Universal Technical Institute Inc (UTI) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the UTI's third-quarter 2005 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 Wednesday, August 10, 2005.

I would now like to turn the conference over to Jill Peters of the Financial Relations Board. Please go ahead, Ms. Peters.

Thank you. Hello and thank you for joining us today for Universal Technical Institute's conference call. By now, you should have received the Company's earnings release, which was issued after market closed today. If not, it is available on UTI's website at www.UTICorp.com.

Management will discuss the results for the third quarter of fiscal 2005, which ended June 30th, and then open the call up to your questions. During the Q&A, please limit yourself to one question.

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 forward-looking statements.

Factors that could affect the Company's actual results include changes to federal and state educational funding; construction delays for new campuses or campus expansions; possible failure or inability to obtain regulatory consents and certifications for new or expanding campuses; potential increased competition; changes in demand for the programs offered by the Company; increased investment and management in capital resources and the effectiveness of the Company's recruiting, advertising and promotional efforts. Further information on these and other potential factors that could affect the Company's financial results may be found in the Company's filings with the Securities and Exchange Commission.

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Thank you, Jill. Good afternoon and thank you for joining us to review our third-quarter results for fiscal 2005. On today's call, I will begin with a brief overview of our Company and a summary of our third-quarter results. Then, I will discuss our expansion efforts and provide an update on our OEM relationships.

Jennifer will then provide a detailed review of our financial results, as well as our forward-looking guidance. In closing, I will address some current topics related to UTI.

Universal Technical Institute is a leading for-profit provider of technician training for the automotive, diesel, collision repair, motorcycle and marine industries. We offer undergraduate degrees, diploma and certificate programs at 9 campuses and 22 manufacturer-specific training facilities across the United States.

Our student population is primarily male, with approximately 60% being recent high school graduates and the remaining 40% adult learners seeking career changes. Approximately 72% of our total revenue comes from federally-insured title for funds.

We're pleased to announce our results for our third quarter of fiscal 2005. Net revenues for the quarter were 76.1 million, an increase of approximately 21% over the same period last year. Net income for the quarter was 7.6 million or $0.27 per diluted share. This is approximately a 15% increase from 6.6 million or $0.23 per diluted share for the same quarter last year. Our net income is in line with expectations due to our planned investment and expansion activities at both new and existing campus locations.

Our average undergraduate enrollment for the quarter was 14,572, an increase of more than 16% year-over-year. Capacity utilization during the third quarter of fiscal 2005 was approximately 71%, down from approximately 83% in the second quarter, primarily due to opening our new school in Norwood, Massachusetts. Capacity utilization for the third quarter is typically lower, resulting from seasonality that occurs during the summer months. However, this pattern does change when expansion occurs.

We have increased capacity significantly over the last year to accommodate our growing student population and will continue with our new Sacramento, California location and program expansions at our Houston, Texas, and Exton, Pennsylvania campuses.

At this point, I would like to transition to some specific facts about our new campus openings and program expansions. We're pleased that our campus in Exton, Pennsylvania continues to execute according to plan. Our student population approximates 900, which is consistent with our new campus model. Our operating trends at the Pennsylvanian campus remain comparable to our core business in terms of student start and persistent rates.

However, we continue to see a stronger interest in the Ford FACT elective at this campus than we have traditionally seen at other campuses. To accommodate this increased demand, we have developed two tracks that split students between our Hot Rod U phases and Ford elective courses. Because both Hot Rod U and Ford FACT occurring near the end of the program, the change in course sequence is not disruptive to the students' learning experience.

Approximately 60% of the students enrolled in Exton have requested the Ford FACT elective. The average ranges from 17% to 40% at our other campuses.

In addition, we recently amended our Exton lease to accommodate the expansion of our diesel program at this campus. And the program expansion requires a 41,000 square foot facility, which is currently under construction. We are on target to begin teaching classes in the fourth quarter of fiscal 2005.

Next, I would like to provide an update on our FlexTech program. It is a blended online/on-ground pilot program. Our first class of FlexTech students is nearing graduation. In fact, our first Flex student was recently accepted into our Volvo SAFE program. Based on ongoing student and instructor feedback, we have made continues improvement to the program and are satisfied with the quality of the program at this time.

In the future, we will be adding a Hot Rod U component to the program and are planning to include a computer as part of the tuition in fiscal 2006. We expect these changes will make the program more appealing, as these two factors have been recruitment barriers.

Today, we have approximately 70 students currently in the program and expect to reach 100 by the end of this fiscal year. We will slowly increase the size of the program into next year. While we are considering expansion opportunities at other campuses, we will not begin selling until the program is approved, and we expect that to occur during fiscal 2006.

During the third quarter, we opened our ninth campus slightly ahead of schedule. The campus is located in Norwood, Massachusetts, a suburb of Boston. We opened with approximately 65 students in late June and currently have 160 students in attendance. Alternately, the campus will have a capacity of 1,900. The retrofit process of this facility is continuing as planned. We funded approximately 12.6 million through the closing of the purchase. The funding includes an additional 200,000 for future enhancements to the property that may be required.

Costs associated with the retrofit will continue for several more months. We have spent 8 million to date and expect total expenditures associated with the retrofit to be approximately 12 million. We are funding this transaction with available cash on hand.

We received our license to operate from the State of Massachusetts and approval from our accrediting body. Recently, we submitted the required documents to the Department of Education, seeking federal approval for Title IV aid and expect to have a response within 90 days.

We have built a backlog of students expected to attend this campus that are planned to start during the summer and early fall months. We expect this campus to have a higher proportion of adult and local students during the ramp up of this campus as compared to Exton.

Exton's ramp up was largely driven by regionally recruited high school students. The addition of Norway divides some of those regional recruitment territories between the two campuses, creating the opportunity for increased local recruitment efforts for both high school and adult students in Norwood and Exton. Local recruitment efforts in the Boston area have been solid and are steadily increasing now that we have the license to recruit specifically for that campus.

