Universal Technical Institute Inc (UTI) 2011 Q4 法說會逐字稿

Good afternoon. And welcome to the Universal Technical Institute Inc. fourth quarter 2011 conference call. All participants will be in 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 7, 2011 by dialing 877-344-7529 or 412-317-0088 and entering pass code 10007024. At this time, I would like to turn the conference over to Mr. John Jensen, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead.

Hello and thank you for joining us today for Universal Technical Institute's quarterly conference call. During the call we will discuss the results of our fourth quarter and fiscal year ended September 30, 2011. We will then open the call up for your questions. The Company's earnings release which was issued after the market closed today 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 within the meaning of Section 21-E of the Securities Exchange Act of 1934, and Section 27-A of the Securities Act of 1933 as amended. 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 today you will hear 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 fourth quarter and fiscal 2011 results, discuss key operating trends, the drivers and implications, as well as our key business priorities. I'd hike to begin with a high level recap of last year. Fiscal 2011 was no doubt a challenging year for the Company. Economic and regulatory headwinds prevailed throughout the year, but we started to see some stabilization and signs of improvement by year end. During the year, some major strategic issues were settled. Regulatory uncertainty became regulatory certainty. And we put the necessary processes in place to adapt to the new rules.

Upstream pressures we began to see in 2010 lagging student inquiries, fewer student applications and weaker new student starts became downstream reality as our average student population decreased in size and we cut costs and reduced our workforce to align with that reality. Insight into changing consumer attitudes and a shifting marketplace required us to look at changes in how we brand and market ourselves as well as how we engage and recruit prospective students. Innovations in our new curriculum and a new campus model saw impressive results as our Dallas/Fort Worth facility concluded its first year of operation and we laid the groundwork for launching the new blended curriculum at additional campuses in the coming year. To sum it up, it was a year in which we had to balance our response to a demanding present while staying committed to strategies and investments in our future. We ended the fiscal year with 18,500 students in school, a decrease of 12% or 2,500 fewer students than at September 30, 2010. Despite the decrease in our student population, we achieved record revenues for the year of $452 million, up 4% from last year, while our net income of $27 million was down 5.5%.

Excluding severance charges of $4.3 million, taken in our third quarter, net income was $29.8 million compared with $28.8 million the year before. I am pleased all things considered including the severance charges we were able to achieve our goal of double-digit margins for the full year. Looking specifically at the quarter, the average number of students in school decreased 11% compared to the same quarter last year to a total of 17,300 students. This decline was largely driven by a 13% decrease in new student starts, and a 34% increase in the number of graduates. There are a number of contributing factors behind the decrease in new students which we will cover in more depth in a moment. Eugene, could you first discuss the financial results in greater detail and then we can cover some of the specific business drivers and operating trends for the quarter.

Sure, thank you,. Good afternoon everybody. Revenues for the fourth quarter were $111.4 million, that's a 6.6% decrease compared to last year. The decrease in revenues is primarily related to a decrease in average undergraduate full-time students of 11% and partially offset by an increase in tuition rates which I'll discuss later. During the fourth quarter of fiscal 2011 and 2010, tuition excluded $1.9 million, and $2.2 million respectively related to students participating in the Company's proprietary loan program. Average revenue per student for the quarter increased 5% to approximately $6,400 per student.

Operating income for the fourth quarter was $10.2 million, that's down 13.6 compared to the $11.8 million in the same period last year. The operating margin for the fourth quarter was 9.1%, compared to 9.9% in the fourth quarter of last year. Compensation and benefit costs decreased $3.8 million from last year's fourth quarter, to $53.3 million. Now, this decrease is primarily attributable to the reduction in workforce that Kim mentioned which was completed during the third quarter of this year. Our bad debt expense represented 1.8% of revenues for the year, and we anticipate going forward that bad debt expense to be in the range of 1.6% to 1.7% of revenue for the full year 2012.

We continue to be very pleased with the results of our Dallas and Fort Worth campus. At September 30 we had 560 students in school and we now have north of 570 students in school. Additionally, the development and delivery of the new blended curriculum has been completed and we recently celebrated our first auto diesel graduating class at Dallas/Fort Worth. For the fourth quarter the Dallas campus recognized $3.5 million in revenue and incurred approximately $3.9 million in expense. Now, that $3.9 million included $1.8 million in corporate allocations so the actual operating profit was $1.4 million. For the year ended September 30, Dallas had revenues of $10.9 million, and an operating profit of $2.9 million. It has been our past practice, we'll now stop reporting on Dallas as an individual segment for future periods. It will be treated as one of our legacy campuses.

