Universal Technical Institute Inc (UTI) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Universal Technical Institute Incorporated's fourth-quarter fiscal 2009 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 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 8, 2009 by dialing 877-344-7529 or 412-317-0088 and entering the passcode of 435399 pound. At this time, I would like to turn the conference over to Ms. Jenny Bruso, Director of Investor Relations of Universal Technical Institute. Please go ahead.

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, 2009 and then open the call up for your questions. The Company's earnings release was issued prior to the market opening this morning 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.

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 morning, ladies and gentlemen and thank you for joining us. On today's call, I will give a high-level overview of the quarter and provide a year-end review of key operating results and business initiatives. Eugene Putnam, our CFO, will follow with a more detailed review of our financial results and will provide an update on our Dallas campus and curriculum project, as well as discuss 2010 forward-looking information. We will then take your questions. Let's begin.

Fiscal 2009 was a very good year for UTI overall. It was a defining year in that we realized the operating and financial results we worked hard to achieve after a multiyear turnaround effort. In an unprecedented time of challenge and change for the automotive and transportation industry in general, our team was able to largely overcome any associated implications.

Last year, we told you that on a year-over-year basis, we expected to achieve double-digit contract and start growth and single-digit growth in average undergraduate student enrollment. Finally, we said a return to double-digit margins during our fourth quarter was a real possibility. I am pleased to say we achieved all of these goals. For the full year, contracts increased 12%, starts increased 17% and our average undergraduate student enrollment grew 6%. And our operating margins were 12% during the fourth quarter. By the end of the year, we had 2300 more students in school than last year for a total of 18,800 students, which is a record high in our 45-year Company history.

Looking more specifically at the fourth quarter, our net revenues were $99.5 million, up 18% as compared to the prior year. Net income for the quarter was $7.6 million, or $0.32 per diluted share, compared to net income in the prior-year fourth quarter of $600,000 or $0.02 per diluted share.

Our average undergraduate enrollment during the quarter was 16,905, up 2216 students, or 15% from 14,689 a year ago. As I mentioned earlier, by the end of the quarter, we had 18,802 students in school as compared to 16,481 at September 30, 2008, which is an increase of 14%, or 2321 more students.

Let's look a little closer at key operating trends across the student funnel beginning with marketing. During the quarter, our marketing team exceeded our lead generation goals for the sixth consecutive quarter, bringing the year to a close with a 25% increase in leads for the full fiscal year and a 2% increase for the quarter year-over-year. The 2% growth rate is both expected and acceptable as our sales team effectively worked both their existing base of business, which is their current lead supply, as well as new leads generated by advertising.

Our advertising spend decreased 14% this quarter or approximately $850,000 to 5.3% of net revenues compared to 7.3% of net revenues for the same period last year. This improvement was driven by an effective and efficient web-centric strategy, our national advertising campaign and favorable advertising rates, all of which contributed to a lower cost per lead. In fact, our cost per lead was 16% less than last year.

For fiscal year 2010, I would expect advertising costs to run between 6% and 7% of revenue. This is a slight increase from our current rate due to a stabilizing advertising environment, our continued focus on more expensive local market advertising to complement our national media campaign and the need to grow our overall lead base as the year progresses.

Let's move on to student contracts. Contracts were up 12% for the full year, 4% for the quarter of which adult contracts were up 19% while high school contracts were down 13%. During the fourth quarter, we implemented significant changes in the area of student recruitment, specifically with our high school reps that we believe will ultimately improve our student experience and at the same time better utilize financial, human and technological resources. As we continue to focus on areas to improve margins without compromising quality, this is an area where we believe opportunity remains.

As a reminder, Bob Adler, our SVP of Admissions who led the turnaround of our campus in the adult-based sales channel starting 24 months ago, assumed responsibility for the field sales channel in May.

In August, we completed our high school market coverage strategy and territory alignment project. This study was launched to support our broader business strategy to one, increase market penetration across key customer segments located within close proximity to a campus; two, to improve customer service levels with key customer segments; and three, better allocate Company resources based on territory potential and an overall return on investment.

