Bright Horizons Family Solutions Inc (BFAM) 2004 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Bright Horizons' fourth-quarter 2004 earnings conference call. Your host for today is David Lissy. Mr. Lissy, you may begin.

Thanks Mary and hello to everybody on the call. Greetings from Titletown (ph) where, given the results of last Sunday's game, everybody seems to be walking with a spring in their steps this week.

Joining me on the call here in Watertown is Elizabeth Boland, our Chief Financial Officer. We begin will today's call as usual with Elizabeth going through a few administrative matters. Elizabeth?

Thanks, Dave, and hi, everyone.

Our earnings release went out over the wire after the close market today and also is available on our Web site, BrightHorizons.com. This call is being recorded and simultaneously webcast and a complete replay will be available by either medium. Those wishing to access the replay by phone may dial 973-341-3080 with pin code 5595110, while the webcast will be available at our Web site under the Investor Relations action.

In accordance with Regulation FD, we use these types of conference calls and other similar public forums to provide the public and investing committee with timely information about our business operations and financial performance, along with our current expectations for the future. We adhere to restrictions on selective disclosure and limit our comments to items previously discussed in these forums.

Certain non-GAAP financial measures may also be discussed during the call and detailed disclosures relative to these measures are included in our press release and in the Investor Relations section of the Web site.

The risks and uncertainties that may cause future operating results to vary from those we describe in our forward-looking statements made during this conference include our ability to execute contracts for new center commitments, to enroll children, to retain client contracts and to operate profitably abroad, the effect of governmental tax and fiscal policies on employers considering worksite child care, and the capital investment in employee benefit decisions such employers are making, and lastly, the other risk factors that are set forth in our SEC filings.

In addition, as of the time of this conference call, we and our independent auditors have not yet completed the work associated with Section 404 of the Sarbanes-Oxley legislation and there are no assurances that such work will be completed in advance of the March 16 filing deadline for the filing of our Form 10-K. The timing and final outcome of this work has, therefore, not yet been determined. There are no assurances that internal controls deficiencies, including material weaknesses, will not emerge or that remediation efforts will be completely successful.

Now, back to Dave.

Thanks, Elizabeth, and hello to those of you who may have just joined us.

Let me begin today with a recap of the fourth-quarter and our fiscal year 2004 performance. I will then look ahead to 2005 and beyond. When I'm through, Elizabeth will come back with a more detailed review of the numbers, including our guidance for 2005 and some detail on the stock split that we announced today before we open it up for your questions for a Q&A session later on.

First, let me give a quick review of the numbers. For the fourth quarter, revenue of 145 million was up 16 percent over last year, while operating income rose 13 million from just over 9 million in last year's fourth quarter. Net income in the quarter rose 42 percent to 7.6 million, resulting in earnings per share of 54 cents, up 39 cents over -- excuse me, 39 percent over last year.

For the whole year, revenue of 552 million was up 17 percent, net income up 27 million grew 37 percent, and earnings per share of $1.96 for fiscal year 2004 grew 31 percent over our 2003 levels.

As you can see, 2004 performance was very strong and I'm proud and honored to share the results of all of the hard-working and dedication of our 16,000 employees throughout the U.S., UK, Ireland and Canada. Our success this past year further underscores the long-term viability of our business model. The alignment of key demographic, social and workplace trends, combined with an overall undersupply of quality childcare options for working families, has continued to fuel strong interest in our services. In addition, the focus on educational outcomes being brought about in part through No Child Left Behind has helped bring new life and new attention to something that we've known for a long time -- the critical link between a high-quality early educational experience to a child's future success in school and life.

We've long differentiated ourselves by the quality of our programs at Bright Horizons, and we believe that this renewed public focus on early education will only serve to bolster our competitive advantage going forward.

As I look back on this past year and look ahead to 2005 and beyond, I wanted to focus my comments today around 5 key elements of our overall business strategy. These elements are -- first, identifying and executing on growth opportunities; second, achieving modest and sustainable margin improvement; thirdly, maintaining our competitive advantage as the employer of choice in our field; fourth, enhancing the quality of our programs; and last but not least, finding new, vigorous opportunities through logical expansions of our core competencies.