EBITDA for the fourth quarter of fiscal 2011 was $16.8 million, compared to $18.4 million in the same period last year. Net income for the quarter was $6 million, compared to $7.2 million last year, and earnings per share were $0.24, down 17% from the $0.29 per share for the fourth quarter of last year. Net revenues for the year were $452 million, that's up 3.7% versus the $436 million in the prior year. Our operating margin for the year was 10%, and that's down slightly from 10.6% last year. For the year ended September 30th, net income was $27.2 million, or $1.10 per share, versus $28.8 million or $1.18 per share last year. As a reminder, the reduction in workforce announced in June and discussed on our third quarter call resulted in severance costs of $4.3 million pretax and impacted reported earnings per share by approximately $0.11. Return on equity for the trailing four quarters of this year was 21.4%.

Our balance sheet continues to be extremely strong and liquid. We had cash and cash equivalents and investments of roughly $110 million at September 30, compared to $81 million at September 30 last year. We generated cash from operations of $26.5 million, and $58 million for the 3 months and year ended September 30 respectively. That compares to $30 million and $67 million for the same time periods last year. We continue to have no debt on our balance sheet and we did not repurchase any shares of stock during the quarter or for the year.

During the quarter we did invest $3 million in fixed assets which was down from the $10.6 million in the same period last year. The $3 million in the current quarter is primarily related to new and replacement training equipment for our ongoing operations. We've invested $29.1 million in fixed assets for the full year fiscal 2011 compared to $37.2 million last year. And again, the reduction is due to the significant investment last year in our curriculum and the opening of our Dallas/Fort Worth campus. And now I'd like to turn it back to Kim to discuss our student metrics in a little bit more depth.

Thanks Eugene. In round figures we started 6,500 new students during the quarter compared to 7,600 a year ago. The decrease of roughly 13% was primarily attributed to a 520 basis point decline in new student show rates. Given the trends we experienced earlier in the year, the continued decline in show rate was anticipated. The good news is that the rate of decline in new student starts slowed significantly to less than half of what we experienced last quarter. Sustained economic pressures, affordability concerns and adversity to debt continued to negatively impact our student recruitment efforts throughout the quarter as it did for the year.

For the full fiscal year, total new students were approximately 16,200, down 17% from 19,500 in fiscal 2010. As we look forward to 2012, we expect the rate of decline in both new student applications and student starts to slow in the first half of the year before potentially seeing some growth in the second half of the year. With that said, we do anticipate our average student population for fiscal '12 to decline by a rate in the low teens. This is driven by the size of the average student population as we enter the year, fewer new students projected to start school during the first half of the year and the projected number of graduates.

Now I'd like to spend a few minutes talking about our marketing and admissions efforts. First, we continue to rebalance our marketing mix to higher quality student inquiry sources through various media. You may recall we moved away from lead aggregators several quarters ago to improve overall branding and demand generation. We have also been specifically targeting higher performing media channels to create awareness among students who have both the willingness and the ability to pursue a UTI education at this time. On our third quarter call, we discussed a 25% decline in adult inquiries as a result of this rebalancing. Our work on this effort appears to be moving in the right direction as that decline has slowed to 12% in our fourth quarter.

We have also been retooling our brand platform to ensure key messages and positioning are consistent with our brand persona and promise so that we can better communicate and differentiate our brand and the value we offer to students and employers. We have been testing new creative and certain markets and are now building on what we have learned. We believe the new campaign will effectively target key student segments. Finally, we continue to test innovative nontraditional student demand strategies for both local and national markets.

During the fourth quarter our advertising expense was 8.7% of revenues compared to 7.4% in the prior year's fourth quarter. In total, advertising costs increased $860,000, or 9.7% year-over-year. The increase in cost in part was due to a desire to invest in higher quality media outlets and to increase awareness during the traditional back-to-school time of year. In addition, the increased investment was to help bolster solid Q1 and Q2 enrollments and starts, understanding that the holiday season is typically a more challenging period for inquiry generation using traditional media sources. For the full year, we expect advertising costs to increase to 9% to 10% range as a percentage of revenue.

Now I'd like to address our admissions efforts for just a moment. The total number of student applications received during the quarter decreased 8% year-over-year. Breaking that down further, the number of high school applications was the same as last year. The number of military applications increased 55% and the number of adult student applications decreased 18%. The decrease in adult applications is largely driven by a decrease in the volume of adult inquiries, 18% fewer admissions representatives and the sustained economic pressures these students face. Overall our adult student representatives' productivity levels were the same as last year.

