Universal Technical Institute Inc (UTI) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Universal Technical Institute Inc's fourth quarter fiscal 2008 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, today's conference call is being recorded. A replay of this call will be available for 60 days at www.uti.edu, or alternatively, the call will be available through December 1, 2008, by dialing 800-405-2236 or 303-590-3000 and entering the pass code 11122194#. At this time, I would now like to turn the conference over to Ms. Jenny Swanson, Director of Investor Relations of Universal Technical Institute.

Hello and thank you for joining us today for Universal Technical Institute's quarterly conference call. During the call we will discuss the results of our fourth quarter ended September 30, 2008, and then open the call up for your questions. The Company's earnings release was issued after the market closed today and is available on UTI's website at www.uti.edu.

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, among other things, changes to federal and state educational funding, possible failure or inability to obtain regulatory consent and certification for new or expanding campuses, potential increased competition, changes in demand for the programs offered by the Company, increased investment in management and capital resources, the effectiveness of the Company's recruiting, advertising and promotional efforts, changes in interest rates, low unemployment, general economic conditions, and other risks that are described from time to time in the public filings of the Company. 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 expressly disclaims any obligation to publicly update any forward-looking statements whether as a result of new information, future events, changes in expectations, any changes in events, conditions or circumstances or otherwise. Information in this conference call including the initial statements by management, as well as answers to questions related in any way to any projection or forward-looking statement are subject to the Safe Harbor statement. At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, Jenny. Good afternoon, ladies and gentlemen. Thank you for joining us to review our fourth quarter and fiscal 2008 results. On today's call I'll provide a high level overview of the quarter, an update on key business initiatives and commentary on the overall economy and the impact to UTI. Eugene Putnam our CFO will follow with a more detailed review of our financial results and provide some 2009 forward-looking information before opening the call up for your questions.

For the fourth quarter of fiscal 2008, our net revenues were $84.6 million, down 2.7% from the prior year. This is primarily due to having 5% fewer students in school during the quarter than last year at the same time. Our average undergraduate enrollment for the quarter was 14,689 compared to 15,464 a year ago. While we have continued to make significant progress rebuilding our pipeline of students, due to improved lead generation, student contract and start growth, our average student population and revenue growth lags leading indicator trends.

Overall our operating performance improved during the quarter producing net income of $551,000 compared to a net loss of $1.3 million for the same quarter a year ago. This was due to lower compensation and benefits and contract services costs primarily outplacement services associated with our reduction in force and sales reorganization in September 2007. We also experienced a decrease in advertising expense partially offset by an increase in occupancy costs. This improvement in operating performance was despite the fact that we had several items that negatively impacted the quarter.

During September 2008, our Houston campus was closed for approximately one week after Hurricane Ike moved through the Houston area. Fortunately our campus experienced minimal damage. However, many of our students employees were without power and water over a two week period. The hurricane occurred at the end of a new student orientation week, only a few days after many students had relocated to the Houston area to attend school and just a few days before a large start for the campus. Thanks to the truly heroic efforts of our people, team Houston was able to start and retain students well beyond expectations. Although students were unable to attend class for six days equating to a loss of revenue for the quarter of approximately $620,000, I am pleased that both students and staff have worked diligently to make up the lost time during October. We therefore expect to recognize the $620,000 of revenue in October.

Additionally, during the fourth quarter we wrote off approximately $385,000 in assets that were not being utilized. We also recorded approximately $380,000 in severance costs for certain long-term individuals. These items were offset by a reduction in our self insured workers' compensation plan of $200,000. The combination of these items as well as the impact of closing the Houston campus impacted EPS by approximately $0.03. Now I'd like to spend a few minutes discussing the positive results we are seeing from a marketing and sales standpoint.

First, we remain encouraged by the continued success of our revised lead acquisition strategy. Since January of this year, building upon a quantitative positioning study we implemented a new national advertising campaign coupled with the revamped web strategy that has proven to be a very efficient lead production engine. During the quarter we generated 33% more leads as compared to the prior year. At the same time, our cost per lead decreased approximately 33% for the fourth quarter on a year-over-year basis. This is attributed to efficiencies gained with our new web centric strategy as well as less expensive advertising costs. As a result of these efficiencies we reduced our advertising spend during the quarter to 7.3% of net revenues as compared to 8.5% of net revenues during the prior year's fourth quarter. For the first quarter of fiscal 2009, we expect advertising expense as a percentage of revenue to remain flat to this past quarter. However, we do expect advertising expense to be up compared to the first quarter of fiscal '08. As you may recall, we intentionally reduced our advertising spend during the first quarter of 2008, due to constraining market conditions and the pending launch of our new advertising campaign. Let's move on to student contracts.

