Universal Technical Institute Inc (UTI) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the UTI second-quarter fiscal 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Wednesday, May 12, 2004. I would now like to turn the conference over to Ms. Jill Fukuhara with the Financial Relations Board. Please go ahead.

Thank you. Hello and thank you for joining us today for Universal Technical Institute's quarterly conference call. Management will discuss results for its second fiscal of 2004, which ended March 31, 2004, and then open the call up to your questions. The second-quarter earnings release was issued after the market closed today and is available on UTI's website at www.uticorp.com.

Before we begin, we would like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements 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 to federal and state educational funding; construction delays for new or expanded campuses or campus expansions; possible failure or inability to obtain regulatory consents 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 Kim McWaters, President and Chief Executive Officer, and Jennifer Haslip, Chief Financial Officer of Universal Technical Institute. At this time, I would like to turn the call over to Kim McWaters. Kim.

Thank you, Jill. Good afternoon, everyone, and welcome to our call. On today's call, I will start with a brief overview of our Company and business model for those of you who may be new to UTI. I will then review our second-quarter performance and provide an update on our growth initiatives. Jennifer will follow with comments and more details on our financial results, as well as some forward-looking guidance.

Universal Technical Institute is a leading provider of technician training for the automotive, diesel, collision repair, motorcycle and marine industries. We offer undergraduate degree, diploma and certificate programs at seven campuses located in Arizona, California, Florida, Illinois, North Carolina and Texas. And we have educational representatives in all 50 states. In addition, we offer manufacturer-specific advanced level training at 22 dedicated training centers across the United States.

Our strong second-quarter performance was primarily due to higher student enrollment, as demand for our educational programs remains strong. Over the last three years, student enrollment at our campuses has increased more than 20 percent on a compounded annual basis. This quarter, we experienced average undergraduate enrollment increases of approximately 26 percent as compared to the second quarter of 2003. This is attributed to the effectiveness of our duel-pronged student recruitment strategy, targeting both the high school student as well as the adult learner. As a result, our campuses are operating at or near peak efficiencies, utilizing approximately 90 percent of current capacity during the quarter.

Second-quarter net revenue grew more than more than 34 percent from last year, and net income was higher by approximately 49 percent. Operating margins for the second quarter improved to 21.2 percent from last year's second quarter of 20 percent.

The UTI team is very focused on the execution of our growth strategies while improving operational efficiencies and financial performance. In addition, we are working together to build a culture and an infrastructure to support our fast-growing Company. We have been able to execute well on these fronts due to the alignment of our employees to our vision and mission and their commitment to share best practices across the system. Their efforts have enabled us to truly leverage the strength of our (indiscernible) business model and a common operating platform.

Moving to our growth strategies, I would like to remind everyone that we have four primary growth strategies. They are one, building a national footprint with new campus openings; two, increasing student recruitment and marketing efforts to support national expansion plans; three, expanding program offerings; and four, seeking additional industry relationships.

To address the significant and growing demand for technicians and the favorable student demographics, we plan to open five campuses over the next three to four years. We are currently working toward opening our newest campus in Exton, Pennsylvania which is located just outside of Philadelphia. This location was a preference of our industry customers and will be within close proximity to three of our existing advanced training sites with Audi, Volkswagen, and Mercedes-Benz. We have seen strong student interest for the campus that should support a late summer opening.

We are currently working with the Pennsylvania State Regulatory Body to receive approval of our new location. The campus will be approximately 160,000 square feet and offer automotive technician training. When the Exton campus opens, we will have a total of eight campuses. And while this campus expands our national footprint, there is still plenty of room for additional growth that will allow us to tap into that incremental population that has been unwilling to relocate to attend one of our resident campuses. Our business development team is currently identifying and negotiating our next three sites, and we anticipate that one of the new sites will be in northern California and the other two will be in the New England and New York areas.

Concurrent with our new school openings, we are expanding some of our more established campuses. In March, we added space to our Glendale Heights, Illinois campus, and will add additional square footage to that campus this summer as well. The expansion will increase student capacity from 1850 to 2250 students, with the opportunity to expand to 2400 students with additional facility buildouts as required.

At the same time, we are expanding the size of and relocating our Southern California campus in Rancho Cucamonga. This move, which is within a few miles of the current campus, will add capacity for approximately 800 additional students. We expect to incur costs of approximately 500,000 to 800,000 this year, and that is associated with the early exit of our current lease. In addition, we are incurring approximately 300,000 of cost each quarter of fiscal year 2004 as a result of this accelerated depreciation expense equally throughout the year. We expect to open the new campus in the fall of 2004.

