, it became very obvious that with a physical presence in the northeast we would be able to tap into a student population that has been unwilling to relocate to another part of the country. In addition, the population based in this area will allow us to have a good balance between commuter students and those who will relocate to attend UTI in Exton. In addition the manufacturers with whom we have contractual training agreements have requested our presence in this region to meet the growing needs of their dealer network. We are in the process of identifying potential sites in northern California, the pacific northwest area, as well as an additional location on the eastern seaboard.

Once the sites are determined and the details are finalized, we will share this information with you consistent with our investor communication practices. As we identify new campus sites, we are concurrently expanding our capacity at some of our more established schools, we are adding space to our UTI Illinois campus, located in Glendale Heights during March 2004. We intend to add 24,500 square feet on a campus expansion with an additional building near the school in August that has approximately 26,000 square feet. The new space will allow the campus student capacity to grow from less than 2,000 students to approximately 2,400, as well as accommodate the lengthening of our Ford elective to 15 weeks. UTI Arizona is moving its location to Avondale. The 273,000 square foot building will replace the current facility and certain manufacturer training facilities also located in Phoenix. The new facility is not expected to significantly increase capacity. This move is scheduled to take place late summer 2004. In addition, we have received approval from our accrediting commission to add our automotive program to our Orlando campus, this is something we will keep you apprised of as the development progresses.

The second objective is to increase sales and marketing efforts. This past summer we hired 15 field representatives, primarily in the east, in preparation of our Exton, Pennsylvania campus opening this year. Additional telesales representatives will be added over the next few months in preparation for the opening. Our third objective is to deepen relationships with existing industry partners and establish new relationships as well. Clearly a differentiating factor of our business model is the unique and longstanding relationships we have with our industry customers. These relationships are mutually beneficial by providing our industry partners and their dealers with a steady flow of skilled technicians. In turn they provide with us financial sponsorship, equipment, and product donations; as well as access to proprietary curriculum. In addition, our graduates benefit by enhanced employment opportunities and potential earnings. Currently we have relationships with nine OEMs in the automotive industry, one OEM in the diesel industry, two in the collision repair industry, five in the motorcycle industry, and two in the marine equipment industry. A number of these relationships were established more than five years ago, and have successfully been renewed year after year.

Additionally, in most cases, we are the only company providing this type of manufacturer specific training for these OEMs. Most recently we expanded our collision repair program by adding a new Ford elective at our Houston campus. The fourth objective we have is to expand program offerings based upon feedback from our customers and our students. Our goal is to insure that our programs remain up to date on the latest technologies and cover the topics that are most important to our OEM customers. As a result we are currently developing several new courses that will lengthen our automotive programs over time. This year we are lengthening and completing the full roll out of the Ford elective at all of our automotive campuses. Potential new courses are also being evaluated including service writing and NASCAR pit crew training. As you can see we are making great strides in executing our growth plan and the achievements of every one of our dedicated employees are translating into tangible results. These past few months have truly been an exciting time for us as we've completed our IPO and embarked on a new era in UTI's history.

In the IPO we were able to reward all 1,500 of our employees with stock options, which I believe will continue to drive the ownership spirit throughout our company. We are firmly committed to enhancing shareholder value and ensuring the long term success of our business. That concludes our prepared remarks and now we are happy to take your questions. Operator.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question please press the star followed by 1 on your push button phone. If you would like to decline from the polling process press star 2. You will hear a three-tone prompt acknowledging your selection. If you are using speakerphone equipment you will need to lift the handset first. One moment please for our first question. Our first question comes from Greg Cappelli with Credit Suisse First Boston.

Congratulations on a great first quarter as a public company.

Thank you.

Eric and I just have a couple of questions here we wanted to follow up with. You talked a little bit about capacity in the press release and I wondered where that really stands right now? If you could give us an idea after the quarter, sort of system wide on average where capacity is. Then Kim if could you maybe just follow up with that on how -- we understand it's critical to get the new school open for you at this point and on time, given capacity. How do you get comfort that the students are going to actually travel to this new location? I'm assuming you'll to have drive them from other locations that are more full and can't accommodate them. I'm wondering if you could address that as well.

