Universal Technical Institute Inc (UTI) 2011 Q3 法說會逐字稿

Good afternoon and welcome to the Universal Technical Institute, Incorporated Third Quarter 2011 Conference Call. (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 August 8, 2011 by dialing 877-344-7529 or 412-317-0088 and entering passcode 451826.

At this time, I would like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Mr. Jenson, the floor is yours, sir.

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 third quarter ended June 30, 2011, 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'll 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'll 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, net income.

At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, John. Good afternoon, ladies and gentlemen, and thank you for joining us. On today's call, Eugene and I will review our third quarter results, discuss key operating trends, the drivers and implications, as well as our key business priorities. In addition, we will comment generally on the regulatory environment and any current and anticipated business impact. We will also share our outlook for the remainder of the year and preliminary insights for 2012. Our third quarter was very busy and challenging. We implemented new plans, policies, and procedures in response to the Department of Education's new regulations effective July 1. We focused on ways to improve our overall marketing and admissions efforts given an ever evolving marketplace and changing consumer attitudes and behaviors.

We achieved a major milestone at our newest campus in Dallas and are nearing the completion of successfully implementing a new curriculum and education delivery model that improves our value proposition for all of our key stakeholders. Across the organization our team worked hard to improve educational outcomes for our students and assist a growing number of graduates in securing employment. At the same time, we implemented changes to align our cost structure with current and projected student enrollment trends while ensuring we balance short term trends with long term sustainability.

After nine consecutive quarters of year over year growth in our average student population, the average number of students in school decreased nearly 4% to a total of 17,200 students. The 4% decline in average students was largely driven by a 33% decrease in new student starts off a very tough comparison last year, and a 14% increase in the number of graduates.

There are a number of contributing factors behind the decrease in new students, which I will cover in more depth in a moment. Despite the decrease in our average student population, our revenues increased slightly for a total of 109 million. Net income for the quarter was 4 million compared to 6.3 million last year, and our earnings per share was $0.16 per diluted share, down 36% from $0.25 a year ago. Excluding severance cost of 4.3 million for the workforce reduction implemented in the quarter, our net income was 6.6 million, or $0.27 per diluted share.

Eugene, perhaps you could cover the financial results in greater detail, and then we can discuss the specific operating trends in the quarter.

Sure. Thanks, Kim. Revenues for the third quarter were $108.9 million, up approximately 1% versus last year. The improvement over the period was primarily driven by an increase in tuition rates, partially offset by the decline in average students of approximately 700. During the quarter we had 1.7 million in tuition revenue from our loan program that was not recognized. That amounts to about 1.6% of revenue and compares with 2.4 million in the same period last year. Our average revenue per student for the quarter increased 5.4% to approximately $6,300. Reported operating income for the third quarter was 6.7 million, down 32% compared to the 9.9 million in the same period last year. Operating margin for the third quarter was 6.2% compared to 9.2% last year.

Year to date, our operating margin, excluding the quarterly severance charge, is 11.5%, which is up from the 11% for the first nine months of last year. And excluding the severance charge, operating income for the third quarter was $11 million, a 12% improvement over last year, and our operating margin was 10.1%. Compensation and benefit cost increased 4.1 million from last year to 57.6 million. The increase is primarily attributable to the workforce reduction which we announced on June 30, which resulted in severance costs of 3.7 million. The remaining severance charge of $600,000 represented outplacement assistance and impacted our selling, general, and administrative expenses.

Approximately two-thirds of our reduction in force impacted our educational services and facilities expense with the remaining third impacting SG&A. And additionally, we have increased staff dedicated to assisting students with graduate employment, as well as to respond to the increased regulatory, administrative, and reporting requirements. The reduction in workforce is expected to provide an expense savings in compensation and benefits in fiscal 2012 of approximately $12.4 million.

Depreciation expense increased during the quarter $1.5 million to 6.4 million and year to date depreciation expense totaled 19.1 million, which is up from 14.2 during the first nine months of last year. The increase is primarily due to additional assets related to our curriculum transformation project and the addition of software developed for internal use, as well as acceleration in depreciation related to our home office move.

