Universal Technical Institute Inc (UTI) 2013 Q1 法說會逐字稿

Good afternoon, and welcome to Universal Technical Institute's first quarter 2013 conference call. At this time all participants are 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 the call will be available for 60 days at www.uti.edu, or through February 8, 2013 by dialing 1-877-344-7529 or 1-412-317-0088, and entering pass code 10023737. 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 thanks for joining us. During today's call we will review the results of our first quarter, discuss our strategic direction, and take your questions.

Before we begin, we must remind everyone that except for historical information presented the matters discussed today may contain forward-looking statements as defined by Section 21E of theSecurities Act of 1933, and Section 27A of the amended Securities Act of 1933. I will refer you to today's news release for UTI's comments on that topic. The Safe Harbor statement in this release, which I won't 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 the Safe Harbor Statement.

In the prepared remarks you will hear today we will make reference to EBITDA. EBITDA for all periods discussed during our remarks is a non-GAAP measure representing net income, exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure, net income. At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim.

Thank you John, and good afternoon everyone. Thank you for joining us. The first quarter was a difficult one for Universal Technical Institute. I will let Eugene Putnam, our President and Chief Financial Officer, share more of the details with you, as well as some color on our performance. But first I would like to give you an overview of UTI's plan to navigate throughout current environment, and to drive meaningful improvements in our results, and deliver long-term value to our shareholders.

At UTI, we use these tough times to take a very close and very honest look at our business. We validated a number of strengths we can build on. It seems likes our position as a niche player and a market leader, our unmatched industry relationships, and our strong and long-term record of delivering solid student outcomes. But we also found some things that just aren't working as well as they should. Like everyone in our industry we are challenged with persistent economic headwinds and changes to regulations, but the reality is that in key areas of the business we simply can and need to execute better, and we have developed plans to make that happen.

Finally, we identified new ways of thinking and doing business that we believe can improve our operations and drive growth. Our plan is not about reinventing our business. In fact it addresses areas you will be very familiar with that we have been working on and talking about for some time. That is because the levers that drive UTI haven't changed, but the environment we are operating in continues to change.

Our reinvigorated strategy simply guides us on which levers to pull, and with what intensity and in what direction. It is about managing the basics with a focus on execution and efficiency, making data-driven decisions and developing innovative approaches to existing challenges and opportunities. We have built the plan around five core pillars. One, efficiency in costs management. We continue to diligently control costs at the same time we are building streamlined effective business processes that can make our operations much more efficient, and give us a solid foundation for growth.

Two, growing student population and market share by shifting our focus from generating high volumes of inquiries to increasing the number of student starts, and at the same time lowering our cost per new student. For some time we have been working to improve our understanding of students and what motivates them. While there is still work to do, we are getting close to the point where we can use data to identify students who are most likely to be successful at UTI, and to drive decisions about our marketing mix, our messaging, and how we engage with those students.

Three, delivering value. We continue to focus on our core strength of quality student outcomes, and we are providing even more options for industry-driven education, that meets the needs of students and industry customers. In addition, we are pursuing a number of initiatives to make UTI more affordable through other financing options, better financing tools for students and their families, and guidance on the mix of classes students should take.

Fourth pillar,strengthening industry relationships. great relationships with industry customers are at the heart of UTI's enduring strength, so we are making ongoing investments to nurture existing relationships and build new ones.

And five, developing our people. We remain focused on helping our employees unleash their full potential, so they can make a difference in the lives of our students, and the satisfaction of our industry customers and the results of our business. In a moment I will share with you our progress against these five platforms and where we are headed, but first, let me turn it over to Eugene to discuss our financial results in greater detail.

Thank you Kim. Good afternoon everyone. In the first quarter of 2013 we saw economic weakness continue, and we saw prospective students that seemed even less willing to take on debt, or make an investment in their education. In round numbers we began the quarter with 1,500 fewer students than in the same quarter last year. Overall student starts were down by more than 18% compared to the first quarter of last year. This was driven by fewer students scheduled to start, and a 334 basis points decrease in our show rate.

The result was a 7.5% decrease in revenues, which came in at $98.4 million. Partially offsetting lower enrollment was $1.7 million from an additional earning day in the quarter, and an increase in tuition rates. During the first quarter of 2013 average revenue per student was up about 3.5% to approximately $6,000 per student. Tuition excluded $5.8 million related to our loan program, compared to $2.6 million in the first quarter of last year,which reflects our efforts to ensure that the program is accessible to our students. As a reminder, revenue from this program is only recognized when payments are received.

