Good afternoon, and welcome to the Universal Technical Institute Second Quarter 2014 Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. A replay of the call will be available for 60 days at www.uti.edu or, through May 9, 2014, by dialing (412) 317-0088 or (877) 344-7529 and entering passcode 10044353. At this time, I'd like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead.

Hello, and thanks for joining us. With me today are Kim McWaters, Chairman and CEO; and Eugene Putnam, President and CFO. During today's call, we'll review the results of our second quarter and take your questions. Before we begin, we must remind everyone that except for historical information, today's call may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the amended Securities Act of 1933. I'll refer you to today's news release for UTI's comments on that topic. The Safe Harbor statement in the release also applies to everything discussed during this conference call, including initial comments by management as well as answers to questions. During today's call, we'll make reference to EBITDA, which is a non-GAAP measure representing net income exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure, net income. And now I'd like to turn the call over to Kim McWaters, our Chairman and Chief Executive Officer. Kim?

Hello, everyone, and thank you for joining us on our call today. As we expected, the second quarter was difficult from a financial perspective, but we continue to make progress against our core objectives of continuing to deliver value and strong outcomes for our students, growing our student population so we can meet our customer's increasing demand for trained technicians and managing costs and improving operating efficiencies. Achieving these goals is a matter of balance. We're balancing strong transportation industry dynamics with a challenging regulatory and economic environment. We're balancing tried and true strategies with the need to innovate and change. And we're balancing diligent cost control with thoughtful targeted investments and growth. America's transportation industry is once again thriving, and the demand for well-trained technicians continues to grow. There are more than 1.1 million auto, diesel, motorcycle, marine and collision repair jobs in the country, and these jobs are expected to grow nearly 10% through 2022. That creates plenty of opportunity for our graduates and for UTI, and we believe we are well positioned to meet the growing demand. We understand that our industry-driven focus and our strong relationships help us offer high-tech, high-touch education that's specific to our customers' needs. Our educational programs and delivery models specifically cover the wants and needs of our industry customers, providing our students access to some of the most relevant tools and technologies. As a result, our student outcomes are strong and they're getting better. Our graduates leave UTI ready to find good-paying jobs in an industry that offers plenty of opportunity for advancement. But for so many qualified students who have dreams and aspirations of becoming a technician, there are big hurdles to overcome on the path to a good education. Families are feeling the lingering effects of the Great Recession…

Thanks, Kim. We began the second quarter with 800 fewer students than last year. However, with a very nice increase in new student starts, we ended the quarter with about 14,300 students, which is only down 100 students from this time last year. Despite continuing pressure on show rate, which was down about 450 basis points, student starts were still up about 7% for the quarter in line with our previous guidance. Revenue for the second quarter was $94.7 million, which was basically flat from last year. Our average tuition per student was up 1.8% for the quarter to approximately $6,500. Tuition excluded $6.6 million related to our loan program compared to $5.2 million in the second quarter of last year, reflecting continued difficulties for students and parents to secure financing for their education. For the first half of 2014, revenues were approximately $191.7 million, which was down about 1% for the same period last year. With continued efforts to control costs, this revenue level yielded an operating loss of $1.5 million for the quarter, which bettered last year's operating loss of $1.9 million. The quarter's operating loss was driven, in large part, by increased spend in advertising, which was up $1.6 million compared with the same time, same quarter last year. Advertising expense came in at $12.4 million for the quarter, which represented approximately 13% of revenue, up from 11% last year. Kim will spend more time on this, but it's important to note that the second quarter is seasonally a very important quarter for advertising and inquiry generation, and we are continuing to respond to challenges we have experienced with the introduction of a new TCPA language. Managing expenses continues to be a very important focus while we're working to increase our student populations. We have and we…

Thanks, Eugene. To meet our industry customer's growing demand for trained technicians and build a business capable of generating long-term results, UTI is focused on finding the most efficient and effective ways to grow our student population. During the second quarter, we continued to implement a media optimization strategy intended to drive new student growth more efficiently and effectively. This shift continued to move the company away from an inquiry volume focus. As a reminder, our overall objective is to generate a greater number of student inquiries with a higher propensity to start school. The good news is, despite a 7% decrease in inquiry volume year-over-year, of those inquiries we did generate, the propensity for those students to start increased 11.5%, resulting in approximately 5% year-over-year growth in the number of predicted starts. We are still trying to find the right balance between efficiency and growth and ideally would like to generate both higher-volume and higher-propensity inquiries to effectively grow the business. Contributors to inquiry volume decline during the second quarter were some lingering effects of the TCPA language implemented and modified during our first half of the year. Some television clearance issues, as well as some television saturation issues, on certain networks and programs impacted our inquiry volume. Competitive pressure in key media channels also continued to pressure cost efficiencies. While we increased our advertising spend in the second quarter to address the challenges I just mentioned seasonally, it is the highest level of the advertising spend for the year. We still expect to see advertising expense for the full year come in a little higher than 10% of revenue for the full year. New student applications grew more than 3% in the second quarter, marking our fourth consecutive quarter of application growth. New applications from adults were up…

