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Universal Technical Institute, Inc. (NYSE:UTI)

F2Q08 Earnings Call

May 6, 2008  5:00 pm ET

Executives

Jenny Swanson - Director of Investor Relations

Kimberly J. McWaters - President, Chief Executive Officer

Eugene S. Putnam - Interim Chief Financial Officer

Analysts

Robert Craig - Stifel Nicolaus & Company, Inc.

Mark Marostica - Piper Jaffray

[Evan Doherty] - Banc of America Securities

Gary Bisbee - Lehman Brothers

Corey Greendale - First Analysis Corp.

Jennifer Cho - Credit Suisse

Frank Adkins - BMO Capital Markets

Operator

Good afternoon, ladies and gentlemen, and welcome to the Universal Technical Institute, Inc. second quarter fiscal 2008 conference call. (Operator Instructions)

At this time I would like to turn the conference over to 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 second quarter ended March 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. I'll refer you to today's news release for UTI's comments on that topic.

The safe harbor statement in this release, which I will not repeat here in the interest of time, also applies to all statements made during this conference call. Information in this conference call, including the initial statements by management as well as answers to questions related in any way to any projection or forward-looking statement are subject to this safe harbor statement.

We have updated our historical business statistics for those who have asked for our company's trend information. We have posted a slide presentation on our website under the Investor Relations section to provide greater transparency on key operating statistics.

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

Kimberly J. McWaters

Thank you, Jenny. Good afternoon, ladies and gentlemen. Thank you for joining us to review our second quarter results.

On today's call I'll provide a high level overview of the quarter and share the progress we're making on key initiatives. Eugene Putnam, our interim CFO, will follow with a more detailed review of our financial results and an update on the lending environment before opening the call up for your questions.

Before I summarize our results for the quarter let me preface my comments with the fact that the financial and business results reflected in the first half of fiscal 2008 are largely driven by an insufficient number of student contracts and starts during prior quarters. Due to the length of our business cycle, the quarter does not fully reflect the progress made in terms of lead generation, student recruitment and show rate improvement.

Our net revenues for the second quarter were $88.2 million, down 3.8% from the prior year, primarily due to the decline in average undergraduate student enrollment.

Net income for the second quarter was $1.9 million as compared to net income of $6.1 million for the same quarter a year ago. The decline in our operating performance in the quarter as compared to the prior year was due to decreased revenue as well as higher contract services costs, occupancy costs, advertising expense and bad debt expense, partially offset by lower compensation costs.

These factors contributed to diluted earnings per share of $0.07 for the second quarter of 2008 compared to diluted earnings per share of $0.22 a year ago.

Average undergraduate enrollment for the second quarter of 2008 was 15,092 compared to 16,389 a year ago, a decrease of 7.9%. This contributed to a year-over-year decrease in our capacity utilization rates from 65% to 60%.

During the quarter we started 2,829 students as compared to 3,082 students a year ago, which is an 8% decline year-on-year. The number of actual starts is driven by two components - first, contracts written for the period, and second, the show rate, which is the percentage of contracts scheduled to start who actually start as planned. The decline in starts for the quarter is solely attributed to an insufficient number of contracts, as the good news is our show rate improved year-on-year during the quarter by 40 basis points.

This quarter starts are particularly dependent on the young adult population. While we have recently seen significant improvement in contracts written for the young adult population, these students are scheduled to start in future quarters and therefore did not benefit this quarter.

Student persistence has remained strong throughout the first six months of 2008, improving by roughly 10 basis points over 2007.

In summary, I am disappointed with the quarter in terms of year-over-year financial performance as it has taken longer than any of us would have hoped to improve our operating results. However, for the first time in a long time we are very encouraged with the results of our key business initiatives and leading indicators, and I'd like to share that progress with you now. These initiatives are specifically designed to improve lead generation, student recruitment, show rates and ultimately start growth.

Let's start with marketing. Since January of this year, building upon extensive student segment research and a quantitative positioning study last year, UTI implemented a new national campaign, coupled with a revamped web strategy.

The new campaign and web strategy was designed to produce more leads, student contracts and starts more economically over the long term. The strategy emphasizes more efficient and effective media buying, supporting more brand-focused advertising with a clear call to action - visit UTI.edu. Our Internet lead volume is also supplemented by increased sourcing from Internet lead vendors and, more importantly, an improved natural search strategy driving an increase of more than 800% in natural search visits year-over-year.

Clearly our strategy is producing more informed leads that are converting at a higher rate into student contracts as evidenced by the steadily improving productivity levels of our campus-based reps. While momentum and cost efficiencies are still building, indications are that our strategy is working.

