Bright Horizons Family Solutions Inc (BFAM) 2013 Q1 法說會逐字稿

Greetings and welcome to the Bright Horizons Family Solutions first-quarter 2013 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Lissy, CEO of Bright Horizons Family Solutions. Thank you, Mr. Lissy. You may begin.

Thank you, Roya, and greetings from Watertown, and hello to everybody on our call today. Joining me as usual is Elizabeth Boland, our Chief Financial Officer. She's been waiting all day to go through our Safe Harbor statement, so let me turn it over first to Elizabeth. Elizabeth?

Thank you, Dave. Hi, everybody. Our earnings release did go out today after the close of the market, and it is available on our website under the Investor Relations section at brighthorizons.com.

This call is being recorded and it is also being webcast, and so a complete replay is available in either medium. The phone replay number is 877-870-5176, or if you are an international caller, it's 858-384-5517 with conference ID number, 413218.

The webcast will be available at our website under the Investor Relations section also.

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 expectations for future performance. We adhere to restrictions on selective disclosure and limit our comments to items previously discussed on these types of calls.

We also discuss certain non-GAAP financial measures on these calls, 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 might cause our future operating results to vary from what we describe in our forward-looking statements made during this call include our ability to successfully implement our growth strategies, including executing contracts for new client commitments, end rolling children in our childcare centers, retaining client contracts and operating profitably in the US and abroad; secondly, our ability to identify, complete and successfully integrate acquisitions and to realize the attendant operating synergies; third, decisions around capital investment and employee benefits that employers are making; fourth, our ability to hire and retain qualified teachers and other key employees and management; fifth, our substantial indebtedness and the terms of such indebtedness; and lastly, the other risk factors, which are set forth in our SEC filings.

So back to Dave to summarize our results and give you all a business update.

Thanks, Elizabeth, and hello again to everybody on our call. It's been a busy couple of months since we last spoke to you about our fourth-quarter results. And as usual, I'll kick things off with a broad overview, and Elizabeth will follow up with a more detailed review of the numbers and our outlook before we open it up to Q&A.

First, let me recap the headline numbers for the quarter. Revenue of $280 million was up 9% over prior year, and adjusted EBITDA of $49 million was up 17%. Adjusted net income of $16 million was up 85% over the first quarter of 2012, which yielded adjusted earnings-per-share of $0.25, up from $0.16 in last year's first quarter.

We started off 2013 strong as we continue to execute on our long-term plan to grow our core center business while expanding our newer services and growing our footprint outside of the United States. We added 11 new centers in the quarter and increased our Full-Service Center capacity by just over 5%.

Some of the highlights in the first three months were new centers for St. Jude Children's Research Hospital, Marian Regional Medical Center, as well as our third center for the University of California at San Francisco.

Our Back-Up and Educational Advisory Services also continued to grow this quarter with new client additions that included Limited Brands, T. Rowe Price and Ingersoll Rand, just to name a few.

We continue to be very optimistic about the cross-selling opportunity that exists for us to expand our relationships with existing and new clients through these valuable service channels.

Once again this quarter, we have continued to deliver on our long-term plan to improve our gross margins, which expanded 100 basis points to 23.5%.

The main drivers of the improvement this quarter were first tuition increases that averaged 3% to 4% and were paced modestly ahead of our cost increases in our Full-Service Care segment; second, enrollment growth in our mature and ramp-up class of centers; third, new centers added in 2012 and the first quarter of 2013; fourth, continued growth and improvement in our Back-Up business; and lastly, growth and the associated benefits of scale in our UK operations.

Speaking of the UK, I also wanted to talk with you today about our recently completed acquisition of kidsunlimited, which closed on April 10. kidsunlimited operates 64 centers throughout the UK with concentrations of centers in greater London, as well as in and around Manchester. The purchase price for this deal was GBP45 million. On an annual basis, kidsunlimited generates GBP45 million worth of revenue.

This is a group that we have known and respected for a long time, and one of the most exciting aspects of this deal is the fit with our existing UK business as this combination aligns us with the other major provider of employer-sponsored centers in the UK.

kids manages centers on behalf of the University of Oxford, Cambridge University hospitals and WH Smith, to name a few. And their consortium lease models provide high-quality care to working families in geographic locations that complement our existing footprint.

Their centers average 88 capacity and achieve gross margins at maturity that are consistent with our existing business in the UK.

