Universal Technical Institute F4Q08 (Qtr End 30/09/08) Earnings Call Transcript

Nov.24.08 | About: Universal Technical (UTI)

Universal Technical Institute Inc. (NYSE:UTI)

F4Q08 Earnings Call

November 24, 2008 5:00 pm ET

Executives

Kim McWaters - Chief Executive Officer

Eugene Putnam - Chief Financial Officer

Jenny Swanson - Director of Investor Relations

Analysts

Kevin Doherty - Banc of America Securities

Mark Marostica - Piper Jaffray

Jeff Silber - BMO Capital Markets

Corey Greendale - First Analysis

Jason Anderson - Stifel Nicolaus

Kian Ghazi - Hawkshaw Capital Management

Arieh Coll - Eaton Vance

Trace Urdan - Signal Hill

Jennifer Todd - Credit Suisse

Operator

Good afternoon ladies and gentlemen and welcome to Universal Technical Institute Inc. fourth quarter fiscal 2008 conference call. At this time all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder today’s conference 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 1, 2008 by dialing 800-405-2236 or 303-590-3000 and entering passcode 11122194#.

At this time, I would now like to turn the conference over to Mr. Jenny Swanson, Director of Investor Relations of Universal Technical Institute; please go ahead.

Jenny Swanson

Hello and thank you for joining us today for Universal Technical Institute’s quarterly conference call. During the call we will discuss the results of our fourth quarter ended September 30, 2008 and then open the call up for your questions. The company’s earnings release was issued after the market closed today and is available on UTI’s website at www.uti.edu.

Before we begin we would like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s current expectations and are subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements.

Factors that could affect the company’s actual results include among other things, changes to federal and state educational funding, possible failure or inability to obtain regulatory consents and certifications for new or expanding campuses, potential increased competition, changes in demand for the programs offered by the company, increased investment in management and capital resources, the effectiveness of the company’s recruiting, advertising and promotional efforts, changes to interest rates, low unemployment, general economic conditions and other risks that are described from time-to-time in the public filings of the company.

Further information on these and other potential factors that could affect the company’s financial results maybe found in the company’s filings with the Securities and Exchange Commission. The company expressly disclaims any obligation to publicly update any forward-looking statements whether as a result of new information, future events, changes in expectations, any changes in events, conditions or circumstances or otherwise.

Information in this conference call, including the initial statements by management as well as answers to questions related in anyway to any projection or forward-looking statements, are subject to the Safe Harbor statement.

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

Kim Mc Waters

Thank you, Jenny. Good afternoon ladies and gentlemen. Thank you for joining us to review our fourth quarter and fiscal 2008 results. On today’s call, I’ll provide a high-level overview of the quarter an update on key business initiatives and commentary on the overall economy and the impact to UTI. Eugene Putnam, our CFO, will follow with a more detailed review of our financial results and provide some 2009, forward-looking information before opening the call up for your questions.

For the fourth quarter of fiscal 2008, our net revenues were $84.6 million, down 2.7% from the prior year. This is primarily due to having 5% fewer students in school during the quarter than last year at the same time. Our average undergraduate enrollment for the quarter was 14,689 compared to 15,464 a year ago, while we have continue to make significant progress resulting our pipeline of students due to improve lead generation, student contract in third growth, our average student population and revenue growth lag leading indicator trends.

Overall, our operating performance improved during the quarter producing net income of $551,000 compared to a net loss of $1.3 million for the same quarter a year ago. This was due to lower compensation and benefits and contract services costs, primarily outplacement services associated with our reduction in force and sale reorganization in September 2007. We also experienced the decrease in advertising expense partially offset by an increase in occupancy cost. This improvement in operating performance was despite the fact that we had several items that negatively impacted the quarter.

During September 2008, our Houston campus was closed for approximately one week after hurricane Ike move through the Houston area. Fortunately, our campus experienced minimal damage. However, many of our students, employees were without power and water over a two week period. The hurricane accrued at the end of the new student orientation week only a few days after many students had relocated to the Houston area to attend school and just a few days before a large start for the campus.

Thanks to the truly heroic efforts of our people, team Houston was able to start and retain students well beyond expectation. Although students were unable to attend class for six days, equating to a loss of revenue for the quarter of approximately 620,000, I am pleased that both students and staffs have worked diligently to make up the loss time during October. We therefore expect to recognize the 620,000 of revenue in October.

Additionally, during the fourth quarter we wrote-off approximately $385,000 in assets that were not being utilized. We also recorded approximately $380,000 in severance cost for certain long-term individuals. These items were offset by a reduction in our self-insured workers compensation plan of $200,000. The combination of these items as well as the impact of closing the Houston campus impacted EPS by approximately $0.03.