I'll take the capacity question, Greg. We are current sitting right about 21% from a vacancy rate standpoint throughout all of our schools. And that's on an average basis. We envision adding our Pennsylvania site in the fourth quarter to open up that capacity for the '05 time frame.

Okay. Great. Then what is the possibility you might do two in fiscal '05 at this point?

We are evaluating that possibility. This is Kim, Greg. And believe that that is a clear possibility. We want to make certain that we do have the people in place. That is our number one priority and we are working towards that goal, I believe that that is a very likely opportunity and possibility.

Great. Kim, is it actually possible you guys could open a second NASCAR school given how well the current one is doing?

It is a possibility and we certainly have that right given our NASCAR agreement. However, at this point in time we would like to see that campus mature a little more. As some of you know, it is located in Morrisville; which is race city, U.S.A., right in the middle of all of the NASCAR teams. And so we need to understand the demand for the NASCAR program, if it is not located specifically in Morrisville; and as we understand that more that will drive our decision as to whether to add NASCAR electives at another UTI campus or in fact, open another NASCAR campus in another state.

Great, understand. Just one final one here. You guys had a big jump in the margin this quarter. You noted in the press release that you expect about 20 basis points year-over-year. I know you talked about that. Is that -- given how well you did on the quarter, do you consider that to be conservative at this point or is that – obviously you talked about the potential to do more than one school, but just wanted to get your feelings on the potential for maybe better than 20 basis points of margin improvement given how well did you this quarter.

That's a good question. Basically, we're looking at the fiscal '04 timeframe and saying that we believe, on a net income basis, that we can actually improve by 100 basis points this year; because of the strong performance that we saw during the first quarter. And what we're saying from a go forward standpoint is that we're going to hold to that in excess of 20 basis points as we're opening multiple sites. We do believe that we have opportunity for expanding our margins. However, we do have to balance that with the buildup of our staff, as Kim talked about earlier.

I understand. Our best to Bob and John as well and congratulations.

Thank you, Greg.

Our next question comes from Mark Hughes with SunTrust Robinson Humphrey.

My congratulations as well, 50% up side pretty good stuff. The 100 basis point improvement you're talking about, just so I'm clear is that off of a 10.4% number in '03?

It is.

That's correct?

Yes.

If you do that, I don't know if you want to go this far, but I'm sort of coming out with a number like $1.03, $1.05, something like that, in terms of EPS. Is that -- am I doing any sort of wrong math getting there?

We really aren't commenting on EPS but you can -- it's not that challenging to go back through and work the math on a diluted share. But we have stayed away from the dilutive commentary currently.

So just do that straightforward math and you get there?

You just do the real straightforward math and you get there.

How about for the second quarter? I don't know whether you suggested you would give margin guidance for the second quarter, but any thoughts there?

We really haven't focused on giving specific margin guidance on a quarterly basis. We view our business more on an annual period, and as costs need to be pulled in, both from a ramping up for the new organization that we will be building in Pennsylvania; we do that just in time to make those operations as efficient as we can, but we've not been commenting on specific quarters.

The margin improvement, you had mentioned a couple factors, bad debt and compensation expense. Can you give us a sense of the magnitude of the improvement in those categories?

Well, from a comp and benefit standpoint if you were to, certainly comp and benefits were--was the largest driver of that. And I guess I would say that we've been very efficient in our hiring, and we do that in a very systematic way; allowing us to bring people on board as we need them, both from a teacher’s standpoint as well as throughout our entire system. So I would say of the percentage betterment, in essence, the highest piece is coming from comp and benefits.

Is that anything that will reverse itself in the future quarters? Is this a fairly stable level?

I think that it won't reverse itself from the quarter. I think we'll keep what we gained in the quarter. But, again, I would point back to, as we do ramp up you will have costs that begin to be incurred from a Pennsylvania opening standpoint as well. You'll start to have comp and benefits that pick up on that front as well.