Bad debt expense for the third quarter was flat as compared to the prior year at 1.6 million, and bad debt expense as a percentage of revenue was 1.5% in both periods.

As Kim mentioned, we continue to be very pleased with the results of our new Dallas/Fort Worth campus and we're proud to announce that 13 graduates from the initial class graduated on June 17. As of June 30, we had 480 students in school and we currently have about 550 in school at that location. It's worth noting that the student pass rates for the new blended learning curriculum are equal or better to the legacy curriculum and students' comments continue to be very positive. Additionally, the development in the new curriculum continues to be on track and is scheduled to be completed by the end of the fiscal year.

And at this point, we expect to begin rolling out the blended learning curriculum to our legacy campus as early as the second quarter of next year.

During the three months ended June 30, the Dallas campus recognized $3.1 million in revenue and incurred approximately 3.6 million in expense, which included 1.5 million in corporate allocations. So the campus had an operating profit of roughly $1 million during the quarter.

EBITDA for the quarter was 13.2 million, as compared to 14.9 for the third quarter of last year. And as a reminder, EBITDA was impacted by the $4.3 million of severance charges in the quarter.

Net income for the quarter was $4 million, compared to 6.3 last year and earnings per share was--reported was $0.16, down from the $0.25 of last year.

And as mentioned, the reduction in force impacted--severance cost impacted pre-tax income by 4.3 million and $0.11 per share. Our return on equity for the trailing four quarters was 24% compared to 25.6% for the trailing four quarters ended September 30.

Moving to the balance sheet, it continues to be extremely strong and liquid. We had cash and cash equivalents of roughly $86.5 million at June 30, compared with $81 million at June 30, 2010. We generated 2.7 million in cash flow from operations during the third quarter and the decline from last year's quarter is driven primarily by the use of cash to effect the changes made to our compensation plans during the quarter. We continue to have no debt on our balance sheet, and we have not repurchased any stock during this calendar year.

During the quarter we invested 7.9 million in fixed assets, which was down $12 million from the same period last year. The 7.9 million is primarily related to our investment in the new curriculum, as well as new and replacement training equipment. We have invested 26.1 million in the first nine months of the fiscal year, compared to 26.6 last year. And for the full year, we expect to invest a total of approximately $30 million.

And now, I'd like to turn it back to Kim to discuss this quarter's results in a little bit more depth.

Thanks, Eugene. During the quarter we started 2,700 new students compared to 4,000 a year ago. Admittedly, we expected starts to be down, but this decline was greater than we anticipated. As I mentioned earlier, we did face a particularly tough comparison as new student starts during the third quarter last year were a record high, having grown more than 30% year over year for two consecutive years. In May, we reported that we had 20% fewer students scheduled to start school at the beginning of the quarter than we had had in the prior year. Unfortunately, we were unable to close the gap. In fact, it widened a bit to 27%. This is largely attributed to continuing challenges with the adult student segment, as this quarter is heavily weighted toward the adult learner. However, we did see some declines with the younger students as well.

As we've discussed previously, continued economic pressures and adversity to a growing--to debt has negatively impacted our recruitment efforts, beginning with student inquiry generation, enrollment rates, through our student show rates. During the quarter our show rate declined 460 basis points. Again, this decline was off a Company high for the quarter last year, but this is the third consecutive quarter of declines, which speaks to some of the challenges our students face. The combination of fewer students scheduled to start during the quarter and the show rate decline drove the decrease in the number of new student starts.

What does that mean for the fourth quarter, given it is largely comprised of recent high school graduates? Currently, the number of students scheduled to start during the fourth quarter are pacing slightly ahead, approximately 4% ahead of the same time last year. However, we do expect some show rate deterioration even with the high school students given the recent trends and the fact that their parents face some of the same economic realities as the adult students we discussed earlier. Therefore, assuming students scheduled to start are flat to prior year, and we see on the order of a 400 basis point decline in show rate, new students could decline year over year for the quarter translating into a decrease in new students for the full fiscal year.

