Bright Horizons Family Solutions Inc (BFAM) 2003 Q1 法說會逐字稿

Welcome to the Bright Horizons First Quarter Earnings Call. At this time, all parties have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. David Lissy. Sir, the floor is yours.

Thank you. Hello to everybody on the call today. Our earnings release went out right after the market closed, and it is also available in the investor relations section of our website at www.brighthorizons.com. With me as always on the call this afternoon is Elizabeth Boland, our CFO. Before we begin, I will ask Elizabeth to read our safe harbour statement.

Thank you. Hello to everyone on the call. As you know, in accordance with regulation FD we use these types of conference calls and other similar public forums to provide you the public and the investing community with timely information about our business operations and financial performance, as well as about our expectations for future performance. We adhere to restrictions on selective disclosure and appreciate your understanding of the limits to which we will be able to comment on items not previously discussed in these forums.

Certain non-GAAP financial measures may be discussed during the call and detailed disclosures relative to these measures is included in our press release and also may be found in the investor relations section of our corporate website at brighthorizons.com. The risks and uncertainties that may cause our future operating results to vary from what we describe in forward-looking statements include our ability to execute contracts for new centre commitments, to enrol children in our centres; to retain clients and centre management contracts; to expand and operate profitably abroad; as well as the effects of governmental tax and fiscal policies on employers who consider worksite child care.

The specific risk factors associated with our business are detailed in our SEC fillings, including our form 10K filed in March of 2003. Also a replay of this entire conference call will be available by calling 973-341-3080 and entering PIN code 3851808.

Thanks, Elizabeth, and I am really pleased to be talking with all of you today about our first quarter results. Let me start by briefly recapping the numbers. First quarter 2003 revenues of $112m were up 19 percent over last year, while net income of $4.5m and earnings per share of 35 cents were up 22 and 21 percent respectively over last year. Center margins for the quarter increase increased 20 basis points over last year to 15.2 percent, while overhead as a percentage of revenue of 8.2 percent was up 10 basis points over last year, reflecting our continued investment in overhead in the U.K.

As you can see by the numbers, we are off to a good start in 2003. We added a total of 15 new centres to our network this quarter. The new centres we added reflect our strategy and specific focus on a countercyclical industries while continuing to develop relationships across the broad range of industries represented in our client base.

We added two centres for major hospital systems, two for government agencies, one university along with centres in the pharmaceutical, high tech, entertainment and leisure, consumer products and manufacturing sectors. These new additions include [Astra Zenica] in Delaware, the [Masapeekwa] Indian Tribe at the Mohegan Sun in Connecticut; Georgia Tech University; the Henry Ford Health System in Michigan; the Christiana Care Health System in Delaware; and the Public Employees Retirement Service of Ohio, all here in the U.S. along with a new centre for Microsoft in the U.K. and an office park exertion model in Dublin, Ireland.

In addition, we began managing a travelling program for the LPGA tour, similar to the one we have done for several years for the PGA tour, and opened a centre for Toyota Motor Manufacturing of Indiana, which is our third centre for Toyota between the U.S. and the U.K.

We’ve been really pleased to see our existing clients continue to invest in their worksite childcare and work life initiatives. We now have 40 clients that have more than one site. This group of 40 clients which includes Johnson and Johnson, IBM, Merck, Bristol Meyers, Squid, J.P. Morgan Chase, Bank of America, Motorola, Pfizer, Citigroup and the UAW Ford represents a group of over 180 centres.

This group of centres for multi-site clients has doubled over the last five years. To us, this further underscores the value the companies are receiving by continuing to make investments in their workforce through the provision of quality worksite childcare.

We closed four centres this quarter for a net of 11. Even with the strong centre openings this quarter, the current pipeline of committed centres continues to hold steady with over 50 centres in 20 states, the U.K. and Ireland under development.

Our new business development efforts in the U.S. and Europe continue to emphasis countercyclical industries such as health care, education and government agencies, as well as have a broad focus across a wide array of industries that have shown interest in our services.

As I have spoken to you about in the past during this lingering period of economic softness, we continue to experience a somewhat longer sales cycle compared to several years ago. While the overall pipeline is down slightly from its peak a few years ago, we continue to backfill with new commitments and remain on plan to add 45 to 48 net new centres this year, including expected centre closings for the year in the range of 10 to 12, which is consistent with the past few years.