As we continue to replace the low quality inquiry sources with a greater volume of higher quality prospective students and implement new tools and resources to help them overcome some of the affordability and economic challenges they face, we should see efficiency gains with this team. In alignment with inquiry growth and efficiency gains we will consider adding new representatives but we're not at that point just yet. Our primary focus for admissions is to improve efficiencies and obviously increase the number of student applications. We are not as efficient as we believe we can be or have been in the past 5 years for all of the reasons we've previously discussed. So this creates some short-term pain as we build efficiency gains. We do expect to see improved operating efficiencies, though, and believe we have significant capacity to do so with the current size of our team. However, we realize that it's a different environment and that the continued investment in training and development given the changes in performance management and compensation are still very early on.

Overall, I believe our admissions team is adapting to all of the changes with a positive attitude while sharing feedback and insights to create compliant and effective plans, processes and procedures. I'm very optimistic about how these changes ultimately will better serve our students and how we as an organization will eventually benefit as well. Meanwhile, we need to be diligent in our efforts to help prospective students show to school, stay in school and graduate into a career as a skilled technician. Eugene is going to discuss our approach to all of this as well as some of the operating results as they relate to persistence, completion and graduate employment. Eugene?

Thanks, Kim. As she mentioned, students who are scheduled to begin school have many hurdles to face, and we are working diligently to assist them. One area of concern for our students and their families continues to be 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 programs will make it more difficult for our students to pursue an education. While the change may not significantly impact our revenues, it is creating pressure on our show rates and requires alternative solutions to help our students. Our teams make certain that our students know of all the financing resources available to them, whether it's grants, loans or scholarships.

We're continuing to offer both merit and need based scholarships and we are planning on increasing the amount of need based scholarships awarded this year. We're also planning to make our proprietary loan program more accessible to students who may not understand this alternative loan solution is available to them. Along with increasing awareness of the program, we are removing qualification barriers for dependent students. In short, these moves will make it easier for students to participate in our loan program. As a reminder, that program helps students who don't have sufficient access to traditional credit-based loan products and who are otherwise fully qualified to attend UTI. At September 30 we have committed to provide approximately $34.2 million under this program. The average loan per student is now about $5,000. Since inception of the program, we have not recognized tuition and interest revenue which totals almost $30 million through September 30th.

As more and more participants enter repayment our cash collections are continuing to improve. During the fourth quarter, we recorded $230,000 in revenue and interest from cash payments that were received. That's up from $88,000 in last year's fourth quarter. We expect the revenue from the program to increase sequentially, contributing over $1 million in revenue for fiscal year 2012. To date since inception, we have collected $1.2 million on this program.

Our support of student success continues while students are in school as well. For the fourth quarter, we saw a very slight decline in student persistence of 36 basis points. During the quarter, we graduated over 3,700 students, which is an increase of 34% year-over-year. Over the past 12 months, we have graduated a total of approximately 12,800 students with either degrees or certificates. Every campus has had an increased focus on persistence this year and we realize that a small improvement in those percentage points can make a big impact, both for the student and for our financials and for our outcomes. I'm pleased to say that for the year, 9 out of our 11 campuses either maintained or improved their performance as it relates to persistence.

As I mentioned earlier, the success we are seeing with the new blended curriculum at our Dallas/Fort Worth campuses. It's worth nothing that the student pass rates for this new curriculum are equal to or slightly better than the legacy curriculum and our student comments continue to be very positive. We have been actively planning for the roll-out of the new curriculum to all of our auto and diesel campuses. At this point we expect to begin the next campus with our Avondale campus roll-out in the spring and then an additional campus in the fall of this coming year. Based on how smoothly we go through the implementation at Avondale, we would like to pick up the velocity somewhat significantly in the future and do more than one campus at a time, but we're not ready to make that decision or relay those plans to you until we've gone substantially through the first implementation. And while we ultimately believe our blended curriculum will help us reduce costs once fully implemented across the system as we've talked about in the past, the next couple years will require further capital investment as we transition to all of our auto campuses having this new curriculum.

Another area where we have seen positive outcomes against a very difficult economic backdrop is graduate employment. Although motorcycle, collision and marine graduate employment remains challenging, we are seeing some very good outcomes in both auto and diesel employment markets. I'll remind you that 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. We believe this to be a key differentiator for us, similar to our manufacturer relationship programs.