Thanks, again, Kim. While we are working to attract and start more high-quality students, with a heavy emphasis on the front end of the business, we also continue to focus on ensuring we offer a product that delivers substantial value and prepares our graduates to meet industries' needs. Additionally, we continue our efforts to manage the business efficiently and to reduce costs where appropriate. Strong industry relationships remain critical to our ability to deliver quality training and, we believe, continue to be an important differentiator for UTI. In December, we announced that we had begun teaching a pilot manufacturer-paid program in partnership with Peterbilt, designed to deliver comprehensive service technician training. I'm pleased to announce that the pilot was completed successfully, and we are now offering this program in our Dallas campus, and we'll be expanding this program to another campus later this year. I'm also pleased to announce that we are now teaching classes in our new state-of-the-industry blended learning curricula at our Sacramento campus. So including Avondale and Dallas, we're now teaching that at 3 campuses, with efforts underway to roll it out on a fourth campus later in calendar year 2015. Additionally, we're in the process of preparing our Orlando campus to begin offering our diesel program in early 2015. And as we have been discussing, a new campus on a scale similar to our Dallas campus that opened in 2010 is a direction that we are continuing to pursue. We will anticipate having something more substantive to discuss regarding both location and timing in the upcoming couple of quarters. We continue to make our loan program accessible to prospective students, as well as offering existing scholarships and testing new ones. Our loan program helps students who are well qualified to attend UTI but have a gap…

[Operator Instructions] Our first question comes from David Chu at Merrill Lynch.

So can you speak to how you think the impact -- like, what do you think the improving job market is having on show rates? And I think this is the first time you -- Kim, you mentioned that as a deterrent.

Yes, I'll give you the information that we're hearing from the front line. And that is, typically, students who are not coming to school suggest that they are actually not doing anything. Until recently, some of the research that we did this last quarter suggested that some students are opting to go to work and take lower, unskilled jobs. I think that could have an impact on the show rates somewhat. I also think it's impacting our inquiry conversion to both application and showing to school. If you remember, the male population or segment has lagged the recovery, from an employment standpoint, of most other workers in the U.S. And so I think that's a bit of a delayed reaction. And for the first time from the front lines, we're hearing that, that is becoming a little bit more of a competitive factor, if you will, on the front end. I still think the major contributor to show rate issues are centered around affordability challenges, however.

Okay, that's helpful. And you also mentioned some television clearance and saturation issues. Can you just discuss that in a bit more detail?

Sure. So we have been investing in this media mix model that suggests it's better for us to invest more in television, which we have. And we started off beginning of the calendar year, in January, with great success, decided to increase the television spend in February and March because of those good results, as well as it means to offset some of the TCPA impact that we had. And in doing so, we faced some competition from general advertisers who tend to outbid direct-response advertisers. And so we got -- we had some clearance issues where we were preempted from running. And on the stations where we could run, we saw some saturation issues. And so I guess an easy way to put it is we increased our frequency, but we didn't necessarily increase our reach, so we saw some diminishing returns in the latter part of the quarter. Does that help?

Yes, yes, no, that's helpful. And do you expect that to be an issue in the back half of the year as well?

Well, we've seen some easing there, but it does vary by quarter. And I think what we are doing is we're just -- we're rebalancing our television spend based on what we saw in that quarter. And while we know that we'll face some of those things throughout the year, at various times of the year, we believe that we do have the ability and are in the process now of rebalancing some of that spend across television as well as other media channels.

Our next question comes from Jason Anderson at Stifel.

Just, I guess, trying to debate here. I mean I know we've talked about acquisitions and that potential, in the past. Is there anything -- and I'm intrigued by your discussion about STEM programs potentially -- is there any way you could -- do you see acquisition potential, particularly with STEMs? I mean I'm looking, maybe thinking of a way you could add a vertical to help populate your campuses, which obviously you have all the capacity to fill up, or even going online. And I know it's way -- a different -- ways away from where your heritage is, but is that -- do you see a potential there and particularly in STEM?

