Universal Technical Institute Inc (UTI) 2010 Q4 法說會逐字稿

Good afternoon and welcome to the Universal Technical Institute, Inc. fourth-quarter 2010 conference call. All participants will be in a listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. 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 6, 2010 by dialing 877-344-7529 or 412-317-0088 and entering the passcode 445543#.

At this time, I would like to turn the conference over to Ms. Jenny Bruso, Director of Investor Relations of the Universal Technical Institute. Ms. Bruso, the floor is yours, ma'am.

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, 2010 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. I will refer you to today's news release for UTI's comments on that topic.

The Safe Harbor Statement in this release which I will not repeat here in the interest of time also applies to all statements made during this conference call. 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 this Safe Harbor statement.

In the prepared remarks you will hear today, we will make reference to EBITDA. EBITDA for all periods discussed during our remarks is a non-GAAP measure representing net income exclusive of interest, income taxes, depreciation and amortization.

The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure of net income. At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, Jenny. Good afternoon, everyone.

Fiscal year 2010 was a very exciting year for UTI. We celebrated our 45th anniversary, opened our 11th campus and launched a new blended learning curriculum, all while achieving the highest level of student enrollment in the Company's history.

We ended the fiscal year with more than 21,000 students in school, an increase of 12% or 2200 more students than at September 30, 2009. Additionally we achieved record revenues for the year of $436 million, up 19% from last year, improved our operating income by 150% to $47 million and achieved our goal of double-digit margins for the full year.

And while I'm quite pleased with our overall operating and financial results for the year, I am most proud that these results were after we invested $4 million more this year than last to improve levels of customer service and the overall educational experience for our students. Further, the capital investments we made this year in facilities, equipment and curriculum development were significant, equaling more than $37 million.

Looking specifically at the quarter, our average student population for the quarter was approximately 19,500, up 2,600 students or 15% from a year ago. Revenues for the fourth quarter were $119 million, up 20% year over year.

Net income was $7.2 million or $0.29 per diluted share compared to $7.6 million or $0.32 per diluted share last year for the same period. Eugene will cover the financial results in greater detail in a moment. Now let's look at key business drivers beginning with student inquiries.

This quarter, we saw a nice year-over-year increase of 22% in student inquiries. This growth was driven by a combination of an increase in our overall advertising spend and the launch of several new television spots and a new website, all of which are performing well.

Our advertising spend during the fourth quarter was 7.4% of revenues compared to 5.3% in the prior year quarter and 8.2% in the previous quarter. For the full year, advertising spend was 7.5% of revenues as compared to 6.5% of revenues last year. This was in line with our expectations and guidance of 7 to 8% of revenues for the full year.

We expect our advertising expense to remain in the range of 7 to 8% of revenues for fiscal year 2011 as the market normalizes with an increased number of advertisers and spend compared to the current and previous year. We will continue to supplement our national campaign with local and grassroots marketing efforts in alignment with our business strategy to focus on local markets and the commuting student segment. This successful strategy has supported the improvement in student show rates throughout the year.

Now let's look at student applications. For the quarter, student applications declined slightly at 1.8%. This is understandable and occurred for a few reasons.

First we made changes in management at the beginning of the quarter at the top of the admissions organization and across multiple channels which does create disruption in the short term. We also pulled the entire admissions team out of the field and campuses for a week's worth of training and development around business strategies for fiscal 2011 including the regulatory environment.

Third, our annual tuition increase was delayed until first quarter which consequently prolonged the time in which students could enroll under prior year tuition rates. Last there are certain regulatory distractions for this team as they await changes in compensation plans and business practices.

It's probably worth noting that we have not changed any admissions policies or student recruitment practices at this time. Many for-profit schools are changing their student recruitment policies to reduce or eliminate ATB students. Roughly 5% of our students are ATB and we are comfortable at that level. Should we decide to make any changes in the future, we will certainly make you aware.

Given that we are nearly two months into our first quarter, let me give you insight as to where we are from an application standpoint today. During the month of October, the first month of our new fiscal year, student applications grew year over year by 18%.

Each of our admissions channels compares favorably year over year with our military team surpassing last year by 100% and the high school field team was up 24%. While we are just wrapping up the month of November, indications are that student applications will grow in the low-single digits year over year.

New students for the quarter were approximately 7,600 compared to approximately 8,000 in the fourth quarter of the prior year. As we guided to on our last two calls, we expected starts to be flat or down during the fourth quarter.

This 5.4% decline was due to a couple factors. First, we successfully accelerated new student starts into the third quarter due to fourth quarter capacity constraints at certain campuses and we did this by increasing our focus on 19-year-old students or older in local markets.

