Bright Horizons Family Solutions Inc (BFAM) 2003 Q2 法說會逐字稿

Please stand by for realtime transcript. The Bright Horizons Family conference call will begin momentarily.

Good afternoon, ladies and gentlemen and welcome to Bright Horizon's second quarter earnings release conference call. Alt this time, all lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is my pleasure to hand the floor over to your host, Mr. David Lissy. Sir, you may begin.

Thank you. Greetings from Boston and hello to everybody on the call today. Our earnings release went out right after the market closed and it's available in the Investor Relations sections of our website at www.brighthorizons.com. With me, as always, on our call today is Elizabeth Boland, our Chief Financial Officer. And before we begin, I will get Elizabeth to read our Safe Harbor statement.

Thanks, Dave. As you know, in accordance with Reg FD we use these types of conference calls and other public forums to provide the public and investing community with timely information about our business operations and financial performance as well as about our expectations for the future.

We adhere to restrictions on selective disclosure and appreciate your understanding of the limits that we will be able to comment on items not previously discussed in the 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 web site. The risks and uncertainties that may cause our future operating results to vary from what we describe in any forward-looking statements include our ability to execute contracts for new center commitments.

To enroll children in our centers, to retain clients and center management contracts, and to expand and operate profitably abroad. The specific risk factors associated with our business are detailed in our SEC filings, including in our form 10K filed in March of 2003. A replay of this entire conference call will be available by calling 973-341-3080 and entering pin code 402-1167.

Thanks, Elizabeth. And welcome everybody, again, to our second quarter 2003 earnings call.

Today I'm pleased to be reporting another strong quarter for Bright Horizons and I will begin today by briefly recapping the numbers for you. Revenue in the quarter of $117 million was up 17 percent over last year's $100 million, while net income of $5.1 million was up 30 percent over last year and earnings per share of $.39 cents also increased 30 percent over 2002's $.30 cents per share. Let me provide you with a little more insight into our performance this quarter. Our revenue growth continued to include the addition of new centers, tuition increases and enrollment gains at centers that are immature and ramping up.

As somewhat of our counterbalancing effect we continue to work with clients to be more efficient in light of the soft economic conditions and often we make operating changes and implement efficiencies in our cost plus contracts that have little to no impact on our margins while lowering revenue. This is a trend we've discussed with you over the past few years and we continue to see it playing out in our results. As you can see, our center margins improved again this quarter, moving from 15.2 percent in the first quarter to 15.4 percent. At the same time, we've leveraged overhead below eight percent of revenue for the first time in our history. The bottom line results reflect and across-the- board outperformance this quarter and year to date, compared to where we projected to be at this time a year ago. As I've commented in the past, our team continues to do an excellent job at managing costs while maintaining our high quality standards.

Our tuition increases have held steady at four percent on an average, and when you couple this with the easing of labor and other cost pressures, it's helped to create this modest uptick. In addition, we've experienced higher than planned enrollment at profit and loss centers. Many of you may recall we did have a large class of maturing profit and loss centers given the growth in the area in the past few years. Another factor in our positive margin trend has been our consistent practice of identifying and fixing or closing underperforming mature centers. Approximately half the centers we've closed over the past few years have about the result of underperformance. Although these closures result in lower revenue, this disciplined approach to assessing center performance has paid off in the form of positive impact to our overall center margins. I should note, however, though, that this quarter does typically represents our strongest quarter for center margins when we maximize occupancy levels prior to our preschoolers graduating and the rebuild of our fall enrollment. Many of the same general economic influences and cost factors that have helped our center margins have enabled us to leverage overhead faster than planned.

Most importantly, we've achieved this result while continuing to make the necessary investments in our growth, including our significant investment in support and systems in our UK and Ireland operations. The combination of these positive trends will move our earnings per share estimates for fiscal year 2003 up from our prior range of $1.39 to $1.41 to $1.45 to $1.48. Elizabeth will give you more specific guidance on our -- on the fiscal year in a few minutes. During the past quarter, we opened nine new centers, including new centers in the U.S. for Ikos, Standard Process, Comp Wear, Bristol Myers Squibb, and a new consortion backup center in Charlotte, serving During the past quarter, we opened nine new centers, including new centers in the U.S. for Ikos, Standard Process, Comp Wear, Bristol Myers Squibb, and a new consortion backup center in Charlotte, serving Wachovia and several other local importers. In addition, we doubled the capacity at a newly expanded facility for SE Johnson in Racine, Wisconsin. and several other local importers. In addition, we doubled the capacity at a newly expanded facility for SE Johnson in Racine, Wisconsin. We continued our steady growth in the UK and Ireland with the addition of a new center for the revenue in Newcastle, which is our sixth overall for them. And we opened a new consortion center in Dublin at the East Point Business Park. We closed four centers this quarter and ended the quarter with the capacity to serve almost 56,000 children. As we look ahead to the remainder of 2003, we remain on plan to open approximately 45 net new centers which allowed approximately 5,500 capacity to our network, an increase of more than ten percent in capacity over our 2002 levels.

