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Executives

Jenny Swanson - Director, Investor Relations

Kimberly J. McWaters - President, Chief Executive Officer & Director

Eugene S. Putnam, Jr. - Chief Financial Officer & Executive Vice President

Analysts

Kevin Doherty – Bank of America Merrill Lynch

Robert Craig – Stifel Nicolaus

Mark A. Marostica – Piper Jaffray

Kelly Flynn - Credit Suisse

Trace Urdan – Signal Hill Group, LLC.

Jeffrey Silber – BMO Capital Markets

Gary Bisbee – Barclays Capital

Kian Ghazi – Hawkshaw Capital

Corey Greendale – First Analysis Corp.

Universal Technical Institute, Inc. (UTI) Q1 2009 Earnings Call February 3, 2009 5:00 PM ET

Operator

Welcome to Universal Technical Institute, Inc.’s first quarter fiscal 2009 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 February 10th of 2009 by dialing 1-800-405-2236 or 303-590-3000 and entering pass code 11125072 followed by the pound sign. At this time I’d like to turn the conference over to Miss Jenny Swanson, Director of Investor Relations of Universal Technical Institute.

Jenny Swanson

Thank you for joining us today for Universal Technical Institute’s quarterly conference call. During the call we will discuss the results of our first quarter ended December 31, 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 and 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.

Kimberly J. McWaters

Thank you for joining us to review our first quarter 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 automotive industry. Eugene Putnam, our CFO, will follow with a more detailed review of our financial results and provide an update on our 2009 forward-looking information before opening the call up for your questions.

For the first quarter of fiscal 2009 our net revenues were $90.1 million basically flat to the prior year or up .1%. This slight increase was primarily driven by higher tuition prices partially offset by 1.5% fewer students in school. Our average undergraduate enrollment for the quarter was 16,323 compared to 16,576 a year ago. Our operating performance declined during the quarter to net income of $2.3 million compared to $6.5 million for the same quarter a year ago.

As expected this was primarily due to a heavy investment in front loaded sales and marketing costs to rebuild our student pipeline which occurs well in advance of students starting school. The higher expense categories are compensation and benefits as well as advertising expense. In addition our bad debt expense increased as we raised our allowance for doubtful accounts.

Also contributing to our lower net income was a decline in interest income of approximately $1.3 million. Now I’d like to transition and provide an update on our marketing and sales efforts. During the quarter our advertising spend increased approximately $1.2 million to 6.7% of net revenues compared to 5.3% of net revenues for the same period last year.

You may recall that we advised you on our last earnings call to expect this increase due to the fact that we intentionally reduced our usual advertising spend last year during the first quarter. This was in anticipation of the launch of our new advertising campaign scheduled for the second quarter.

The continued effectiveness of our web centered national advertising campaign coupled with the ability to take advantage of opportunistic buys on premium programming drove an 82% in leads for the quarter over last year while delivering a more efficient cost per lead. The cost per lead for the quarter decreased 27% on a year-over-year basis.

It is worth noting that we do not expect to deliver an 82% in leads during the next quarter as this quarter’s performance is really more a reflection of the decrease advertising spend during the first quarter of fiscal ’08.

For the second quarter of fiscal 2009 we expect advertising expense as a percentage of net revenue to increase as compared to this past quarter due to greater lead requirements this time of year which is necessary to drive contract and start grows during the summer and fall start. In addition local promotion and events are very heavy in this quarter which is more costly than national advertising.

The good news however is we expect advertising expense as a percentage of net revenues to decline year-over-year in the second quarter due to efficiencies gained with the national campaign. We will continue to take advantage of opportunistic buys and media rate discounts while focusing on quality lead generation.

Depending on the level of cost efficiencies gained during the second quarter we may repurpose some of the planned advertising expense to help drive improved show rates. Let’s move on to student contracts. For the quarter student contracts were up 20% compared to last year. The adult segment recruitment efforts produced 47% growth year-over-year for the quarter.

This is a reflection of the continued investment in our adult recruitment sales channel and our marketing and lead generation efforts. Since January 2008 this team has steadily improved year-over-year performance with a significant increase in lead volumes we added 14 additional campus admissions reps during the first quarter in order to effectively work those leads.

This equates to approximately 43 more full time employee equivalents than we had last year at this time or a 47% increase in headcount. I’m pleased that our productivity levels for the team remain constant compared to last year which suggests our rookie representatives are producing at higher levels than we have historically achieved. We currently have 140 adult student admissions reps and do plan to hire any additional reps during this next quarter.

Our high school and military base recruitment efforts continue to improve as well. For the first quarter high school and military contracts grew 6% year-over-year which is slightly ahead of our internal plan. We ended the first quarter with 170 high school and military admissions reps and currently have about six openings. This equates to approximately 10 more people than we had last year during the same quarter.

Representative productivity measures remain constant on a year-over-year basis for this team as well. So to summarize contract growth we’re up 20% for the quarter which is at the top end of our range of guidance for this year. Preliminary data for the month of January indicates contracts were up better than 20% with both sales channels delivering double digit growth for the month.

Given the positive momentum in lead and contract growth it is imperative we do everything we can to turn contracts into starts and this brings me to our next key performance indicator the show rate. Our show rate is based upon the number of student starts as a percentage of those who were scheduled to start during the same timeframe.

After three quarters of year-over-year improvement in our show rates we experienced a decline of 220 basis points this quarter. This was disappointing given the investment we have made in this area to improve processes and customer service as well as offering our own student loan program. After careful assessment of the drivers behind the decline we believe there are both external and internal factors impacting the students’ ability to begin school as planned.

In some instances the weaknesses in the economy or the concerns with the automotive industry has risen to a point that is either in perception or in reality impacting certain students’ ability and/or willingness to start school as planned. In this quarter we saw the greatest show rate deterioration among young adults who needed to physically relocate to attend one of our schools.

We continue to develop tools to help our staff address the uncertainties with the economy and the auto industry with our potential students to minimize any fallout. From an internal execution standpoint despite best efforts from our people the demand to balance the growing volume of contracts with the increased amount of time required to advise students and families pushed our staff to the max.