Second, with the increased focus on the adult student and the success in accelerating these students to begin school earlier, we unfortunately gave up some of the traditional high school students who usually start during the fourth quarter. We simply did not have a sufficient number of high school students scheduled to replace the number of open seats we created by moving the adult population into the third quarter. This was an execution miss due to a change in process and does not reflect a change in market opportunity.

With that said, total new students for the year were approximately 19,500, up 11% from 17,600 in fiscal 2009, within the range that we expected for the full year. As we look forward to 2011, we expect the growth of new students will fluctuate by quarter and overall growth to be in the low single digits for the year.

This is for a couple of reasons. First we are entering 2011 with fewer applicants scheduled to start as compared to the prior year.

Second, we experienced 11% start growth in fiscal 2010 which makes for tougher comparisons year on year. Third, with the growth in average students of 17%, we're reaching capacity constraints at some of our campuses.

And forth, the show rate improved 380 basis points year over year but we do not believe that that level of improvement will continue. Speaking of student show rates, I am pleased with the continued progress we have made on this front during the year.

For the year, the student show rate improved 380 basis points. For the quarter, I was especially pleased that we experienced continued improvement in this key metric.

In fact, a 250 basis point improvement. Given that more than 65% of the total student starts in this quarter are recent high school graduates and quite unpredictable, this is very positive and demonstrate that our process improvements are effective across all students segments.

One of the areas we did see a decline in at the end of the year given the current economic environment was in our completion rates. Historically we have reported stable graduation rates approximating 70%, ranging anywhere from 68 to 72% but this year we closed out the year at 67%.

This statistic is fairly consistent across all campuses and reflects the challenging economic environment more than a programmatic or a geographic issue. We've noticed that the increased mix of local students has had some impact on the statistics as it is easier for local students to drop out of school to address economic or family issues during these challenging times.

The good news is it's easy for them to come back to school when the situation changes and many have expressed the desire to do so. While our graduation rate is a few percentage points below our historic norms, even at this rate, it compares quite favorably to the education universe; proprietary, public and nonprofit.

Regardless, our bar remains high and we continue to work with our students to help them complete their education as many say they intend to do when circumstances change. However, this is where we stand at this point.

As discussed during the year, the employment environment was also challenging. Our placement rate for fiscal year 2009 graduate cohort was 81% as compared to 87% for the prior year.

The 81% placement rate was in the range of where we expected it to be for the year but below historic norms and our goal of 90% placement. Given the very difficult economic environment and specific challenges our end-markets have faced this past year, it is a very good rate overall.

Again this rate compares favorably to other proprietary education institutions and very favorably to public institutions. This rate reflects the hard work of both our employment service teams and our graduates. As we look forward, I would expect the environment to remain challenging for our motorcycle programs in general and in specific geographic regions for all programs.

With that said, given the progress and momentum gained in the later half of this year as well as the projections for the upcoming year, I would expect to see improved placement rates on a year-over-year basis especially in the automotive and diesel fields. And now I would like to turn the call over to Eugene for specific commentary on the quarter's financial and operating results. Eugene?

Thanks, Kim. Good afternoon, everyone. As mentioned, revenues for the fourth quarter were $119.2 million. That's up 20% versus last year. This improvement over the period was primarily driven by an increase in undergraduate students of approximately 2,600 or about a 15% increase.

During the quarter, we had $2.2 million in tuition revenue from our loan program that was not recognized. That amounts to about 1.8% of revenue. Nevertheless, average revenue per student for the quarter decreased 4% to approximately $6120.

Operating income for the fourth quarter was $11.8 million compared to $12.3 million in the same period last year. Operating margin for the fourth quarter decreased to 9.9% from 12.3% in last year's fourth quarter.

The decline in operating margin and income on a quarter-over-quarter basis was primarily attributable to the opening of the Dallas-Fort Worth campus, an increase in advertising expense as well as some expense items we recorded during the quarter this year totaling $1.6 million which should not recur in our run rate going forward. That $1.6 million and the impact of Dallas equates to approximately $0.08 per share on this quarter.

Compensation and benefit costs increased $9.1 million to $57.1 million. This increase is due to the number of instructors and employees in our financial aid and other support departments to support the need of the growing student population as well as an increase year-over-year in the number of salesforce representatives.

Advertising expense increased $3.6 million to $8.9 million. This increase is attributable to our marketing spend to generate additional high-quality inquiries to support future student enrollments and the overall increase in media costs. As an example, for the quarter, cable television rates increased 10% and unfortunately we expect those costs to continue to increase.

