Universal Technical Institute Inc (UTI) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the UTI fourth-quarter 2004 conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder this conference is being recorded today, Wednesday, December 1, 2004; and I would now like to turn the conference over to Ms. Jill Fukuhara with Financial Relations Board. Please go ahead, ma'am.

Thank you. Hello, and thank you for joining us today for Universal Technical Institute's quarterly conference call. Management will discuss the results for the fourth fiscal quarter of o2004 which ended September 30, 2004, and then open the call up to your questions. The Company's 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, 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 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, Jill. Good afternoon, ladies and gentlemen. Thank you for joining us to review Universal Technical Institute's fourth-quarter and year-end fiscal 2004 earnings. On today's call, as usual, I will begin with a brief overview of our Company followed by a review of our year-end financials and operating performance. Then I will update you on the most significant news on our growth initiatives.

Jennifer will then provide a more detailed review of our financial results as well as our forward-looking guidance. In closing I will address some frequently asked questions we have been receiving from our investors.

Universal Technical Institute is a leading provider of technician training for the automotive, diesel, collision repair, motorcycle, and marine industries. We offer undergraduate degrees, diploma, and certificate programs at 8 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.

We are pleased to announce another strong quarter of earnings and enrollment growth, which brings our fiscal year to a successful close. Average undergraduate enrollment for the fiscal year was 13,076, compared to fiscal year '03 of 10,568, an increase of approximately 24 percent year over year.

Our capacity utilization during Q4 of 2004 was approximately 75 percent, including the expansion of our Pennsylvania, California, Florida, and Illinois campuses. In addition, FlexTech, our blended e-learning program, began during September of 2004. We estimate that the program will add capacity of approximately 20 percent to the Arizona location, or 500 seats over time; and that is included in our current capacity calculation. The increased capacity system-wide brings relief to our existing sites that were operating at or above capacity.

Net revenue for fiscal year 2004 was $255.1 million, an increase of approximately 30 percent over last year. Net income improved by more than 41 percent as compared to a year ago, and our net income margins increased by 90 basis points.

Next I'd like to update you on new campus openings and campus expansions. In July we started our first class of students at our newest, 160,000 square foot automotive campus in Exton, Pennsylvania. Today the student population at this campus is greater than 600 after several successful start dates this summer and fall.

We continue to have both strong student and customer interest in this new campus, as our presence in the Northeast strengthens. We believe this demand will support the campus's growth target of 7 to 800 students on average during the first full year of operation, which is in line with our new school model that has been previously disclosed.

At our Rancho Cucamonga campus in Southern California, we expanded student capacity by 800, bringing our total student capacity at this location to 2,100. The new 187,000 square foot leased facility is conveniently located within a few miles of our former campus. Classes began at the new facility during September according to plan, on time, and within budget.

This summer we started an automotive training program at our Orlando campus, which historically trained only for the motorcycle and marine industries. Earlier this year, we entered into a long-term lease agreement to construct a 60,000 square foot facility near our existing Orlando campus. This building is now complete and has automotive student capacity of 500, which will not be fully realized until the latter part of this fiscal year. Currently we have better than 300 automotive students attending at Orlando.

Moving to our future growth strategies, our plans are well under way to open our next automotive campus in Norwood, Massachusetts, a Southwest suburb of Boston, in the fourth quarter fiscal year 2005. As previously announced, UTI purchased this property; and a discussion of the economics will be covered later in the call.

We also recently announced plans for our 10th campus in Sacramento, California. This 110,000 square foot facility is scheduled to open in the first half of fiscal year 2006 and will initially accommodate 1,100 students with the potential to add additional course offerings.

Our student demand from the Northern California and Pacific Northwest remains strong despite a changing competitive landscape. As a result, we have reduced sales and marketing costs related to this expansion for fiscal 2005.

We have identified several regional areas for expansion beyond fiscal year 2005 and will share our progress as we move forward over the next year. This summarizes our national footprint expansion progress and future plans.

I would next like to move to update you on the effectiveness of our sales and marketing effort to support campus expansions and our new campus locations.

In August we increased our field sales team from 122 to approximately 150 high school representatives. Field representatives introduced a new marketing campaign that has proven very effective with high school teachers as well as students and their parents.

Through increased recruitment efforts with the adult market we will continue to add up to 10 campus-based representatives throughout the year, 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.

