Universal Technical Institute Inc (UTI) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Universal Technical Institute Inc. third-quarter fiscal year of 2004 conference call. (OPERATOR INSTRUCTIONS). A replay of this call will be available for 90 days at www.uticorp.com or alternatively the call will be available through August 18th of 2004 by dialing 1-800-405-2236 or 303-590-3000 and entering the passcode of 11004362.

At this time, I would like to turn the conference over to Ms. Jill Fukuhara of the Financial Relations Board.

Thank you. Hello and thank you for joining us today for Universal Technical Institute's quarterly conference call. Management will discuss the results for its third fiscal quarter of 2004 which ended June 30th and then open the call up to your questions. Our earnings release issued after the market closed today and is available on UTI's Web site 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, 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 of Universal Technical Institute. At this time, I would like to turn the call over to Kim. Kim?

Thank you. It is my pleasure to welcome you to our quarterly conference call, and on today's call, I will begin with a brief overview of our Company followed by a review of our third-quarter performance. Then I will update you on our growth initiatives and turn it over to Jennifer for a more detailed review of our financial results, as well as our 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 degrees, diplomas and certificate programs at eight campuses and 22 manufacturer specific training facilities across the United States. Our student population is primarily male with approximately 60 percent being recent high school graduates and the remaining 40 percent adult learners seeking career changes.

Our strong third-quarter performance is due to higher student enrollment across all programs. In fact, average undergraduate enrollment for the quarter was up 24 percent compared to Q3 of 2003. As a result, our campuses operated with higher student densities in this quarter compared to the same period a year ago. During quarter three of 2004, we utilized approximately 85 percent of our capacity, an improvement of more than 10 percentage points from the prior year.

Net revenue for the quarter was 63 million, an increase of 29 percent over last year, while net income improved by 30 percent. As expected with expansion costs, we experienced a slight decline in operating margin; however, lower interest expense generated a slight improvement in net income margin. These additional fiscal Q3 costs were due to new facility expansion of 1.3 million and additional expenses related to our follow-on offering in April of 2004. Fortunately stronger margins at our mature campuses helped to offset the preopening costs of our new locations.

And now I would like to move to our growth strategy. As a reminder, there are four primary objectives. The first is to build a national footprint which is opening campuses in new markets. The second is to strengthen our sales and marketing efforts to support the ramp-up of new locations while maintaining enrollment in our mature markets. Third is to expand our program offerings, and fourth is to strengthen the existing industry relationships while seeking new industry alliances.

I would like to speak to each of them briefly and give you some insight on our progress. I will start with building a national footprint. This summer has been a very busy one for expansion. First, we leased a brand-new build-a-suite 287 square foot facility in Avondale, Arizona and moved our Phoenix campus, as well as all of the advanced training programs in the Phoenix area to the new site, and that happened in June. The campus is home to our automotive and diesel programs, as well as Hot Rod U, Ford Stack Fact, Audi, BMW and Volvo. The new facility will allow us to train all programs in a single more efficient facility located within a mile of numerous dealerships. This campus has a capacity of approximately 100 students, but creates a more conducive learning environment for them as well. The new facility is located in a developing area of the city where ample job and housing opportunities exists for the student population. This project was completed on time and on budget with no disruption to training.

Next we open the doors to our newest automotive campus in Exton, Pennsylvania. This campus is a build-a-suite lease facility encompassing 160,000 square feet of classrooms and training labs. We started our first class of 75 students on July 19, and our second class started this past Monday, bringing our entire student population to greater than 175 students. This project was also on time and on budget.

We have had strong student and industry customer interest for the new campus as this marks our first school in the Northeast. We believe this demand will support the campus's growth target of 500 to 700 students during its first full year of operations. In addition, we have been very successful in staffing the campus from both an instructor and support services standpoint to support its ramp-up.

Because of market demand, we're expanding and relocating our Southern California campus in Rancho Cucamonga. The new 187,000 square-foot facility is located within just a few miles of our existing campus and should be open for business during the fall. We also plan to lease this facility. This expansion will increase our capacity by approximately 800 students, bringing the total student capacity at this location to 2100.

Our next two campuses are planned to be in the Boston and Northern California areas, and we will release the specific locations once we have finalized the real estate transaction. We will be evaluating both lease and buy opportunities for our new facilities as a result of our available liquidity and potential tax incentives in certain areas. Both of these campuses are planned to open during the 2005 calendar year or the beginning of calendar year 2006 with the first in Q4 of fiscal year '05 and the second opening in the first half of fiscal year '06. We have identified several regional areas for expansion beyond our fiscal year 2005 and will share our progress as we move forward over the next year. This summarizes the national footprint expansion progress in our future plans.

I would like to spend just a few minutes on the second growth strategy, which is to strengthen our sales and marketing effort. This past year we conducted research in a variety of methods and worked with industry experts to strengthen the UTI brand and positioning for our target audience. This project is now completed and has been incorporated into a new marketing and advertising campaign that will launch this fall. This summer we will increase our field sales team, which is our high school representatives from 122 to 150 to support the continued growth of our new and existing campuses. Field representatives has now been equipped with computers, projectors and printers, and their high school presentation has been updated to incorporate Flash technology and video which is very appealing to the Generation Y audiences.

In addition, new print collateral now includes a very interactive CD-ROM, which again is very appealing to these audiences. To increase recruitment efforts within the adult market we will add 22 campus-based representatives for a total of 95. New advertising and print collateral has been developed for this team as well with different messages that resonate with the adult learner.

