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Edited Transcript of UTI earnings conference call or presentation 30-Nov-17 9:30pm GMT

Q4 2017 Universal Technical Institute Inc Earnings Call

PHOENIX Jan 11, 2018 (Thomson StreetEvents) -- Edited Transcript of Universal Technical Institute Inc earnings conference call or presentation Thursday, November 30, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryce H. Peterson

Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer

* Jody Kent

Universal Technical Institute, Inc. - VP of Communications & Public Affairs

* Kimberly J. McWaters

Universal Technical Institute, Inc. - President, CEO & Executive Director

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Conference Call Participants

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* Barry Lewis Lucas

G. Research, LLC - Senior Analyst

* Justyn R. Putnam

Talanta Investment Group, LLC - Managing Member and MD

* Peter Perry Appert

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to Universal Technical Institute's Fourth Quarter 2017 Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded and a replay of the call will be available for 60 days at www.uti.edu or through December 8, 2017, by dialing (412) 317-0088 or (877) 344-7529 and entering the passcode 10114297.

At this time, I'd like to turn the conference call over to Ms. Jody Kent, Vice President of Communications and Public Affairs for Universal Technical Institute. Please go ahead.

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Jody Kent, Universal Technical Institute, Inc. - VP of Communications & Public Affairs [2]

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Hello, and thanks for joining us. With me today are Kim McWaters, President and Chief Executive Officer; and Bryce Peterson, Chief Financial Officer. During the call today, we'll update you on our fiscal fourth quarter and full year 2017 business highlights, our financial results and our vision for the future. Then we will open the call for 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 refer 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 or loss.

Now I'd like to turn the call over to Kim McWaters, our President and Chief Executive Officer.

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [3]

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Thank you, Jody. Good afternoon, everyone, and thank you for joining us. In 2017, we successfully executed against our key strategic objectives, creating the foundation and momentum for investments in 2018 that we believe will support growth and profitability for UTI.

In 2017, our main objectives were to: one, restructure our cost model through successful implementation of our financial improvement plan; two, optimize our marketing mix and address affordability concerns to drive new student start growth in the second half of the year; three, to improve our business model to better match our students' needs through smaller, commuter-friendly campuses and expand course offerings that better utilize our existing capacity; and last, to strengthen our relationships with employers and industry partners.

I'll run through the accomplishments and future plans specific to each objective, then turn the call over to Bryce for a review of fiscal fourth quarter and full year 2017 financials along with our fiscal 2018 outlook.

First, our financial improvement plan. In 2017, we restructured our cost model with the intent to create a more efficient operating structure and to cut between $25 million and $30 million of operating expense. As a credit to our great people, we identified and successfully implemented additional initiatives to achieve $39.7 million or approximately 11% in cost savings as compared to fiscal 2016.

Because of our efforts in 2017, we are a much leaner organization. Approximately 70% of the compensation expense reductions will carry forward as our campuses are operating more efficiently. However, we are making additional investments in our operations to fund future growth. As such, we expect to increase our future annual compensation expense by about 5% as compared to 2017.

Looking at the big picture, our 2017 successes enable us to make strategic investments in 2018 that are necessary for the long-term success of UTI and will best position us to answer the annual nationwide demand through 2026 for nearly 186,000 transportation technicians, welders and CNC machinists. As Bryce will discuss in a moment, these investments will have a short-term financial impact, but we're confident the investments will put UTI on the right path for long-term growth and profitability.

Turning to new student start growth. In fiscal 2017, we implemented several initiatives which drove student start growth during the second half of the year. Third quarter starts were up 12.5% and fourth quarter student starts were flat year-over-year despite the impact of hurricanes in Texas, Florida and Puerto Rico.

Key efforts contributing to this start growth included the Long Beach campus, which opened in August of 2015, our new welding and CNC machining programs, and our need-based institutional grant program, which we introduced in the third quarter of 2017. We invested just over $1 million in that program last year, which helped an incremental 225 students start school. Excluding taxes and interest, the net return on this program is approximately 38%.

For fiscal 2018, we have engaged a top-tier consulting firm to build on our successful 2017 student start initiatives. Through further optimization of our marketing and admissions processes, our new campus and our new programs, we expect growth in student starts for the back half of 2018, which will result in positive start growth for the full fiscal year.