For the quarter, student contracts were up 28% compared to last year. Campus admissions which is the team focused on young adults and career changes accounted for the majority of the year-over-year growth. In fact, they achieved 40% growth year-over-year for the quarter. Since January, this team has steadily improved year-over-year performance with a significant increase in lead volume, we added 14 additional campus reps during the fourth quarter in order to effectively work those leads. We plan to hire eight additional reps during the next quarter for a total of 135 reps. We are also seeing solid progress with our field admissions team. This team serves the high school market and military bases. For the fourth quarter, field contracts improved 17% year-over-year.

During the fourth quarter, we did add nine field representatives to further penetrate the high schools in select territories and military markets based on successful pilots tested this past year. We ended the year and quarter with ten additional field representatives than in the prior year and we plan to hire eight additional reps during the next quarter for a total of 177 reps. Taking into account the performance for both the campus and field sales team, contracts improved 28% for fourth quarter and it looks like we're off to a good start for the first quarter of fiscal 2009. Together, campus and field teams enrolled 30% more students in October than they did last year for the same month. In fact, October 2008 was a record month with the most contracts written in a single month in the Company's history.

The next critical performance indicator is show rates. As a reminder, the show rate is the measure of the number of students scheduled to start during a specific time frame and the number of students who actually show to school and attend classes as scheduled. We were pleased to see continued improvement in our show rate on a year-over-year basis. For the quarter, our show rate improved 160 basis points. As we expected, on a sequential basis, the rate of improvement did decline from Q3 due to the high concentration of remote high school starts during the quarter. We continue to focus on the sustainment of our customer service training efforts to drive further improvement in the show rate.

Our efforts to drive lead generation, student contract growth and show rate improvement are starting to pay off. This quarter we were pleased to achieve 5% start growth year-over-year, starting 6,940 students compared to 6,612 students a year ago. We are expecting to see further start growth during 2009 as the increase in contracts we experienced during 2008 turn into starts in future periods. We ended our fiscal year with 16,481 students in school, as compared to 16,882 at September 30, 2007, which is a 2.4% decline. We announced last quarter that we were starting the fourth quarter with 940 fewer students as compared to the prior year. We reduced that gap to approximately 400 students by the end of fourth quarter.

The increase in starts during the quarter helped contribute to the reduction in this gap and we expect the gap to narrow even further in the coming quarters. Persistence for the quarter declined 30 basis points as compared to the prior year. We view it as nothing other than normal fluctuations as our student outcomes remain strong. Our completion rates were greater than 70% for 2008.

As expected given the challenges facing the transportation industry our employment services team has seen some tightening in the job market specifically with certain brands and certain geographies. Our most recently reported placement rate was 91% and while we may see some slippage in the near term, we are committed to increased effort and focus to achieve strong placement rates throughout 2009.

It's probably worth noting that demand for technicians is based on demand for service, not new vehicles sold. The demand for service is more a function of the number of vehicles on the road and their age, not the number of auto dealerships and historically the number of vehicles on the road increases even during recessionary periods. Even so, it's reasonable to expect demand for service to decline somewhat during a recession. However, it is less cyclical than demand for new vehicles. Therefore, demand for technicians is also less cyclical.

We do expect to see continued consolidation of auto dealerships although the projected decline may be more severe than in prior years. According to a recent Grant Thornton news release, the Detroit 3 account for more than 85% of the decline in dealerships and their sales per dealer were already well below the industry average. For some time now, the manufacturers have wanted to consolidate the dealerships for the good of the industry. We believe this will be healthy for the industry in the long-term and in the meanwhile service business will increase for the larger dealers and the aftermarket. Service and parts accounted for 81% of dealership operating profits in 2007, up from 77% in 2006.

During the last recession, service and parts profits held up. Recent earning reports for the publicly held automotive retailers suggest that the trend continues despite significant decreases in vehicles sold. While dealerships may not expand their service operations during challenging and uncertain times they will certainly focus on keeping their service bays filled with vehicles and qualified technicians to service them. In fact, our channel checks with large public auto retailers suggest that reductions in staffing have been primarily non revenue producing employees versus technicians. We also believe that our manufacturer relationship help mitigate the downturn risk from both the student recruitment and graduate employment perspective. When potential students think of UTI, they think of Audi, BMW, Mercedes Benz and Porsche. When their dealerships need technicians they think of UTI.