Yes, we do. I would say we would most likely steer clear of the online, but technical-type training, whether it's STEM or closely related to STEM, I think is absolutely something that is currently under evaluation. And we are looking at some things, not to the point of being raise -- obviously discuss them publicly, but we are actively engaged in looking at different types of add-on curriculums, whether they're de novo or through acquisition, that would either leverage some of our fixed assets, leverage some of our brand marketing, leverage some of our admissions efforts and/or obviously some of our overhead and fixed costs. So I think you're spot-on there: We are clearly looking at some of those things that would market to maybe not the same potential student, because we don't want to just cannibalize, but the type of demographics that we're currently going after.

And I think you guys referenced testing some shorter-length programs. Is it -- could you maybe provide an update on that? Or how is that going?

Yes. We are testing some shorter-length programs at different times of the day, things like that. It's a little early to tell, but I think a slightly shorter program might be beneficial for us especially when combined with some of our industry partners' manufactured specific training. So we're looking at making some minor tweaks there. And I think that's something that -- that's not going to be a flip a switch and we go from A to B overnight, but I think we will continue to adjust some of our program offerings over the course of the next few quarters basically.

If I could just jump in there too. Not only does it offer the benefits that Eugene mentioned, but it also begins to address some of the challenges that we may face, or headwinds, with an improving unemployment rate. What we want is for our students to obviously be able to work and support themselves but to have an education that is convenient for their schedules. And our shift to our new curriculum, shortened programs, different times of day responds to that convenience as well as cost factor that's so important to our students today.

Our next question comes from Peter Appert at Piper Jaffray.

So Eugene or Kim, I'm interested in your thought process around new campus. What's the message behind that? Do you -- is it that you think there's peak demand [ph] that you're not reaching?

Sure. So I'm sorry, I didn't hear the last part of it.

I was just wondering if it's sort of geographically driven. You see demand in certain areas that you feel like you're not serving. Because it seems like there's sort of a contradiction, right, expanding capacity at a time when you've got the issue of underutilized existing facilities.

Sure. So absolutely, the purpose of a potential new campus is not solely to increase nationwide capacity. It is in recognition of the role that proximity plays to students' willingness and ability to come to UTI and afford their education, as well as to meet manufacturers' geographical needs. So as we did in Dallas, we didn't open Dallas because we needed more systemwide capacity. We opened Dallas because we identified a part of the country that had demographics and growth aspects that met our hurdle rates in terms of our ability to attract students, our ability to train them and our ability to place them with our industry partners. And what that allowed us to do even though we cannibalized about 100 students out of the -- that would have otherwise gone to Houston or that were going to Houston, we lost 100 in Houston and added 800 at Dallas. So it's that thought process of different areas of the country where there is demand from our students and demand from our industry partners in size and growth aspects that we believe, makes sense to address the proximity challenge. Said another way, it's taking the education closer to the student.

Right. That makes sense. And is there a model in which you could actually maybe open a campus even smaller than Dallas to get to full capacity sooner?

Well, we could, but Dallas is at capacity. We actually have, through the summer starts, some waiting list there. So the -- we cannot -- I guess, let me answer this in a slightly different way. We can operate a campus efficiently and at acceptable margins, smaller than Dallas, but the thought process is really what parts of the country meet those first things that I have talked about, about being able to attract and place students. And then it becomes a sizing issue based upon what curriculums we're going to offer there, what electives we work with our partners that need to be offered there. And that's what we'll really -- those 3 things will kind of triangulate in on the size of the hypothetical facility. Let me just add to that so nobody's -- I say Dallas-type facility. It could be a little bit smaller. It could be a little bit larger. What we're not talking about is another -- for those of you that have been to Avondale, the 280,000-square-foot large boxes. We're talking about more of a metro model where we would expect 70-plus percent of the population to be attracted from within a 50- to 75-mile radius of that campus.

Understood. And Kim, I wanted to ask you sort of maybe kind of a philosophical question perhaps. The -- it feels like the underlying trends, as you outlined, in the auto business are clearly getting better, hiring dynamics perhaps better for auto technicians. So it feels like there's a disconnect maybe in terms of the market environment and the enrollment trends that you guys are seeing. And I'm just -- beyond what you spoke to in the call, is there anything that you're seeing happening that might account for that disconnect?