Now, I’d like to spend a few minutes discussing the positive results we are seeing from our marketing and sales standpoint. First, we remain encouraged by the continued success of our revised lead acquisition strategy. Since January of this year, building upon a quantitative positioning study, we implemented a new national advertising campaign coupled with a revamped web strategy that has proven to be a very efficiently production engine.

During the quarter, we generated 33% more leads as compared to the prior year. At the same time our cost per lead decreased approximately 33% for the fourth quarter on a year-over-year basis. This is attributed to efficiencies gained with our new web centric strategy as well as less expensive adverting cost. As a result of these efficiencies we’ve reduced our advertising spend during the quarter to 7.3% of net revenues, as compared to 8.5% of net revenues during the prior year’s fourth quarter.

For the first quarter of fiscal 2009, we expect adverting expense as a percentage of revenue to remain flat to this past quarter. However, we do expect advertising expense to be up compared to the first quarter of fiscal ’08. As you may recall, we intentionally reduced our advertising spend during the first quarter of 2008 due to constraining market conditions and depending launch of our new adverting campaign.

Let’s move no to student contracts. For the quarter, student contracts were up 28% compared to last year. Campus admissions, which is the team focused on young adults and career changes accounted for the majority of the year-over-year growth. In fact, they achieved 40% growth year-over-year for the quarter.

Since January, this team has steadily improved year-over-year performance. With a significant increase in lead volume, we added 14 additional campus reps during the fourth quarter in order to effectively work those leads. We’ve planned to hire eight additional reps during the next quarter for a total of 135 reps.

We are also seeing solid progress with our Field Admissions team. This team serves the high school market and military basis. For the fourth quarter, Field contracts improved 17% year-over-year. During the fourth quarter, we did add nine Field representatives to further penetrate the high schools in select territories and military markets based on successful pilots tested this past year. We ended at year and quarter with ten additional field representatives than in the prior and we plan to hire eight additional reps during the next quarter for a total of 177 reps.

Taking into account the performance for both the Campus and Field sales team, contracts improved 28% for the fourth quarter and it looks like we are off to a good start for the first quarter of fiscal 2009. Together, Campus and Field teams enrolled 30% more students in October than they did last year for the same month. In fact October 2008 was a record month with the most contracts written in the single month in the company’s history.

The next critical performance indicator is show rates. As a remainder the show rate is the measure of the number of students schedule to start during a specific timeframe and the number of student to actually show to school and attend classes as schedule. We were pleased to see continued improvement in our show rate on a year-over-year basis. For the quarter our show rate improved to 160 basis points.

As we expected on a sequential basis the rate of improvement did decline from Q3 due to the high concentration of remote high school starts during the quarter. We continue to focus on the sustainment of our customer service training to drive further improvement in the show rate.

Our efforts to drive regeneration student contract growth and show rate improvement are starting to payoff. This quarter we were please to achieve 5% start growth year-over-year starting 6,940 students compare to 6,612 students a year ago. We are expecting to see further start growth during 2009 as the increasing contracts we experienced during 2008 turn into starts in future periods.

We ended our fiscal year with 16,481 students to school as compare to 16,882 at September 30, 2007, which is a 2.4% decline. We announced last quarter that we were starting the fourth quarter with 940 fewer students as compare to the prior year. We reduce that gap to approximately 400 students by the end of fourth quarter. The increase in starts during the quarter helped contribute to the reduction in this gap and we expect to gap to narrow even further in the coming quarters.

Persistence for the quarter decline 30 basis point as compared to the prior year. We view it is nothing other than normal fluctuations as our student outcomes remain strong; our completion rate for greater than 70% for 2008.

As expected, given the challenges facing the transportation industry our employment services team as been some tightening in the job market specifically were certain brands in certain geographies. Our most recently reported placement rate was 91% and while we may see some slippage in the near-term we are committed to increase effort and focus to achieve strong placement rates throughout 2009.

It’s probably worth noting that demand for technicians is based on demand for services not any vehicle sold. The demand for services more function of the number of vehicles on the road and their age not the number of auto dealership and historically the number vehicles on the road increases even during recessionary period. Even so, it’s reasonable to expect demand for service to decline somewhat during a recession. However, it is less cyclical than demand for new vehicles; therefore demand for technicians is also less cyclical.

We do expect to see continued consolidation of auto dealerships although the predicted decline more severe than in prior years. According to a recent grand thought in news release the Detroit 3 account for more than 85% of the decline in dealerships and their sales per dealer were already well below the industry average.