Local advertising is typically more expensive than regional or national advertising from a cost-per-lease standpoint. So we could see and experience an increase in advertising expense in this area, while we build our presence. In time, this should be offset as the number of campuses in the East increases; regional and national advertising efficiencies are expected to occur. We will keep you updated on the progress in Norwood.

Progress also continues on our Sacramento, California site. As we discussed previously, the permitting phase has proven to be quite challenging. However, we are making progress with the City of Sacramento and expect to begin construction in September 2005. As we discussed in our second-quarter conference call, we will begin teaching in a temporary facility. We have signed a lease for temporary space near our planned campus location. The lease will allow us to accommodate starting students during the first quarter of fiscal 2006 and approximately 21,000 square feet of space. We anticipate occupying the temporary facility for approximately 9 months.

The cost of the temporary site retrofit is expected to range from 8 to 900,000 and will be expensed over the lease term. The temporary space will allow us to meet perspective student expectations for start dates during the first quarter of fiscal 2006, a quarter ahead of what we'd previously reported.

We planned to transition to the new facility during the third quarter of fiscal 2006. We have received temporary approval from the State of California to enroll students and have submitted part one of our accrediting package for review. We continue to meet the milestones associated with opening this location, despite additional hurdles in the permitting process.

We are experiencing strong results from our recruitment efforts in the Northern California area. Some portion of these students will still attend Avondale. But going forward, they will be able to select our Sacramento campus.

The 400 feet expansion of our collision repair and refinish program at our Houston, Texas campus is expected to be complete during the fourth quarter of fiscal 2005. The program will be modified to include a 3-week course on custom paint, as well as other curricula changes that are being driven by industry feedback.

Now, I would like to shift the discussion to our planned expansion at MMI, Arizona. We had discussed adding 500 seats during the fourth quarter of fiscal 2005. Due to some unanticipated delays with permitting and the need to do some additional environmental testing before we acquire the land, we are now expecting the expansion to occur during the second half of fiscal 2006. As a result, the capital expenditures will also shift to fiscal 2006.

Because of the delay related to the MMI Arizona expansion, we expect capital expenditures for fiscal 2005 to range from 48 to 50 million, down from previous guidance of 50.5 to 52.5 million.

We continue to work on our new campus expansion opportunities beyond fiscal 2005. Our plans include expanding program offerings at existing locations, as well as opening new ones. I will keep you informed of our progress as we move forward over the next year. This summarizes the current national expansion progress and future plans.

Next, I would like to provide a brief update on our OEM relationships. Overall, our relationships remain strong. We continue to make good progress in renegotiating our contract with BMW, which expires in December of 2005. In June, we received a verbal commitment for the renewal of a 3-year agreement, which incorporates the BMW elective option at our Avondale and Rancho Cucamonga campuses. This is in addition to the graduate level programs we are currently offering. The written agreement is under legal review at this time.

With the addition of the Exton campus and the Norwood campus, we are planning on relocating the Audi and Volkswagen programs from Allentown, Pennsylvania to our Exton campus and Mercedes-Benz of Allentown to our Norwood campus. We expect the program moves to occur during late fall and early next year. Once the moves are complete, we will close the Allentown training center when the lease expires in the spring of 2006. Our campus locations are more convenient for our students, better match the needs of the industry customers, and serve as a strong marketing advantage.

Furthermore, we will be consolidating the Audi program at the Glendale Heights campus and moving the classes taught at this location to Phoenix and Exton. This move improves facility utilization for Audi and better matches the needs of their dealers geographically.

Our International Truck program, which is a graduate-level program, is certain currently located several miles from the Glendale Heights campus. This program will now move into the space vacated by Audi at the Glendale Heights campus, which will offer the same advantages as I previously discussed.

Negotiations for a multiyear, multidiscipline contract is in progress with Mercedes-Benz. The new contract is awaiting signatures and includes training programs for entry-level service and collision repair technicians, retraining for existing technicians, and new programs for service advisers and sales consultant training. We have already begun teaching the aforementioned programs.

Many investors have asked us if we have been negatively impacted by the conditions of the automotive industry. And for the most part, we have not. We have been partnering with our customers to find cost efficiencies. But we have not been materially affected. We are very sensitive to the needs of our customers and are looking at current market conditions as an opportunity to expand our services to them when it makes economical sense to do so, thereby, further strengthening our relationships.

We have had some requests to focus our graduate-level recruitment efforts in different geographic regions to better match dealer demand. This means, we may reduce the numbers of students accepted for graduate-level programs from the West Coast and the Midwest regions but then increase the recruitment efforts in the East. The numbers of dealers represented by our graduate-level programs on the East Coast is actually double that of the West Coast region. Thus, the shift in focus is a better match for dealer demand.

An interesting fact with respect to the graduate-level programs for the past 12 months is that 93% are UTI graduates. The remaining 7% come from other feeder schools. The largest feeder school contributors are Lincoln Tech at 2% and Wyoming Tech at 1%. This trend has changed significantly over the past few years. 2 years ago, 20% were coming from other feeder schools.

Our business-to-business sales force has done a good job building relationships with our OEM partners and has made great strides last year in establishing relationships with the world's 100 top dealerships. We have meaningful relationships with 70% of these dealers and are in constant contact with them to provide access to graduates who meet their needs.

As an example of these relationships maturing is that some dealers are working with our local field reps to host career fairs at the dealerships to excite students and their parents about a career in the automotive industry trade. The dealer then encourages students to attend UTI and return home to work for a quality employer. This new grassroots initiative called Future Tech helped our recruitment efforts last year. And so, we are launching this across the country to further solidify our relationships with industry, specifically dealers.

We have several other strategic initiatives underway focused on building relationships in the high school market, the automotive aftermarket and the broader transportation industry, which I will share with you in the very near future.

And now, I would like to turn it over to Jennifer Haslip, our CFO, to review our financial results and forward-looking guidance in more detail. Jennifer?

Thank you, Kim. As noted in our press release, net revenues for the third quarter of fiscal 2005 were 76.1 million, up 20.9% from 62.9 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 for the quarter.