Our pipeline of new centers remains in the 50-plus range as we continue to add new commitments at roughly the same pace as center openings. The pipeline remains diverse, both in terms of industry and geography and extends through early 2005. Though our sales team has been focusing on counter cyclical industries such as healthcare and higher education, the overall sales environment does remain challenging, as I've reported in the past, we're continuing to see a length in the sales cycle. One counterbalance to point out about this trend which we've deployed, is to target more outsourcing opportunities. These are existing worksite child care centers that are either self-managed by the client or by another provider. Our estimates tell us that there are over 1,500 of these programs out there with at least several hundred of them operating at quality levels that would meet our criteria for management. Over the past few years, we've successfully transitioned the management of 16 of these kind of programs and expect another three to five by year-end.

Upon transition to our management, these centers perform without the normal ramp up period and therefore immediately contribute to our financial results. One other thing we should note about these kind of transitions is they typically sit in our pipeline for shorter periods of time, on average for about three months, unless they create a quicker turnover in the pipeline. I spoke to you about a desire to continue to incremently grow our position and extend our reach into elementary education, as you know, we currently operate two schools, in Seattle and Palm Beach, Florida. Today, I'm pleased to announce that earlier this week we acquired Brookfield Academy, a network of four private schools in the Oakland County area of Michigan. It's long held a reputation for quality and won a number of awards for educational achievement and civic involvement. We've gotten to know the founders of Brookfield over the past year and ultimately agree that becoming part of the Bright Horizons network as they were pulling back from their day-to-day operations would be the right decision. The four schools which have a rich, 25-year history offer preschool through 5th grade with a total capacity to serve over 800 students.

The Brookfield model truly represents an extension of our capabilities with roughly half of the enrollment mix being preschool and kindergarten with the other half of the next -1st through 5th grade. From a financial point of view, these schools have about 50 percent more revenue than one of our average P&L centers and contribute center margins slightly better than our mature P&L centers. Our strategy for expanding our presence in the schools area is focused on either finding clients who want to expand their services, similar to what we did with JFK Medical Center in Florida, or focusing in areas where we have strong operating presence and can build on our brand accordingly. In the case of Brookfield, we currently operate nine child care centers in the surrounding area for clients such as Pfizer, Compu Wear, The U.A.W., Ford Motor Company, Visneon, and the Henry Ford Health System. To be clear, we continue to be interested in expanding our reach in schools in this manner, however, our approach will be a careful one, focused on quality and will happen at a gradual and deliberate pace. Overall in the acquisition front, we continue to focus on core business opportunities and our sense remains that we continue to be in a good position to take advantage of opportunities that meet our stringent criteria for quality and the financial performance. Over the course of time, we've built our organization, as you know, 70 percent organically and 30 percent through acquisition. I would expect that going forward over the next few years this mix will continue.

Along the way, we built a strong competency around integrating new organizations into our network through an exchange of best practices and through incorporating new and talented leaders onto our team. To date, we've been able to finance our acquisitions with cash generated from operations and I expect our continued strong cash position will enable to us continue to execute on the right opportunities in this same manner. Finally today, let me focus on several important areas related to our ability to continue on our mission to be the partner of choice for families and clients around quality early education and solutions that help better integrate the challenges of work and life. This past June we released a new study, conducted by our consulting group that focused on the investment impact of employer-sponsored child care. The study included detailed analysis of turnover statistics and usage of our onsite child care centers for major employers such as Staples, Household Financial, Citibank, New York Hospital, Abbott Labs, and Banc of America. Among the key findings was significant decrease in voluntary turnover among center users in relation to the overall population of this employer study group. In fact, the users of these centers turned over at half the rate of these organizations average turnover rates.

Equally important, though, the study focused on another critical component of our business case, the retention and productivity of top performing employees. The results highlighted the unique demographics of the employees with children enrolled in a center. There is a higher concentration of top performers and long-term employees using these centers as compared to the general population of the study group. These are the exact employer groups that employers want to motivate and retain. We've long believed and thought that our worksite child care centers on average attract a highly motivated and productive employee and this is just another piece of evidence to that end. On the bottom line, we take companies that participated in this study saved almost $3.5 million in one year from reduced turnover alone, using their own estimates for the average cost of turnover.

This study reinforces the underlying business case for employer-sponsored child care and when you couple it with the continued lack of supply of quality and affordable options for working parents, it continues to make us optimistic about our long-term growth potential, particularly when you factor in an economic recovery and when that begins to restore the confidence in new corporate spending. Finally, I want to share with you the results of our latest Parent Satisfaction Survey, which is hot off the press last week. The results are once again very gratifying. Again, this year 98.8 percent of our parents were either highly satisfied or satisfied with the care their children were receiving. There's no question in my mind that as a growing organization, we have been, and will continue to be challenged to maintain our high quality standards. It takes real commitment and exacting execution day in and day out to consistently deliver the high quality of care that our clients and parents have come to expect. And while we're under no illusion, and we still have many areas on which to improve, this is an extraordinary level of overall satisfaction and I'm really proud of our entire team for making it happen. In summary, Bright Horizons's financial position has never been stronger.