The key operational objectives which will drive our projected start growth are as follows: Continued optimization of our media mix, and that is to generate high-quality inquiries and to create greater brand awareness and sustainable student interest; the launch of a new website to enhance our users' experience with relevant and targeted content that also significantly improves our ranking on search engines, therefore generating more valuable organic traffic to our website; conducting career workshops at high schools to help students discover their career and educational pathways, especially as it relates to the skilled trades; to work with industry partners, regulators and policymakers to improve our access to high schools and military bases; and then substantial completion of the conversion of our admissions representatives to a graduate-based variable compensation plan, which we believe will ultimately improve overall student and financial outcomes but will have some P&L and cash flow implications in fiscal 2018 as we continue to accrue for and begin to pay out graduate bonuses ahead of fully adjusting fixed salaries; and last, continued deployment of institutional grants, need-based and merit-based scholarships as well as the expansion of our employer-based tuition reimbursement incentive program to help students overcome affordability challenges.

Another key strategic objective is evolving our business model to better match our students' needs, and we are doing this through 2 main initiatives, the first of which is to open new, smaller commuter-friendly campuses in high-demand locations. We find this approach is more in line with today's students, who want to be able to work and live at home without incurring the cost and uncertainty of relocating to school. To that end, we recently announced the site for our next campus in Bloomfield, New Jersey. This campus will be similar to the campuses in Dallas, Texas and Long Beach, California, so we expect it to be accretive to earnings in the first 18 months and cash flow breakeven by year 4.

We anticipate that our capital investment in the Bloomfield campus will be approximately $11 million in fiscal 2018, to retrofit existing buildings, build out the space and fully equip our popular automotive and diesel programs. This new campus will accommodate approximately 800 students at full capacity.

We are excited to enter the very competitive New Jersey and New York metro markets for the first time. While new to the market, we have a very successful history of entering new markets where we faced existing competition. We entered the Philadelphia, Sacramento and Dallas/Fort Worth markets and very rapidly gained market share from our closest competitor, outpacing the number of student completions within just the first few years. We are committed to achieving the same success in the New Jersey, New York markets after opening our Bloomfield campus next year -- next fall, excuse me.

The next long-term strategic initiative is to rationalize our footprint and optimize the space at our big box destination campuses, effectively transforming them to smaller commuter-friendly campuses and/or offering new expanded programs to better utilize existing capacity. This plays an important part in the profitable growth of our business as it reduces underutilized space and associated rent costs and drives improvements in student starts.

In 2017, we introduced 2 new programs: welding and CNC machining, which enabled us to attract new students and to optimize our excess capacity at 2 campus locations. Welding complements our core competencies in technical training and addresses strong market demand. This standalone program is expected to be accretive to earnings in the first year and cash flow breakeven in year 2. We opened our first location in July of 2017 and we'll open our second location in January of 2018 at our Avondale campus. We also expect to open welding at a third campus location in 2018 and will announce that location next quarter.

In August of 2017, in partnership with Roush Yates Engines, we launched our first CNC machining program at our NASCAR Tech campus in Mooresville, North Carolina. This program gives students the opportunity to train in our state-of-the-industry CNC machining lab and it teaches students the skills necessary to start careers in this high-demand industry. There are approximately 146,000 CNC technicians employed today, with more than 14,000 new entrants required each year.

We are currently vacating 2 smaller leased properties in Arizona and Texas, which will eliminate the associated rent expenses in 2018 and beyond after those leases expire. We're also consolidating operations at our Rancho Cucamonga campus, so that we can reduce the overall size of that campus in 2019 and beyond. In addition to subleasing a portion of our corporate offices earlier this year, we executed subleases at our MMI Phoenix, Arizona; Lisle, Illinois; and Norwood, Massachusetts campuses in September and October of 2017.

All told, we have optimized approximately 54,000 square feet for an annual cost savings of more than 700,000 to date and we expect to optimize another 156,000 square feet in fiscal '18, ramping up our annual cost savings to between $3 million and $4 million beginning in fiscal '19. We are continuing to evaluate or negotiate additional optimization opportunities at multiple locations and will share those details with you when the negotiations are finalized.

The final strategic objective is strengthening our industry partnerships as they deliver significant value to our students. For decades, UTI and the transportation industry have been national leaders, directly connecting workforce needs with curriculum development, programs and training, well before this became the mandate in higher education in recent years. The Manufacturer Specific Advanced Training programs we offer provide them with some of the industry's most comprehensive training and certification. For UTI, these partnerships provide important brand recognition in our recruiting and marketing efforts and help further differentiate us from our peers.