In regard to the first element, identifying and executing on growth opportunities, our track record growth and pipeline of committed business are the clearest indicators of our success in this area. This past year, we added 60 new centers. We began back on January 2 with 1 for the New York Racing Association at Bellmont Park and another for JanSport in Wisconsin. We ended just before Christmas with the opening of our seventh center in Ireland located near the Dublin airport in Swords. Along the way, we added signature new clients that included Proctor & Gamble, Symbol Technologies and WL Gore (ph), and we expanded our relationship with the UAW Ford and they now operating childcare and family resource centers in 18 locations. The success of that particular relationship helped us this past quarter, as we were able to win the contract to manage a center for the UAW General Motors in Flint, Michigan, further broadening our presence in the automotive industry, which had already include 3 centers for Toyota and individual centers for Subaru, Isuzu, J. M. Family Enterprises and Land Rover.

We've continued our focus in the acyclical type of industries that we've spoken to you about in the past, and we've added 10 new centers this year for hospitals and universities. These included 2 for Cambridge University in the UK, our third center for MIT here in Boston, along with new ones for Savannah Memorial health, Virginia Mason in Seattle and San Juan Regional Medical in New Mexico. In total, we now operate 19 centers for colleges and universities and 47 centers for hospitals. These areas continue to have strong potential for growth, given the continuing nursing shortage AND hospitals and the growing focus on work/life issues on college campuses, both here and in the UK.

Our sixth center for USAA is another example of the expanding relationships we have with existing clients. We added new locations for 6 multi-site clients during the year and now serve 44 multi-site clients at 217 locations. This is a strong network of centers and relationships that we expect will continue to grow. In fact, we estimate that this group of clients alone has more than 600 work sites that could potentially support a work site childcare center. When you add that number to the overall base of clients for which we have at least 1 center today, we estimate there's a total potential universe of 3,000 locations that could justify a center just within our existing client base today. This would be an important area of focus for us, going forward, and should contribute significantly to our future growth.

Looking ahead, there's been a continued positive trend in sales activity within the more cyclical sectors, namely financial services, professional and legal services, and consumer goods. We continue to see strong interest in our base of pre-commitment prospects, coupled with a modest shortening in the sales cycle over the last few months. In addition, with over 50 centers committed to open through mid-2006, our pipeline of new centers under development remains strong even as we open new centers at a rapid pace, another positive sign for renewed interest among our existing clients and expanding the capacity of their existing centers.

I should also point out that while I'm saying all of this and it's extremely encouraging, the natural length of our sales cycle dictates that the impact much of this activity may not begin to manifest itself in a meaningful way until 2006 and beyond.

Lastly, on growth, let me comment on the 2 remaining contributors to our past and to our future growth. The first is outsourcing or transitions of management of existing employer-sponsored centers, and the second is acquisitions. Over the past 3 years, we've successfully transitioned the management of 30 centers, in addition to the UAW Ford Family Centers that were previously either self-managed by an employer/sponsor, or by another provider. We believe we will continue to find good opportunities in this area, as employers focus on outsourcing non-core services and on consolidating the number of providers they do business with. We estimate that the potential universe for targets in this area is roughly 1,200 centers.

Now, let me move onto acquisitions. This past year, about 1/4 of the centers that we added came through acquisition and over the course of our history, we've grown Bright Horizons roughly 70 percent organically and 30 percent through acquisition. We've been diligent about finding situations that meet our stringent criteria for quality and financial performance and have developed a strong integration capability. We've also been successful at further leveraging the potential of many of those client relationships that we've acquired, due to our scale and our multinational presence and our diverse array of service offerings.

As we look ahead, you can expect that our future growth mix will improve acquisitions that are both good strategic fits and allow us to gain access to new markets, new lines of service, or to employer relationships.

Now, let me move onto my second point, and the rest -- the other 4 won't be as long as my first, you can be assured of that. No less important though -- achieving operating margin improvement as we leverage our growth. In 2004, we achieved a significant increase of 120 basis points in our operating margin. It's important to note that while we are very pleased with this performance, coupled with similarly strong leverage in 2003, those 2 years were preceded by a few years of stable or relatively modest margin growth.

As we look ahead to 2005, the opportunity to sustain modest margin expansion will be driven by a few factors -- first, continued incremental enrollment growth in our mature and maturing classes of centers; second, through competitive pricing. We expect annual tuition increases in 2005 to approximate 5 percent, continuing to slightly outpace our expected annual average wage increases, which will be approximately 4 percent. The third piece will be through careful cost management; and lastly, through successfully integrating transitions of management and acquisitions into our network in addition to consistent organic new center growth. This will create a balanced portfolio of new centers, some of which will begin with us at full financial condition and others that will need to ramp up over time.