Therefore staffing levels are increasing to accommodate the continued growth in contracts and the additional time needed to effectively serve our students during these challenging times. Sustaining and improving show rates remains our number one business priority for 2009. While our show rate declined for the quarter we did achieve 6% start growth year-over-year starting 3,319 students compared to 3,126 students a year ago.

This is the third quarter of year-over-year start growth and we expect to see this continue through the remainder of 2009 given the continued growth in contracts. We ended the first quarter of fiscal 2009 with 15,143 students as compared to 15,415 at December 31, 2007 which is a 1.8% decline. You may recall that we announced last quarter that we were starting the beginning of this year with approximately 400 fewer students as compared to the prior year.

By the end of the quarter we reduced the gap to 270 students despite the fact that we typically see a higher number of students take a leave of absence during the holidays. As the student return to school during the month of January we eliminated that gap and achieved slight year-over-year growth of nearly 1% with our average student population.

Our graduation rates continue to remain at approximately 70% however we did see a slight increase in our student withdrawal rates during the quarter. Tightening labor markets are making it difficult for students to obtain part time employment to support themselves while in school. Our employment services teams are working diligently to help students secure both part time employment while in school as well as full time employment upon graduation.

Given the challenging labor environment we will add resources to support our employment services team throughout the year. Even so I do expect pressure on our employment percentages throughout fiscal 2009 and anticipate we will likely be in the low 80% range if present conditions persist. We do not expect this to become the new normal range, rather it is a reflection of an industry in transition that will correct itself over time.

I’d like to talk for just a minute about the current state of the auto industry and its impact on our business. At the moment what seems to be of greatest concern to both our prospective and active students and their families is the fear of the unknown at a time when people are looking for job security and other confidence boosters. Top of mine are what will happen to the demand for technicians? Will there fewer dealership jobs overall? Will I get to work for the brand I prefer?

And what will happen to technician wages? While most of these are perception issues and short term challenges they are legitimate issues that we must address and overcome in the short term as the demand for their technicians and their earning potential remain strong over the long term. The good news is the concerns our students have are in general temporary issues that can be overcome with a little education and a longer term perspective.

The three biggest perception gaps we need to consistently address are the media’s doom and gloom obsession with OEMs problems and the implications to the industry in general, the bad news about dealer consolidation and its short term impact on technician demand and the general lack of awareness about the importance of service and parts to both dealers and independents and what that means to the value placed on technicians during this recession.

There are three key points that address these perception gaps. First demand for service is based primarily on vehicles in operation versus new car sales. In addition as vehicles age there is greater need for repair. During recessions consumers may choose to drive fewer miles or postpone repairs but the impact is not nearly as volatile as the sales side of the business.

This was evident during the last earnings cycles that included the overwhelming fears of a recession, all of the Wall Street turmoil and hurricanes in certain geographies. During that quarter publicly held automotive dealer groups acknowledged double digit declines in vehicle sales and also acknowledged basically flat or low single digit declines in parts and service revenue.

While the troubles impacting the OEMs are significant it is different for retailers. In the most recent 2008 National Auto Dealers Associations report for the year 2007 parts and services accounted for only 12% of total dealership revenue but 81% of operating profits. This reality will force dealers to build their parts and services department to drive margin improvement while top line growth declines.

Second point demand for technicians is not determined by the number of dealers. For several years now domestic OEMs have been trying to consolidate dealers to create a more efficient business model. No doubt current conditions will accelerate the consolidation efforts but consolidation alone will not diminish the need for qualified technicians.

Consumers needing warranty work will still go to a dealer even if it means driving a greater distance to a surviving dealer. Those needing repairs may go to either a dealer or an independent. Therefore consolidation of dealers will not alter demand for technicians even if it changes the market share of independents versus dealers. UTI supplies technicians to both dealers and independents and can adjust its business model to meet the needs of both.

Over time we do believe that UTI and our graduates will benefit from the greater sophistication of the consolidating dealers who place a greater emphasis on parts and service. Last point the service business is far more important to dealership profitability than recognized generally. As I mentioned earlier parts and services accounted for 81% of dealership operating profits as reported by the National Automotive Dealers Association last year.

Further gross margins on parts and service was 46.2% which is far greater than the margins on new or used vehicles. So parts and service is the key to dealer profitability and survival during the downturn even if the media focuses on new car sales. With all that said we won’t deny the fact that the negative public perceptions are creating pressure points in the business in the short term but believe that we can overcome them in time with increased customer communication and education.

Finally we do not believe that the current situation significantly changes the fundamentals of our business, our strategy or the value proposition for our students in the long run. Before I transition to Eugene just a few comments on the OEM relationships as a follow up to our last call.

We completed the contract renewal with Porsche for the next year. Others specifically Audi, BMW, Volkswagen and Mercedes Benz have asked for a several month extension to the contracts given the current operating environment.

We anticipate the contracts will be renewed over the next several months but expect that there’ll be pressure from the OEMs to cut costs which could result in further consolidation of training facilities, decreased students throughput during fiscal ’09 or other contractual changes. As a reminder our OEM relationships contribute less than 5% of our net revenues.

Despite the immediate challenges facing some of our OEM partners the relationships are generally very strong and we are working collaboratively with them and their dealers to address short term issues while strengthening the relationships over the long run. 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 S. Putnam, Jr.

As mentioned net revenues for the first quarter were $90.1 million basically flat with a year ago. The slight increase was primarily driven by higher tuition prices as well as we previously discussed recognizing approximately $600,000 in revenue this quarter that was due to the one week closure of the Houston campus during the hurricane in September of 2008.

These increases were partially offset by the decline in average undergraduate student enrollment of 253 students or 1.5% as well as a decrease of approximately $400,000 related to students retaking courses and an increase in needs based tuition scholarships and military and veteran discounts of $600,000.