Bad debt expense as a percentage of revenue declined for the quarter from 1.7% to 1.6% as a result of some of our improved processes. The actual expense increased $252,000 for the [fourth quarter from fiscal 2010] from $1.7 million to $1.9 million.

EBITDA for the quarter was $18.4 million as compared to $17.3 million for the fourth quarter last year and for the full year this year, EBITDA totaled $67.8 million. Net income for the quarter was $7.2 million or $0.29 per share compared to $7.6 million or $0.32 per share for the fourth quarter of last year.

For the year ended September 30, net income was $28.8 million or $1.18 per share versus $0.48 per share last year. That $1.18 is right in line with our previous guidance.

Return on equity for the trailing four quarters was 25.6% compared to 11.3% last year. Our balance sheet continues to be extremely strong and liquid. We had cash, cash equivalents and investments of roughly $81 million at September 30, 2010 versus $85 million last year.

We generated roughly $30 million in cash flow from operations during the quarter compared with $31 million during the three months ended September 30 of last year. Cash flow provided by operating activities was $67.5 million for the year. That's up from $49.5 million in the year 2009.

As you know, we also continue to have no debt on our balance sheet and we did not repurchase any shares of our stock during the quarter. As a reminder, we paid a special dividend of $1.50 per share on June 16 this year and that totaled $36.3 million.

Looking at fixed assets, we invested $10.6 million during the quarter. That was down from $14.1 million in the same period last year. The majority of that had to do with the buildout of our Dallas campus and development of our new curriculum.

In terms of our proprietary loan program, it continues to meet its objectives of enabling students who are qualified and desire to attend UTI but for whatever reason lack sufficient federal funding or third-party resources to still be able to enroll in school. Just as a reminder, this program mirrors many aspects of the Title IV program.

The loans have no in-school repayment requirement, they have a six-month grace period upon leaving UTI and they have a 10-year repayment and amortization schedule. During the quarter, our Board approved an additional $10 million of credit under this program and that total program authorization is now $40 million. At September 30, we have committed to provide approximately $25.6 million under this program and have just under $22 million in loans outstanding.

The average loan per student is now about $4900. Since the inception of the program, we have not recognized tuition and interest revenue which totals $20.3 million through September 30.

As more and more participants graduate and enter repayment, our cash collections continue to improve. During the fourth quarter, we recorded $110,000 in revenue in interest from cash payments that were received. That's up from $67,000 in the previous quarter. To date, we have collected $311,000 on the program.

Taking a look at the Dallas-Fort Worth campus, this is a reminder that opened at the end of June of this past year, as of September 30 we had approximately 240 students in school and currently we have over 300 students in school both of which are exactly in line with our expectations. We've invested approximately $20 million on the Dallas-Fort Worth campus which includes the land purchased, building improvements and equipment. Approximately 3.7 of that occurred during this past fourth quarter. We are extremely pleased with the result of this campus and everything is going extremely well there.

Most surprisingly, we are pleased to see an increased interest in our diesel program at this campus as a higher percentage of students are enrolling in that longer program then at our other campuses and this is good for us in the long run as we earn more revenue for those students over a longer period of time, but in the short term, it drives down our average revenue per student because we provide a discount for the longer program.

During the past three months ended September 30, the Dallas campus recognized $1.1 million in revenue and incurred approximately $2.8 million in expense. For the fiscal year, Dallas recognized $1.2 million in revenue and incurred approximately $4.8 million in expense. As mentioned, that had a negative impact of about $0.04 per share in the quarter and $0.09 per share in the year, both of which were in line with our estimates.

As mentioned before, we anticipate that this campus will become profitable on a quarterly basis sometime in the latter half of this coming year 2011. Overall I'm very, very proud of our results for the quarter and the year.

We set out to achieve double-digit growth in applications, starts and average students. Despite lower application growth than we anticipated, our improvement in processes and show rate enabled us to achieve 10.7% growth in starts and 17.2% growth in average students.

Additionally we exceeded our goal of full-year double-digit operating margins, resulting in an operating margin for the year of 10.6%. This is especially notable given the investments we made into the business that Kim mentioned earlier, the opening of a new campus, the launch of our new curriculum and the regulatory overhang that has had a costly impact on our business throughout the year. And finally, we achieved and exceeded what I consider to be a very aggressive budget for 2010.

Speaking of the regulatory environment, a majority of the program integrity rules are now out as you I'm sure you are all well aware. We are currently evaluating their impact and will provide updates as we determine what changes we intend to make.