As a reminder, our leads were down year-on-year in the first quarter due to decreased advertising expense prior to the launch of our new campaign in January. For the first six weeks of the second quarter, we further tested and refined our strategy, which did not contribute to lead growth during that time. We started to build momentum during the latter half of the quarter, contributing to a 5% increase in leads year-over-year for the quarter. In March we generated 32% more leads than last year, and in April the team delivered better than 47% growth.

As I mentioned during our last quarterly call, we continued to achieve cost per lead efficiencies with our national television directory [spot] campaign, however during the quarter we did supplement our national advertising with local advertising to promote brand awareness, campus events and walk-in traffic, which is less efficient but necessary to support local start growth. As a result, our cost per lead increased approximately 5% for the period, which includes an annual increase in advertising costs of 5% to 6% against an industry norm of 7% to 8%.

Based on the early positive results of our new marketing efforts, we increased our advertising and marketing spend during the quarter to 9.6% of net revenues as compared to 5.3% of net revenues during first quarter and 8% of net revenues during the prior year's second quarter. We expect to continue to increase advertising expense as a percentage of revenue during the latter half of the year despite the short-term impact to operating income. This is the moment we've been waiting for, and now is the time to invest as it fuels the growth of our student pipeline.

Benefiting from the new and improved marketing campaign is our Campus Admissions team. During the quarter, Campus Admissions, the team that focuses on young adult students, also started to build positive momentum, driving 14% growth year-over-year for the quarter. This growth is not only attributed to more effective advertising but also leadership changes, improved sales processes and staff development.

Since January, the team has steadily improved year-over-year performance. In March the team achieved 36% growth year-on-year, and in April exceeded the prior year by 45%. In order to offset the structural changes to our Field Admissions organization, Campus Admissions must grow annually at better than 20%. March and April marked the first time the goal was met or exceeded, and we have reason to believe they will meet or exceed goals for the remainder of the fiscal year.

As a reminder, last year we consolidated 24 high school territories and changed our lead policy to allocate more business to Campus Admissions. We did this because Campus Admissions has proven to be a most cost-effective sales channel with certain student segments and geographies. While we knew it would take time, we believed it would prove to be more effective and efficient.

During the second quarter we started to realize some of the efficiencies. Although Field business for the overall quarter was down 18% year-on-year, each month of the quarter their performance improved. In January, Field was down 26% year-on-year, in March, down 11%, and in April their performance matched last year. This means the team wrote the same number of contracts in April with 19 fewer people and less leads. In fact, they were approximately 14% more productive.

Taking into account the performance for both Campus and Field sales teams combined, we started the quarter down 15% and ended down 6.1%. For April, we are up 19% and May is off to a good start.

Based on the volume of leads and the recent success of our Campus Admissions team, as well as new opportunities identified with our Field and Military recruitment efforts, we anticipate increasing our total admissions team throughout the remainder of this fiscal year.

Now let's talk about our show rate improvement efforts for a moment. As I've discussed in previous calls, we have made significant process changes with respect to financial aid and future student services. We have outsourced a significant portion of the initial paperwork collection and quality control for financial aid processing.

We have invested in the training of our staff to improve skill level and overall customer service. We have trained six of our locations at this time and anticipate the remaining four will be completed by mid-summer. Campuses that have received the training show an initial average show rate improvement of 530 basis points, whereas other campuses have continued to decline. Of those campuses that have been trained, we have determined that further investment in the development of our leaders, staff and information technology and reporting capability is necessary to sustain the improvement, therefore we will continue to invest in this training initiative to support the complete rollout to the remaining four campuses while increasing the level of support at the initial six campuses.

Lastly, we have heard speculation of how the changes in the lending environment will affect various educational institutions. I'd like to give you my perspective on the impact to UTI. First is the point on lenders and their participation or lack of participation in FELP and private loan programs. Eugene will provide more detail later in the call on this subject, but UTI and our students have not really been impacted by the most recent changes announced by major banks.

Second, we anticipate the implementation of new legislation on Title IV funding will have a very positive impact on our students and ultimately our business. You may recall that last year Pell amounts for an average student increased approximately $460, and Stafford loan amounts increased $1,700 over the course of the student's program. Beginning July 2008, Pell amounts for our average UTI students will increase up to an additional $446 and assuming H.R. 5715 is signed into law, unsubsidized Stafford amounts will increase by approximately $3,900 over the course of the student's enrollment.

This is a significant improvement when you compare the financing options for a student taking our average $25,000ayear program who started in '06 versus '08. As an example, for dependent students who are fully Pell eligible, their Plus loan need will be decreased by 40%. Even dependent students who are not Pell eligible will see a 20% decrease in Plus loan need over 2006 levels. For independent students and those dependent students who are Plus denied but Pell eligible, they will be able to cover their entire tuition with no requirement for private financing. For independents or dependents who are Plus denied and are not eligible for Pell, their alternative loan need will decrease by 36% from 2006.