Simply put, we eliminated field territories with a poor ROI and low potential and increased coverage in local territories that have greater potential. We then increased our headcount in our campus-based sales channel to cover remote territories that may not justify the expense of a field rep.

As a result of this study, we realigned many field territories, actually eliminated 18 low value territories and increased our campus sales channel by 32 people. Most of the territory changes were implemented mid-September and the additional 32 campus representatives were hired midway through the first quarter. So the net effect is we now have 350 admissions reps compared to 310 last year, which should serve us well in 2010. For the full year, I would expect double-digit contract growth; however, I would expect minimal growth in Q1 due to the number and timing of the changes I just discussed, as well as the ramp-up time required to get our reps fully productive.

Before I move on to starts and show rate, let's talk about how we will discuss and report contracts for 2010. Historically, we have reported contract statistics by sales channel. Generally speaking, the field was responsible for high school recruitment and the campus-based teams were responsible for adult recruitment. And while it is generally true that the field will be responsible for covering the majority of high schools in assigned territories in 2010, the field territories have been efficiently redefined to include young adults.

Further campus-based admissions teams will work the high school age population from unassigned high schools and territories. Therefore, in 2010, it will be difficult to provide relevant comparisons year-on-year by sales channels. Going forward, we will report contracts statistics on a consolidated basis, but not by specific sales channel. We recognize the value in having insight into the high school population and will occasionally provide data that is specific to the customer segment rather than the sales channel.

Now let's talk about starts and show rate. For the full year, starts grew 17%. For the quarter, starts grew 15% year-over-year despite a slight decline in show rate of 120 basis points. During the quarter, we started a total of 7985 students compared to 6939 last year. This is an improvement of 1046 students and marks the sixth consecutive quarter of start growth.

Moving to student retention, it continues to be more challenging than in years past given the current economy, but our teams are really doing a great job of keeping students in school by delivering a quality education and offering greater levels of customer service and support when needed. We are very proud that we continue to graduate about 70% of our students.

As we have discussed on prior calls, the job market for our graduates is a very different landscape than a year ago. And while the environment continues to be challenging and requires different strategies, our employment services teams and our graduates have worked very hard to navigate a sea of change.

Our placement rate for fiscal '08 graduate cohorts was 87.5% as compared to 90.6% for the prior year. The 87.5% placement rate was on the higher end of where we actually expected it to be for the year. This rate reflects the hard work of both our employment services team and our graduates.

As we look forward to fiscal 2010, I would expect continued pressure on employment rates throughout the year given the current environment and know that we will invest additional marketing resources and staffing where required to accommodate an increasing number of graduates throughout the year. While our placement goal remains 90%, realistically, I believe we will see placement rates somewhere in the mid 80% range for the year.

Now I would like to provide an update on our OEM relationships. We remain very committed to our industry customers and are working together to continue to create a win for them, a win for our students and a win for UTI given the current economy. We have seen a recent trend among OEMs to migrate from OEM-paid to student-paid training programs. There are numerous benefits to the student-paid elected form of paying -- one, more students have access to manufacturer-specific training; two, both student and dealer are free from any contractual, financial or employment agreement with the OEM; and three, electives are traditionally more profitable for UTI due to greater flexibility with instructor and student ratios.

The level of OEM support for elective-based training remains very strong with product and curriculum as evidenced with all of our motorcycle OEM-specific electives and all of our automotive and truck electives, including BMW, Cummins, Daimler Trucks, Ford, Nissan and Toyota. OEM-specific training programs, whether OEM-paid or student-paid, remain a key differentiator for our brand and strengthen the UTI value proposition for both our students and employers.

Before I turn the call over to Eugene, I would just like to publicly thank our people for their passion and commitment to our purpose, our students and industry customers. They put forth a tremendous effort this year and it is clearly reflected in our results. Thank you team UTI. Eugene?