Operating income for the first quarter was $3.6 million, that’s down from $9.3 million in the same period last year. The decline is due to increases in compensation costs, advertising expense and bad debt expense. Taking a look at those individually compensation and benefit costs increased $3.6 million to $47.5 million.

The change in compensation and benefits is primarily attributable to increases in salary expense due to a higher number of sales force representatives in response to our increase in the number and quality of leads and an increase in the number of employees in our financial aid and other student support departments to assist our students with challenges presented by the general economic conditions as well as the changing student funding environment.

We also experienced an increase in bonus expense as a result of certain campuses and our consolidated results meeting their first quarter bonus criteria for the year. Finally we had an increase in benefit expense which was due to expenses under our self insured employee benefit plan. In sum these impacted EPS by approximately $0.09 versus the prior year.

Advertising expense as Kim mentioned increased $1.2 million from the first quarter of last year from $4.8 million to $6 million and as mentioned we previously announced that we had lowered the first quarter of 2008 in anticipation of launching our new campaign in the second quarter of 2008. This change amounted to $0.03 on EPS. Our bad debt expense for the first quarter of 2009 was $2.1 million as compared to $900,000 for the first quarter of 2008.

This $1.2 million increase is primarily due to an increase in our allowance for doubtful accounts in response to the changes to our overall economic environment and our internal financial aid process.

It is important to note that the majority of this increase is not due to any deterioration that we are really seeing but rather a refinement of our reserve methodology that I believe to be more conservative and more appropriate given the economic climate as well as some of the changes to our enrollment and financial aid process.

Finally it’s important to note that the $2.1 million should not be used as a run rate going forward as we anticipate that number will come down from the $2.1 million as we go forward with this current methodology.

The sum of all of those three things impacted EPS by $0.13 and in total when we add in interest income which decreased $1.3 million to $79,000 for the quarter as we moved approximately $80 million in our investment account to a lower risk Treasury fund investment that obviously earns a lower amount of interest and in this climate the actual interest rates went down as well. That impacted EPS by $0.03.

So when you add the compensation, benefit, advertising expense, bad debt and the interest income the impact to EPS is approximately $0.16 versus the prior year. Finally our provision for income taxes for the quarter was 38.2%, that’s down slightly from the 39.2% a year ago. In the future as we mentioned before our book tax rate should range in the 39% to 41% range absent any unusual items.

Net income for the quarter was $2.3 million or $0.09 per diluted share compared to $6.5 or $0.24 per diluted share first quarter of last year. I think as you can see our balance sheet continues to be extremely strong. We had cash and cash equivalents of $87.5 million at December 31st, that was up from just under $81 million at September 30th.

During the first quarter we generated $10.7 million in cash flow from operations, that’s up significantly from $4.5 million in the prior year and in this time it’s extremely important to remember that we have no debt on our balance sheet. We did not repurchase any shares during the quarter and don’t intend to repurchase any shares in the coming quarter.

During the quarter ended December 31st, we had $4 million in fixed assets that were purchased, that’s down from $6.5 million in the same period last year. That $4 million for the most part represents purchases associated with information technology projects primarily our general ledger replacement project as well as some ongoing replacement of equipment related to student training.

Moving to our First Century loan programs some statistics for you, at December 31st we had committed to provide approximately $7.4 million, that is made up of 1,278 loans representing an average student balance of $5,755 and of that $7.4 million we have funded approximately $5.1 million. A further update through actually yesterday we’ve committed $7.9 million for a total of 1,417 students or an average of just under $5,600 per student.

There’s been some preliminary but positive news in the student funding area that you’re probably all aware that last week the House approved an economic stimulus package. In that package the Bill included a $500 increase to the Pell Awards for the 2009/2010 award year and a $2,000 increase to the annual unsubsidized Stafford Loan limit.

Unfortunately at this point in time the Senate Bill apparently does not include the $2,000 the Stafford Loan limit and the Pell Award is slightly lower at $281 for the ‘09/’10 year and $400 for the 2010/2011 Award year. Finally in closing I wanted to add some color and commentary on where I believe we are relative to the full year outlook that we provided on our earnings call in November.

At this point I believe that the outlook that we gave for the full fiscal year of 2009 in terms of double digit contract growth, high single digit start growth, year-over-year growth in students in school remains appropriate but I want to clarify a couple of points. First I want to reiterate what I said in November that the outlook that I gave then was for the full fiscal year and not necessarily on a quarterly basis.

I even mentioned and I still believe that our progress will be highly volatile on a quarterly basis. As an example of that in 2008 21% of our starts were in the first quarter, 19% were in Q2, 15% were in Q3 and 45% were in Q4. Our students in school tend to decline in our second and third quarters and grow in our first and fourth quarters.

I emphasize this because I sense from some of the questions that I get and some of the earnings models that I see that many of you expect more of a straight line improvement to achieve the outlook that we discussed. That most likely will not be the scenario rather you will see significantly different growth rates in our metrics from quarter to quarter especially in starts that when combined however for the full year will equate to a high single digit number in growth in starts.

The second point I’d like to make is that I think we are making very good progress in terms of refilling our seats but given the current state of the economy and the challenges that Kim mentioned previously the progress that we are making is neither as great as we had hoped for nor is it as efficient as we would have like to see when we went through our budget process and put in place goals for our leaders.

I want to elaborate on that a little bit. We’ve now had three consecutive quarters of increasing year-over-year contract and start growth. We’ve reduced our year-over-year shortfall in students from nearly 1,400 to under 300 in just three quarters and as Kim mentioned at least preliminarily through January we’ve actually turned the corner and started to show growth on a year-over-year basis in the actual number of students in school.

Whether that preliminary number holds or not I believe that in the next quarter or two we should totally erase the shortfall and report year-over-year growth in students in school. I believe this is excellent progress in what is an extremely difficult environment but we had challenged ourselves to our budget process and continue to to improve even faster.

More importantly the progress that we have made while impressive we are currently filling the seats more by generating additional leads in contracts rather than through improvements to our show rate. Now we’ll take it either way but obviously improving our show rate gives us much more leverage and is a much more cost efficient method of filling our seats.