These changes, in combination with our own lending program scheduled to launch during our third quarter, should benefit our efforts to drive continued show rate improvement and start growth during the latter part of this year and beyond. As we look forward to the balance of this year, we currently have 86% of the contracts already written to deliver the same number of starts we had during the second half of last year without any improvement to last year's show rates. However, we did experience a 40 basis point improvement in our show rates during the second quarter, and, in fact, April's preliminary results indicate an improvement of over 500 basis points year-over-year.

We will continue to focus the organization on accelerating start growth during this period by investing in lead generation activities that produce quick starts, increasing our admissions representative headcount to effectively work the increased lead volume and drive contract growth, and by sustaining the show rate improvement with continued investment in our customer service training programs at our campuses. Certainly, we believe the availability of affordable funding options for our students will support our efforts in these areas as well.

In summary, we are really beginning to see the positive momentum in marketing, admissions and show rate improvement. Given the nature of our business, it will take several quarters to rebuild the average student population and revenue, but the front-end drivers of the business are moving in the right direction for the first time in a long time. We will continue to invest in the business to drive more leads, contracts and starts, while maintaining strong cost controls across the business without compromising our commitment to students and industry customers.

Before I pass the call over to Eugene Putnam, our interim CFO, I would like to provide an update on our search for a new Board member. We issued a press release last night announcing the appointment of Alan Cabito to our Board. He has a significant amount of experience in sales and marketing during his 36 years at Toyota Motor Sales. We are pleased to have Al join our Board and look forward to his contributions.

Now I'd like to turn the call over to Eugene, our interim CFO, for a detailed review of our financial results for the quarter and fiscal year. Eugene?

Eugene S. Putnam

Thanks, Kim. Let me start with the income statement.

Net revenues for the second quarter were down 3.8% versus the prior year. This decrease was primarily driven by a decline in average undergraduate student enrollments of 1,297 students, a decline of 7.9% from last year. That decline was partially offset by higher average tuition revenue per student of 4.5%.

Both operating and net income margins for the quarter remained under pressure due to these lower revenues as well as increases in specific expense line items, specifically contract services occupancy costs, advertising and bad debt expense.

For the quarter, compensation costs decreased $2.5 million to $44.3 million. This decline is primarily related to aligning our cost structure with our existing student population and maintaining an expense discipline during this challenging environment.

Contract services in the same period increased $1.9 million for the quarter to $3.3 million. This is primarily related to outsourcing the front-end financial aid process as well as contract employees that we've used to fill open positions and some consultants that we've used to provide additional marketing and advertising research and creative materials as we continue to invest in our national advertising campaign that Kim discussed.

Occupancy costs for the quarter were $9.3 million, up from $7.4 million for the second quarter of last year. This increase in costs was primarily related to the previously announced sales and leaseback of our Sacramento and Norwood facilities.

Advertising expense increased $1.2 million for the quarter from $7.3 to $8.5 million, and it was primarily due to the additional investments in advertising in response to the positive results we've been seeing on our new national advertising campaign as well as our redesigned website. And as Kim mentioned, these expenses are investments in our core business intended to drive higher levels of contracts, improve the show rates, and ultimately generate higher student counts leading to improved revenues and improved margins.

Bad debt expense during the quarter was $1.3 million. That was up from $600,000 in the second quarter of last year. The increase is due to the write off of balances which were transferred to a third-party collection agency. As some of you might know, historically we used an internal group of collectors to collect tuition from students who are no longer attending UTI. Beginning in the fiscal year 2008 for us, we outsourced that collection function to a third party but we've been very disappointed in their level of service and performance, and just this quarter decided to bring that function back in house. And we do expect to see improvement in those collection efforts going forward.

The bad debt expense as a percentage of revenue was 1.5% during the quarter, and we believe that compares very favorably to industry norms. And I think it's also important to know that none of the bad debt expense in the quarter was associated with our Genesis loan program, which accounts for 474 students at quarter end and really represented less than 1% of our revenue.

Net interest income for the quarter was $857,000. That's up from $595,000 in the same period last year. Despite lower interest rates, we had higher investable balances of cash.

And finally, our tax rate was 39.1% for the quarter, and going forward we expect to see smaller state tax credits and we'd expect in the second half of the year our book tax rate to range between 39% and 41%.