Additionally, we recently entered into a long-term lease to expand program offerings at our Orlando campus. Currently, we offer motorcycle and marine training in Orlando, (indiscernible) expansion will offer automotive training as well. The new 60,000 square foot facility is being constructed near our existing campus. And this expansion will ultimately increase the campus capacity to approximately 2400 students from the existing 1900. Preopening costs on a pretax basis will total approximately 3 million, two-thirds of which is related to sales and marketing, as well as educational services and facility costs associated with the opening. The remaining third is related to capital expenditures. The transplant of the automotive curriculum and the related campus expansion fits well within our strategy, as Florida ranks in the top 10 states in terms of annual automotive technician openings.

Lastly, we were pleased to announce our new training alliance with Toyota Motor Sales USA. We believe there will be a strong student interest in this program, based on the popularity of the brand and the quality of Toyota's vehicles. This is our ninth OEM relationship with the automotive service industry, and we believe our industry relationships are unmatched and remain a key differentiator for us. The Toyota elective will be offered at our Glendale Heights, Illinois campus beginning in the summer of 2004. The curriculum will focus on brand-specific training for both Toyota and Lexus brands.

In summary, I am pleased to report that we are executing on each of our defined growth strategies. And now I'd like to turn the call over to Jennifer, our CFO, for a detailed review of financial results for the quarter. Jennifer.

Thank you, Kim. As noted in our press release, net revenues for the second quarter of fiscal 2004 were 63.7 (ph) million, up from (ph) 34.5 percent from 47.4 million reported in the same quarter last year, and 7.9 percent higher than fiscal 2004 first-quarter net revenues of 59 million. As Kim mentioned earlier, revenue growth was driven primarily by higher student enrollment, as well as modest tuition increases and program extensions.

Income from operations for the second quarter was 13.5 million, 42 percent higher than 9.5 million in the corresponding quarter last year. The year-over-year increase is attributable to growth in overall revenue combined with improved capacity utilization at existing campuses, and continued development of our North Carolina NASCAR Technical Institute campus. On a sequential basis, operating income was slightly lower than the 14 million reported in the first quarter of this year. The sequential decrease resulted from a nonrecurring favorable adjustment in toolset expense in quarter 1 of approximately $800,000.

In addition, we have incurred higher professional services and insurance costs associated with operating as a public company. There are also increased preopening costs related to our planned expansion and internal training that typically occurs during the second and third quarters.

Operating margin for the second quarter was 21.2 percent, up from 20 percent for the same period last year and compared to 23.7 percent from the quarter ended December 31, 2003. We incurred approximately $1 million of preopening costs during our second quarter of fiscal 2004 associated with our new Exton, Pennsylvania campus, inclusive of corporate allocation. The costs were primarily selling, general and administrative of approximately $900,000. Operational staff has recently relocated to the area and we are beginning to hire instructional staff and educational support staff prior to our planned opening in the fall.

Interest expense for the quarter was 195,000 compared with 882,000 for the same period last year, due to a lower average balance of total debt and favorable interest rates. Our effective tax rate for the second quarter was 39.7 percent compared to 38 percent reported for the same quarter last year, and 40.2 percent for the fiscal quarter of fiscal 2004. The lower effective rate for the same three-month period in 2003 is attributable to the favorable impact of increased deductions for tax purposes not allowed for book purposes related to a recapitalization transaction completed in April of 2002.

In addition, our current quarter tax rates were favorably impacted by a reduction in taxes associated with an enterprise zone impacting our Avondale, Arizona location and corporate headquarter facility. In the near-term, we expect our tax rate to be approximately 40 percent to 41 percent.

Our net income for the second quarter was 8.1 million, or 28 cents per diluted share. This represents a 49.1 percent increase from 5.4 million, or 21 cents per diluted share, for the same quarter last year. Net income margin improved to 12.7 percent from 11.4 percent in the second quarter of fiscal 2003 and 12.6 percent in the first quarter of fiscal 2004.

Turning now to our balance sheet, we increased cash and cash equivalents to 34 million at March 31, 2004, compared with 8.9 million at September 30, 2003 and 28.8 million at December 31, 2003. We generated 11.5 million in additional cash flow from operations for the first six months of the fiscal year as compared to the same six-month period in the prior 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 approximately 4.7 million and an increase in deferred revenue of 4.2 million for the six-month period.

Please keep in mind that timing of cash received related to student receivables varies due to the volume of students reaching the matriculation point that allows access to financial aid funding. Because we start students every three weeks, the timing may not correspond to the end of the quarter.

Capital expenditures for the six months ended March 31, 2004 were approximately $8 million compared with $3.5 million for the same six-month period. Capital expenditures typically vary with our student population, as well as planned 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.