Solid growth and increasing margins are producing strong earnings growth. Our strong balance sheet and cash flow provide us with the flexibility to continue to invest in our future. We're very pleased, as I've said earlier, with our performance this quarter. And we remain very focused on insuring that all of our measurable outcomes, quality programming and accreditation, client and parent satisfaction, educational excellence, being an employer of choice in our field, and producing positive gains for our shareholders are all aligned and are delivering strong and constantly improving results.

Now let me turn it over to Elizabeth to walk you through the quarter in a little more detail and give you our outlook for the year ahead. Elizabeth?

Thanks. As Dave said, I will start with a recap of the quarter and then move on to the outlook for the full year and a quick overview of what we're looking at for 2004. As Dave mentioned earlier, revenue grew 17 percent in the second quarter to $117 million.

Top line growth, as you know, is driven principally by the addition of new centers, the additional enrollment in our centers which are ramping in their second and third year, and tuition increases of approximately four percent per year. Operating income as a percentage of revenue increased 60 basis points this quarter to 7.4 percent, compared to 6.8 percent last year. Center gross margins make up the lion share of that, up 40 basis points at 15.4 percent as we continue to carefully manage labor and benefits costs, as well as other controllable operating expenses.

While at the same time increasing enrollment marginally and maintaining our pricing position. As Dave mentioned, the first two quarters of the calendar year are our strongest in terms of center level performance because enrollment levels are typically higher from January through June, especially in the preschool classrooms. Later in the year, older preschoolers and kindergartners begin to move out of our centers as they begin elementary school. Therefore, center margins dip over the summer and then rebound in the fall as we rebuild that preschool enrollment in younger children and age up. Overhead as a percentage of revenue was 7.9 percent this quarter, down 20 basis points from 8.1 percent in 2002, our first quarter reporting under eight percent. As in our centers, the primary cost in SG&A is personnel-related. While field operations in the sales team continue to expand in concert with our center growth, we're able to realize modest economies in the administrative support function, which is where you see that leverage. As many of you know, EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization is a good representative measure of cash flow for our business.

For the quarter, we generated approximately $11 million in EBITDA, an increase of 25 percent over the same 2002 period. And our cash balance at quarter end, approximates $38 million. Finally, capital spending for the quarter totaled approximately $5 million. Our tax rate in the second quarter of '03 was 41.6 percent, which approximates our projected rate for the full year of '03. Let me end the review of the quarter with a few statistics. At June 30, we were operating 481 centers as we added nine and closed four. Our total operating capacity at quarter end was just about 56,000 with an average per center size of 116. U.S. centers average 129 capacity per location while in the UK and Ireland our 72 nurseries have an average capacity of 48.

At the end of the quarter, as in prior periods, approximately 60 percent of our centers are profit and loss and 40 percent are cost plus. As Dave discussed, our pipeline of over 50 centers, spans a wide array of industries, in the mix it's similar to past quarters, so let me walk you through those elements. Ten percent of our pipeline is technology. Ten percent, healthcare and pharmaceutical. 15 percent, government and education. 20 percent, consumer and other. 20 percent, industrial and manufacturing. 20 percent, consortion of office park and five percent, financial services. Before I get to detailed guidance, I also wanted to run through a couple of metrics on Brookfield Academy as I expect some of you will be inclined to model this acquisition differently. The four schools which do operate on a traditional calendar and therefore will begin contributing to our results in September, are projected to contribute roughly 50 percent more than than an average P&L center both at the revenue and contribution lines.

So that the addition of approximately 800 capacity equates to six conventional profit and loss centers, with contributions in the neighborhood of 17 to 20 percent, rather than our usual 16 to 18 percent for mature P&L centers. As Dave mentioned, there are P&L centers just at the higher end of the contribution range. I will now walk through our current financial projections for the remainder of 2003. We project revenue growth from our base of existing centers as well as new centers in the pipeline, slated to open in the last half of '03, to continue at its current pace with annual growth in the range of 16 to 18 percent. Underlying this projection is our view that the modest economic recovery that appears to be under way will not bring measurable changes to our growth rate, as capital spending will likely lag for several quarters. In addition, it is our view that we should continue to be conservative in projecting tuition increases and enrollment growth in our existing base of business. Our forecast includes capacity growth of 10 to 12 percent for the year, which will translate to approximately 45 net new center additions. And revenue will also have tuition increases averaging four percent and enrollment growth from existing centers of one to three percent. We do expect to improve both center margins and overhead in 2003, with center margins projected to approximate 14.8 to 15.1 percent for the full year and overhead spending to approximate 7.9 to 8.1 percent of revenue. After the amortization of nongoodwill intangible assets, of which we do have some, this will result in operating income in the range of -- an increase of 30 to 50 basis points.