Advertising costs rose slightly during the quarter as the result of increased testing in local markets in support of new campus locations. Internet advertising continues to increase as a greater component of the overall media mix. We have not seen any deterioration in conversion rates from the Internet-generated leads.

We continue to execute against our third growth strategy, to add new curriculum to existing locations. In November we announced that Ford Motor Company intends to bring the FACT program to our Exton, Pennsylvania, campus. Students can begin taking FACT classes as early as fall of 2005. Ford also committed to expanding the program to future automotive campuses.

We also intend to add an additional 50,000 square feet building to our Exton campus to accommodate our diesel and industrial technology programs during the fourth quarter of fiscal 2005. This program is a popular add-on to the Automotive Technology program at our Phoenix, Houston, and Glendale Heights campuses.

At our Houston campuses we're planning to increase the capacity of our Collision Repair and Refinish Technology program by 400 seats and to add approximately 12,600 square feet to the training space. We will also be adding 3 additional weeks to the program related to custom paint.

FlexTech, our new 50-50 blended e-learning program pilot, has been launched. We currently have approximately 20 students attending this program. Our next class is anticipated to begin in January of 2005; and this allows us ample time to integrate student feedback into the curriculum that we are receiving from the pilot program. Overall, comments and early student outcomes have been positive.

Our last growth strategy is focused on adding new industry partners as well as successfully renewing and strengthening our existing relationships. We have successfully launched a new Toyota elective at our Glendale Heights campus. This program adds 9 weeks of training for students who select the Toyota elective. We are pleased with the initial positive feedback on this program from both students and employers.

With respect to our manufacturer-specific advanced training programs, I am pleased to announce that we've successfully renewed our agreement with Jaguar cars for a 2-year term.

As for the agreement with BMW of North America that expires in December of 2004, the contractual agreement has been drafted, and terms agreed upon, and is waiting final signatures from BMW. As 2004 comes to a close, UTI will have graduated over 1,100 BMW step (ph) technicians since the inception of the relationship in '96. These relationships continue to be a key differentiator to our business strategy.

Now I would like to turn the call over to Jennifer, our CFO, for a detailed review of our financial results for the quarter and fiscal year. Jennifer?

Thank you, Kim. As noted in our press release, net revenues for the fourth quarter of fiscal 2004 were 69.5 million, up 26.7 percent from 54.9 million reported in the same quarter last year.

Revenue for the fiscal year increased to 255.1 million as compared to 196.5 million, a 29.9 percent increase. Revenue growth was driven primarily by higher student enrollment, as well as modest tuition increases and program extensions for the fiscal year and fourth-quarter results.

Income from operations for the fourth quarter was 11.7 million or 26.8 percent higher than the corresponding quarter last year. The year-over-year increase for the quarter is primarily attributable to growth in overall revenue and efficiencies in selling, general, and administrative costs.

The increase was partially offset by expansion cost at our new Exton, Pennsylvania, campus and Orlando automotive facilities of approximately $2 million. We also incurred higher costs as compared to the prior year quarter, related to being a public company, of roughly $350,000.

Income from operations for the fiscal year ending September 30, 2004, was 50.1 million, as compared to 36.2 million a year-ago, an improvement of 38.6 percent. We incurred preopening costs of 4.6 million for the year related to Exton, Pennsylvania, and approximately 405,000 related to our Orlando automotive program. Both sites will continue to incur costs through our fiscal year 2005.

Net interest expense for the fourth quarter was 8,000 compared with 849,000 for the same period last year due to a lower average balance of total debt, favorable interest rates, and higher interest income related to investment of our excess cash.

During September 2004, we terminated our credit facility and expensed approximately $380,000 of deferred fees that were associated with the agreement. During October, we entered into a new credit facility with more favorable terms and interest rates.

In addition, we collateralized our letter of credit required by the Department of Education during October of 2004. Cash collateralizing the letter of credit reduces our fees assisted with the facility. The letter of credit is currently 10 percent of our 2004 financial aid received, and has been raised to 14.4 million from 9.9 million during the November 2004 period.

The requirement for a letter of credit will be evaluated by the Department of Education upon receipt of our fiscal year-end 2004 audit and submission of our composite score calculation. Although our composite score has improved significantly, the Department of Education may elect to require the continuation of our letter of credit at their discretion for a period through June of 2006.