Gotcha. Thank you very much.

Our next question comes from Fred McCrea with Thomas Weisel Partners. Please go ahead.

Good afternoon, Kim, Jennifer.

Hey, Fred.

How are you?

Fine, thank you.

good. Clearly the company has had great success with the Ford undergraduate elective program. Could you talk to us a little bit about either Toyota, General Motors, or DaimlerChrysler in terms of efforts and inroads you've made there.

Okay. I can't give specific information on the manufacturers that we don't have agreements with at this time. I can tell you that we are working on the three that you've mentioned in various ways, and believe that there is opportunity and potential; but I can't comment on exactly on where they're at, for competitive reasons, I'd prefer not to disclose that at this time.

Okay. And then following up in terms of when you were talking about Orlando and rolling out the auto and diesel programs to that campus, how much expansion of existing facilities would that take, or is there extra capacity, physical capacity there, in terms of adding students?

It would require additional expansion, and we are currently looking for a facility to accommodate approximately 500 students at this location, so it would be about 60,000 square feet in building space. So we will most likely retrofit an existing building in the area close to the MMI campus.

And any estimate in terms of timing when you'd expect to enroll the first students in that program?

Go ahead, Jen.

When we sign the lease relative to that particular space, is when we would be able to describe the opening timeframe on that. So we would have to do a press release subsequent to this call on that.

And then in terms of the Los Angeles campus, any update there in terms of expansion timing?

We are moving ahead with plans at our Rancho Cucamonga campus, there's not much difference in what we've been telling all along. We're moving according to plan in relocating and expanding our existing facilities; and expect that over this next year we will increase the population to close to 2,000, 1,900 to 2,000 students.

From a current?

Currently at about 1,300 student capacity today. And we won't take that new site likely until the first quarter '05.

Things are progressing as planned.

Thanks so much.

Thank you.

Our next question comes from Richard Close with Jefferies & Company.

Congratulations on a great quarter coming out of the box. I was looking at the guidance for the tuition increase and it was, I think you put down there 3 to 5%. I was just curious on that, because if I remember correctly, maybe it was a little bit lower in the current fiscal year; maybe if you could comment on that and what we should look for maybe in fiscal '05.

Okay. I'll take that one. Basically we've tended to raise the automotive programs more on the 5% side of the range, and from an MMI standpoint, we've looked at more the 2 to 3% range; and I think that would stay somewhat consistent as we look forward. We did not change that, though, from prior periods. That would be quite consistent with what we've done for the last several years.

Okay. And then maybe if -- a follow-up question. With respect to the impact that maybe talk in and around the financial impact of adding a program, I believe you announced a Mercedes collision in your sort of long-term growth press release a couple weeks ago. Maybe if you could talk a little bit about that in terms of what those programs really add.

That particular program would be quite small. Because it would be an elective program that's added on to the existing program that's offered there. It does show that we're able to lengthen those programs, but we don't have a significant overall number of students in that program; and I'd say it's around 300 to 400 students, and so it won't drive -- that particular program wouldn't drive revenue in a significant way.

And it's important to note that the Mercedes-Benz one is actually a graduate-level program, and the Ford elective that's been added to collision is an elective that all of the students may take. So that number will most likely be higher than the student population that you see going into the Mercedes-Benz advanced-level collision repair program.

What about in terms of new programs on the drawing board, on the undergraduate side? Would there be similar stuff with respect to like the Ford that you mentioned here?

Yes, there are similar opportunities that we are exploring with our existing manufacturers in terms of new program -- or new course offerings, as well as with new manufacturers; and as those materialize that is of course something we would share with you.

Great. Thanks.

Our next question comes from Howard Block with Banc of America. Please go ahead.

Good afternoon everybody, and congratulations on a very strong quarter and welcome to the club here. I had a couple of questions. First is, your equity peers seem to have, maybe even arbitrarily selected one, two, three years as the definition for same-store. They all have seemingly different somewhat arbitrary definitions, but it sounds as though you're going to use this notion of capacity as the milestone at which point a campus will be labeled mature, or no longer new. Is that true?

