Bright Horizons Family Solutions Inc (BFAM) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for holding and welcome to the Bright Horizons' first quarter 2005 earnings release call. Your host today is Mr. David Lissy. Mr. Lissy, you may now begin.

Thanks Chris and hello to everybody on the call today. Joining me on the call as usual is Elizabeth Boland, our Chief Financial Officer, and we will begin today's call with Elizabeth going through a few administrative matters. Elizabeth?

Thanks Dave. Our earnings release went out over the wire after the close of the market and is also available on our website at brighthorizons.com. This call is recorded and is being simultaneously webcast and a complete replay will be available in either medium. Those wishing to access the replay via telephone may call 973-341-3080 and use pin code 5938072, while the webcast will be available at our website under the Investor Relations section.

In accordance with Regulation FD, we use these conference calls and other similar public forums to provide the public and the investing community 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 as well as the Investor Relations section of our website.

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 call include - one, our ability to execute contracts for new center commitments, to enroll children, to retain client contracts, and to operate profitably abroad. Two, the effect of governmental tax and fiscal policies on employers considering work site childcare. Three, the capital investment in employee benefit decisions that such employers are making. And lastly, the other risk factors which are set forth in our SEC filings including our 2004 form 10-K. Back to Dave.

Thanks, Elizabeth, and hello to those of you who just joined us. I will begin today with a recap of our first quarter results and then discuss our operating performance this past quarter. Since we just had our last call in mid February, I will try to be a little more brief than usual in my opening comments. Elizabeth will then follow with a more detailed review of the numbers, including our outlook for the remainder of 2005. And then we will open it up for Q&A.

First, let me give you a recap of the numbers. Revenue for the quarter of 151 million was up 15% over last year, while operating income rose to 14 million from 10.5 million in last year's first quarter.

Net income of 8.4 million generated earnings per share of $0.30 up 34% over 2004. Just as a quick reminder to everybody on the call, we split the sock two-for-one this past March so all the EPS figures we'll talk about reflect the split. As you can see, our performance this quarter was again based on solid revenue growth and strong margin performance. We're very pleased with our start to 2005 and with the positive signs we see in our business that have allowed us to continue the momentum of the past year.

Our operating margin improvement is due to a continuation of most of the factors that we've talked about on previous calls. As a reminder, these include a 1 to 2% increase in enrollment year-over-year in our mature center base. Our ability to increase our tuition slightly ahead of our annual wage and other cost increases, managing appropriate levels of staffing at centers, without impacting quality and the impact of the slightly heavier rate of transitions and acquisitions in our new center growth mix.

In addition, we're beginning to see the positive impact on our margins of our UK operations where we have made a considerable overhead investment over the last few years. As a result of our outperformance this quarter, we now expect to improve our operating margins for the year in the range of 30 to 50 basis points over 2004 levels, and are raising our fiscal year 2005 earnings per share guidance to a range of $1.18 to $1.22. Elizabeth will discuss that in more detail with you later on the call.

We added a total of 17 new centers to our network this quarter. These additions include our second center for Schering-Plough, which is by the way our newest multi-site client at their location in New Jersey. And our backup center for Pfizer in New York City, which we've transitioned from another provider making it the fifth center in our Pfizer Network. Blue Cross Blue shield of Mississippi became our third blue cross affiliate center. And Kadlec Medical Center in Washington joined our growing list of hospital-based centers.

We also added our fifteenth center in partnership with the General Services Administration. There's one in Omaha and our fifth in partnership with the land registry in Plymouth in the United Kingdom. Rounding out the center additions in the first quarter was our acquisition of Seven Oaks Academy, a group of 11 childcare centers in the Greater Denver area. These high-quality centers firmly established Bright Horizons in the Denver market and give us the local presence that is key to growth in any given market.

I will talk a little bit about that one a little bit more later on in my comments. At the end of the quarter, we continue to have more than 50 centers in our pipeline of new commitments in the US, UK, and Ireland. These centers under development span a broad range of industries and geographies. And notably this quarter I am pleased to announce 2 centers that are in our pipeline slated to open later this year in Puerto Rico. These new centers will mark our entry point on the Island. We'll manage these centers for a leading pharmaceutical and biotech organization, and for a multinational financial services company, and they will be state-of-the-art fully bilingual programs.