We are continuing to communicate the UTI story to the Department of Education, to Congress, to governors, to state and local leaders and even to the White House directly. That story, the UTI story, is one of a company focused on our positive student outcomes which include high graduation rates, high placement rates, low cohort default rates, and good earnings prospects that support our value proposition.

Since our last earnings call, the Department of Ed has released their repayment rates by institution. Our consolidated repayment rates used as a current proposal for gainful employment were 55% and they range by campus from 49% to 64%.

These rates are not at all surprising to us given our high graduation rates, our high placement rates and our low cohort default rates. While the gainful employment provisions will evaluate each of the 100 plus programs individually and these campus results do not necessarily correspond to all these programs, directionally this information is quite encouraging to us.

Just as a reminder, a program needs to have better than 45% repayment rates which all of our campuses have or lower than an 8% debt to income ratio to remain fully eligible for Title IV funding. While the gainful employment rule is certainly not final, the [data and proposal] provided to date by the Department suggests that we are tracking well and we will not have to implement many changes to our programs for them to remain fully eligible for Title IV funding.

For fiscal year 2011, we anticipate growth in student applications in the mid-single digits and as a result of the shortfall in applications generated in 2010 as well as the record number of starts in 2010, we expect start growth to moderate as we have previously guided. We would anticipate mid-single-digit growth in the average number of students in school and we would expect to see low double-digit growth in total revenue.

This past year, even with the additional investments we made that Kim mentioned, we had incremental margins of roughly 40%. Given the improved revenue, I would expect incremental margins in the 40 to 50% range. However, I believe they will be lower than that for the following reasons.

We're starting the year at nearly 80% capacity utilization, which is great for financial performance but makes efficiency improvements more difficult and we will continue to invest in our business and have been in 2010 and will continue to invest in 2011 and that has accounting consequences. We will have in expenses nearly $12 million above and beyond our 2010 levels specific to these investments.

These expenses include a full year of operating expenses at our new Dallas campus, the beginning of depreciation for our new curriculum which is now underway, the introduction and buildout of our Rancho campus to support the rollout of our diesel program and a higher anticipated advertising cost. This $12 million equates to approximately $0.28 per share and is an investment of which we expect to see improvements in the latter part of 2011 and building into 2012.

They will slow our rate of improvement in operating margins in 2011 but we believe they are important investments to be made to continue to grow our business and provide our students and our industry partners the quality education that they both expect. These additional costs notwithstanding, I would expect us to continue to report improved financial results with full-year operating margins in the range of 11 to 13%, EPS growth of 15 to 20% and EBITDA growth in the range of 25%. And of course due to the seasonality of our business and our normal fluctuations due to populations, we would continue to expect to see volatility in the level of our quarterly results.

In closing, Kim and I would both like to thank the ever 2400 employees in UTI who come to work everyday hoping to improve a student's life. Their efforts this year resulted in over 10,400 students graduating from UTI, from a UTI campus, with an education designed to bolster their careers. We truly appreciate their efforts. With that, operator, I think we are ready to open the lines for questions.

(Operator Instructions) Kelly Flynn, Credit Suisse.

Hi, it's Patrick (inaudible) for Kelly. Thanks for the color on the applications in October. I'm wondering if you can describe any significant other changes in demand trends or leading indicators like show rates or conversion rates through the first two months of Q1.

Yes, we're pretty early on in the year with only two months to go, so we don't have a whole lot of start dates to report on. But I'd say that trends are continuing to be positive from a show rate standpoint, stable and sometimes improving.

Where we have seen some challenges has been across the adult or older students who typically have further distances to travel and that trend started last year and has continued. Thus our focus on local students within a 50 mile radius.

So conversion rates in terms of inquiry to applications as well as show rates with that population remains a focus and we believe that there's opportunity to improve execution and certainly we will focus on that as the year progresses.

Okay, thank you. And then now that the rules are final, can you address any changes you may need to make to the incentive compensation policies in order to be in compliance with the new regulations and what sort of financial impact that may have and if that's included or reflected in some of the guidance that you gave on the call?

First of all, just to be clear, we have not made any changes to the compensation plans at this point in time. However, as you have heard from most others, we do you expect to make changes.

Currently our representatives have the opportunity to earn bonus or variable compensation upon students matriculating through the program as well as upon graduation. Neither of those are acceptable under the new plans.

So we would expect to have more of a movement back to fixed salary based income with not purely quantifiable indicators or performance criteria that you've seen in the past, so away from the traditional. So it's basically pretty pure and simple.