We are executing against our third growth strategy to add new curriculum to existing locations. We started an automotive training program at our Orlando campus, which historically has trained only for the motorcycle and marine industries. Currently we have started three classes, the first being on June 28. The current student population at Orlando in the automotive program is now over 180 students.

Earlier this year we entered into a long-term lease agreement to construct a 50,000 square-foot facility near the existing Orlando campus. This building is planned to house the UTI automotive technology program and will have a potential student seating capacity of 500. This addition increases the capacity of this campus to 2400 students. We expect preopening costs to be incurred primarily during Q4 of 2004 and the first quarter of 2005.

On a pretax basis, this will total approximately 3 million, two-thirds of which is related to sales and marketing, as well as the educational services and facility costs. The remaining third is related to capital expenditures. This is the first of several curriculum transplants currently under exploration across the UTI system.

As for our e-learning initiative, the first class is scheduled for September 22 in Phoenix, Arizona.

And then on our last growth strategy, which is to add new industry partners in more branded OEM programs, we have successfully launched a new Toyota elective at our Glendale Heights campus. This program adds nine weeks of training for students that select its elective. Toyota is significant in that it is our first automotive service elective with an Asian OEM. Each time an OEM selects UTI as a training partner it validates UTI in the marketplace in both the minds of the students and our industry customers.

We're pleased that we are executing on all of our key strategies, which is contributing to our strong financial performance. And now I would like to turn the call over to Jennifer Haslip, our CFO, for a detailed review of our financial results for the quarter.

Thank you. As noted in our press release, net revenues for the third quarter of fiscal 2004 were $63 million, up 28.7 percent from 48.9 million reported in the same quarter last year. Revenue growth was driven primarily by higher student enrollment, as well as modest tuition increases and program extensions. Income from operations for the third quarter was 10.9 million or 18.5 percent higher than the corresponding quarter last year. The year-over-year increase is attributable to growth in overall revenue combined with improved capacity utilization at our existing locations. The increase was partially offset by expansion costs at our new Exton, Pennsylvania campus and Orlando automotive facilities, and that totaled approximately $1.3 million. We also incurred approximately $500,000 of costs during the quarter related to our follow-on offering which was completed in April 2004 and, in addition to that, have incurred $300,000 of higher costs as compared to the prior year quarter related to being a public company.

Net interest expense for the third quarter was $89,000 compared with $954,000 for the same period last year due to a lower average balance of total debt and favorable interest rate. During July 2004, we negotiated the release of collateralization of our surety bonds through the issuance of a letter of credit. This $7.1 million letter of credit reduction will further reduce our interest expense in future periods.

Our adjusted tax rate for the third quarter was 38.4 percent compared to 38 percent reported for the same quarter last year and 39.6 percent for the second quarter of fiscal 2004. The higher effective rate for the three-month period in Q4 2004 as compared to the same quarter a year ago is attributable to nondeductible costs related to our follow-on offering. The lower effective tax rate during the third quarter of 2004 as compared to the second quarter relates to the release of state tax reserves. We would expect our tax rate for forward-looking periods to be in the 40 to 41 percent range.

Our net income for the third quarter was $6.6 million or 23 cents per diluted share. This represents a 30.3 percent increase from 5.1 million or 20 cents per diluted share for the same quarter last year. Net income margin improved slightly to 10.5 percent from 10.4 percent in the third quarter of fiscal 2003. During the quarter, we overcame a significant amount of expansion cost through the efficient utilization of our existing campuses.

Turning now to our balance sheet, we increased cash and cash equivalents to 40.8 million at June 30, 2004 compared with 8.9 million at September 30, 2003 and 34 million at March 31, 2004. We generated 16.1 million in additional cash flow from operations for the first nine months of the fiscal year as compared to the same nine-month period in the prior year. Our increased cash flow is the result of improved net income with favorable combined changes in assets and liabilities.

A significant portion of the favorable change in assets and liabilities is from the timing of cash receipts related to student receivables. This variation is due to the volume of students reaching the matriculation point that allows access to financial aid. Because we start students every three weeks, the timing may not directly correspond to the end of the quarter.

Capital expenditures for the nine months ended June 30, 2004 were approximately 12.1 million compared with approximately 6 million for the same nine-month period a year ago. Our capital expenditures typically vary with our student population, as well as planned program enhancements and expansion. Assets are a typically placed student 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 fiscal 2004 is approximately $18 million, inclusive of approximately 5.4 million of expansion-related costs. We believe that we will be able to adequately fund these activities with cash generated from operations.

The primary driver for our Company's solid performance is average enrollment growth. Our average undergraduate enrollment for the three months ended June 30, 2004 was 12,517 students, an increase of 23.9 percent from 10,104 students for the same period a year ago. Average undergraduate enrollment for the nine months ended June 30, 2004 was 12,762 or an increase of 24.8 percent from 10,228 students for the same period a year ago.

Undergraduate enrollment at the end of our third quarter of fiscal 2004 was 12,020 students compared with 9798 students at the end of the prior year third quarter and 12,834 students at the end of the second quarter of fiscal 2004.