There are a number of our existing clients who have operations in Puerto Rico, and we believe that additional new growth opportunities exist in this market, from that existing client base alone. Establishing this global presence has already sparked conversations with a few of those client locations. As I discussed on our last call in February, we continue to see an uptick in front-end prospecting activity and in our center feasibility consulting work. This increased activity consists of interest both from new prospects, as well as new projects for existing clients.

Specifically, we continue to witness an improved sales environment in the cyclical sectors, namely financial and professional services, which as we all know have slowed somewhat in past years due to some of the economic softness. But we continue be optimistic that this trend, coupled with the momentum that we have built over the past few years in the acyclical areas such as hospitals, Higher Ed, and the government, will help to ensure our ability to maintain our track record of solid growth in the corporate market.

Let me also take a moment to reiterate that given our long sales cycle and time it takes to build and open new centers that any uptick in the pace of new business is not likely to have much of an effect on our results until 2006 and beyond.

Having mentioned the Seven Oaks acquisition earlier, let me spend a little time discussing acquisitions. As you know, Bright Horizons has historically grown roughly 70% organically and 30% through acquisition. We view acquisition opportunities as a great way to enter new markets, gain talent, and better leverage client relationships across our multinational presence.

Prior to adding the Seven Oak centers to our network, we only operated one center in Colorado Springs. We have long seen the Denver area as opportunity rich. It is a high population growth area, and its highly educated work force is home to many locations of our existing clients. And as we have done over the years in other markets such as Seattle and Chicago, we have now established a strong presence in Denver, having gained local management and high quality centers, from which to build and expand relationships with both new and existing clients.

The timing of these acquisitions is really linear. And we expect that within quarters or even years there will be peaks and valleys in terms of the absolute numbers of centers that we acquire. We fully expect our overall future growth mix over the next few years, will continue to include acquisitions that are good strategic fits such as Seven Oaks, and that overtime we will see that mix continue to approximate 30% of our overall growth.

Now let me switch gears for a minute, and I'd like to talk about some recent news on the regulatory front. Specifically, developments in Universal Pre-Kindergarten or UPK as it's commonly known. Until recently, outside of Georgia and a few other places, there has not been much real momentum for the implementation of broad based Universal Pre-Kindergarten.

However in Florida, in 2002, voters approved a constitutional amendment to establish a voluntary pre-kindergarten program with the stated goal of implementation by 2005. Many of the details have recently become available, and we have some insight into how this program will work. The new legislation covers two types of programs - a school year program that will begin this fall and a summer program which is scheduled to start in 2006. Although the school year program is slated to begin this fall, funding has not been yet finalized by the Florida legislature. Though it's currently estimated that the funding pool will approximate $400 million.

A key component to the program is parent choice, allowing parents to select which participating preschool program is best for their child. The funding will support three hours per day of preschool and will follow the school calendar. In order to participate, public and private providers must meet certain minimum quality standards relative to licensing and staffing qualifications, group sizes and ratios.

We're comfortable that all of our centers in Florida meet or exceed these standards. Overall, it's our view that Florida's conceptual approach to implementing UPK is positive for us. We believe that the combination of parent flexibility and choice, along with a focus on quality standards should help raise the awareness of the strong connection between a high quality preschool experience, and a child's readiness for school. Although the program will not provide enough funding to cover the full day needed by most of the working families we serve, we will still hope to participate in the program, thus allowing our clients and our families to benefit from the funding as an offset to their full cost of tuition.

The next big hurdle is to see how the final funding comes out. We will certainly keep you posted as we watch this program's implementation unfold in the coming months. There are similar UPK efforts happening in other states and as you might expect, we are closely monitoring them and participating in the process where need be.

Lastly, let me close by telling you I had the opportunity to spend three days earlier this month with many of our clients and prospects at our annual client conference in San Antonio. We had record attendance. Most of the discussion centered around the need to get ahead of the curve with respect to future demographic and work force trends that signal a more competitive labor market. I left feeling very good about the many discussions that I had, and most importantly about our future growth -- potential to grow and enhance our client partnerships.

Our success in the past has been driven by the dramatic need for quality childcare, due to the transformation of the work force as women with young children have entered in record numbers. The reality of this new work force, coupled with the under supply of quality care designed to meet the needs of working families in virtually every place we operate, will continue to fuel our growth going forward. As I look ahead, our financial position is strong, and we've got the flexibility and determination to invest in our future growth and capitalize on the work force trends in the coming years.