The challenge in the next six months is to secure the new commitments necessary to give us the forward visibility for centre openings in the second half of 2004.

Let me briefly update you on the progress of our integration efforts in the U.K. Earlier this quarter we relocated all of our business support functions to one new head office in Rushton, which is about an hour outside of London. This location centralizes our systems and back office functions that support our business in England, Scotland and Ireland. We will maintain smaller field offices in Edinburgh and Dublin, which mainly held our sales, client support and field operation teams for those markets.

We have rebranded our group under the Bright Horizons Family solutions name, and put in place a regional management structure in the field that mirrors our field operating structure here in the U.S. Currently we are in the process of implementing our centre management and PeopleSoft financial systems. Given this is the first introduction to automation for many of our child care centre directors, this process will continue for the remainder of the year, with a goal of having in place complementary systems to that of our U.S. operation.

Our back office systems in the U.K. will mirror the U.S., we are taking a different approach with our centre based curriculum and client services. Our approach in the U.K. and Ireland will be culturally sensitive to the prevailing needs and issues in each local market in which we operate.

I am really pleased that our growth effort is taking hold there, and we opened four new centres this quarter and have an additional five in the pipeline. We now operate over 70 centres in the U.K. and Ireland, and our clear goal is to continue to grow our network and enhance our position as the leader in high quality, workplace child care.

Getting back to our overall outlook. The economy is obviously still a big question mark, despite the unsettled economic picture and conflicting statistics and market sentiments, we believe we have weathered the storm thus far and that our strategic approach is right on track. There are five elements of our approach that I wanted to briefly highlight today.

First, we continue to execute consistently and solidly at the centre level through four operating principles, the first of which is managing labour costs. A delicate balance of optimizing staffing, aligning with local pay scales and controlling turnover while still providing an industry leading compensation and benefits package for teachers and directors.

Next, maximizing enrolment through proactive parent marketing efforts and backfilling with community enrolment wherever possible while actively managing our wait lists.

Maintaining our pricing position through an average 4 percent tuition increase, and finally, adhering to our strict quality standards. This last point is critical. All of the first points are intrinsically linked to maintaining our high quality standards and our commitment to obtaining NEAYC accreditation, which is the gold standard in our field and our ultimate differentiator in the market.

The second element of our strategy is to vigorously pursue client growth opportunities across a wide range of industries and geographies while specifically targeting countercyclical industries such as health care and higher Ed. We firmly believe that by aggressively cultivating new relationships and continuing to invest in our growth effort we have been able to maintain our momentum where we will be in an even better position once overall economic conditions turn around.

Third, we are taking advantage of opportunities to selectively transition high quality mobile manage programs or acquire other quality child care centre operators. This has been proven to be a very successful avenue for us in the past, and we believe that in the current economic environment we continue to have an advantage in bringing on new centres and adding valuable talent to our team.

The fourth piece is to remain thoughtful and judicious with our investments in overhead. We are committed to building a solid support structure in Europe as well as continuing to invest in our U.S. infrastructure to support our growth. By consistently making these investments such as our new head office in the U.K. and marketing and sales tracking, budgeting and intranet support systems here in the U.S. we are able to pull further ahead of our competition when it comes to supporting our field operations and growth effort.

Lastly, we continue to evaluate new services and products that are a natural extension of our business and have the potential to leverage our expertise in child care and early education. Our employer-sponsored JFK charge school and Chestnut Hill Academy, along with the growth of our backup child care division are just a couple of examples of new markets and services that have the potential to become increasingly larger pieces of our growth in the future.

I just returned last week from our annual client conference in San Diego where we had roughly 100 of our clients in attendance. This is always a great opportunity for us every year to connect with clients and to directly hear from them about our satisfaction with us and their thoughts on how to best continue to meet their needs.

It was particularly useful for us to hear that while many of them have been challenged by budget cuts and other economic pressures, they viewed their investment in worksite childcare and work life initiatives as long term commitments that are part of their overall people practice and strategy.

At the conference, we presented the findings of a new study performed by our consulting group this year. This study, which focuses on the investment impact of worksite childcare will be released more broadly next month. It included detailed analysis of turnover statistics and usage of the onsite child care centres from major employers such as Staples, Abitt Labs, New York Hospital and the Bank of America.