For fiscal year 2010, graduates -- I'm sorry, for fiscal year 2010 graduates, approximately two-thirds of our auto diesel campuses have employment rates at 90% or better and on a consolidated basis, our employment rates were 85% for the year, that's compared to 81% last year. And we're working hard to continue that momentum as we move into the coming year. As we look to 2012, we expect the rate of decline experienced in 2011 in both applications and new student starts to slow in the first half of the year, before potentially improving in the second half of the year. However, given our current enrollment levels, the macroeconomic headwinds, and the challenging regulatory environment we operate in, we anticipate that the average student population for 2012 will be lower than the rate in 2011. We expect these lower levels of enrollments will result in a mid to high single digit decline in revenue in 2012.

Given these trends and the fact that due to regulatory changes, we have a higher fixed component in our cost structure, we must remain focused on efficiencies and managing costs. Furthermore, we plan on making our proprietary loan program more accessible to our current and prospective students and that may increase -- and we may increase the number of need based scholarships in 2012, creating the potential improvement in our show rates which would positively impact revenues. Despite these efforts, however, we do not anticipate reaching the same level of operating margin as we achieved in 2011. And obviously with the seasonality of our business and normal fluctuations in student populations, we would expect to see historical volatility in our quarterly results. Needless to say, 2011 has been a year of significant challenges, not only for UTI, but for the industry as a whole. Despite severe economic headwinds caused by the length and depth of the recession, coupled with unprecedented regulatory uncertainty and change, our Company and our employees have remained focused on our core mission, changing our students lives for the better by providing a quality education which we believe leads to enhanced employment opportunities. Kim and I would both like to thank all of our roughly 2,200 employees for their efforts and we look forward to dealing with whatever challenges that are presented to us in 2012 and increasing the number of students we can successfully educate. Now with that, operator, I think we're ready to open the lines for questions.

(Operator Instructions)

Gary Bisbee, Barclays Capital.

Hi. This is Zach Fadem for Gary. I've got a question on revenue per student. Last quarter you said that for fiscal '12 you have about 2% to 4% growth in revenue per student. Do you see that remaining with the increased scholarships?

Yes, I think just to clarify maybe what we said last quarter is we put in place a tuition increase of 2% to 4% in November and I think we expect to see tuition that is actually booked to income in the 2% to 5% range of increase in fiscal year 2012. And that would be inclusive of the positive and the negatives of tuition increases, offset somewhat by scholarships, offset somewhat by the loan program which we don't accrue revenue for. So taking all those factors into effect, we still anticipate tuition per student to increase in that 2% to 5% range.

Okay. And on the loan program, could you put some numbers around your plans to increase your internal lending and make it more accessible and do you see yourself increasing the limit from $40,000 in the next couple quarters? Thanks.

I think you meant $40 million there.

Yes, I'm sorry, $40 million.

I don't think that will go up in the next couple quarters, just because I don't think the -- we will use it up that quickly, but certainly as we approach that $40 million I would expect it to go up historically we've raised it by $10 million as we've approached that. So it would not surprise me at the end of the year to be talking about a $50 million limit. In terms of how we're making it more or may make it more accessible, it's really 2 factors, well, it's 3 factors. One is we are introducing it to the students earlier in the process, so the theory there is before the student gets frustrated with their ability to get a credit-based loan, they know that this is an alternative and that it's something that they can fall back on if necessary. Two, I think we will remove some of the restrictions as I talked about in my prepared remarks in terms of the need to -- for some of the dependent students to show a rejection from a credit-based lender. So that I would anticipate those 2 factors would increase the percentage of students that actually utilize the program. The third factor is, I do believe as tuition increases and potentially PELL grants are slightly smaller, the funding gap will be slightly larger and, therefore, the average loan size that incremental loans come out at will be slightly larger. So I would expect the $5,000 per loan student to slightly increase over the coming years and I would expect the 11% or 12% usage that we currently see on new students starting school to slightly tick up into the 12% to 14% range.

Okay. Very helpful. Thank you.

David Chu, Bank of America-Merrill Lynch.

Hi, good afternoon. I just had a question on starts. Given the number you posted this quarter, do you believe that 1Q should be actually worse, just because there's a less of a high school population?

You know, no, not necessarily. I mean, based on what we're seeing halfway through the quarter from a starts and show rate standpoint, we're basically flat year-over-year. So as I look at the first quarter, if we can hold the show rate, we should come in closer to last year continuing to see that rate of decline improve or get better. So I don't think that Q1 would be worse from a year-over-year start standpoint.

Okay. Thanks. Also, I think I missed, but how does the show rates compare year-over-year for 4Q?

For Q4, they were down 520 basis points.