All in all, we're really very pleased with our performance this quarter, and we remain confident in our outlook for the rest of 2005 and beyond. So let me turn it over to Elizabeth now to run through our financial results in a little more detail, and I will talk to you again in the Q&A. Elizabeth?

Thanks Dave. Again to set the stage for the financial discussion, revenue of 151 million was up nearly 20 million or 15% from the first quarter of '04. Operating income in the quarter increased 34% to 14 million, while net income rose over 2 million to a total of 8.4 million for the quarter. Earnings per share of $0.30 is up 34% from the $0.22 we reported for Q1 of last year, on a 2% increase in weighted average shares outstanding.

The revenue growth in the quarter is driven by three main components, growth in the number of centers we manage, additional enrollments in ramping as well as mature centers, and price increases. We have added a total of 69 centers since the end of the first quarter of 2004, including the 17 additions this quarter, which Dave mentioned in his remarks. The Seven Oaks acquisition closed in mid March of '05, so it will contribute at its full run rate of approximately 10 million in revenue per year, beginning in Q2. The strength and relative enrollment levels also continued this year quarter. As many of you know, the first half of the calendar year represents our strongest enrollment period of the year.

But in relation to this same period of '04, we're continuing to realize modest growth, 1 to 2%, in our PNL contract centers that have been open more than two years. Average tuition, the final component of top line growth, are also up on average 4 to 5% over last year. Center margins increased to 17.8% for the quarter compared to 15.9% in the first quarter of '04 and 17.3% last quarter. The primary factors in improving margins are first, modest improvements in enrollment, which continue to drive operating efficiencies at the center level as the fixed costs are obsorbed over a broader tuition base.

Second, contributions from new cost plus centers, transitions of management of existing program and acquisitions, all of which enter our network of centers at mature operating levels. And thirdly, improving contributions from the UK operations. Let me expand on this a bit. Increasing enrollment coupled with our disciplined approach to raising prices at or ahead of the rate of expected wage increases are the primary drivers to the margin expansion over the last several quarters and continuing into this year. Wage and benefit costs comprise a large majority of our operating costs at the center level, and we carefully monitor wage rate trends and turnover, to ensure that we proactively address emerging issues.

Carefully managing tuition rate increases, which typically occur annually and wage increases which occur throughout the year as the individual employee's anniversary date, is crucial to maintaining and improving center margins over time. We continue to be cautious about the possible effect of escalating labor costs, as a few areas around the country are seeing a slight tightening in the labor market. And that said, we're confident we will be able to stay ahead of the cost curve and with continued strong labor-management in appropriate tuition increases.

As noted, we are also realizing improved overall performance in our UK operations where we have made significant investments over the last several years. A clear focus on growing enrollment in our installed base and the addition of new organic and acquired centers over the last couple of years, are contributing to the overall increase in center margin contribution from this portion of our business.

Turning to overhead, SG&A as a percentage of revenue was 8.3% in the first quarter of '05, versus 7.8 % in the first quarter of '04 and 8.2% last quarter. That is the fourth quarter of '04. We should note that this includes an incremental, non-recurring charge of approximately 400,000 arising from spending for 2004 Sarbanes-Oxley compliance. At the end of last year, we had underestimated the total cost to complete this work and the shortfall is therefore included in this quarter's results.

Although this catch up for 2004 is non-recurring, we have also had to increase our 2004 estimates for ongoing Sarb-Ox compliance costs. As a result, we expect that overhead will remain in the range of approximately 8% of revenue for the full year. As we look beyond '05, we believe that we can continue to make important investments in our operations support team sales force and basic infrastructure and continue to leverage overhead spending. We would therefore expect overtime that over head as a percentage of revenue would begin to trail down again in future years. Amortization of identifiable intangible assets totaled approximate 400,000 in the first quarter.

Considering the full effects of Seven Oaks, we now expect amortization to approximate 1.7 million on an annualized basis. Our strong financial performance so far this year has driven a 30% increase in EBITDA, to approximately 17 million for the quarter, while capital spending totaled 3 million. We ended the quarter with approximately 55 million in cash.

Let me recap our usual operating statistics. At March 31st we operated 577 centers, 60% of which are profit and loss and 40% of which are cost plus contracts. Having added 17 new centers during the quarter with no closures. We now have the capacity to serve 63,925 children and families in our centers. Excluding the 18 incremental UAW Ford Family Center programs that we added in the third quarter of '04 which don’t operate with a conventional center capacity. This translates into a 115 per center capacity on average, with US centers at 127 average per location, and European centers at 54 capacity per location.