Another attractive feature in our decision to acquire kid was the recent growth of new organic centers over the past two years, as well as a pipeline of centers in various stages of development. As a result, their portfolio included several centers that are still ramping up and will become mature contributors under our ownership.

As such, we expect to be able to expand their current operating performance over the next 12 to 18 months, which today is somewhat diluted by the immature class of ramping centers.

Lastly, we are excited about the opportunity to cross-sell Back-Up services into this expanded portfolio, which will further leverage our investment.

We have already begun the integration process, which is proceeding well. First and foremost, we will ensure that employees, families and clients understand our deep commitment to quality in all that we do. Over the next 12 months, we will combine our support functions given the overlap with our current back-office structure.

As a result, we expect to realize significant back-office overhead synergies similar to what we did in our last two acquisitions in the UK.

Once this integration period is complete, we project that the business will generate EBITDA of just over GBP7 million on an annual basis.

Let me give you a little context about how this fits into our existing growth plan for 2013. As we previously discussed, given our consistent track record of executing on acquisitions each year, we had expected in our 2013 plan to achieve approximately 30% of our new center growth from acquisitions.

So the kids acquisition is not all incremental to our previous outlook that we gave you for this year. The size of this transaction does fill that placeholder; however, when you consider the ramping phase of the newer centers, deal costs and the time it will take us to achieve our targeted synergies, we are not expecting to realize the full earnings impact until 2014. Therefore, while this addition will improve our revenue growth for 2013, it won't change our earnings outlooks for this year.

Now let me update you on our view for the remainder of 2013. Our view now contemplates the addition of 100 to 105 new centers, 75 to 80 net of expected closures. This is inclusive of our organic growth and the newly acquired centers. The organic new center growth will be achieved in large part due to the strength of our pipeline of centers currently under development. Broadly speaking, the mix of centers in our pipeline is representative in geography, industry verticals and operating models as our existing base.

Consistent with our last discussion, we continue to see good momentum within higher education, technology, healthcare and the energy sectors with both new clients and new centers for existing clients in our pipeline.

As we typically do each year, we will augment our new center openings in the year with transitions of management of centers as either self-managed by an employer client or managed by a competitor.

Moving to the acquisition side, our pipeline of prospects remains robust in each country in which we operate. While we have satisfied our initial target that we set for ourselves in 2013, we continue to be encouraged by the opportunity that we see and continue to add strategic value in this area.

Another important part of our story in 2013 and beyond will be the growth of our newer lines of business led by the growth of our Back-Up Dependent Care services. Back-Up Care will continue to contribute to our margin expansion once again this year. Although still our smallest sector, our Educational Advisory Services grew almost 20% again this past quarter as interest in our EdAssist tuition advisory business continues to expand. These services allow us to offer a broader value proposition to employer clients, serving their employee populations through more key life stages and in more locations than we ever could in the past.

On the pricing side, consistent with our historical experience, we expect to realize 3% to 4% tuition increases on average once again this year, and this will outpace our expected cost increases by approximately 1%.

We also expect to continue the positive trend in enrollment growth in our mature class of P&L centers that have been steadily regaining enrollment for the past two plus years, which is also contributing to gross margin expansion.

As we talked about before, we are always working to enhance the key drivers of quality in our centers. Two important areas of focus this year are on the enhancement of our pre-K curriculum focused on school readiness and on the well-being of the children and families we serve through our comprehensive set of parodies around healthy eating, movement and wellness that make up our commitment as part of The Partnership for a Healthier America.

Overall, we are raising our outlook for revenue growth for 2013 to a range that approximates 10% to 13% over 2012 levels. The components of this topline growth are as follows -- organic growth, which includes the estimated 3% to 4% price increases; 1% to 3% growth in enrollment in our mature and ramping centers; 1% to 2% from new organic Full-Service Center additions; and 1% to 2% growth from Back-Up and Educational Advisory Services.

In addition, acquisitions will add approximately 5%, including the lapping effect of the acquisitions completed last year.

Offsetting these increases are the effects of center closings and variations in Cost Plus revenue, which together approximate 2%.

As a reminder, Cost Plus center revenue is somewhat harder for us to gauge, particularly early in the year, and movements in revenue in this class have no effect on earnings. For example, in the first quarter, this group was approximately $3 million lower than we had previously anticipated in our plan, but given the fixed nature of this group, there are no economics on it either way.