What that all amounts to is net income as stated for the quarter of $1.9 million or $0.07 per share. That's down versus the $6.1 or $0.22 per share reported in the second quarter of last year. For the first six months of the year, net income was $8.4 million or $0.32 a share, again, down from the $13 million or $0.48 per share in 2007.

Moving to the balance sheet, I'm pleased to report that even in this difficult environment, our balance sheet continues to be extremely strong. We had cash and cash equivalents of $75 million at quarter end, virtually unchanged from where we were at the beginning of the year, September 30, 2007, and up significantly from the $40.4 million that we had at March 31 of last year.

During the second quarter, despite the challenging environment, we generated $1.6 million in cash flow from operations, and most importantly, we continue to have no debt on our balance sheet.

At quarter end at March 31, we had repurchased 1.9 million shares of common stock on the open market at a total cost of approximately $29.5 million. And while we continue to have an open authorization to purchase approximately $20 million more of common stock, we believe that the most strategic use of our cash resources is subsidizing funding alternatives for our students and/or maintaining a strong and liquid balance sheet, although we will continue to evaluate the appropriateness of repurchases going forward.

During the first six months of the year we had fixed asset purchases of $10.4 million, which was down significantly from $18.1 in the same six-month period of last year. The $10.4 million that we purchased this year is almost entirely associated with new training programs and ongoing replacement of equipment related to existing student training.

We're continuing to address our capacity utilization issues while at the same time remaining mindful of our customers' needs. From a fixed asset perspective, we plan capital expenditures for the fiscal year '08 to be $14 to $16 million, which is down from the previously disclosed $16 to $18 million.

We're continuing to look for potential opportunities to optimize our footprint. These could include relocating or reallocating a portion of existing space to OEM retraining programs, to new product offerings or subleasing facilities with excess capacity at certain locations. We've already consolidated some of the space at our corporate office and moved some of our team members to our Avondale campus here in Phoenix. We have sublet some of the space, and we're actively in the market looking to sublet the remaining space that we vacated to the corporate office. And we continue to actively evaluate any of our leases that are approaching expiration dates.

And finally, we are expanding several of our elective programs in 2008 during the remainder of the calendar year. We've already added the Cummings Power Generation program and the Freightliner program to our Avondale campus. The Cummings engine program will be offered at the Houston campus beginning later this summer, and we are expanding both the Toyota and Nissan electives at the Sacramento campus and are also expanding the ITEP advanced training program to our Exton campus.

Kim commented on the pending legislative changes which may positively impact the student lending environment, but I wanted to take a moment to update you on what's going on in the private lending environment as well. As we all know, it's been a very turbulent time in lending over the past several months, including news from some of the lenders who are adjusting their offerings in the student loan arena. Large lenders such as B of A, J.P. Morgan Chase and Citibank have all had recent announcements regarding how they intend to play in the role of student lending going forward.

Of these three lenders, B of A remains committed to providing FELP to UTI students and their parents, but has left the student loan sector entirely, the private student loan sector. So we've removed them from our private loan list going forward. That said, private loans from Bank of America only accounted for less than 1% of the private loans that we received for our students during the second quarter.

J.P. Morgan Chase has been on our private loan list, and they continue to offer their suite of private loan products to our students.

Citibank was never on either of our FELP or private loan lists, so their suspension of activities has really had no impact on us.

And additionally, we have received confirmation from our other lenders on both our FELP and private lender list that they intend to continue these loans to our students and parents for the foreseeable future.

And while the lending environment has definitely become more challenging for our students, it really has not had a major impact on UTI's financial performance. Forty-two percent of our students are fully funded by Title IV loans and grants. Another approximately 23% meet their tuition gap with funding with cash payments. Another 25% of our students require some type of private alternative loan. And finally, the remaining 10% require some type of discount alternative loan. And as I mentioned earlier, these discounted loans amount to less than 2% of our total revenue.

Given the strength of our balance sheet, we believe that there's an opportunity to provide our students with more affordable and flexible funding options, and we're in the process of evaluating a UTI-backed lending option. While we have high graduation rates, strong placement rates, lower default rates and reasonable and competitive starting salaries as well as an extremely clean balance sheet, we think it's a prudent time to pursue this strategy.

We are currently in contract negotiations with third parties to roll out a UTI private loan program, hopefully by midsummer. And while I'm not yet ready to share the exact terms and conditions of the program, I think it's important to understand and make sure the investment community understands what we're attempting to accomplish. We want to ensure and the priority is to ensure that our students interested in attending UTI have adequate access to fund whatever tuition gap they may have and that that funding is provided at acceptable rates with acceptable terms and conditions.