Many students who are interested in our Ford courses actually use these courses as a spring board into auto luxury brands, the aftermarket and the diesel industry. Ford does not require or expect all graduates with Ford training to work at Ford dealerships.

We do have a number of OEM contracts up for renewal at the end of the calendar year and we with are working through the process at this time. We do expect to see some consolidation of training sites with certain manufacturers in an effort to improve resource utilization, cost efficiencies, and overall profitability. We do expect some manufacturers to decrease technician demand from last year and others to increase based on their own business needs. As you are well aware, UTI takes great pride in its manufacturer relationships but we do serve a much larger market than auto dealerships.

We serve the entire auto truck industry and successfully place graduates within all industry segments. In fact, during fiscal 2007, 48% of our auto graduates were placed in dealerships and the remainder were placed at independents and other transportation companies. This is a shift from years prior where better than 50% of our auto graduates were going to work in dealerships. This suggests that we are able to respond to the needs of the overall market. We fully anticipate more of the job opportunities for our graduates shifting from auto dealers to the independents and into the diesel and trucking fields. Demands for diesel technician remains particularly strong and is underserved which speaks to the opportunity for UTI and our graduates.

Now I'd like to turn the call over to Eugene for a detailed review of our financial results for the quarter and fiscal year. Eugene?

Thanks, Kim. As mentioned, net revenues for the fourth quarter of fiscal 2008 were $84.6 million, down about 2.7% versus last year. The decline was primarily driven by a decline in average undergraduate student enrollments of 775 students or roughly 5%, as well as an increase in needs based tuition scholarships and military and veteran discounts which totaled $1.2 million. Additionally we did not recognize, as Kim talked about, approximately a little over $600,000 in revenue due to the one week of closure of the Houston campus. These decreases in revenue were partially offset by higher tuition prices as well as $1.4 million related to one additional revenue day during this quarter versus last year's quarter.

Operating income for the fourth quarter was $0.5 million, compared to an operating loss of $1.9 million last year. The improvement in operating income is due to decreases in compensation costs, contract services expense, and advertising expense, partially offset by the revenue issues we spoke of previously.

Compensation and benefit costs decreased $3.1 million, to $44.4 million. The decline is primarily attributable to the reduction in force that we had in September of 2007 that resulted in a reduction of $3.8 million in compensation and benefit costs. This decline this quarter was partially offset by an increase in the number of campus based sales representatives during 2008 and an increase in the sales rep bonus expense which is now based on student retention and graduating students.

Contract service costs were down $800,000 for the fourth quarter, to $3.2 million, and primarily related to outplacement services which occurred last year and were not repeated this year. Advertising expense decreased $1.2 million for the fourth quarter, from $7.4 million to $6.2 million. As Kim previously discussed, we gained efficiencies in a new web based model which allowed decreases in local media spending as well as other less efficient media while increasing lead productivity during the fourth quarter.

Occupancy costs for the quarter were $9.8 million, up from the $8.0 million spent in the fourth quarter of 2007. The $1 million increase is primarily related to the sale and leaseback of our Sacramento and Norwood facilities that we've discussed in previous quarters. Our provision for income taxes for the year -- I'm sorry, for the year ended September 30, was 41.4%, and going forward we expect the after tax rate to range from 39 to 41% absent any unusual items.

Net income for the fourth quarter was $551,000 or $0.02 a share, compared to a loss of $1.3 million or $0.05 a share in the fourth quarter of last year, and for the full year we earned $8.2 million, $0.32 a share versus $15.6 million, or $0.57 per share. And it's worth reiterating what Kim mentioned, knowing the unusual items in the quarter, specifically the hurricane in Houston, some severance items and some year-end write-offs totaled a reduction of revenue this quarter of roughly $1.1 million or roughly $0.03 a share and of that, the $600,000 will come back to us in October.

Moving to the balance sheet, we continue to have an extremely strong balance sheet. We had cash and cash equivalents of just under $81 million at year end, compared with $75 million a year ago. During the fourth quarter, we generated $15 million in cash flow from operations, that was up from about $13.5 million last year. And it's worth pointing out in these times, just to reemphasize, we still have no debt on our balance sheet. We did not repurchase any shares during the quarter and while we continue to have an open authorization, we believe that a better strategic use of our cash is to subsidize funding alternatives which we'll discuss in a moment for our students and maintaining a strong and liquid balance sheet.