Now, moving onto my third element that I wanted to talk about, maintaining our position as the employer of choice in our field. This is a critical element of our strategy that the quality of our programs and services are a direct result of the quality and experience of the teachers in our centers, our center directors and the rest of us who support them in making it happen every day. In a field where 50 percent-plus annual turnover is the norm, we are proud that our rate in 2004 was brought down nearly 10 percent to an annual rate of 20 percent. This enables us to maintain high service quality and attain high parent and client satisfaction rating, both of which now stand over 97 percent.

I'm also immensely proud of the fact that Bright Horizons was once again selected as one of Fortune magazine's "100 Best Companies To Work For" in America this past December. This is the sixth time we've been included on this prestigious list, and the fact that two-thirds of the ranking is based on an independent employee survey makes it even more gratifying.

The fourth element I wanted to talk about and one of our guiding principles is that we cannot afford to have profits at the expense of quality, nor can we sustain our quality at the expense of profit. We are proud of our industry-leading record for center accreditation, from the National Association for the Education of Young Children here in the U.S. to (indiscernible) care standards in the UK to NC&A (ph) in Ireland. We view the continued accreditation an examination our centers to be an indicator of our commitment to high quality. That's a motivating force for our staff and a competitive advantage for us in our field. In the U.S. alone, we are only 7 percent of the 120,000 licensed childcare centers are accredited by NAEYC (sic), nearly 80 percent of our eligible centers are accredited with the remainder in process.

Along with the quality of our teachers and staff I mentioned earlier, our commitment to independent verification of the quality of our programs and services is a key component to our high parent and client satisfaction levels.

The last element is our ability to continue to develop and deliver new services as a logical extension of our core competencies and assets. We now operate 39 dedicated backup or emergency childcare centers in 15 states, DC and London, in addition to the more than 45 dedicated backup rooms in our full-service centers and our national access program. Over the past 5 years, we've successfully grown this area from just a handful of centers and clients to become the largest provider of backup childcare. We expect, going forward, this area will continue to grow and will develop new and innovative ways to provide this important service.

Our 6 elementary schools continue to perform well, both educationally and financially. We've taken this year to build our platform and successfully integrate the schools we acquired last year into our network. Enrollment is strong and we are actively looking for expansion opportunities in our existing markets and pursuing ways to develop new geographic locations where we have an existing feeder system of childcare centers and client relationships.

All of these elements combine to create the background for our growth in financial performance. Let me end my piece by pulling this altogether for you in financial terms. How does all of this impact our performance moving into 2005? We expect to see continued strong performance across the board. Our guidance for fiscal year 2005 includes revenue growth in the mid teens, steady operating margin improvement in the range of 20 to 40 basis points, and we project earnings per share growth of approximately 20 percent. As a result, we are moving up our pre-split guidance for fiscal year 2005, up to $2.30 to $2.37 per share.

Like our hometown football champions, we (indiscernible) are very proud of what we've accomplished this past year and yet we feel even better about how well we are positioned as an organization to take advantage of the many opportunities in front of us.

Let me turn it over to Elizabeth to give you a little more detail on the fourth-quarter and our fiscal year results and also expand on our financial outlook for 2005. Elizabeth?

Thanks, Dave.

Again, to set the stage for the financial discussion, revenue of 145 million was up 20 million or 16 percent from the fourth quarter of '03. Operating income in the quarter increased 37 percent to 12.9 million while net income rose 2 million to 7.6 million. EPS at 54 cents is up 39 percent from the 39 cents in Q4 of last year on a 3 percent increase in weighted average shares outstanding. Revenue and EPS growth for the full year were 17 and 31 percent respectively. Again, the revenue growth in the quarter as well as for the full year is driven by 3 main components, growth in the number of centers we manage, the additional enrollment in ramping as well as mature centers, and price increases.

Growth from new centers added since late 2003 include the news client centers Dave mentioned in his remarks as well as the acquisitions at UK based Child & Co. in June of 2004 and Marin Day School contract back in the fourth quarter of 2003.

We've also talked with you over the last couple of quarters about enrollment strength in 2004, and we saw this continue in the fourth quarter. We experienced some seasonality in the late summer/early fall when older preschoolers move into the elementary school system, but we've been able to quickly backfill this enrollment through the end of the year. More mature centers, those that are open more than 2 years, continue to show overall modest growth of 1 to 2 percent over the prior-year levels. This would equate with the rate increases to be our same-school growth. Average tuition, the final component of topline growth, are also up 4 to 5 percent over last year.