Thanks, Kim. Good morning. As Kim mentioned, net revenues for the fourth quarter were $99.5 million, up 18% versus last year. The increase was primarily driven by an improvement in average undergraduate enrollments of 2216 students or an increase of 15%, along with higher tuition prices and a decrease in need-based tuition discounts of about $730,000. These increases were partially offset by approximately $2 million of tuition revenue and loan origination fees financed under our loan program that were not reported as revenue during the quarter. As a reminder, we recognize the related amounts of tuition revenue when such amounts have actually been collected. Average revenue per student for the quarter was $5,888, which was up 2.2% from last year.

Operating income for the fourth quarter was $12.3 million compared to $0.5 million in the same period last year. The improvement is due to increases in net revenues and decreases in advertising expense, partially offset by some increases in compensation costs and bad debt expense. The operating margin for the fourth quarter was 12.3%, up from 60 basis points for the fourth quarter of fiscal 2008. Our operating margin for the full year of 2009 was 5.1%.

Compensation and benefit costs increased $3.6 million to $48 million for the quarter. The increase is primarily attributable to an increase in the number of salesforce representatives and the number of employees in our financial aid and student support departments. We continue to increase staff in these areas in response to the number of contracts, the changing student funding environment and changes in the general economic conditions.

Advertising expense decreased $850,000 for the quarter from $6.2 million to $5.3 million. As Kim previously described, the decrease in expense is the result of efficiencies gained through our lead generation efforts, as well as lower rates on national advertising. Bad debt expense increased $681,000 for the quarter from $1 million to $1.7 million. This increase represents both a small increase in actual charge-offs, as well as the building of our reserves.

Interest income decreased $362,000 to $65,000 for the fourth quarter. This decrease is attributable to lower cash balances than last year, combined with a lower overall interest rate environment and our investment philosophy of investing in lower risk, lower yield municipal bonds.

During the quarter, we invested approximately $15 million of cash and pre-refunded municipal bonds, which are classified as current and noncurrent investments on our balance sheet and as we discussed in our last call, these refunded bonds represent debt obligations issued by states, cities, counties and other government entities. It is a laddered portfolio of short duration bonds, which have been fully defeased with US treasury securities.

Our provision for income taxes for the year ended was 39.2%, down from 41.4% of pretax income for the year ended September 30, 2008. Net income for the fourth quarter was $7.6 million, or $0.32 per share as compared to $600,000, or $0.02 per share in the fourth quarter of last year. For the full year, net income was $11.7 million, or $0.48 per share, which was up 54% from the $8.2 million, or $0.32 per share earned in 2008.

For the year, roughly 65% of our earnings came during this past fourth quarter. Now while I don't anticipate that level of seasonality in fiscal year 2010, the general pattern of a strong first and strong fourth quarter should continue.

Our balance sheet continues to be extremely strong. We had cash and cash equivalents of $56.2 million at year-end compared with $80.9 million last year. Cash including investments at September 30 totaled $85.1 million. During the year ended September 30, we invested $31.6 million in pre-refunded municipal bonds. We also generated $49.2 million in cash flow from operations compared with $21.1 million in cash flow last year. And we continue to have no debt on our balance sheet.

Again, during the quarter, we did not purchase any shares of stock and we currently have approximately $23.5 million of repurchase authorization remaining. During the year ended September 30, we purchased $28.5 million in fixed assets compared to $17.7 million last year. The $28.5 million is primarily associated with purchasing the facility for our Dallas-Fort Worth campus for $9.1 million, along with various information technology projects, primarily our conversion to a new general ledger system, which occurred in May, as well as the ongoing replacement of equipment related to student training.

We continue to see good results from our internal loan program. At September 30, we had committed to provide approximately $17 million in loans and we have approximately $14 million in loans outstanding with an average balance of just under $5,500 per loan. Since the inception of the program, approximately $8.4 million in deferred revenue, which, as a reminder, does not appear on our balance sheet, has not been recognized. Because collectibility is not reasonably assured, we will recognize that revenue at the time we actually collect payment on these loans.

Through year-end, we have collected $52,000 of an expected $94,000 on outstanding loans. It is extremely early given that only $94,000 has migrated to the payment mode, but I am very encouraged with only a 45% delinquency rate on these loans. We currently have $30 million dedicated to this program and I would expect the program to continue for the indefinite future. And we will report on it during our earnings calls, as well as in our quarterly filings, but we do not intend to put out press releases when additional amounts are authorized by the Board.