The bottom line is it’s great that we’re seeing contract and start growth, terrific to think that in the second or third quarter we should see year-over-year student growth but to really accelerate the timeline to return to double digit margin growth we do need to improve our show rates. I think from my comments and Kim’s you can tell we are extremely focused on the show rate and the variety of initiatives that are under way to improve it.

We’re extremely fortunate that our other leading metrics are now showing consistent improvement and in fact I can tell you that at this point in time at the end of January we have 20% more contracts written to start for the remainder of this fiscal year than we did at this point last year. But if we can continue those trends as well as improve the show rate we should really see greatly enhanced financial performance.

That said we’ll continue to invest in the business to drive both more leads, more contracts and more starts but the primary focus is on improving those show rates and getting kids to start school and finish school. With that we certainly thank you for your time and your interest and we’d be very happy to turn it over to the Operator for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question and that’s coming from Kevin

Doherty – Bank of America Merrill Lynch.

Kevin Doherty – Bank of America Merrill Lynch

Just wanted to get a sense at what point should you start to really leverage your existing cost structure? I guess recognizing that you still have some hiring needs around some of the support services for the start growth and just trying to get a sense maybe more broadly speaking about the relationship between your capacity utilization and then your margins going forward.

Eugene S. Putnam, Jr.

I didn’t quite catch the first part, the leverage with our cost structure. Could you repeat that part?

Kevin Doherty – Bank of America Merrill Lynch

I’m just trying to get a sense of when we should start seeing some more leverage from your existing cost structure? I know you’ve obviously been bringing on some more support staff but how should we just think about that going forward? Traditionally there’s been that tight relationship between the utilization and your margins and any reason that relationship shouldn’t continue to trend going forward?

Eugene S. Putnam, Jr.

I think on the first part as far as leveraging our existing cost structure I think you’re starting to see that now. We have stopped ramping up the hiring at least of the sales force notwithstanding what Kim said about the potential to hire additional people to improve and accelerate the financial aid process. We’re kind of where we need to be from a sales force perspective at this point in time.

That has been where the lack of leverage has been coming from as we make that investment prior to the kids starting. If you assume that they’re fully staffed now and give them a quarter for the new ones to be up and running, those contracts that they put on the books tend to start on average within one to two quarters. So I would say just from the current cost perspective you should see some fairly meaningful leverage late second, third quarter.

As far as the second part of that question the relationship between capacity utilization and margins, in the past when we were approaching high 70s, low 80% capacity utilization we were running peak margins in the high to upper teens. That can still happen but the big driver of that is really how do we get to that higher capacity utilization. Do we get there by improving the show rate?

Is that the predominant way we get there in which case that leverage and those operating margins come back significantly faster or do we get there through a slightly lower show rate and more volume pumping through the system which is obviously still financially attractive but not as attractive as converting more leads, converting more contracts in.

There’s a wide spectrum of when we get there based on utilization that is dependent upon what that show rate does and how we actually fill those seats.

Kevin Doherty – Bank of America Merrill Lynch

Last quarter you did mention potentially reaching a double digit margin by the end of this year. Is that something that’s still feasible?

Eugene S. Putnam, Jr.

It’s still feasible but it will necessitate an improvement in our show rate from where we currently are. Now we expect some improvement but the show rate in the first quarter while we achieved all of our other metrics including our budgeted GAAP financials we did not achieve the show rate that we had budgeted. So we need that to bounce back and to improve that show rate in order to hit that target in my belief.

Operator

Your next question comes from Robert Craig – Stifel Nicolaus.

Robert Craig – Stifel Nicolaus

Couple of questions for you, could you provide some color on the new marketing campaign that’s beginning here and is it designed to address some of the perceptual issues that you’re facing?

Kimberly J. McWaters

When we reference the new national campaign I’d say the newness is about a year old in terms of what we’ve been doing to drive traffic to the website using the national presence and branding platform. This year beginning in January we started to launch Phase II which includes web enhancements focusing on quality lead generation as well as starting to address some of the perception issues out there in terms of the stability of the career and those types of things.

Creative messaging and I’d say broadcast Internet and print is changing to accommodate some of the perception issues that exist out there but the strategy per se is the same in which we launched last January.

Robert Craig – Stifel Nicolaus

Are you folks contemplating any greater level of discounting and if you could bring us up to date on where you stand in terms of facility rationalization or repurposing?

Kimberly J. McWaters

I think that this year and looking at the year prior we did have an opportunity to track and measure the success of certain student segments who were offered the scholarships, military and some of the job training scholarships. While we’re seeing the impact throughout this year for those that were awarded in the previous year, we actually plan to award less this year.

I can’t give you exact numbers but I do know that we will be awarding less given the changes in the financial aid program as well as being able to offer our own loan program to help those students. We don’t anticipate further discounts being offered from the tuition standpoint to need based scholarships, military discounts or the job training type program.

Then in terms of the facilities rationalization we’ve had I’d say minimal changes where we’ve consolidated a custom training group program or a manufacturer specific training program at the Houston site which was I think a little over 3,000 square feet equating to about $50,000 in rent expense and then in Glendale Heights we had a similar change with a small lead and I think that was roughly 10,000 square feet and a couple hundred thousand in rent expense for this year.

We continue to market any excess capacity at our various sites but it’s very difficult from a commercial real estate standpoint and we are also looking at ways to further optimize our operations within the existing footprint. We’re making progress but it’s slow and we’ve got a long journey ahead of us there.

Eugene S. Putnam, Jr.

I just wanted to clarify one thing I said on Kevin’s question regarding the margin and the ability to get to double digit margins. Obviously show rate improvement we believe we can still get there. Even without the show rate improvement as we fill capacity I believe that we can get to double digit margins, it just takes longer to get there filling it with lower show rate percentages than it would with higher show rates.

I didn’t want anybody to think that if it doesn’t improve we can’t get there, as long as we’re filling those seats we will get there, we’ll just get there faster if we fill them in a more efficient way.