Our tax rate for the fourth quarter was 41.2 percent, compared to 39.4 percent for the same quarter last year and 39.9 percent for the fiscal year ending September 2004. The higher effective rate for 3-month period in 2004 as compared to the same quarter a year ago is primarily attributable to increases in our tax reserves. We expect our tax rate to be approximately 40 to 41 percent for fiscal year 2005.

Our net income for the fourth quarter was 6.7 million or 23 cents per diluted share. This represents a 27.4 percent increase from 5.2 million or 16 cents per diluted share for the same quarter last year.

Net income margin was consistent at 9.6 percent in the fourth quarter of fiscal 2003 and '04. Our net income margin improved to 11.3 percent as compared to 10.4 percent for the 12-month period of fiscal 2003.

We overcame significant preopening and expansion costs during the year, as well as costs assisted with being a public company and a follow-on offering through improving margins at our existing facilities and remaining stable for the year in selling, general, and administrative costs on a common-size (ph) basis.

Turning now to our balance sheet, we increased cash and cash equivalents to 42.6 million at September 30, 2004, compared with 8.9 million at September 30, 2003, and 40.8 million at June of 2004. Approximately 10.4 million of cash has been provided to our former lender to collateralize our line of credit. The restricted cash has been repaid upon the cancellation of the bank letter of credit.

We generated $11.2 million in additional cash flow from operations for the fiscal year as compared to the prior-year. Our increased cash flow is the result of improved net income, with favorable combined changes in liabilities, offset by increases in assets.

Capital expenditures for the 12 months ended September 30, 2004, were approximately 16.9 million, compared with approximately 12 million for the same period last year. Our 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're required for training purposes. We expect capital expenditures to increase over the coming quarters as we upgrade currency equipment, expand existing facilities, and open new locations. We anticipate ongoing capital expenditures to range from 5 to 6 percent of total revenues. New and expand facilities add to our ongoing or maintenance capital expenditures.

Our Florida automotive fiscal facility was completed and equipped 2 months later than planned as a result of the 4 hurricanes that hit the state. Fortunately we did not have significant damage from the hurricanes. We had some minor repairs to our campus buildings as well as some repairs at our manufacturer-specific training facility. We were able to successfully accommodate student starts at our existing campus for the automotive students that were slated to begin at the new facility.

We have recently taken occupancy at the Orlando automotive facility. Approximately $760,000 of capital expending is anticipated to occur in the first quarter of 2005, partially attributable to the delays from the hurricanes. We believe that we will be able to adequately fund these activities with the cash generated from our operations.

The primary driver for our Company's solid performance is growth in average student enrollment. Our average undergraduate enrollment for the 3 months ended September 30, 2004, was 14,048 students, an increase of 21.3 percent from 11,582 students for the same period a year-ago.

Average undergraduate enrollment for the 12 months ended September 30, 2004, was 13,076 students, an increase of 23.7 percent from 10,568 students for the same period a year-ago. Undergraduate enrollment at September 30, 2004, was 15,212 students, compared with 12,561 students at the end of the prior-year.

Now I will update forward-looking guidance for our fiscal year ending September 30, 2005, which is broken down into the following categories. Fiscal year 2005 expected revenue growth and annual margin targets; fiscal year 2005 ranges for capital expenditures; quarter 1 2005 revenue growth targets; unusual costs related to quarter 1 of fiscal 2005 and the comparable fiscal 2004 period; seasonality in the business; and finally, fiscal 2006 ranges for revenue and net income margin.

Our target for fiscal 2005 year-over-year revenue growth ranges are from 20 to 22 percent. We are raising our annual net income target range to 10.5 to 11 percent from our previous guidance of 9.7 to 10.2 percent.

We are raising our guidance for 2 primary reasons. We have identified approximately 2 million of cost related to our Sacramento facility that can be delayed and timed to coordinate with the anticipated opening during the first half of fiscal 2006. In addition, our student population is trending higher than originally planned as a result of strong starts at our locations in California, Illinois, and Pennsylvania.

Our capital expenditure targets for fiscal 2005 range from 47 million to 48.5 million which includes approximately $30 million of expansion costs. Approximately 24 million of the expansion costs relate the purchase and retrofit of our Boston facility.

We evaluated the economics related to purchasing or leasing the Boston facility and elected to purchase the facility. Several factors contributed to our decision. We're eligible to receive up to $1 million of tax credits that were not available if we leased the facility. In addition, we pay a cap rate when we lease the facility which typically ranges from 9 to 11 percent. Today we earn less than 2 percent on our liquid cash.