Let me now expand on our guidance for the rest of '05. Based on the core business performance and the visibility we have in the new center openings from the pipeline, we continue to project revenue growth for the remainder of '05 in the mid teens, similar to this quarter. The fundamentals that most directly affect our business are competitive labor environment and capital investment by our client partners are improving in early stage deal flow, and are evident in some sectors of the economy, but overall commitments have not fully rebounded to pre-2001 levels.

Our outlook therefore for '05 is based on capacity growth in the 8 to 10% range, tuition increases averaging 4 to 5%, and enrollment growth of 1 to 2% in our maturing and mature center base. Although we did not close any centers during the first quarter, we do expect to close approximately 12 centers this year, up slightly from 2004 levels but consistent with prior year averages. We're off to a good start in Q1 with center margin growth dampened somewhat by overall, overhead spending requirements. Given the rate of margin improvement we've seen since 2003, we expect to sustain and improve operating margins in '05, but at a more modest level with operating income expanding 30 to 50 basis points.

With an estimated tax rate of approximately 41.5% and outstanding shares averaging 28.5 million, we now project EPS for the full year to range from $1.18 to $1.22 per share. For the second quarter of '05, we're now estimating EPS at 29 to $0.31 per share, and for the third quarter 28 to $0.30 a share. For the remainder of the year, we would expect to see similar seasonal operating trends that we've experienced throughout our historical performance.

Last quarter, we provided you with an estimate of the expected effect of expensing stock options beginning in the third quarter. As the mandated adoption of this new standard has now been delayed to the first quarter of '06, we will not have any incremental effects for stock option expensing in the 2005 results. We will update our guidance to you on the expected effects, which will vary based on the options then outstanding when we're closer to the adoption date. With that Chris, we will open the call for questions.

[Operator Instructions].

Our first question comes from Michael Lasser of Lehman Brothers.

Hi guys, nice job on the quarter. With respect to Seven Oaks, is it fair to say that you paid a multiple similar with your historical experience? And just as a follow-up to that, is it currently operating at a margin that is similar to the average for the entire company, or is there an opportunity to get profitability enhancements from it as well?

The answer to your question, Michael, would be yes and yes. We paid within our historical range for acquisitions and the margins are in the range of where our overall company margins are.

And aside from pockets of potential wage inflation in certain areas of the country, is there anything else you're seeing in the environment that is resulting in being conservative with the margin guidance for the remainder of the year?

I think that we're pretty much saying what we said before, that we have seen some really strong out performance in prior years. It is not that we still don't expect to achieve really good results; it's just that we do not think that it will be as strong as year-over-year performance was last year over prior year. I think that is based on the fact that we have had all the indicators that I talked about earlier all lined up to be really strong at every given step of the way. I think we feel a little more conservative that will not continue to happen at the same level, albeit it's still a very strong improvement at 30 to 50 basis points for 2005.

One last one and I will get back in the queue. Could you provide an update on how the UAW family centers are performing? Given all of the current happenings with the car companies, are there provisions in the contract should that benefit be changed in the future?

Well the centers are operating well. And as you know, those centers are on a cost plus contract, so we earned a fix fee for our efforts both on the childcare side and on the Family Center side. And we feel good about that arrangement, as you probably know it is a joint negotiated arrangement that the union negotiated with management in the labor agreement. The funding has been set aside through the joint programs of the UAW Ford, as a result of those negotiations, and they set aside funding that should sustain itself for a long time. Everything is subject to change, I guess you could say. But in the context of the way we look at it, we feel pretty good about the sustainability of those programs.

Thank you very much.

Our next question comes from Colin Mickque (ph) of CSFB.

This is actually Brandon for Colin. How are you?

Good.

Okay, a couple of quick ones. Is there a way you could give us a little bit of color in terms of comparing the U.S. operations with the international operations gross margin wise, overhead wise? Just trying to get a feel for the comparable business models in those two geographies. And then, I’m not sure if it was asked earlier or not I just hopped on, did you guys give an impact from the acquisition in the quarter or was it at the end of March, so it was too small to make a difference?