We continue to manage our variable costs to align with our student population, but our high fixed cost structure combined with the weakening top-line, resulted in a decline in our operating results. Operating income was $6 million,that was down 17.8% compared to the $7.3 million in the same period last year, while our operating margin was 6.1% compared to 6.9%.

With revenue pressures it is imperative that we make good progress on trimming expenses. As a result of our work to reduce and better target our marketing investments, we had a $2.1 million decline in advertising expense, which came in at $8.4 million for the quarter. And as a percent of revenue it declined from 9.9% last year to 8.5% this year.

Compensation related expenses were also down$3.4 million this quarter compared to the same period last quarter. That decrease was primarily the result of a reduction in our workforce that we discussed last September, as well as fewer self-insurance claims, and a reduction in the bonus plan payout levels for 2013. Also our bad debt expense as a percentage of revenue was 1.6% for the quarter.

We generated $12.1 million in EBITDA for the quarter versus $14 million last year, and net income for the quarter was $3.6 million, or $0.14 per diluted share, compared to $0.18 per diluted share first quarter of 2012. Our return on equity was 5.5% versus 6.2%, both of those were for the trailing four quarters.

Moving to our balance sheet we had cash, cash equivalents and investments of roughly $89.3 million at December 31 compared to $101.7 million at September 30th. We used cash of $1.6 million in the first quarter compared to generating cash from operations of $5.6 million in the same period last year, and as a reminder we continue to have no debt on our balance sheet. During the quarter we invested $2.8 million in fixed assets, which was up from $1.5 million last year as we purchased new and replacement training equipment necessary for our ongoing operations, and the roll out of our new curriculum at our Avondale and second campus later this year.

Finally, we returned almost $8 million to shareholders in the first quarter, through a combination of dividend payments and share repurchases which I will touch on a little bit later. With that, I would like to turn it back to Kim to discuss our path forward in more detail.

Thanks, Eugene. As I mentioned earlier, UTI has used the challenges of the current environment to take a deep honest look at our business,the hurdles we are facing, and the opportunities that lie ahead of us. We have created a new path forward for UTI, and we are working against a plan to leverage our strengths, improve our operations, and make targeted thoughtful investments to create greater competitive advantage and deliver solid long-term shareholder returns.

As you know, we have done a great deal of work to align our cost structure with the number of students enrolled at UTI. Now we are building on that work by reviewing all our major business processes with the goal of eliminating costs and waste, driving efficiency, and making it easier for our students, our industry customers, and our employees to work with UTI. We are beginning to see the benefits of that work in marketing. Where process review led to last quarter's wholesale restructuring of the department. The changes to our organization and the way we work drove down operating costs in the first quarter, while new shared goals and processes are creating better alignment between our marketing and our admissions team.

From here we are moving on to other key business processes, and will revise them to make it easier for prospective students to work with us, and to deliver greater efficiency, better results, and lower costs. While it is too early to estimate the total financial benefits of process improvement, this work has the potential to make our entire operations leaner and stronger. We believe effective and efficient processes give us a solid foundation, one we can build on with strategies and initiatives to grow our student population, and meet our industry customers' expectations for our graduates. Our work to better understand prospective has led us to pursue a suite of initiatives aimed at the dynamics and needs of various student segments.

Let's start with students coming out of the military, where we saw a 21% increase in applications compared to the first quarter of last year. Our military segment is benefiting from an influx of high-quality prospective students and the availability of financing. In addition, UTI has a solid seasoned military team, and in the first quarter we also saw the benefits of changes to make this team even stronger and more productive on the bases.

The potential number of new students coming to us from the high school markets also grew in the first quarter with applications up approximately 4%. Serving the high school segment is a key competitive strength for UTI, driven by our strong team and excellent relationships with teachers. High school students are a key to the future of our business, and we continue to invest in this segment with initiatives to improve market penetration, to strengthen relationships with counselors and administrators, and finally to demonstrate the value of technical education. Relationship building and communication drive both the high school and the military segments of our student population.

Unlike the military and high school population the adult segment team relies almost entirely on media generated inquiries from prospective students. While our media generated inquiries were up 6% year-over-year, we saw a 14% decrease in applications for our adult segment for the same period. That decrease offset the growth in high school and military, and we closed the quarter with total new applications down 2%.

Our first quarter performance is consistent with our ongoing challenge,converting high volumes of inquiries into new student starts. The persistent economic and regulatory headwinds that uniquely impact our adult student segment have clearly played a role, and over the past few years, our marketing has simply been less efficient and less effective, in a very complex, confusing and competitive marketplace. So we are continuing to shift our focus from generating a high volume of inquiries to a focused more deliberate approach of growing our new student starts at a lower cost, while pursuing a holistic focused approach to identifying recruiting and enrolling students who can be successful at UTI.