So what are we doing to change the trajectory moving forward? First, from an advertising and marketing standpoint, we're continuing to rebalance our marketing mix to higher quality lead sources through various forms of media. Second, we're developing new creative campaigns that build brand awareness and support traditional direct response media. In addition, the new creative will address changing perceptions and behaviors, program preferences, and geographies. Last, we will continue to test innovative demand generation strategies for both local and national markets. Ultimately, the goal is to rebuild the volume of student inquiries from higher quality sources, focusing on those students who have both the willingness and ability to pursue a UTI education.

During the third quarter, our advertising expense was 7.4% of revenues compared to 8.2% in the prior year third quarter. In total, advertising costs decreased 680,000, or 7.8%, year over year. The decrease in cost was due to the elimination of lower quality inquiry sources in some advertising clearance rate challenges. As we continue to eliminate poor quality inquiry sources, the quantity of student inquiries in the quarter declined 25% year over year, yet some leading indicators suggest the quality has improved. It's too early to speak to that with too much confidence.

As we look forward to the last quarter of the year, I anticipate our marketing and advertising costs will increase year over year by a couple of percentage points due to higher advertising costs overall. Our continued investment in local markets and an overall shift in our marketing strategy to generate higher quality inquiries will also contribute to that. I expect advertising costs to be approximately eight to 9% of revenues for the remainder of the year, and approximately seven to 8% for the full year.

Now, let's talk about our admissions efforts for a moment. The number of student applications received during the quarter decreased roughly 10% year over year, all of which is attributed to a 20% decline in adult students. Just to clarify, this is the number of student applications received during the quarter regardless of the time or quarter for which they are scheduled to begin school in the future. High school applications held steady with last year and the number of military applications increased better than 50%.

In addition to the sustained economic pressures our students face, the decline in student applications can be attributed to disruption in the advertising and inquiry generation markets, as well as regulatory changes that have impacted our overall effectiveness and efficiency with our marketing and admissions efforts. Another contributing factor is the fact we have roughly 20% fewer campus based or adult segment admissions reps. Those are the people that work with the adult students where we've had most of the challenges.

Right-sizing our admissions team is intentional as we reduce the volume of low quality student inquiries. However, we need to simultaneously improve productivity levels to achieve optimal results. Overall, productivity levels for the quarter were the same year over year, which is actually positive given all of the changes. We do expect to see improved operating efficiencies over time and believe we have significant capacity to do so with the current size of our team.

Eugene?

Meanwhile, our teams are doing everything possible to help those students who are scheduled to begin school overcome some of the hurdles they face. Obviously, we cannot change individual circumstances, but we can make certain we help them overcome as many hurdles as possible. One area of concern for our students and their families is the cost of education, and more specifically, affordable options for financing their education. We know that the recent elimination of year-round PELL and any additional cuts to the program will make it more difficult for our students to pursue an education.

While the change may not significantly impact our revenues, it could create additional pressure on our show rates and require additional--alternative solutions to help our students. We continue to offer both merit and need based scholarships, and will likely increase need based scholarships to help additional students. Further, we continue to offer our proprietary loan program with interest rates similar to government education loans. As a reminder, our loan program helps students who don't have sufficient access to traditional credit based loan products and who are otherwise fully qualified to attend UTI. As of June 30, we have committed to provide approximately 29.3 million under this program. The average loan per student is now about $4,700. And since inception of the program, we have not recognized tuition and interest revenue, which totals 27.3 million through quarter end.

As more and more participants enter repayment, our cash collections continue to improve. During the quarter we recorded $250,000 in revenue and interest from cash payments that were received, which was up from 210,000 the previous quarter. To date, we have collected 910,000 on this program.

Depending upon the impact of any PELL changes or other impacts to student funding brought about by the recent regulatory changes, I would expect us to tweak this program in the coming quarters to make it even more accessible to some of our students.

I am also happy to say that our student persistent rates continued to improve during the quarter, up 30 basis point in a time where we would expect deterioration given economic pressures. During the quarter we graduated 2,700 students, an increase of 14.3% year over year. And over the past 12 months, we have graduated a total of 11,800 students with either degrees or certificates. And while employment remains very challenging for motorcycle, collision, and marine segments, specifically, we are seeing some very good progress in the auto and diesel segments. I'll remind you this has been an area of heavy investment and focus on our part and it's rewarding to see improved performance even in the face of continued unemployment headwinds.