Now I will look forward and give some guidance, which I will break down into the following categories -- fiscal 2004 expected revenue growth and annual margin target, fiscal 2005 ranges for revenue and margins, and fiscal 2006 ranges for revenue and margins, and lastly, seasonality in our business. Our target for fiscal 2004 fourth quarter year-over-year revenue growth ranges from 22 to 24 percent as compared to the same quarter last year. Based on the strong results of the first nine months of our fiscal year, we expect our net revenue growth targets to range from approximately 28 to 29 percent for the fiscal year ending September 30, 2004. We are targeting a net income margin of 11.2 percent for the fiscal year ending September 30, 2004, which is an 80 basis point improvement from the prior fiscal year. The net income margin target excludes costs associated with our recent follow-on offering of approximately $600,000, which were incurred primarily during the third quarter of fiscal '04.

I thought it would be helpful to highlight some unusual costs that we expect to incur during our fourth quarter of fiscal '04. We have recently negotiated the exit of our current lease related to our California location. We will incur exit costs of approximately $600,000 during the fourth quarter of 2004. We will also incur accelerated depreciation expense related to relocating that same California operation.

In addition, we expect to incur hiring costs during the fourth quarter related to significantly increasing our sales team. These costs are directly related to the two campus openings planned in calendar year '05, as well as growing our Exton, Orlando and Southern California locations.

Moving to our 2005 targets, we expect to increase net revenue in the 20 to 22 percent range for the year ending September 2005. Our planned campus expansions will include an opening in the fourth quarter of 2005 and the first half of 2006. A full year of preopening costs is anticipated to be incurred during 2005 for both locations. A significant portion of these costs directly relates to building the pipeline of students that support strong fall starts at our planned campus openings.

The Company expects to report net income margins for fiscal 2005 ranging from 9.7 percent to 10.2 percent. The targets include preopening costs for new locations as described above, as well as costs associated with the Company's program to comply with the Sarbanes-Oxley Act of 2002. The planned campus expansions subscribed above will alleviate capacity constraints in our current structure, as well as allow us to better meet our industry customer needs in their preferred areas of the country.

Looking further ahead to our fiscal 2006, we expect net revenue growth in the 20 to 25 percent range. We expect that revenue growth will come from three primary sources. First would be increased average enrollment growth. Second would be program extensions and new elective growth, and then lastly, tuition increases ranging approximately 3 to 5 percent on an annual basis.

During fiscal 2006, we would expect net income margins to return to our 2004 levels of 11.2 to 11.4 percent. The improvement is expected to be driven by efficient capacity utilization combined with constant attention to cost controls.

As new locations are added, the rate of margin improvement may slow or there may be slight margin compression. In the event that two campuses are opened within a twelve-month period, margins may be lower for several quarters as the new locations grow their student population.

As we discussed last quarter, operating income typically is the lowest during the third fiscal quarter ending June 30 due to a lower population of students. As our program length continues to expand, we are seeing better utilization of our facilities during our non-peak periods of the year. The Company's costs, however, do not typically vary 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 the result of new school openings, new program introductions and increased enrollment for adult students.

We are focused on strategic growth where it is aligned with our industry customers' needs. We are balancing that growth with building a strong infrastructure that can support a growing organization.

Now I would like to turn it back to Kim for a quick summary.

Thank you, Jennifer. Before we take questions, I would like to just comment on a few concerns that seem to be top of mind with our investors, and these issues are namely marketing trends, student persistence rate, the economy's impact on our business, and of course, the regulatory environment. From a marketing perspective, we continue to see efficiencies in lead generation as the Internet becomes a larger piece of our overall media mix. We're experiencing stable lead conversion rates with some productivity measures improving on the sales team. There was a slight increase in advertising cost in this quarter, but it was due to media blitzes in the new locations through local broadcasting efforts.

Our student persistence rates remain stable, and this should lead to the same general completion rates that we have historically reported of approximately 70 percent. While some believe an improved economy has a negative effect on the school business in general, our experience suggests that our business is acyclical and that there are no indications that would suggest anything different in our business today.

From a regulatory standpoint, we are moving forward on completing our Exton, Pennsylvania accreditation. We are awaiting the commission's approval on the second part of the application. Once this is completed, we will submit our package to the Department of Education, and this process typically takes about 90 days. Two of our campus locations that had their accreditation renewed for five years, four of our locations are in the middle of the accreditation process, and we are awaiting the commission's report for these campuses early in September. Our last campus is due for review in the fall of 2004.

At UTI we take compliance very seriously. Our culture is centered around doing the right thing. We have established processes and controls that we evaluate and measure regularly to manage business risks, and many of these processes have been automated to reduce the potential for human error. Our internal audit function regularly assesses compliance throughout the Company, and additionally we retain external financial aid auditors and other third-party consultants to evaluate our compliance with regulatory requirements. As customary, in March we submitted a financial aid audit in addition to our financial audit to the Department of Education with no significant findings at any of our locations.

And with that, we would now be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Greg Cappelli, Credit Suisse First Boston.

Just a couple of questions. I wondered if we could drill down a little bit more on your guidance for '05. If I run through the revenue and margin projections you guys put some color around, it looks like there is going to be from our expectations anyway a shift in the expenses. We had built in two new schools for the year, but opening in Q3 and Q4, it sounds like you will get one of those open but later in the year, and the other one if I heard you right right, you will have the expenses for that for the full year, but you won't be getting any revenue from it I guess in '05? Is that correct?