As Dave mentioned, center margins increased to 17.3 percent for the quarter and were 16.7 percent for the full year. We said, in the last several quarters, that modest improvement in enrollment drive operating efficiencies at the center level, as the fixed costs are absorbed over a broader tuition based. This is the main components of this growth. Contributions from new centers, transitions of management of existing programs and acquisitions also factor into the margin improvement as they enter our network of centers and mature operating levels.

In addition to the leverage gained by increasing enrollment, we've also continued to closely manage center level spending. One of our key operating strengths is in our pricing discipline, whereby we are able to raise prices at or ahead of the rate of increases in wage and benefit costs, which comprise the lion's share of our operating costs. Carefully managing tuition increases, tuition rate increases, which typically occur annually, and salary wage increases, which occur throughout the year, is crucial to maintaining and improving center margins over time. Although we are cautious about the possible effects of escalating labor costs as the economy rebounds, the effect of which we are not seeing at this stage by the way, we are confident that we will be able to stay ahead of the cost curve with continued strong labor management and appropriate tuition increases.

Overhead as a percentage of revenue was up to 8.2 percent in the fourth quarter of '04 versus 7.7 percent in '03 and totaled 8 percent of revenue for the full year, 2004. Incremental spending for Sarbanes-Oxley compliance has offset the modest overhead leverage we would have otherwise seen this year. The costs of complying with these new regulations have surpassed our early estimates, and we also now expect the majority of these costs to continue in future periods in order to maintain and refine the control systems that are in place.

As we look ahead, however, we believe that we can appropriately invest in our infrastructure and still leverage overhead spending. We would, therefore, expect that overhead as a percent of revenue will begin to trail down again in future years.

(indiscernible) identifiable intangible assets totaled approximately 200,000 in the fourth quarter, as we finalized a purchase accounting asset allocation for the Child & Co. centers. Considering the full-year affects, we expect amortization to approximate 1.2 million on an annualized basis.

The strong financial performance this year has driven a 29 percent increase in EBITDA, or earnings before interest, taxes, depreciation and amortization, to approximately 59 million while capital spending totaled 13 million for the year. Lastly, we ended the year with approximately 42 million in cash on the balance sheet.

As usual, I will end my quarter review with a few operating statistics. At December 31, we operated 560 centers, 60 percent profit and loss and 40 percent cost-plus contracts, having added 5 net new centers during the fourth quarter. For the full year, we added 51 new net centers, having opened 60 and closed 9. We now operate 94 centers in the UK and Ireland, having added 20 to this group in '04.

Excluding the 18th incremental UAW Ford family centers we added in the third quarter of '04, which do not operate with a conventional center capacity, we now have the capacity to serve more than 62,000 children or families in our centers. This total translates into a per-center capacity average of 115, with U.S. centers averaging 127 capacity per location and European centers averaging 53 capacity per location, which by the way is an increase of 10 percent from 2003 levels.

The 2-for-1 stock split we announced today will be effective March 18, 2005 for shareholders of record as of March 4. All the per-share amounts we are discussing today are pre-split. When we report our first-quarter results in April of this year, we will provide detailed results and guidance, including the effects of this split.

As we've done in the past, we update you once a year on the industry mix of our pipeline of centers under development. At the end of 2004, the mix was as follows -- approximately 25 percent healthcare and pharmaceutical; 10 percent consumer; 10 percent industrial and manufacturing; 10 percent financial services; 10 percent government and education; 5 percent technology; 5 percent professional service firms; and 25 percent consortia office park models.

Let me now expand on our guidance. (indiscernible) existing pipeline in other growth areas, as Dave described, we are projecting revenue growth for 2005 in the mid teens. (indiscernible) that most directly affect our business, the competitive labor environment and capital investment by our client partners appear to be picking up in some sectors of the economy. However, they have not fully rebounded to pre-2001 levels. Our outlook for '05 is based on capacity growth in the 9 to 10 percent range, or approximately 50 to 55 net new centers, tuition increases averaging 4 to 5 percent, and 1 to 2 percent enrollment growth in our maturing and mature center base.

Given the level of margin expansion this year and last, we would expect further improvement into '05 but at the more modest level of 20 to 40 basis points in total at the operating income line. With an estimated tax rate of approximately 41.5 percent and outstanding shares averaging 14.25 million, we now project earnings per share for the full year to range from $2.30 to $2.37 for the full year. For the first quarter of '05, we are estimating EPS at 54 to 55 cents a share and the second quarter, we estimate 58 to 60 cents a share. For the remainder of the year, we would expect to see similar seasonal operating trends that we've experienced throughout our history.