Operator

Your next question comes from Mark A. Marostica – Piper Jaffray.

Mark A. Marostica – Piper Jaffray

I wanted to pick up on the show rate comment discussion that you were having Eugene and ask the basic question when you look at that show rate decline in the quarter and you think about improving it going forward how much can you really control here based on the perception issues in the market? Maybe go over some specific items that you’re planning to focus on to get that show rate up.

Kimberly J. McWaters

With the show rate decline there are certain things that we can control and certain things that we cannot so we are focused on the things that we can control and part of that is driving our business mix in a different way. We talked in a number of calls and during last year that we were trying to move our business mix towards a population located within a closer proximity to our campus because they showed at higher rates.

We have continued to make progress in that area and will continue to do so through 2009 because students that come within a 50 mile radius tend to show at a much higher rate so some of it just shifting the business and where we’re actually recruiting students from. In the prepared comments I talked about students who tended to be older than 20 and having to relocate from greater than 100 miles to campus.

This segment was under the greatest pressure so the economy in terms of raising additional monies to help them relocate, finding housing and employment, all of those areas are where we’re focusing on because we do have a large population that does need to relocate to attend one of our schools.

First would be changing business mix to within closer proximity and we’re continuing to make progress there. Second is to ramp up our services to better the needs of the student segments that have to physically relocate to school.

Third is equipping all of our staff, not just in the marketing messaging but our representatives, our financial aid teacher student services people and instructors as well to help the students understand that concerns and perceptions with the automotive industry are short term and that there will be a need and is a need for technicians.

Some of it is the economy and others are just perception issues with the industry. So we’re just continuing to reinforce and educate all of our people as well as prospective students and their families as to what the long run value proposition is for this type of education and it remains very strong.

Mark A. Marostica – Piper Jaffray

Just a follow up on that point, I wanted to get a sense of the total student population you have, what percentage are in that category of over 20 that have to relocate because they’re over 100 miles away from a campus?

Kimberly J. McWaters

I’m not going to give the specifics in terms of percentages from a competitive standpoint, but I can tell you from on a quarterly basis, if you take this quarter compared to last year’s first quarter, we saw a shift in terms of adult population at I’d say roughly 40% last year and that mix changed to 55% of the student contracts written for this quarter.

Some of those were within 50 miles or 100 miles or 200 miles and I want to break all of those specifics out but we did see a significant increase in the adult population scheduled to start in this quarter and then of course given the fact that there’s some unique challenges for the adult student having to relocate that did create pressure points for us inside of this quarter that we didn’t face last year.

Mark A. Marostica – Piper Jaffray

Just one other question, I’ll turn it over. Eugene you talked about start growth and outlook for the fiscal year, I just want to confirm are you still endorsing the high single digit start growth for the full fiscal year understanding of course I think you were mentioning Q2 starts and Q3 starts will be down year-over-year but we should see a recovery in Q4 starts being up year-over-year?

Eugene S. Putnam, Jr.

The first part of your question, yes I’m still looking for high single digit full year start growth. To clarify what I was saying about second and third quarter, our actual number of students in school tends to decline those quarters. I am not in any way looking for declines in start, I’m looking for growth in starts on a quarterly basis all four quarters but what I don’t want people to do is say oh, it’s 6% this quarter, it’s 2% next quarter.

They’re going to be vastly different growth rates between the quarters that in sum I believe will get to high single digit growth.

Operator

Your next question comes from Kelly Flynn - Credit Suisse.

Kelly Flynn - Credit Suisse

Couple questions, I know you’re not giving earnings guidance, but in the interest of avoiding having consensus numbers that are so far above what you end up reporting, can you help us at all with margin assumptions, I guess starting with the key expense line items, ad services and SG&A what we should be looking at generally year-over-year for next quarter and for the year?

Eugene S. Putnam, Jr.

I think that’s more specific than I’d like to get. I think what I would say without giving absolute guidance on the full year EPS I think when I look at the consensus numbers that are out there – don’t read this as an endorsement but I’m not overly concerned with the full year number. I am more concerned about the quarterly way that it gets there. Said another way, we significantly underperformed the consensus number for this quarter, that said we achieved our budget for this quarter so I’m more concerned about how the outside world sees it coming together on a quarterly basis than I am for what their full year number is.

Their full year number I believe is a low of $40 and a high of $64 with an average of $50. Again, without giving guidance that mean is not significantly different plus or minus from the budget that we would have put together.

Kelly Flynn - Credit Suisse

Secondly, I know you said a couple of times that you kind of stand by the starts and total population targets you set out in November but can you just clarify and give a bit more detail on what you said about show rate assumptions? I think you said in response to an earlier questions that those targets do imply some improvement in show rates. Can you just reaffirm that is the case and possibly quantify what improvements you’re expecting? And finally, tell us have you seen any improvements for example since the end of the quarter or anything that gives you hope that it is realistic for you to think show rates will improve?

Eugene S. Putnam, Jr.

We always have hope. A lot of questions, I’ll try to get them all. First of all, back in November I didn’t give any specific guidance nor do I intend to on show rates. What I said this quarter, I don’t believe that the guidance that I just gave as far as high single digit starts I believe we can achieve that without any meaningful improvement in our current kind of forecasted show rates.

That said, to get to the previous guidance that I gave as far as the potential for double digit margins in the fourth quarter, I don’t believe we will get there unless we do see some improvement from the level of show rates that we’re seeing right now which we anticipate to see some because of seasonality but, obviously I’m slightly discouraged by the fact that we’ve seen deterioration in show rates after three consecutive quarters of growth in it.

We know we’re in a difficult environment but to your question of hope which I half way joked about, yes there are things that we know we can do differently, that we’re trying to do differently. I think we will see improvement in show rates, the focus of the entire company is on it. The question is how much improvement will we see, how much can as Kim said can we control versus how much of it is outside pressure and to make a guess as to what that will be at this point would be quite honestly be nothing more than a guess.

Operator

Your next question comes from Trace Urdan – Signal Hill Group, LLC.