I will take the last one and I'll let Dave jump on the first question. There was some modest contribution from the acquisition in the quarter but they did come in mid March. We would expect to see the run rate of revenue is in the neighborhood of 10 million a year. We would expect to see more of that affect coming in in Q2. So as Dave mentioned, their contribution is comparable and comports with the rest of our book of business, if you will. It is an element of growth for the year. So it is not incremental to the otherwise levels of growth in new centers that we have been guiding for the year.

Thanks.

Brandon, I will try to answer your question with respect to the climate of the differences in our model here in the US vs. the UK. And the single biggest difference as we talked about before is the average center size. So, as Elizabeth talked about before, the average center size in the UK is up. When we first went there, I think the average was roughly 40. It is up to 54. That is because we've either opened ourselves or acquired larger centers to help offset the installed base of the smaller centers. But it takes awhile to move that needle when you have an installed base of those smaller centers already in place. So, that is the single biggest difference in terms of the metrics.

With respect to the center margins, they follow suit. They're very close to what our center margins are here in the US. Of course, the single biggest difference is the heavier overhead investment that we have made as a percentage of revenue in the UK vis-a-vis the revenue based in the U.S. That is what we're starting to see some light on, in that we are now beginning to see contribution after overhead from the UK, and that is the single biggest difference on a stand-alone basis.

Obviously, there's a great difference in what they would each contribute after overhead. We think that is our opportunity there. As we continue to grow not only in term of the numbers of centers, but as we continue to add larger centers to the mix there, we will need to add some overhead along the way, but clearly not at the pace of the investment that we initially made or not in the bulk of the investment that we've already made. So the base that we have is leverageable. So we expect in the coming years we will continue to gain some positive impact from the UK base.

Maybe a question in the same direction there. If the centers are half or so the size, or a little bit less than that, but you're still getting the same kind of margins, as that number moves from 40 to 50 to let's say 60 or even looking out a little while longer up to 70 on an average center size, does that margin structure still staying intact from a gross margin perspective? Or is there room because of the costs of the staff are lower or the rent costs are lower to see center margins in the UK outstrip what you could see here in the U.S.?

I think it is too early to tell what the ultimate opportunity is in the UK for center margins. It is safe to say we have a firm goal of improving them over time. As we've done here in the U.S. I think the big thing to remember is the primary reason for the tick up in center size is because we're opening new groups of centers that are larger. That is really the driver and then the economics tend to follow that. Overall, I think over time we would expect to achieve some modest center margin improvement similar to what we have done here in the US.

Thanks a lot.

Our next question comes from Jeff Silber from Harris Nesbitt.

Thanks and let me add my congratulations, as well. In terms of the Seven Oaks acquisition, roughly what is the capacity of those locations?

They are on the higher average size, Jeff, similar to the US centers. They are about 130 -- 135 on average.

Okay. And the 63950 or so that you quoted at the end of the quarter include Seven Oaks?

It does. Yes.

Okay. So, it looks like that was up including the acquisition about 7% year-over-year, yet you’re guiding for 9 to 10% increase in capacity over the rest of the year. Does that assume future acquisitions, as well?

Well, it does include our -- the guidance of 8 to 10 does include acquisitions that may be in the part of the 30% of our overall growth for the year. Just pointing out the comparison to the first quarter of last year and the growth that we had in '04 did include the UAW Ford family centers, 18 incremental centers, and 8 programs that are contemporaries with our overall centers that are operating. So they contribute also to our top-line growth. That is why measuring just capacity or just numbers of centers or just revenue -- they all need to be looked at together.

Okay, that's fair, I appreciate that. Just another question on the gross margin side, you guys did a phenomenal job just increasing in that line item. But from a seasonality perspective, should we expect gross margins to kind of tail off in the current quarter, as I guess your tuition increases have already been done, but you might get a little bit more wave inflation going forward?

You know, typically what we would see from a gross margin trend is a fairly consistent margin in the first and second quarter, because it's where our enrollment levels are at their optimal stage. We start to have a little bit of a summer fall off in the June timeframe, but margins fall back in the third quarter and then are rebuilding into the fourth quarter of the year.

So we are not seeing -- I alluded to a little bit of tightening of the labor markets in some areas. We're not seeing wage pressure having a discernible effect at this point. So we would expect to be able to sustain the kinds of margins that you are seeing in that neighborhood in the first half of the year, but they do fall back then, in the third quarter, and then are rebuilding in the fourth quarter and hence you wouldn't see this level for the full year.