Our capital expenditure target for the fiscal year of September 30, 2004, is approximately 18 million, inclusive of roughly 5.9 million of expansion related costs. We believe that we will be able to adequately fund these activities with cash generated from operations.

Next, I will discuss our (technical difficulty) population. Average undergraduate enrollment for the three months ended March 31, 2004 was approximately 1306 students, an increase of 24.9 percent from 10,029 (ph) students for the same period a year ago. Average undergraduate enrollment for the six months ended March 31, 2004 was 12,931, an increase of 25.3 percent from 10,324 students for the same period a year ago. Undergraduate enrollment at the end of the second quarter of fiscal 2004 was 12,834 students compared with 10,382 students at the end of the prior-year quarter and 12,282 students at the end of the first quarter of fiscal 2004.

Now I will review our forward-looking guidance, which is comprised of the following components. Next quarter's expected revenue growth and annual margin target, seasonality in the business, long-range revenue growth targets, and future operating margins.

Based on the current market environment, we expect year-over-year revenue growth in the 23 to 25 percent range for the third quarter, which is consistent with our internal growth plan. In light of the Company's strong performance in the first half of our fiscal quarter, we expect our net revenue growth target to range from approximately 26 to 28 percent for the fiscal year ending September 30, 2004.

The Company also expects improvement in net income margin as a result of lower interest expense related to the repayment of our long-term debt. The Company is targeting net income growth of approximately 80 basis points for the fiscal year ended September 30, 2004, excluding costs associated with our recent secondary offering of approximately $0.5 million. Future-year improvements are expected to be more modest. Our annual target is anticipated to exceed 20 basis points on an annual basis when we are opening a single large location.

As we discussed last quarter, operating income typically is the lowest during the third fiscal quarter, which ends June 30th, due to the lower population of students. The Company's comps do not vary significantly with changes in student population. We expect quarterly fluctuations and 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 farther ahead, we expect to sustain net revenue growth over the next two fiscal years in the 20 to 25 percent range. We anticipate that this growth will come from three primary sources -- increased enrollment growth of 15 to 19 percent per year; program extensions and new elective growth; and tuition increases, which we expect to be in the 3 to 5 percent range.

Turning 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 out our infrastructure, we must balance margin improvement with the need to build bench strength through 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, or we may see slight margin compression as we incur initial investment costs associated with the planned openings. In the event that two campuses are opened within a twelve-month period, margins may be lower than in the comparable quarter for several quarters as the new locations build up their student population. Now I will turn it back to Kim for a quick summary.

Thank you, Jennifer. The opportunity before us is immense, and through focused execution, we believe that we can create a winning solution for our industry customers and our students, while building long-term success for our business and increased value for our shareholders. At this point, we would be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) Howard Block with Banc of America Securities.

Good afternoon, Kim and Jennifer. Congratulations on a very nice second quarter as a public company. First question I have is, with regard to what we call the earning rate per student, it looks like the revenue per average population was up about almost 7 percent year-over-year. I know that your price hikes are 3 to 5 percent year-over-year. Can you perhaps unbundle the difference between the two, and what would you attribute to pricing mix issue, what do you attribute to longer programs, extended programs?

We are seeing some improvement on a year-on-year basis that's being attributed to our NTI location, which is a higher-priced program for us, and that's driving that rate up a little bit. As you look forward, that will even out, simply because it's moving more toward maturity and becoming less of a percentage year-on-year.

We are also seeing a shift to longer programs. And I'd say that over the last year time frame, we've seen an extension in program lengths of approximately close to a month of additional links in that program, which also helps to contribute there.

I think maybe on the last conference call you mentioned there was, for instance, a service writing module that was being added at Rancho Cucamonga. When you add a model, it's not really supplanting something else, right? It's just extending the program?

That would be correct.

And if we were trying to model that, would we think about -- if it's $20,000 a year roughly, can we just prorate that over on a weekly basis and get close to what the extension is contributing to revenue?

Yes, that would get you pretty close.

The last question, more housekeeping. Can you share with us what the receivables balance was and the deferred revenue balance was at the end of the quarter?

I sure can. Hang on just a second.

Why don't we go on the next thing, and I will pull that out in just a second.

I'll cheat another one in before I come back to the queue. Can you update us on these OEM contracts. I know that there were a few that were expiring at the end of '03. I don't know if that's all that critical or not, but I was wondering if there had been recent signings or renewals that are worth mentioning, like the BMW and I think VW and maybe Audi expired at the end of '03?