Among their findings were significant differences in voluntary turnover among centre users in relation to the overall population of the employers’ study group. In addition, the data illustrated an increase in the usage percentage and the retention of the most highly rated performers within these companies. In fact, the users of the centres turned over at half the rate of these organizations average turnover rate. This study will serve to reinforce the business case for worksite child care and will touch on an important subject to most employers, the retention and productivity of the employees they deem to be the biggest contributors and having their highest potential for future growth.

Looking ahead over the next few years as the economy changes, many employers recognize there will be a crunch for qualified labour that will rival or even exceed that of the late 90s. We believe this bodes well for the future of worksite child care and other programs that directly assist in retaining valuable employees and increasing productivity.

In summary, Bright Horizons continues to deliver solid and consistent results. Tuition increases are holding, enrolment is growing, our pipeline is steady and we continue to enhance the quality of services that we offer and make important investments in our infrastructure.

Our financial position has never been stronger and our healthy balance sheet and cash flow afford us the flexibility to invest in our future growth. All in all we are very pleased with our performance this quarter and throughout the last few years of this recession, and continue to remain confident in our outlook going forward.

Let me turn it over to Elizabeth to run through our financial results with you in a little more detail. Elizabeth.

Thanks, Dave. I will start with a more detailed review of our quarterly results, and then move on to look at the outlook for next year. As Dave mentioned earlier, revenue growth of 19 percent in the first quarter was up to a level of $112.4m. Top line growth is driven principally by the addition of new centres, additional enrolment in our ramping centres and tuition increases that have approximated 4 percent per year.

Operating income as a percentage of revenue increased 10 basis points to 6.9 percent for the first quarter, compared to 6.8 percent in 2002. Centre gross margins for the quarter were up 20 basis points at 15.2 percent as we continued to carefully manage labour and other controllable operating costs while at the same time increasing enrolment and maintaining our pricing power.

As we have talked about in the past, the first two quarters of our calendar year are our strongest in terms of centre level performance because enrolment levels are typically higher from January through June, particularly in preschool classrooms. Later in the summer, older preschoolers and kindergarteners begin to move our of our centre to begin elementary school, therefore centre margins dip over the summer and then rebound in the fall as we rebuild the enrolment in younger children, age up.

Moving onto overhead, overhead as a percentage of revenue was 8.2 percent this quarter, up slightly from 8.1 percent in 2002, as a result of the overhead investments in our U.K. operations that Dave discussed before.

EBITDA, earnings before interest, taxes, depreciation and amortization for the quarter approximated $10.3m, an increase of 20 percent over the same 2002 period, and our cash balance at quarter end approximates $22m. Finally, cash spending for the quarter totalled approximately $4m.

Our cash rate of 41.9 percent in the first quarter of 2003 also approximates our projected rate for this whole year.

Let me end the review of the quarter with a few statistics. We ended with 476 centres, as we added 15 and closed four programs. Our total operating capacity at quarter end was 55,200 with an average per centre of 116. U.S. centres average 129 capacity per location while in the U.K. our nurseries have an average capacity of 47.

At the end of the quarter of the prior period, approximately 60 percent of our centres were profit and loss contracts, and 40 percent are cost plus contracts. As Dave discussed, our pipeline of over 50 centres spans a wide array of industries and the mix is similar to past quarters, with approximately 10 percent in technology, 15 percent in health care and pharmaceutical, 20 percent government and education, 20 percent consumer, 20 percent consortium office mark, and 5 percent financial services.

I will now walk through our current financial projections for 2003. We continue to project revenue growth this year in the range of 17 percent to 20 percent, which considers our pipeline of new centres scheduled to open this year and the inclusion of the U.K. acquisitions we made in the second quarter of 2002 for a full year in 2003. We therefore expect this comparative growth rate to be somewhat higher in the first half of 2003.

This presumes the continuation of current economic conditions, and our view that we should continue to be conservative in projecting tuition increases and enrolment growth in our existing base of business. Our forecast includes capacity growth of 10 to 12 percent which will translate to net new centre additions of 45 to 48 centres; tuition increases averaging 4 percent and enrolment growth from existing centres of 1 percent to 3 percent. We expect to maintain or slightly improve both centre margins and overhead in 2003, with centre margins projected to approximate 14.7 percent to 14.8 percent for the full year, and overhead to approximate 8.1 percent to 8.2 percent of revenue for the full year.