During the first quarter we implemented new admissions processes that simplifies work and cuts out wasted efforts, and gives our teams tools to drive quality interactions and outcomes with students. There is more on way, and it is expected to roll out over the course of the year. Very soon we will be able to use data analytics to not only identify these potential students with the best potential to start school, to stay in school and graduate, but we will also use it to inform our media buying strategies, and to match our admissions representatives with specific types of students, and to tailor our services to the needs of those students by giving our teams insight and the tools they need to better engage with different times of students.

While each of these reinvigorated initiatives is in the early stages, and needs time to take hold, we expect them to ultimately deliver meaningful results and student outcomes. With that I will hand it back to Eugene to discuss our strategies to improve student value and affordability, to further our strong industry relationships, and to develop our people. Eugene.

Thanks again, Kim. With work under way to attracts high-quality students, we focused on ensuring we offer a product that delivers substantial value, and that means training that works for students and prepares them to meet industry's needs. Our blended learning curriculum creates a significant competitive advantage for UTI and for our students. By combining lecture and hands-on learning in the lab with interactive web-based programs, we are training our students the way industry trains, and providing them a more dynamic and flexible education.

At our Avondale campus we recently completed our first phases of courses with very positive outcomes and feedback. While we believe our blended learning curriculum will reduce costs once it is implemented across all of our auto campuses, the next few years will require further capital investment as we have discussed, and some higher than usual operating expenses, as we complete the transition from our legacy curriculum to our new curriculum.

Our strong industry relationships are critical to our ability to deliver quality training, and I am pleased to tell you that during the first quarter we renewed our manufactured specific advanced training agreement with Volvo, and started a Mercedes-Benz elective at our Houston campus. Our many industry relationships continue to provide a key differentiator for us, and for our graduates. Our strategy focuses the entire organization on student outcomes, which have long been a hallmark of UTI's performance, and continue to be a meaningful measure of the values we provide.

Compared to the same period last year, we have seen a slight decrease in student persistence of about 99 basis points. However, about a third of our campuses are improving their performance as it relates to persist. Every campus remains focused the on this metric, and we realize that a small improvement in these percentage points can make a big impact, both for the student as well as for our financial and student outcomes.

During the first quarter we graduated about 2,400 students, a decrease of about 17% compared to the same quarter last year, which is to be expected with our decline in student population. In the past 12 months about 10,700 students graduated from UTI with either degrees or certificates, and in the first quarter our overall consolidated graduate employment rate was about 2% higher compared to last year at this time. We experienced improvement in our motorcycle program, as well as our marine segment, while our auto and diesel programs remained stable. We also are seeing overall increases in wages offered to our graduates.

When we deliver relevant training that leads to quality student outcomes and successful years. We clearly create value for students and industry customers. But we also know we need to put an education at UTI within reach for more potential students. Last year we made our loan program more accessible to prospective students by increasing awareness to the program, and removing certain qualification barriers for dependent students. As a reminder, the loan program helps students who don't have sufficient access to traditional credit based loan products, yet are otherwise fully qualified to attend UTI.

In the quarter we extended approximately $10.5 million in loans under the program, which was up from just under $5 million in the first quarter of last year. At December 31st we have committed to provide $65 million under this program, and the average loan amount is about $5,100 per student. With that said, our cash collections continue to improve. During the first quarter we recorded $450,000 in revenue and interest from cash payments received, which was up from $320,000 in the same quarter last year.

In addition to making loans more accessible, we are also developing tools that help students and their families navigate the financial aid process, and clearly understand the many options available to them. In the second quarter of this year we expect it to launch a new net price calculator, that can show students how to fund a UTI education, reinforce the value that we offer, and ensure that our tuition rates are competitive. Finally, we are making targeted investments in developing our people even during this challenging year. We recognize that it is our employees who bring our plans to life, deliver results, and make a difference for our business, and change the lives of our students.

With that let me take a few minutes to talk about our outlook for the rest of the year. First and foremost we expect macroeconomic drivers to create continued pressure throughout the year, and for that pressure to increase somewhat as the year goes on. Our growth in new students starts historically has been correlated with the change in unemployment rates. When see a rise in unemployment rates, we have historically seen enrollments rise and vice versa, and given the slow recovery, we expect little improvement in our student's ability to fund an education.

While we believe in our people and we are confident the plans we have put in place will help us tackle these challenges, our work is in the early stages of development and implementation. and will still need some time to take hold. So with slightly worsening macro pressures, the time required for new initiatives to take hold, and the lag between students applying for school and starting school beginning to increase, we expect new students starts to be down for the next two quarters, before possibly showing year-over-year improvement in the fourth quarter. While that trend would prove very positive for 2014, we do anticipate full year new student starts for 2013 to be down in the mid to high single-digits, resulting in a lower average student population this year than last. These lowered levels of enrollments will most likely result in a high single-digit decline in revenue in 2013, and an overall decline in operating margin and net income compared to last year.