And finally, I want to emphasize we're not talking about putting the strength of our balance sheet at risk here. Rather what we're really looking at, even in a worst case scenario, amounts to an opportunity cost of potentially foregone revenue, very similar to what we had with the Sallie Mae discount program and what we currently have with our Genesis program.

So in closing let me remind you that we have not in the past and do not intend in the future to provide earnings guidance, but I do want to comment on some of our leading metrics.

We ended the quarter with 14,637 students in school, and as most of you know, historically our third quarter's our weakest start quarter. I expect to see student populations decline further in the third quarter before they increase in the fourth quarter during our prime start season.

As Kim has mentioned, we're seeing positive trends in our sales efforts but we start the second half of the year with nearly 1,400 below where we were at this point last year, and I believe that this shortfall will make it a challenge for us to achieve the revenue and net income levels that we achieved in the third quarter of last year.

We spoke to starting to see some positive metrics in terms of lead generation, contracts signed and show rates, all of which are clearly encouraging. But I want to remind everyone of the long lead time, sometimes as much as 18 months, between our marketing and sales efforts and a student actually starting school and generating revenue. And therefore I don't really believe that these positive trends will equate to improvement in actual number of students in school until the fourth quarter and on a year-over-year comparative basis until some time in 2009.

And with that said, we are working diligently to ensure the improvements we've already made in the front end of our business model and that the positive trends that we're beginning to experience equate to an enhanced financial performance as quickly as possible.

And before opening it up to Q&A, I'll turn the call back over to Kim for a quick summary.

Kimberly J. McWaters

Thanks, Eugene.

In closing, I see the quarter as a mix of financial disappointment as well as signs of promise. Traditionally I've been as candid and as transparent as possible about our business and the challenges we face, and at the same time have spoken with cautious optimism when warranted. This call is no different, nor is my approach.

Despite the financial results of the quarter, there is simply more to be optimistic about than I have seen in several years. Our initiatives are working, our execution is improving, and we are building momentum. We are a solid company and a quality brand. We remain industry's choice as the leading provider of auto, diesel, collision repair, motorcycle and marine technicians.

And with that, we're happy to take your questions.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Robert Craig - Stifel Nicolaus & Company, Inc.

Robert Craig - Stifel Nicolaus & Company, Inc.

Kim, I apologize. You threw out an awful lot of numbers there. Could I just get a read on contracts written during the quarter and/or if you'd like to update us on where you stand in contracts written quarter-to-date so far in 3Q?

Kimberly J. McWaters

So for both Campus and Field sales combined, I said that we started the quarter down 15% and ended down 6.1%. For April we're up 19%.

Robert Craig - Stifel Nicolaus & Company, Inc.

And as a follow up, could you give us some idea as to your plans and advertising spend as a percent of revenue for the balance of the year?

Kimberly J. McWaters

Well, it was in the 9% range this quarter, and I would expect it could go up another point or two if we continue to see the results that we're seeing currently. If we continue to see efficiencies on our national campaign, we may have an opportunity to reduce it, but I do think it's important to support the local market effort given our push to drive quick starts that typically originate from a 50mile radius around the campuses.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

I wanted to ask, Kim, in regards to your comment on building your admissions team as one of the key drivers here, how many reps do you currently have now and how many are you going to add in [break in audio] half of the year?

Kimberly J. McWaters

Well, we have about 159, I think, on the Field side, and we're contemplating adding maybe 10 to 15, you know, over the next six to seven months. We have about 99 Campus or close to 100 Campus, and that we could add, I don't know, up to 115 depending on how the lead flow continues. But based on what we're seeing now, I don't think that those numbers are unrealistic by the end of the fiscal year.

Mark Marostica - Piper Jaffray

And how long does it take typically for a new rep to ramp up to optimal level of productivity [and] conversion rates?

Kimberly J. McWaters

Well, they're typically different. On the Campus side, those are the ones that are focused on the young adults and are located at the campuses, we can see a couple months before they get to the same productivity levels. I can tell you of the rookie class that has been trained this year, they are already producing at the average of the rest of the Campus Admissions team.

So that's much faster than the Field or Military organization, because that typically takes six to nine months before you actually see the same productivity levels, especially because they have a longer lead time from enrolled to start.

Mark Marostica - Piper Jaffray

Eugene, you mentioned that Q4 would see an improvement in population, and I just want to clarify that. Are you referring to a sequential improvement around Q3 versus Q2 in population?

Eugene S. Putnam

Yes, I am. I'm referring to a sequential - I think exactly what I said was I expect to see student enrollments decline from the ending second quarter level in the third quarter, and then grow in the fourth quarter as we have seasonal stronger starts. But on a year-over-year basis, I don't expect to see year-over-year student growth until some point in 2009.

Operator

Your next question comes from [Evan Doherty] - Banc of America Securities.