Okay great. And just one other one and I'll let somebody else jump on. Can you just give us a comment on turnover, and how that has been going?

You mean staff turnover, Jeff?

Yes please.

As I reported in the last call we have seen that number tick down to just about a 20% annual rate. And that's where -- we just reported on that in February. And we will get another report on that pretty soon. The intermediate reports we get show me that we're right around where we reported in February. Again, against an industry average of just about 50% annually.

Okay great, thanks a lot.

Next question comes from Mark Hughes of SunTrust.

(Inaudible) -- I think at least one of the new locations was a transition in management. Were there any others in the quarter? And then typically do you pay it when you assume those management contracts? Is that something you acquire the right to manage the location?

Before we answer, you got cut off a little bit at the beginning. So did you say something before the transitions of management?

Yes I'm sorry. Let me pick up the speaker here. I think, in your prepared comments you had said that one of the locations that you signed up this quarter was a transition in management. I wanted to see if there were any others other than the one that I think you'd specifically mentioned. And then, generally, do you pay a fee in order to assume the management contracts for those locations?

Yes generally when we're taking over the management of an existing program Mark, we do not pay for it. It's a change in operator usually from a self-op situation and sometimes from another provider. So there is not typically a fee that's involved. With respect to individual --we talked about some of this on the annual call, but we don't break down every individual center. We try to talk about the larger components. So, hence the conversation about Seven Oaks and mentioning that the one center was a transition. But it is not a blow-by-blow by deal.

Right, exactly. Okay. Thank you.

You're welcome.

Next question comes from Howard Block of Banc of America Securities.

Good afternoon. This it's Derek Johnston here.

Hi, Derek

Hello. The -- question here on the margin -- center margin expansion. Which is having a larger influence if you looked at acquisition and transition of US centers versus the UK centers?

The largest contributor to margin expansion is the effect of cost control management and enrollment gains, and so just to put that out there. With respect to acquisitions, transitions in the US versus UK we did acquire Child and Co (ph) last year in June. So that had a -- from a total dollars or pounds contributed, that is a big factor in the UK’s performance, but overall the US business that 90-plus% of our total consolidated results pretty much overshadowed the UK results.

I got you. And with the UK, were you seeing a meaningful contribution? Is this the first quarter where you're seeing that meaningful contribution in the margin, or did you get it right out of the chute with Child & Co.?

We're starting to see it albeit really slightly and immaterial at the tail end of last year, we commented I think, a little bit on it last time. But really, we felt like it was trending to the point where it was enough to - I don't want to say make a material difference, because I don't think that is really the right way to put it, but it was enough to signal to us that there's going to be future contribution that's going to come out of this, that's positive, and will have an impact.

Any changes on the length of the sale cycle versus fourth quarter year ago this time, and what types of leads (ph)?

Well, I reported earlier that there has been an uptick in activity and it is pretty consistent with what I have said I think the past few calls. The sale cycle that had it gotten a little more elongated in the 2001 to 2003 timeframe has now come back to, what I will call usual levels for us, which is still long. Still a long sales cycle for what we do. It has swung back to what we would call our usual timeframe, and most specifically as I said earlier Derek, I think we're seeing that change in behavior or change in environment in the more cyclical sectors. In your financial services sector, professional services, law firms, accounting firms, consulting firms, and also a little bit in tech.

Great, and a question on the acquisition environment. Any change there in just the environment in terms of the number of targets, the pricing, new entrants vis-a-vis a knowledge learning kindercare, and maybe just kind of walk through the Seven Oaks. How did this come about? How long had it been in the works? Who are you competing with?

Well, Seven Oaks is really it’s kind straight down the middle of what our traditional acquisition process has been, and who we have ended up acquiring in that they are a very strong, well-run, quality network of centers locally in the Denver market. We've known about them for a while. They have known about us for a while. I think through developing our relationship over time, we were quickly able to get it to a place where it is not a real competitive process in that I think once we tend to engage after the relationship stage, if the seller is very caring about the home they're looking for for their centers, that being a place that is going to maintain quality levels, we can distinguish ourselves as a buyer. That is not to say there is never any competition for acquisitions, but it is to say that Seven Oaks is pretty traditional to what we have experienced in the acquisitions we have done over the past 4 to 5 years.

And with respective to the overall environment, there is really no change to report to you other than things I've said in the past, which is that we feel like we're in a good position. We’ve got a few folks that are deployed out there and they have got pipelines of their own, looking at acquisition potential. Most of which we're going to acquire are the small operators, small regional operators and that's what is mostly in our pipeline today as we look ahead for what the deal flow might look like over the next few years.