An important caveat here on our earnings guidance -- the figures do not yet include the effects of expensing stock options, which is currently scheduled to take effect in the third quarter of '05. We understand that the debate on this standard continues and that further guidance may be forthcoming. Based on the current state-of-the-art of the GAAP standard, we would expect EPS to decrease by a total of 6 to 8 cents in the second half of the year in connection with the adoption of stock option expensing. We will update you on detailed projections for Q3 and Q4 on our next quarterly call.

With that, Mary, we will open the call for questions.

(OPERATOR INSTRUCTIONS). Howard Block of Banc of America.

Good afternoon, Dave and Elizabeth. Congratulations on a real nice year! I will say, though, as a former Pittsburgher and an avid Steelers fan, I'm a little offended by not one but two references to the Patriots!

I was born in Philadelphia and the rest of my family -- and even in my roots, I feel a little the same way, to be honest with you, even though I lived in New England for a long time.

With regards to acquisitions, could you update us as to what multiple you are seeing and if, even in the past few weeks, the couple of months since the knowledge learning merger, if you've sensed any heightened multiples?

We haven't. We've developed, over time, as you might imagine, a pipeline of deals that we've been talking to for a while, some of which may never happen, others that we hope will happen. You know, in those discussions, we are still in a range and feel good about the range of 4 to 6 times cash flow that we've talked to you about before.

Okay. With regards to sort of the margin improvement, which obviously we appreciate your conservative and cautious outlook but it's clearly been far more impressive than we expected and I imagine more than you expected -- have you given or have you been able to sort of reconsider, long-term -- I'm not asking you to pick a number in '06 or even '07 -- but long-term, what do you think the operating margin potential is of this business, Elizabeth?

You know, it's a good question because we have had the evolution of the margin improvement over the last couple of years that has surpassed what we had seen as a little bit more of the upper end. When we look at the construct of the cost-plus and the P&L contracts, how they're coming together, what we are able to negotiate and the margin improvement we would see year by year, we look at probably 10 percent as that 3 to 5-year outlook, probably closer to 5 than 3, given where we are now and where we're -- we're still looking to be under 9 percent next year. So you know, it's a path that is in that 20 to 40 basis points a year kind of improvement but we do see that, with the ongoing leverage we've got, we can do that.

One last and I will jump back into the queue -- as you sort of look at the impact of Sarbanes-Oxley, any sense -- can you quantify what that margin impact (indiscernible) was in the quarter or even maybe more importantly, it sounds like it's going to continue on through '05. So what is the weight on the margins from Sarbanes-Oxley, let's say, for '05?

Well, we probably -- we would estimate that we spent 1.5 million more than we had expected this year. In terms of an ongoing cost, it's not something that's easy to see out beyond '05, because it's just going to be a long process of implementation, but we would see the bulk of that continue -- 75, 80 percent of that continue into '05.

Your next question is coming from Mark Hughes of SunTrust.

What was cash at the end of the quarter?

42 million.

Then the guidance for the first quarter of 54 to 55 cents is relatively level with the fourth-quarter number. It looks like, historically, you've had a nice uptick in profitability usually. Is there any particular issue there that would retain the margin in the first quarter compared to the historical trend?

Well, Mark, I think, as we look ahead, looking at the year in review and total, I think the fourth quarter certainly has a bit more of a pop in the margin. If we look at the experience this year, we've explained a few of the things that contribute to margin outperformance between enrollment and cost management, and we look ahead and see those still having a positive effect.

Things that can pull back on the margins somewhat would include changes. We've had good experience this year in our insurance and benefits costs, better experience than we had estimated and I'm not sure that we can count on that recurring. We also have had a number of the openings that are lease models, that the timing of when lease models open and also pull back on the margins somewhat, because when we are taking the losses in a P&L contract, you know, they have a short-term drain but then their long-term has more upside potential. So that, from the quarter-to-quarter or year-to-year, can have a modest impact.

Nice. Good quarter. You know I was impressed!

We appreciate that, Mark!

Brandon Dobell of CSFB.

Good afternoon. A couple of quick ones for you -- Elizabeth, you mentioned the acquisitions contributed about a quarter of the net centers out of this year. I wondered if you could give us a little bit of flavor for kind of how much of capacity or perhaps how much of revenues for the year they also contributed.

Let me just try to put that math together for you, Brandon -- (multiple speakers) -- back on the call.