I mean, there's not a whole lot of flexibility in terms of what we can implement and our teams are working across the organization and with outside counsel to create a plan that is within compliance and also what we need as a business, so to meet both goals. So we haven't changed anything at this point. We will make certain that we transition by the deadline of July 1.

One more quick one, if I may, can you give us any color on preliminary 2009 core default rate trends? Thank you.

You know, I don't think we can give those yet, although my -- what I'll give you is my gut. We had the 2008 numbers that came out and we were I think from 4.5% to 6% which is extremely low.

I would anticipate those to trend up slightly. But we were -- I think were at 7% roughly in the prior year.

So I have not seen anything in our performance that would suggest that it would be materially different from any of those numbers. Although at 4.5%, it's hard to get much lower than that. So I would expect a slight uptick from there.

Peter Appert, Piper Jaffray.

Thanks. Eugene, I think you mentioned $1.6 million in one-time costs in the fourth quarter ex Dallas. Can you give us some detail on what those were?

They were a variety of things that include some severance, some what I would call cleanup items of some balance sheet items that are typical fourth quarter things that when we do a hard scrub, they look at some of our systems, we find some things. And as we have improved our processes, improved the quality of our people, we dig a little deeper and sometimes you find things that -- from past years that should have been cleaned up and weren't and that's what those were. But there was nothing of significant size in there. It was a host of issues.

Would there have been an equivalent cost item in the fourth quarter of last year?

No.

Okay, so that was an incremental expense relative to what folks would've been anticipating.

That's what I gave you. It was what was incremental.

Okay and it seems like -- I think the differential in terms of your operating results relative to what I think the consensus expectations were came mainly from the selling and administrative costs, so I assume mainly the advertising costs. So can you talk about any strategy changes or other changes you're making in terms of allocation of ad budget or media mix etc. to address some of the pressures associated with higher media cost?

Yes, Peter, this is Kim. We have made several changes inside of the last quarter launching a new campaign, a new website.

As we talked about previously, we do have a Web-centric strategy that drives our students to the Internet. Certainly the Internet and our homepage produce lower-cost leads. But at this point in time, we still are largely dependent upon television because our audience and students watch this specific programming.

So even though the costs ticked up to pre-2009 rates and we expect to continue, we still believe that there's a good return on investment, but we are constantly monitoring our buys whether they be national or local, programming and the mix and continuing to migrate more of the spend towards the Internet which is obviously less expensive. But we do expect that the costs will again increase in 2011 in the range that we talked about with the 7% to 8% of revenues.

Does that imply, Kim or Eugene, that the SG&A expenses as a percent of total revenue would be then roughly flat on a year-to-year basis?

I'm sorry, as a percent of revenue?

Yes, I'm just looking -- to the extent that ad spend is theoretically then up by a reasonable amount (multiple speakers)

Yes, within 10 or 20 basis points, yes.

Last thing, is there a pricing differential or a tuition price differential by market or is it the same price point across all your campuses?

There are some slight distinctions between campuses, but they are slight. For the most part, the programs are priced the same.

And I'm just wondering, in the context of you being at capacity in certain markets, is there an opportunity to perhaps be somewhat more aggressive in those markets from a pricing standpoint or is that something you would consider?

That's a potential.

Have you guys specified -- this will be the last one -- the tuition increase in the new fiscal year?

Yes, we just announced one in November. That's what I mentioned in the prepared remarks. Typically that occurs in September and we had it for the November timeframe this year. So just recently announced.

What was the percentage, Kim?

I would say roughly 4% for the year. In the past, we've done it a couple times a year at 2.5%. So it can range anywhere from 3% to 5% I would say on average.

Any particular reason why you delayed it a couple of months?

There was a lot of transition with the admissions team with the change in leadership and we were training and just from a regulatory standpoint, we wanted to make certain they were off and out before we put another thing out that was new in the market. And that's all just a timing change.

Gary Bisbee, Barclays Capital.

Hi, good afternoon. Eugene, I think you'd heard you say there was $2.8 million of operating expense at the new campus but your press release says 4.2 and I guess I was trying to understand what the differential between those two numbers were.

I'm afraid to give you the answer that it's corporate allocation. So what I gave you in the $2.8 million was -- well, I gave you -- let's make sure, so let me just repeat it.

It had $2.8 million in what I would consider incremental expense to the consolidated results in the quarter, $4.8 million in the full year. Both of those numbers, the $2.8 million and the $4.8 million, are expenses, direct expenses if you will specific to that campus.

Sometimes when you get into our regulatory filing, that has corporate allocations and things like that. But I think for purposes of communicating with the Street to give them a better understanding, those are expenses we would have anyway and to spread them thinner does not give a clear picture. So the numbers I'm trying to give you are incremental to the campus.