For sometime now, the manufactures have wanted to consolidate the dealership for the good of the industry. We believe this will be healthy for the industry in the long-term and in the meanwhile, service business will increase for the larger dealers and the aftermarket.

Service in part accounted for 81% of dealership operating profits in 2007 up from 77% in 2006. During the last recession, service and parts profit held up. Recent earning reports for the publicly held automotive retailers suggest that the trend continues despite significant decreases in vehicle sold.

Our dealerships may not expand their service operations during challenging and uncertain time, they will certainly focused on keeping their service based filled with vehicles and qualify technicians to service them. In fact our channel checks with large public auto retailers suggested that reductions staffing have been primarily non-revenue producing employees versus technician.

We also believe that our manufacture relationship help mitigate the downturn risk from both the student recruitment and graduate employment perspective. When potential students think of the UTI, they think of Audi, BMW, Mercedes-Benz and Portia. When their dealerships need technicians, they think of UTI. Many students, who are interested in our fourth courses, actually use these courses as a springboard into auto luxury brand, the aftermarket and the diesel industry. Ford does not require expect our graduates with Ford training to work at Ford dealerships.

We do have a number of OEM contracts set for the renewal at the end of the calendar year and we are working through the process at this time. We do expect to see some consolidation of training sites with certain manufactures and in effort to improve resource utilization cost efficiencies and overall profitability. We do expect some manufactures to decrease technician demand from last year and others to increase on based on their own business needs.

As you are well aware, UTI takes great pride in its manufacturer relationships but we do serve a much larger market than auto dealerships. We serve the entire auto truck industry and successfully place graduates within all industry segments. In fact, during fiscal 2007, 48% of our auto graduates were placed in dealerships and the remainder was placed at independents and other transportation company. This is a shift from years prior, we’re better than 50% of our auto graduates, were going to work in dealership. This suggests that we are able to response to the needs of the overall market.

We fully anticipate more of the job opportunities for our graduate shipping from auto dealers to the independents and into the diesel and tracking field. Demand for diesel technician remains particularly strong and it’s underserved which speak to opportunity for UTI in our graduates.

Now I’d like to turn the call over to Eugene for a detailed review of our financial results for the quarter and fiscal year. Eugene.

Eugene Putnam

Thanks Kim. As mentioned net revenues for the fourth quarter of fiscal 2008 were $84.6 million, down about 2.7% versus last year. The decline was primarily driven by a decline in average undergraduate student enrollments of 775 students or roughly 5% as well as an increase in need-based tuition scholarships and military and veteran discounts, which totaled $1.2 million.

Additionally we did not recognize as Kim talked about approximately a little over $600,000 in revenue due to the one-week closure of the Huston Campus. These decreases in revenue were partially offset by higher tuition prices as well as $1.4 million related to one additional revenue day during this quarter versus last year’s quarter.

Operating income for the fourth quarter was $0.5 million compared to an operating loss of $1.9 million last year. The improvement in operating income is due to decreases in compensation cost, contract service expense, and advertising expense, partially offset by the revenue issue we spoke up previously.

Compensation and benefit costs decreased $3.1 million to $44.4 million. The decline is primarily attributable to the reduction in force that we had in September of 2007 that resulted in a reduction of $3.8 million in compensation and benefit costs. This decline in this quarter was partially offset by an increase in the number of Campus based sales representatives during 2008 and an increase in the sales rep bonus expense, which is now based on student retention and graduating students.

Contract service costs were down $800,000 for the fourth quarter to $3.2 million and primarily related to outplacement services which occurred last year and were not repeated this year. Advertising expense decreased $1.2 million for the fourth quarter from $7.4 million to $6.2 million. As Kim previously discussed we gained efficiency in a new web-based model which allow decreases in local media spending as well as other less efficient media well increasing lead productive during the fourth quarter.

Occupancy costs for the quarter were $9.8 million up from the $8 million spent in the fourth quarter of 2007. The $1 million increase is primarily related to sales leaseback of our Sacramento facilities that we discuss the previous quarters. Our provision for income taxes for the year ended September 30, was 41.4% and going forward we expect that tax rate the range for 39% to 41%, absent any unusual items.

Net income for the fourth quarter was 551,000 or $0.02 per share compared to a loss of $1.3 million or $0.05 per share in the fourth quarter of last year and for the full year we earned $8.2 million, $0.32 a share versus $15.6 million or $0.57 per share and its worth reiterating what Kim mentioned knowing the unusual items in the quarter specifically the Hurricane in Huston, some severance items and some year-end write-offs totaled a reduction of revenue this quarter of roughly $1.1 million or roughly $0.03 per share and of that the $600,000 will comeback to it in October.