Great thanks, and just a little data point here. The number of international centers and the number of back up centers in the quarter?

I don’t know. We're not breaking down individual components. Let me just look it up, Derek, and if anybody jumps on with a question, I will just interrupt after the next one.

Great, Thanks very much.

You're welcome.

Next question comes from Jerry Herman of Legg Mason.

Good quarter guys. First question is with regard to Seven Oaks. Elizabeth, what did you guys pay for that?

We paid in our usual range of four to six times cash flow.

Okay, but the actual dollar amount?

I think you'll have to wait for the Q.

You're not going to give it to us in advance of the Q? Okay and the model there, is it predominantly corporate sponsored, or is it more of a retail model? And is there any client overlap if it is corporate?

Jerry, mostly they are community-based models with strong enrichment and after-school programs with them. They have not started with the employer sponsor as the start of any of the centers, but many of our clients have employees in spaces in those centers. Our feeling is we look at the Denver market and we think it is a place where we have got a lot of locations of clients who we do business with in other areas.

We feel like being able to, both use those centers as a base, and sell additional sponsorship into those centers based on the attractiveness of those centers in the area. And then also, probably equally as important to that, if I were to a equate it to what we did in Seattle 6 or 7 years ago where we acquired a group of 6 centers there, today we now we have 17 centers in Seattle. I would like to say it is because we were able to leverage both the relationships that already existed, plus it is more difficult to sell in a market when you have nothing to show. And so our ability to use these centers as a base, the hope would be to replicate what our experience was in Seattle 6 or 7 years ago.

Okay, great with regard to the relationship between tuition and wage inflation, we often just talk about that relationship. You raise tuition and wage inflation goes up. Is there anything else impacting that number, i.e., can you offer any insight on child teacher ratios? Is that number trending either because of demographics or geographic mix with say regulatory issues or even turnover, as turnover has an impact on general seniority levels? Is there anything you can add to that, that will help us try and depict the trends there?

Well there is not really much to add Jerry, other than to say, I think you know that probably the most significant (indiscernible) thing we can do to effectively manage the business and improve margins is to manage the interplay between tuition increases and what wage increases and other benefit costs will be.

And so, if I were to point to one of the things that our Operations Team has gotten really skilled at, in the past few years even more so than and they were already doing is, being diligent about looking at each of the markets individually in which we operate in, to better understand what the labor market is like and what we are going to have to pay and then to budget accordingly. And if we can price ahead of that, we can be successful, and I think one of the big contributors has been our ability to get that right and actually even get it right beyond what we even planned in the past.

As we go ahead -- as we go forward, the bigger trends we're watching are just that; what's the pressure, what's the turnover rates. If we see any spikes, for example, in our usage of temp help which is very small, we need to monitor that, understand that, get right on that and be sure we do not allow that to spike up. That's an early indicator that we look at, but as Elizabeth said earlier, with the exception of a few places -- we're not seeing much change in the wage pressure that we're seeing across the board. There are some small exceptions in certain markets, but across the board it is not a real change from what we talked about in the past.

Okay great and then a question with regard to the UK, if I could maybe I misunderstood but Dave you mentioned that they are now covering overhead, as well. Does that imply that they went from a money-losing situation to a profitability situation, or did I just misunderstand that?

Let me just jump in on some of the metrics. What we have now is a scale -- a relative scale to the centers for the investments in the overhead that we’ve made that has not been particularly linear. We made a number of acquisitions over the last few years. It involves a stepped overhead. The UK has been profitable. We've made some investments. We've had some elements of teams from here helping to install systems there and what have you.

What we're seeing now is a more definitive, discernible contribution. It's not to imply that it was money-losing, although if you weigh in all overhead and all the amortization and inter company interest charges, etc. it's a different prospect, but that’s too much arcane accounting for an earnings call. I think the real answer here is that operationally we are at a scale now. To answer Derek's question, we opened 1 center incremental in the UK this quarter. And so we're getting to a scale between the UK and Ireland now where we’ve got the team in place to drive the growth, and they are contributing, they are able to be self-sustaining. That is really what we're getting at in terms of new information.

Great thanks guys

The other answer to Derek's question was 1 backup center this quarter.

Next question comes from Jeff Silber from Harris Nesbitt.