We are continuing to make progress on our plans to implement the federal direct loan program. We are currently piloting direct lending at one of our campuses and have already begun to package students who are scheduled to start in the spring quarter.

We are also one track for our summer opening of our new Dallas-Fort Worth campus. In October, we announced that we had purchased the campus facility for $9.1 million. While historically our strategy has been to lease our campus facilities, given the current economy and the strength of our balance sheet, we chose to purchase the facility rather than entering into a long-term lease. We anticipate spending approximately $10 million on building improvements and equipment over the next 12 months.

Once the renovations of the facility are completed, it will be approximately 95,000 square feet, roughly a third the size of our existing destination campuses and will accommodate approximately 750 students. We anticipate we will incur approximately $6.6 million in operating expense in fiscal year 2010 and expect the Dallas-Fort Worth campus to have a drag on earnings per share of approximately $0.11 in fiscal 2010.

The Texas Workforce Commission has issued a Certificate of Approval for the campus. It has approved the auto and diesel programs. Once the licensing process is complete, we will begin to incur sales and marketing costs, which have historically preceded the opening of a new campus by approximately nine months.

While we anticipate the new campus will be profitable within 9 to 15 months after opening, we obviously will provide specific student and financial performance of the new campus's impact on our consolidated results as we go forward.

Our curriculum transformation project is also progressing on schedule. As a reminder, we are transforming our auto and diesel curriculum into a blended learning experience that combines several methodologies reflective of current industry training methods and standards and incorporates on-site classes and web-based training.

In addition to improving the overall educational experience for our students, the new curriculum will offer more convenience and training flexibility for students while meeting industry standards and providing expense benefits to us. We'll be running a pilot at our Avondale campus with a new program beginning in the spring and then we plan to launch the new curriculum at Dallas-Fort Worth when it opens in the summer of 2010.

In closing, let me just say that I think this has been a terrific year for UTI. I am particularly pleased that we exceeded all of the targets we put forth at the beginning of the year, specifically 12% growth in contracts, 17% start growth and a significant increase in the number of students in school notwithstanding the general economics and industry conditions that we have been under.

I am most pleased however with our return to double-digit operating margins during the quarter. Both versus the third quarter of this year, as well as last year's fourth quarter, nearly 80% of our incremental revenue (inaudible) at an operating profit in the fourth quarter. This is above the high end of the range that we have provided and it is indicative of the leverage in our business model.

As we look to 2010, our financial goals are clear. While quarterly results may be volatile, we want to achieve full-year contract and full-year start growth in double digits. We need to continue to improve our capacity utilization while at the same time controlling expense growth. We need to successfully launch our Dallas-Fort Worth campus and roll out our blended learning curriculum. And we need to continue to stabilize and hopefully improve our show rates to drive further efficiencies. If we accomplish these objectives, I believe we will exceed the current year full year consensus earning estimates.

That said, while I don't expect two-thirds of our earnings to come in the fourth quarter like they did this year, the current consensus estimates have 37% of our full-year earnings coming in the fourth quarter of fiscal year 2010. I believe it will be a higher percentage than that; although not all the way up to the two-thirds percent that we earned this year.

And finally, excluding the financial drag from the Dallas-Fort Worth campus, I do not believe we will achieve double-digit operating margins in every quarter this year, but I do believe it is appropriate for us to target full year double-digit operating margins for the year.

We certainly want to thank you for your time, your patience and your interest in us and at this point, we would be glad to answer your questions. Operator?

(Operator Instructions). Kevin Doherty, Bank of America-Merrill Lynch.

Great, thank you. I guess just first of all, could you talk about the double-digit margin outlook for 2010 and what do you think that means in terms of full-year revenue growth and capacity utilization? And how do we think about any additional impact from adding more sales folks and more support folks?

Kevin, obviously, the additional salesforce headcount is included in that guidance that I gave you. So I think that that is, from our minds, anticipated in the increase and the continuation of double-digit contracts and double-digit start growth. I think you can kind of model out low teens start growth with roughly 2% to 3% revenue growth and that should be the math that gets you to a double-digit revenue growth number.