Down 520 basis points.

Yes.

Just a question on that. Do you think it will take an improvement to the economy before these rates improve other than just kind of the easier comparisons that are eventually going to come up?

I think some of the things that Eugene mentioned in his remarks earlier will help as we've seen some of this cycle before and that is making need-based scholarships more available and accessible to the students, and helping them with the proprietary loan program and moving that up earlier in the cycle. An improvement in the economy would certainly help. Meanwhile, we're focused on the things that we believe will help the students overcome some of the hurdles they face and trying to focus on the things that we can control versus those that we cannot.

Peter Appert, Piper Jaffray.

Hi, this is George Tong, for Peter Appert. UTI's margin profile has been in the low teen/high single digits for the past several quarters. Do you see that as the new steady state margin level for the Company or should we expect some upside in the longer term, especially given the new blended curriculum that you guys have?

Well, in the short term as I mentioned in my remarks, I do not expect us to achieve those level of margins in 2012. As we -- I'll use the term lightly -- stabilize, since we are still very volatile in terms of our earnings stream over the course of cycles, I do expect, and we've talked before about the potential to reach more in the double-digits or mid-teen margins. We believe that we can do that over the longer term. We have not done that since 2004 and I don't think we'll get back to those levels but I do think an internal goal of 14%, 15% operating margins is something that we talk about frequently internally and something that we strive for. But it will not happen this year. It will certainly not happen in 2012 and I think it would be a stretch to get to that level in 2013, although I would hope to make significant progress there.

Got it. And you had mentioned earlier that net of scholarships and the loan program, you still expect roughly a 2% to 5% increase to tuitions. Given the fact that UTI's effective tuition rates are still significantly above community -- most community colleges and post secondary institutions, how much do you think that differential plays in terms of the slowdown in starts and enrollments and do you have any strategies in terms of pricing to offset that?

Honestly, I don't think it plays a significant role, given that inside of the last year or 2 is not when we saw tuition increases, significant decreases from a community college standpoint or increases from UTI or other for profits. Our tuitions have been significantly different for years and decades, so from our perspective it's a student interested in a community college program is different than those that are interested in a UTI program. They're looking for different educational experiences. Their investment in education is different overall and so I don't see that as being significantly different inside of this past year or the past couple of years. Now, from a strategy standpoint, we continue to work in the high schools to educate students who are interested in this type of a career path, in the traditional classes, as well as some of the academic classes and believe that there is opportunity for students who may not have considered this path to do so. So we continue to develop strategies to tap into that population and we'll keep you posted on any progress that we make. But it's nothing that's significantly different this year.

Great. Thank you.

Kelly Flynn, Credit Suisse.

Thanks for taking my question. I have a couple questions. First, just to go back to the comments you made about pricing and then revenue per student, I'm a little confused. I think you said the price increases were 2% to 4%. You expect revenue per student to be 2% to 5%. But I think you also said scholarships and your proprietary loans are increasing. So I would think that the pricing would increase at a higher rate than the revenue per student, given the scholarship changes. So I must be missing something. Can you help me with that?

Well, I think, Kelly, what you're missing there is we have raised tuition in the past even before this November, so -- and as you know, there is a delay between when a student signs a contract to start school and when they actually start generating revenue for us. So there is constantly revenue increases in terms of revenue per student that are rolling through the books and the point I was trying to make is that while we raise prices 2% to 4%, some of those won't start for another year or so. The important factor I think for you all that are trying to model things like revenue and things like that is that net-net of what we know is happening in terms of revenue -- I'm sorry, tuition per student, net of what we think is going to happen in scholarships and the loan program, we expect revenue per student to be up in the 2% to 5% range, 2012 over 2011.

Okay. And the prior price increase, was that more like in the 3% to 5% range? Is that right?

Traditionally, that's what they've been averaging on an annual basis, yes.

Okay. Great. And then the second question relates to the causes of the starts declines. I know you cited the economy which I think you guys have been pretty consistent on. But I just wondered, are there any other factors at play here. I think last quarter you said the year-round PELL elimination might have had a small impact. If you could just address that specific issue and also just whether or not on the margin, any of the regulatory changes are impacting starts as well. Thanks.

So I'm sure that all of the factors you just mentioned have contributed somewhat, Kelly, but I will say in this quarter it was the first time that we saw a decline in show rate that stood out within like the 50-mile radius that we've spoken about earlier. In the prior earnings calls, we've talked about the students who have had to relocate and overcome some of those hurdles where inside of this quarter we did see pressure even at a local level with student incomes that I put on the lower end of the spectrum. So that reinforces to us that the loss of year-round PELL and the fact that students needed to be repackaged without the PELL has had an impact on their start rates. So I do believe that that's a bigger contributing factor, and as we start to introduce more of the need-based scholarships to help supplement that and the first entry loan changes, it should start to offset it.