No problem. Okay, I will throw one more in there for you. I guess, from more of a strategic or capacity perspective, have you guys looked into using the centers in hours when they aren't used by the corporations for trying to get more leverage on the capacity you have open, maybe for after-school programs for corporations, or maybe just any different programs, either for adults or for kids?

Yes, Brandon, we currently, in our centers, manage a host of programs that range from in some places before and after-school care, in other places school vacation clubs, in other places, bringing in outside enrichment like tutoring-type services. Usually, that's done on a center-level basis, depending on the prevailing demand and issues that exist within that community.

So the answer to your question is yes, and any one of our centers might have any one of those services baked into the overall service offering that that center makes to either the employees of the company or to the consortium of sponsors that might be in a given center.

So we are always looking at that. Nothing new to report in terms of any new service that we think is really material, other than what we've already talked to you about in the past.

When a center opens or when you are talking to a corporation about opening one, are those extra programs, if you want to call it that, are those thought about in advance or are there opportunities as the center matures to introduce new services? I'm trying to get a feel for how the companies think about that extra service.

Yes. Usually it differs depending on the client you're talking to. When we are talking to some clients, we may start out with a full array of services -- backup care, full-service care, before and after-school, summer camp -- and then they might make some decisions up front depending on what they think and we've talked to them about what their needs might be against what their budget is in that present period of time. They will make their decisions accordingly.

Over time, things change, and we've seen, for example, in a certain professional service clients whereby they have some seasonality, whether it be tax season or other times of the year where there's a need to have people work either longer hours or weekends, will often flex services at the time to meet those needs.

So the answer to your question is it happens, in some cases, right from the onset, and obviously, over time, we will add those services as clients' needs change.

Okay. Then maybe one final one before the numbers question -- maybe kind of building on Howard's question about the competitive environment, are there any particular areas -- geographic areas -- where either KU or KinderCare has had a particularly large number of centers where you guys have a large number of centers as well, that you might see a change in the competitive dynamic or is it easier to get pricing power in those areas as you would someplace else? I'm just trying to gauge what the impact might be in areas where you've had experience with those 2 companies.

Let me comment on how I think the KinderCare and knowledge learning merger will affect us, and that is that, you know, I would hope that, in the short run, that there will be some opportunities that will be created for us, just because whenever you are integrating large organizations, there's bound to be some spillover in terms of talent and also in terms of potential client relationships. So, we've competed for years against both organizations and predecessor organizations that they've rolled up into that organization in the past.

So, from a competitive point of view, in the near term, I think it's an opportunity for us. In the long term, I think it's a big question mark as it relates to how successful they are at integrating. I hope ,for the sake of our field, that it is successful because I think it's good for our industry to have some successful large companies in it. But you know, with respect to the employer-sponsored market, we really don't see much change in terms of the competitive dynamics. So you know, from the standpoint of maybe a summary, I think it's an opportunity in the short run and I think it's neutral in the long run.

Okay, I appreciate it.

Brandon, just to answer your question about what did the acquisitions that we did this year added (sic) -- about 1400 to our overall capacity. So just under 100 capacity average each of the UK centers as you know are smaller on average than the U.S. centers.

In terms of a revenue number, I wasn't sure if you were asking if it was a contribution this year or if it was an annual run rate.

Bob Craig of Legg Mason.

Good afternoon, everybody. Congratulations, and by the way, thanks for the new head coach! I hope we can pilfer some more folks from you guys.

Just a couple of questions, one just to clarify something. The guidance you threw out of 2.30, 2.37 I take it does not in any way include that decrease of 6 to 8 cents in the second half of '05.

That's correct.

You mentioned, I think in your comments today, some modest shortening of the sales cycle over the last couple of months. Is that a statement that's true overall, or is it concentrated in any one or several end markets?

I think, as you know and as we talked about in the past, our average sales cycle can be 3 months to 2 years, depending on the situation. As the economy slowed down a few years ago, we started to see it drag out further towards the longer end of that spectrum. I think what we are seeing over the past few months, Bob, is it come back from where it had elongated to over the past few years.

With respect to what centers we see in having a better opportunity than what we've seen over the past few years, I think I commented earlier that financial services, professional and legal services, consumer goods, as well as a continuation in hospitals and universities -- those are the areas that seem to continually be moving at a faster pace than, say, technology, which we think we've got a good opportunity in but hasn't quite rebounded, at least not with respect to our services, in the same way that the other industries I just talked about have.