Yes, that is correct, and that would be a slight shift from what we had discussed earlier. What I would say is that we have been evaluating and looking at properties, and we think that it is most likely that we will be able to open locations in quarter four and then in the first half of '06. But the costs associated with opening that second campus are going to be born in the 2005 period simply to build that pipeline of students so that we have strong false starts for both locations.

Second question. On the cost front, has anything changed in terms of your original expectations for how much it would cost to open up a new school, including the two that are in fiscal '05? Has the amount of your cost expectations or losses throughout the year changed, or is it simply just the timing issue?

We are not really seeing any change at all. As Kim talked about on the Exton location that we just opened up, it opened up right on time and honestly right on budget. The new sites that we are planning, the real shift is that there's about 1.5 million of revenue that if we had started in quarter three and quarter four we would have seen in the fiscal '05 year, but with it postponing just slightly, it winds up falling into the following fiscal year. So that is where -- there are more costs being born, but not a change in the overall model.

Obviously if we are able to open them sooner, we are working towards that and we will have built a pipeline so that we can do that.

I understand, okay. Then you mentioned Sarbanes-Oxley. Was that -- can you just explain was there incremental work that came up that caught you by surprise? I've heard a couple of other companies mention the fact that there has been more work than they would have originally thought. Is there a way you can quantify it? Is it 500,000, a million on expenses?

Okay. Basically with Sarbanes-Oxley, we were well aware that we would need to comply with that by the end of our fiscal year 2005. I will say that there have been some changes in what those requirements are from an external basis. And when I say that I mean they are broadening and defining because these are new rules exactly what it means to comply.

I would say from a cost perspective we're seeing an increase in what we would have expected the cost to be, but not -- I would say it is probably in the range of $400,000 to $500,000 more than we would have planned on. And when I say that, I would estimate with all the IT components of the costs, all of the accounting costs related to both headcount, as well as the test function itself, those costs probably are in the $1.8 million range from the Company's standpoint.

Given your fiscal year, when do you actually need to be completely compliant with Sarbanes-Oxley?

Our application will be done as of September 30, 2005. But we have to obviously show that we are in compliance before then with our auditors.

I understand. One quick last one. You mentioned -- I just want to make sure there is an increase in the tax rate. Did you say 41 to 42 percent?

No, 40 to 41 percent would be our expectation going forward, so it is a slight increase from what we are seeing this year. But we're getting to being a full tax payer in all of our states, and that is what is driving that rate up.

Got it. Thanks a lot.

Fred McCrea, Thomas Weisel Partners.

A couple of questions about the new capacity expansion. Maybe you can first tell us in terms of looking at these various two markets that you have identified, Boston and Northern California, would there be one you would be interested in opening prior to the other, or is that going to be largely identifying the real estate right now?

It is largely dependent on the real estate. We have a good indication at this point as to which one will come first, but our preference is based on how quickly we can wrap up these real estate transactions.

And then in terms of maybe you could walk us through -- I know that Exton based upon previous models will come in probably a little bit lower than expectation or in terms of the expenses, so you have done a little bit better there. Do you assume looking forward in terms of your guidance that these could come in a little bit better than previous schools as well?

I would say that Exton is a good target and is going to be right in the range. Certainly each location has its own specificity for prices, and we typically build out into tuition pricing. But depending on if you are in the East or in certain other locations, the East tends to be a little bit more expensive from a staffing perspective and you bear those costs in advance of when you open up the school, but it is priced accordingly. So as it ramps up, it becomes invisible.

And then maybe you could just walk us through where Exton came out at in the split between CapEx and operating expenses up to the opening day.

Up to the opening day? We had from an Exton standpoint, it was really $1.2 million of costs that we have incurred to date and a very small portion of costs related to the Orlando opening that we had, basically a little over $100,000 that were actually attributable to that site.

Was that just -- the 1.2 for Exton, was that just in the quarter?

That was just in the quarter.

And what would have been a fully loaded preopening expense on Exton?

It was really right around 2.8 million to date, and then we will continue to incur ramp-up costs into the fourth quarter, but we also then will be taking in some revenue as well.

Very good. And then maybe one final one. In terms of your overall media mix right now, how is that sitting in terms of your advertising spend?

I would say that we are continuing to see improvement in efficiencies as the Internet grows as a larger piece of our media mix, and we are seeing reduction in overall television spending. We're spending the same amount of money. It is just being reallocated to different sources, and we have been very pleased with the results coming off of the Internet with our own micro site and driving that activity to our Web site. So the Internet has been very helpful in our overall media mix.

And have the Internet conversion rates been going up?

Yes, Internet, it's been positive on all fronts. We have seen very strong conversion rates with all of the media for that matter. Our conversion rates remain strong. But Internet has certainly become a bigger player for us in the overall mix.

Howard Block, Bank of America Securities.

Congratulations on a very nice quarter. The first question is in Exton, the 75 students that started in July and the 100 or so started in August, any sense of how many of those were actually transfers from other schools?

Well, effectively all of them were simply because of the way we ramp up the enrollment. Let me back up. They were not actually attending a school, but they were originally enrolled to go to one of our other campuses, and as soon as they know that the Pennsylvania location is up and running and we are approved to recruit, we transfer those students to Pennsylvania and then backfill the other locations. So in effect, we overfill some of the other locations to allow for this transfer, and that is what is happening with the first couple of start dates. These are primarily field representatives or high school business that have been on the books that we are now building into this ramp-up, and it is very much the way we have done in the past and will continue to do in the future.