During the year we purchased approximately $17.7 million in fixed assets, that's down significantly from $46.6 million purchased in 2007. This year's purchases were primarily associated with new industry based elective training programs such as Cummings, Straightline and Toyota as well as ongoing replacement of student training and computer equipment.

I want to spend a moment talking about a new program that we just launched in the fourth quarter that is related to the transformation of our auto and diesel program curriculum. We're transforming that curriculum into a blended learning experience that reflects current industry training methods and standards. The blended learning model combines several methodologies for communicating training information, and incorporate on-site classes, real time online learning sessions and independent learning and this is a standard used by our industry partners to provide continuous technical education.

As currently planned we anticipate the blended learning model will require our students to spend less time on campus, which would allow them greater flexibility in achieving their educational objectives. And additionally, we anticipate that it would allow for more efficient use of both our faculty and our facilities. This is a long-term project and we don't anticipate beginning to roll it out until the beginning of the first quarter of 2010 at the earliest.

I wanted to touch briefly on default rates. We've got our reports back in and all three of our OPEIDs for 2006 came in below 10% and range from 6.5 to 8%. And while those numbers are up slightly from the previous year, given this credit environment, we're particularly proud of those statistics as well as the placement rate which continues to be north of 90%. I wanted to spend a second giving you an update on our First Century loan program. As you know in the filings you will not see any of this information on our balance sheet or on our income statement as we are using cash basis accounting. As of September 30, we had committed to provide approximately $3.8 million in loans and we have currently funded approximately $1.7 million of those. To date, the average loan per student is roughly $5,700.

Finally, as most of you know, in the past for a variety of reasons we have not provided earnings guidance. But I think given the length of our business cycle, the progress that we're making on our leading indicators as well as the wide range of analyst expectations that are out there, I feel it probably behooves us to share with you our outlook for some of our key metrics and how the achievement of them might translate into our financial statements. Our guidance is based on current expectations. As Jenny mentioned, it is forward-looking and actual results may differ materially as a result of factors described in our public filings. I want to caution you that we have absolutely no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

With that said, we anticipate continued improvement in our lead generation. Which when combined with the improvement made in both our campus and field sales processes, should lead to an improvement in year-over-year growth in contracts written, in the low teen range. Given the recent growth and performance trends, we currently expect year-over-year start growth while it will be volatile on a quarterly basis, to be in the high single to low double-digit range for the full fiscal year. And if we're successful in achieving these level of contracts and starts, we would anticipate average students in school to turn positive on a year-over-year basis sometime either in the second or third quarter of our fiscal year and continuing to improve as we go into the fourth quarter. Finally, if we do in fact achieve these results, on these metrics, I believe that we can return to double-digit operating margins in the fourth quarter and be well-positioned both from an operating perspective as well as from an actual number of students in school to continue our momentum into 2010.

In summary, we're very happy with the results in our lead generation, our marketing and our admissions. We're continuing to focus on show rate improvement and increasing starts. As we've discussed on previous calls, the nature of our business, it will take several quarters to rebuild the average student population and revenue, but we're beginning to see that. We're very pleased now to see the second consecutive quarter of start growth and it was meaningful this quarter at 5%. We will continue to invest in the business to drive more leads, more contracts, and eventually more starts while maintaining strong cost controls across the business without compromising our commitment to either students or our industry's clients.

And finally, I wanted to just let you know that from a disclosure and governance standpoint, we are, effective immediately instituting a quiet period. What that means is beginning on the 15th day prior to the quarter end, through the day of our earnings call, we will refrain from participating in communications with analysts or investors. For the first quarter, which ends for us December 31, our quiet period will begin on December 15, and end roughly on February 3, which is the scheduled date of our earnings call. So I just ask for you all to help us with that and be respective of our quiet period that is now in effect. With that, Kim and I would be glad to answer your questions, and operator, I think we're ready for those now.

Thank you. (OPERATOR INSTRUCTIONS). One moment, please, for our first question from the line of [Kevin Daugherty] with Banc of America Securities. Please go ahead.

Thanks. I guess just want to follow-up first on the comments on the outlook, getting back to that double-digit margin rate and the start numbers. How confident are you that you can reach some of those targets? Just thinking about that double-digit level, I guess you guys really haven't been there for about four years, just looking at the 4Q seasonal levels. So sort of a sharp ramp-up there, but maybe if you could just talk about where you see some of the biggest opportunities for cost leverage and really how much of that will be contributed by the lower ad spend environment?