For the third quarter, approximately half of our auto diesel campuses had employment rates at 85% or better, so we continue to see really nice progress. And on a consolidated basis, our employment rates improved 730 basis points for the quarter, compared to last year's third quarter.

Since our last call, the Department of Ed made public their final gainful employment regulations, which go into effect July 1 of next year. While we don't yet have access to program level repayment rates, I'll remind everyone that our 10 campuses previously ranged from 49% to 64%, with a weighted average of 55% on the initial rates, which the department published last August. Additionally, we believe that based upon BLS data, which as you know can be used in a transitional timeframe, we believe that all of our programs would currently pass both parts of the debt to income test.

On July 1 of this year, in order to comply with Ed's gainful employment disclosure requirements, we established a web page to disclose to the general public certain information about our programs, which included recognized occupations, costs, completion rates, graduation employment rate, and median loan debt of our program completers. You can find this information at our web page and it's located at www.uti.edu/disclosure.

In closing, this has been a year of significant challenge for us and the industry. The financial resources required to deal with the economic and regulatory headwinds, as well as the severance costs related to reducing our workforce, will cause us to miss our internal goals. While I still expect fourth quarter starts to be down versus last year, I do believe that the rate of decline is significantly slowing from the third quarter and I still expect 2011 full year operating margins, excluding this quarter's severance charge, to be within our guided range of 11 to 13%.

As we look towards 2012, I believe it will be a year of significant transition for our Company. We will begin to rollout our new curriculum at our legacy campus, which will be critical for us to improve our leverage to achieve our operating margin targets. I expect us to continue the momentum we have seen recently in improved placement rates. Hopefully, the incredible financial and human capital burden of dealing with regulatory changes for the past several quarters will moderate. And finally, as Kim mentioned, we hope that a focused effort by our marketing and admissions professionals targeted at dealing with the increased financial hurdles of our potential students, will result in a stabilization of our show rates and improved workforce efficiency.

This has been a very demanding year and I would expect some of the headwinds and challenges that we have faced to carry over into 2012. Specifically, I don't expect to see year over year start growth until at the earliest the second half of 2012. But I believe with our strategies clear, we are well positioned for the future. I also believe it's important to remember and remind everyone what UTI is. We are the market share leader in our field with an extremely strong and liquid balance sheet. We appear to be in very good shape under the newly imposed regulatory metrics. Almost regardless of the economic cycle we produced strong cash flows. We focus strongly on industry as our customer, which has resulted in unparalleled industry relationships and superior placement metrics even in these challenging economic conditions.

We have a new world class curriculum that should provide us the opportunity to improve further the educational opportunity for our students and at the same time improve our cost structure and our operating margins. And we have, most importantly, a strong and dedicated workforce committed to improving the lives of our students.

And with that, Operator, I think we're ready to open the lines for questions, please.

Yes, sir. (Operator Instructions.) The first question we have comes from David Chu, Bank of America Merrill Lynch. Please go ahead.

Hi. Good afternoon. So in addition to shifting your marketing mix, I mean, are you kind of making other changes to address the weakness in the adult market? I just wanted to see if you guys could elaborate on that a bit.

Hi, David. This is Kim. Certainly, we're changing many dimensions of the marketing mix. We have also invested in our admissions training effort to help our representatives as well as those staff members who interface with students once they enroll through the point of actually showing to school to help them anticipate, identify new hurdles, and assist those students with overcoming them. So some of the things that we have resources to help them with in terms of our First Century loan, need and merit based scholarship programs that we may need to increase more, we haven't increased those at this point in time, but are currently evaluating that. And I think this--it's process improvement and training to help people address the new challenges that our students and their families are facing now.

But I'd say most of it is marketing mix changes, creative and messaging, and then process improvement.

Okay. Thanks. And one additional question. I mean, in recent quarters you guys have mentioned that prospective adult students were not really going to other schools, but they seemed less motivated. I mean, are you hearing a similar message from your reps at this time, or are you seeing them possibly attending other students--other institutions, those maybe with lower price points?

That's a good question. We have not conducted any formal competitive research in the recent quarters, but I'd say frontline indicators are it's more about the students not doing anything. They face some of the same hurdles regardless of the school and where it's located. And so, we're not hearing that they're making choices to attend another campus, whether it's a for profit or non-profit. It's more of just not being willing to move and make the commitment to get an education at this point.