Okay. But there were not any bodies that left other facilities and moved to Exton?

No, there were no physical transfers. They had just committed to go to school at another UTI location, and we are hoping that the Pennsylvania campus opened before they started. There were no physical transfers.

Any update on the OEM relationship front. I think we were chatting about maybe Jaguar, Land Rover and BMW on the last call.

Yes, Jaguar is -- we're basically waiting for the signed contract at this point. All of the negotiations are complete, and I was hoping we would have the signed contract before this call and are expecting it any day, which is basically a three-year renewal.

We are expecting that Land Rover -- I think I announced on the last call that Land Rover would be negotiated separately and don't believe we will have anything in the works until 2005 with Land Rover.

As far as BMW, we have basically reached a handshake agreement for the next three years as well. But they have up until December to sign the agreement, and my guess is they will wait up until December to send us the agreement. Meanwhile we are scheduled scheduling students beyond that date for the BMW classes.

Okay and has there been any meaningful shift or do you see any meaningful shift coming in terms of the percentage of undergraduate students who moved into graduate programs? I think it was last disclosed at about 30 percent.

I would say that as our undergrad population grows and the fact that the MSAT or the advanced training programs are not growing as a larger percentage, that percentage is going to shrink. And without having the numbers in front of me, that would be my guess is that it has shrunk somewhat just given the growth of our undergraduate population.

And is the graduate revenue still sort of at about 7 percent of the total?

I think it is going to wind up closer to 6 by the end of the fiscal year if I remember correctly, and I would expect that would again as a total percentage to drop. It could go to 5 or even 4.5 percent in the upcoming year. It is still growing. It is just not growing at the same pace as the rest of the business.

Okay. And then the guidance for the fourth quarter, I know you are sort of a net margin guidance company. But it seems that in the last couple of quarters, your first two public quarters, you have outperformed nicely, but all along you have sort of been holding to this full-year improvement and a net income margin of about 80 to 100 bips (ph), which has obviously added more and more compression if you will to the fourth-quarter number. You have been implying something for the fourth quarter, and now here we are looking at the fourth quarter. It looks like sort of at the operating level -- I know you don't disclose guidance there -- that you are implying a pretty significant year-over-year erosion in the operating margin, somewhere in the neighborhood I want to say of about 300 basis points. It seems as though that level of erosion is maybe a little bit too conservative considering that in the third quarter the year-over-year erosion was not that severe considering that you have students now in these new schools in the fourth quarter generating revenue.

Finally considering I think last year Q4 '03, if I recall, you said that you had a lot of pre-IPO costs incurred, as well as maybe some incremental marketing spending in the quarter that was a bit extraordinary. So can you help reconcile all that with what appears to be an implied erosion in the fourth quarter margin, or are you just being real conservative?

I can tell you that there are a number of things that are incurring in this fourth quarter fourth quarter that did not occur in the prior year, and one of the biggest costs is the exit costs for our California location. We are exiting that lease, and we have just recently renegotiated that contract and it became very close to $600,000 for us to exit that lease. That allows us to move to a new facility and really add nearly 800 new students. So it's a very good exit strategy, but that does fall into that quarter.

In addition to that, as you compare the quarters year-on-year, we had accelerated depreciation of $300,000 that will fall into that quarter that just did not exist because again we are exiting that location and there is an acceleration that is occurring.

In addition to that, one of the things that I think is driving a significant portion of our cost in the fourth quarter is advertising and sales and marketing related to our new Orlando expansion. As you might remember when we gave our original guidance for the year, that was not included in any of the targets. But we have been able to really overcome all of those costs and keep our targets the same. I would say that is one of the bigger primary drivers of what those extra costs are in that quarter.

Okay. Thank you. I will jump back into the queue.

Mark Hughes, SunTrust Robinson-Humphrey.

Thank you very much. I think you've touched on some of this, but is it possible to break out the sales and marketing expenses for the expansions in Q2, Q3 and Q4? As I said, I think you have mentioned some of those numbers, but do you have them there in front of you sort of in that way?

I can talk to you -- I can give you some of that. I can tell you that it was really only around $100,000 of costs associated with opening up our Orlando location that occurred in Q3 that was specifically related to that facility. And so the basically $2 million that we're discussing now will fall between our fourth quarter of '04 and our first quarter of '05. We will want to build that population as soon as, as quickly as we can. So we will spend a significant amount of those dollars during our fourth quarter.

I will say that primarily up through the second quarter of 2004 from an Exton, Pennsylvania standpoint, those costs were primarily sales and marketing oriented, and now we have had a blend between those two costs. I don't have the breakout specifically in front of me for how those costs ramped up on an individual quarter between the two categories, but I can certainly get that for you.

So it was the 1.2 million in spending on Exton this quarter, was that combined capital and sales and marketing?

No, it would have been sales and marketing and operational type expenses related to hiring instructional staff, as well as support services as that school launched.

Right. How do we think about seasonality in the business between looking second to third quarter? If you look over the last couple of years in '02, you had kind of a meaningful sequential dip last year, just a modest drop between 2 and 3Q. What would you expect to be sort of the normal change in operating profitability between the second and third quarters?

I think we are going for a period of time looking forward. We are going to continue to see a dip that occurs between the second and third quarters, and I think one of the biggest drivers of that is the length of our program. We have students typically in school 15 months because some are longer and some are shorter. We tend to experience a number of graduations that occur during that summer quarter, and our stronger starts occur in the fourth quarter.