An estimated 13.25 million shares outstanding for the year will lead us to a projected earnings per share of approximately $1.45 to $1.48 in 2003 as Dave mentioned. For purposes of your modeling, our current quarterly estimates are as follows: For Q3, a range of $.35 to $.36 cents a share and for Q4 a range of $.36 to $.38 cents a share. As you can see in this quarterly breakdown, we do expect the usual seasonality trend in the third quarter to affect both margin and earnings, resulting in lower center margins and EPS relative to the first half of the year. Looking beyond '03, we continue to see strong opportunities for growth, particularly when an economic recovery takes hold.

With top line growth in the high teens, we would expect to be able to continue to modestly expand center margins and further leverage overhead, such that earnings will continue to grow at a pace ahead of top line growth. In a preliminary top level look at '04, with revenue growth in the high teens, based on our pipeline of new centers scheduled to open in the latter half of this and the next, center margins increasing by ten basis points and overhead leveraging down by ten to 20 basis points, as well as a consistent tax rate in outstanding shares averaging $13.5 million, we would project EPS to increase approximately 20 percent to a range of $1.73 to $1.77 per share. With that, we'll open the call for questions.

Angela, we're ready.

Thank you. The floor is now open for questions. If you do have a question, please press the numbers one followed by four on your touch-tone telephone. We do ask that while speaking to please utilize your handset to provide optimum sound quality. Once again, that is one followed by four on your touch-tone telephone to ask a question. Our first question is coming from Howard Block of Banc of America Securities.

Good afternoon. Congratulations on another solid job.

Thanks, Howard.

The -- the outperformance on the bottom line was really a surprise, certainly relative to my short-term memory. Is there a -- as you go through the P&L there's a couple of other surprises throughout.

In your opening comments, Dave, you did mention that because of the cost plus model you do tend to see revenue come down without any jeopardy to the margin. Was that one of the drivers of what was in our model, and I think relative to consensus, a bit of a shortfall in revenue?

Yeah, I think that, Howard did, and has consistently contributed to a slight shortfall relative to what we had forecasted, you know, in advance in the past. So the answer is yes.

Okay, and are those surprises a little bit less -- I guess I should say, do you have a little bit less visibility into those surprises so that it's possible that even with regards to the guidance that Elizabeth just gave, you actually could continue to come up a bit shy on the revenue side because of, again, limited visibility into cost savings?

Well, we gave guidance for the rest of this year and we expect revenue to be in the 16 to 18 percent range. So I think within that range, we feel comfortable factoring in what we forecast today to -- to be those same shortfalls for the rest of this year.

Okay. And then with regards to perhaps some of the other leverage in the business that seemed more robust this period, is there more leverage coming, I would say maybe a disproportionate amount of leverage coming from the UK, at least relative to the amount of time in which you've owned those centers? Or are they perhaps a little bit more rewarding at this point then you would have thought?

Actually, Howard, I'd say no. It's not higher contributions yet from the UK. We're really are still in integration mode and investment mode there. And while they're performing according to our planned performance, the outperformance in both the center margin and even at the overhead leverage state is -- is really based here in the U.S.

Okay. And -- and then the -- you may have said this in your detailed listing of openings, but I didn't quite catch it. In terms of the nine new openings in the quarter, how many of those were for existing clients?

Let me just look that up for a second.

Okay. And then, Dave, is there anything at all in the environment with regards to pricing that you'd like to speak to? Or has it been relatively stable in terms of opportunities to increase a few hundred basis points a year? Or anything you're seeing in any of the different economies, whether it be here or the UK or geographically that leave you at all cautious about pricing?

Well, I think we're -- as Elizabeth mentioned, generally speaking, I don't see any change related -- from the economy as it relates to the -- the how our average client or average prospect would view things or spend money. I do think that that said, from a tuition perspective, we're comfortable that the four percent that we've -- we had planned this year is sticking and will stick throughout the year and feel like next year, 2004, will be pretty close to what we experienced this year.

That is the ability to increase tuitions around that same level, but also, probably experience the similar easing of labor pressures and labor costs that -- that have helped to create some of that uptick in margins this year. We will probably have that same -- that same situation again, at least from what I can see now for next year.

Okay.

And Howard, of the openings this quarter, three were for existing clients, were added to our multisite base.

And one last question and I'll jump back into the queue, with regards to the acquisition, which actually sounds pretty exciting, is that the direction of future acquisitions in terms of identifying schools or pods of schools for which your centers concede and affect your graduates of the young centers right into those schools?