Well, I would caution you that I don't expect it to be a cost-driven return to operating metrics. It's -- operating margins. It's more getting the growth up in our students in school and that's really what will drive it. Obviously, given today's environment and we can talk about that more, there's opportunity to do things on the expense side from advertising, but it is -- it's a nice problem to have. We have not decided whether we're really going to scale back on advertising. Obviously, the more efficient that we get with advertising, converting those into contracts and then eventually into starts, that will provide us greater leverage there.

To your initial question about confidence, I'm not going to give you a confidence level. That's our best thinking right now. It is certainly not a layup but it -- I wouldn't have said it if we didn't believe that it was achievable. There are certainly trends out there and headwinds that we struggle against every day and will in every economy and we have tail winds that help us. But we think it is -- we think it's achievable and it's something that we're shooting for.

Thank you.

Our next question comes from the line of Mark Marostica with Piper Jaffray. Please go ahead.

Just picking up on the question of double-digit operating margins, not to beat a dead horse, but I'm curious, the last time you had double-digit operating margins in that fourth quarter, do you recall what capacity utilization level you were at or maybe asked a better way, where does capacity utilization need to be for to you hit that?

I did not have in front of me where it was. Obviously, it was significantly higher than the roughly 60% that we're at. Somewhere I believe with a seven handle on it. It's the big driver.

Thank you.

Our next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. Thanks so much for giving us some color on the end markets out there in terms of what's going on in the auto industry. Do you see any meaningful difference between any pushback coming from your high school students or potential high school enrollees and the working adult market? And the reason I'm asking, I'm thinking some of the folks that are working right now would obviously have to stop working or go back to part-time in order to go back to your campuses as opposed to the high school students that were not working in the first place. Any meaningful difference between those two populations?

I think how we interact with them is different. Certainly with the high school students you have the parents and a larger buying committee and how they view these opportunities might be different than the prospective student who is underemployed and looking at this career choice. I don't think that the automotive overhang is affecting them differently, necessarily, it's just how we respond to them. I think if we see anything between the two markets, the two student segments there, is that it's taking longer to make a decision. They are fully vetting out the opportunities and looking at this and it's requiring more interaction with our representatives, both the field and campus based, to get them there, but I think we're successfully doing so.

Thank you. And our next question comes from the line of Corey Greendale with First Analysis. Please go ahead.

Hi, good afternoon. Wanted to ask you about the lending environment, whether you've seen changes in the credit standards from Sally Mae or anybody else that you're using and whether you are seeing a greater percentage of your students tending to use your internal lending program?

We have not certainly in the past quarter really seen anything other than a recommitment to the business from Sally Mae. The lenders that we work with, we are not really privy to their underwriting black box but that said, looking at what comes out and looking at the pie of our students, if you will, we're still seeing roughly a little bit under 10% utilize our loan program and the 10% was roughly the number that it was anticipated to replace. So I would say the lending environment, while crazy reading from the media perspective, has been fairly stable over the last quarter.

Thank you, sir. Our next question comes from the line of Jason Anderson with Stifel Nicolaus. Please go ahead.

Hi, Kim and Eugene. I'm in for Bob and Jerry. You touched on the job placement there in your comments about independent versus the dealer. Just could you give us any more color? Do you need to change anything strategically to address independent more? Would that include any additional build-outs in your career services or anything like that?

I think that potentially it could mean a few more resources across the system. What we are discovering is that it's taking more touches, more calls out to employers on both the dealer side as well as the aftermarket. Certainly with the independents, we have more work to do from a relationship building standpoint than on the dealer side. But again, 50% of our graduates are already going to those types of jobs, so I don't think it's a major strategic shift. We believe that we have the relationships across the industry to serve both dealerships and the aftermarket as well as diesel. I just think it's going to take more effort, focus and relationship building.

Thank you. And our next question comes from the line of [Keyon Gaja] with Hawkshaw Capital Management. Please go ahead.

I have a couple of questions. The first was about the double-digit margin potential for fourth quarter '09. Historically, the fourth quarter has been the weakest or if not the weakest, one of the weakest quarters of the year, so if you're exiting 2009 with a double-digit margins, and there's ifs, I know that was a projection, but if that happens it would suggest you're on a run rate to do better than that. Whatever that double-digit number is, but better than that into fiscal 2010. Is that a fair presumption?