Yes, I would be happy to comment on it. The Audi and Volkswagen contract has been renewed. We do have signed contracts in-house on both of those programs. And the other one that was up for renewal was BMW. We did extend the length of that program through the year 2004. And contract negotiations are currently underway; we are looking at making some changes to the model to accommodate BMW's changing needs. But we feel like we are progressing favorably with those negotiations. The other one is Jaguar. And they are looking at some additional programs with Land Rover and have elongated, I think, the renewal process, but we are expecting that to wrap up within the next 45 days.

Great. Thank you very much.

And Jennifer, I think, has your answer.

Yes, you were looking for the receivables balance at March 31, 2004, which would be 14 million 034. And then at the September time frame, it would have been 19,856,000.

And actually a little big of deferred if you have it.

Sure, I have that as well. The deferred revenue would have been 29 million 890 at March 31, and 25,692,000 at September 2003.

Great. Thank you.

You are welcome.

Fred McCrea with Thomas Weisel Partners.

Good afternoon. My congratulations as well.

Thanks, Fred.

Quick question on the Toyota relationship. This is obviously a nice win for you guys. Maybe you could walk us through this in relationship to how the Ford relationship blossomed. Is this the same type of expansion or would that be on the path, or do you think this could be something that could even exceeded it, in terms of number of campuses and participating students (indiscernible) the program?

Certainly, I think from a student demand standpoint, it could be as strong as Ford, but this will have to tie into the needs of Toyota. But as far as the evolution of the relationship and the way the contract is structured, it's very similar to how we began with Ford. And that was to test it at a single campus, work some of the issues out of the program on an elective standpoint, and then look at further expansion based on Toyota's dealer needs. I can't comment as to how it might expand over time, but my guess is we will work with the program at the Glendale Heights campus for a good year before we are talking about where else to expand it.

Following up, any thoughts in regards to General Motors and where they might be in terms of looking at alternative source suppliers relative to community colleges right now?

I believe that General Motors has just awarded their very large RFQ4 automotive training to Raytheon, who is overseeing their community college programs at this point in time. And if it's any indication of how it's been in the past, Raytheon has been reluctant to release some of that. However, I can tell you that we continue to work very closely with GM on some smaller segments of potential training opportunities. They are well aware of UTI's presence in the marketplace and the success that is helping Ford as well as Toyota and many of the premier OEMs as well in this different type of model.

So I can't comment on where they are going. I can tell you that there is a great level of awareness, and when they began to migrate from the community college programs, I can't tell you. But I can tell you that we are very much engaged with GM and are looking for any opportunities to be a training supplier for them.

So Raytheon is going to be overseeing, effectively, their current relationships with the community colleges on a go-forward basis?

That's how it has been structured for the last several years, and the word on the street is that's how it's going to continue for the foreseeable future. That's really all I can comment on -- that's all I know this point.

Okay. Jennifer, a quick one. In terms of cash flow from operations, do you have quarterly breakout as opposed to a six-month breakout for us?

I did not prepare a quarterly basis, but I would be happy to get that back to you.

That would be great. Thanks so much.

Greg Cappelli with Credit Suisse First Boston.

Congratulations to the whole team. I wanted to ask you for an update on vacancy rates as of the second quarter and where you expect them to be for the year, given the square footage adds?

We are just slightly above 90 percent capacity for the quarter -- between 90 and 91 percent. And then when you add the additional space that we are increasing at each of the locations, which would be inclusive of the Orlando automotive expansion, the new Exton, Pennsylvania campus, as well as the California location, it's going to get you back to about 75 percent capacity.

Okay.

And that's kind of the range that we have tended to try to run in at the beginning of the fiscal year, and then we kind of run through that capacity in that upcoming fiscal year.

Jen, when does that peak again during the school year?

Our peak students typically occur in the November time frame in the UTI system, and it's typically in the April time frame in MMI. But overall, it is typically the November time frame.

Okay. I'm sorry if I missed this. Would you be able to quantify the setup (ph) losses again in the second quarter?

I couldn't quite understand your question -- I'm sorry.

Would it be possible to quantify the setup losses in the second quarter. Sorry if I missed that, if you gave it out.

It's right at $1 million for the second quarter, and about 900,000 of it related to the SG&A line, in essence.

Okay. And then are your plans to go and open up two campuses next year, or does it stand at one?

We are working toward two, and that is largely dependent upon our ability to negotiate land or an existing building, but the goal that we are working on internally is toward two.

Just one more quick one, just to follow up on that comment on BMW, so I don't misinterpret that. Is that an issue right now with that, where potentially they may elect to go with somebody else or is that just something where you need to tweak some things for their needs?