We believe our strategy will appropriately position UTI to deal with these challenges, and return to sustainable profitable growth. Our employees remain focused on their core mission, changing or students' lives by the better by providing a quality education, and this focus can and should strengthen our competitive advantage, and lead to market share growth, increased market share growth, as well as generating long-term shareholder value.

Now operator, I think we are ready to open the lines for questions, please.

We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. The first question comes from David Chu of Bank of America Merrill Lynch. Please go ahead.

Hi. Thank you. So just wanted to get a little bit more clarity around starts and kind of what happened there. I know you mentioned a few things on the call, but if you can elaborate a little bit on what caused the weakness?

Yes. I can add some color there, David. I think the balance of the start decline was driven by and is an insufficient number of new student applications for the quarter. Some of that was due to the elimination of ATB students, especially when you consider that this quarter is primarily filled with adult type students, not coming right out of the high school. And then of course we had some show rate decline, which is again, attributed to some of the challenges with affordability, and the aversion to debt, and all of the things that we have been talking about for numerous quarters, and as we have mentioned in our last call and on this call, I think that there was some execution challenges as well, in terms of how we serve the students which we are currently addressing.

Okay. Now, that is helpful. And is it possible to provide any insight into how things look for January?

January although it is not closed out, I would say that our application trend is relatively the same. We have not really lapsed the year in terms of the ATB issue. So our adult segment is still feeling the pressure that we spoke of. Our show rate although again not finalized is relatively flat to slightly better, but it is one month in the quarter at this point.

Okay. And last question. You guys talked a little bit about trying to drive efficiencies in terms of costs, and given your relatively high fixed costs base, I mean in terms of absolute dollars, how much do you think you can actually take out of the system in 2013 or fiscal 2013?

Well, I think at this point, David, that the majority of what we expect to take out would be variable costs associated with increases or declines of student population vis-a-vis what our expectations are. So we were down fairly significantly in costs this quarter versus last quarter, but that was primarily a result of a reduction in workforce. So I think typically you will see about a 20% to 25% decline in expenses, in terms of variable costs that might go away from lower students, but I think those costs don't necessarily adjust as quickly as ups and downs in students, so I think that is really what we are kind of looking for is that marginal costs to go away. Obviously we are going to continue to look at specific areas where we have discretionary spend that we might be able to address, but I think we did the lion's share of that last year in September/October timeframe.

Okay. Great. And if I can squeeze in one last question. Marketing expenses as a percentage of revenue expectations for the year?

For the year I would say it is probably towards the upper range that we mentioned, around 10%.

Okay. Great. Thank you.

Okay.

Next question comes from Peter Appert of Piper Jaffray, please go ahead.

Thanks. So Eugene, just sticking on the costs for a second, are there any timing or seasonal issues we should be aware of in terms of thinking about how the costs flow through the year?

Well, the costs tend to flow with our population which tends to be higher in our fiscal first and fourth quarter, and lower populations in our second and third quarters. So I think you would expect that type of trend to follow with expenses on a year-over-year basis. So if you look at the first quarter and view that as run rate in both terms of revenue and expense, I think you can, that will give you a pretty good indication.

Sorry. I asked the question poorly. I meant to ask more about year-to-year rates of change, and specifically because it seemed to me that in the context of the revenue weakness, you guys have done a great job in terms of managing costs even acknowledging the high fixed costs base, and so I am wondering if the year-to-year rate of decline in costs in the context of an assumption around similar enrollment trends would be, with would the first quarter being indicative of what we could look for percentage-wise in terms of--?

I think it will be until you gets to the fourth quarter. In the fourth quarter, with two caveats. One, you have to exclude any one-time costs this year or last year from a comparison standpoint. When we get to the fourth quarter of this year, you will start lapping where we did reduce some staff, so I would expect what you saw this quarter to somewhat replicate itself in second and third quarter, and then maybe moderate a little bit in the fourth quarter.

Okay. That is helpful. Thanks. What do you think in terms of competitive dynamics, how big a factor do you think that is if at all in terms of what is impacting you in the adult market?

It is a very good question, Peter. I think that the competition that we are facing is really focused on the need to move to a non-ATB population by a variety of educational institutions out there, and so where we have seen the competition is really on the front end over the internet in terms of key search terms. So all of that competition to try to get a student who is qualified to go to technical schools, even four year or non-direct competition has increased, and that has been steadily increasing since the spring of last year. As far as the traditional competition, or what I would call our direct competitors, I don't think we have seen the dynamic change significantly, except for the focus on trying to recruit a higher quality student.