And so I think as the population shifts a little bit more towards the adult learner, which we're starting to see occur, that will even out a little bit, and I believe that is what played into our ability to really leverage our facilities and have a higher number of seats filled both in that third quarter but also in that second quarter.

Connie Regan (ph), ThinkEquity Partners.

I got a bit late on the call, and I apologize if you talked about this already. But you were originally shooting for two campus openings in '05, one of which is now in '06? Can you elaborate on the reasons for that slight delay? And also if this reason why the top-end of the revenue guidance range for '05 came down a bit?

I will say that we have talked about opening two locations in the calendar year of '05, and and it would be dependent upon whether or not we could negotiate the leases in a timely way to be able to start those -- to be able to open those campuses. That would dictate whether it was Q3, Q4 or Q1 of 2006.

I will say that we have not seen -- or we are in negotiation with two of those locations and expect that we can hit the timing that we committed to, and there's some potential that it could move up. As Kim talked about in her call, we are building the pipeline of students if that becomes available. But I would say it is as likely as not it will be the third quarter and the first quarter of '06.

Okay, great. And then Corinthian recently acquired the American Motorcycle Institute in Florida which is less than 60 miles away from your MMI campus in Orlando. Have you looked at that school as a potential acquisition, and how do you think of it in terms of competition? How has that competition been with that school in the past?

I am certainly familiar with AMI. No, we have not considered it as a potential acquisition. It did not really meet our national footprint requirements.

As far as competition, it has not been that strong a competition for us historically, and I guess this applies to both the motorcycle and the automotive market. I am not that concerned about Corinthian's entry into the market simply because the schools that they have acquired have been some form of competition for us historically. While their growth plans may heat up the competitive battle in certain locations, I believe in the end that the industry customer relationship and the opportunities afforded to our students as a result of those relationships will be the key factor. I believe that that provides UTI the competitive advantage, not only in the motorcycle area with a school 50 miles away, but in the automotive area with the school five miles away or several states away.

Okay, I see. And then I have a question on your entrance requirements. You mostly require high school or GED for your programs, but at some point, you said you also admit some ability to benefit students. What overall percent of the student population would you say are ATB students at this point?

I would say that probably 25 percent of the student population is ability to benefit.

And is California the only state where UTI uses an entrance exam, and if so, is it standardized tests like the (inaudible) or CPAT or COMPASS tests?

California is the only state where we are using that. I do believe it is Wunderlich.

It is Wunderlich.

And that is the only state that requires that we use that.

I see. What is the test score that you require to pass?

I cannot tell you exactly what that test score is off the top of my head, but I can get that out to you.

Right. And last question, what was your bad debt in the quarter?

It was just slightly below 1 percent for the quarter, and our target internally is 2 percent of net revenue.

Richard Close, Jefferies & Co..

Congratulations on a very solid quarter. And good clarity here. Just a couple of questions and more housekeeping, Jennifer. Just to go over the Sarbanes-Oxley again just to make sure that I am on the right track, the 1.8 million that you mentioned, was that expected for fiscal '05 and the 400,000 to 500,000 is on top of that or included in the 1.8 million?

That would be included in that 1.8 million number.

Okay. All that 1.8 million is what you expected for fiscal '05, correct?

That is. Actually it is 1.7 for the '05 period.

1.7, okay. So you incurred about 100,000 to date so far?

No, we plan to incur between 100,000 and 200,000 in this last quarter of the fiscal year. (multiple speakers)

And then maybe, I apologize if this is a repeat for everyone else, but maybe if you could just go over what a typical opening is from expenses as well as the ramp up? And obviously it sounds like we will be adjusting things here for fiscal '05. Could you may be just refresh us on a typical opening and everything involved in that on the expense lines and revenue buildup?

You bet. I will talk to it and I will give you a little bit of color on the quarterly impact since we are talking about two different timeframes. Our most typical model has been opened in the fourth quarter and typically somewhere near the beginning of that quarter. And so if we look at it as a potentially new school, we have been targeting a seating capacity of around 1900. In that first quarter, we typically see between 1.5, right around 1.5 million of revenue.

For that first full year of preopening costs, we would see on the educational services and facilities lines typically about 2.7 million, and on SG&A we're going to see around 3.3 to 3.5 million, which gets you to basically an operating loss with one quarter of operations during that timeframe, right around $5 million.

And when I am saying in the way that we are looking at opening basically incurring the cost for '06, but not opening until that first half of '06, you basically lose 1.5 million of revenue, and that is what takes you above the $6 million range of around $6 to $6.5 million that we would incur from a cost perspective if you lose that revenue.

From a capital expenditure standpoint, we are typically see around $2.5 million of capital dollars being required to begin a facility. And then you're going to see in the following year another $1.5 to $2 million as that population ramps up, and it is somewhat dependent upon high quickly it ramps as to how much you are required to spend.

I would say that the typical cash flow breakeven occurs in the first full year of operations, and it typically results around the 500 to 700 student population. And then over a three-year timeframe, we typically are able to recoup the entire investment.

Okay, great. I appreciate the details there. And then, Kim, just the last question. You had mentioned on the Internet marketing side something that is driving individuals to your own personal site. If you could maybe elaborate a little bit on that, what you're using and maybe some additional details?