Moving to the balance sheet we continued to have an extremely strong balance sheet. We had cash and cash equivalents of just under $81 million of year-end compared with $75 million a year ago. During the fourth quarter we generated $15 million in cash flow from operation and that was up from about $13.5 last year and it’s worth pointed out in these times, just the reemphasize we still have no debt on our balance sheet.

We do not repurchase any shares during the quarter and while we continue to have an open authorization we believe that better strategic use of our cash is the subsidized funding alternatives until discuss in the moment for our students and maintaining the strong liquid balance sheet.

During the year we purchased approximately $17.7 million in fixed assets, that’s down significantly from $46.6 million purchased in 2007. This years purchases were primarily associated with new industry based elective training programs such as Cummins, Freightliner and Toyota, as well as ongoing replacement of student training and computer equipment.

I want to spend a moment talking about a new program that we just launched in the fourth quarter that is related to the transformation of our auto and diesel program curriculum. We’re transforming that curriculum into a blended learning experience that reflects current industry training methods and standards.

The blended learning model combined several methodologies for communicating training information and corporate onsite class, real time online earnings session and independent earning and this is a standard used by our industry partners to provide continues technical education.

As currently planned we anticipate the blended learning model while require student is spend less time on campus which would allow them greater flexibility in achieving there educational objective and additionally we anticipate that would allow for more efficient use a both our facility and our facilities. This is a long-term project and we don’t anticipate beginning to roll it out until the beginning of the first quarter of 2010 at the earliest.

I want to touch briefly on default rates. We’ve got our reports back in and all three of our OPE IDs for 2006 came in below 10% and range from 6.5% to 8% and while those numbers are up slightly from the precious year, given this credit environment we’re particularly proud of those statistics as well as the placement rate which continues to be north of 90%

I want to spend a second giving you an update on our First Century loan program. As you know in the filings you will not see any of this information on our balance sheet or on our income statement as we are using cash basis accounting. As of September 30 we committed to provide approximately $3.8 million in loans and we have currently funded approximately $1.7 million of those. To-date the average loan per student is roughly $5700.

Finally as most of you know, in the past, for a variety of reasons we have not provided earning guidance, but I think given the length of our business cycle, the progress that we’re making on our leading indicators as well as the wide range of analysts expectations that are out there, I feel it’s probably behooves us to share with you our outlook for some of our key metrics and how the achievement of them might translate into our financial statements.

Our guidance is based on current expectation. As Jenny mentioned it is forward-looking and actual results may differ materially as a result of factors described in our public filings and I want to caution you that we have absolutely no obligations to update any forward-looking statements whether as a result of new information, future events or otherwise.

With that said, we anticipate continued improvement in our lead generation, which when combined with the improvement made in both our campus and field sales processes should lead to an improvement in year-over-year growth in contracts written in the low teen range.

Given the recent growth and performance trends, we currently expect year-over-year start growth while will be volatile on a quarterly basis to be in the high single to low double-digit range for the full fiscal year and if we are successful in achieving these level of contracts and starts, we would anticipate average students in school to turn positive on a year-over-year basis sometime either in the second or third quarter of our fiscal year and continuing into improve as we go into the fourth quarter.

Finally if we do in-fact achieve these results on these metrics. I believe that we can return to double-digit operating margins in the fourth quarter and be well positioned both from an operating prospective, as well as from an actual number of students in school to continue our momentum into 2010.

In summary, we’re very happy with the results in our lead generation, our marketing and our admissions. We’re continuing to focus on show rate improvement and increase starts. As we’ve discussed on previous call, the nature of our business, it will take several quarters to rebuild the average student population in revenue, but we’re beginning to see that.

We’re very please now to see the second consecutive quarter of start growth and it was meaningful this quarter at 5%. We will continue to invest in the business to drive more leads, more contracts and eventually more starts while maintaining strong cost controls, across the business, without compromising our commitment to either students or industry clients.

Finally, I wanted to just let you know that from a disclosure in governance standpoint, we are effective immediately instituting a quite period. What that means is beginning on the 15th day prior to the quarter end, due to day of our earnings call we will reframe from participating and communications with analyst or investors. For the first quarter, which ends for us December 31, our quite period will begin on December 15 and end roughly on February 3, which is the schedule date of our earnings call. So, I just ask for you all to help us with that and be respective of our quite period that is now in effect.

With that Kim and I would be glad to answer your questions and operator, I think we’re ready for those now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Doherty - Banc of America Securities.