The savings related to the cap rate and tax rebate result in improving the operating margin of the campus by approximately 1 percent. The purchase requires us to pay cash to purchase and retrofit the facility and subsequently depreciate the building and improvements over their estimated useful lives. On the release this cost will be characterized as rent expense.

Our cash position is sufficient to fund our operations, and we continue to build our cash balance. Although we do not plan to purchase all of our new facilities, we will selectively consider leasing versus purchasing as we continue our expansion.

Turning to our first fiscal quarter 2005, we anticipate year-over-year revenue growth ranging from 22 percent to 24 percent as compared to the first quarter of 2004.

Now I would like to spend some time discussing our expecting (ph) quarterly results. Currently we do not provide quarterly guidance for earnings per share or net income. We're focused on the long-term results of our Company which we believe will benefit our shareholders over time more effectively than a quarterly focus.

However, with regard to the first quarter of 2005, there is currently a 10-cent difference in diluted earnings per share as reported by First Call. As a result, I believe we need to provide better clarity of unusual activity that occurred during our first quarter of fiscal 2004. In addition, I will highlight expansion costs in the first quarter of fiscal 2005 that do not have a comparable number in the first quarter of fiscal 2004.

During the first quarter of 2004, we recorded a reduction of our tool set cost of approximately $800,000. The favorable adjustment is not expected to reoccur in the first quarter of 2005. As we closed our fiscal year 2004, we had approximately 10 percent more seating vacancies than a year ago as a result of our expansion effort.

We anticipate filling a significant amount of our capacity over fiscal 2005. As a result, rent costs as a percentage of revenue in the first quarter are planned to be higher than the previous year in the approximate amount of roughly $800,000 when compared on a common-size basis.

In addition, we hire instructional and educational support staff in advance of when training begins. For the first quarter of 2005, salary and benefit costs in the educational services and facilities as a percentage of revenue are also planned to be higher by approximately $900,000.

Some of these costs will be offset by additional revenue as a result of higher than planned student enrollment. As a result, we expect to meet or slightly exceed the consensus earnings per share amount of 29 cents for the first quarter of 2005.

We have also raised our guidance for the full fiscal year as described earlier in the call. The majority of the additional earnings are planned to occur during our fourth fiscal quarter when our average students peak for the year.

Next I will talk about seasonality. As we have discussed in previous calls, operating income typically is lowest during the third fiscal quarter ending June 30 due to a lower population of students. As our program length continues to expand and our adult student population grows, we're seeing better utilization of our facilities during our nonpeak periods of the year.

The Company's costs do not vary significantly with changes in student population. We expect quarterly fluctuations in operating results to continue as the result of seasonal enrollment patterns. These patterns may change, however, as a result of new school openings, new program introductions, and increased enrollments of our adult students.

Looking further ahead to our fiscal year 2006, we expect revenue growth in the 20 to 25 percent range. We expect that revenue growth will come from 3 primary sources -- average enrollment growth; program extensions and new elective growth; and tuition increases of approximately 3 to 5 percent per annum.

During fiscal 2006, we expect net income margins to return to fiscal 2004 levels of 11 to 11.5 percent. The improvement is expected to be driven by efficiencies in capacity utilization, combined with constant attention to cost controls.

As new locations are added, the rate of margin improvement may slow and there may be slight margin compression. In the event that 2 campuses are opened within a 12-month period margins may be lower for several quarters as the new locations grow their student population.

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

Thank you. Before we take questions I would like to comment on a few topics that are top of mind with our investors.

First would be student persistence rates, and our student persistence rates remain stable. We believe this should lead to the same general completion rates 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. 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, Title IV approval. We have received accrediting approval for this campus. The Department of Education approval process takes approximately 90 days, and we are about halfway through this process.

We have received verbal notification from the accrediting commission for career schools and colleges of technology for our UTI Arizona California, Florida, Illinois, and Texas campuses that the campuses have been reaccredited for 5 years. We have recently completed our financial aid audit with our external auditors and had no material findings on any of our schools. With that, we would be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Eric Schlegister (ph) with Credit Suisse First Boston. Please go ahead.

Good afternoon; it's Eric filling in for Greg. Two questions. First, you mentioned you're raising net income margin in 2005, due in part to enrollment training higher than expected. But then it appears that your revenue guidance has not changed. Is that just conservatism?