Now, when you look at October, our show rate was only down 50 basis points. So I do think a lot of it had to do in the quarter with the population being largely high school and again, with the lower income and the fact that they enrolled so far in advance. They may have enrolled in their senior year, the year prior, and then had to go through multiple changes in terms of financing before they actually showed to school. So given that we're now kind of beyond that high school population and everybody understands what's available at the time they enroll, I think that we'll start to see some improvement there.

Corey Greendale, First Analysis.

Hi, good afternoon.

Hi, Corey.

Hey, Corey. Hello? We lost him.

Okay. Jeff Silber, BMO Capital Markets.

Thanks so much. Eugene, you talked about fixed cost component of your operating model and I know it may have changed a little bit with the workforce reduction. Can you remind us from a modeling perspective roughly what the breakdown is between variable and fixed costs or another way of looking at it, what would be the incremental operating margins on added dollar revenue or loss of dollar revenue?

Let me attack it slightly differently for you, Jeff. Specifically what I was talking to was just with our reps and I think you may find it interesting, we have in 2012 versus 2010 -- 2011 was kind of a transition year so I'm ignoring that. But while we're going to have roughly the same level of expense for our representatives in 2012 as we had in 2011, about $10 million of that spend in 2010 was variable, based upon their performance. That has all shifted to fixed costs. So that was really indicative of my comment that we have more fixed costs as a component of our cost structure.

In terms of where we are right now, we've traditionally said -- and I know this is a wide range -- that at this point of capacity utilization, we're kind of in the 25% to 50% incremental margin. It really varies significantly, based upon what it is that generates that incremental revenue, i.e. whether it's an improvement in show rates. So we already have the fixed cost and we're just converting at a higher rate, if that's the case we're significantly towards the north end of that range. If we have to expend more marketing dollars or more admissions dollars or more on-boarding or more tuition discounts to get an incremental student, then we're at the lower end of that. But for ease, I would say it's somewhere in that 25% to 50% incremental range.

That's actually very helpful. Just a follow-up, just some numbers questions. For modeling purposes what should we be using for capital spending and the tax rate in 2012? If you could remind us how bad debt expense works with your proprietary loan program. Do you only book it when you actually have a default? Do you put some numbers in based on collections? If you could just give us some color on that, that would be great.

Sure. I think there were 3 questions there. I may forget one of them. But the capital expenditures for 2012 you ought to be thinking in the $25 million, maybe $30 million range. That is -- includes both normal CapEx and some heightened CapEx for rolling out of the curriculum at 2 new locations. I know the second question was bad debt. Bad debt on First Century, there really -- our proprietary loan program, there really isn't any bad debt associated with that because if you'll recall, we don't book any revenue until it's actually received. So there's no revenue on the books, so-to-speak, that hasn't been collected and, therefore, if we don't collect it there's just no revenue ever recorded, as opposed to revenue that had previously been recorded being reversed through a bad debt charge. I think I missed one of your questions, but if I did, call back in.

Jeff Lee, Wunderlich Securities.

Hi, good afternoon. What can you tell us about the number of graduates you expect for fiscal year '12 to help us with our modeling? Do you expect more graduates next year than this year?

I don't have that number in front of me. Can we take that offline and John will get back to you on that?

Sure. What do you expect for the mix of advertising, media types, how do you expect that to shift in fiscal year '12? And then what are your expectations for advertising expenditures for next year?

So I would expect that we would continue to see more of the spend in television and, again, increasing our digital format but today we have 50% of our spend is in television. I would expect that to increase in 2012. And that is largely driven by the media attribution model that we've been using this year and building on that success as we try to replace the 30% that was generated from lead aggregators. If you look at Q1, my expectation is that advertising expense will probably be around 10% of revenue in that quarter, simply because we are accelerating the spend into the first part of this year. So you're going to see a heavier spend the first half of this fiscal year than the second half for obvious reasons. And I think, again, in the 10% range for the full year, it's just slightly front end loaded in the first half.

Okay. Great. And then one last question. You talked about seeing margin degradation for next year. Is there a line between educational services and SG&A that you expect to see more degradation than the other?

I would expect to see more in the SG&A line. I'm trying to make sure I got your question right. Which one will see more decline? Or which one will contribute more to the decline will typically be the SG&A line.