For our graduates, these manufacturer-specific credentials and certifications help get them hired faster at higher earning levels and best position them for career success. We are very proud of the relationships that we built over time with industry leaders. Throughout 2017, we expanded industry relationships and program offerings with several industry leaders, including Infiniti, Mercedes-Benz and Porsche. We also added Detroit Diesel engines into our OEM-sponsored Freightliner First Program.

Turning to fiscal 2018, in partnership with BMW, we are launching a new military service technician education program at Camp Pendleton in California, which will expand our exposure to prospective students in the process of transitioning out of the military and give veterans the opportunity to train to work on this exciting brand. Their training will be fully funded by BMW of North America. Similar to the existing BMW step programs at our Avondale and Orlando campuses, this program allows qualified candidates to earn credentials leading to a BMW member-level technician.

We are also exploring industry partner programs for our new Bloomfield, New Jersey campus and we'll share that update with you when a final decision has been made. We continue to explore and expand dealer-sponsored workforce training offerings for our key OEM partners, which are especially valuable opportunities to generate non-title IV revenue.

We are confident that now is the time to invest in these initiatives and that will continue to drive our transformation. And while this will have a short-term impact on our bottom line this year, we believe we are setting the stage for profitable growth. Consistent with that confidence, we announced yesterday the hiring of Jerome Grant, our new Chief Operating Officer. Jerome is a strong leader and operator with a long record of implementing transformational change. As we innovate and invest in the future and focus on driving revenue growth, he is a great addition to the UTI bench.

And with that, I'll turn the call over to Bryce for a review of our financials.

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [4]

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Thanks, Kim. I'll start with a review of our fourth quarter business metrics and then discuss our financial results for the fourth quarter.

Total starts were 5,600, flat to Q4 of last year. Our average student enrollment for the fourth quarter was 10,700 compared to 11,700 last year. At the end of the fourth quarter, about 41% of the students in school were benefiting from a UTI scholarship discount or institutional grant as compared to about 35% in the fourth quarter of fiscal '16. The year-over-year increase was primarily driven by our institutional grant initiative aimed at improving student starts. These scholarships and discounts reduced tuition revenue by an additional $643,000 this quarter as compared to the prior year.

For the fourth quarter of fiscal 2017 compared to the same quarter last year, revenue was $81.3 million, excluding $2.9 million in tuition revenue related to students participating in our proprietary loan program. This compares to $86.9 million in revenue for the fourth quarter of 2016, which excluded $4.2 million in tuition-related revenue. The year-over-year revenue variance was attributed to an 8.5% decrease in our average student population.

Total operating expenses were $82.4 million compared to $92.1 million for the prior year period. The $9.7 million improvement is largely due to a lower compensation expense and improved operating efficiencies pursuant to the implementation of our financial improvement plan.

Our operating loss was $1.1 million compared to an operating loss of $5.2 million for the prior year period. The improvement reflects the significant cost reductions previously mentioned and $900,000 in incremental operating income from the Long Beach campus, which opened in August of 2015. To put this improvement into perspective, even with year-over-year revenues down $5.6 million for the quarter, we reduced our operating loss by $4.1 million over the same time frame.

We also recorded a preferred stock cash dividend of $1.3 million in the fourth quarter, which was related to our $70 million capital raise in June of 2016. Net loss available for distribution to common shareholders was $2.1 million or $0.08 per diluted share for the fourth quarter compared to $10.3 million or $0.42 per diluted share for the prior year period.

EBITDA reached $3.9 million for the fourth quarter of 2017 compared to a loss of $900,000 for the prior year period.

For the year ended September 30, 2017, compared to the prior year period, we recorded revenues of $324.3 million compared to $347.1 million, which excluded $16.3 million and $18.7 million, respectively, of tuition related to students participating in our proprietary loan program. On a year-to-date basis, average student enrollment was 10,900 compared to 12,000 for the prior year period.

Operating expenses were $326.1 million compared to $365.8 million for the prior year period. All told, we reduced annual operating expenses by $39.7 million, which was about $10 million greater than our original target when we launched the financial improvement plan. The largest driver of expense reductions was compensation expense.

Our operating loss was $1.8 million compared to an operating loss of $18.6 million last year. This loss was slightly larger than the guidance range we gave on our last call and was the result of increased conversion costs as we transition our admissions representatives from fixed to variable compensation as part of our graduate-based compensation plan.