Trace Urdan – Signal Hill Group, LLC.

Through the magic of Excel I can kind of sit there and look back through the years and the various December quarters you guys have and I am really struck by how it seems structurally your business has changed quite a bit. We can go back to say December of ’02 where we were in the last economic downturn, arguably not as difficult as it is today but certainly getting part-time jobs must have been challenging in that environment.

Half the revenues, two thirds of the student population, higher operating income, you had a lower price point there, I’m just wondering have you stepped back and looked at whether there’s been any kind of structural change either in the value proposition or do you ever have a conversation about maybe you have too many campuses, that your footprint is too big right now for the market that you are serving?

Eugene S. Putnam, Jr.

I’ll take the last part as far as the campuses, I certainly don’t think we have too many campuses.

Trace Urdan – Signal Hill Group, LLC.

But you’ve never actually been at full capacity with the footprint that you have now. These campuses were added just as things started to turn down so there’s no place that you can point to and say, “We use to fill these campuses so we know we can.”

Eugene S. Putnam, Jr.

Absolutely correct and what I was going to say is we have enough – I’m not saying we have too many campuses but I think we clearly acknowledge that some of our campuses are too large given the changes that we’ve seen demographically from 2002 to 2008, 2009. So, as I think some of you have heard me say before, while we think the number of seats that we have system wide, roughly 25,000 seats is probably fairly appropriate given our market share and our potential, and our ability to penetrate, that is too many seats spread over 10 locations.

It might be enough seats spread over, and I’m picking numbers here, 15 to 20 locations but that obviously isn’t going to happen overnight. So, yes there have clearly been some demographic changes and there have been some changes to the way we market, to the way we teach, to the way companies hire since 2002 so there are things that we can learn from that but it’s not necessarily let’s just restructure to the way we were in 2002 and things will be back to those levels of performance.

Operator

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

Jeffrey Silber – BMO Capital Markets

I just want to follow up on the capacity utilization issue and this is maybe more of a theoretical question than anything else. Some of your competitors have expanded in to other verticals when they’ve had capacity utilization issues and I’m wondering if you’re thinking of doing that? I know it doesn’t work exactly with the footprints that you have but you probably have some classrooms that maybe there’s excess capacity, maybe you can put other verticals in there? I was wondering if you could comment on that?

Kimberly J. McWaters

I think as part of our facility rationalization effort and looking at the 10 sites that is certainly one of the options that we are exploring and that is how to be more efficient in less space than what we’re currently operating out of today. I just want to be certain that what drives our strategy is not a rush to fill seats and we just add on programs with that being the primary driver, rather that it is a strategic decision that creates and builds brand value over the long term and those are things that require a little bit more research but we are working and looking at those things that we believe would play off the core competencies that we have already in this space and leveraging our brand and infrastructure across these 10 sites.

So, of course it’s part of the conversations and we’re continuing to evaluate those things and when we’re at the point to discuss whether or not we move forward, we’ll certainly bring that forward but today it’s more in the discovery process and consideration.

Jeffrey Silber – BMO Capital Markets

Actually, just a quick numbers question, what are you budgeting for capital spending in the current fiscal year?

Eugene S. Putnam, Jr.

The cap ex purchases I believe are right around $15 million but as we previously said we’re also undertaking a curriculum transformation project where we’re redoing our auto and diesel curriculum. Those costs which would be capitalized either through purchases or capitalized labor will be on top of that and over the course of fiscal 2009/2010 will run somewhere in the $10 million range.

Jeffrey Silber – BMO Capital Markets

So looking at the $4 million run rate for the past quarter we should probably expect that to go up a little bit because of that?

Eugene S. Putnam, Jr.

Certainly if you include the transformation project, yes. The majority of that however will come in the later two quarters of the year.

Jeffrey Silber – BMO Capital Markets

The latter two quarters of the current fiscal year or 2010?

Eugene S. Putnam, Jr.

Of what we’re going to spend this year which will be a piece of that $10 million will come in our fiscal third and fourth quarters. So, in other words, I wouldn’t take second quarter up too much but starting in third and fourth quarter you’ll see some creep up.

Operator

Your next question is from Gary Bisbee – Barclays Capital.

Gary Bisbee – Barclays Capital

I guess trying to understand what’s the magnitude potentially of hiring of some of the financial aid and other advising support services that you talked about to try and improve the show rates, is that going to be a material amount? I guess what I’m ultimately getting at, would we be prudent to think that SG&A spend moves $1 million, or $2 million, or $3 million higher sequentially in to the March quarter?

Eugene S. Putnam, Jr.

No. No, we’re not talking that magnitude of people. The folks we’re talking about and I mean this in the nicest way, this is moving woodchips from one pile to another. They are processors, it’s getting the work done, we just need more resources as we have been overly successful with leads and contracts as the process of finding appropriate funding and quite honestly the challenges of the economic environment becomes a longer process and we get backlogged there.

We start classes every three weeks which I believe is unique and that adds its own level of stress and complexity as far as getting people ever three weeks ready to start on time and it’s just for us we believe a wise investment to throw more resources at that rather than to have a backlog there.

Kimberly J. McWaters

I think we’re talking a couple of people per campus and are also looking at the efficiencies created with the marketing to help offset that so that’s why we don’t have necessarily a specific number for you but we do think that will absorb some of the costs associated with the increased resources required to help with financial aid and future student services processing.

Gary Bisbee – Barclays Capital

Then if I could ask just sort of a big picture question about the demand and what not, I hear you on the three challenges you face and your commentary around why they don’t really impact long term demand and there’s some things you can do to get the message out there but, it seems pretty likely that the big three are going to have to consolidate their dealerships pretty dramatically over the next – and I guess the issue is does it happen really quickly or does it happen over time?

But, what are you doing other than just saying historically we’ve placed a lot of people in to the independents so we’ll just do that. What are you doing to be prepared for this because it seems to me there could be a real issue and maybe it’s only over six or nine months where if starts start growing you’ve got a bunch of grads but all of a sudden short term there is this dislocation, you can’t get them jobs. Do you worry about this like I feel like we should be?