Well, I think you need to remember we're on a September 30, fiscal year, so our fourth quarter does tend to be a fairly strong quarter for us. That said, the follow-up to your question, yes, I mean, this business as we're trending upwards and end the year on an upward trajectory, yes, that would clearly set us up and to my comments, that's what I was trying to imply, would set us up fairly well going into full year fiscal 2010.

Thank you.

Let me just add to that. I think that -- I don't think it would be wise to take double-digit in the fourth quarter and then significantly add to that on a quarterly basis going into 2010. At least as far out as we are right now. We're shooting to kind of hit that first hurdle and get back to that double-digit and then go from there.

Thank you. And our next question comes from the line of Arieh Coll with Eaton Vance. Please go ahead.

Good afternoon and continued best of luck in your efforts here. Question number one, in the September quarter most of your intake new starts are coming from high school students who graduated a couple months earlier and I'm just wondering what are your plans to try and, going forward, before next September rolls around in '09 to get more of those high school students to enroll at UTI? Because clearly this was your big opportunity in September. There was growth. But I'm just surprised, wondering how you get even more of those high school students to come in in the next six months or have you really kind of missed your opportunity and you have to wait another year to get most of them?

I think with the graduating seniors, typically they try to start in the late summer, early fall, so there is a window where you want to maximize your high school recruitment efforts. You will also see some that may not have had opportunity to save enough funds to relocate, show up after the first of the year, so you'll see some increase in high school students in the January time frame. With that said, we continue to try different strategies related to the high school marketing efforts and sales efforts to tap into a wider student population than just the vocational education classes and we are seeing some success there. I think our opportunity is to make certain that once these students are enrolled and our contracts these students have committed is that we are doing all that we can to hold their hands and help them walk through a very complicated financing process to get these students to show to school.

We will continue to enhance and improve that, I think also strengthening the interaction with the parents to provide that support should help us in future periods. The down side of the high school market is they tend to start in the summer, fall time frame. I think the good news here is that we are being very successful with the young adults, those who have been out of school for a couple months or a couple years and we're seeing those success and we want to make certain that we build on those as well and those students do tend to start all throughout the year.

Thank you. And our next question comes from the line of Trace Uran with Signal Hill.

Good afternoon. I wondered if you could tell us what contact you've had with the different manufacturers that you have programs with and how they're thinking about those programs in the context of the current economy?

It differs by manufacturer and of course we're having ongoing conversations with them. All of whom are cost conscious. And so as we've done in the previous contract renewal periods, we are looking for ways to improve efficiencies through our facilities utilization and instructor resources, et cetera. So as we're going through these contract renewals, we do expect to see some consolidation of some of the training sites which is good for the manufacturer and it's good for UTI as well. It's a little bit more of an inconvenience for students because they may have to transfer or change locations for these programs but overall we've been able to make that work in prior periods. Some will see a decline in technician throughput requirements. Others are increasing and I say specifically on the diesel side, we're continuing to see more growth and interest from the diesel manufacturers other than the autos. With that said, I don't believe that the relationships are at risk. I think they will just be redefined to meet the current needs of the various manufacturer brands.

Thank you. And our next question is a follow-up from the line of Mark Marostica. Please go ahead.

Yes, thank you. Kim, I'm not sure if you mentioned this but in the past you provided start growth for the month of October. And I know you provided contract growth for October but I didn't hear start growth.

I do not actually have that in front of me but we might be able to get it by the end of the call. Do you have that? I don't know if we do. It's not intentional. I just didn't bring it in.

Thank you.

We'll get back to you.

We just need to be a little careful with what we give you because start dates when you look at it a quarter, it's usually fairly relative on months. We don't necessarily always have the same number of starts each month on a year-over-year basis but if you'll give us a call, we'll give you a follow-up on color on that. I would just say, so that everybody doesn't have to call us, what we're seeing, you heard our comments about expecting start growth in future quarters. We obviously would have been much more cautious with that statement were we not seeing it in October. So everything that we have seen year-to-date since September 30, is -- coincides with that comment about our expectation of continued start growth.

Okay. Fair enough.

Thank you. And our next question comes from the line of Jeff Silber, a follow-up, please go ahead.

Thanks so much. I've got some numbers related questions. I'm going to ask them all at once before I get cut off. I don't know if you gave show rates in the quarter or at least change year-over-year, if you can give us that and then also looking out at fiscal year '09 if you can tell us what your capital spending budget is and how much you'd be willing to commit to funding in fiscal year '09 for students? Thanks.