That would be for the entire year that we're giving the revenue growth, and we did see that we were having a stronger than planned student population. But no, I wouldn't say that it's necessarily conservative.

Okay. Second, can give us any sense as to the amount you have invested in online to date, and any expectations you have for revenue and profitability in '05 and '06?

Sure. From an online standpoint, we've basically invested between half a million and 750,000 to date. We would expect to continue to incur additional capital expenditures related to that program as it grows. I would say from a revenue perspective, for the fiscal '05 period, it is quite small. It is a pilot program that we are running during this period, and the expectation is that '06 will be a year that it could have a little bit more impact, but even in that fiscal year we don't expect a significant outcome from a revenue perspective overall.

Great, thanks a lot.

Jack Shirk (ph), SunTrust Robinson Humphrey.

2 quick questions for you. First on that $2 million on the raising guidance, I take it that number is after-tax?

Actually, that number is pretax.

It's pretax? Okay. Also, on your capital spending, if I caught the number correctly you said you spent 16.9 million for the year. I was just wondering; on your third-quarter conference call you mentioned that you were going to spend 18 million for the year. Is the difference there the hurricanes? Or is there something else?

The difference is partially that we're shifting some of that spending from hurricanes; and I missed the first part of your question. Was it the first quarter that you were talking about or the full year?

For the full year I thought that you said that you spent 15.9 million; and I was just looking through your third-quarter conference call when you said you were going to spend 18 million for the full year. I was just wondering what the difference was.

The biggest difference is that 750,000 that relates to the Orlando facility, that was shifted because of the hurricanes. The other piece is there is roughly $0.5 million, half -- the $700,000, that relates to our Glendale Heights facility that we have not fully retrofitted yet. So both of those components are moving to the '05 period.

Okay, thank you.

Howard Block, Bank of America Securities.

Good afternoon. It's Derek (ph) here. Nice job on the quarter. A couple of questions. On the start up, spent is in the fourth quarter, the 2 million, was that on (technical difficulty)? I was looking for a little bit more than that.

The start-up expenses in the fourth quarter, we're right on target for what we would have expected for Extent; slightly under budget, maybe by 100 or $150,000 to the new school model that we would have put out previously.

From an Orlando standpoint we have actually spent a little bit less than we had originally planned in the fourth quarter. That was simply because of the hurricanes. Some of our advertising spending was delayed because it simply wasn't beneficial for us to run it when people were unavailable to really be watching television. It was an impact to that particular state though.

Did you incur those exit costs associated with California in the fourth quarter? What was that?

The exit cost related to that was roughly $600,000 that we incurred; and they were all in the fourth quarter. We also had a continuation of extra depreciation expense related to that facility that did end with that fourth quarter. That was roughly $300,000.

Great. On I guess the costs here in '06, what sort of costs were deferred in Sacramento? What did you realize now versus several months ago when you shifted that campus into '06 from '05?

I would say, it's 2 things that's working to our favor here. (indiscernible) get to your first question, which was how are they split between educational services and facilities and sales, general, and administrative.

They're almost equally split between the 2 categories. A little bit more heavily weighted to the educational services and facilities side. But I would say about 1 million relates to the sales and marketing side.

In that primarily, that we're not seeing any direct impact in that particular advertising region. We are seeing a strong lead flow and we're just not needing to infuse that with additional advertising dollars that we really thought we might have to do.

From an educational services side, it relates to our ability to delay some of the hiring process as we have better visibility to when that campus will likely open.

Can I interject 1 thing there? What Jennifer is talking to relative to student interest and demand in the Northern California area, there was some concern originally with the presence of a competitor in the market there, that we could see some deterioration from our very strong territory while we were building a presence.

In analyzing our summer starts and fall starts, we have seen actually an improvement in our business outcomes from student demand, both in terms of enrollment and show. Therefore, the additional advertising expense is not necessary at this time. But we did not know that prior to our summer and fall starts.

Great. Just a couple here on data checking. If I missed it, I apologize. The accounts receivable for the fourth quarter and the bad debt expense margin?

The bad debt expense margin came in fairly consistent with what we have seen previously; right around 1 percent. Accounts receivable, bear with me just a second; I don't have that handy. Here we go. Receivables actually wound up being $20.1 million in the September '04 period versus 19.9 in the '03 period.

Great, thank you very much.

Cliff Greenberg (ph) with Darren (ph) Capital.