Okay, let me go to the number in the press release for a second. Because last quarter I think that number which I guess as you're saying may include some corporate allocation of cost, that number said it was year-to-date $4 million and would be $7 million for the year implying (multiple speakers)

I'm afraid that has allocations in it and maybe there's some SEC reason why we have to do that in a press release. But the actual hard dollar direct costs are what I gave you today.

I guess what I'm more interested in is the difference, right? Last quarter's number including the allocation implied $3 million of expense and in this quarter's number including the allocation by the press release was $4.2 million, so $1.2 million higher.

I guess I'm wondering did anything sort of change versus your expectations? You sound very encouraged by the performance of the campus so far, but is there anything costing more or is that more likely something (multiple speakers)

Nothing is costing more other than training aides cost more on a quarter-to-quarter basis as the student population grows. So really the only difference in Dallas from what we were thinking about it -- and Jenny can follow up with -- the confusion with the press release.

But the only difference in Dallas from our plan is as I mentioned, we are seeing a higher population than we anticipated enrolled in the longer program, the auto and diesel programs, which is good. What it does do is it reduces revenue in the short term because they accrue it at a slightly lower weekly rate, if you will, because of the discount we get. But that's really (multiple speakers) the only change from what our internal business case was, if you will.

Okay, and I guess just how has the blended learning offering been received by faculty, students and is there any sense that you might more aggressively roll that out or is it still (multiple speakers)

Very good question. At Dallas, it has been received extremely well by both of those. Now to be fair, the students don't have anything to compare it with there.

So I think a similar question if you look at our Avondale campus where we actually ran one class and are still running a one-class pilot there, when it first started, I think there was a little bit of gosh, the new curriculum seems a little bit harder and in fact it probably is a little bit harder. But as that has gone on for what is now I guess about six months, a little bit harder -- student speak, if you will -- has translated into a little bit better.

And we're starting to see people that are asking questions about how do I get into that type of program. So, we're very encouraged by the results of it, by the acceptance of it. It is -- we want to continue to roll it out and I do believe that we will start this year to roll it out to some of our existing legacy campuses.

But that has some logistical challenges to it. So it won't be a quick rollout, but I do believe we will start rolling it out and getting the efficiencies of that and the better, the more enhanced product to our students and our faculty during the year.

As you do that, does that free up excess campus capacity such that the physical capacity you talk about being at 80% would be somewhat lower over time?

It absolutely does. It has the ability and de facto freeze up some physical capacity without the need to add any physical capacity.

Is that a material number or should we think 5% (multiple speakers)

It's in the probably 15% range. It will differ a little bit by campus but on a whole, it's about 15%. It has the ability to free up about 15%.

One last question for me. It sounds like that could go a long way to alleviating some of the capacity issues that you may be having, but I know the plan is to have more smaller campuses in more markets so you can more broadly attract the commuter market.

I guess given that, are you in a position to lay out any sort of plan as we look over the next few years? Do you get to a point where you open a new campus a year? Or how should we think about three to five year planning here? And I ask specifically from the perspective at some point the job market gets stronger and I think it could get more difficult to go after (multiple speakers)

I think you want to always balance what your constraints are. And our constraints are our ability to attract students, our ability to place students and our physical capacity to teach them.

And you want to balance that in terms of the economic conditions. We will not open a new campus in fiscal year 2011.

While we believe that there are locations and geographies that are similar to Dallas, honestly we kind of want to prove Dallas out. So I think the earliest we might open an additional campus would be the middle or latter part of 2012.

And honestly that's not on the drawing board right now. So I think simply put, we think the possibility is there. You mentioned three to five years to have two or three more campuses, but we want to prove out Dallas before we announce plans to open an additional campus.

Jeff Silber, BMO Capital Markets.

It's actually Paul Condra in for Jeff Silber. I just wanted to follow up on the one-time charges in the quarter. I think you had implied that it amounted to roughly a $0.04 EPS impact. Is that correct?

Yes, not including Dallas, yes.

Right, okay. And then I guess most my questions had been answered, so I just wanted to get your thoughts on share repurchases at this point and what the current authorization is that you have available.

Sure, the current authorization, it's roughly $25 million I believe that we have out there. It's a little stale but it's out there.

You know, we have -- we're certainly generating cash and expect to continue to generate cash. We paid the special dividend this year. We have more cash on the balance sheet than we need to operate effectively, even with what we need for contingencies and potential capital improvements and investments.