Okay. And then I guess specifically this quarter, the revenue per student turned positive. Could you talk about what drove that and then what that means looking out over next year?

Well, that is one of -- as I said before, that is one of the hardest metrics for not only analysts and investors, but also internally for us to forecast because of the complications of mix of classes that students are taking.

That said, we have consistently been increasing tuition over the past 18 months on average 3%to 5% a year. That is somewhat offset by the students that participate in our loan program since we are not accruing that piece of the revenue, which has about a 2% drag on the growth. But I think what you're seeing is as students start showing up for school, they are coming in at higher tuition rates from those tuition increases and I would expect that to continue. So I would expect to continue to see somewhere in the 1% to 3% range in revenue per student growth.

Okay, great. And then just as a follow-up, if I can just get one in on the regulatory environment. I just wanted to see if you could just touch on the potential impact from any changes in the Neg/Reg draft regulation that has just been released about potential eliminating some of the Safe Harbors and what that might mean for your enrollment rep compensation practices?

I think it is probably likely that some of the Safe Harbor provisions will be removed. I doubt that they all will be, but who knows at this point. Needless to say, I think we have been very conservative in our compensation plans for our representatives and should any of those changes occur, I think it is something that we can easily manage in the business without any major implication for us.

Okay. There was one Safe Harbor that I think captures some online recruitment issues. Could you just remind us what percent of your leads right now come from lead aggregators?

I can tell you that 70% of all of our leads are coming over the Internet with the vast majority now coming through our own domain, UTI.edu. I can't give you the specifics. I can look that up, but I don't have it with me from lead aggregators. I know it has been something we have continued to migrate away from, but I don't have the exact percentage on that.

Okay. I can just follow up off-line. Thank you.

Trace Urdan, Signal Hill.

Thanks. Good morning. Eugene, I was wondering if you might be able to tell us how many -- what the dollar amount of loans that you expect to come due in the next fiscal year is?

It is roughly -- Trace, it's roughly in the $1 million to $3 million range. That is a wide range obviously, but it is a little dependent upon how students depend on taking additional classes and when they actually matriculate out. But of the $14 million that is out there, the program has been in place for about a year and a half now. So we are just really in this coming fiscal year starting to get some of those first planned graduations coming. So I would expect on average somewhere between $1 million and $3 million. I think by the end of calendar year 2010, we will probably be approaching somewhere a little north of $5 million.

Okay and then at what point would we sort of reach kind of a steady state? Would it be sort of the following year?

Well, no, it will take longer than that because, remember, the term of the notes are 10 years. So if you are defining steady state as how much is due each year versus how much is going out, it will clearly take longer than that. It will be a few years before we get to that.

Understood. Okay, thank you.

Jerry Herman, Stifel Nicolaus.

Thanks. Good morning, everybody. I was wondering if you could talk a little more specifically about the Dallas-Fort Worth operation, $6.6 million in operating expenses for the year. Can you talk about revenue contribution and the quarters that will be most seasonably impacted by the start-up?

Well, there won't be any starts until the summer. And quite honestly, probably hardly anything for our June quarter. So the vast majority of the starts and hence the revenue will be in our -- the vast majority, if not all of the revenue will be in our fourth quarter. There could conceivably be a couple weeks worth in June. So all the revenue will come in the fourth quarter. The expense will ratchet up over the course of the year. There won't be a lot in the first quarter, but starting in the second quarter, you will start to see some marketing and sales expense and then it will ramp up throughout the year.

As far as the total impact, we have said it would be roughly $0.11 a share. So you can -- kind of with $6.6 million of operating expense, you can kind of back into what we are anticipating there revenue-wise.

That's great. And just one follow-up. The timing of price increases, can you just review that?

We did -- are you talking historically or going forward?

Going forward.

Well, we just did one in October. So -- historically, we have done them kind of every six months. So kind of midspring, you would probably be thinking about another one.

And the amount, Eugene? I'm sorry, the amount of the --?