Okay. Thank you. And then lastly can you remind me what you specifically did on pricing this year, and what was the timeframe in terms of the implementation?

I would say roughly it is 2.5% to 3% that we do in the late fall/early part of the calendar year, and we did the same thing this past year. So that price increase will be something that will roll through, obviously over the next year and a half, but I would expect that to be the normal run rate.

And then just for modeling purposes, we should assume that the revenue per student could grow at roughly that rate? It wouldn't be offset by higher scholarships?

I would say generally, yes, but we are continuing to test and balance scholarship programs, and if we find one that works better than we have seen, we would continue to invest in it, but generally yes.

Okay. Great. Thank you.

I don't foresee any significant changes to that.

Got it. Thanks.

The next question comes from Corey Greendale of First Analysis. Please go ahead.

Hi. Good afternoon.

Hi Corey.

Hi Corey.

Kim, I was actually going to ask you about testing pricing elasticity, given that affordability seems to be a big component of the challenge right now, so can you just elaborate on what you were saying, that you have tested that and not finding it to make a big difference in terms of driving demand?

Yes, well there are two dimensions on that, on our last call we talked about our efforts to really research pricing and demand elasticity in relationship to our profitability, as well as looking at students and their return on educational investment, and we have completed the first part of that process, and continue to believe that wholesale price decreases are not in the best interests of the organization, nor do we think it would really offset or simulate enough demand to make it worth while. We do believe that continuing to focus on our targeted approach and scholarship program, is really where the answer is at and that is creating a win that is good for the student, and a win that is good for UTI. Now some segments have a higher need for scholarship and yet there are diminishing returns, and so that is the fine balance that we are constantly evaluating as we calculate a breakeven. So we are getting smarter about how to help the right students, but it takes time to I guess push and pull the levers that really are truly benefiting the student and the organization.

Okay. And then Eugene, in your commentary you said that you expect the macro pressures to intensify but as the year goes on. Can you just clarify what mean by that? Are you saying you think the unemployment rail is going to go down as the year goes on?

Well, I think we are seeing just a day or two ago you saw the GDP contracted, whether that leads to a recession or not I will leave to the economists, but I think that combination along with people's willingness or lack thereof to take on debt, I think you have a wild card with the fiscal events going on in DC through sequestration, in terms of any potential impact on student funding, while nobody anticipates it to be significant, I saw some article that suggested it might impact people by $750, which doesn't sound a lot, but any time you get those negative perceptions out there, they are out there and they stick in people's minds. So I don't think we are forecasting anything significant, maybe a better way to say it is we see more headwinds than we see things getting significantly better, or going back to the way that they were maybe three or four years ago.

Given that historically higher unemployment was better for your enrollment, what macroeconomic scenario are you rooting for?

Well just to be clear, what our enrollments are closely correlated with is the change in unemployment rates, specifically to young males in the 17 to 24 age group, and as that group's unemployment rates increase, we tend to see more enrollments. As it decreases we tend to see a slowdown in enrollment growth, or an acceleration in enrollment reductions. So I don't want to say we are rooting for anything, but when students have, potential students have an ability to find work easily, they tend to put off an investment in their education. Simultaneously when students can't find part time work because the economy is soft, or their spouse or significant other or parents have economic weakness, and can't support them as well, that is an additional hurdle for us to overcome from enrollment. So the economic scenario that closely correlates with high degrees of enrollments is increasing unemployment rates for our sub-segment, while a strong economy for them to get part time jobs, a strong economy for the auto industry, and those that hire for us, and a reasonably good overall economy that gives people consumer confidence and allows them to make the choice to invest in their education for the future.

I appreciate that. I will get back in queue. Thanks.

The next question comes from Jeff Silber of BMO Capital Markets. Please go ahead.

Thank you so much. Can I just get a little bit more color on the decline in show rates? It seemed a little bit stepper than what we have seen in the past.

There is nothing really new to talk about there. I think it is in large part due to the economy, aversion to debt, some processing issues, given the complexity of completing the paperwork and going through the process. It is the same story, unfortunately.

Okay.

You also had a hurricane hit the East Coast, so I don't want to overplay that, but that impacted a couple of our campuses.

I can just add a little color. A lot of it was related again to the students who had to relocate, but we did see pressure across all student segments across the country, which leads me to believe that there was some greater focus on the execution missed than perhaps a significant changes in macro environment, with exception to what Eugene mentioned where we did feel some of that pressure on the East Coast.