I'm not sure -- certain that there's anything that we haven't already discussed. I think, even though we had some hiccups in terms of our inquiry generation and advertising in the quarter, generally, students are very -- or prospective students are very interested in these types of careers. We have the issues that we have to overcome with a traditional academic focus from key influencers such as parents, students and counselors. But I'd say that's hopefully beginning to improve, so I don't think that's driving it. I think the awareness continues to be out there perhaps at a greater level. There has been some positive shift in the national conversation about the skills gap and the types of jobs and STEM jobs that are available to those with this type of training. So I see some of those things that are favorable, but I think it still comes back to students lack the resources to be able to go get the education that they deserve. I mean we're seeing greater challenges again for those campuses who have a higher population that must relocate. And it's a significant difference than what you see at some of the campuses that have a commuter population. So I think the interest and desire is there. I just think they cannot figure out how to get themselves to a UTI campus and pay for their education given the hardships that their family or that they personally might have faced.

And then Eugene, just one more thing, please. The loan program, are there any regulatory issues that are more relevant on your ability to continue to offer these programs? And any thought that you might have to start recognizing the revenue associated with these programs on a real-time basis, I mean?

Yes, in reverse order, absolutely not. In fact, we have this conversation with TWC all the time. And it is not something that the way our program is structured now will at some point cause an accounting change. This is the appropriate accounting for the way our program is set up. And absent any pronouncement from the FASB, it won't change. In terms of the hypothetical about regulatory constraints, there's nothing that we're aware of. Obviously, we see the press of what some other programs are doing. Our programs are mirrored after the Title IV programs in almost all respects. So it's an interesting question, but there's nothing that I'm aware of at this point in time that would suggest any changes that are necessary to it.

Our next question comes from Jeff Silber at BMO Capital Markets.

In your prepared remarks, you mentioned something about the military axis continuing to be a challenge. I'm just wondering if we can get a little bit more color on that. And historically, what percentage of your population came from that channel?

Good question. If you look at our, I guess, entire population, it's been trending at about 10% to 12% coming from that specific channel. Although, there is better than 20% in school who receive some sort of VA benefits. So this is an -- it's similar to how we have our representatives out at the high schools versus those at the campuses responding to media inquiries. And it's simply a change in their philosophy on transition programs, largely coming from an executive order some time ago about what types of schools and programs will have access to those veterans who are transitioning off the base and back into civilian workforce. We have been very responsive to the requirements and needs on an individual base standpoint, have developed strong relationships out there so that we are able to offer assistance to students who have interest in our programs. But it is more challenging. And some of the impact there is that we are having to talk with students much earlier in the pipeline, and I think that is also weighing on our show rates as well because, typically, it was more at the point of them actually transitioning out. So it's something that continues to weigh on us, although we are very focused on it and investing the resources necessary to keep doors open so that we can help our veterans in any way that we can.

And then just a couple of quick numbers questions for Eugene. If you could remind us what your budget is for capital expenditures for the current fiscal year.

This current year ought to run $15 million, plus or minus.

Okay. And I know it's a little bit too early to talk about 2015, but any change in trends based -- just for that line item?

We will be up a little -- all else equal, we'll be -- we should be up a little bit from that because of the rollout of the diesel program in Orlando. So absent any new campuses or anything like that, I'd say $18 million, give or take.

Okay, that's helpful. And I know you were very detailed about the impact of the deferred tax item on your tax rate, but assuming that we kind of say status quo, what should we be modeling for tax rates for the rest of the year?

The rest of the year, I would model kind of in that 40%, 42% range. I don't think we will have much impact the rest of the year from the deferred taxes.

And that's a good rate going forward for long term?

No. We have -- for a couple of years, we're going to have deferred taxes that roll off, so I can't really give you too good a guidance going forward. What I would suggest you do is kind of model it at that 40% rate and understanding that there's going to be a plus or minus each quarter that, as we get 6 months out, we'll try to give you better guidance on.

The next question comes from Corey Greendale of First Analysis.

This is David Warner for Corey. I just wanted to dig in just a little bit more on the opportunities for using available capacity with or with addition -- adjacent curriculum. I know you mentioned the diesel program being expanded, but is there any other hot areas in -- where it would make sense that you could use that capacity without having to invest significantly in retooling your space or developing new curriculum, anything in oil...