Again, they have been averaging 2% to 5% not across the board, but on average 2% to 5%. It obviously differs a little bit by program and differs a little bit by geography. But on average 2% to 5%.

Just to be clear, I'm sorry, just to be clear, 2% to 5% twice a year?

I would say it's 2% to 2.5% every six months. In some of the programs, to Eugene's point, we may increase up to 5%. But I'd say 5% would be more on an annual basis for the vast majority of the programs.

Okay, great. Thanks, guys.

Corey Greendale, First Analysis.

Thanks, good morning and congratulations on the progress. First question is on the contracts where you talk about expecting low to mid teens growth in contracts next year. Given that that has fallen off and understanding there are some reasons for that with the restructuring of the salesforce, but also that you have had basically flat year-over-year leads. Can you just talk about what gives you the confidence that you do get that kind of level of contract growth next year?

Sure. I think a good example of that is the current quarter where we saw the 2% increase in lead growth, but the sales channel that is largely dependent upon lead growth grew at 19% -- what did I say -- what percent increase? 19%? Hold on one second here. Yes, 19% increase year-over-year.

So I think that as we start to increase the leads throughout the year in alignment with our growing salesforce, that will support the double-digit contract growth, as well as the increasing ability to work our current base of business. And so we are continuing to work deeper into our existing leads and remarketing those and having a good success in converting that population.

So I think we have been able to dial in our lead engine, if you will, based on our staffing levels and contract requirement. I believe that the slowing growth inside of this quarter and what we project inside of Q1 is really a reflection of the significant changes on the field organization and realignment of those territories.

You may recall last quarter we talked about having 11 open territories, ultimately cutting 18 territories. So that obviously has an impact in the last quarter and will in Q1. But as we ramp up the staffing levels and increase our advertising to support that throughout the year, it should pick up over time.

Okay, and if I could ask one follow-up. Eugene, if you exclude the start-up costs for the Dallas campus for next year, would you expect to be within that 50% to 70% range on margin and incremental revenue? And do you have any thoughts on free cash flow for this year?

To your first question on the incremental revenue, yes, excluding Dallas, I would continue to expect to see that. I don't think it will be as high as the 80% that we exhibited in the fourth quarter because clearly we were in more of a turnaround this year than we will be next year. But I would expect those 50% to 70% ranges to hold. Remind me of your second part of the question?

If there is any sort of directional guidance that you can give or thoughts you can give on free cash flow for fiscal 2010?

Well, we did high $40 million this year in operating. We used a fair amount of that between some repurchases, as well as the Dallas purchase. But I would expect free cash flow to be north of where it was this year fairly significantly. I know that is not as exact as you would like, but that is as far as I want to go in the crystal ball.

I'll take fairly significantly. Thanks very much.

(Operator Instructions). Jeff Silber, BMO Capital Markets.

Thanks so much. Just to follow up on Corey's question, I just want to make sure I understand on the contract side. I think you mentioned in your prepared remarks that high school contracts were actually down. Was that specifically because of the realignments or were there some other issues going on?

No, that really is what the driver was. With 11 open territories beginning at the beginning of the summer and ultimately taking out 18 territories through the transition and then increasing -- I think we added six territories within the local proximities of campuses, there was just -- the headcount and changes there really contributed to the decline. And are continuing inside of the first part of this quarter as we ramp up the staffing levels on the campus side and get these people out into the high schools across the country. So yes, I believe that that is the largest contributor to what we have seen there.

And if I could just say one other thing in regards to high school. I don't want to paint a doom and gloom picture there because when you look at fourth-quarter starts and in fact for the full year, our high school business was up 7% and inside of that quarter, roughly 67% of all starts are high school related. So it was a good strong quarter from a start standpoint from our high school efforts and we think that we will continue to improve that from a more efficient standpoint as we work through 2010.

All right I appreciate the color. And moving on to show rate. I think you said show rates were down. If we could get some explanations why that was and what you think you'll be doing over the next year to try to improve that. Thanks.