Jason Anderson, Stifel Nicolaus.

Good evening, guys, I'm in for Bob and Jerry today. Just want to touch back on the advertising. I guess, a couple of things tied with that, the lead, last quarter I don't think you were able to comment on your lead quality progress and if you're seeing progress there. I guess I wanted to see if you had an update on that. But tied with that, with that, are you convinced that the shift in ad spend is the right one is working? Obviously realize you're dealing with the economy and all the other regulatory stuff going on but I just wanted to test your conviction there and I'll take your comment.

My conviction is, yes, it is the right thing. We've been studying it now for well over a quarter, probably going on 2 with this media attribution model and we're adjusting the media mix on a daily basis and can see the impact there, in specific geographies with specific programs and how rebalancing has driven a higher volume of leads and a higher quality of leads. Now, given the fact that there's 5 to 6 months for typically the adult students to move through the life cycle from inquiry to application to start, it is difficult to give you something scientific that says our lead quality has totally improved because I'd like to see that in terms of enrollment growth and start growth and show rate improvement, et cetera. But I can tell you on the front lines and this is very subjective, the representatives score the leads based on their interpretation of the quality of that and that is about 5% better than last year. So I do trust their perspective. There's no reason for them to say that it's a higher quality when it's not. Obviously, that translates into their conversion rate. So I'd say front line indicators are good and the things that we're looking for, we're starting to see those trending in the right direction. I just -- I'd like to see it work its way through the cycle a little further before I give you some hard facts on that one.

Okay. Thanks. Another question here, kind of shifting more to the costs. You alluded to when you talked about further potential focus on efficiencies here in '12. Is that something -- is there a size you could put on that or size of the opportunity, is that in addition to what you announced in third quarter, the $12 million or could you give us an update on that?

Sure. No, it is not in addition to that. I don't want anybody to -- it would be wrong to interpret my comments as an additional reduction in force or anything like that. The comments were intended to -- well, let's back up. We have -- believe we have right-sized our workforce to the revenues and the student loads that we expect to see in 2012. That said, we know we have higher costs that we have to spend in some areas including regulatory and we talked about the fixed cost component. With limited top line growth, while we're going to continue to try to improve that top line growth, it just puts more emphasis on the need to find better ways to do things, things that we might be able to do without process improvements, et cetera, et cetera. So that's what I was alluding to there. Aspects of rolling out the new curriculum as quickly as we can and getting whatever synergies we can get there, purchasing decisions, things like that. But it was meant to be an efficiency comment, not a workforce reduction comment.

Barry Lucas, Gabelli & Company.

Thank you and good evening. Kim, maybe you could talk a little about the demand side for your graduates in light of what looked to be pretty good unit sales for auto makers and the expectation of maybe another million incremental units sold in 2012, so what is the job picture looking like for your graduates?

Well, I think it's improving and as Eugene mentioned in his comments, it's been an area of investment for us. We saw significant improvement, especially on the auto diesel side of the business, and if you look to the manufacturers with whom we have relationships, they are pretty positive in general. They're asking for increased throughput and partnering with us on how to make certain that we are anticipating technician demand in the current year as well as beyond, and I'd say even when you look more specifically at the diesel manufacturers, they've not only talked about increased student throughput, but additional locations. So I'd say overall I feel positive about the commentary coming from the manufacturers and the dealers and other employers on the front line and we're working to make certain that we continue to have the greatest share there with those open jobs and building on those relationships that we do have with industry.

Thanks. If we can just switch to the cost side, Eugene, I think you said something on the order of $25 million plus in CapEx for fiscal '12 so maybe you could break that down between maintenance and what the incremental is for deploying the blended curriculum.

Well, the business as usual or the maintenance CapEx round numbers is about $20 million of that. That's not to say the remainder is all the curriculum but the remainder is partially curriculum deployment and other projects that we may undertake from a technology standpoint. In terms of the CapEx for the deployment of the curriculum, depending upon the campus that it goes to, if you look at all the campuses that it goes to, it will probably average about $1.5 million per campus.

Great. That's just what I was looking for. Thank you.

You're welcome.

Corey Greendale, First Analysis.

Hi, can you hear me this time?

We can.

Excellent. Thank you. Sorry about that before. So first of all, if you won't count it against my two question total, I think Jeff Silber's question you didn't answer was expected tax rate to model for fiscal '12.

I knew there was one, I won't count it. 40%.