Okay. Thank you very much.

You're welcome.

The next question we have comes from Peter Appert with Piper Jaffray.

Thanks. Kim, you or Eugene mentioned in your prepared remarks about increased use of grants. And I'm noticing obviously as you reported revenue per student is up pretty nicely. How should we think about revenue per student over the next year or couple of years in the context of more pressure to raise the grants or the aid? Any thought on potential adjustments in pricing strategy?

I would expect at least at the end of this year to increase our tuition at the same rate that we have historically, so somewhere in the three to 5% range, depending on the program, as well as geography and location--campus location. As you've noticed over the last several quarters, the amount of first entry loans, our proprietary loan program, have decreased which we believe has contributed--or that the PELL increases have helped contribute to that. And we believe that we're going to have to offset that with some alternative, so an increased usage or total loan amount for students who may not have access to the same level as a government grant. Certainly, closing that gap, and potentially offsetting that with similar amounts in scholarships that are need based. At this point in time, we don't see the need to do broad based or hold our price in tuition, given that it does appear to be certain student segments that we believe we can adjust accordingly with our own loan program in merit--I'm sorry--need based scholarships.

You want to talk anything about how to model that?

Yes. I think, Peter, at this point, until we get a little bit more fine-tuned changes to either the loan program or, as Kim was saying, what sub segments of our demographics might be eligible for additional scholarships or grants, I think it's premature to really focus on any decrease in revenue per student. I think at most it would be a slight slowing of our rate of growth. As you mentioned, we have seen good rate of growth in the revenue per student. But I would expect, with all of the factors that work against each other in that calculation that you would continue to see somewhere in the two to 4% increase in revenue per student.

Okay, great. Thank you, Eugene. And then, I know you've talked about this in prior quarters. But just can you help us understand the cost implications and maybe the margin implications of the blended curriculum as you roll that out next year? Is that something significant that we should be factoring into the models?

Not at this time. I think it will be dependent upon when we roll it out and where we roll it out. And at that point we'll give you some guidance, because it will--not to get into the details, but it will be--have--if we go to a larger campus or a smaller campus or one with multiple sessions versus just dual sessions, it will have significantly different impacts. But when we decide where we're going first and when, we'll provide you some additional guidance on that.

So, Eugene, you're going to do one campus at a time? That's how you're thinking about it?

I think we will definitely do one initially. Even though it's in Dallas, that was a new campus. So our--I think as we roll it to our legacy campuses we will definitely do one at a time initially and get--or one initially and get the learnings from that, and then decide at what speed we'll roll it out to the remainder of them.

And this will be the last thing. I have a sense that the progress in Dallas in terms of road to profitability has come maybe a little more quickly than initially anticipated. Do you attribute that to the--to this blended curriculum and the margin implications associated with that?

Well, it's partially attributed to that just because the nine to 15 months kind of breakeven we had given was on our traditional campus. It is really performing right in line with what our expectations are, so even though we gave that guidance with the new curriculum and the new cost structure there, we were hopeful that it would play out that we would achieve that profitability a little bit earlier, which in fact we did. In fact, it slightly beat nine months. So, yes, some of it is due to that. Some of it is quite honestly due to the fact that we got absolutely the enrollments and starts that we anticipated getting, as well as the good persistence that we anticipated getting. So it plays a part, but it's not the sole contributor. But you bring up a good point. Dallas is behaving and acting equal to or better than our business case. So I think we have certainly--at the point where I can say we've proved out that hypothesis that a smaller model will work. And as we've talked about before, there are clearly other parts of the country that could house a Dallas type facility. We're not ready to go to one yet, but we've proved out that hypothesis and it's something that in the coming quarters we'll probably talk to you more about.

Great. Thank you, Eugene.

And our next question comes from Corey Greendale with First Analysis.

Hi. Good afternoon. A few questions. First of all, Eugene, I think you went over this a year or two ago, but could you remind us. Is there some simple math you could give us for what--a 100 basis point change in the show rate means X on new students?