That's correct, Howard. What we were envisioning was that once a campus scales up to be really at that 60% range, and the operations build at a slightly slower pace and (inaudible) to our already operating schools; but we thought that it would be helpful to understand how our newer operations are ramping up, so that you can see how they're progressing.

Okay. And then applying that template, if you will, to NTI, or NASCAR, it sounds as though it got there in about 60% of the time, or maybe half the time even.

It was definite -- this is Kim. It was definitely an acceleration of our original plan, and we believe that that was due to the pent up demand for this type of program. So I would say that that did ramp up at, you know, a much faster pace than what you'll see at our existing campuses going forward. I'm not certain of the percentage, 50 to 60%, but it did ramp up significantly faster than what we've experienced in the past.

And our target is to have it ramp quickly but we're not planning for our newer operations to have quite that much. However, we do envision that they -- they will ramp very nicely, in particular because of the in advance sales and marketing teams that are out recruiting, building up a backlog of students.

Okay. So just following up on Greg's earlier question, with regards to Exton, it sounds as though -- when would this first class begin? Would that be September?

It would be late summer, early fall.

So based on what you're sort of boilerplate comment about the new campus you said you would build a backlog log of three-week increments. Should there be a backlog already, that is somewhat quantifiable something I am sure that you want to share with us but do you have a sort of quantifiable backlog already at this point; or is it just way too early?

No, it's not way too early. As I said last -- or earlier, actually, in this call we did hire representatives along the East Coast to potentially support the Pennsylvania campus. And they have already started recruiting students who were currently being recruited for one of our existing campuses. However, depending on where they're located, they can request a transfer at the time the school is approved and operational. So we do have a list of requests to transfer -- at the time of the Pennsylvania campus opening, so, yes, we have a good idea of the backlog.

So would you say that the -- that you're on a path to perhaps exceed the boilerplate time frame that you offer on the new campus in Exton, or are you right on pace?

I'd say we're right on plan.

Then with regards to the margin, I guess deterioration, or at least the pressure that it's imposed by a new campus, in 2002 the year in which NTI opened, margins still improved somewhat significantly even with the burden of that new campus. Is it possible that even with the burden of a new campus in 2003, and perhaps even two new campuses in 2005, that we may see a repeat of 2002's margin improvement, maybe not to that level; but yet certainly no deterioration?

I would say that as we were ramping up our NTI campus, we did have some unique capacity existing in our system, and when we have capacity at each of our sites, it helps us to overcome that margin basically compression. And I would say that there's some opportunity in the '05 time to see some betterment but I hold firm to what we've already given you from a guidance standpoint, because that's really the target we're striving for.

You probably don't have this off the top of your head but if you do, you don't happen to recall -- I know you said you're at about 21% capacity right now. You don't happen to recall what the capacity was in 2002 on an overall basis when NTI was ramping, and margins were benefiting from that as well as the maturation, I guess, of some of the other locations?

I would to have look that one up but I would be happy to do that.

And then -- in terms of the $800,000 explanation you offered earlier, Jennifer, can you walk through that again? You spoke sort of quickly about that nonrecurring item.

Absolutely. This calculation on the accrued tool kit, what we've done is really refined it and looked at it more on an individual program and location basis; and applied really the Bell curve of students that would be exiting against specific students that are in our school today. Previously that calculation would have been done a little bit more on a global basis. And so it truly is just a refinement of the accrual, and-- which allowed us to lower it, in essence.

Okay. So I know it's nonrecurring, but it is going to at least recur three more times? Is this something that's going to anniversary after a year, or is it just a one quarter adjustment?

It really should just be a one quarter adjustment. Certainly on a quarterly basis we evaluate all of our estimates to ensure that they are the most accurate they can possibly be. But, I would not envision a significant change in this going forward.