Kevin Doherty - Banc of America Securities

I guess just want to follow-up, first on the comments on the outlook, kind of getting back to that double-digit margin rate and the start numbers; I mean how confident are you that you can reach some of those targets and just thinking about that double-digit level? I guess you guys really haven’t been there for about four years, just looking at the 4Q seasonal levels? So, it’s sort of a sharp ramp up there, but maybe if you can just talk about where you see some of the biggest opportunities for cost leverage and really how much of that will be contributed by the lower spend environment?

Eugene Putnam

Well I would caution you that I don’t expected to be a cost driven returned operating metrics into operating margin; it’s more getting the growth up in our students in school and that really what will drive.

Obviously, given today’s environment and we can talk about that more, there is opportunity to do things on the expense side from advertising, but it’s a nice problem to have. We have not decided whether we’re really going to scale back on advertising. Obviously, the more efficient that we get with advertising converting those into contracts and then eventually into starts that will provide us greater leverage there.

To your initial question about confidence, I’m not going to give you a confidence level, that’s our best thinking right now. It is certainly not a lay up, but I wouldn’t have said it if we didn’t believe that it was achievable. There are certainly trends out there and headwinds that we struggle against everyday and will in every economy and we have tailwinds that help us, but we think it’s achievable and it’s something that we’re shooting for.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

Just speaking up on the question of double-digit operating margins not to beat a dead horse, but I’m curious the last time you had double-digit operating margins in that fourth quarter, do you recall what capacity utilization level you were at or maybe asked a better way, where this capacity utilization needs to be for you to hit that?

Eugene Putnam

I do not have it in front of me where it was. Obviously, it was significantly higher than they were roughly 60% that we’re at; somewhere I believe with a seven handle on it, it’s the big driver.

Operator

Your next question comes from Jeff Silber - BMO Capital Markets.

Jeff Silber - BMO Capital Markets

Do you see any meaningful difference between any pushback coming from your high school students or potential high school enrollees and the working adult market and the reason I’m asking is I’m picking some of the folks that are working right now, would obviously have to stop working and go back part time in order to go back to your campuses, as opposed to the high school students that we’re not working in the first place, any meaningful difference between those two populations?

Kim McWaters

I think how we interact with them is different certainly. With the high school students you have the parents in a larger buying committee and how they view these opportunities might be different than the students or the prospective student who is underemployed and looking at this career choice. I don’t think that the automotive overhang is affecting them differently, necessarily; it’s just how we respond to them.

I think, if we see anything between the two markets or the two student segments there, is that it’s taking longer to make a decision. They are fully vetting out the opportunities and looking at this and it’s requiring more interaction with our representatives both the Field and Campus based to get them there, but I think we’re successfully doing so.

Operator

Your next question comes from Corey Greendale - First Analysis.

Corey Greendale - First Analysis

Wanted to ask about the lending environment whether you’ve seen changes in the credit standards from Sallie Mae or anybody else that you’re using and whether you are seeing a greater percentage of your students having to use your internal lending program?

Eugene Putnam

We have not certainly in the past quarter really seen anything other than a recommitment to the business from the Sallie Mae. The lenders that we work with, we are not really privy to their underwriting black box, but that said looking at what comes out and looking at the pie of our students if you will, we’re still seeing roughly a little bit under 110% utilized our loan program and the 10% was roughly the number that it was anticipated to replace. So I would say the lending environment while crazy reading from the media perspective has been fairly stable over the last quarter.

Operator

Your next question comes from Jason Anderson - Stifel Nicolaus.

Jason Anderson - Stifel Nicolaus

You touched on the job placement there in your comments about independent versus the dealer. Just could you give us any more color, do you need to try to change anything strategically to address independent more? Would that include any additional build-outs in your career services or anything like that?

Kim McWaters

I think that potentially it could mean a few more resources across the system. What we are discovering is that it’s taking more touches, more calls out to employers on both the dealer side as well as the aftermarket and certainly with the independents, we have more work to do from a relationship building standpoint than on the dealer side, but again 50% of our graduates are already going to those types of job, so I don’t think it’s a major strategic shift. We believe that we have the relationships across the industry to serve dealerships and the aftermarket as well as the diesel. I just think it’s going to take more effort focused and on relationship building.

Operator

Your next question comes from Kian Ghazi - Hawkshaw Capital Management.

Kian Ghazi - Hawkshaw Capital Management

I had a couple of questions the first was about the double-digit margin potential for fourth quarter ’09. Historically, the fourth quarter has been the weakest or if not the weakest one of the weakest quarters of the year so, if you are exiting 2009 with a double-digit margin and yes I know it’s a projection, but if that happens it would suggest you’re on run rate to do better than that, whatever that double-digit number is, but better than that into fiscal 2010? Is that a fair presumption?