Okay. That is helpful. Shifting gears a bit to your dividend, it is a pretty hefty dividend when we look at in terms of the payout ratio. Now, I know the Company has a very strong balance sheet, but is this something that you may want to rethink in terms of the size of the dividend that is out there?

Well, we are not on automatic. We always consider it before we declare it. The Board spends times looking at it, spends time looking at projections, and I think our belief is we want to continue to return capital as appropriate to shareholders. Obviously, that is dependent upon how much internal capital we are generating, but I expect to see a continuation of the dividend and/or share repurchases for some time into the future. The absolute makeup of those two I think is always something that we will take a look at, but there is nothing that is under immediate consideration at this point to the leading point of your question there, Jeff.

Okay. Appreciate that, then just a couple numbers questions. First of all, were there any restatements in looking all the last year's press release, it looks like the numbers for the December 2011 quarter were a little bit different?

There was, I might need to get you offline on this, but if you will you recall I think in either the third quarter or the fourth quarter, we revised some of the quarterly numbers in 2012, and John is just telling me that it is in Table 1.

A table in the Q.

It is a table in the Q, which will be out tomorrow.

Okay, and that will be really helpful.

There were some slight revisions to the quarterly numbers from the initial press releases, so if you are using the initial press releases yes, it will look a little bit off, So we will clarify it for you in the Q tomorrow, that you will see after the close of business.

Okay, that will be great. For modeling purposes what should we be using for the tax rate going forward for this year and for capital spending?

I would use around 40% for the tax rate. Or I would use 40% if you will allow us a little give or take from that. Capital expenditures, I would assume that we would be somewhere in the $18 million to $20 million range.

Alright. Great. Thanks so much.

You are welcome.

The next question comes from Gary Bisbee of Barclays. Please go ahead.

Hi. Good afternoon.

Hey Gary.

Hi Gary.

So I guess can you give us the mix just among the population of high school versus military versus the working adult? I don't think I have heard that in a while.

Mix of what, of starts or current students?

Number of students. I mean starts. If you want to give trailing 12-month starts. I know there is real seasonality, so just in he terms of students?

I would say it is still around 50% that's recent high school graduates, about 15% to 18% in school military, and then the balance would be the adult career changers. An approximate.

Okay. Great. How are the job placement prospects for your graduates? I don't know if it is just in the New York market, or maybe it is because I read the Post which I probably shouldn't, but I have seen a couple of stories sort of hinting at the fact that maybe there is either less turnover, or despite the fact that we have had increase in auto sales there is actually less staffing because maybe the recent current generations of cars don't break down as much. Are the prospects still as good, and is that something that you are using to aggressively try to get prospective students in the door?

I think, Gary, that it differs by category. The auto prospects are reasonably good and reasonably flat, and honestly for the first time we have begun to see a little bit of at least starting wage growth there. So I am not familiar with the Post article that you saw, but it sounds like we would counter that a little bit. Diesel is extremely good both in terms of demand and absolute wage rate, especially down south. Motorcycle is struggling somewhat. The demand for motorcycle techs is the weakest of our sectors, so I would say that is where we are seeing pressure and that is what would bring down our overall rates, but for our core curriculums of auto and diesel, demand for those techs is still pretty strong.

If I can jump in there as well, I think recently we have seen articles talking about demand and the aging workforce, which kind of helps to balance out the equation of cars are breaking down less, and it has been the first time in probably a decade where I have started to see the word shortage used coming from the major domestic manufacturers. I think they were at least GM and Mercedes-Benz were quoted in a USA Today article talking about that, and the skill level and technology requirements for the workforce, and even in the proprietary conversations we are having with our partners and the manufacturers looking forward, those tend to be pretty positive conversations, in terms of the outlook for the demand for our graduates. So that is a good story, and it is one that we certainly use to create awareness about the opportunities in this sector.

Okay. Great. And then just, I guess I wonder given the big campus footprint, the legacy model of the Company, what would it take to get you to consider more aggressive downsizing from existing facilities, moving to smaller ones so that maybe at fully, full box might not be as profitable as the big box, but would allow you to have lower facility costs in light of the lower revenue level. Is that something that is on the table, or would it have to get a lot worse before you start to take that kind of aggressive action as a serious potential?

I think it depends upon the location. I think we have a location or two where clearly we would like to be smaller, and I think the prospects of either subleasing something and/or moving to a smaller facility are something that we are starting to consider, but not something that I view as eminent. I think our ability to maybe utilize some of that space in a different way, whether it is subleased or whether there are appropriate other disciplines that could leverage some of that space, through a business development effort is something that we will absolutely look at, and work, as Kim said, with some of our OEM partners that are looking and asking for more output than we are currently providing, and some of the challenges matching up geographic locations. So that is some of the work, but if your question is, are we going to go into a wholesale let's shrink some of the campuses and close them down and open them across the street in a smaller facility, that is not very likely.