We recorded and paid a preferred stock cash dividend of $5.3 million in accordance with our Series A preferred stock purchase agreement. Net loss available for distribution to common shareholders was $13.4 million or $0.54 per diluted share compared to a loss of $49.1 million or $2.02 per diluted share for the prior year.

As we previously guided, we significantly improved EBITDA to $17.9 million compared to $800,000 for 2016, reflecting the positive impact of our financial improvement plan.

From a liquidity perspective, we had cash, cash equivalents and investments of roughly $97.9 million at September 30, 2017, compared to $120.7 million in the prior year. This decrease in cash was primarily attributable to approximately $11 million of collateral requirements for surety bonds renewed during the year and changes in working capital, which included $8.2 million in capital expenditures and $4.7 million in severance payments.

Now turning to our outlook for fiscal 2018, we expect new student starts to grow in the low single digits in fiscal 2018. As Kim mentioned earlier, new student start growth will be weighted toward the back half of the year. Our goal for 2018 is to end the year with more students in school than we had at the end of fiscal 2017.

Our student population as we entered 2018 was down 6% as compared to prior year. This puts pressure on our revenue for the first half of the year. Based on the timing of new student start growth, our average student population for the year is projected to be down in the mid-single digits as a percentage compared to the prior year. As such, we expect full year revenue to range between $310 million and $320 million as compared to $324 million in 2017.

We expect our operating expenses will range between $340 million and $345 million, an increase of $14 million to $19 million from 2017. Of the increase, $3.7 million represents nonrecurring charges primarily related to the consulting agreement Kim mentioned earlier and the costs associated with early adoption of revenue recognition, which I will discuss in more detail momentarily. $10 million to $15 million of the expense increase is for growth-focused investments, such as our new campus, the rollout of 2 additional welding programs and additional expenditures to optimize marketing and admissions.

We expect to generate solid returns on each of these investments. For example, the new campus and welding programs are expected to be accretive to earnings within the first 18 months of operation. The remainder of the year-over-year expense increase is $2.7 million of conversion costs related to the transition from fixed to variable compensation as part of our graduate-based compensation program and expenses related to our expanded executive team.

We expect total capital expenditures to be between $24 million and $25 million, including approximately $11 million for our New Jersey campus that is expected to open in fall of 2018 and approximately $4 million to expand our welding program to 2 additional campuses. The remaining capital expenditures include approximately $7 million for new and replacement equipment for our existing campuses and about $2.5 million for real estate consolidation.

For the full year 2018, we expect to generate an operating loss of between $20 million and $25 million and negative EBITDA. Excluding the nonrecurring charges I mentioned a moment ago, EBITDA would have been between $8 million to $10 million if we had -- if we were not making these significant growth investments. However, we firmly believe, thanks to the solid foundation and momentum started in 2017, now is the time to invest in UTI's future growth and profitability.

Before I turn the call back over to Kim, I would like to briefly discuss an upcoming accounting change. We expect to early adopt the provisions of the new accounting standard on revenue recognition using the modified retrospective method as of October 1, 2017. However, our ability to early adopt is subject to the completion of our analysis of certain matters and obtaining the information necessary to calculate the cumulative effect of the new guidance. This approach was applied to all contracts not completed as of October 1, 2017.

In addition to the enhanced footnote disclosures related to customer contracts, we anticipate the most significant impact of the new standard will relate to the timing of revenue recognition for our proprietary loan program and the accounting for student program changes. We estimate the impact of this change will require a noncash adjustment to equity of over $30 million in fiscal 2018. Please see our 10-K report for more details on this change.

With that, I'll turn it back over to Kim for a few final thoughts.

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [5]

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Thank you, Bryce. While our efforts in fiscal 2017 generated positive results in second half start growth and significant cost savings, we know that much work remains to build on these successes.

We are focusing on the following 4 objectives that we expect will grow starts for the full year in fiscal 2018: First, continued optimization of our marketing and admissions efforts to build upon our accomplishments of fiscal 2017; second, the opening of our new Bloomfield, New Jersey campus to better serve students and employers in the New Jersey, New York metro market; third, the expansion of our welding program to our Avondale campus and one other campus later to be disclosed; fourth, continued optimization of our footprint by shrinking excess square footage at our larger campuses.

We are focused on driving transformational rather than incremental change and that requires a level of dedication that I know is shared by everyone at UTI, and I'd like to take the opportunity to thank them for their hard work and their commitment to providing a quality education to all of our students.