Okay. Thank you. And my question. First of all, just Eugene can you talk a little bit about how you're thinking about investments at this point, first of all in terms of potential new campus openings given success of Dallas and secondly just more broadly, given that your cash balance does continue to build, how you're thinking about potential uses of that?

Specific to new campuses, as you're probably all painfully aware, we're very happy with the Dallas campus. We believe that there are a handful or more of Dallas type opportunities. Obviously, I don't believe that we're prepared to open one of those this year but I think we have proven out the concept there and I think during this calendar year we will spend some time -- I'm sorry, during this fiscal year, we will spend some time updating our demographic works and confirming that hypothesis that what did look like Dallas in the past still looks like Dallas, potentially doing some site selection. We're clearly not ready to announce something but I think that work will -- is under way and will continue this year and potentially during the year we might announce something.

In terms of broader uses of cash, clearly we've kind of kept our powder dry for some of the reasons that we've talked about in terms of regulatory uncertainty and student loads and the loan program. I think while there's still some level of uncertainty out there about all these things, not the least of which is what's going on in Washington in terms of the budget, but it's becoming a little clearer as to what the operating environment is going to look like. We continue to generate cash and as we have had a history of returning it to shareholders, I think we will continue to look at those options. Clearly, with the weakness in the stock market as a whole and education stocks and UTI in particular, repurchases which we've done in the past clearly look somewhat more positive for us now than they did several months ago. That's not to indicate that we're going to do that, but it's one of the options that we have and that we'll look at over the course of the coming months.

Great. That's good to hear. And then second question, Kim, first of all I might have missed this, just a numbers question. Did you give what the year-over-year change was in number of leads? And secondarily I think in your script you mentioned something about some changes you're making around operational efficiencies around admissions and how there's some short-term pain around that. Could you just elaborate on that? Is the real opportunity for you more shifts in the marketing and at some point hopefully the economy, or do you think there really is significant improvement to be made on admissions once you have the leads in house?

Good question. As far as the leads for the quarter, they were down 12%, and as far as the opportunity to improve efficiencies, I do think there's opportunity from a marketing and an admissions standpoint. We're starting to see some improvement from an efficiency standpoint. It's just not sustained month in and month out. And we're relating that to sources of lead generation as well as some of the new tools that we have been rolling out. So I do think that there's been a significant amount of change for our admissions representatives this past year, certainly from a regulatory standpoint with the incentive compensation plans changing, as well as just everything that's happened from a regulatory standpoint. And those tools, the new plans are rolled out but people are still adapting to them and gaining skills and momentum that I don't think is at peak efficiency level yet and I don't think any of the admissions teams believe that they are.

Now, I do believe if you talk to them, they would say give us more interested, qualified students and we'll be more successful. So our marketing and our admissions teams must work hand in hand, which I believe they're doing, to drive the level of efficiency improvement that we need. What we're asking for from an efficiency standpoint is something that we have achieved before and believe that we can do that with the team right-sized as it is right now. And so we'll continue to focus on those priorities so that we can see some efficiency gains by the end of the year.

Kelly Flynn, Credit Suisse.

Thanks. Can you just go back to what you were talking about as far as changing up your marketing mix towards more TV and this media attribution model? I guess, can you talk specifically about what sources were disappointing and why you made changes, if you did? Thanks.

So I think that this past year and a half we've all had learnings regarding digital media, the Internet, the student lead or inquiry aggregators, and so as we've tested different digital formats, I'd say kind of gorilla marketing tactics, some have worked better than others. And for competitive reasons, I'm not going to share what has worked and what hasn't. But I will tell you that what's coming through on the model is giving us clearer direction as to where we should be going and how we should be balancing our spend across certain geographies, programs and various channels. So I don't -- it's probably not as much information as you want, Kelly, but I don't necessarily want to give all of that in a public environment given that we're learning as we go and hopefully we're learning at a faster rate than some of our competitors out there.

Okay. Fair enough. Just a couple quick ones. Can you just update us on the percentage of revenue from PELL and also from military?

I think we're going to have to do that offline. I don't have that in front of me.

All right. No problem.

John will have that.

We do have the graduate number that was asked earlier. I would expect it to -- our graduates to be down 9% to 10% this year.

(Operator Instructions)

At this time we show no further questions. I would like to turn the conference back over to management for any closing remarks.

Well, thank you very much for your questions. We certainly appreciate your time and interest in Universal Technical Institute. And we look forward to updating you on our next earnings call which is scheduled for Thursday, February 2. Have a great evening. Thank you.

The conference is now concluded. Thank you for attending today's event. You may now disconnect.