Of the 120 basis point improvement you had in operating margins in '04, how much of that was attributable to the wage/price relationship versus other cost reductions, efficiency-enhancing efforts? I take it's the lion's share?

Yes.

Okay. The economy would probably have to get much better for this to be a valid question, but at what point would it be difficult to pass along price increases, i.e., at what level of wage inflation would you be unwilling or unable to match it with price increases?

That's an interesting question because, as you know, we've now operated for a few years -- a few years back in a few years where the labor market was extremely competitive and one might have thought we would be able to have price increases be stronger, just given the economy of the late '90s into 2000. Then we've now operated in a few years where it's been just the opposite -- where the labor market has softened and one would argue that we have the ability to increase price less than what we might have when the economy was booming. So we feel good that, if you take a look at the past 6 or 7 years, we've had the ability to operate in both ends of the spectrum from an economic point a view. You know, our challenge, and I think we've met it pretty well, is being able to accurately forecast the wage pressure so that we have the ability to push price at least consistent or if not ahead of that.

You know, when the economy -- I guess the way to kind of summarize an answer to your question would be, if you were to look back, we had points in time where we had to push price 6, 7, even 8 percent above wage pressures at points in time that were in the late '90s. That may not have been our average but (indiscernible) pockets of the country where we had to do that.

So, we feel good that, as long as we can continue with our diligence of managing the business in the way our team does and doing the kind of market surveys that we do to get competitive wage data, that we can be well-positioned. As we said earlier, we expect that will happen -- that we are in a good position in 2005 and you know, we will keep telling you, as things progress, how it's going to look as the labor market changes over the next year or two.

That's helpful. One other question and I will turn it over. Can you give some metrics on the relative size and profitability of the (indiscernible) business number of students, revenue, profitability?

You mean our business or the general market?

No, sorry -- (multiple speakers).

I was struggling to answer the question -- (Multiple Speakers).

(Multiple Speakers) -- I'm not looking for industry data, just your business.

Relative size across the 6 schools, we serve about 1,400 students, so you can gather that the average size of those facilities is quite a bit larger. What were the other questions?

Revenue amounts generated from that business, profitability levels overall -- and relative to your expectation?

Yes, the expectations of the revenue levels are certainly in line and slightly ahead of our expectation. The overall size of these schools is about double the size of a childcare center, and so, on average, you're going to see revenue in the range of 2 to $3 million per unit and the contribution at the school level is in the neighborhood of 20, 22 percent.

Thanks, guys.

Michael Lasser of Lehman Brothers.

Nice job on the quarter! Could you comment a little bit on the profitability in Europe at this point and what scale you would need to achieve over there for it to make a meaningful contribution to the overall profitability?

Yes, I will start and Elizabeth can add a little bit of color. I think we've talked before that we now operate 94 centers in the UK and Ireland. The center contributions for the centers over there are pretty close to our centers here in the U.S. on average. So, the issue has been that we've made a conscious decision to make a pretty substantial overhead investment at a size of the business that probably just into itself today didn't warrant it, but rather we did it because we thought there was good potential and still feel like there is good potential for growth. So it has been -- the reason why it hasn't contributed after overhead at levels are consistent with the States is just is the scale issue to your question.

It did contribute in the quarter, in the fourth quarter, even after overhead, so we expect, in 2005, there will be contribution after overhead in the UK. We expect growth over there to continue on a steady pace. As long as it does, we expect, in the next few years, to realize the financial contribution that would warrant the investments that we've made.

Okay. If you do a rough calculation of kind of an average revenue per center metric, it was a bit lower -- the growth was a bit lower year-over-year than perhaps the 4 to 5 percent pricing and 1 to 2 percent same-school growth. Is that due solely to the acquisition that occurred in the fourth quarter of 2003?

That certainly could have an effect. I would need to go through the same calculation that you are looking at to try to parse it, but the timing of when centers enter the stream obviously will have an effect, as will the relative size of the centers that enter the stream.

You know, for example, the UAW Ford family centers have come into the overall center count and they have revenue contribution that is on a scale of a small backup center. So that's going to be in the range of 300 to $400,000 of contribution -- not of contribution, sorry -- of revenue per unit in a year, which is lower than our overall center average of $1 million. It's a mixed thing like that.

I got you. Thanks. Keep up the good work.

Jeff Silber of Harris Nesbitt.

Boy, last quarter the Red Sox; this quarter, the Patriots. I hope we are not talking about the Celtics next quarter!