That's our experience in Seattle, Howard, as you know, we're located smack in the middle of about nine child care centers throughout the Redmond, Belleview, Kirkland, Issaquah area, serving principally Microsoft parents in many ways. And so locating the school there seemed natural for us. That's one strategy.

Brookfield actually does represent a continuation of that because it's in an area where we have a high concentration of centers and feel like we can build out our brand. The other strategy will be to work with clients where we can find them that are interested in investing and extending the reach just like JFK was interested in doing. I mean, ultimately we think from a -- from a educational point of view, you know, our vision would be if we could have a young child from the time they're an infant to the time they're in 4th or 5th grade sort of as a continuing process, rather than sort of the harsher transitions that happen from our programs from preschool into a public school system, you know, we think we can really, you know, provide a lot to a child and a family under that circumstance.

So, our strategy will -- will really be focused around those two areas. With that, let me say that our strategy, as I pointed out in my -- in my talk earlier, is going to be a really careful and deliberate one, because, you know, we've taken -- we've witnessed some other rapid expansion in the schools area by others and really want to ensure that when we do make this move, we have a strong eye for quality, but also in models that have the kind of underlying financial strength that are going to support it for, you know, over time, consistent with, you know, the way we've run the child care piece of our business.

Great. Thank you and congratulations, again.

Thanks.

Thank you. Our next question is coming from Trace Urdan of ThinkEquity Partners.

Hi, good afternoon. With respect to the -- to the Brookfield acquisition, are we meant to then read, Elizabeth, from you guidance that that constitutes six net new centers from -- toward your sort of year-end target?

Because of the relatively larger size, I think it's important to look at our growth from both our capacity and a number of units basis, so, on a capacity side it's adding more like six equivalent centers. So, rather than four, it's adding six if you look at it that way.

Right, but I'm saying it's not additive to your goal, it's part of your overall goal for the full year.

Right.

I think, Trace, our expectations - we will add approximately 45 new units, if you will, but I think what Elizabeth is pointing out is that the Brookfield units, which represent four units, actually from a capacity perspective, which is arguably more important as it relates to growth or growth potential, it's going to represent six centers.

Sure, I understand. The -- and I guess, I mean, judging from your guidance, you're anticipating that there won't be any -- necessarily any kind of overhead increases as a result of bringing on these schools. In other words, the entire cost of managing this type of operation is encompassed in the margins that you cited at the center level?

Yeah, I think -- I think the way to look at it, and it's a good question relative to the operation of the facility and a different avenue, but in our built-in base of overhead and looking at the cost structure that is there it would be part of our overall average. So, there's no incremental cost per se that would degrade that.

Okay. And can you speak to what the average tuition is for the kids in the higher grade levels?

The tuition, without getting into too many specifics on it, the tuitions are relatively lower than our overall child care center tuitions, which average in the 9,500 to $10,000 per year range, so they're lower than that kind of a level, but not, you know, not dramatically. So, I don't have the statistics right in front of me about the different age groups and whether they - how the metrics would flow from that.

Right, I'm just trying to get a sense more than the modeling aspect, I was just trying to understand from the sort of market segmentation aspect, where these schools kind of fit.

Yeah, they fit, Trace, I don't have the exact tuitions in front of me, but I can tell you from the -- from where they fit in the local private school market there, it fits pretty similar to the way we fit in Chestnut Hill in Seattle - which is, there are some really long-term, high-end, well-known private schools like Detroit Country Day, for example, which is in that area, that are priced, you know, well above where these schools are priced. And there's sort of a number of schools in that segment of the market, if you will, and then there's sort of what I will call the net level of the market, which is a high quality end, which is not quite priced as high as the Detroit Country Days of the world, and more sort of rated at the high end of that next year.

Is it fair to say that you're on a par with parochial schools, perhaps?

I think we're slightly above parochial schools.

Okay, great.

I know specifically in that area we are.

All right. Great. Thank you.

Sure.

Thank you. Our next question is coming from Brandon Dellbell of Credit Suisse First Boston.

Good afternoon.

Hi, Brandon.

Hi, Brandon.

A couple of quick ones here, Dave or Elizabeth, if you could talk about what kind of assumptions you've built into the back half of the year, and I guess, also into '04 in terms of salary increases or health and benefit increases from what I've seen in other parts of the services world?

Sure, I'll start off and Dave can jump in with other thoughts. With respect to our labor increases we are tending to see salaries increase at a rate about one percent below our tuition level increases and those are averaging four percent, so on average we're seeing labor rate increases in the range of about three percent.

Some cases it's higher, but then the tuition rates are higher. In some cases it's lower, but that's representative. With respect to benefit plans increases, we are lucky enough to have a fairly young and single population as the majority of our employment base, so our costs are not rising at the same kind of pace that some companies are experiencing but we still are seeing relatively high double-digit increases on the medical and other plans and we are expecting to see that going forward.