We project operating income therefore to increase by approximately 10 basis points to 6.5 percent. With an estimated 13.2m shares outstanding for the year, we therefore project earnings per share will approximate $1.39 to $1.41 in 2003, and for purposes of your modelling, our quarterly estimates are as follows. In Q2, 35 cents to 36 cents, In Q3 34 to 36 cents and in Q4 35 cents to 37 cents.

We would also expect us to see finality in both margins and earnings trends will follow historical patterns. As we have also said in the past, we don’t recommend that you simply add up either the low end or the high end of these indicative ranges.

Looking beyond 2003 we continue to see strong opportunities for growth, particularly when an economic recovery takes hold. Over time, we projected annual centre margins may approach 15 percent given the mix of our profit and loss and cost plus contracts, and that we will continue to be able to leverage overhead down over time to a targeted level of 7.5 percent.

With top line growth in the high teens and improved operating margins from both centres and overhead, we project EPS growth to be consistent with our past trends at a rate modestly in excess of top line growth. With that, we will open the call for questions. We are ready for the first question.

Thank you. (Operator instructions) Our first question comes from Howard Block Banc of America Securities.

Good afternoon, David. Nice job on the quarter.

Thanks, Howard.

The first question is an easy one. The guidance for the year of 45 to 48 in the centres, how many international?

Well we opened four this year internationally, so with the centres that are in the pipeline, five. A couple of them are out in 2004 and beyond, so about 8 total opening in the U.K. and Ireland.

With regard to the pipeline, I haven’t asked you this before, I don’t know if this is a question you need to give some thought to, but if you look at the centres that are in the pipeline right now, how many were in the pipeline 12 months ago or 18 months ago? How many are just sort of stuck there for economic reasons, or is the flow or the rate of the pipeline unchanged?

I don’t see any real difference in the flow through the pipeline, Howard. As you know, traditionally what tends to drive many times how long something sits in the pipeline has more to do with zoning, construction, all the issues associated with getting something up and running on a new centre. Obviously, clients that moves around. It always has both in good and bad economic times. I don’t know the direct answer to your question, how many exactly have been there, but I can tell you anecdotally that there are some that stay there for upwards of two years and other that stay there for as short as three to six months. It is just all over the map.

Okay. What prompted the question was, it sounds as though you have a prescribed plan to focus on countercyclical businesses, but to the extent that you are opening centres now for countercyclical businesses, apparently you are focusing or initiated this strategy a year or two years ago. In other words it is coming to fruition now but it must have started a long time ago. Is that correct?

Oh yeah. I think we started talking to all of you about this when, depending on whether you want to look at the middle of 2000 or the end of 2000, but this was a strategy that was taken upon the economic downtime.

Okay, and then in terms of centres that enter the pipeline, how leaky is the pipeline? How many would you say, on a percentage basis, have sort of fallen out over the last year? And is the leakage rate higher now than it was two years ago or three years ago?

I don’t see any difference in the leakage rate, Howard. I think that the difference, as I have talked about before, is the time it takes to get something in the pipeline. The sales cycle. That’s what has changed. We have talked about before, that range is from three months to two years, everything doesn’t take two years but it is definitely proportionately moved later on down the line as the economy has softened.

Let me also say that I don’t see any difference in that today than what I would have said at this time last year.

Okay. Any back up centres open in the quarter, and any sense of how many will open this year?

We did not have any new backup centres open this quarter and we have three in the pipeline. I’d have to double check to see when they are opening.

And then, did you give us a cash flow from operations?

I did not give you a cash flow from operations. Our EBITDA figure is our sort of interim proxy while we complete the details of our financial statements. EBITDA is 10.4 and our cash flow from operations, as you know, has a little bit of movement around with changes in working capital. We are still wrapping up the quarter with payroll and tuition collection, et cetera.

How about capex?

Capex was $4m for the quarter.

Thank you very much.

Okay, thanks.

Our next question comes from Gerry Herman from Legg Mason Wood Walker.

Thanks, good afternoon everybody.

Hi Gerry.

A question with regard to the pipeline, I know that is metric we maybe sometimes rely too heavily on, but it appeared to be down a little bit. Dave, are there other opportunities or business venues that you guys can consider that would sort of help offset the relative decline in the size of the pipeline?

Well Gerry, let me first say that the pipeline remains steady. Obviously we have opened 15 centres this quarter and it has been on one hand gratifying to continue to backfill that pipeline with new commitments as we’ve opened a lot of centres in the past few years, so it is steady.