Okay. And then just lastly the comments that some of the OEMs are talking about, shortages or lack of skills, is there any possibility to get them to foot a bit more of the bill than just part or all of their specific class that you might have, or is that really a non-starter for the industry?

Well, I think it all depends on the supply and demand dynamics, and there was a time when the automotive industry was very invested in education at the secondary level, and hit some hard times and that is probably not where it was in the past, but as they I think look forward to what their needs are and where they can get that supply of technicians, that there is certainly opportunity to partner with industry and educational institutions, and we certainly believe there is opportunity and believe that we are in the best position to do that with the relationships that we have. So it might be a difficult conversation at first, but I think as reality starts to change, it is one that we will entertain and certainly that they are looking at. What Nissan does today with scholarships for relocations to help students and funding their education is pretty significant, and that support continues to grow, and hopefully, it will serve as a model to others in how they can support students considering this sort of career path.

Okay. Thank you very much.

The next question comes from Jerry Herman of Stifel Nicholas. Please go ahead.

Thanks. Good afternoon everybody. Kim, I am wondering if you would give us a little bit more color on the analysis that you did with regard to price elasticity or demand elasticity, and what factors in particular led to the conclusion that lowering price would not stimulate enough demand and not be the best center of the organization? I mean I guess I seems to conflict in some way with debt aversion, and taking on more absolute dollars in whatever form?

I understand, and certainly I think that is what we felt initially, which is why it warranted a little bit more research and in-depth analysis, and some of the models are far too complex for me to talk about, but there is certainly a population that is willing and able to fund this sort of education, and believes and sees the return on educational investment, and then there is a population who definitely sees the opportunity but cannot, may not be Pell eligible and falls into that middle income category, and just gets kind of stuck in how they might be able to finance this education, and trying to understand that population or the incremental student, and how best to help them, we believe that is in the best interests of both the organization and the students.

I don't know that we want to give away too much information because we spent some time and money getting there, to figure out whether or not we are priced correctly and what actions we should take, but the conclusion is that we are not going to make any wholesale reductions, and we are going to use a more targeted approach with our scholarships and institutional grant-type programs, as well as helping to guide students in terms of what educational path and course or program is best for their personal circumstances.

Okay. And let me just sort of broaden Gary's question with regard to consolidation. Could you maybe share some thoughts on what you believe to be the prospects for overall industry consolidation? And then separately, last quarter you alluded to some investigation of diversification, and if you could just address those two issues?

I think from a consolidation, and I will let Eugene maybe hop in on the diversification comments and what we have been looking at. But from a consolidation standpoint, at least in terms of what we see out there is some of the smaller schools are certainly struggling, just from a scale standpoint, and an ability to adapt to some of the regulatory environment, and may not be able to make the investments necessary to deliver the student outcomes in a way that is required in today's environment, and so we expect to see some sort of consolidation just like we did a couple of decades ago when this started to happen.

I do think that now it is really far more focused on quality, and that will be the criteria in terms of how this consolidation actually takes place, and how we are looking at it is typically we have been an organic growth company and there has been opportunity, better opportunities in return for kind of a Greenfield approach, but there may be opportunities out there now that make sense, and it is going to come down to location and quality, and how that aligns with our footprint today. So there is not a whole lot more I can add on that in terms of consolidation, other than I think we all believe there is going to be opportunity there, and we are more open to looking at that than we probably have been in the past, and seeing what we can pursue. You want to mention on--

Well, I will stand by what I said to Gary's questions. I think we clearly believe that in some locations we have fixed assets that could be leveraged. We have an admissions force that could be leveraged, and I think to the extent that we can find companies, divisions, curriculums, et cetera, that are similar to our brand in terms of quality, relationships with manufacturers, et cetera, we would be interested in that, moreso than we were four or five years ago. If the number of books that we are seeing from potential sellers is any indication of consolidation, you would have to say their consolidation is coming. When and what that consolidation looks like I think remains to be seen. I don't think there is equilibrium yet between sellers expectations and buyers willingness to pay, but that will happen at some point in time, and I think we want to be cognizant of where we provide, what our core competencies are, what we can leverage, and what our brand stands for, and to the extent that we can add something positively, that we will be interested in.

Great. Good color. Thank you.

The next question comes from Trace Urdan of Wells Fargo. Please go ahead.