Eugene Putnam

I think you need to remember we’re on a September 30 fiscal year. So, our fourth quarter does tend to be a fairly strong quarter for us. That said, the follow-up to your question, yes I mean this business as we’re trending upward and the year on an upward trajectory; yes, that would clearly set us up into comments and that’s what I was trying to imply which set us up fairly well going into full-year fiscal 2010, but let me just add to that, I don’t think it would be wise to take double-digit in the fourth quarter and then significantly add to that on a quarterly basis going into 2010, at least as far out as we are right now. We’re shooting to kind of hit that first turtle and get back to that double-digit and then go from there.

Operator

Your next question comes from Arieh Coll - Eaton Vance.

Arieh Coll - Eaton Vance

Question number one; in this September quarter, most of your intake new starts accruing from high school students who graduated a couple of months earlier and I’m just wondering, what are your plans going forward before next September, it also run in ’09 to get more those high school students to enroll at UTI?

Clearly this was your opportunity in September, there was growth, but I’m just surprised or just wondering how you get even more of those high school students to coming in the next six months or you really kind of missed your opportunity and you have to wait another year to get most of them?

Kim McWaters

Well, I think with the graduating seniors, typically they tried to start in the late summer early fall, so there is a window where you want to maximize your high school recruitment efforts. You will also see some that may not it had opportunity to save enough funds to relocate, show up after the first of the year. So, you’ll see some increase in high school students in the January timeframe.

With that said, we continue to try a different strategies related to the high school marketing efforts and sales efforts to tap into a wider student population and just the vocational education classes and we are seeing some success there. I think our opportunity is to make certain that ones these students are enrolled in our contract, the students have committed, is that we are doing all that we can to hold their hands and help them walk through a very complicated financing process to get these students to show the school.

So, we will continue to enhance and improve that. I think also strengthening the interaction with the parents to provide that support should help us in future periods, but the downside of the high school market is they tend to start in the summer fall timeframe, I think the good news here is that we are being very successful with the young adults, those who been out school for a couple of months or a couple of years and we’re seeing those success and we make certain that we build on those as well and those students do tend to start all throughout the year.

Operator

Your next question comes from Trace Urdan - Signal Hill.

Trace Urdan - Signal Hill

I wonder if could tell us sort of what contract you’ve had with the different manufacturers that you have programs with and how they’re thinking about those programs in the context of the current?

Kim McWaters

Well, it differenced by manufacturer and of course we’re having ongoing conversations with them all of whom are cost conscious and so as we’ve done in the previous contract renewal periods, we are looking for ways to improve efficiencies through our facilities utilization and instructor resources etc.

So as we’re going through these contract renewals, we do expect to see some consolidation on some of the training side, which is good for the manufacturer and it’s good for UTI as well. It’s a little bit more of an inconvenience for students because they have to transfer or change locations for these programs, but overall we’ve been working in prior period.

Some of the decline in technician throughput requirements, others are increasing and I say specifically on the diesel side, we’re continuing to see more growth and interest from the diesel manufacturers other than the autos. With that said, I don’t believe that the relationships are at risk. I think they will just be redefined to meet the current needs of the various manufacturers brand.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

Kim, I’m not sure if you mentioned this, but in the past you provided start growth for the month of October and I know you provided contracted growth for October, I didn’t hear start growth.

Kim McWaters

I do not actually have that in front of me, but we might be able to get it by the end of the call. It’s not intentional; I just didn’t bring it in. We’ll come back to you on its.

Eugene Putnam

We just need to be a little careful with what we give you, because start dates, when you look at it a quarter it’s usually fairly relative on months. We don’t necessarily always having the same number of starts each month on a year-over-year basis, but if you’ll give us a call we’ll give you a follow-up on color on that.

I would just say, so that everybody doesn’t have to call us. You heard our comments about expecting start growth in future quarters. We obviously would have been much more cautious with that statement, where we not seeing it in October. So, everything that we have seeing year-to-date since September 30 coincides with that comment about our expectation of continued start growth.

Operator

Your next question comes from Jeffrey Silber - BMO Capital Markets.

Jeffrey Silber - BMO Capital Markets

I’ve got some numbers related question. I’m going to ask them all at once before I get cutoff. I don’t know if you gave show rates in the quarter or at least change year-over-year, if you can give us that and then also looking out at fiscal year ’09. If you can tell us, what your capital spending budget is and how much you would be willing to commit for funding in fiscal year ’09 for students? Thanks.