I think there are two things there. BMW has been one of the OEMs who have partnered with other schools, and that is based on a corporate mandate that they cannot sole source. So I think that we will continue to see BMW reach out into a number of different systems of training, whether it be community colleges in intercity schools or like competitors with UTI; and they currently do have some of those programs today. What we're looking at is something of a strategic nature with them in terms of the type of technician training they need and at what level. We are contemplating an elective-type program as well as an advanced-level program. And that's kind of what is delaying this contract negotiation, because it looks different than it has in the past.

So this isn't something where they were dissatisfied with the quality of the training or something like that?

Oh no, it's not anything to do with that. The contract was up for renewal and I think they have restructured their training division and have incorporated their own growth plant and are now looking at the best way that UTI can help meet those needs.

Thanks a lot for the help.

Thank you.

Mark Hughes with SunTrust Equitable Securities.

Thank you very much. Your revenue target of 23 to 25 percent growth seems fairly modest in light of what you have been doing and in light of your enrollment numbers that you reported. It would seem like it's a midpoint that would be meaningful sequential decline, whereas the last couple of years you have had positive growth between the March and June quarters. Is there something different this year or are you just being conservative?

I would say there's a combination of things coming into play here. When you look at our fourth quarter, it tends to be one of our higher quarters from a student population standpoint, and so there's not as much room for growth in that period year-on-year as there might have been in prior periods, because we are closer to capacity. Certainly, our third quarter has always been our lowest quarter from an enrollment standpoint, primarily because the shorter programs, many of those students begin to graduate during that time frame.

I hear that. But then just looking at the last couple of years, the revenues have been positive, whereas you seem to be suggesting a decline sequentially.

You bet. I will say that when you look a year ago, NTI was just ramping up and so we had a lot of capacity at that particular location. And several of our other locations were also building very strongly. And we are seeing consistent growth, but those sites have come to a bit more of maturity, and so you're not seeing as large of an increase during those time frames.

Right. From the expense standpoint, Kim, I think you had talked about some extra expenses in Florida. Was I right in understanding 3 million in extra expenses? Is that going to be incurred this year and is that something that you had not considered in your guidance previously?

On that particular piece, it's really to of the $3 million is likely to hit expense in this fiscal year. The other million would be capital expenditure related, and then would be over the life of that equipment in subsequent years.

Those costs, though, it is likely that we will incur those costs. And what those mostly relate to are building the pipeline of students so that when we do open that campus that we can start class this fall.

And so those are extra expenses that you had not previously contemplated in your guidance, is that right?

That is correct.

Is that the reason I see that your year-over-year increased target is 80 basis points as opposed to a 100?

Yes, you're exactly right. We are able to overcome the majority of that because of the outperformance that we've seen in the first and second quarters, but the decline is related to that component, exactly.

One final question. I think you had suggested that the vacancy rate last quarter was 21 percent, whereas this quarter you are talking about utilization of 90 to 91 percent.

It actually was very close to that 90 percent range in last quarter. However, when we answered the question, we answered it for the fiscal year as opposed to that specific quarter. So it really was -- they are almost identical to one another from a capacity standpoint. We're just almost spot on between the two quarters.

So was that fiscal '03, that was the vacancy rate last year?

The 20 percent would have been what we would expect by the end of the fiscal year, so if you were to take into account new expansions. And now we have a couple additional expansions that's driving that percentage closer to 75 percent, as opposed to the 80 that we had previously reported, the difference being that we had not originally anticipated that we would be able to open the Orlando automotive program in this fiscal year.

And the 300,000 in extra expense for the accelerated depreciation, is that new as well?

That actually was part of last quarter's information as well, that is spread ratably over the term. I will say that we didn't spend a lot of time talking about it, and I thought it would be helpful for people to understand some of the more unusual costs that would be coming through. The reason we are highlighting that as a cost is that initially we had planned potentially to sublet that property. But now we are negotiating with the landlord and are able to exit that in a more expeditious fashion. And in doing so, we needed to shorten the life of those lease-hold improvements that are located on site.

Okay, thank you very much.

Richard Close with Jefferies & Company.

Congratulations. I had a quick question, Kim. You had mentioned I think in the dialog that you didn't have the license yet for Pennsylvania. Maybe if you could clarify that a little bit -- maybe I misheard that -- but what your expectations are, do you feel good about that, getting that in the near-term?

Sure. Yes, Pennsylvania is a state that does not grant full approval until you actually have your certificate of occupancy and are utilizing -- or ready to move into the facility. We have been working through conditional approvals, and we are expecting an approval in May for the formal recruitment and transfer of students to this campus. So we are on track and have made all of the milestones that we have laid out in terms of the regulatory approvals with Pennsylvania. So I do not see it being problematic; it's just the normal course of going into that space.