Evan Doherty - Banc of America Securities

I just wanted to see if you could just comment on the average revenue per student? That's come in a little higher than we were expecting now for the second quarter in a row. Maybe just what's driving that and then how shall we think about that going forward given the April price increases?

Eugene S. Putnam

Well, as you know, the average was about $5,800 per student. That is up about 4.5%. We have a fairly long lead time, as I talked about, so one of the factors that is impacting it is even though we just had a tuition increase in April and did not have one last October, what we're seeing is the benefit of increases that were made last year because a student's tuition is locked in at the time he or she signs a contract.

So part of the improvement is stemming from last spring's increases, part of it is coming from a mix shift to taking more electives, which are more expensive for our students, and part of it is coming from what we call rephase revenue, although that is fairly insignificant. It's really a combination of the first two things I'm talking about, just general tuition increases, that's really impacting it.

Evan Doherty - Banc of America Securities

And then as a follow up, you had mentioned some comments on the higher Stafford loan limits; do you see that as an opportunity to get pricing later down the road?

Kimberly J. McWaters

Yes, we do, and plan on a fall increase of traditional norms between 2.5% to 4%, depending on the campus and geography.

Evan Doherty - Banc of America Securities

Would you expect that to be closer to that higher end of the range, given the increases?

Kimberly J. McWaters

Yes, I'd say that you could see it higher than the typical 2.5% at some locations. Some in the more, I'd say, depressed socioeconomic regions, we would probably keep it lower, but yes, more towards the high end.

Operator

Your next question comes from Gary Bisbee - Lehman Brothers.

Gary Bisbee - Lehman Brothers

I wondered if you could just give us some sense, you know, order of magnitude, how you'd think about the drivers of some of the better metrics, an improvement in the metrics you talked about, between the new marketing campaign, maybe any benefit from weakening job market, and then just other things that you've been working on for longer than just the new marketing campaign, like training your reps, reorganizing the reps, etc., etc.

Kimberly J. McWaters

Yes. Inside of 2007, we had a lot of efforts around research and learning, and then started to put some of those initiatives with respect to our advertising, our lead generation efforts, as well as structural changes with the sales organization, process improvement, training and development of staff and leadership, and also did it in the areas of financial aid and future student services.

So in those key, critical functions in the front end of our business we have invested more than 12 months' worth of effort to turn it around, whether it was incremental improvement or a total reinvention of processes where warranted. And in January we started to see the benefits of those across the spectrum. We had commented on certain improvements that kind of seemed to ebb and flow depending on the quarter, but January we started to see the momentum build, and then certainly March and April, from all fronts - lead generation, admissions or student recruitment, and show rate improvement - was, you know, significantly different.

So we do believe that the initiatives are starting to pay off. The macro environment is certainly contributing in some way. It's difficult for me to quantify that, but I do know that our people on the fronts lines are commenting on the fact that the job market is drying up is driving some students to interact and to close the enrollment process sooner than they have in the past. And then we have campuses where we're not seeing it at all yet because the economy is strong in that local area.

So it depends on the campus and the geography, but overall I'd say improved execution, sound initiatives, as well as the macro environment is starting to benefit us.

Gary Bisbee - Lehman Brothers

Should we be thinking about a material level of cost here over the next six months in terms of you getting up and running your own lending program? I know you're not ready to give a lot of details, but are you spending money on that or is it going to be reasonably immaterial?

Eugene S. Putnam

It's the latter. It's going to be reasonably immaterial. The general plan is to outsource the vast majority of it. Obviously, there'll be a person or two here that - FTE that will be involved. We will clearly have some startup costs from a technology standpoint in getting systems ready, but I would put those in the immaterial category. We're certainly talking well under $1 million in total to be up and running.

Gary Bisbee - Lehman Brothers

You mentioned that you've got, I believe it was in the 80% somewhere of the starts from the second half of last year already contracted for the second half of this year. How confident are you in those? It sounds like the show rate's getting a little better, but I think last year that number fell apart somewhat as we got towards the end of it so I'm trying to gauge comfort level, confidence in the continued progress with the show rate and actually getting those kids in school.

Eugene S. Putnam

Yeah, let me clarify. The number was 88%, and what the 88% really was was the percentage of contracts that are already written on our books right now versus what we think we need to have for the remainder of the year, okay? So that's kind of the inventory that we're playing with.

And your follow-up question as far as show rates, I think what Kim talked about is one, we've seen, yes, it did fall apart late last year, but we've seen improvement on a year-over-year basis both in the first and second quarter, so that gives us some level of confidence that some of the things we're doing are taking hold.