Our operating income for the third quarter of fiscal 2005 was 11.5 million as compared to 10.9 million a year ago. Operating margins for the second quarter was 15.1%, down from 17.3% for the same quarter last year.

I will briefly cover the significant areas contributing to the decline in margin. First, we expanded several of our locations during the fourth quarter of fiscal 2004 and added our new Exton, Pennsylvania facility. As a result, occupancy costs represent a higher percentage of revenue as compared to the prior year, equating to approximately $700,000 for the quarter. The other main contributor as a percentage of revenue was increased compensation costs in the educational services and facilities' category.

The additional compensation costs equated to approximately $900,000 for the quarter. The compensation increased as a percentage of revenue, primarily resulted from expansion of our Exton campus of approximately $1 million.

I would also like to provide an update on our operating loss for Norwood, Massachusetts and Sacramento of $1,750,000 and $400,000, respectively, as compared to pre-opening costs in Exton, Pennsylvania in the prior year of approximately $1.3 million.

Net interest income for the third quarter was 403,000 compared with net interest expense of $89,000 for the same period last year due to a lower average balance of total debt, favorable interest rates and higher interest income related to the investment of our excess cash. We currently have a letter of credit requirement with the Department of Education for 10% of our financial aid received during our preceding fiscal year. The letter of credit requirement is currently 14.4 million and is collateralized by a restricted investment of $16.1 million. We have filed our fiscal 2004 audit with the Department of Education and are awaiting their review to determine if the letter of credit requirement will be removed.

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 third quarter of fiscal 2005 was 35.8% compared to 38.4% for the same quarter last year and 39.9% for the fiscal year ending September 2004. The lower effective rate for the 3-month period in 2005 as compared to the same quarter a year ago is primarily attributable to a tax incentive related to Norwood facility purchase and releasing certain state tax reserves that are no longer required.

As a result of the lower-than-anticipated state tax rates, we expect our effective tax rate to be approximately 37 to 39% for fiscal 2005. Beyond 2005, our effective tax rate is expected to range from 39% to 41%.

Next, I will provide some details related to the growth of our per-student revenue rate for the third quarter of fiscal 2005. Our per-student revenue rate grew by approximately 3.8% for the third quarter as compared to approximately 2% for the second quarter of fiscal 2005. Students that elected to take two courses at the same time returned to historical norms as compared to the prior-year quarter improving our per-student rate for the third quarter. However, we have not yet returned to historical loads for our retake rates.

One additional factor related to our increased retake rate is that students are competing for acceptance in manufacturer-specific training and are voluntarily retaking courses to improve their GPA. We're focusing on the contributing factors and expect to see progress at some time during 2006 related to our retake rates in courses with higher electrical content. As a result, we expect that per-student revenue rate for fiscal 2005 will lag our tuition increases slightly.

Turning now to our balance sheet, we increased cash and cash equivalents to 47.3 million at June 30, 2005 compared with 42.6 million at September 30, 2004. Approximately 16.1 million of cash has been provided to our current lender to collateralize our letter of credit required by the Department of Education. Capital expenditures for the 9 months ended June 30, 2005 were approximately 34.2 million compared to approximately 12.1 million for the same period last year.

The significant increase relates to our Norwood purchase of 12.6 million for the building and land at approximately 8 million capital expenditures relating to retrofitting the facility. We anticipate an additional $4 million of retrofit to occur over the next several months.

Our capital expenditures typically vary with our student population, as well as our planned program enhancements and expansions. Asset duck (ph) placed in service slightly ahead of when they are required for training purposes. We expect capital expenditures to increase over the coming quarters, as we upgrade current equipment, expand existing facilities, and open new locations. We anticipate ongoing capital expenditures to range from 5 to 6% of total revenue. New and expanded facilities add to our ongoing or maintenance capital expenditures.

Now, I will provide an update to our student statistics, which also contributed to our solid performance for the quarter. Our average undergraduate enrollment for the 3 months ended June 30, 2005 was 14,572 as compared to 12,517 for the 3 months ended June 30, 2004. Our average undergraduate enrollment for the 9 months ended June 30, 2005 was 15,155 students, an increase of 18.8% from 12,762 students for the same period a year ago. Undergraduate enrollment at June 30, 2005 was 13,867 students compared with 12,020 students at the end of the prior-year quarter.

Next, 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 target, quarter 4 2005 revenue growth targets, and a recent accounting pronouncement impacting UTI. Our current target for fiscal 2005 year-over-year revenue growth ranges from 21 to 23%. We are reconfirming our revenue guidance for fiscal 2005. We are also maintaining our annual net income target range of 11% to 11.5% for fiscal 2005.

Turning to our fourth quarter of 2005, we anticipate year-over-year revenue growth ranging from 20 to 21% as compared to the fourth quarter of fiscal 2004.

Next, I would like to focus on our recent accounting pronouncement that impacts UTI. In December 2004, the Financial Accounting Standards Board issued a Statement of Financial Accounting Standards, SFAS, related to accounting for stock-based compensation. The pronouncement was made effective for interim or annual reporting periods beginning after June 15, 2005. Recently, FASB delayed implementation of the pronouncement and is currently scheduled to impact us beginning in the first quarter of fiscal 2006. Accordingly, our estimates do not include any effect of this new pronouncement.

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

Thanks, Jennifer. Before we take questions, I would just like to comment on some calendar items related to UTI. We're planning to hold a conference call to update the market on our 2006 fiscal year growth plans, strategic initiatives and net income targets during October of 2005.

Last year, we included these topics during our fourth quarter and annual period call in early December. The feedback that we received indicated there was too much information to cover during the call and that it was too long of a period between calls, since annual reporting occurs later than quarterly reporting. In response to that feedback, we will be holding a separate call that should allow more time to discuss our upcoming plans for fiscal 2006. The scheduled timeframe also coincides with our large student starts that occur in the late summer and early fall periods, which provide visibility to our upcoming fiscal year's operational results. We will be announcing the date of the call near the end of our fiscal year, September 30, 2005.