Eugene Putnam

Show rate was up 160 basis points on a year-over-year basis and so you know that’s traditionally what we give; it’s the movement, not the absolute number. The CapEx question, we put out a number of 17.74 for this year and that is actually a little bit higher that without getting into the details of accruals from previous years that get backed out, but in essence we spent about $15 million this year.

I would expect next year for that number to be all else equal about the same and then depending upon what piece of the curriculum transformation project we do, we would add and that would be an addition to kind of the $15 million run rate number

I think your last question revolves around the lending program. We currently have the $10 million that are allocated toward it. I always will be hesitant talking for the board and I don’t mean to be doing that, but I would anticipate that we have given the current environment, enough money to take us into the middle of next calendar year.

I would anticipate sometime early next year going to the board with a thorough review of our program, how it’s working, is it working for the purposes intended and probably at that point if we’re in today’s environment or similar environment, probably recommend doing some more of it, whether it would be on the exact same terms and conditions.

I don’t know, but at some point you get to a level of commitment where you balance sheet and your P&L require you to you tweak the program a little bit, but everything I see today suggest that it is working as intended, not seeing any abuses and its getting people that want to come to UTI that otherwise would not be able to do actually show up and given while were at these levels of capacity utilization, I would certainly be in favor personally of continuing that.

Operator

Your next question comes from Corey Greendale – First Analysis.

Corey Greendale - First Analysis

Eugene you somewhat answered us, kind of pointing us towards the guidance for next year, but would you say that your confident about the tone of business is better; we’re or unchanged now from what it was last time reported and specifically are you seeing more people raising questions about affordability in the current environments and also raising questions about what historically has been your competitive advantage being the connection with OEMs, being either less of a new advantage or disadvantage given this headlines while it’s unnecessarily your partners. The headlines are pretty negative about the OEM at this points?

Eugene Putnam

I know that gets a lot of headline risk and its certainly real out there; there’s no doubt about it, but I don’t think we can point to any downturn in our business as witnessed by the results that we just reported as well as what we’re seeing from a lead regeneration and contract growth standpoint into this year.

What I think it is creating is as Kim mentioned, a longer sales process more and probably appropriate, intelligent questions by potential students and parents, but I think its something that there are good answers to and I think the value proposition is still holding guess your question was am I more positive or more negative. I would have to say on a whole I’m more positive, because we’ve had another quarter of good results not only at the front-end, which we’ve been seeing for basically a year now, but some of that is starting to flow out the funnel as far as getting additional starts there.

So notwithstanding, the challenges, the headlines, the macro economy and new administration, all those things that keep you up at night, if you want to be really good Coconino, the bottom line is the business is performing better now than it was three months ago and better than it was three months before that. So from that perspective, I’ll let Kim add to that, but I’m more positive.

Kim McWaters

I would second what Eugene is saying and I think that we are listening carefully to both our industry customers, as well as the student customers IN adjusting our message. As Eugene said, there are good answers to it, the value proposition remain strong and I think with the little more effort and focus we can overcome any of the employment hurdles on the backend.

With that said, I don’t see the automotive cloud hurting our recruitment and marking efforts. As Eugene said, we’ve seen better results in the last three months and six months than we’ve seen in the previous quarters and year for that matter. So, I remain optimistic and very pleased with the success that we are making in spite of a challenging macro environment.

Operator

Your next question comes from [Jennifer Todd] - Credit Suisse.

Jennifer Todd - Credit Suisse

Kim, can you put the growth in contract signed in some sort of context. Maybe in other words, if show rates remain consistent, what rate of start growth should we expect based on your current run rate or maybe where you were last year at this point relative and how that translated into starts? Thanks.

Kim McWaters

I think what we’ve already given as far as the forward-looking indicators, it accounts for that the show rate remaining stable or slight improvement, as well as the contract growth at the rate that we’re currently seeing and experiencing. So, I don’t know that I want to go that far and be that specific as to if this happens and it’s going to yield that number of start. So, I feel very comfortable with what we have already provided and believe we’ve already given the statistics and data to support that.

Eugene Putnam

And don’t forget there is, we’re taking a little bit apples and oranges. When we talk about contract growth that is for contracts that are written during that period, but they can range from starts as soon as the following month to as long as 12 months or even longer out there.

So, we need to be careful and I think that’s why we since that we fraise the guidance going forward in terms not only a contract written, which suggest future growth goes down the road, but as a undisclosed and unknown time versus giving you some guidance on what we expect from start growth, which is more immediate in its impact.