Our plan with that is that we've worked with our client partners and work internally on our own plan design so that we are cost sharing as much as we can with parents through the tuition increases, with clients through our contracts with them, and then through our own plan design, to manage that cost. Other insurances, you know, I think we've done very well, they continue to be less than half of one percent of our revenue, and that's for all of our liability general umbrella, property, etcetera, and even in this tough market we've been able to, through both our size and -- and performance, in terms of, you know, very modest claims experienced, etcetera, have not many increases there that aren't just manageable within our usual annual growth.

Okay, that certainly makes sense. In the discussion earlier, actually comments earlier, you mentioned an expansion of a facility, I believe, for SE Johnson. How common is that? And maybe if you could talk about the trends the last couple of quarters versus let's say '01 and '02, how common is it to go back to an existing client and maybe not add a full new center in a different location, maybe a different city or different state, but actually expand a facility? And then typically, of those facilities that are expanding, are they real small ones, kind of average size or above average?

Brandon, in terms of expansions, they've been a part of our -- we haven't broken that out as a part of discussing the growth and capacity, but we've done a handful of them every year and -- and in terms of the -- the -- the situation at SE Johnson, literally it was doubling the center in a new facility, we've got -- we've done a number of those same order of magnitude expansions this year and we did probably the same handful of them last year. And my expectation is we will continue to see every year a number of clients do that. Now, that's very different than Bristol Myers Squibb doing their fourth distinct center.

When a company does another center at another location like Bristol Myers, that's when we talk about how many of the new centers were existing clients versus new clients. And as we have roughly 42 or so clients that make up about 185 or so of our centers. So, and that number has grown pretty consistently over the past five years every year.

So, you know, I think it's a good trend see existing clients continuing to do the sites, but also these expansions, you know, to answer your question directly, there are probably four or five of them a year that act to double whatever their existing capacities, you know, were before they -- before they expanded.

And some clients do smaller expansions where they have a little bit less space, but what you see, again, it's back to my earlier point about considering capacity growth year-over-year, because these do add to our capacity base, and although they may not be unit ads.

Okay. That makes sense. Final question: If you look at your -- at your pipeline right now, and give us good metrics on kind of what companies are out there, maybe give us some color on what kinds of contracts are more prevalent, still the 60/40 split in favor of P&L? What kind of sizes are you seeing? And has that changed? Trying to get a flavor for if there is any impact from the economy on your pipeline? How is it manifesting itself?

I think Elizabeth gave you the industries and we can break that down again. But in terms of the contract types, roughly half the centers in the pipeline are cost plus and half are P&L, and the reason for that, that's no different, frankly, than what we've seen in the past, even though 60/40 is our split, as you know. Usually the larger cost plus centers sit in the pipeline for longer and therefore at any given point in time, the number of cost plus centers, usually in the pipeline, it's about half and half. And in terms of -- in terms of the capacity of centers that are in the pipeline, the pipeline today averages roughly 125 capacity of the centers that -- that are -- that are in there.

And I think Elizabeth covered for you the -- the -- again, the industry mix. But let me also say that, you know, I highlighted earlier that we're seeing an uptick in our activity around outsourcing opportunities, transitioning the management of other centers, either managed by the client or another provider and one of the -- I think those are -- those are really good things for us to be targeting but one of the things relative to the pipeline is they sit in the pipeline a very short period of time and therefore create quicker turnover as compared to a Greenfield center which might sit in the pipeline for 12 to 18 months on average.

Okay. Thanks a lot, appreciate it.

Okay.

Thank you. Our next question is coming from Richard Close of SunTrust.

Yes, congratulations on a -- a very good quarter there.

Thank you.

Had a question, Dave, I guess, hitting on your last point, the outsourcing opportunity, whether you could tell us, you know, whether the -- the -- the revenue model is different on that? I mean, -- or the economics I should say, is different on that. And then, you know, this is, I guess, the last two quarters you've talked about this a little bit more and with respect to talking about them sitting in the pipeline a little bit less, is that prepping us to see, you know, show the pipeline going down into the high 40s or maybe just a little bit more details surrounding that?

In terms of the actual outsourcing opportunities in the sales, part of the reason -- I think the economy has created a situation where a lot of the smaller providers that may run some of these work site centers are -- may have a couple of other centers besides the one they might have for a corporate client, are finding, you know, the economy difficult. That's creating some additional opportunity for us. So, that I think helps to explain some of the uptick in this activity.

The other factor is that, you know, many -- it's -- it's very, very rare, if ever, I can't think of a recent time where we've ever been in a competitive situation and we've lost to a client who decided they wanted to manage the center themselves and like the past five years. Most of the centers that are out there have been long-term centers that the decision was made many years ago to self-operate these centers and I think what you have going on is a combination of two things. One, the economy is, you know, forcing more of these companies to say this is noncore business. We don't want to have any part of this anymore. We want to bring in outside management. They're outsourcing a lot of other things they're doing. And secondly, a lot of directors they hired many years ago are they themselves aging.