We are scheduling several conferences over the next quarter, and we look forward to seeing some of you during our travels. We will be certain to post any presentations made during the meeting on our Investor Relations section of our website.

Operator, we will now be happy to take any questions.

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

Good afternoon. Congratulations on another solid quarter. The first question I had was -- with regards to your comment about Exton and its 60% of the students are enrolled in the Ford, and this compares with I think you said a range of 17 to 40%. I was wondering if you might speculate as to why that is occurring and what, if anything, it may mean for the mix at Norwood and other new campuses.

I think that the primary reason is there is not any other elective for them to take at Exton, meaning they do not have the option to take the diesel program. And there haven't been any of the MSAT or graduate-level training programs for them. I do believe that that is driving it.

I also believe that there has been a much stronger message out to our students that the Ford program provides a higher level of electronics training, and that it helps them as they pursue acceptance into the graduate-level programs. So we are seeing an increase in interest I guess across all campuses.

But I think the primary reason at Exton and Norwood is not having a diesel program or another elective to choose from. I do think that in those regions for some time, that is going to remain relatively higher than what we see at some of the other campuses.

And in terms of all the facility movement and consolidation you mentioned before -- I sort of lost track, but there was the Mercedes-Benz and the Audi and a couple others -- is there a net effect that we can look to next year in terms of the net effect on the margins from all this movement? Should we expect a better margin, a worse margin, a wash, some charges?

There will be some minor charges that we will run through during fiscal 2006 in the 2 to $300,000 range in aggregate.

Okay, but ultimate when you're beyond that, is there some uplift in margin from having fewer locations -- co-location initiative we hear about with other companies?

Well, I would say that the rent at our Allentown facility was a little bit lower than what we are paying at Exton. But the real value comes from our ability to have those programs located directly at the facility. It allows the students not to have to relocate twice during their training and also provides us the opportunity as we tour individuals through the campus to see those programs and not have to travel a farther distance.

In addition to that, the upside I would say would be in additional dealer training that we might be able to offer specifically to the dealers in that regional area.

We will see an improvement in margins, should we run more classes through the facilities. And that is what the consolidation of the Audi program at the Glendale Heights campus creates by moving a class to Phoenix and then one to Exton. That does improve the profitability for that brand.

One more little one and then I'll sneak in the back of the queue. Any update you can offer in terms of the number of high school recruiters and the number of campus recruiters?

Yes, as we move into this fiscal year, we will move to 170 field representatives and approximately 120 campus-based reps. And I think that's moving from 150 field to 80 or 90 campus reps.

Greg Cappilli, Credit Suisse First Boston.

It is actually Steve Allen (ph) for Greg. Just wondering if we could touch on the enrollment front a little bit. In you could give us a sense for how you are feeling about enrollment growth heading into the seasonally stronger back half of the year?

I think we have seen strong performance from our field representatives and actually from our campus-based reps as well, which gives us pretty good visibility to our starts for the fall. I'll tell you that in the newer markets, we have been testing different advertising and media plans. And I'd say the results are various, depending on the market and the type of media we are using.

But overall, it has been good. I think what we are seeing in Norwood is tracking pretty closely to what we have seen in Exton. And Sacramento is lagging slightly because we have not been able to recruit specifically for that campus.

When I look at the other campuses, I would say all of the other indicators are good.

I guess just to pick up on the Sacramento point. Can you give us a sense of -- you're expecting in terms of the timing of the starts there and the temporary facility, how that may or may not impact enrollments relative to the new campus model?

Okay, I will take that one. From the Sacramento perspective, it will ramp up more slowly than our new campus model would because we will be in that temporary facility. In addition to that, it's planned to be an 1,100 student population campus, as opposed to a 1,900 student campus. So there is some difference in the components of that.

I'd like to share more specifically how that will roll out in our strategy call that we are planning for the first part of 2006.

Mark Marostica, Piper Jaffray.

A question regarding the SG&A growth in the quarter, which was very closely aligned with revenue growth in the quarter. And I noticed last quarter, SG&A grew quite a bit faster or marginally faster, I suppose, than revenue growth.

And then, I'm just wondering as we think about the model going forward, do you think that trend of in-line SG&A growth of revenue growth should continue as we think about modeling the business going forward?

Let me take that quarter question first. You're right in stating that in the prior quarter, sales and marketing was on a common size basis, the contributor to growing that line more significantly. And that would be consistent with this quarter also. It was about $1 million on a common size basis from a marketing and sales standpoint that we saw be higher.

However, it was offset by a leverage that saw on our selling, general and administrative side. So you're not seeing an uptick on that cost category because of that netting of those two items.

Is your sense that that leverage on the SG&A offset that you described should be something that would continue on the go-forward basis?

I do expect that we are going to continue to see leverage on the general administrative side. And I also would say that we do expect marketing and sales costs to creep up in certain cases even about what our revenue growth is, as we develop new markets and enter new areas. And so I'm hoping that they will complement one another. And our goal is somewhat keep pace on that total line.

In regards to your comments on your focus on the retake issue, could you give us a little more detail on the steps you are planning to take to address that topic?

Yes, all of the instructors who are teaching the electronic courses have been -- they have been -- I do not want to say retrained, but they have been given more information on how to better deliver the electronic content. As we have said earlier, we have increased the complexity (technical difficulty) --

Ladies and gentlemen, we experiencing technical difficulties. One moment please.

Okay, to continue -- sorry about that -- on the retake rates, one thing that we're doing with the instructors, who deliver the electrical content, is to make certain that they are given good educational support and teaching aids in those classes. So we are really focused on how best to deliver that content, given the fact that we have increased the complexity. We're doing our best to address that population.

The second thing is a little more difficult to change. And that is that as the UTI campuses grow at a faster rate than the graduate-level programs, the competition to get into these programs is getting more and more intense. And so the students realize that they can take an extra phase or re-phase to improve their GPA to get considered for acceptance into these programs. And that is something that is harder for us to change.