Okay. And then the last question is, if you look at the data that you shared about the 60,000 shortage by NADA and then-- the National Automotive Dealers Association, and the 30,000 from the BLS, obviously they're two different organizations but the numbers seem somewhat irreconcilable. It seems to me if there's 60,000 shortage there would be 60,000 openings, but the BLS data doesn't seem to capture that, or am I misinterpreting the BLS data?

You're right, Howard. it's very difficult to reconcile both of them. If you talk with the Department of Labor and the Bureau of Labor Statistics, they don't address the existing shortage in the same way that the Dealers Association does, or the industry. When you look at it, they would say that the 60,000 is included in their calculations. The industry reports say that they're not considering the fact that they're unable to fill the openings that they report exist year after year. So the industry is agreeing with what the Department of Labor projects, however, they say that they're not making adjustments based on the fact that they're not filling all of these open positions.

I see. Okay. Thank you very much. Again, congratulations.

Thank you, Howard.

Next we have a follow-up question from Mark Hughes. Please go ahead.

The Arizona move that you talked about later this year, are there any costs associated with that? I'm sure there are, but how to factor those in.

The costs are really the move of the campus in and of itself, and if I recall it was a little bit more than $.5 million to move that particular site. And, of course, there will be some equipment upgrades that will be done along with that, that have built into our projected capital expenditure plan as well.

So those moving costs are capitalized?

The moving costs are not, it would really be the -- that part would be expensed, the other piece would be capital.

So the $500 K would be expensed?

Right.

Capital otherwise?

Correct.

And then what was bad debt in the quarter? I don't know if that was disclosed and I missed it in the press release.

We didn't put the specific number in the press release, but it was running-- as a percentage of revenue, let's see, -- I'm sorry, I don't have that particular statistic handy. It was between 1.2 and 1.4% if I remember correctly.

Do you happen to recall generally how that compared to last year?

Last year was actually 1.3% on an annual basis, and we've seen it kind of stay in that range; 1.3 to, you know, -- I guess I'd say our target is less than 2%.

Great.

And I think that's pretty strong comparatively.

Right. Exactly. Thank you very much.

You're welcome.

Next we have a follow-up question from Richard Close. Please go ahead.

Couple of questions here. One with respect to the Orlando campus, education management is doing these co-locations where they're locating an (inaudible) university or an art institute. Is this going to be something similar to that, where you have a UTI and MMI and you're able to get a bunch of cost synergies; or we could see that the 500 students that you expect at the Orlando campus to be higher margin business possibly?

It is very similar to what you described, in that we will be able to leverage some of the management team, you know, some of the expenses that you have already there for the MMI campus. We would not be bringing in a whole new infrastructure to support 500 additional students.

Okay. And one question. Going through, I guess, your comments. You mentioned something with respect to the manufacturer training programs, or that something was 7% of your revenue, and that you expect that to go down over time. Can you just go over that again, what you were talking about there? I believe it was manufacturer programs.

You're correct there. The 7% really is based off of the 9-30-2003 period. The reason we expect it will go down is not because it's not going to grow. We do anticipate that line will grow over time. It just isn't planned to grow at the same pace as the undergraduate programs will. So on a percentage basis we expect it to decline as a total percentage of revenue.

Okay. And then are the training centers in that revenue as well? Or is that separate?

The training centers would be the manufacturer specific training, so they would be included in that 7%.

They are included in it. Okay. Thank you.

We have a follow-up question from Howard Block. Please go ahead.

It's nice when you just get started, you have a short queue, so we all get to circle back; and I trust in a year or two this won't be the case. Hopefully not. Just wanted to have you follow up a little bit on the aspiration to build out the OEM relationships and trying to understand, if you sort of look at let's say the OEM universe, where are you now in terms of percentage of where you want to be in five years? Are you more than halfway there, are you less than halfway? Some sense of -- particularly on the automotive side.

If you just took number of manufacturers, excuse me, I'd say that could you say we're almost halfway there. If you looked at in terms of who the remaining manufacturers are and the size of those particular OEMs, I'd say we're not near halfway there; in terms of the opportunity and potential for the business.