Thanks just a quick follow up. What was cash flow from operations in the quarter?

We disclosed EBITDA Jeff as a proxy for cash flow it was about 17 million, and we haven't got all the discreet elements of the financials pulled together. The Q will be filed shortly.

Okay. In looking at your CapEx guidance, I think in the 10-K you said was going to be closer to the 2002, 2003 levels about 17 and 19 million. Is that something you're still comfortable with?

Yes that is still the right number we had. It is just timing of what we're spending this quarter versus what we’ve got in the pipe for the rest of the year.

Okay great thanks again.

You're welcome.

Next question comes from Michael Lasser of Lehman Brothers.

Hi guys if you look out over the next year, can you talk maybe a bit about potential expansions of current locations? I believe at a couple of your locations within your schools division there's a possibility of adding additional grade levels. What is the possibility for maybe doing that at some of the core daycare centers?

I would say, Michael, to that end and I think I talked about this on the last call, part of what we don't disclose specifics on, but part of the additional capacity adds that happen every year, comes from the expansion of capacity at existing centers. I would just reiterate what I said on the last call, which is the pace of that activity parallels the pace of our prospecting activity on the sales side, so that in the past few quarters, we have seen more and more activity around the desire for companies to expand.

When I commented earlier that our center feasibility consulting work is up, sometimes that's clients employing us to look at the feasibility of building on to their building or adding a couple of rooms to expand capacity -- reconfiguring to expand capacity. So I would say that the way to think about that would be pretty consistent with the way you're thinking about our opportunities on the new business side.

Okay and if you look at the client meeting this year compared to last year, is there any commentary you could offer about the number of prospects that attended. Was it greater than or less than last year?

Our overall attendance was up 20, 25% over last year. So, I think that was encouraging. Every year it is attended by roughly 75% of the attendees are current clients and about 20, 25% of them are people who are yet -- are currently prospects. So, I think that percentage in numbers is probably a little greater this year. But as a percentage of the overall attendance it's probably about the same percentage.

Again, as I commented earlier, I was pleased to hear a lot of discussion around the anticipation of the tightening of the labor market, specifically around the skills gap in selected professions. And so, not just a tightening in the overall headcount, but a tightening around specific professions, and we've seen that most profoundly in our business in hospitals. We are seeing a direct correlation between the inability of hospitals to recruit and retain nurses, and other medical professionals with the addition of childcare centers as a tool.

And so, it is encouraging - it's not encouraging necessarily for our overall well-being as a country, but I think it's a reality that we need to face, is that we probably are going to have skills gaps in other areas, and you know, you have the age-old desire for each company within those industries to do more to attract and retain and become employers of choice. So that is what a lot of the discussion is centered around. I feel good that employer sponsored childcare fits squarely into that. That is what led to my comments earlier.

Understood. One last question, if you look at the number of prospects that have attended those meetings in prior years, do you have some sense of the conversion rate for the prospects who actually became clients?

I would not be able to give you any specific numbers and nor would I want to get into the habit of reporting on that. But I would tell you anecdotally I think that you could probably imagine that a prospect that decides to take three days out of their schedule and fly to San Antonio, and be with us for that time period, is a pretty good prospect and the chances of doing business are elevated. And you might imagine that we do do our best to be sure they have a good experience there.

Sounds great. Thank you very much.

Thanks.

Next question comes from Jack Sherk (ph) of SunTrust Robinson.

I am sorry. I may have missed it. What was your CapEx number for the quarter?

It was 3 million, Jack.

Thank you.

You're welcome.

[Operator Instructions].

Next question comes from Caren Nold (ph) of Shaker Investments.

I'm sorry, if I missed this earlier. Could you give us the breakout of the existing centers?

The breakout in terms of the industry specialty sectors?

Yes.

We did not go through that, but I will. Financial-services is 15%, technology 10%, healthcare and pharmaceuticals, 15%, consumer services 5%, industrial manufacturing 10%, government education 15%, office park consortium 25%, and other, including professional service firms 5%.

Thank you very much.

You're welcome.

Okay Chris if we don't have any more calls - questions, we can go ahead and close.

Yes sir. Mr. Lissy there are no questions at this time, sir.

Okay, then thanks everybody for being with us today. As usual we are here for you if you have any more questions and look forward to seeing many of you on the road over the course of the year.

Thanks. Bye-bye.

Bye.