I'd rather not kind of do the math off the top of my head here. Maybe we could work through that offline here.

Okay. No, that's fine. The second question is the timing of the headcount reduction, you shouldn't have any cost saving benefit of that in Q3, right? That would start in Q4?

That is correct.

Okay. And at this point, do you think--and I realize we're still a ways out, but the cost savings from the headcount reduction, do you think that is sufficient to keep margins flat in fiscal 2012 or at least flat given what you're seeing right now?

I think for that to happen we would need to see some combination of an acceleration in enrollments and stabilization to improvement in show rates.

Okay. And the margin benefit--ultimate margin benefit of the new curriculum, would that require that--the campus to be growing in enrollments or could there be a margin benefit even if the enrollment is declining at the campus with the new curriculum?

Potentially either. Certainly, the--certainly if it's growing, but I think it does have the potential even in the hypothetical case of a stable or flat enrollment at a campus or population at a campus.

Okay. And Kim, I have two questions for you. The first one is the way you're talking about changes you are making in marketing and messaging, you're talking--I realize you're talking about it at a very high level. It sounds somewhat similar to how you talked about such changes back in 2007 when there was a new student downturn. Can you just--are there lessons from that period that you can pull forward from here? Isn't what you're doing now pretty similar to what you did then in terms of changes, or is this totally different?

I think there are some similarities just because the cycle is similar. And so, you have to constantly change messaging to respond to the consumers' attitudes, perceptions, and behaviors. I think what has changed since then is certainly the importance of the internet and other forms of digital media. And I think from an advertising standpoint, let's just say that in the traditional media form such as television, we have seen some further changes in that regard as well. So as the consumer and prospective students start to shift more towards the internet, that's been less effective. Television has been less effective compared to historical levels. But it is still a very critical component of our overall media mix as it creates awareness and then drives traffic to the website.

I think one of the differences this time around is that we are trying to measure the combination of various media forms when acting together. So we're using a media attribution model that still suggests we have opportunity for improvement. But we're trying to balance out the end market promotions with national and local spot advertising, with the new reality show as an example, digital forms of media, and trying to figure out what that perfect balance is, because we do know that it requires all forms to be optimal. And if you go back to the 2006, 2007 timeframe, that was largely about moving away from paid programming, 30-minute infomercials to 30 and 60-second spots. But we had certainly not at that point fully dialed up the internet. And I'd say that we continue to build on the TV to web strategy, so it is a web centric strategy using UTI.edu as the hub. But what is different a couple years later is that the way in which consumers interface with the internet has changed and not everybody lands on your home page or your URL.

So we're trying to make certain that our interface from an internet standpoint meets the students and their prospective families or key influencers in the way in which they want to engage, as an example, with social media, et cetera. So I think there are a lot of similarities in lessons that we have certainly learned. And then, there is a lot of new things that we'd never seen before as others in the sector have commented on. If there is one thing that I can say that's not necessarily specific to marketing but was a definite strategy change for us was really to focus on the local markets. And again, even in this quarter when you look at the show rate decline what you will see is the greatest declines are coming from that population that has to relocate to attend school.

So our focus on the local markets and increasing that population is working. It's just it's not large enough to fully offset the decline for those students who have to relocate. I don't know if that helps or not, or if I've confused the issue, but--.

--That does help. And I had a couple more questions, but I'll follow up offline--.

--Okay--.

--So I don't take up more than my pro rata here. Thanks.

The next question we have comes from Gary Bisbee with Barclays Capital.

Hi. Just I guess a question--the thought dawned on me a minute ago as you were talking about the success, the data of the Dallas campus, does--would it make sense given what you're seeing in the difficulty with the adult market to shrink your footprint in some of the existing markets and move like either subletting space or just getting out of campus space and getting a new one that's smaller. Even though there is obviously a capital expense associated with that, you're so well capitalized that wouldn't seem to be an issue and it might be a way to weather this current storm from a profitability perspective. I guess, updated thoughts on any of that.