The items that Kim talked about as far as training and investment in both the front-end systems, the sales process, the financial aid systems are all taking hold, so that's a second thing that gives us a little bit more confidence and optimism about show rate.

And the third thing is at this point versus last year, we not only have a higher percentage of our contracts written but a higher percentage of them are also campus leads, which tend to both start sooner and at a higher rate.

So those are all factors that, you know, while we're not going to say our show rate's going to improve, it all gives us, you know, guarded optimism that our show rate will continue to improve and certainly improve over the second half of last year.

Operator

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

Corey Greendale - First Analysis Corp.

It sounds like there would be a pretty nice benefit to you in terms of the student financing from the passage of the bill, for the bill getting signed. Any concern that you'd start to bump up against 90-10 limits if it does go through?

Kimberly J. McWaters

At this point, based on our analysis, we're not concerned that it's going to bump up against 90-10, certainly not in this year and the next year. So we'll continue to evaluate that, but it's not a concern given the gap that our students face today.

Corey Greendale - First Analysis Corp.

And Kim, I wanted to follow up on a comment that you'd made. I think you said something about local advertising not being or local marketing not being as efficient as national marketing, and I believe that the show rate tends to be higher for people who are local to a campus, so can you just elaborate on that? And when you factor in the show rate, is the cost per start still lower for locally based people as opposed to national?

Kimberly J. McWaters

The cost per start for local based people is definitely lower than those coming beyond the 50, 100-mile radius.

In terms of the efficiencies that I was speaking to on the local advertising basis, that is strictly speaking to a cost per lead. So when we report on the cost per lead, you'll initially see that increase because of the local efforts. So the leads may cost us more, but the more we can get from that local population, the higher the show rate and the better off it is for that campus and the business overall.

What we are still trying to crack the code on is the right balance in some of these local markets. Because even though we are investing in a national advertising campaign that is building efficiencies and momentum, you do have those programs airing in a local market. What I'm talking about specifically, inside of this quarter we also advertised on local broadcast stations or independent stations as well as radio to drive traffic to campus events, etc. And finding the right balance based on the quarter and what events are running at the campuses is something that I think we're still figuring out.

Clearly, what is most efficient from a cost per lead standpoint is a nationally generated lead coming from the local area. But if we can augment with local broadcast advertising and radio to support events, we're going to do it. So some quarters we might see that higher, especially during the springtime or when we're having our midyear meetings, to get people to the site because we do know that there's a strong correlation with those students who actually tour and visit a UTI campus and then actually show to school. So the more we can drive them to the campus, the better off our starts and show rates will be.

Corey Greendale - First Analysis Corp.

Can you just comment on current trends in placement rates, and should we expect that placement rates could come off a bit with the economy being down or should it not be impacted?

Kimberly J. McWaters

At this point we continue to see very strong placement rates. You might see certain issues in geographies by brand, you know, specific to the manufacturer program. But out of the core program, the demand remains high, our placement rates remain strong, and we cannot supply enough graduates to meet the demands of our employers. So I don't foresee that as being a problem.

Operator

Your next question comes from Jennifer Cho - Credit Suisse.

Jennifer Cho - Credit Suisse

I am curious, with Corinthian reporting that their starts were up nicely in their automotive division, do you think you might be losing some market share there? And secondly, based on what you're seeing from your lenders, your private lenders, and their underwriting standards, what percentage of your revenues might you be willing to self-fund in '08 and '09?

Kimberly J. McWaters

I'll comment on the Corinthian and market share, and then Eugene can take the latter question.

In terms of the growth reported specifically for the Wyo-Tech division, I don't know what the percentage growth was based upon given that I know the strong starts are in the July-October timeframe, so I don't know what the percentage growth is based upon, the comment on that.

I can tell you in the areas where we compete head-to-head with them, specifically in the Sacramento area, market share does not seem to be a problem, and we are not getting that feedback from our representatives in other regions as well.

So we're not getting competitive with the for-profits as being an issue or challenge for us. With that said, I do think there remain some community college competitive issues with the cost and convenience factor that we're overcoming in certain markets.

Eugene S. Putnam

With regard to the second part of your question, I think if you look at what we had in Sallie Mae, discount and opportunity, what we have in Genesis, that's kind of what we're looking to replace, at least initially. We have about $4 million outstanding with Genesis. The opportunity and discount pools totaled about $10 million even though we never used them.

So I think if you think about it $10 million a year, that's kind of where we're starting the program or anticipate starting the program. I'm not saying that we wouldn't go beyond that. It certainly is dependent upon, as you said, one, what alternative lenders end up doing, if they are making basically payments too difficult for our students because of terms, rates or conditions and there's an opportunity for us to step in there and provide incremental funding to achieve incremental students, we'd certainly consider that.