The second part of your question, what is not in the pipeline and where the opportunities tend to come and go faster are in transitions of management of programs that are self-operated by a small provider or that are operated by companies that do it themselves, may have started it 10 or 20 years ago. We uncover those opportunities and every year we do a handful of them and those tend to come very fast and open really quickly, so they don’t sit in the pipeline for that period of time.

So lots of time each year we augment what is already in the pipeline with a number of those centres that come and go fast that we wouldn’t have predicted a year in advance or even six or nine months in advance.

The second thing, obviously as you know well is acquisitions which tend to come and go as we uncover them and we feel they are appropriate to move forward with.

Great. With regard to the quarter that just closed, the 15 openings, were there any of those in there? I guess a different way to ask the question would be, how many of those were with existing customers of the centres opened during the quarter?

There were no acquisitions in the first quarter, so that answers that.

No transitions either?

A few transitions, I don’t have an exact number.

I will look that up Gerry and try to answer it in a minute.

Okay, great.

Our next question comes from Chase Arden from ThinkEquity Partners.

Good afternoon. Just following up on Gerry’s question a little bit, one of the things that we have seen become more prominent recently has been some pre-K tutoring and supplemental work offered by companies like Sylvan and Score. Does something like that represent an opportunity for you guys to charge additional fees, or would it mess up sort of the standard operations of your centres?

Chase, I think your question is, would we consider doing some of those things at our centres, and ultimately see that as an additional business opportunity for us. We’ve looked at those things over time, and the truth is in isolated cases around the country we actually provide some of those services, its just that we have never been able to convince ourselves that there was a significant enough business opportunity for us to draw from to make that worthwhile, given all of the other operating challenges of our centres.

I wouldn’t say that we have dismissed it entirely or things like that entirely, but in the past in the scheme of everything else we have going on, we just haven’t been able to convince ourselves that it was worth the effort given everything else happening.

And then, sort of related to that, what about, is there any kind of a pipeline I guess for additional school openings? Are you currently considering any additions to your roster of K-6 schools?

I think as we have said before, we look at the school opportunity and say that it is an area that we would like to continue to add to, provided we can find opportunities like we did in Florida where we have an underlying financial model that makes us comfortable that we can run a quality school and also have a good visibility on return similar to our P&L child care centres.

So the answer to the question is yes, we are actively exploring where those opportunities may be, but I don’t have anything to report to you today.

Fair enough again. The last question I had was, I noticed higher education now is figuring prominently in the last several quarters in terms of the business mix. Are you serving the employees of universities through those centres? Are you at all serving students at the universities?

It is a combination of everything. In certain cases we are serving both graduate students and undergraduate students. In other cases it is just graduate students and employees. In most all cases it is the employees of the university, and then the question is, when it is open to all, just graduate or undergraduate.

And in any of those cases, do any of the parents qualify for federal assistance and is that something that you get involved in at all?

Much like in our centres, if there are people who qualify for either state or federal assistance we work that out. We derive less than a percentage of our revenue from those kinds of sources, but in an isolated case there could be a few people in one given centre where that happens.

Okay, but it is not a particular phenomenon necessarily among university clients versus any other?

No.

Great. Thanks very much.

Before I move ahead, let me answer the rest of Gerry’s question. In the quarter, 75 percent of the centres were opened for new clients and 25 percent were existing clients.

Our next question comes from Richard Klaus from SunTrust Robinson Humphrey.

Congratulations on the good quarter. Just maybe a quick comment on the investments overseas. I guess, Elizabeth, you said 8.1 percent to 8.2 percent on the GNA for the year. Should we see maybe more inline with what was reported this quarter, 8.2 percent coming up in the second quarter and then it tapering off to the 8.1 percent as you make those investments? How are those investments going to be staggered throughout the year?

I think that you will see slightly more investment in the front end. It is when we have relocated to this office, but some of those investments will manifest themselves in ongoing depreciation expenses and some of the hiring we have done. There will be a modest tick down in the overhead in the U.K. The integration cost element, I think that is what you are asking.

In that regard, I think that we would see the 8.2. The reason our guidance is 8.1 to 8.2 for the year is we think we are at the higher end now than where we will be as that begins to get leveraged and we spend a little bit less on the actual integration, travel and getting people together in some of these one of investments.

Okay, and maybe a follow up on that. As that office gets up and operational and moving forward, is there the opportunity to get some centre operating boost from that in terms of the centre operating margins over there, just related to efficiencies or anything?