Operator, we are now ready for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Peter Appert from Piper Jaffray.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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Kim or Bryce, do you have any estimate of what the impact was from the Florida and Texas hurricanes in terms of the start number in the quarter?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [3]

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Yes. So as far as the impact from the hurricanes, we estimated about 41 students for the quarter. P&L impact was a negative hit to revenue of just over $0.5 million.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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And then, Kim, I'm interested in the thought process basically behind opening a new campus, given what are frankly still pretty challenging operating results. I guess the question is, does it make sense to make this investment in the context of still soft operating results within the core business? Would it might not make more sense to focus on righting the business before investing in expansion?

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [5]

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I appreciate the question, Peter, and it is a good one, and I think it is something that we have clearly focused on the last several years in trying to grow enrollment at the destination campuses. And we will continue to do that as we implement some of the square footage optimization efforts and new programs.

But the reality is, there is such a stark difference between what is happening at the smaller metro campuses with Dallas and Long Beach and we know that, that is the future of this business and what our students prefer that we are much better off making some of the more difficult decisions now to invest in that growth and accelerate it because that model is working. And the bigger boxes are the drag on the overall business.

So the more quickly we can transition to opening the new, small campus model as well as converting our existing big boxes to that same model, the faster we create value for shareholders.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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Okay, fair enough. Any specifics can -- you can share in terms of the volumes that you're seeing in terms of inquiry and trends in conversion rates recently?

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [7]

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Yes, we are seeing especially -- there was a little noise during the September, October time frame with the hurricanes. But recently, we've seen our inquiry volume continue to increase and we're pleased with the results over the last 60 days, for sure.

If you look back over the last quarter, it was up slightly from a gross inquiry standpoint and that continues to be an area that we are very focused on in terms of optimizing our advertising spend and our media mix to create greater awareness as well as improved conversion.

So I think in our conversion rates for -- I'll say inquiries to applications, again, the first quarter was a little muddy and less than the prior year, and I think the hurricanes did have some impact there in terms of activity, for sure. So we'll continue to report on that. It's not a significant decline. It just was off from the trend. We definitely saw some variance in that quarter.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [8]

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Got it. And the changes in the recruiter compensation, do you think that's causing some disruption as well in terms of things like conversion rates?

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [9]

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I don't believe that it is causing problems from a conversion rate. I do think that there's probably a sorting out of different types of representatives who are more comfortable in this type of compensation plan than those who are more comfortable in a fixed compensation.

So we are seeing some turnover in that regard but it is expected, and we are working to ensure that our representatives have the training and tools necessary to be successful, and I think that, that might be contributing to it in terms of some of the turnover but I don't believe that the plan per se is driving decreased conversions.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [10]

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Okay. And then, just last question. The consulting firm you're hiring, Kim, what is the specific focus? Are they working on -- with you on the cost side of the equation, on the marketing side? Can you give us any more color on that?

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [11]

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Yes, at this point, it is very much focused on revenue growth and front-end optimization. And I think, as we talked this past year, we really focused on improved efficiencies, which we did make a lot of progress.

But we realize that there is much more efficiencies to be gained and at the same time, taking those efficiencies and investing in the opportunities for growth, we want to make certain that we are turning over every rock and that we are ensuring that we have the capability to execute.

Because, as Bryce said, we believe the time is now, and we see that opportunity and want to make certain that we are focused on building it. This business changes significantly for the better with an improved pipeline of students and that's where our company is focused on.

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Operator [12]

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(Operator Instructions) Our next question comes from Barry Lucas from Gabelli & Company.

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Barry Lewis Lucas, G. Research, LLC - Senior Analyst [13]

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Kim, I was hoping you could update us a little bit on any graduation statistics that you have and starting salaries and...

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [14]

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Yes, our graduates for the year were down slightly, given just the population decline, but our persistence throughout the year, leading to graduation rates, it's been -- it was probably the strongest rate we've seen in 7, 8 years.

So the team is very -- has been very focused on improving persistence and helping our students who come to school actually graduate. So I'm very happy with the success there. The demand has continued to be extremely strong for our graduates and our graduation rates are in the 86% range.

And in terms of our compensation, we see -- starting wages, we see a slight improvement in the starting wage, but we also see significant bonuses, commitments to tuition reimbursement, toolboxes and other sort of compensation and benefits that doesn't necessarily show up in their starting wage. So hopefully, that gives you some color that the demand on the back end continues to be extremely strong.

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Barry Lewis Lucas, G. Research, LLC - Senior Analyst [15]

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Okay. And where would you put the placement rate of your 86% graduation rate?