You know, repurchases are something that we look at. We look at them in conjunction with dividends. Sometimes we'll do one, sometimes we'll do the other, occasionally we will do both.

We are a proponent of returning capital to our shareholders at the appropriate time and it's just a question of what mechanism we use, how much we use and when. So we believe in them but it's relative to market prices and economic conditions and our outlook when we look at that versus dividend versus holding onto it for a time being.

Great, and actually just one more. I think in the past, you'd said that you would not be continuing to provide the same capacity utilization number as you had in the past. So this 80% number, is that what we should look at in sequence to the numbers you provided in the past or is this (multiple speakers)

No, that is what you should look at going forward. We're at roughly 80% of the capacity and I want to be clear as we start to go deeper and deeper into this, that's the capacity of total seats that we have and can get students in.

As Kim mentioned and as we have talked about, some of our campuses, especially during the fourth quarter, run up against start capacity and there's a difference between how many students you can start and what the capacity is of the institution as a whole because of differences in how you have to sequence courses and have space available for somebody that's coming back from leave of absences etc. So that said, we are at roughly 80% capacity right now of students in school relative to kind of how many seats we have.

Okay, great. Thank you.

Bob Craig, Stifel Nicolaus.

Thank you, operator. Good afternoon, everybody. I wanted to follow up briefly on that last question, Eugene, if I could.

What I'm trying to get a gauge of is under the limits of manageable capacity, how many more students can you add to existing capacity at this juncture?

That's well asked. Call it about 27,000 is our capacity roughly including Dallas now. You could get up somewhere to 24, 25, somewhere in that range, and that would in essence get you full in your terms of usable capacity.

So, we have got roughly 20,000 students in school. So we've got a fair amount of ability to grow if we can do it the right campuses and at the right start dates. We have to obviously plan that out. They can't all start at once.

That's really helpful. And you did mention --

That would be a nice problem to have.

Yes, exactly. And then the logical follow-on to that is you mentioned I think 40% incremental margins in 2010 and normally 40 or 50, but it's going to be less than that for a myriad of reasons. Could you hazard a guess as to what that number might be in 2011?

It's a little early, but I would hope it's somewhere in the 30 to 35% range. I think if you do some of the math and you use that kind of $12 million additional expense number I gave you, you can kind of back into somewhere in that range.

I'm not trying to be coy and vague, there's just a lot of unknowns at this point with the regulatory environment and what costs we might have there. But just looking at that $12 million, that has the potential to have that type of impact.

Don't worry, us analysts never hold you to anything, so don't worry. Any planned additions to the recruiting staff this year? I think earlier you'd mentioned some very minor additions possibly?

I would say it's a handful of that, just making certain that our open positions are full and I think we added less than 10 in terms of our budget for the year.

Any real change, Kim, in turnover there?

You know, I think the turnover for the admissions team ticked up. It's a little over 20% which is about six percentage points higher than our overall organization.

Not surprised given the changes and such and some of it needed to occur. I think the good news is the quality representatives that we want are still on the team and are performing very well.

I'm especially pleased with the efforts with the military and the high school team which does have a seasoned veteran team. So you know, we added a lot of representatives last year, so I'm not surprised to see some of them turn over. It's a difficult job.

Last one for me and I'll turn it over. Could you size up your career service capability and how many individuals you may have added to that department last year and how many you might add this year?

You know, I would have to -- and I might even be able to flip through this to get the total number, but we added about I would say 20 across the system throughout this last fiscal year and we will add more if necessary. But I think we have evaluated the processes and we have basically re-engineered the and entire employment services team.

So we're investing in more tools and training for the team and don't expect to add significant headcount to the employment services team going forward. But I think the biggest change that we made this year was creating an outbound marketing arm if you will to create additional job opportunities in the pipeline for our campuses.

And as we move through the latter part of the year, we did see improvement in terms of job openings and our fill rate and expect to just build off the successes we had in the latter part of the year and refining the new tools and training that we put into place.

David Choa, Bank of America Merrill Lynch.

Okay, thanks. Last quarter you mentioned that the credit hour definition could have an impact on I guess financials. (inaudible) I guess reading the rule, do you guys still see that as the case?

We do see that there's been some challenges there for certain programs and certain student segments. The impact could be a couple hundred dollars to a couple thousand dollars without any sort of changes to the program.

And obviously we're looking at program completion documents based on what employer needs are and student expectations to help again meet student and employer expectations. Some will have a positive benefit on the [plot] credit hour.

What this means is that they will just have to fund this gap with private financing or cash, so there's less available Title IV for some of these programs. More information will be forthcoming on that. It's not a show stopper for us but it does require some change in program structures.