Maybe moving on to Florida, I think you gave a capacity addition of 400, I believe, for the automotive.

It's actually 500.

Why so small, or are you just doing 500 now with an option to really expand it to 1000. That's smaller than your typical automotive.

It is smaller than the typical automotive, but this is an expansion to an already very large campus in Orlando. So there is opportunity to expand and grow that program, but thought that this staged growth starting at a 500 student population made the most sense, given the existing size of this campus.

Typically, we try to keep campus sizes between 2500 and 3000 at a max, just in terms of the impact to the surrounding community, as far as part-time job availability and housing. We will look at how this continues to play out in the Orlando market, but we do have opportunity to expand it if the community and the surrounding areas are able to support it.

With respect to new school openings, staying on that subject. You mentioned I think New York, New England, potentially, as well as Northern California. Is there any type of preference there or is it just a matter of timing. And then, is there any opportunity we actually see something slip into or both in fiscal '05, or maybe even three schools in fiscal '05?

I think three schools in fiscal '05 would be a stretch, given the expansion that we've done in California and bringing the Orlando school on, as well as Pennsylvania and the growth that's required to support those inside of '05. I do think that two is possible, and our preference would be to open one on the West Coast and one on the East Coast. However, all three of those areas are easily supported, given both the student demand as well as the employer demand. And whichever site and lease that we can bring to closure first will be the first campus to come on. So we are working all three sites on a parallel basis.

Just one final one. I guess a follow-up to Fred's question on Toyota. Can you just sort of take us back in time to Ford? I know Toyota is different than Ford, but maybe talk a little bit what the Ford relationship did in terms of extending the stay and added revenue possibly?

Yes, I'd be happy to. In 2000 is when we actually started training students for Ford, and that started at a single campus in Arizona. And we operated that program for almost a full year before we started to expand it to the other campuses. When the program began initially, it was an extension of nine weeks and we were training about 700 students by the end of a full year period -- or at least 700 students had committed at the Arizona campus to take that program.

At this point -- or at the end of 2003, we had lengthened the program from nine weeks to 15 weeks, and we have rolled it out to all five campuses, and now more than 2000 students are enrolled or committed to taking the Ford program. I would say that we have seen continued growth year after year in terms of the campus rollouts, as well as the lengthening of the program as the needs of Ford and its dealers changed.

Thank you.

You're welcome.

Howard Block with Banc of America Securities.

The first question is, when you talked in the past about site selection, you offered a litany of factors -- the demographics, the psychographics, I believe, housing, job availability, possibly some manufacturing facilities. Anyway, in that litany the word competition isn't mentioned. And now you are moving into Philly, where there is certainly more competition, at least up in the Northeast, and also if you move into Northern California, Wyo Tech has a new campus up there. How important is competition in terms of the factors that you evaluate? And if you're moving in irrespective of competition, what does that say in terms of the size of the market and the opportunity?

That is a great question, Howard, and certainly competition does play into the decision-making. And we are always taking a real close look at the competitive landscape. The fortunate thing at this point in time is that the opportunity is so great that this isn't a marketshare game. And so there is enough student demand, as well as employer demand, for UTI and others to really excel in this industry.

I think the other thing is that if you look at Wyoming Tech, or even the Lincoln Tech on the East Coast, that our models are different, and that we differentiate ourselves with the industry relationships and are building that platform so that when marketshare is the game or part of the game, that we have the differentiation and the added value that the students will need in terms of making a decision. But I am not concerned about going into a Sacramento area knowing that Wyoming Tech is there, simply because of the supply-and-demand characteristics -- they are strong enough to support both.

Anything to add yet regarding a possible online learning initiative or anything?

Sure. As I mentioned in our last call, this was something that we had a dedicated team working on internally, and we were looking to pilot a blended program -- partly e-learning and part on-site. We were in the process of submitting that for regulatory approval. We have in fact received regulatory approval, we have the results of our pilot, and will begin testing this program on a larger-scale basis at our Arizona campus beginning in the fall -- this summer and fall, actually.

And our hope is that at the end of this fiscal year, we can comment on the roll e-learning will play for us in terms of our core programs, as well as what it might do with the relationships that we have with OEMs in training beyond the entry-level technician. So we have made good progress there. It's a small piece of our business today and we are just looking at new ways to integrate that into both our undergrad programs as well as the advanced-level training program that we are offering our OEMs.

Great. So would it be fair to think of it in terms of an opportunity to further leverage the capacity of a location?