Okay. Is that the way you think about it in terms of just autos that are out there on the street? Is that sort of a way to think about the opportunity with this? Or is it thinking about the fact that you already have so many of the high end OEMs, and that really is more important than just having the lower end or more mainstream OEM?

I think that both are important, and they're important for a number of reasons. Even though the OEMs at the graduate level or the luxury brands are smaller, they provide, in terms of number of students or graduates, they provide great strategic value. It's limited in terms of the number of students who qualify to get into their programs, but still it is a great marketing tool for us. As far as the domestic and some of the Asian manufacturers that are much larger, those programs potentially would not be at the advanced level and would mirror more the Ford program. So those programs are elective based programs at our undergraduate school. And would provide greater opportunity for a larger student population to access them and provide, you know, greater opportunity for to us provide this. So it would have a greater impact on our business.

Okay. And when students start school, do you survey them with regards to what were-- on what variable they discriminated between providers and trying to quantify the significance of having the OEM relationship in a graduate program to offer them?

Yes. We do survey. We survey potential students, existing students, and those who are nearing graduation on those types of things all the time.

And how do they sort of weigh this as one of the variables across which they discriminate?

It's important to them. The opportunities to -- the opportunity to be able to have this manufacturer specific training is certainly important to the student in their decision to pursue this type of career.

Okay. Thank you very much. Bye bye.

Bye, Howard.

Next we have a question from Laird Beager with Barron Capital. Please go ahead.

Hi everyone. Congratulations. Couple questions for you. Are there any schools out there besides maybe Orlando where you'd like to maybe add capacity over the next couple of years?

Some of our existing campuses that we talked about already today in our prepared remarks, we're certainly expanding those sites, and as we look at our more mature sites; where there is potential to add capacity would be if we added another manufacturer elective program at one of those campuses.

Okay.

So that potential exists. We do try to keep our peak between the 2,000 to 2,400 student population, and believe that that's the limit we would like to have it. So we would work within those parameters but believe that, you know, if that opportunity arises that we have an opportunity to add another elective. We certainly would expand the capacity at those sites to do so.

If you open two schools in 2005 would you open them both during the summertime? At the same time or thereabouts?

At this time it is not planned to open both of them at the same time. They would be probably six months apart.

Just a housekeeping question, on the other expense line what exactly is the other expense?

The other expense in the current period is a write-up of some deferred financing costs that was related to the repayment of the long-term debt that we made in December.

Okay. And lastly, you talked that you have about a 21% vacancy now. If you take out some of these schools that you don't consider mature, where do you think you kind of max out? Do you max out at utilization in the high 80s or can you go higher than that?

We can go higher than that. I would say that at a mature campus. We kind of look at it in two different ways. One is a peak and the other is kind of the average undergraduate for the whole year. And certainly at all of our sites, at sometime during the year we reach the peak of what we can accommodate. Then what the other component of it is obviously the average, but we can -- on average we can run into the 90% range once we get too far into that -- once you get beyond 95% it becomes a little bit difficult for operations to run the site, simply because of the volume of students that are constantly in place there.

So but in general we can kind of say that you hit the maximum right around mid 90's?

I call it between 90% and 94%, that you're kind of maxed out at the site.

Thanks so much.

There are no further questions at this time. Please continue.

Thank you very much. We believe today's results support our continued optimism about the future of UTI and every day we are working to further strengthen our market leadership position as the largest provider of higher education for the automotive, diesel, collision repair, motorcycle and marine industries. I'd like to thank you for participating and we look forward to updating you on our achievements next quarter. Also would like to tell you we will be presenting at the CSFB Global Services Conference in Phoenix in mid March, and in May we'll be presenting at the Piper Jaffray Technology Conference in New York; as well as the SunTrust Robinson Humphrey Institute Conference in Atlanta. We hope to see some of you there or hope that you'll access the webcast to our presentation. Again thank you for your interest in UTI.

Ladies and gentlemen, this concludes the Universal Technical Institute first quarter fiscal 2004 conference call. You may now disconnect