Okay, so this is not a kind of institutional-wide change that needs to be implemented, it's just for certain programs?

The impact in terms of the student in program is what I was referencing as far as the couple hundred dollars to a couple thousand. I think across the system, you may see some changes with the course structure as we've talked about earlier.

Our employer and student surveys have requested the opportunity to pursue degree granting. That in and of itself addresses some of this and that will happen at certain campuses as we move through the year. So, I can't give you a whole lot of specifics because we are still working through those changes in structure. But we will as we finalize them.

Sure and just one follow-up. I guess just to go back to high school starts for the quarter and -- what was I guess the real -- or what were some of the reasons for the slight miss in high school according to I guess your estimates?

So just to be clear, in that quarter, 57% of the starts are high school. So I don't want to mislead in that we didn't have a great high school season or quarter because we did have a large number of students that were right out of high school that started.

But this actually was because of the success in moving the adult students from Q4 into Q3, we just did not have time to back-fill the high school seats at the level we had hoped to that were vacated by accelerating those students into Q3. And so, a lot of those students -- in hindsight we would have had to write more students at the beginning of the year that were high school students scheduled to start in Q4 to fill in those seats that were opened with our efforts to move them into Q3.

And we did not know how successful we would be in doing so, so some of that was an execution miss and a planning miss. But overall, I think that the high school sales team and admissions team is doing a great job.

We did a lot of changing and restructuring from a territory standpoint a year, 18 months ago. We're seeing the benefits of that.

I just mentioned how much year-over-year improvement we saw with the high school team and I also think that it's worth noting that although we may not have had as many students as we had hoped for to back-fill those seats, we saw a 500 basis point improvement from the high school segment from a show rate standpoint. So it speaks to the quality of the business that they are writing and that the territory and structural changes that we made were the right ones.

And that show rate improvement in high school was for Q4?

Yes.

Trace Urdan, Signal Hill.

I heard you guys talk about the increase in advertising costs and I guess that presumes that lead costs are rising or have risen. Are you seeing any significant change in terms of how effective those leads are in the hands of your enrollment counselors?

Well, I'll give you it from two perspectives. We score every type of lead inquiry that we have and on a quality scale, we have seen that improve, primarily coming from the local markets.

But we have not seen the improved conversion rate with the adult population as much as we would have expected and that's where our focus is. So we have seen it with the high school students and the younger population, but where our focus is right now is on the adult channel.

So quality leads in terms of advertising and where we are getting those student inquiries from, but opportunity to improve from an effectiveness and an efficiency standpoint with our adult admissions team.

Kim, what's your theory as to why you're seeing that? What do you think is the reason for that?

I think there has been a number of changes and I think the adult student, especially those who have to travel that are not within the local markets, are facing some very challenging economics barriers. And that is something that we have seen throughout the year.

So we've seen it in terms of the inquiries to application conversion as well as application to show rate conversion. And much of the improvement that we've seen in our show rates have been offset by the younger students. So that's where I think there's opportunity and we're focused on the right things with the local markets and trying to best serve the students who can pursue this type of education.

Okay, Eugene, I guess this question might be for you. The $110,000 you received in the quarter from repayment and interest on loans that you have made, how does that compare to what you were doing in the quarter?

Trace, our collection rates have been ramping up. I believe for the quarter, the collection rate was around 35%. So we collected roughly 35% of what was scheduled to be collected.

When we first got into collections, that was about 20%. So it's been ramping up as the population pool of those in repayment looks more and more like our 70% graduation rate.

It had been skewed obviously to a much higher percentage of students that had dropped from school. So as we get more and more of that shifting to a graduate population, we are seeing that collection rate tick up.

Okay, it seems as though you are at kind of a run rate in terms of the loans that you are making on an outbound basis. Is that a fair characterization?

Yes, that's relatively fair. We've have been doing roughly $10 million per year.

Okay and then when do we expect that we'd be at something like a run rate in terms of on the loan collection side?

You're a few years from that because it's got a 10-year repayment. So, you probably won't get into equilibrium until probably year five of the program and we are 2.5 years into it.

Ms. Bruso, ladies and gentlemen, I'm showing no further questions at this time.

Alright, well with that, we will close out the call. Thank you very much for your questions. We appreciate your time and interest in UTI and we look forward to updating you on our first-quarter earnings call which is scheduled for Thursday, February 3, have a great evening and a happy holiday season. Thank you.

Thank you, ma'am, and to management also for your time. We thank you all for attending today's conference call. At this time, you may disconnect your lines.