Yes. I think we would welcome the ability to sublease some of our space. I don't think--to the other part of your question, I don't think we have any desire to exit any of our locations or at least our geographies that we're in, to speak to that, not necessarily facilities. But it's--our space is difficult to sublease. We have done it somewhat and we continue to look at it. But I think you have a greater opportunity to do that--that strategy of reducing fixed costs when your leases are closer to renewal. And some of those are coming up. We have a--our Chicago facility in Glendale Heights is up for renewal in the next 12 to 18 months. So I think you might see some strategy there. But, yes, we will continue to look at ways of optimizing or monetizing some of our fixed costs.

I guess the--thanks. The second question, what impact has--or is it--are you able to tell at this point what type of impact changes in incentive comp are having on reps' morale and productivity?

Sure. I'll comment on that. I'd say overall the morale has been better than we expected and anticipated. And if you look at the third quarter from the point in time we announced the changes with the compensation plan - so that was in the April-May timeframe - they took effect in June, but everybody understood what it meant for them going into the quarter. So as the quarter progressed, we saw productivity gains. In April, our admissions teams were 12% less efficient than the prior year. In May, they were 7% less efficient. And by June, that trend was reversed and they were 12.5% more efficient. Now, I'm not saying that that will hold through the next quarter, but I do think it's a positive indication that they have accepted the new compensation plan, they understand it. But we have more work to do in terms of the performance management and how we kind of transition to the new world. But the trends inside of the quarter from an efficiency standpoint were actually pretty positive.

Okay. And then, just any more color you can give on the high school market? I think you said--I don't know if it was contracts that you said were flat, or there was some number you gave looking into next quarter. And I know that's normally a real important group of students, but is that--how are the high school trending?

When you look at the high school contracts for the third quarter, I said they held steady compared to last year. And again, that was the number of applications received in the quarter that could be scheduled to start in the quarter or in any subsequent quarter for that matter. But they were steady. When you look at it year to date, our high school business is ahead by 5%. So that's been--the high school and military combined up a couple of percentage points. So again, the big drag on our enrollment has been the adult and campus segment.

And then, when you look at quarter four, we said we were pacing ahead by about 4% on students scheduled to start. A large number of those are actually high school. So I'd say the high school business has been strong, steady, to slightly better than the year prior.

Okay. Thank you.

The next question we have comes from [Paul Tomja] with BMO. Please go ahead.

Hi. Thank you. You mentioned the possibility of starts growth in the second half of 2012. And I just wondered if you thought you might see starts positive for the year. Could you talk about that?

For 2012?

Yes, for fiscal year 2012.

Yes. So just to clarify, I--what I think I said--what I know I said is that I don't see start growth until at the earliest the second half of 2012. So I don't want to go so far as to say that I am projecting it to happen there, but I think that's the earliest that it could happen. At this point, I would say we need to see significant improvement from the current trends either in some combination of enrollments or our show rate needs to stabilize and/or improve to see full year start growth in 2012 above and beyond 2011.

Okay, thanks. And I just wanted to ask about the savings from the workforce reduction.

Okay.

I think you had said about two-thirds of that was in the ESF line and then one-third in SGA. So when we look to 2012, can you allocate the savings across the two lines like that, or how does that breakout?

Yes.

Okay. And then, I guess lastly, this strength in the military applications, what do you attribute that to?

We have increased our coverage and expertise out on the bases and certainly there is interest for the military veterans to transition to civilian life and have a good career opportunity. And many of them see this as a real opportunity to leverage their passions and strength and experiences from the military. But I'd say certainly it's just--it's macro factors as well as our focus on increasing our coverage and service levels to help this student segment.

Okay. Thanks a lot.

You're welcome.

The next question we have comes from Jason Anderson with Stifel Nicolaus.

Good afternoon, guys. Along the military topic there, is there--I guess, one, would you be able to provide any color or even the number of your population that's from military? And then, also with that, any color on maybe conversion rates or show rates, applications--well, you gave application level on growth anyway. But any additional color you could provide there?

Yes, I'd say that from a military standpoint, specifically looking at the base--military base coverage, from applications in the third quarter it was about 7%. It's been ranging--last year was more like 5%. If you look at our entire student population, I'd say it's roughly 10% that has some sort of military background. So the efforts in the military base coverage have continued to steadily increase year over year. And I'd say all of the front indicators--so interest from students' inquiry levels, quantity and quality, conversion rates from inquiry to application, as well as to showing to school, are all positive and trending in the right direction with the military students.