Well, I think that what we are expecting is that with better information flow and an ability to more timely analyze some of the information that we may be able to react quickly to some of the opportunities in cost management that we have been able to implement here in the States. I think at the margin we will expect to see some operational improvement in process.

What I think it also allows people to do is be together in one place and have the synergy on the response to the sales function and to be working more closely together and have just a more directed operational flow. Some of that is kind of intangible, but we definitely see a benefit over time manifesting itself in how the operations flow and being able to bring our own expertise to bear on the collective group there.

Finally, Dave, maybe on the tuition, you talked quite a bit about trying to hold that 4 percent in there. Are you getting any pressure based on the way you said that? Are you getting any pressure that 4 percent is too high? Can you go higher on that?

Let me reiterate what I said, Richard, which is that tuitions are holding. Our price increases are sticking and holding so we are not feeling the pressure on the 4 percent increase and we feel like that is the appropriate number that we are comfortable with for the year.

Just a final one, Elizabeth. Can you go over the cash number again? I didn’t quite get that and maybe the breakout of the centres or the industries in your pipeline again?

Sure. I actually found that I did leave off one industry, so for those of you out there who are trying to add up to 100 I had a little bit of a shortfall, so I will reiterate those and I appreciate you asking. The cash number is around $22m for the quarter end and the pipeline components if you will are 10 percent technology, 15 percent health care and pharmaceutical, 20 percent government and education, 20 percent consumer, 20 percent consortium office park, 10 percent industrial and manufacturing and 5 percent financial services.

Sorry to make you go through that again. Congratulations on a good quarter guys.

Thanks, Richard.

Thanks.

(Operator instructions) Our next question is a follow up question coming from Howard Block from Banc of America Securities.

Hi there, this is Derek Johnston, Howard just stepped away for a moment. The 45 to 48 centres, is that gross?

That’s net.

That’s net.

That’s net. Okay.

Net of the 10 to 12 closures, which is pretty consistent with what we have done in the past few years.

Super. Can you give us an idea of the renewal rates? I guess for both the cost plus and the for profits and maybe how those have changed over the past few years?

Do you mean client contracts?

Yes.

There is no difference in what has gone on there in the past few years. We have a really strong client retention rate and there has really been no change. The reason for centre closures too haven’t changed, it’s been all over the place in terms of some underperforming changes, some clients going through mergers or acquisitions to close down sites, just a variety of reasons that we’ve talked about in the past.

And is it kind of high 80 percent or something like that?

No, it’s over 95 percent.

I don’t have the exact number for you, but it is between 95 and 99 percent.

Great. And one more question here.

I actually didn’t step away. Derek and I always do these things two on two. Just back to the centre count, as I look at it you are saying 45 to 48 for the year, and only about three of those are back up and about eight of them are international, so we are in the high 30s here on the primary and the net in primary for the first quarter was only about six? Is that right?

In primary meaning domestic?

Yes. I guess what I was driving at is -- what’s that?

It’s probably seven, but yes.

It looks like a pretty ambitious schedule for the rest of the year, meaning more than 10 net primary per quarter for Q2, Q3 and Q4, which is again, achievable, but that is not what we -- we haven’t seen that rate of openings in a couple of years.

I think two things that I will point out. One is the variety of centre sizes. We use centre numbers as a proxy for capacity growth and truly, capacity growth is what drives the business and we have in this quarter alone we opened centres that ranged in capacity from 20 to 360 capacity. So it may be elements -- we translate to 10 to 12 percent capacity growth into 45 to 48 centres, but there may be some larger facilities. Certainly a couple came in this quarter.

I think your point on the relative numbers of centres, we did have fairly heavy U.K. openings this quarter relative to the overall pipeline and then have visibility into the rest of the year, so I think that is where our comfort on the growth in the openings comes from.

Okay. I am all done if my sidekick is done. Thanks.

Okay, thanks.

Our next question comes from Sean Chadborn from Credit Suisse First Boston.

Just a quick question here. In terms of the 11 new centres that were opened or the 15 new centres that were open, net of 11, how many were from existing customers and how many were from new customers? Did you mention that?

Yes, 75 percent, Sean, were from new customers and 25 percent in existing customers.

Okay, then in terms of the prospect list. I know in the past you’ve said there has been about 150 companies that you have been prospecting. Has that number changed, and how has the relative mix of that changed between existing new customers? Then, if you could provide any information on particular industries if they are again, more countercyclical and what not.