Okay. Show rate was up 160 basis points on a year-over-year basis and so all of you know, that's traditionally what we give is the movement, not the absolute number. The CapEx question, I would expect -- we put out a number of 17.7 for this year. That is actually a little bit higher, without getting into the nitty details, accruals from previous years that get backed out but in essence we spent about $15 million this year. I would expect next year for that number to be, all else equal, about the same. And then depending upon what piece of the curriculum transformation project we do, we would add that -- that would be in addition to kind of the $15 million run rate number. And I think your last question revolved around the lending program. We currently have the $10 million that are allocated towards it.

I always want to be hesitant talking for the Board and I don't mean to be doing that but I would anticipate that we have, given the current environment, enough money to take us into the middle of next calendar year. I would anticipate sometime early next year going to the Board with a thorough review of our program, how it's working, is it working for the purposes intended, and probably at that point if we're in today's environment or a similar environment, probably recommend doing some more of it. Whether it would be on the exact same terms and conditions, I don't know. At some point you get to a level of commitment where your balance sheet and your P&L require you to tweak the program a little bit. But everything I see today suggests that it is working as intended, not seeing any abuses and it's getting people that want to come to UTI that otherwise would not be able to, to actually show up, and given while we're at these levels of capacity utilization, I would certainly be in favor personally of continuing that.

All right. Thank you. And our next question is a follow-up from the line of Corey Greendale. Please go ahead.

Hi, thanks. Eugene, you somewhat answered this with kind of pointing us toward the guidance for next year, but would you say that your confidence about the tone of business is better, worse or unchanged now from what it was from last time you reported? Specifically are you seeing more people raising questions about affordability in the current environment and also raising questions about what historically has been your competitive advantage, being your connection to the OEMs, being either less of an advantage or a disadvantage given the headlines, while it's not necessarily your partners, the headlines are pretty negative about the OEMs at this point.

I know that gets a lot of headline risk. It is certainly real out there. There's no doubt about it. But I don't think we can point to any downturn in our business as witnessed by the results that we just reported, as well as what we're seeing from a lead generation and contract growth standpoint into this year. What I think it is creating is, as Kim mentioned, a longer sales process, more -- probably appropriate intelligent questions by potential students and parents, but I think it's something that there are good answers to and I think the value proposition is still holding. I guess your question was am I more positive or more negative? I would have to say on a whole, I'm more positive because we've had another quarter of good results, not only at the front end, which we've been seeing for basically a year now, but some of that is starting to flow into, out the funnel as far as getting additional starts there.

So notwithstanding the challenges of headlines, the macro economy, new administration, all those things that can keep you up at night if you want to be really draconian, the bottom line is the business is performing better now than it was three months ago and better then than it was three months before that. So from that perspective, I'll let Kim add to that, but I'm more positive.

I would second what Eugene is saying and I think that we are -- we're listening carefully to both our industry customers as well as the student customers and adjusting our message. As Eugene said, there are good answers to it. The value proposition remains strong. I think with a little more effort and focus we can overcome any of the employment hurdles on the back end. With that said, I don't see the automotive cloud hurting our recruitment and marketing efforts. As Eugene said, we've seen better results in the last three months and six months than we've seen in the previous quarters and year for that matter. So I remain optimistic and very pleased with the success that we're making in spite of the challenging macro environment.

Thank you. Our next question is from the line of [Jennifer Todd] with Credit Suisse. Please go ahead.

Thanks. Kim, can you put the growth in contracts signed in some sort of context? Maybe in other words, if show rates remain consistent, what rate of start growth should we expect based on your current run rate? Or maybe where you were last year at this point, relative and how that translated into starts? Thanks.

I think with what we've already given as far as the forward-looking indicators, it accounts for the show rate remaining stable or slight improvement, as well as the contract growth at the rate that we're currently seeing and experiencing. So I wouldn't -- I don't know that I want to go that far and be that specific as to if this happens and it's going to yield X number of starts, I feel very comfortable with what we have already provided. And believe we've already given the statistics and data to support that.

Just don't forget, there is a -- we're talking a little bit apples and oranges when we talk about contract growth, that is for contracts that are written during that period, but they can range from starts as soon as the following month to as long as 12 months or even longer out there. So it's -- we need to be careful and I think that's why we, as Kim said, we phrased the guidance going forward in terms not only of contracts written, which suggest future growth down the road, but at a undisclosed and unknown time, versus giving you some guidance on what we expect from start growth, which is more immediate in its impact.