We are looking at some of our policies in terms of the number of retakes that students can take without paying additional tuition. And I think that in time, that will help to mitigate it. But that is one of the contributing factors -- is that students really want into these graduate-level programs, and they are going to do whatever they can to improve their GPA for acceptance into it.

And lastly, Kim, you described the persistent situation at Exton being well in line with your expectations. I'm wondering if you could comment on persistence relative to the entire campus system. Thank you.

We have seen persistence rates remain very stable. We measure a cohort period, which is actually May through June internally and look at the starts that occur during that period. And we were relatively flat for that timeframe, slightly better, but relatively flat. And we really only have 1 month of data for this current fiscal year. And the trend is consistent, but 1 month does not make a trend.

Mark Hughes, SunTrust Robinson Humphrey.

I just wanted to confirm a couple of numbers. I think you had suggested occupancy costs up 700,000 for the quarter. Was that an absolute number, absolute year-over-year increase?

It was on a common-sized basis, so it's the relative percentage change quarter-on-quarter.

So if I understand it, so occupancy costs 700,000 higher this quarter than they were last quarter -- or a year ago?

A year ago quarter, you're correct.

And ditto with the comp costs up 900,000 -- 1 million related to Exton, correct?

That's correct.

And then the pre-opening expense is 1.3 million this quarter, then 1.7 million in this quarter last year?

No, that would be the reverse. It was 1.750 million in this current quarter and 1.3 million in prior.

Yes, that's right. And then can you describe the profit impact at Exton this quarter -- 900 students. I think last quarter, it was breakeven. How about this quarter, modestly profitable?

We've seen it continue to progress. It stayed fairly stable from a student population standpoint. We've increased slightly over the quarter, which I think is favorable for us. We have been pretty consistent when you look at profitability between the 2 quarters. Because we haven't seen that much ground in (technical difficulty) in student population.

And we are preparing for larger starts that are going to occur in the fourth quarter, so we have a little bit of instructional and student support service expense occurring in this quarter proceeding our next quarter.

And then the graduate programs in the West versus East, is that -- could you go into a little more detail on that? Is that a case where not as much demand in the West, and then you're looking to replace that with the East Coast?

Well, as we have talked, there has been I would say significant pressure from our industry customers to gain a stronger presence in the East Coast because that is where the majority of their dealerships exist. And one of the things that we have been doing to try to address the East Coast's demand is we will enroll students from basically anywhere in the country, and then they agree to relocate based on wherever the dealer resides.

But in reality, the students really want to go back to where they came from. And so the dealers get frustrated if after a year or two, they ultimately end up -- even if they stay with the brand -- they go back to where they came from.

So now that we have started to build the campuses on the East Coast and we're starting to get students out of there, it makes sense to really start I would say more intense recruiting from the East Coast with less on the West Coast. And that way, we really start to address this relocation issue that has kind of been plaguing UTI prior to having a Northeast campus.

The MMI of the environmental issues, does that have an expense impact in addition to the CapEx impact?

Well, the environmental issue that we're looking into is on the land that we actually do not own at this particular point. We're in the stages of evaluating what severity that is. And that will lead us down the path of what remediation might need to take place. But we have not secured that parcel yet.

I was thinking just in terms of the delay in the construction. Does that also mean that some startup expenses are deferred at MMI?

It was very limited in number. I would say probably around $200,000 for the quarter of costs that we would have incorporated into our plan that we will move now into the fiscal '06 period.

That was 200,000?

Yes, that was about the right number.

Jeff Lee, Robert Baird.

I just want to talk a little bit about growth opportunities. First of all, looking at your domestic expansion opportunities, how many more attractive markets do see for your campuses in the United States?

Well, as we have talked before, we're actually looking at changing our campus model to have slightly smaller campuses, 500 student population to 1,000 student populations that would allow us to have more campuses in I would say the largest MSAs. So we are now currently looking at that and are rebuilding our 10-year plan in terms of the number of campuses we have. And I'm not prepared to comment on that today.

I do think I will have more clarity in October, as we better refine what that national footprint looks like. Because it is a change from what we had previously stated. And that was to have a new campus of 1,900 to 2,000 students every year. And as you start to look at the smaller campuses, it means that you're adding more campuses inside of a year or expanding the existing campuses to add a minimum at 2,000 new seats each year.

But I would be happy to give you more information once we have that completed. We are right in the middle of it at this point in time.

And then just the other thing is -- wanted to get your view point on how you look at the international opportunities. What does that market place look like in other countries? What areas are attractive? Is that something you'd be interested in?

I will tell you that our first priority is right here at home because there is a lot of demand for what we're doing. We want to make certain that we are not diluting the efforts of our management team and to make certain that we are providing the level of service necessary to our students as well as our customers. I will tell you that we have been approached by a number of countries to offer some type of training. And we have currently explored a number of those. For the most part, we have said -- no, not at this time; it doesn't make sense.

Probably the strongest interest and pressure is coming from China, and we are evaluating that. But do not believe we will be opening up schools in China. We may consider something along a licensing agreement similar to what other schools in our peer group are doing.

But at this time, our primary focus is right here at home because there's a lot of work left to be done.

Michael Lasser, Lehman Brothers.

If I look at the drop off of period-end enrollments from the second to the third quarter, it was a bit more pronounced this quarter. And I recognize that period-end enrollments aren't a great corollary for you guys. Was there anything going on there? Was there a bigger graduation class or something else that you can provide commentary on?

I would say, our third quarter has historically been our slowest quarter. And yet, you can see the benefits in our second quarter by the continued expansion of the program lengths. But then those students ultimately do graduate, and so we don't have that similar benefit all the way through that third quarter.

Probably one of the primary factors for that period-end count was that we had a few more students out on lead for that since at the end of the quarter. And although this is not unusual during the summer, it's difficult to predict exactly when students will take a break. We typically see students return over several start dates ranging through July to September. And we are seeing our return rates be consistent with our historical rates.