Kimberly J. McWaters

I certainly worry about it in terms of the student’s perception primarily coming in to UTI with the expectation of working for the preferred brand given the partners and relationships that we have. I don’t worry about them getting a job and I think the students that are in school currently are the ones we have the most work to do with because they came in with certain expectations. Those that are yet to start school or are considering it, we start working with them well ahead of time to create realistic expectations of what they might find upon graduation and why you may need to pay your dues before you land the dream job.

So, all of the fundamental drivers around technician demand, etc. are there, there’s just going to be a shift in the market place. By the way, dealer consolidation is not a new phenomenon, it’s been happening year, after year, after year, it’s just going to be accelerated so to your point of what are we doing to prepare for that it needs to happen at two levels. One, is at the campus level on a local basis where and in the surrounding feeder states if you will, to establish those relationships with employers for the graduates and their place of origination because 90% of them want to go back to where they came from.

So, the campuses will be working with local employers in those states where students come from. With our B-to-B team, we are looking at further expanding the relationships with the aftermarket in the same way that we have with the OEM and large dealer groups and we have some of those relationships already, they just need to be strengthened so that we create a strong feeder system in to their networks in the same way that we have with the OEMs.

I think we have the skill set and the infrastructure to do it, it’s just the shift in focus and that shift in focus in occurring throughout the organization. So, the immediate challenge is, overcoming perception issues with the current population and those that are incoming students we’re already beginning to address their expectations and making it more realistic and understandable that they may not get the dream job right out of UTI but they’re going to be best prepared when it opens.

Operator

Your next question comes from Kian Ghazi – Hawkshaw Capital.

Kian Ghazi – Hawkshaw Capital

Could you talk a little bit about the timeframe to implement the initiatives you put in place to address your show rate challenges? I think you referred to three things, one a bit of a focus shift or mix shift towards more local leads and getting more local contracts leading to more local starts. Secondly, you talked about beefing up the services to help get a contract to a start and third, you talked about equipping your staff, I presume training your staff to handle the questions that parents and perspective students might have. Can you address with each of those three the timeframe it might take to implement those initiatives such that it could have an impact on the show rates?

Kimberly J. McWaters

Sure. If you take the first one, shift in mix, that’s a little bit more difficult than some of the other two because you’re trying to locate students within a 50 or 100 mile radius and target them with greater precision than we are currently today. I think we’ve got pilots at certain campuses just as we had last year. We already have a lot of those things in play and did move the needle to drive a greater percentage within a 50 mile radius this year but I think that is something that will continue to build momentum as we learned throughout the year.

But, any shift in terms of the business mix does have quite a difference in the show rate. You could see a 20 percentage point difference from students that have to come from 300 miles to students that live within a 50 mile radius just to give you a range of why that is a priority and primary focus. That’s going to be as the year progresses we’ll see improvement there and most likely fourth quarter, first quarter of next year that you could really see a big difference assuming that we continue to learn more on our pilots and implement accordingly.

In terms of staffing level increases out at the campuses, some of that has already occurred and we started doing that in Q4 of ’08 and have continued through this quarter. I would expect that the staffing model in hiring would be in place by the end of Q2, maybe first part of April and it’s important that that happens by that time so we can have our people trained and up to speed to accommodate the large summer and fall starts.

Training of staff I’d say that has occurred at all of our 10 campuses with respect to future student services and financial aid as well as all of our representatives have training in terms of how to overcome the perceptions, etc. The challenge there is to increase the level of training for our existing staff and to bring new players up to speed. Again, the timeframe there would be end of Q2 and in time for April.

Now, some of the stuff that’s happening with the representatives and the future student services for the existing team, we’re continuously feeding them information to help them overcome what these challenges are so that training is already in place. I’d say the big date is end of Q2 to have this team up and ready and fully trained to execute on the contracts written scheduled to start in summer and fall.

Kian Ghazi – Hawkshaw Capital

Kim, if I heard you correctly the attempt to drive a mix shift to more local starts, the real benefit of that might come in the fourth quarter or first quarter of next year and the next two items on the list starting kind of end of second quarter or March/April timeframe. As we look to the current quarter that we’re in the midst of right now, are there initiatives or are there any reasons to believe the greater focus and attention of the company firm wide can lead to an improvement in show rate in the current March quarter or there’s really nothing happening right now that can drive that kind of a shift?

Kimberly J. McWaters

Well, there are a lot of things happening right now and we are hopeful as Eugene said, that it will drive improvement. So, all of the things that I mentioned are already in play with the exception of having the full team hired for financial aid and future student services. So, I remain hopeful that we can by the end of the quarter see improvement and believe that the efforts and the focus across the organization will contribute to that and that’s assuming the things that we can control we drive improvement on.

I wish I could give you a more clear answer. I guess the main point is we’re focused on it, things are in play right now and we’re hoping that we see results inside of this quarter but most importantly we want to make certain that we are geared up for the large summer and fall starts given the heavy contract volume in growth.

Kian Ghazi – Hawkshaw Capital

Were show rates down a comparable percent in the month of January as well?

Kimberly J. McWaters

Yes, I would say they were pretty much the same. The trend has continued through the first starts in January. We don’t have the final detail or data there but that would be my best guess that January was a continuation of the previous quarter.

Kian Ghazi – Hawkshaw Capital

Eugene, to just clarify a comment that you made earlier, if we have these trends of show rates that you are currently seeing and you saw this last quarter, do you still feel like you can get to your starts range that you referred to in the press release of high single, low double digits?

Eugene S. Putnam, Jr.

The starts, yes. The margin by the fourth quarter, no.

Kian Ghazi – Hawkshaw Capital

Then order of magnitude, so if you still get to your starts range but the way you thought you were going to get – the efficiency that you thought you would have in enrollments is going to be different, order of magnitude is that the difference between an 11% and 5% margin or is it a couple of hundred basis points of margin?

Eugene S. Putnam, Jr.