Well, yes, I mean I'm not going to -- there are skilled trades. Let's leave it at that without getting specific as to what they are that we are looking at. And in some cases, they would be something that would make sense in all of our campuses. In some cases, they would make sense in a specific campus either because of some geographic interest or demand from industry or because of fixed-asset capacity of a specific campus that we have, but those are the types of things that we're looking at. And hopefully, within the next 6 months or so, we'll have something a little bit firmer to talk about.

Okay, great. And then are you still anticipating $13 million worth of scholarships in this year? And maybe just a little bit of color on how you're targeting those to drive the better conversion or show rates.

Yes, we do expect to offer around $13 million. What the acceptance rate or utilization rate will be is unknown. I'd say that, roughly, probably 60% of the scholarships that are -- either need based and/or merit based but excluding the military, 60% of those are probably merit-based with high school competitions and recognizing academic success. The merit -- in addition to the merit and need based, we do have specific scholarship programs for the military, and it is not need or merit based. It's simply based on their -- the designation as being a veteran. So does that answer your question?

Yes. And just finally, maybe a broader question. I hear that -- I understand that the major trend is still affordability, maybe with a footnote of some increasing competition from the job market. So maybe just talk a bit about how you're thinking about the cyclicality of the business at this point. Is it sort of segmented, where a stronger economy helps you on the high school area but potentially hurts you with the competition from the job market in the adult military segment? Or is that the way you're thinking about it? Or what drives starts growth from here from maybe a macro standpoint?

Sure. I think you're directionally correct in that, students coming out of high school, typically, they may feel it somewhat from an employment or an economic cycle, but generally, they're going to go to school or do nothing. And that's not driven by whether or not the employment is changing. With the young adults -- or older adults, the career changers, that certainly does impact them, especially with the recession. So ideally, we would like the recession or the economy to improve enough such that they have the funds to relocate to go to school, and that would support themselves, but that they also see the value of an education over the long term and are not forced or feeling pressured to take a job simply because they've been out of work. So we definitely will be facing headwinds with the adult population returning to work and some of the things that Eugene mentioned earlier with the shorter-length programs, different sessions. And even campus locations help us address those headwinds for the working adult. So we expect that we will continue to focus both on the high school segment and the adults, as well as military. Our strategies within the segments just need to be a little different.

The next question comes from Trace Urdan at Wells Fargo.

My first question was, I wondered if, given the competition with the employment market, Kim, whether you guys have tested or looked at the feasibility of more part-time programs that would allow students to extend the time that they're in school, or whether that just runs afoul or Title IV limits.

Well, we haven't really looked at part-time in a long time. We had years prior, but for the most part, what we found in our previous research was that students ultimately do want to complete their education in a reasonable period of time. And our students are going to school 5 days a week, but if our schedules are such that it does allow them opportunity to work either in the morning or in the evening, many -- most of them can find a way to support themselves while they're at school. It's simply getting them to school and helping them leave behind a job that they have perhaps in another market and securing one that they have here. But I wouldn't say never, but I'd say based on what we've looked at in the past, it overall did not tend to help the bigger issue.

Okay. And then the other question I wanted to ask you is whether you felt like this was maybe a time or whether there was an opportunity for consolidation in the automotive space. I know that you've indicated that you're looking at diversifying program offerings, but I'm wondering if this isn't a time to leverage some of those shared services expenses and actually look at bringing in some other operators and maybe even rebranding them.

Certainly. As Eugene mentioned, with our, I guess, desire to look at potential acquisitions, certainly, those that match our core competency and core business today are of interest. Location and student segment served, as well as employment demand, is the key driver of whether or not that sort of acquisition would make sense. But in theory, in what you're saying, yes, we are looking at that, but we want to make certain that it meets brand standards, quality student outcomes and that it's something overall that we can roll in and build from extending our brand and what is expected of consumers as well as employers. Did you want to add something?

Okay, great. And just to clarify that answer: When you say employment availability, are you referring to opportunities for students to work part-time while they're in school? Or are you talking about placement employment?

Both. It would need to be both. We need to have -- unless it is a young population that does not need to support themselves, and I can't envision something like that, we would need a market sizable enough to support students working while they're going to school. It is something that our employers do require. And then certainly, we want to make certain that there is employment demand in and around that campus, as well as the regions that would be supporting it.

[Operator Instructions] At this time, we show no further questions. Would you like to make any closing remarks?

I would. Thank you, operator. And thank you, all, for joining us today. We very much appreciate your questions and your interest in Universal Technical Institute. We look forward to updating you on our next earnings call, which is scheduled for Tuesday, August 5. Have a great evening. Thank you.

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