We have about 170 more students more than in the prior year out on leaves of absence. However, we are seeing some returns in the August timeframe, so it's not ultimately concerning for us.

Did that impact average enrollments as well?

It would have impacted average enrollments as well.

So it was kind of a leave of absence effect?

Yes, combined with no course availables as well. I would say it's those two categories that are contributing.

Could you quantify the impact of no course availables?

I have included that in the approximately 100 students. The primary piece is from leaves of absence.

That's helpful. And just a second question -- will there be a margin effect of having the temporary location in Sacramento?

Not for fiscal 2005.

But for 2006?

For 2006, we're anticipating that we will have between 8 and $900,000 of retrofit costs. And it has end up being those costs spread over the life of the building, which could be -- if it were a leased facility, could be 12 to 15 years. You will see that spread over the other 9-month period. So that, you should take equally over those 9 months.

And so that will be on top of retrofits for the permanent location?

That is correct. And you know, actually just to clarify, you'll see us from a cash flow perspective spend some of those dollars in the 2005 period. But since we will not be occupying the facility until the October timeframe, none of the expense will hit from an amortization perspective.

Kirsten Edwards, ThinkEquity Partners.

You mentioned something about the Mercedes relationship being under review. Can you just go over what that is currently? And how you expect that to change, if at all?

Well, currently, we had a multiyear agreement with Mercedes-Benz for service technician training at the advanced level, as well as the small collision technician training program at the advanced level. And we did start to do some training with their existing workforce. This contract expands those services from basically the graduate-level programs to include service adviser, as well as sales consultant.

It actually includes parts in counter training, but that doesn't really start happening for another year in terms of the actual training. The rest of these, we have already started teaching.

Okay, and you just started teaching in the third quarter?

Well, some of them have been a continuation like the collision program. The graduate-level Mercedes-Benz ELITE program, we have been doing that. The sales consultant pilot was just completed and actually crossed in between the third and fourth quarter. And service advisor, we actually did some in the second and third quarter, I believe.

And without adding those programs -- impact the margin at all?

I think it is relatively the same. I don't have it broken down by program in front of me. But we continue to make progress in terms of improving profitability with these OEM relationships in trying to create more efficiencies for both of us. But I don't think it is significant enough to really comment on.

And these programs that we've begun training on, the newer ones, are still small at this particular point that it would have a difficult time having any meaningful impact.

Jeff Silber, Harris Nesbitt.

You spoke earlier about a potential increase in advertising because some of the local advertising costs might be a little bit more expensive. Can you just talk generally -- I know some of the other companies in this space have been talking about a sizable increase in TV advertising costs. I was wondering what you are seeing.

Well, we have seen a slight increase in terms of our cost per leads. If you look at this third quarter on year-over-year basis, I would say our cost per leads increased less than 20%, but it was in the high teens. And the majority of that increase is attributed to new market launches, such as Boston and Sacramento, with some additional testing still occurring in the Exton area to support that campus.

And when you are in a new market launch, the cost per leads in those areas are going to be higher, as you are trying new things to create awareness. Once that lead generation flow gains momentum, the cost per leads should normalize, but it does take several quarters to do that.

My comments in terms of noting that the cost per lead generated via local advertising methods are more expensive than regional and national is true in that UTI has been able to benefit from being a niche marketer advertising on national cable programming as well as regional programming. And when you are really targeting the local market, you are pushed into more of either the broad day rotators, the prime time or overnight.

And when you're typically trying to drive that commuter population there, those advertising efforts are more expensive. And I think that is what some of the peer group is experiencing as well.

So if we would remove the impact of the new markets, how do cost per leads trend?

I would say that they are still up slightly, somewhere between 6 to 10%.

That's helpful. And then just one quick follow-up -- on capital expenditures -- and I know you are not giving any guidance for fiscal year '06 -- but should we be modeling in terms of a percentage of revenue somewhere between your normal 5.5, 6% and the rates that you are going to have this year as a percentage of revenues? Would that be apropos for fiscal year '06?

I think that will make sense. And then, if we have additional expansions that we are planning, we would lay those in on top of that. But to do the baselines, you are exactly right. It would be between 5 and 6% of revenue.

Richard Close, Jefferies & Company.

I will try to keep it quick. With respect to your admissions reps out in the fields in the -- I guess on the campus, what are you seeing in terms of turnover or productivity in those reps? Are they more productive, less productive? Is turnover higher?

I would say our turnover for our admissions rep is really low. In fact, our retention rate through the third quarter of '05 is better than 80%. And we attribute this to really three things. One is the strength of our brand because good salespeople are attracted to the market leader. So we have unique differentiation and distinct competitive advantages that draws them to UTI, which means -- we are able to hire good people or the right people.

And just to -- as an aside there, the new hires that we have been adding to go from 150 to 170 field reps, more than 75% of those have been referrals. We have not even needed to advertise in the territory. So that speaks to the strength of the brand. And many of them have already had prior school experience.

The other thing I think that really helps with our admissions productivity and turnover is the strength of the management team and the way that we structure it. They have a pretty small span of control that ensures a high level of support, as well as accountability for that rep to be successful.

And I think the last thing is, we are not a high-pressure sales company. Our reps, they get to offer very passionate students exactly what they dream of and at the same time provide a good value proposition to them. So there's no reason for them to oversell or high pressure, which means they really enjoy their role at UTI.

One thing we are really proud of as we have been on this quest to become one of the best places to work -- in our last survey, with the great places to work institute -- our representatives -- more than 85% stated that UTI was a great place to work. And I think that speaks to the quality of the people on that team.

And from a productivity standpoint, we continue to improve. And we have not lost any ground, which I think is significant when you consider the number of new hires we have been adding each year. I am very pleased with their productivity.