Well on the first question which is the prospect base, we have seen the prospect base pick up slightly over where we have reported in the past, which we considerably view as good news. The activity levels are good and that is consistent between -- I don’t have the number for you on that, Sean, on how many are existing versus how many are new clients, but anecdotally I think I could say that roughly two-thirds to 75 percent of the prospect base is new clients and one-third to one-quarter of that is centres for existing clients. So that answers the first part, I think, of your question.

And then in terms of the industries those prospects are in?

I think that it is fair to say that there is a heavier proportion of the health care higher end and government agencies that follow suit with what we have talked about in our strategy, but I’d have to say that it is also pretty broadly represented and probably wouldn’t differ terribly from what you see in the industry mix in the pipeline. Again, that is speaking anecdotally because I don’t have that analysed.

I think we have seen the counter cyclical become more active and that is where we have a little bit more flow and our strongest group of prospects. We have sort of a three tier system there where we are subtracting them at different stages of their development, but that is about as much industry breakdown as that list of 100 would break down into.

And there is no difference in the selling time between the counter cyclical industries, the government basically and higher end universities versus--

I think the selling time is pretty consistent and as I said earlier that is where we have seen a little bit of a drag in this economy in general.

And then just one last question in terms of KinderQuest, how much did that contribute to revenue this quarter?

It was about $4.5m.

Terrific. Thanks, guys.

Okay.

Thanks.

You have a follow up question coming from Gerry Herman from Legg Mason.

That was a pretty quick hook last time. Just a couple of questions. I know you guys like to target your tuition increase relative to the labour cost changes. Is the environment any better there? Are you experiencing an improving spread given the economic circumstance on labour?

Well, I think we feel like the situation for us in terms of attracting and keeping quality teachers and folks in the field has improved considerably over the past few years. Our operating protocol, as we have talked about before is to try and have a pull in spread between tuition increases and salary increases. I think that is reflective of what we are seeing. I think you see average salary increases in the range of roughly 3 percent and tuition increases at 4 percent.

The good news on that from a quality point of view is our turnover in every category is down and our number of open positions are half of what they were at this time last year. Two years ago.

So that might be economic related. Do you think, Dave?

Well yeah, I think it is economic related.

Dave, can you comment on sort of just the competitive landscape, the Aeromark transaction and anything else you are seeing in the market, if there is an increasing trend towards outsourcing or anything other that is worth commenting on?

Just a quick comment on the competition. I think that the Aeromark and Knowledge Beginnings coming together is essentially, from our point of view, just two organizations that are principally focused in residential child care that have small pieces of their focus on the corporate market. We have competed with them separately and now essentially we will just be competing with them as one.

I think for us it is not a real big -- we do not see that as any real change in the competitive landscape from our point of view. The same really holds true with the rest of the field. I think the rest of the competition on the larger chains are all over the place in terms of their focus versus corporate market versus their primary focus which is residential.

Our competition also comes from local providers who are regionally based in practically everywhere we operate. We have just been used to that kind of competitive dynamic over the course of the past many years, and we’ve competed against them. So there is really not too much on the corporate competitive situation to report differently than we have talked about in the past.

From an acquisition point of view, I think that is where the economy has really created change for us in that it is a much, I think, improved environment for us to not only find but also in at least the discussions we’ve had contemplate better terms and the ones we’ve executed on, we think better terms than what we would have seen a few years ago.

I continue to believe that that environment is a good one for us and our balance sheet is in a place where we can seize on them that makes sense for us and the business and it has been also a great way to not only add centres but also to bring new talent into the company.

That’s great. And one just final question for Elizabeth. Capex and D&A for the full year, Elizabeth?

We are only through the first quarter so I am not --

Is that a good number to anticipate.

I am just teasing you, Gerry. The capex we would expect actually to be not that different from the pace that we have in the first quarter, somewhere between $16m and $18m for the year. Depreciation and amortization will probably be $11m to $11.5m.

Great. Thanks guys.

Great.

At this time I am showing no further questions and I will turn the floor back over to Mr. Lissy and Ms. Boland for any closing comments.

Thanks, Wayne, and thanks to everybody on the call. We appreciate your questions and certainly are here to follow up with you if there are any follow up questions Elizabeth and I will be in the office today and tomorrow. I wish you all well. Take care.

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