Operator

Your next question comes from Kian Ghazi - Hawkshaw Capital Management.

Kian Ghazi - Hawkshaw Capital Management

It seems to me that given the roughly 10% of your students that you are actually lending some money to. I believe if I remember correctly, that’s a number that was comparable to the amount of discount loans that were being given in the past.

So, if I’m not mistaken it seems like there’s been no increase in the number of students that would be in this category whether it was previously discount or now; discount loans are now; you’re funding them, but they are doesn’t seem to be any increase in the number of students that would following to that category. Am I recollecting this right and is that a fair presumption?

Eugene Putnam

Yes, you are recollecting that right and it is fair; in fact I would go further, that we’re actually getting slightly less usage as a percentage of our students than we say in the back in the discount fund days. It still a relatively small sample size, so I attribute a little of it to that, I attribute a little of it to just the kind of it would easier to go.

I think it was easier to go I think to the discount program than probably it is to ours and I think you combined that the small sample size and just the resiliency of students and parents that are still paying a fair amount by cash and/or credit card and that contributes to us doing slightly under what we actually forecasted and thought we might see.

Operator

Your next question comes from Jason Anderson - Stifel Nicolaus.

Jason Anderson - Stifel Nicolaus

In 2009, should we think about the timeline for a potential tuition increase to be similar to this past year timeline and amount actually?

Kim McWaters

Yes, I would think you couldn’t model it that way. We may see some variations by certain locations, but it should be pretty similar to last year.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

It’s a two part question on operating margin guidance that you provided; first part, is the operating margin target that you have for fourth quarter, is that GAAP operating margins or exclusive of stock-based comp and secondly, what does that portend for Q1 operating margin? Should we believe that Q1 operating margin should be up year-over-year to kind of hit that Q4 target that you have? Thank you.

Eugene Putnam

Yes, GAAP; the answer to your first question and I assume you are talking about first quarter and I apologize, maybe operator if we don’t cut him off quite as quickly, so there’s a little of give and take, I think that might help. I think your question is, I’m making assumption for your question was first of 2009 versus first quarter of 2008?

I don’t really want to get into the quarterly guidance at this point because it is going to be volatile, don’t read that as a no, it won’t be or yes, it will be. I’m just really more comfortable given the guidance that we gave for the fourth quarter and as we get into the first quarter, we’ll report it and we’ll go from there.

I guess to add to that, I mean there is a bit of hockey stick here, I mean we’re entering the quarter with less students than we had entering the quarter a year ago. So, from that perspective, we’re still kind of digging out the hole, although and I apologize this is a corny analogy, but we’re throwing dirt back into the hole that were a year ago, we were still digging the hole.

So, that enrollment growth is filling up, but I think until we actually get to that point where we have year-over-year total enrollment growth, it will be difficult to show operating margin growth on a year-over-year basis.

Operator

Your next question is a follow-up from the line Kian Ghazi - Hawkshaw Capital Management.

Kian Ghazi - Hawkshaw Capital Management

Correct me if I’m wrong; the bulk of high school students signing contracts I imagine would be happening in the December and the March quarters. So, I would think that the number you report for those quarters that are forthcoming for our contracting signing is going to be more heavily high school students, which has been lagging the contract growth rates you’ve been signing on the campus level.

So, as we go to the December quarter and the March quarter, should we anticipate that the contract growth rates that have accelerating as far and I think you said there were 28% in the September quarter and 30% in October. Should we anticipate that’s going to decelerate in December and March as they are more heavily skewed towards high school students, which we have been growing contracts and slightly at a meaningfully lower rate than your campus contract growth rates.

Kim McWaters

I think that your logic is correct other than we continue to spend and invest in campus admissions. So, while you historically expect to see fewer of the high school contracts written during that time period, because we’re investing so much in the campus admission side and the growth is significantly higher than we’ve experienced in previous years.

We do believe that will offset it and that without getting into all of the detail, remember a year so ago we did change the lead policy and shifted some of these younger students to campus admissions and so it does create difficulty comparing historical norms they came from the high school reps or the Field reps.

So, you may not see as great an increase from the high school reps, but I think that what campus is doing with the younger adult market is going to offset that and I don’t think it will be a significant deceleration now, when you look at contracts for both teams.

Operator

And Miss McWaters, there are no further questions at this time; please continue.

Kim McWaters

Well, we would just like to thank everybody for participating on our call. We look forward to updating you our first quarter earnings, which is schedule for Tuesday, February 3. Hope you have a great evening. Thank you.

Operator

And ladies and gentlemen this does conclude your conference call. You may now disconnect and we thank for using ACT conferencing.

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