Yes, I mentioned that it was a slight decline. And again, as we have talked throughout the year, students coming from remote locations and the younger students, which the vast majority of starts in this quarter are younger students which are a little bit more volatile than the adults who live within closer proximity, I would say that was the biggest contributor to the show rate decline.

As we have moved into the first quarter, we have seen improvement there and again, it is more reflective of the mix of students. As the adult students start coming back in, we start to see the show rate improve and I think overall we improving on our execution on key initiatives and that is driving it.

So as we started the new year, we've seen improvement and we will continue to focus on that in the same way that we have this past year and that is by targeting the right mix of students, a little bit older, within closer proximity of the campus and then increasing the level of customer service and access to funding as they move through the funnel from the point of contract to the point of start.

Okay, great and just a couple quick numbers questions for Eugene. In terms of fiscal year 2010, what should we be expecting for tax rate and capital spending? Thanks.

The tax rate ought to be probably 39.5% to 40%, probably towards the lower end of that assuming we stay in the municipal bonds. The CapEx number ought to be -- again, we have already purchased the facility in Dallas. So you put that out, so if you exclude Dallas, we will run $13 million to $15 million and then you have roughly another $10 million in Dallas. So we will be -- and curriculum. So we will be running in the low to mid 20%s.

Great, thanks so much.

(Operator Instructions). Corey Greendale, First Analysis.

Thanks for taking the follow-up. A couple of questions on the student affordability front. With the internal lending program, is that -- first of all, can you remind us what percentage of your students are using that program? And secondly, if a student does default on that, is that treated like a normal loan and all the implications of defaulting on a loan that you would have if you defaulted in a Title IV loan for example?

To your first question, roughly 11% of new students are using the loan program in one form or another. I can't tell you how many that are actually in school have it, but the way we track it, about 11% of new students utilize that program. I am not sure I really understand the second part of your question as far as --.

Basically I am asking is it being treated as a loan as opposed to just credit that you are extending to students, so if they don't pay it, it is sent to a collection agency and --.

Yes, absolutely. It is a note that they have.

And the second question also on the regulatory front and I'm sorry, this is probably a little bit asking you cold since you haven't had time to look at the regulations yet. But the department did not end up, as I am reading it, proposing regulations around gainful employment right now, but they do provide a couple of things that they want to consider in the future, including tying the amount you can charge in tuition to the average earnings of students coming out of a given program and looking at how much you get in incremental earnings versus just having a high school diploma with a given degree or certificate. Given that, do you have any thoughts on whether that kind of proposal would, A, cap your ability to raise price or B, perhaps even result in having to lower price given the average earnings of students coming out of the program?

I don't believe that it would impact our ability, our pricing ability at this point. I think overall it is a very solid strong value proposition for our students, especially when you look at the average income for those students and over a period of three years, it continues to accelerate once they are out in the field. So I don't see that as being an issue and I stand behind our results in terms of our graduation placement and then the earning potential of the students relative to their overall cost of education.

And is that data that you have shared or could share in terms of the starting salaries and earnings over three years?

What we have shared is the average of the technician and we typically are quoting the BLS, Bureau of Labor Statistics, data just to make certain that we are in compliance with our crediting commission and various state regulations. And we have compared that to high school graduates and the value that is gained by continuing education. That data I think is going to be updated within the next month and so we can bring that forward, especially as people start to focus more on the gainful employment piece of this.

Is it fair to say that your own graduates' earnings power is at least as good as the average is?

I think earning -- right out of the gate, it is lower than what you will see on the average for the entire technician base. So that I think is normal, but the average is what you should be looking at as they start to get out in the workplace. What has to happen with a technician is they have got to get out there, get their hands dirty, gaining the real world experience and then that accelerates their productivities and flat rate earnings ability and it moves pretty quickly. But when they get hired, they are going to be hired as an entry-level technician, which will lag what you are seeing for the average across the whole segment.

Understood. Thank you, Kim.

(Operator Instructions). There are no further questions at this time.

Well, I would like to thank everyone for joining us this morning and we look forward to updating you on our first-quarter earnings call, which is scheduled for Tuesday, February 2. I hope you have a great day. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time and have a great day.