And then really quick, just getting back on this graduate East/West or West/East thing here. Are you actually saying you are going to restrict in the West? Can't you just open up graduate programs in the East and keep the ones in the West? Or maybe I'm unclear on what you are exactly trying to do there. Obviously, the demand is in the East, and I understand that but --

The demand is in the East. But our larger student population is in the West Coast and Midwest, just based on where our campuses are located and how long we have been there. And so we have more students from that population base to recruit for more job opportunities in the East. And so, as we start to look at them, we will actually be restricting the number of recruits coming from certain states unless we are confident -- and the OEM can screen for this -- that the student will actually relocate without changing jobs a year or two after the fact.

So that is the primary reason. We've got to match the dealer demand. And we simply have not built a large enough recruitment base on the East Coast to do that.

So it begs the question then -- if you have the graduate programs on the West Coast and you are going to open these up on the East Coast, essentially are you saying there's not demand for the end product on the West Coast?

Well, I am not saying there's not demand because there is. But I would say that certainly over the last number of years, we have been filling that demand because that's the student preference -- to go where they came from. And so those dealers have been continuously getting graduates, whereas the East Coast is screaming for them but do not want students, who happened to reside on the West Coast. So it's just matching and balancing it.

But if you looked at the West Coast demand and the East Coast demand, I think demand levels are relatively the same. It is just that we have provided a significantly higher number of technicians on the West Coast than we have compared to the East Coast.

Howard Block, Banc of America Securities.

I'm so tired from that last answer.

Sorry.

The first question is -- this data that you mentioned about on the graduate programs that -- what did you say? 20 years ago, it was a 80/20 mix of UTI versus other?

2 years ago.

2 years ago. And so now, in 2 years, it's gone from 80/20 to 93/7?

Yes.

So obviously, this isn't just about -- your share grains in the undergraduate programs, I imagine, aren't nearly as great. Is that correct? Or would you say that this is just following the share gains in the undergraduate?

Well, I do think that there are a couple things. One is, obviously, the programs are right -- located at our campuses; a number of them are. And we have a number of recruiters that are out working the UTI campuses. We do have one person that covers the other feeder school. And not only that, we do screen and evaluate based on competency. So that is a consideration as well in terms of how the students perform for consideration into these advanced programs. So I think it is a combination of both.

But you're not aware of there ever having been any kind of a grievance filed by a non-UTI undergrad or any kind of discrimination based on their school they were selected against because they went somewhere else?

No, I'm not aware of any of those things. I do think that sometimes the OEMs will get calls saying, why aren't you partnering with this? Or how can my son or daughter get in? And they are given the same opportunities in terms of the qualifications and recruitment process. But I do not think that we've ever had any complaint filed relative to that.

Just a couple of smaller questions -- the TPCT program, how many locations is it in now?

The Toyota?

Yes.

It is only at the Glendale Heights location at this point in time.

Any near-term plans to take it elsewhere?

Not at this time. I still think we need to get more of the graduates out there and certified, Howard. We've got probably only over 100 out there at this point in time. And they are still working on their certifications that come as a result of them actually working at a dealership in getting their ASE test.

That piece has to come to closure before we really start ramping it up anywhere else. And that will be totally driven by Toyota.

And then you said in the 3-year BMW extension that Avondale and Rancho Cucamonga would also have the new elective?

Yes.

And when will they begin offering those new electives?

The Rancho campus has already started adding it. In fact, Avondale started teaching it this summer as well. And it is a 12-week elective for BMW that's a variation on the graduate level. This is not paid for by the OEM. It is student-funded just like the Ford FACT program.

Right. So this is the new FACT-like title for BMW program?

Correct.

It's at two places now, and you think it is going to spread more rapidly than let's say TPCT will?

I do not know that the elective will go to other places because not all of the BMW training centers are located at the campus. So that makes it more challenging to actually conduct the elective. Because we're trying to utilize the BMW training facilities better by having both graduate level programs and electives going through there. So if it's not right on the campus, it is difficult to have an elective at that site.

And then you said that Norwood had 150 students right now?

160.

160. Okay, so from between June whatever 27th, starting with 65 to 160 now. That means you have what two starts with an incremental 50 students each or something like that?

Yes.

Is that on plan or slightly ahead of plan?

I would say it's on plan. It might be slightly ahead because we started it sooner than we had anticipated. But, go ahead, Jennifer, what you --

I think that we're slightly ahead. We have probably started 1 quarter ahead of where we might have started if you were to even compare it to Exton. We started it the third week I believe in July when we opened up that facility with a small class like this.

And the other thing is that number does not have our August starts in there at all. And those are showing well.

So I am sorry, the 160 then as of when?

That would be through end of July.

July 31. I'm going to jump back into the queue if there still is one.

Trey Collin (ph), Stanford Group Company.

Looking at the demand by your students, it looks pretty strong. For prospective students, I remember there being a wait list. Is that still a factor? Once a student enrolls to -- for one of your campuses, they may have to wait a few weeks before they actually can start?

Yes, that still is the case at some of the campuses. And it depends on the time of the year and which campus. But sometimes, there could be more than a couple weeks. It could actually be several months that they are waiting to get in.

And I assume that is at the more mature campuses that that's happening?

Well, it is also happening at the Orlando site relative to the automotive program. So that's a relatively new one that ramped up very quickly. And now we are starting to see backlogs of students trying to get in there as well.

And then if you look at that from a different perspective, the advanced training or the manufactured-sponsored training -- if you are closing one center, training center, does that sort of say that there is less demand by the manufacturers for your students? Or what is that sort of signaling?

Well, this was driven by us. If you are talking about the Allentown, Pennsylvanian center. We are not reducing the number of classes offered. We're trying to get them to move to a campus, where they can be showcased. We can tour people through them. The students obviously get excited about having the opportunity there.

So we were the ones that actually approached them about moving the Allentown training programs to one of our campuses because the lease is ready to expire -- didn't really decrease anything there.

The one in Glendale Heights relative to Audi, I think that that one is basically helping them from a cost efficiency standpoint. Because we were able to transfer classes to other facilities to get better utilization. And frankly, that helps us from a profitability standpoint as well.

(OPERATOR INSTRUCTIONS). Mark Hughes.