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [16]

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86% is a couple percentage points behind last year. I do not think that, that is a reflection of the demand in the marketplace. I think it is a reflection of execution from our team, given some of the structural changes and distractions in the year. It's -- I would attribute the decline entirely to UTI and execution, not the market demand.

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Barry Lewis Lucas, G. Research, LLC - Senior Analyst [17]

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Okay. Any further color you can provide? I know for competitive purposes, it's maybe an issue, but you did change the media mix a bit back to more, what do you want to call, traditional channels and just wondering if you could add to that and give us an idea of what's working and what's not?

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [18]

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Sure. Through the last fiscal year, we've talked about trying to find the right balance between local and national advertising as well as, I'll say, traditional and digital. And throughout the year, we have continued to optimize our digital investment, but I do believe that area has tremendous potential for further optimization.

But we've taken some of those resources and reallocated to, what I'll call, top of funnel or brand awareness, and that has largely been put back into television. So as a comparison, a year or so ago, roughly 10% of our advertising budget was in television. If you look at this past quarter, roughly 25% of it was in television.

And so we've seen improvement in our cost per inquiry this quarter on a year-over-year basis and it's growing, and so far into the new fiscal year, we've been pleased with what we're seeing. And again, I feel like we're just scratching the surface there.

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Barry Lewis Lucas, G. Research, LLC - Senior Analyst [19]

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Okay. Last one maybe for Bryce. If there is a hit to the equity line as a result of a shift in to the new revenue recognition requirements, how might that or does it not impact the financial responsibility requirements that you have?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [20]

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Yes, so it wouldn't be a hit. It would actually be a benefit to the equity line. The amount is north of $30 million and the answer is yes. That does -- in the algorithm that does help with the financial responsibility calculation.

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Operator [21]

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(Operator Instructions) We do have an additional question. This comes from Justyn Putnam from Talanta Investment Group.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [22]

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Bryce, just a quick question for you. You gave us a good guidance on your new campus model. This is actually, again, cash flow positive after 4 years. What's the cash flow potential of those campuses once they get fully ramped up?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [23]

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So effectively, when we get these new smaller campuses fully ramped, then standalone contribution, you're looking at that revenue right around $20 million and you're looking at an EBITDA contribution of $5 million to $6 million.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [24]

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Okay. And then in that 4 years while you're ramping up, what kind of operating losses would you be anticipating?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [25]

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Yes, so from the -- when you look obviously at the first year, that's when you're going to absorb the majority of it because you've got a tremendous amount of the capital investment to get it up and running with very little revenue to offset.

And so ultimately, we're going to take a pretty significant hit from an EBITDA perspective within the first year, and then years 2 and 3, effectively, kind of offset each other, and then in year 4, you get to the -- you start going towards the positive side. So ultimately, at some point in year 4, we're cash flow breakeven, going positive.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [26]

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So those operating losses are not included in the initial investments that you used to say, it's like $11 million (inaudible) New Jersey.

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [27]

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I'm sorry, I lost the second half of your question.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [28]

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Those operating losses that you just mentioned, they are not included in that $11 million (inaudible)?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [29]

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The $11 million is the CapEx investment that we're making in the campus, and so obviously, there is a portion of that which hits '18 and then the other portion of it is going to hit in out-years. And so effectively, when you look at from an operating loss perspective, we've got our nonrecurring charges and then it's $10 million to $15 million captures the P&L investment of the new campus and those 2 new welding programs.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [30]

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Okay. So summing it all up then, would you say that IRR is on those campuses?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [31]

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So from that perspective, I would stick with the EBITDA and the cash flow guidance that we've given. We generally have not spoken to IRR on individual campuses. We feel like the EBITDA and the cash flow contribution and those KPIs are more effective in that area.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [32]

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So it is higher than your cost of capital?

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [33]

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I'm sorry, I missed that.

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [34]

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Yes, it's higher than the cost of capital.

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Bryce H. Peterson, Universal Technical Institute, Inc. - Executive VP, CFO & Principal Accounting Officer [35]

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Oh, absolutely.

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Operator [36]

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(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Kim McWaters for any closing remarks.

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Kimberly J. McWaters, Universal Technical Institute, Inc. - President, CEO & Executive Director [37]

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Thank you. We appreciate everybody's time today, and thank you for your interest in Universal Technical Institute, and we look forward to reporting our first quarter results at the end of February. Have a great day.

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Operator [38]

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Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.