Absolutely. We do think that that will be one of the benefits from the e-learning in terms of the technician training, and believe that there is also opportunity for different types of courses that would benefit our end-markets but are not necessarily technical in nature that could be delivered online as well. So it will help with the capacity, as well as creating a new delivery mechanism to offer new types of curriculums.

The last question is, it seems like a lot of the disclosure in terms of capacity additions and the number of students that correlate to that capacity, the math works to be somewhere around 110 to 120 square feet per student. Is that sort of a rule of thumb number or is that just coincidence or --?

We do have a footprint that has worked well for us. I will say that it is somewhat dependent on the training that's offered at the particular location. An example would be a diesel program takes more space than just a straight automotive program, and collision repair also is a little bit more space intensive simply because the vehicle changeout takes more lab area room to be able to work through that.

Great, thank you.

Robert Craig with Legg Mason Wood Walker.

Good afternoon, everybody. Just a couple of questions. One of them dovetailing a little bit off of Howard's question on online, when you mentioned being able to deliver some other programs. I was wondering if you could comment on any program development efforts. I know in the past you have mentioned some opportunity in areas like service and soft skills, and whether or not that would have any particular applicability online as well?

Absolutely. The OEMs and their dealers are telling us that they really are looking forward to having a more well-rounded technician as service grows and its importance, in terms of their overall business. And they are coming to us and asking us to look at delivering soft skill training, professionalism training, even service adviser, a number of those types of things that are not necessarily required in an instructor-led environment. There is opportunity to integrate those into the existing programs, as well as to create an entirely new program for a different position within the dealership, such as the service adviser or a parts and counter person. And we are in development stages and working with a number of OEMs on this project. I can't really comment on who they are at this point in time, but as they roll out in the near future, I will keep you apprised of that -- but believe there is good opportunity there.

Is that most likely an '05 event to roll out those programs?

I would say that the '05-'06 time frame, because the manufacturers will test it within their own dealer networks first before we really launch a full-blown program. And this would be something that's entirely new. You may see on the blended -- I guess blended training platform something sooner than that in the '05 time frame that would be supplemental to what we are currently doing right now.

That's helpful. One last numbers questions. You mentioned start-up losses of $1.25 million. Could you give some indication of what those might run for the balance of the year?

For the full year, it's close to $5 million, and 2 million of it -- almost 2 million of it -- have been incurred through the first two quarters.

Great, that's very helpful. Thanks, guys.

(indiscernible) with Lehman Brothers.

Congratulations on another real strong quarter. A couple questions, if I could. You talk about the 2500 to 3000 sort of mass capacity that you shoot for in your campuses. Can you give us a sense how many of the seven are there now or will be when you add this capacity you have talked about this year?

Most of the campuses are working towards -- are slightly over the 2000 mark in terms of the capacity -- with the capacity expansions that we will have completed by the end of this year. With the exception of -- NTI is not at that point yet; at this point, they are roughly 1300, 1200 students. But the capacity at all of those campuses we are building towards that. So we're at 90 percent capacity. Some campuses we are closing in on the 100 percent mark. We have about -- I'd say 65 percent of capacity at NTI, so open 35 percent. And there is probably 25 percent additional capacity at the Houston campus. So we are very close to the 2000, 2200 mark at all campuses with this expansion.

And we will open up a little bit more space right at the end of the fiscal year in California, relative to shifting over that 800 students doesn't come on right until the end of the fiscal year, when we expect to take possession of that building.

Okay. But thinking like over the next couple of years, you don't just need these new opens. It sounds like if you're not at that 2500 to 3000, you could potentially seek to do a couple more expansions at some of those seven campuses next year or something like that, that continue to drive growth.

That opportunity exists, and I'll give you an example. Should the Toyota program expand like Ford does, we would get additional facilities at these other campuses and expand the facilities as well as the student population to accommodate the Toyota program. So while we are at capacity today, we will continue to add space as needed to support lengthened curriculum that's coming at the request of the dealers or the OEMs.

Followed up on Howard's question on competition, do you have any plans to expand or is anything on the drawing board to expand beyond the core auto and other areas you are in today. Have you thought about skilled trades or anything else, or are you so comfortable with the growth opportunity over the next five years that you're comfortable just sticking with what you're doing today?

Our strategy is to go deeper within the verticals we are serving today because of the huge opportunity. However, we see that we can meet the end-market's needs in a different way than what we are today. And that would create new types of program offerings, but they would be servicing or meeting the needs of the end market. The answer is going deeper into the verticals, but offering a broader product or service offerings to our customers.