Sure. We are using as my guess is many other schools are some third-party referral sources that are tracking Internet inquiries based on keywords through the search engines and then refer those two one of the school sites to capture the inquiries. We have developed our own system internally where we are developing the micro sites that is doing the same type of things. I would say at this point in time about 60 percent of the Internet regeneration is coming from our own internal efforts in producing these micro sites to drive activity to our own Web site and about 40 percent is with external parties. That is something that we have moved from being 100 percent external to this 60 percent, and because we basically removed the middleman, it is driving our costs down significantly.

Our efforts are a little different than some of the other schools because at this point in time we can still market in a very targeted way, and students are seeking us out. So we are not having to do as much of the pop-up advertising as you might see other schools doing. Rather we're just working with the search engines to drive them to our site, and it happens to be very cost-effective.

Great. Thank you very much. That helps a lot.

Fred McCrea.

Just a quick follow-up. Can you comment, Jennifer, in terms of average share count for the FY '05?

I would have to get back to you on that one. I can certainly do that.

Howard Block.

Jennifer, on the $600,000 in exit costs in California, that does not include the $300,000 of accelerated depreciation? Is that right?

Right. The combined total would be 900,000 that will hit that quarter.

Okay. I think you had mentioned previously that for moving the facility in Arizona it would be about $500,000?

That is correct, and that did come in slightly under budget as I understand it. So that was a favorable outcome that occurred during the third quarter.

Okay. Well, that is over and done with. Did I sense in your presentation that maybe you changed the semantics a little bit? We're talking about expansion costs now? Is that in lieu of start-up, or is that in addition to? It seemed like maybe you're recognizing that some of these are not pure start-ups.

No, I would say it's just the vernacular that we are currently using. There is no difference in the types of costs that we're including in those.

Okay. So we did not hear anything about Glendale Heights or the Chicago facility in the discussion. Were there any expenses incurred in the quarter from that, and what is the outlook on that? Are those considered expansion costs?

I would say it is little different in the Glendale Heights ramp-up just simply because we have pent-up demand for students there, and so we are not advertising specifically to take on additional space. We already saw students on the books relative to that. So the advertising spend would not necessarily be a component of those costs.

Where the costs would come in would be retrofitting that building that we will be taking this off-site and then the resulting depreciation that will come onboard as a result of that. We expect to take possession of that building either late August or late September timeframe is when we are anticipating taking occupancy. So we don't have students in there, and that is really why we did not clarify that on the call.

Okay. But are there any costs in the fourth quarter that I guess are extraordinary or incremental to what we have talked about to date that we need to think about for that move?

There is a small amount of rent that would come into play in that quarter, but it is not significant. There is no real moving cost per se because we are not relocating an existing campus.

Okay.

It is de minimus I would say.

Okay. And then in terms of what we call the earning rate per student, the growth in that number in the quarter was pretty consistent with the advertised price hikes I think sort of 5 percent for UTI and 3 percent for MMI.

Yes, it is coming in just slightly under 4 percent for the quarter, and that is right in line with what our expectations would be.

Okay. So I guess my expectations might have been for it to grow a little faster considering that NTI I would think and its higher price point would be coming a greater part of the mix, as well as it seems like the students -- some of these electives and other programs might be started extending the stay of some students and helping grow that business. I know there was a tough comp last year. I think it was 7 percent in the third quarter of '03, but --?

And really you were right on your comment with NTI that that drove that last year. We were more at scale, and so it still impacts it but to a much smaller degree because it has already been there for a full year, and we did see incremental growth but it was not 1200 students of growth. It was a little bit more measured.

Okay. I had another question here. In terms of the number of starts in the quarter, was it three versus three in the prior year or four versus three?

In that quarter, let me look here.

Is it even important for us to think about is there any implication from the quarter if, in fact, you did have an odd comparison?

There really isn't on the number of starts because it just becomes the deviser for it to calculate the average. So that part of it does not really dictate it. I will say that when we have starts that occur right after the quarter-end, then those aren't in our end of period starts. And so you can wind up with an anomaly that is created there. That is why that average student population is really the best metric to look at.

Okay. But for purposes of comparing the ending number, there is no anomaly to be concerned about?

I personally would not compare ending numbers for the reasons that you suggested because you can be off a start or two or three actually as we start to expand this program or the campuses and the program offerings that they really mean nothing. It could be weak difference or a month difference, and we believe that the average student population is the best indicator over time.

Okay. And then I think you had may have answered it, but did you give guidance for CapEx for '05 and '06?

We did not, but I will say that capital expenditures have been trending between 5 and 6 percent of our total revenue, which would take it to $18.5 to $19 million for our base campuses. And then you would need to lay on top of that new openings. So if it takes us roughly $2 to $2.5 million to open up a new site, that would be incremental to that number, as well as some costs associated with ramping up the Orlando site student population as well.

Now that also would change depending on whether -- and we are evaluating whether we would be leasing or buying our new facilities as Kim talked about in her commentary, and so if we purchased a facility, then that certainly would change that dynamic but it would all be part of the new school capital expenditure.

Okay and then I just assume that all the moves that we're talking about in these schools we're talking about really just through Exton have sort of occurred, let's just say. Do you know where you would be right now in terms of utilization at capacity or where capacity is also I guess? (multiple speakers)

Okay. Well, it is at basically 1900 (multiple speakers)

No, I'm sorry, I actually meant all-in, all schools, all locations?