Great. Thanks for that. And then, along with that, I guess I don't know if we'd had in a while an update on your sales force between the--the quantities between field and campus based and particularly military. I think military at one point was 10 and you've mentioned increasing the focus. Could you provide any update on those?

Sure. During the third quarter our average number of reps or full-time equivalents was 317, compared to 358 last year. So we downsized about 12%. 140 of those reps were high school reps. That was down 6% from the year prior. 160 are the adult learner segment, which is about 20% less than last year. And we've added five military reps, so we have a total of 16.

Great. Thank you for that color. And then, last one here. With the new disclosure requirements--and I know it's been early--but have you--are you hearing anything in the field or any response to that or have students even noticed or has there been any response from the inquiring students?

We have seen increased visits to the page or on that subject matter. It's obviously more accessible for them. So given that we didn't really have a whole lot to compare it to, I would expect to see that. I have not heard any frontline indications of it being either a positive or negative in terms of the enrollment process.

Great. Thanks for that. That's all I had.

The next question we have comes from Kelly Flynn of Credit Suisse.

Hi. I have a couple questions. I guess the first one is pretty simple in terms of the SG&A. It was up a lot sequentially in the fourth quarter last year. So I'm wondering, Eugene, can you help us just model that? I mean, do you expect that to be up sequentially even with the cost cuts, or is that something that should come down due to the cost cuts?

Sequentially from this quarter?

Yes.

I--well, I think the way I would model it is to take that percentage of the savings--that percentage of the one-time cost that we gave you and back that out. But I'll also remind you that the incentive compensation change that we made as required by the Department of Ed to move more into fixed costs will--the fourth quarter will be the first full quarter that is in there. So I would expect those impacts to somewhat offset one another and I'd expect roughly a flattish fourth quarter versus third quarter in SG&A.

Okay, great. And then, second question relates to the PELL grant program changes, the elimination of the year-round PELL. I think you've touched on that a few times in your comments. Could you just specifically address that? I mean, are you seeing demand hurt as a result of the year-round PELL removal, and are there any other issues with the PELL grant that are hurting demand or helping?

I--and feel free to chime in, Eugene. But my guess is that it is having some impact in this quarter given that we saw an impact in our show rates across all income levels. And we had seen continued improvement in some of the lower income levels that we didn't see inside of this quarter. So my guess is that it is impacting somewhat and that could be simply because their packaging has changed, if they were later into the start cycle. So those students may need additional education about alternative sources and our team is working with them. But I do think it's had some impact.

Okay, great. And then, the last question just relates to the weakness in starts within the adult category. And I know you've talked about consumer malaise. Can you just go through more specifically what all the issues are that you think are weighing on the starts?

So on the adult segment, it has certainly been the prolonged recession. And the continued pressure, I think it's just having a cumulative effect. It's--they are more paralyzed, not taking action or making a commitment to pursue the education. And perhaps they need to rebuild their resources and become a little bit more open to taking on debt to invest in education with a longer term outlook on what the value of that investment is. But right now, people are very short term focused and are struggling with ways to fund their education because they don't necessarily have the savings, they don't have the home equity resources, and they are not inclined to take out additional debt. So that has been the greatest challenge for the adult segment and certainly for some of our high school students and their parents as well. But we've definitely felt that.

And I think, Kelly, in addition to that, for those that are relocating, the significant unemployment challenges across the country are impacting that as well. People are hesitant to give up their job to move somewhere where the challenge of getting even part-time employment either for themselves or, if they have a spouse or significant other that's moving with them, a challenge for that person as well. So that's another burden that is certainly specific to those that relocate, which is still a high percentage of the population for us.

Okay, great. Thank you very much.

Ms. McWaters, gentlemen, we're currently showing no further questions at this time.

Thank you, Operator, and thank you all for participating on our call today. We appreciate your time and interest in Universal Technical Institute. And we look forward to updating you on our year-end earnings call, which is scheduled for Tuesday, November 29. Have a great evening. Thank you.

And thank you. You also have a great evening. The conference call has now concluded. We ask that all participants please disconnect your lines. Thank you, again, and take care.