As a result of that, they're looking to pursue, you know, other -- other opportunities and -- and, you know, they sort of Lynch pin for the client and that person moves on and, you know that -- they don't want to think about how they're going to replace that person and it creates an outsourcing opportunity for us. So, you know, I think that's part of what explains why we're seeing this on -- on a more rapid pace than we had in the past. And, you know, I'm just pointing out the fact, I think the fact of the matter with the pipeline is they do sit in the pipeline less, and so therefore, you know, that's a little different phenomenon than what, you know, what we've seen prior. I think the other factor related to the pipeline to -- to consider is that most everything that exists in our pipeline today is what I will call a unique client opportunity or a single center opportunity as opposed to a few years ago when we were on the front end of a rollout of 16 centers for JP Morgan Chase or a rollout of 12 or 13 centers for Ford, or four for Bristol Myers, any number of the clients that we rolled out a number of centers at once.

So, you know, it's been true that in the past, you know, two years, most of what you're seeing in that pipeline is the result of, you know, one sale at a time, if you will, as opposed to, you know, getting a yes and putting, you know, half a dozen or a dozen sites into the pipeline. So, I'm just pointing out some of the differences for you in the pipeline and, you know, our expectation is that we're continuing to put new centers in that pipeline at roughly the same pace as we -- as we, you know, as we've been opening them.

Are you seeing interest out there picking up at all? You know, I guess Elizabeth said, you know, you're spending -- client spending might come a little bit later in a recovery. Are you beginning to see hints of it?

Well, here's the way I look at it. I don't really think that any of the -- the general, whatever you might want to call today as the economic recovery that's happening, has yet really sort of manifested itself in corporate clients deciding to spend capital faster or -- or change their habits relative to what's been gone on in the soft economy for the past few years. I don't see a real general shift in attitude.

What's encouraging is the front end piece of our sales. When I say that, I mean saying yes any faster, Richard, not necessarily having interest, but, you know, getting that sales cycle to get back to where it was say three or four years ago relative to where it is today.

But in terms of the front end interest in what we do, I'm pleased with the activity levels I see in our sales team. In fact, you know, we only report to you what's committed in our pipeline and obviously we have a pretty disciplined approach to managing the other prospects that are along the path to closing and, you know, I -- I just say that I like what I see on the front end of that prospecting today, relative to a year ago.

Okay, and circling back real quick to the outsourcing, because is the -- you know, is the economics any different with that? Or should we just assume that it's like a regular --

Just assume that it's like a regular cost plus or P&L center, it's really kind of 50/50 what they are. I'd say it's kind of down the middle, but the economics are pretty similar to our standard economics for either model.

Okay.

It's just that they hit us at maturity as opposed to ramping up if they're P&L.

Okay, and just one final one and I will let you go here, is with the respect to the schools that you bought -- I mean, what do you see the opportunity going forward, you know, are you going to have a separate, you know, Elizabeth, maybe a separate line item or segment information where you will break this out in the future? And then, you know, what is really -- have you looked at the opportunity throughout the whole U.S. in terms of, you know, how many schools there potentially is like this?

Well, I will speak to the first part and let Dave attack those -- the market opportunity a little more directly, but with respect to breaking out schools division, it -- at this point it's six schools, it's not unlike our backup division where we have a line of our business which is akin to and in many ways very similar to our core business of full-time child care, and while it is a -- a bit of a niche business that we are managing with directed talent inside the company, breaking it out separately financially is both too small and not really that different from our base of business from a reporting standpoint at this stage.

So, we wouldn't plan to do that unless it became of a scale that was more like a segment of a business, 10 or, you know, percent or more of the overall base. So, that wouldn't be the plan. Although I think that over time we will continue to educate all of you on -- on what the schools look like and how they're performing and if it does differ from our core base. So, Dave, you want to address the market?

In terms of the market, as I said, you know, when we did our research in looking at, you know, sort of expanding our presence here, in a way I identified a couple of thousand full-profit private schools that fit sort of the general model.

Obviously when you're doing market research like that, it's more difficult to hone in on quality and what would ultimately fit from that perspective and you have almost little to no information on sort of financial performance. So, it is just what it is. It's sort of I identifying a universe and that is what it is. I think, you know, when we look at something like Brookfield and look at an area where we have a strong operating presence, there may be an opportunity to organically grow the Brookfield schools in that area.

You know, maybe more -- more for us than it would have been for that local operator who might not have the same access to capital we had. I think we need to be careful about doing that, but there may be some opportunity to expand in areas where we already exist, and more than likely we're -- where it's not a client who drives us expand like JFK, our likely route to sort of establishing ourselves in other geographic places will likely be in a similar acquisition approach we did in Brookfield.

Thanks again and congratulations.

Thanks, Richard.