I'm sorry. (multiple speakers). Yes, 85 percent is where we stood for the quarter, and our anticipation is that we would get to the basically 75 percent range with the taking in Exton capacity that won't come into play until the fourth quarter because we did not take occupancy until that point. We will not take occupancy of the Orlando site until later in the fall. We are currently teaching that program at our existing locations.

Got you. So the 85 percent in terms of the students includes the (inaudible) in Orlando, but not any of the new auto capacity in Orlando?

Exactly.

And it includes the 75 students in Exton but none of the Exton capacity?

There were no 75 in that quarter because the start did not occur until (multiple speakers).

July 19th. Got you. Okay, thanks a lot.

Greg Cappelli.

Just a quick follow-up. Two areas. One, the course load per student that you're seeing is there any change in that from existing schools to what you're seeing initially on from the new schools or students in the new areas?

No, I would say that with the new schools the only difference is that Exton only offers automotive, so there is not an opportunity for the students to take an automotive diesel combination as they could at Phoenix, Houston or Glendale Heights. But the length of program for the automotive I guess program offerings remain very similar.

And then what would be your expectations in terms of rolling out additions to the program? Are you waiting for approvals, or what are you waiting for?

Well, in terms of what might be next at Exton would be a branded elective, and that would be something that would be added much later into the year as the students near completion of their core program, and so that is a possibility for this student population federal. As well as we are currently exploring which campuses we should branch our collision repair program to, as well as our diesel program with some of the new campus considerations. And so those things are being considered for the '05, '06 fiscal timeframe.

Okay. And then have you had any issues just with students that might have thought they were going to one school you know now going to a completely different location in the country? Obviously you have got capacity, much more capacity in certain geographic areas, so you're going to have the capacity. But I guess it's not necessarily going to be conducive to where people live or where they might want to go. How do you deal with that situation?

Typically we have been able to accommodate the students' demands, and we try to follow just normal migration patterns of the students in terms of where their preferred location would be. We staff our representatives to support and drive the number of enrollments needed to support the capacity at that campus. We have not had issues where we have students that are upset because they cannot get into their preferred campus location.

So we just try to map it based on historical experience, normal migration patterns and have been able to do that successfully in the past, and we would expect to do the same in the future.

Okay. One final one just for clarification. The next two schools where the timing looks like it's changing a little bit, what quarter actually do the first start-up expenses hit?

They will begin -- some of them will be in this last quarter (multiple speakers) right in particular because we're hiring the field reps so that they can go out and be in the high school market when the schools open.

Okay. My guess is that would be under $1 million per --?

Absolutely, sure.

Okay. Then will both of them be incurring start-ups expenses in Q1 '05?

Yes, they will.

Both of them will be incurring it in Q4 of '04 as well because we are hiring reps to support both of those new campuses.

I would say that the cost would be very similar to that new store model that we had talked to earlier on in the call. You're going to wind up having the cost occur, but the revenue will be dictated upon when the actual opening occurred.

Robin Browdy (ph), Alpha Capital Partners.

Just to follow-up on this new school opening, it is a little confusing. Corrects me if I am wrong, so what is really changing from your previous guidance? Is it that $1.5 million in revenue is pushed out to the next year?

That is that.

And that is the only change from your previous guidance?

Well, the change would -- basically, yes. Effectively that is the only change.

If I were to just in my model input the margin assumptions and revenue growth that you had guided to and added after-tax $1.5 million so it is around $900,000, divide that by your current share count, I think that is only like 3 cents to earnings?

You're not thinking about that quite in the right way. I would say that you have to focus on what was in the year, the prior year, as compared to what would be occurring in the '05 period. And when I say that we have got one really one and half new large campuses that are coming into the '05 period that we did not have related to this (inaudible) plan in essence. You've got one new site that we are putting into play, one large site that we are putting into play in '04, which would be Exton.

About $8 million in cost?

Actually it is closer to 5. When you consider the revenue component of it, the operating income would be closer to 5. And I can work through the model at a later point with you. That might be more helpful.

And so were those assumptions of opening up those two new schools not in your previous guidance? Is that where we are getting the difference from?

We had plans to open potentially two schools in the 2005 period, but we had not planned -- the difference is in when they are going to open. One will be in Q3, and there is original model one was in in Q3 and the other was in Q4.

Okay.

And the other cost that was not in the original model was the expanded program that we -- the automotive program that we moved to Orlando.

But that you said was not that much? Right?

It was not that much for the third quarter. There will be significant ramp-up costs that will occur in the fourth quarter of '04 and the first quarter of '05.

How much -- I'm sure you probably said that already, but can you just restate how much that would be?

Roughly we're expecting roughly $2 million of costs associated with the Orlando site that are P&L oriented and roughly a million that will be related to capital expenditures, and those will follow over those two quarters.

Richard Close.

Just really a quick follow-up on I guess the secondary offering costs and all of that. I have heard 500,000, and 600,000 and have seen it a couple of times at those different levels. Maybe just a little clarification.

You bet. $500,000 was incurred during quarter three. $100,000 was incurred during quarter two.

Okay. Great.

Ms. McWaters, I am showing there are no further questions. Please continue.

With that, I would just like to say thank you for participating on our call today, and we appreciate your interest in UTI. Thank you.

Ladies and gentlemen, this concludes the UTI third-quarter fiscal year of 2004 conference call. As a reminder, if you would like to listen to a replay of today's call, you may dial 1-800-405-2236 or you may dial 303-590-3000 and enter the access number of 11004362.

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