Congratulations. A couple of questions if I may. I was trying to scribble as quick as I can. In the fourth quarter you are staying start-up costs were $2 million. What were they for the year? You're considering start-up cost just to be associated with those 2 campuses, not the online and the extra, the facility overlap? Is that correct?

That is correct. From a Pennsylvania start-up standpoint, on an annual basis, it is roughly $4.6 million that we incurred.

That was in last year?

That was in the fiscal '04 period. That is correct.

How about in Sacramento?

There were no costs incurred from a Sacramento standpoint. But we did have additional advertising costs that would have run through from an Orlando automatic program opening perspective.

Correct. So how much was that? I'm sorry.

Roughly $560,000 for the year.

So about 5.1 million for the year. Than what you're saying is on top of that there were expenses for facility overlap, for being a public company, and for the start-up of the online program.

The start-up of the online program was capitalized and there were really no costs, because the pilot did not begin until the very last part of the fourth quarter.

Jennifer, when you give margin estimates for next year and the year beyond, what are the rough ranges of start-up expenses embedded in those numbers? Similar to what you just reported for the year that just ended?

Well, looking forward into fiscal '05, we would have very similar costs because we are opening up a Boston facility.

Boston should be like Exton, or about 4.5 to $5 million?

Then on top of that, our Sacramento facility is incurring additional costs, and we are going to see roughly $4 million of costs related to that facility roll into the fiscal '05 period.

So 8.5 or 9 million compared to 5.2 you just had?

Correct.

As we look into fiscal '06, how should one look at that?

Fiscal '06, you will continue to have Sacramento cost associated with the ramp up of that facility. You're going to see -- I cannot speak specifically to those costs. It would follow our new campus model, though, quite closely. That we have published and is out on our website if you would like to take a look at that.

But I would imagine you consider in doing these, part of your margins going up in the '06 year? Assume that you're not just going open the Sacramento facility, but there will be additional openings in the back of your mind?

You're right. We would have an opening that we would plan in the fourth quarter as well. But what would happen, because we have kind of split the Sacramento cost between (multiple speakers) you wind up seeing some of that efficiency.

If I may, I know it is 2 months into, and you only have 20 students, but any feedback or any way to help us understand how the online program is going, as far as educationally and being received by students? I know it is modest near-term, but how many starts are you going to do this year? Are you going to try to expand it outside the Arizona campus to other campuses this year?

I can tell you that the feedback that we have received has been very positive, but it has not been without recommendations for improvement. That is why we're moving slowly on this. We want to make certain that our educational outcomes are at least the same if not improved through this process. So we are integrating that. I would think over this year we could hope to see 100 students in the program as we roll forward.

That is an average or a year and? How should we look at that as far as -- that's by the end of the year?

By the end of the year you might see 100 students in that program.

Are you going to offer it outside of Arizona or just in the Arizona market for now?

This is where we have our pilot, but we are in the investigation and exploratory stages of seeking license approval at our other campuses.

If you get them, would it be -- we can expect you to try it there too?

Before we roll it out, we will have the model very refined. But our hope is to be able to have that completed by the end of this year, and we will determine and assess student interest and demand. and roll it out accordingly. So we're starting the licensing process with that in mind, and that is with the understanding that demand continues to grow.

Great. One last question if you don't mind. You have talked about the big mother ship campus openings. What is your present thoughts as far as opening satellite campuses or smaller campuses? Have you ruled that out for this fiscal year we are about to enter? Or is that something that is still on the drawing board?

For this fiscal year, we will focus on the 2 campuses that we have talked, about with the additional expansions we addressed in the call, the diesel movement and the collision program expansion.

Beyond that, in 2006, I do think it is highly likely that you would see some smaller schools start to enter the picture, just to be able to take advantage of the densely populated areas where we can tap into that population with a shorter commute to one of the campuses; and hopefully be able to benefit from the FlexTech program. It is all under evaluation right now.

Congratulations on terrific results and a very cogent presentation of all the multiple things that you're working on. Appreciate it.

Trey Collin (ph), Jefferies & Co.

Congratulations on the quarter. Looking at the stronger trends in your student population that you talked about going into '05, as far as versus plan, if my math is right it looks like that is giving you about 15 basis points of leverage there. Is that a pretty accurate assessment of it?

15 basis points of leverage with the student growth?

With the over what you were planning. 50 basis points over what you were planning. Is that kind of where it is shaking out?

I'm not certain I understand that question.