Thank you. I didn't quite follow the logic behind your feeling that the fourth quarter might result in a change in start performance. I wonder if you could elaborate on that a little bit, how much confidence you have, where the confidence comes from, what you think the drivers will be at that point in time?

Looking at fourth quarter, as you know, it is highly populated by high school students who have a long period from the enroll to show timeframe, and we certainly had a large number of those students scheduled to start in the fourth quarter, and as we have really examined what happened in the fourth quarter, what was micro/macro factors, servicing issues, we definitely found opportunity to improve the level of service for this population over that longer timeframe, and so the confidence comes from seeing the high school admissions representatives progress to date, as well as understanding what we are doing to improve the level of service for this population, and the time in which we have to really implement the changes which have already started at this point.

And I think it goes back to some of the things we talked about on the last quarter, which was the complexity of meeting government, the expectations on the tax transcripts and verification processes, and also post-loan denials slowed things down quite a bit, and the significant volume we had in Q4 just it did not allow us to get through all of those students in a timely manner, to help them get through the process as effectively as we could have, and that is what we will be different about Q4 for next year, and we are confident that it will make an impact.

Okay. Two related questions then, Kim. The first I guess is what happens to them? What do they do instead, and is there not any prospect of sort of focusing in on that particular population, which is between a traditional high school graduate and a working adult student who has trouble relocating, is reluctant to come?

Well, I think we have seen historically a couple of things happen. One is they do nothing for a period of time. They just simply get frustrated with the entire process, and they do nothing. And therein lies some opportunity to go back and help the student and the family through the process, which we will certainly do. The second is that they find employment, and they put off education for a longer period of time, and so they are not an immediately addressable segment, and the third is that we together get them excited about the opportunity in this industry, and because they cannot finance it, they will pursue it at a local community college, and so to me, those are the three big buckets, and we will continue to work this population that in my opinion was not served as well as it could be, not only those that we missed in the last quarter, and potentially some in this quarter to hopefully recover some of that inside of this year, and certainly make sure that we are in a better position for fourth quarter. So I guess worst case scenario is they are frustrated, and we don't get anything, any sort of response back from them, and best case scenario is we can recover those who really want this type of education with a different way of helping them fund it.

And do you guys perceive any difference in terms of how the employment market perceives the graduates, in terms of whether they are sort of freshly minted young people or grizzled 25 year olds? I mean do they employ at different levels of success?

I think it has been different over a number of years, and sometimes we will have employers who would like a student who has had more work experience. There is a high preference for those with a military background certainly, and then you will have others who are looking at costs and culture, and they will look for the younger student that they can help shape in terms of their culture, and may not have to pay as high a cost, especially when they come out with a higher technical understanding. So I would say it is mixed, but certainly our average student population is around 22, so they are definitely employing the younger students, but I think it depends on the employer.

Okay. Alright. Thank you.

(Operator Instructions). The next question comes from Kelly Flynn of Credit Suisse.

Thanks. Did you give the starts ex-ATB?

We didn't, but the starts typically the starts would have been about 4%, 4% to 5% of the total number of new applications, or students scheduled to start.

Okay. Alright. Great. And then just on the execution issues you have talked about. I just want to clarify in a bit more detail what exactly happened there, and then do you consider that a glitch that has been fixed, or is this kind of a longer-term issue that will need to be addressed over time?

I see it more as a glitch than a longer term issue, because some of the changes that were put into place that were government driven, we simply did not anticipate the length of time that it may require a student and family to go through, or the frustration factor, and so those things fully being considered with the high volumes that we get in the fourth quarter, now have been, we have adjusted for that, so I don't know if you have a differing opinion, Eugene, but.

No. I agree.

Okay. Thank you.

You are welcome.

The next question is a follow-up from Corey Greendale of First Analysis. Please go ahead.

Hi. I just had two quick follow-ups. Do you expects the start decline to narrow in Q2?

Yes.

Okay. And the other one is also on the employment front. What do you kind of take-away from the fact that the absolute number of graduates that you have is down, but the employment rate is only up slightly, so in other words the number of students who are getting jobs the absolute number seems to be down one would think with less competition from other UTI graduating students maybe a higher percentage would be able to get jobs?

As far as the graduates increasing, typically the graduate employment services are working a lag population, or a year back and some of them, they are still trying to help find jobs, because we are really focused on that year timeframe. I would say that what you are suggesting is true, with fewer graduates you would expect to see that up. I would say that is probably more a reflection of our resources and staffing, versus some macro factor.

Okay. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Kim McWaters, Chief Executive Officer, for any closing remarks.

Thank you very much for joining us. We appreciate your interest in Universal Technical Institute, and we look forward to updating you on our next earnings call, which is schedule for Tuesday, April 30th. Have a great evening.

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.