Overall, we anticipate that this growth will allow us to leverage gross margins 60 to 90 basis points in 2013, which will in turn drive adjusted EBITDA to a range of $206 million to $212 million and adjusted net income to $76 million to $79 million. Thus, our guidance for earnings per share for the full-year 2013 is a range of $1.16 to $1.21.

With that, let me turn it over to Elizabeth who will dive into the numbers in more detail, and I'll be back with you during Q&A. Elizabeth?

Thanks again, Dave. So my comments on our operating results will focus on revenue, gross margins and certain adjusted metrics, including adjusted EBITDA and adjusted net income and EPS.

As a reminder, the earnings release includes tables that reconcile our US GAAP reported numbers to these additional metrics, including one-time charges of $7.5 million to terminate our sponsor management agreement with Bain, $5 million associated with the vesting of performance-based options upon completion of the IPO and $1.5 million of deal costs in connection with our acquisition of kidsunlimited.

So into the sort of detailed line items on the P&L, topline revenue growth was $22 million as Dave mentioned in Q1 with the Full-Service Center business increasing $18 million, our Back-Up division increasing $3 million, and Ed Advisory Services increasing $1 million. Revenue in our Full-Service segment increased due to rate increases and enrollment gains of approximately 1% in our mature class of P&L centers, as well as through growth from new centers.

Our revenue growth in this segment was dampened somewhat this quarter by lower than planned operating subsidies from our class of Cost Plus centers. As Dave mentioned earlier, movements in revenue and Cost Plus contracts have no effect on our earnings given the fixed nature of our management fees.

This shortfall approximated $3 million in the quarter.

One additional offsetting effect to revenue growth this quarter was approximately $1 million from foreign exchange impacts.

Gross profit increased $7.8 million to $66 million in the quarter and were 23.5% of revenue compared to 22.5% in 2012. The largest contributor to this was in the Full-Service segment, which grew more than $6 million as the margins there expanded over 100 basis points.

Excluding the one-time cost in SG&A related to the IPO and the acquisition of kidsunlimited, overhead in the quarter was $29.5 million and increased to 10.5% of revenue from 9.8% in 2012. The primary driver of this increase is ongoing stock compensation expense, which was $1.7 million in 2013 compared to $225,000 in 2012. This added 60 basis points to the overhead rate in the first quarter of 2013.

Our European operations continue to perform well, despite continued economic challenges. We've completed the acquisition of the integration of the Casterbridge centers and have realized the expected synergies in our overhead spending such that overhead levels in Europe continue to lever down toward US levels.

In connection with the debt refinancing we completed on January 30, 2013, we recorded a net loss on the extinguishment of our previous debt attachments of $63.7 million in the first quarter of 2013. Net interest expense was $13.3 million for the quarter compared to $19.9 million in 2012. This year interest expense includes approximately one month of interest under our old arrangements and two months under the new $790 million term loan, which I'll talk about a bit more in detail in a minute.

In summary, adjusted net income of $15.5 million translates to adjusted EPS of $0.25 a share in the quarter, up from $0.16 a share in 2012. We generated operating cash flow of $52 million in the quarter compared to $38 million last year, and after deducting maintenance CapEx, our free cash flow in the quarter totaled $43 million in 2013 compared to $30 million last year.

The main drivers of this $13 million increase are the improved operating performance and consistent net working capital, offset by incremental maintenance capital spending.

We ended the quarter with approximately $97 million in cash.

Now let me recap a few operating statistics for the quarter end.

At March 31, we operated 773 centers with total capacity of 88,100, an increase of 5.2% from 83,700 at March 31, 2012. We operate approximately 70% of our contracts under profit and loss arrangements and 30% under Cost Plus contracts. And our average Full-Service Center capacity is 137 in the US and 71 in Europe.

As Dave previewed before, our updated topline projection for the full year of 2013 anticipates revenue growth of 10% to 13% over 2012 levels, inclusive of kidsunlimited from April 10 forward.

The gross margin improvement that Dave previewed of 60 to 90 basis points will in turn generate adjusted income from operations improvement of 25 to 50 basis points after overhead.

To be clear, projected adjusted operating income excludes the Q1 2013 cost to complete the IPO, as well as the acquisition costs for kidsunlimited.

In addition, it excludes the one-time expenses for stock comp and IPO-related expenses totaling $16.9 million in 2012.

What this translates to is adjusted operating income margins for the full year of approximately 10.75% to 11% compared to 10.5% for 2012.