I understand it; I don't think that we have exactly looked at it that particular way before. I would say that it is certainly contributing to our overall margin growth. Whether it would be 15 basis points, (multiple speakers) I could get back to you on that specifically. But that is not something that we had really evaluated in that breakout.

I was just sort of doing the math off of where the guidance was coming out; and it looked like if you backed out the expenses that you are moving over and where the margins are shaking out now, that looked to be the difference, but.

I will be happy to work back through that with you after the call.

More or less though, is the trends as far student populations expected in '06 as well?

We would stick with our estimates from an '06 standpoint, from a student population growth average population growth of 15 to 19 percent. Really, our opening up 2 sites allows us to achieve that growth rate from a student perspective.

Okay, thanks so much.

We have a follow-up question from Howard Block.

Are you seeing anything at all on the competitive front from say community colleges whose budgets are strapped and possibly cutting back on automotive programs? Are you seeing much of that? Or maybe an overflow from some of those schools into yours?

I can tell you that the community colleges as a competitive source has just become less and less. Every year it seems to be less. My guess is that their budget cuts do play into it.

There are also some overcrowding of the community colleges in certain states so the students have a difficult time getting in and the programs take much longer. So we are seeing some overflow from those students that would typically go to a community college. I would say the transfer from community colleges to the for-profit model continues to advance.

Great. Aside from the community colleges, who do you tend to run into most with your field reps when they are talking to candidates? What else are they looking at?

I would say Lincoln Tech on the East Coast primarily, Wyoming Tech on the West Coast and somewhat in the Midwest. Then there are smaller schools in certain regions that we come up against in the high schools.

But I can tell you that the report from the field this year with the new marketing campaign has been probably the most positive feedback we have had in the last 5 years. It has just been a very strong fall high school marketing season.

Great. A question on -- can you just walk me through again the seats that you're expecting to add in fiscal '05, and the timing of that? I know we have Massachusetts in the fourth quarter, which is like 1,900 seats. And then I guess the diesel and collision; maybe walk me through those campuses and the timing on those. It would be great.

Both of those expansions -- actually let me take them one at a time. The Exton facility will be in quarter 4. Or Boston, I'm sorry. So Boston facility will be in quarter 4 from a diesel perspective.

The collision program actually comes on board slightly before that time frame, just as we near that fourth quarter. So again most of it is going to fall into that fourth-quarter time frame.

The collision, how many seats was that again?

400.

Great. Thanks again.

Michael Lasser (ph) with Lehman Brothers.

Good afternoon. Will you follow your typical manner for enrolling students in the new Boston and Sacramento campuses, where they will be actually transferring from other -- well, not technically transferring from other campuses? If that is the case, will capacity be greater than otherwise implied by your current footprint?

We will continue the same recruitment efforts for these campuses as we have in the past. Part of that plan, again, as we open up new campuses we will draw from certain regions that have historically attended other campuses; and we will redirect those back to the newer campuses.

We will back-fill our existing or mature campuses from going deeper in the territories around there. So the capacity -- it doesn't really change the capacity because we have that built into this plan and we understand how that will roll out.

Can you remind as of the existing capacity of the Exton campus?

It is 1,920.

On the last call you commented that there was about 175 students, 600 this quarter; so you added about 425. If you assume you add about 400 students each quarter for the next few, that gets you to the 800 on average for the year.

To the extent that you accelerate that, that will be a source of upside. Is that right?

What will happen actually is we have seen a good number of our large starts already occur through the summer and fall at the Exton facility. So you will see smaller starts in the winter and spring months; and then again it will ramp up.

So it is not that we will be adding 400 new starts every quarter. As I said earlier, by the end of the year you're going to see an average between 7 to 800. But a good number of those students will actually start to pick up again towards the latter part of this next fiscal year.

Okay. Appreciate the commentary on the status of the OEM relationships. Are there others in the pipeline that you're working on that you could offer additional color on?

I can tell you we are working on others, but I cannot give you a whole lot of color.

Understood.

We continue to put a very strong focus on the OEMs, the dealership network, Tier 1 suppliers in the automotive industry. That is a very strong focus of ours, so there are always new ones on the horizon. But there's nothing I can speak of today.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Please continue.

I would just like to thank all of you for participating on our call today. As a reminder 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 and happy holidays.

Ladies and gentlemen, this concludes the UTI fourth-quarter 2004 conference call. You may now disconnect, and thank you for using AT&T teleconferencing.