Thank you. And our next question is a follow-up from the line of Keyon Gaja. Please go ahead.

It seems to me that given the roughly 10% of your students that you're actually lending some money to, I believe if I remember correctly, that's a number that was comparable to the amount of discount loans that were being given in the past. So if I'm not mistaken, it seems like there's been no increase in the number of students that would be in this category whether it was previously discount or now discount loans or now you're funding them. There doesn't seem to be any increase in the number of students that would fall into that category. Am I recollecting this right and is that a fair presumption?

You are recollecting that right and it is fair. In fact, I would go a tad further. We're actually getting slightly less usage as a percentage of our students than we saw in the -- back in the discount fund days. It's still a relatively small sample size so I attribute a little of it to that. I attribute a little of it to just the -- it was easier to go I think to the discount program than probably it is to ours and I think you combine that, the small sample size, and just the resiliency of students and parents that are still paying a fair amount by cash and/or credit card and that contributes to us doing slightly under what we actually forecasted and thought we might see.

Thank you. And our next question is a follow-up from the line of Jason Anderson. Please go ahead.

2009 should we think about the time line for a potential tuition increase to be similar to this past year, time line and amount, actually?

Yes, I would think you could model it that way. We may see some variations by certain locations, but it should be pretty similar to last year.

All right. Thank you. And our next question is a follow-up from the line of Mark Marostica. Please go ahead.

A two part question on operating margin guidance that you provided. First part, is the operating margin target that you have for fourth quarter, is that GAAP operating margins or exclusive of stock based comp and secondly what does that portend for Q1 operating margins? Should we believe that Q1 operating margins should be up year-over-year to kind of hit that Q4 target that you have? Thank you.

Yes, GAAP, to answer your first question. And I assume you're talking about first quarter and I apologize, maybe, operator, we don't cut him off quite as quickly so there's a little bit of give and take here, I think that might help. I think your question is -- I'm making the assumption your question was first quarter of 2009 versus first quarter of 2008.

Correct.

I don't really want to get into the quarterly guidance at this point because it is going to be volatile. Don't read that as a no, it won't be or yes, it will be. I'm just really more comfortable giving the guidance that we gave for the fourth quarter and as we get into the first quarter we'll report it and we'll go from there.

But I guess to add to that, I mean, there is a bit of a hockey stick here. I mean, we are entering the quarter with less students than we had entering the quarter a year ago. So from that perspective, we're still kind of digging out of the hole, although -- and I apologize if this is a corny analogy, but we're throwing dirt back into the hole where a year ago we were still digging the hole. That enrollment growth is filling up but I think until we actually get to that point where we have year-over-year total enrollment growth, it will be difficult to show operating margin growth on a year-over-year basis.

Thanks for the color, Eugene.

Thank you. Our next question is a follow-up from the line of Keyon Gaja. Please go ahead.

Correct me if I'm wrong. The bulk of high school students signing contracts I imagine would be happening in the December and the March quarters, so I would think that the number you report for those quarters that are forthcoming for contract signings is going to be more heavily high school students which has been lagging the contract growth rates you've been signing for -- on the campus level. So as we go to the December quarter and the March quarter, should we anticipate that the contract growth rates that have been accelerating thus far and I think you said there were 28% in the September quarter and 30% in October, should we anticipate that that's going to decelerate in December and March as there's more heavily skewed towards high school students which have been growing contracts at a meaningfully lower rate than your campus contract growth rates?

I think your logic is correct, other than we continue to spend and invest in campus admissions. So while you would historically expect to see fewer of the high school contracts written during that time period, because we're investing so much in the campus admission side and the growth is significantly higher than we've experienced in previous years, we do believe that that will offset it. Without getting into all of the detail, remember a year or so ago we did change the lead policy and shifted some of these younger students to campus admissions and so it does create difficulty comparing historical norms that came from the high school reps or the field reps. So you may not see as great an increase from the high school reps but I think what campus is doing with the young adult market is going to offset that and I don't think it will be a significant deceleration when you look at contracts for both teams.

Thank you.

Thank you. And Ms. McWaters, there are no further questions at this time. Please continue.

Well, we would just like to thank everybody for participating on our call. We look forward to updating you on our first quarter earnings which is scheduled for Tuesday, February 3. Hope you have a great evening. Thank you.

Ladies and gentlemen, this does conclude your conference call. You may now disconnect, and we thank you for using ACT conferencing.