Well if Notre Dame hadn't beaten BC, we would be here in basketball to.

Good point! A couple of real quick questions -- Elizabeth, at the beginning, you kind of gave some boiler plates (indiscernible) Sarbanes-Oxley and 404 compliance. Was that just a boiler plate text that the lawyers made you read or should we be reading anything else into that?

No, we're just in a process here whereby under the new guidance with Sarbanes-Oxley, our audit opinion is going to be tied in with the internal control opinion, so it won't be issued until March. As a result of that, the circumstances with our auditors are different than any other year-end, where we would typically have cleared all elements by the time we are releasing earnings. So I mean it's not boiler plate; it's just that circumstances are different.

I understand. I think you had answered an earlier question saying that the stock costs were about 1.5 million more than you expected. Can you quantify what you totally spent during the year on stocks?

I wish I could quantify all of it because there's certainly an element of costs that is just built into the system now, trying to attend to everything. But we had estimated probably a third of that or less, given early estimates and the cost escalated as the year went on. But towards the end of the year, the relative cost is when we saw the biggest effect on overhead in the fourth quarter.

Okay, great. Then, in terms of your guidance for next year, can you tell us what you're budgeting for capital expenditures?

This year, we had a little bit lower level of CapEx than we've seen in the past. It's just timing really of when we are not so much recurring CapEx. It was at a very similar pace 2 prior years, but we would still look at 18 to 20 million as an expected CapEx, not for acquisitions, just for other capital.

Okay, great. Then finally, in prior quarters, you have kind of given us an update on your wait list. I was wondering if maybe you could do the same now.

Yes, what we've talked you about before, Jeff, is there's approximate wait lists at our centers that are around 20 percent -- or 15 to 20 percent, excuse me. That's about the same levels. As you know and we've talked to you in the past, we don't roll that out; we just manage that locally, so the levels, based on our latest look, are about the same as we've talked to you about in the past.

Okay, great. That's helpful. Thanks again.

Howard Block of Banc of America.

Hi again. I want to have you clarify something for me as well. Did you say you had 44 multi-client – multi-clients of 217 locations in total? Is that right? Multi-site clients?

That's right. Just a note, mergers hurt us in this way -- just for anybody that's keeping track -- we had reported on 45 but BankOne and JPMorgan Chase are now one instead of two, so now it's 44.

Okay, so that 217 number, is that the number that -- and again, in theory -- could be 3,000?

Yes -- no, that's the number that, in theory, that could be 600, sorry.

What's the 3000?

3000 is when -- so we estimate there's 600 sites within those 44 clients, in addition to the 217. So really, there's a total universe of just over 800 just within those 44 clients.

Then we took a look at our existing -- (multiple speakers) -- when we have just 1 center today, which is a much bigger base, and we said how many sites to they have with 1000 or more employees at one location? That total is 3000, when you add it to the 800 that we talked about -- (Multiple Speakers).

Right, so the clients that, in theory, could be multi-site clients -- and if everyone was a multi-site client, you'd have 3000 of these locations with multi-site clients?

That's correct.

Then you said the turnover improved 10 percent to 20 for the year?

10 percentage points.

10 percentage points, down to 20 percent for -- on an average for the year.

Okay, so I just -- not to get lost in the semantics, was it 30 percent or 22 percent last year?

30.

Then one would think --.

I'm sorry, these guys are saying no, no.

No, no, no. It was just under 23 percent last year, Howard. You had it right the first time. Let's be clear.

Okay, so then if we believe that the strengthening economy would perhaps increase turnover, one would have thought maybe your turnover would have been challenged in '04'

And it was not.

And it was not, is that right?

Yes, it was not. As we commented earlier, it's not that we don't expect and aren't being vigilant about looking at the market and really trying to project where the pressure is going to come and how competitive the labor market is going to become. We're doing all of that. It's just we haven't seen those affects yet.

Okay. The turnover rate, if you have a turnover sort of run-rate, is sort of no different now or was no different at the end of the year than perhaps in June or March of '04?

No, we are comfortable saying it's a 20 percent run-rate right now. Elizabeth was correct; it had been 30 percent a few years ago, so it has been managed down over the years, down to 20 percent.

I got you. Congratulations and thanks again.

(OPERATOR INSTRUCTIONS). I'm showing no further questions at this time.

Okay, Mary, thanks. We thank you all for spending time with us today on the call. As always, we will be here to answer your questions and look forward to seeing many of you out on the road as 2005 begins to take shape. Take care.

Bye-bye!