Thank you, our next question is coming from Drew Crum of Legg Mason.

Good afternoon. Congratulations.

Hi, Drew.

Thanks, Drew.

Just one housekeeping item, did you happen to mention cash and equivalents on the balance sheet for the quarter?

It's about $38 million.

$38 million. Okay. And any backup centers open during the quarter?

We opened one backup center, a consortion backup center in Charlotte, principally serving Wachovia and a couple others employers bought into it.

Okay. And the pipeline is two to three? So does that still hold?

The backup centers in the pipeline?

Yes.

Yes, there are -- it's two to three in the pipeline, yeah.

Okay, another question on the pipeline, could you -- could you speak to, I mean, you mentioned the outsourcing opportunities, the fact that you're focusing on counter cyclical verticals, maybe discuss any different initiatives you plan on undertaking to fill the pipeline in '04 and '05?

Well, I think that -- that -- Drew, it's pretty much a continuation of what we've been doing, you know, for the last few years, heavily targeting our sales team on healthcare, on higher ed, on non-profits, on these transition outsource opportunities and as we've always closely tracked new campus construction around the country, where it's more likely for a child care center to be baked into a larger capital project.

We're all over that as we typically are and, you know, that coupled with the growth in backup care, which I think will continue to expand, we'll be careful looking at the schools area, which I mentioned, which will help, you know, we do -- we do -- we've traditionally done a number each year of office park consortiums where by the economics are right for us and I think that the -- the -- the real estate market has created a better environment for us because developers are no longer in the position they were a few years ago in trying to fill their office parks, so, it's more like when our number of -- our initial number of consortium office park centers developed years ago. So, I think those, plus the continued growth globally will help us. So, you know, those are really the -- the main areas and, you know, we just remain, you know, very focused on it.

Okay, thanks, guys.

Okay.

Thank you. Our next question is coming from Michael Martin of the Small Cap Report.

Good afternoon and congratulations again.

Thanks.

The potential risk to go with the -- all the furor over child abuse in terms of insurance costs, etcetera, can you talk about that a little bit?

Well, I think Elizabeth, Michael, addressed for you that insurance is, you know, a very small piece of our overall cost structure. But a very -- risk management is a very important piece to us and has always been.

We have a 17-year track record in the field and our primary focus is on quality programs and quality programs include really good risk management and safety procedures and a lot of close oversight of, you know, doing things like ensuring that there's not one adult with children, that we have, you know, partnered teachers in classrooms and all the things that you would typically do to prevent anything like what you're talking about. Obviously we're, you know, we're very carefully focused on it and we're proud of our track record, that so far we haven't had that issue surface in our network.

And as Elizabeth said before, there's been no meaningful impact on your insurance costs?

No, I think that's one of the things, it's helped that we've had such a good track record. We've been able to manage our insurance costs at a time when, I hate to say it like this, but there is a bit of competitive advantage for scale in this case.

A local provider providing child care in an area is having a heck of a time getting special abuse coverage today. We've had it for a long time and we're renewing it. When we talk to a corporate client about a child care center, they won't sign up a provider without that kind of coverage. So, on a certain level, it does give us a bit of a competitive advantage.

I hear you. The other question -- on the foreign expansion, could you give us a little color on what additional risks that might present for us, since your domestic expansion?

Well, we chose to -- we chose to expand internationally because we felt like the markets in both the UK and Ireland represented opportunities that looked a lot like what the U.S. looked like 5 to 15 years ago, depending on whether you're talking about the UK or Ireland.

I feel like we've acquired, in a sense, the top talent in the field in both of those markets, they're now our management teams. And we then helped them -- we're making significant investments in helping them build support systems that mirror what we've had the good fortune of developing here for 17 years in the U.S. And, you know, as smaller investors, they would have never had the opportunity to do that.

And I think that, you know, I think we're on a good path to -- to, you know, assuming a leadership position in both of those markets. That said, like any -- like any, you know, operation that runs outside of our domestic boundaries, you have all the foreign risks that any company chooses to make that decision and, you know, might have.

Thank you very much.

Okay.

Thank you, once again, if there are any questions, please press one followed by four on your touch-tone phone. We do have a follow-up question comes from Trace Urdan of ThinkEquity Partners.

Hi. I guess if you'd wanted us to know, you probably would have told us, but I figure somebody better ask the question. Can you tell us what you paid for Brookfield? [ Laughter ]

Good question! We can tell you that Brookfield -- we paid -- paid -- we're within our typical range of for acquisitions, four to six times cash flow.

Okay, great, thank you.

Okay.

Thank you. We appear to have no further questions.

Okay, well thanks to everybody on the call. As always, Elizabeth and I will be here for any follow-up questions. We're pleased with our performance, as I said earlier, this quarter, and look forward to talking to you again in a few months. Take care.

Thank you all for your participation. That does conclude your teleconference. You may disconnect your lines at this time. Have a great evening.