Including an estimate of the purchase price allocation for kidsunlimited, we expect amortization expense to approximately $28.5 million for the year, including $20 million related to our May of 2008 LBO and depreciation expense to approximate $44 million to $45 million.

We estimate stock compensation expense of $11 million, including the $5 million IPO-related charge in Q1 of 2013.

Interest expense, which includes the amortization of deferred financing fees and OID on the debt we issued in January 2013, is projected to approximate $40.5 million for the year, including the impact of the previous credit arrangements through January 30, which added approximately $4.5 million to the reported interest for Q1. With borrowing rates at approximately 4%, our term loan carries an [L plus 300] with a 1% slower rate. We expect our ongoing interest expense to approximate $9 million per quarter.

We estimate that the effective or structural tax rate will approximate 37% of our adjusted pretax income in 2013, similar to that that we illustrated in our results for 2012. For our GAAP reported results, we're estimating an effective tax rate of approximately 20% for the full year of 2013.

The combination of topline growth and margin leverage leads us to project adjusted EBITDA of $206 million to $212 million for 2013, which is an increase of 14% to 17% over the $181 million we reported in 2012, and adjusted net income for 2013 in the range of $76 million to $79 million.

With respect to share count, we currently have approximately 66.5 million fully diluted shares outstanding. For Q1 weighted average shares, they were 62.75 million, including the IPO shares weight averaged for their issuance dates and assuming the conversion of the Class L shares as of January 1 of 2013. We, therefore, estimate that for the full year, weighted average shares will approximate 65.5 million to 66 million. Based on these share counts, we estimate that adjusted pro forma earnings per share will range from $1.16 to $1.21 in 2013.

Lastly, for the full year, we project that we will generate $145 million to $155 million of cash flow from operations or $120 million to $130 million of free cash flow, net of projected maintenance capital spending of $25 million to $30 million. This compares to $107 million of cash flow from operations in 2012 and $66 million of free cash flow net of $41 million of maintenance CapEx.

Based on the centers in development and slated to open in 2013 or early 2014, we expect to invest $40 million to $45 million in new center capital compared to $28.5 million in 2012.

On the acquisitions front, as mentioned, we spent approximately $70 million for the kidsunlimited acquisition in April, which we funded out of cash from operations.

Looking specifically to the second quarter of 2013, we are estimating revenue growth of 12% to 13% and adjusted EBITDA of $54 million to $56 million.

Using the 37% effective structural tax rate on the adjusted income before tax, we're projecting adjusted net income in the range of $21 million to $22 million, and with 66.5 million diluted shares outstanding in the quarter, EPS would approximate $0.32 to $0.34 a share for Q2 of 2013.

So with that, that's the end of our prepared remarks, and Roya, we would be ready to go to Q&A.

(Operator Instructions) Sara Gubins, Bank of America Merrill Lynch.

This is David for Sara Gubins. Could you just go over the Cost Plus, I guess, situation in a little bit more detail and why it was light for the quarter?

David, I'll take that. So for some of you who followed the Company for a long time, you know that in the Cost Plus class of centers, the revenue component is made up in part by what parents pay us in those contracts and tuitions and in part from what clients subsidize.

And what ends up happening is we set budgets for that class in the beginning of the year for a variety of expenses. And if subsidy spending, which is good in the eyes of the client, is running a little less, it turns into a slightly lower spend for them, a little less revenue for us but doesn't change our fee since the management fee is a fixed fee.

So essentially what we are seeing in Q1, the numbers move around a little bit, but directionally it's not different. It really has no effect in our view on the underlying fundamentals of the business and has no effect on earnings.

Okay. That's helpful and just one more for me. What kind of economic expectations are embedded in your 2013 forecast? I am just trying to get a sense if you expect the jobs picture to improve, which could suggest improved capacity utilization?

Yes, I think our view, David, is we are not banking on any additional economic movement in our plan. I feel like we have been operating in a somewhat schizophrenic recovery period for a while now. I'm hopeful that in time that will change. But for now, our plan banks on sort of the experience we've had over the past year, year and a half to two years of whatever you want to call the recovery period we've in continuing at a pace similar to what we've seen in the second part of this year, in the first quarter of this year. So it's -- we are really banking on any uptick in economic activity.

Thank you. That was helpful.

Gary Bisbee, Barclays Capital.

Good afternoon. If I could just ask about the revenue growth in both Back-Up and Educational Advisory, the growth rate has decelerated somewhat from the recent trend. Anything in particular you would point to?