The numbers for the recruiters currently versus this time last year or however you described it a little earlier, could I get those numbers again?

Yes, the fields reps when we started the -- I'm sorry, the sales year would be from 150 last year to 170 this year. And campus would go from 90 to 120.

And that is sort of as of what dates roughly?

It really -- on the field side, it is going to be in August and September. We start training this month actually for our field's reps. And then campus will actually build through the course of the year.

So the 170 and 120 numbers are currently?

170 is what we expect to be in the field by the end of September. And then 120 for campus, we will actually build up through the year.

And then the 90 and 150, is that the current number?

Yes, that was the number that we actually started with going into this fiscal year. And then I'm certain there are some territories that are open in that. But that is the approved headcount.

You may decline to answer this question, but I'm curious whether you have any sort of thoughts on your share gains versus Lincoln Tech. Any comments you would like to make there?

In terms of the market share gains?

Yes.

I haven't really seen much change in terms of what is happening with Lincoln in our markets. You know, like I said earlier, we have been competing with them for a number of years. And we have very strong performance in the markets where they have reps and where they have campuses. So we're not feeling any of a Lincoln or a Wyoming Tech impact. And when you talk to them, they say they are not feeling ours. So, so far, so good for everybody in the game.

We actually thought we might see a little bit more on the Sacramento side. But we have had very strong results for students relocating to our Avondale location, even though there was a facility -- from a Wyoming Technical Institute in the Sacramento area. We have been pleasantly surprised a little bit this year.

And I do think with Lincoln, Mark, our advertising and marketing approach is different. And so we are still able to pull what we need to pull out of those markets and just based on the way we advertise, market, and recruit.

Well, you certainly seem to be doing better.

Michael Lasser.

Could you remind us what percent of students that directly come out of high school and you serve throughout the year are recruited during the summer? And are you seeing any different trends this summer with respect to that market compared to other years past?

When you look at the field reps, who recruit the high school students, I would say that 60% of their business is going to be enrolled from the August to February timeframe. And then typically, those students enrolled from August to February -- and even those through June -- will start in the next summer or into the fall. I'm not seeing any different trends this summer or fall compared to the year before, other than we are getting students from areas that we never had before based on increasing our present summer recruitment standpoint. So the trends are the same.

Thanks, that is helpful. And generically speaking, are you having any increased activity talking to new manufacturers or industry -- potential industry partners compared to the past? How is that activity?

I would say that the activity remains very strong. We have a very committed B2B team that is focused on OEMs, the top 100 dealers of the automotive aftermarket as well as the transportation industry at large.

And on the OEMs, while it is difficult for me to give you any hard facts, I think we're making pretty good progress with two of them at this point. We made more progress with them than the last time we talked. But I cannot give you any specific dates as to when something will materialize. I think it's good progress.

Last time, I think you mentioned Porsche specifically. You don't have any update there, do you?

No, the Porsche program is -- I think it expires at the end of the year. I don't have anything more to add, other than we are working through the normal negotiations. But I don't have anything to add as far as the new program or anything like that.

Howard Block.

When you say a 40% of the students are adults, are you defining adults as someone who just doesn't come immediately from high school? Or is it an age or certain lapse between high school and school?

I would say it is more those who do not come directly from high school. It is going to be the 19 to 20 and higher or probably 20 and higher falls into the adult.

And then the 900 students you mentioned at Exton, was that also as of July 31st?

Yes.

And then the students, the graduate from FlexTech, who is now going to the Volvo graduate program, is that right?

Yes, he has not graduated at this point. He's met all of the qualifications and has been accepted based on that -- assuming he continues as planned, he will be admitted into the Volvo program.

So just using him as a profile, how many classes has he taken other than online? Has everything been online?

His whole program has been FlexTech. And 50% of that roughly is online.

So by definition, 50% is online, and he's been by definition.

And they actually -- they come to school each week just for a low number of hours on an average basis. So they do get hands-on training on a weekly basis. It doesn't all wind up collapsing into a single period.

And then -- I'm sorry -- for Sacramento, I thought I heard you say 2Q '06. But then I thought I heard you say about 1Q '06 starts.

We will be starting in the first quarter of 2006 in that 21,000 square foot facility -- in the temporary facility.

In the prepared remarks, we did say that and said it was ahead of what we had previously reported for the second quarter.

And then just in terms of I guess the issue you hear about this East Coast/West Coast thing. Is it at all -- and I know it's early obviously -- but do you have any concern whatsoever that if sort of word of this gets out that the prospective students on the West Coast would be a little bit concerned that his opportunities may be limited by virtue just of his domicile?

It's only two manufacturers. And I do not believe that it is going to be a concern. But we are dealing with it. And I already have communication strategies coming out to the students. But it doesn't limit their opportunities with the other OEMs. And if they are willing to demonstrate to the OEM that they are not going to leave after a year, the OEM will make the final decision to consider them for an East Coast placement.

But right now, they just sign 1-year contracts, and there's no thought to changing those to 2 or 3 year?

Not at this point, no.

And then last question is -- I just want to follow up on something actually I think you said last quarter that I thought of today for some reason. I think you had mentioned that the Porsche grad program was fine, but you didn't expect it to grow. I was wondering -- just trying to understand why a grad program, why you wouldn't expect it to grow. Is it something about that OEM's business? Is it something about the program? What is the dynamic that that sets an expectation for no growth in a grand program?

That is direct feedback from the customer, who has very good retention rate of the text. It is that the number one program for students and I think for technicians in terms of a brand. And so they have very good retention rates of their technicians. And they are not really increasing the number of base. So they are content with the output that we are providing them at this time.

Ms. McWaters, at this time, I am showing no further questions. Please continue.

I have nothing more other than to thank everyone for participating on our call today. And I look forward to joining you again in October to discuss our plans for our fiscal year 2006. Thank you.

Ladies and gentlemen, this concludes the UTI third-quarter 2005 conference call. If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 and enter passcode 11033597. (Repeat.)

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