It’s the latter. It’s still good progress but not there yet. What it does is it delays a quarter or so of achieving that because you’re still filling the seats as you get the starts and you’re still getting that leverage but it just delays it a quarter or two.

Kian Ghazi – Hawkshaw Capital

So to be clear, if you are not successful with all the initiatives you are taking to drive the improvement in show rates that are required to get to the double digit margin by the fourth quarter of this year, and if show rates stay roughly in the range that they are in today, are we simply talking about a one to two quarter delay in when we might get to double digit margins? Because, that does not seem like that’s the end of the world if that’s the case.

Eugene S. Putnam, Jr.

Again, as I prepared my comments here it was kind of I viewed this as kind of a mixed bag quarter, we achieved everything we wanted to do just not the way we wanted to do it. That’s good, it’s not great. It’s kind of like an opportunity cost of I feel like I’m leaving a little money on the table because we’re not doing it as efficiently yet we’re still getting to where we want to go just as Kim and I want to do with our team and we want to challenge them to get there faster and sooner and just keep setting that bar higher.

So, I would agree with you it’s not nearly the end of the world, it’s just it’s a little disappointing that we had three consecutive quarters of growth and for a variety of reasons that we mentioned in the show rate, we saw that turn.

Kian Ghazi – Hawkshaw Capital

I applaud you guys for keeping a high bar internally and driving to stretch goals and the double digit margin by the end of this year seems like a stretch goal from the outset and in fact, I don’t think any of the sales side analysts have modeled in double digit margin by the fourth quarter of this year suggesting they thought it was going to be a challenge as well. But, my question is and I just wanted to clarify, I think you said that the opportunity costs of that delay is a quarter or two to get to our double digit margins. Without nailing it down to exactly [inaudible] is that the timeframe we’re talking about?

Eugene S. Putnam, Jr.

Based on what we can see right now. If the world changes and all of a sudden leads dry up and things change, that’s a different world. We’re on a path to continue that start growth, to continue that enrollment growth and to continue to see that capacity utilization start filling up and as that happens we will get to double digit margins. The question is how do we fill it, how quickly do we fill it and how quickly do we get to that margin growth. At this point I would say if show rates just kind of remained flat, yes you’re talking a quarter or two extension to get there.

Kimberly J. McWaters

If I could just add one comment on January where I said the show rate trend looked pretty similar to the last quarter, and assuming that’s finalized and given this is just preliminary data, we would still show start growth year-over-year of better than 8% for the month. So, the fact that the contracts are building, leads continue to build, we will drive year-over-year start growth at a strong level, we just prefer to be more efficient to drive the margin improvement and the faster we can do it the better we all are.

Kian Ghazi – Hawkshaw Capital

So to be clear, given the preliminary show rate you have, even with that still kind of showing the trends from last quarter you’re going to put up an 8% starts growth for January and that’s just one month but, that’s the trend as of now for the quarter?

Kimberly J. McWaters

That is correct.

Operator

Your next question comes from Corey Greendale – First Analysis Corp.

Corey Greendale – First Analysis Corp.

I also had a couple of margin questions, the first is I hear everything that you’re talking about as far as the show rates. If you compare the quarter you just reported to the year ago, revenue was basically flat, up a little bit, capacity utilization was basically flat. Looking at the cost on that services line, you still had margin down about 170 basis points and I understand how the show rate is affecting the SG&A line but is there some way that it is affecting the end services line or is something else changed in the cost structure such that at the same revenue level you can’t get the same margin anymore?

Eugene S. Putnam, Jr.

Let me make sure I understand your question. You’re looking at the ed services line?

Corey Greendale – First Analysis Corp.

Correct. And, if that line looks like margins down about 170 basis points from last year?

Kimberly J. McWaters

No.

Eugene S. Putnam, Jr.

We’d have to dive a little bit deeper to give you some feedback on that.

Kimberly J. McWaters

But, I do think inside of this quarter we did start ramping up support services teams to address some of the concerns we talked about with financial aid support services and so that would be driving that deterioration on that line item which is happening in advance of the additional hiring.

Corey Greendale – First Analysis Corp.

The second question is Eugene on the bad debt, I know you mentioned it’s not a real deterioration in the credit quality but could you just give us a little bit more on that?

Eugene S. Putnam, Jr.

There were three or four items that as I looked at things I felt our methodology was fine but it needed some refinement. An easy example, I thought we were looking at one of the assumptions is historical loss data and I just thought we were looking at too long a timeframe given how the world has changed. So, we shortened that timeframe significantly and obviously that drives a little bit higher loss rate. I think as some of our financial aid processes have changed and we do things to get people in school sooner I think it’s appropriate to put a little bit more of a reserve up against things like that.

It was really just a refinement, I don’t know if I’m suppose to use the word conservative or not but being an old banker I like to be conservative. It was not that we’re seeing losses go through the roof and we said, “Oh my God we’ve got to put up more.” I think it was just the realization that we’ve been doing things a certain way for a long period of time and the world has changed somewhat so we needed to refine some of those.

Corey Greendale – First Analysis Corp.

So going forward maybe it doesn’t go all the way back down to the level that it was last year but not as high either?

Eugene S. Putnam, Jr.

My point is I hate to use the word catch up but we changed it this quarter and that would take in to account if you have a higher loss rate on it’s for on all of those balances that you would attribute it to that are already there. Now, going forward you’re still using that higher loss rate but you’ve kind of already caught up on those balances so now it’s only on any incremental balances that you have there.

Operator

Ms. McWaters there are no further questions at this time. Please continue.

Kimberly J. McWaters

I’d just like to thank you for your time and interest in the call. We’ll see you at upcoming conferences here in the next month and appreciate your interest in UTI. Have a great day.

Operator

Thank you ladies and gentlemen. This does conclude UTI’s first quarter fiscal 2009 earnings conference call. You may now disconnect. Thank you so much for using ACT Conferencing. Have a very pleasant rest of your day.

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Source: Universal Technical Institute Q1 2009 Earnings Call Transcript
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