But I think initially we'll probably go out with something in the $10 million range and evaluate how it goes there. Again, it's not so much how much we put out there. We want to be there in essence as a lender of last resort for the student that can't get - that decides not to come to school because they either don't have access to funding or the access to that funding is at rates, terms and conditions that are just not palatable to them.

Jennifer Cho - Credit Suisse

And maybe if you could just give us a sense of the reserves you expect to take against those loans?

Eugene S. Putnam

Well, we're not exactly sure how we're going to account for it yet. My hope, and we have to make sure PWC is okay with this, my hope is that we'll basically do it similar to the Genesis program, where we're almost on a cash basis accounting and won't really have any, won't have to put up any reserves against it because we won't be booking any revenue until it's received.

So, again, anything that we lend out, you know, those funds, that cash would not be going outside of UTI, so there's no real loss of cash here. It's an opportunity cost, there's a loss of additional revenue if at some point that student doesn't pay that back. But my hope and reasonable belief at this point in time is that we won't need to put up reserves because we won't be booking any revenue.

Before we go to the next question, I need to correct one thing I said on Gary's question. I think I answered it the number we gave out was 88%. The actual number was 86%. And just to clarify, that's 86% of the - we've already written 86% of the contracts to deliver the same amount of starts in the second half of next year without any improvement in show rate over the second half of last year.

So I apologize if I confused somebody by giving the wrong number there, but it's 86%.

Operator

(Operator Instructions) Your next question comes from Frank Adkins - BMO Capital Markets.

Frank Adkins - BMO Capital Markets

I want to go back to pricing for a minute. You had talked about some of the fall increases, you know, the 2.5% to 4%, and it would kind of depend on geography. Could you give us maybe a little bit of color on what geographies are strong and where are you seeing some weakness?

And then secondly, do you think pricing to this point is having any impact on starts?

Kimberly J. McWaters

The areas where we see weakness from a pricing standpoint is typically in the South. So our Houston campus as well as some that feed into our NASCAR campus, we've had less price elasticity in those areas just based on the demographics or the populations that feed into those campuses. So those are the two specifically I'm speaking of when I say towards the lower end of the range.

I don't remember the second half of your question. I'm sorry.

Frank Adkins - BMO Capital Markets

It was do you think that pricing is having any impact on starts at this point?

Kimberly J. McWaters

Well, I think that it's more about lack of access to affordable funding options. And what we've speaking about for the past year really has been the interest rates on especially the subprime or the private loans are higher than what they can get through the federal government. And so the students who have opted to participate in our Genesis product are willing to take loans at very high interest rates, and those who are not are saying no. So from that standpoint, yes, it does impact starts and that's why we're working as hard as we can to make certain that we put in a program that provides students with access to affordable funding with terms and conditions that are acceptable to them.

Eugene S. Putnam

I may be splitting hairs, but it's really more the payment than the total tuition of the program. I think students understand there's a good value proposition for the total amount of the program. As Kim mentioned, it's a question of whether, depending on where they are and what they're entitled to, whether they can finance that in terms and conditions that are palatable to them.

Frank Adkins - BMO Capital Markets

And could I get maybe a little bit of color on this year's outlook for Capex given some of these new initiatives?

Eugene S. Putnam

Yes. We've spent about $10.5 million year to date for the first six months in Capex. I'd expect probably about half of that again in the second half of the year. I think we'll be somewhere in the $14 to $16 million range for the full year.

Operator

Your last question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

Eugene, I think you mentioned that 42% of the revenue of the company comes from students who - or perhaps 42% of the students have their entire tuition covered by Title IV programs. Assuming the - and first confirm that  assuming the legislation passes, what will that metric change to?

Eugene S. Putnam

I'll give you an answer on the first part, and you had it right the second time. It's 42% of the students, not of the revenue, but 42% of the students that we have have their entire tuition covered, either by Title IV and/or grants.

The new legislation, I can't give you an answer to that yet.

Operator

And Ms. McWaters, there are no further questions at this time, so please continue.

Kimberly J. McWaters

Okay, thank you for joining us on our conference call today, and we wish you a pleasant evening.

Operator

Ladies and gentlemen, this concludes UTI's fiscal 2008 second quarter earnings call. As a reminder, this call will be available for 60 days at www.UTI.edu or alternatively, the call will be available through May 13, 2008 by dialing 8004052236 or 3035903000 and entering the passcode 11112957 and the # key. You may now disconnect, and thank you for using ACT.

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Source: Universal Technical Institute, Inc. F2Q08 (Qtr End 3/31/08) Earnings Call Transcript
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