One last one. Other than the industry relationships, which obviously is a huge selling point and plus for you guys, is there anything else when you think about your model versus a Wyo Tech or a Lincoln that you think is much different? I have heard you say that on a couple of calls now. How else do you think about competing with those guys or what is different about what you offer?

I think in terms of Wyoming Tech, their model has been different up to this point in that the students go to school for a shorter period of time for longer days, and they are typically not working while they're going to school. So their overall educational expenses are slightly higher than what a UTI education would cost in total, because our students are actually able to work while they go to school.

So for the student who wants to concentrate entirely on their training and not work and then has the financial ability to do so, the Wyoming model makes sense for then. Typically, most students are needing to work while they're going to school and that has been a differentiator, I think, between the two UTI and Wyoming Tech models.

I think as far as Lincoln Tech goes, it's been more of a commuter-based model, so I think when you start to branch out beyond their areas of recruitment, it starts coming to brand name and recognition. And certainly the success of our graduates and where they're going to work, which is at a higher proportion than what the overall industry would reflect in terms of dealership positions becomes a very key differentiator for us.

Great, thanks a lot.

Mark Hughes with SunTrust Equitable Securities.

Just a quick follow-up. It's unclear (ph), the 5 million you talked about in spending this year -- is that just for the Exton campus or does that include the additional 2 million of sales and marketing in Florida?

That is just for the Exton location. The other 2 million would be incremental to that.

Gotcha. Okay.

Howard Block with Banc of America Securities.

Me again. Actually, a follow-up on Mark's question. So when you incur expenses to either augment or move a facility, even when it is bringing on new capacity and thereby arguably comparable to a startup in nature, those expenses will not be labeled as startup?

Because of the (technical difficulty) of not breaking out from a GAAP perspective, all of those costs would be operational in nature to us. But when we are expanding in a significant way to a location, we will break those costs out so they become visible to you and you can predict then what those costs will be.

I guess there's a little bit of gray here. For instance, Glendale Heights expenses to incur for the 4 to 5 or 600 additional students capacity there.

Okay. I understand now what you are saying. From a Glendale Heights standpoint, that expansion was just a little bit different than what you would see from relocating an entire program. That met two needs for us. One was that the campus itself had reached capacity and we had pent-up students, in essence, that were willing to come to the school that we were unable to teach if we didn't expand that capacity.

The other was that we needed to expand in relation to the Toyota contract coming on board, and we had visibility to that being added and knew we would need specific space associated with that. Just a little different. There aren't the same types of costs because we didn't need to launch an entirely different advertising campaign to fill those seats; there was demand already there.

Okay. Does you receivable balance include amounts where revenue has not yet been recognized?

Our receivable amounts would be strictly those amounts that we -- typically the amount that we would be owed under that student contract. So it would not include items that had not been earned, in essence. There is no gross up -- I guess that's what you're asking.

Right. Does the deferred revenue balance include any cash -- well, actually, would the deferred revenue include any amounts where cash has not yet been received?

It really is the amount -- the unearned component. So if we wound up -- under certain circumstances, you are able to receive funding in advance of the student matriculating, that would result in a credit balance. And that would be part of the deferred component.

Okay.

If that is helpful.

It would seem, though, in that case you would have a countervailing receivable without any revenue having been recognized, which means you would have some receivables where revenue hasn't been recognized if you have deferred where cash hasn't yet been received?

We really look from a receivables standpoint at a point in time and say what obligation exists for the student at that point in time. So if we are able to collect the funding, then that results obviously in a reduction of that receivable. But from a deferred standpoint, it looks at the unmatriculated portion. I guess the one point that would be a little unclear or less visible would be if we are able to receive those funds in advance, those credit balances would be a part of the deferred component, because those students have not matriculated through their program at that point.

Okay. And then the last question. Really the last one this time. Just to help understand the way in which you sort of measure either -- there were four starts in the quarter or five?

It is either four or five in a particular quarter, and it just depends on how that actual quarter winds up.

How did the second quarter wind up?

I believe it was four -- let me check to be sure.

It's not that urgent.

It is four.

Thanks again for your patience.

Thank you.

(OPERATOR INSTRUCTIONS) We have no further questions. I would like to turn the conference back to management for any concluding comments. Please go ahead.

I would just like to close by thanking you for participating on our call today and you to let you know that we will be presenting at a number of upcoming conferences, and we hope to see some of you there. Otherwise, we look forward to updating you on our achievements next quarter. Again, thank you for your interest in Universal Technical Institute.

That concludes the UTI second quarter fiscal 2004 conference call. If you would like to listen to a replay of today's conference, you may dial 1-800-405-2236 or 303-590-3000, using pass code 578763#. Thank you again for your participation on today's conference and you may now disconnect.