No, just timing more than anything else. I think there is to change in our view of the fundamentals in those areas, Gary. Quarterly growth rates may move a little bit based on the timing of new center contracts and things like that, but no real change in the fundamentals.

Okay. And are there reasons to believe both of those -- that the year-to-year growth rate would accelerate based on the contract activity and what not as we move throughout the year?

Yes, so over the course of the rest of the year, there is a little bit of seasonality in the Ed Advisory business in particular. So both the timing of the growth in the newer contracts in that area, we would expect to see it moving up as the year goes along. The Back-Up business has a bit of that seasonality as well in that what we have in the plan for the rest of the year's openings, we would see that tick up somewhat as well so that the rate you're seeing in Q1 is the lightest quarter of the year.

Okay. All right. And then just on the acquisition, it sounds like a rugged deal. The $7 million of EBITDA, once you have achieved the overhead savings, is that a good number to plug-in for 2014, or could that get better as you see their recent startup facilities mature?

Gary, we are not yet in a position to give definitive guidance for 2014. So we wanted to provided you with a number that is the basis -- a rational basis on which we looked at this deal. And we believe that on an annualized basis, that it will generate GBP7 million of EBITDA.

It's fair to say that in that number includes some of the rampup within their centers, sort of a realistic view of what that can be over the course of the next 12 months. Also, it includes a what I will call a realistic view of overhead synergy opportunities that exist, and it's also fair to say like in any acquisition, there's risks and opportunities. And we will be working hard to try and see if we can get the opportunities to play out and achieve upside. But I think GBP7 million is a fair kind of annualized number, and I think it also directionally helps you to understand the value that we saw in it, and what we paid for it, we believe, is pretty much in our wheelhouse in terms of fair valuation of the deals we like.

Okay. Great. And then just one last cleanup question, all right. The $1.5 million this quarter in deal charges, are there going to be more one-time stuff in the second quarter, or was the fee paid ahead of the close?

No, there will be -- there is some expectation of the final charges that we will have to complete some of the work that is necessary with our SEC filings, Gary. So there will be a little bit more coming, not at that scale, but we would expect another $0.5 million to $0.75 million probably in Q2 that we would just isolate as well.

Jeffrey Volshteyn, JPMorgan.

Thank you for taking my question. In the second quarter, I appreciate the additional guidance. Can you help us think through the acquired revenue piece? I know the prior acquisition kind of rolls off and the new one comes in. What is the percentage of acquired revenues in the second quarter?

Let me just take that off, and maybe I can circle back. I don't know if you have another question, Jeff, that I can -- as I try to diagnose that?

Sure. International markets outside of US and the UK, can you comment on those what's going on there? I know they are much smaller.

Do you mean, Jeff, the ones we are currently in or things (multiple speakers)

Yes and potentially where you are potentially looking.

Yes, I think that as you know, I think it's early days and relatively small-scale for us in both the Netherlands and in India. I think in both places, you know, there are continued sort of challenges, but also I think in those challenges, we see opportunity.

In the Netherlands for example, we see -- when we got into that market, we anticipated some ultimate contraction in the market that we are starting to see. But we also saw an opportunity, particularly around the major cities of Amsterdam, Rotterdam and The Hague. And so we are growing in those areas and opening new centers this year in those markets.

With respect to India, it is early days for us. We are still in the process of thinking through the right strategy. We only operate a Cost Plus center there, and we will continue to comment over time as we look at what the right growth vehicles should be for us in that market, which is a big market. But nonetheless as I talked about before, we want to take sort of a cautious approach to be sure we find the right platform for us to grow.

With respect to other markets around the world, there's a lot of activity in the world around child care and related services, and obviously we have been the recipient of lots of interest both historically and now post-IPO.

I would say it's fair to say they were interested in continuing to look at opportunities both in Europe and Asia and other places around the world, but we are going to take a cautious approach. There's nothing on our radar today that would suggest we see something that we are going to jump off on. But we are going to continue to keep our eyes open, and I'm confident over the long run we will find other markets where Bright Horizons can add value.

Great. Thank you. And just one follow-up on the one-time adjustments in the second quarter. So outside of the -- if you have the $0.75 million for the deal, will there be any other one-time adjustments in the second quarter?

In the second quarter? Not anticipating anything else in the second quarter, no.

Okay. Again, we can follow-up on that (multiple speakers)

Yes. We will circle back on the other question, Jeff.

[Ang Syng], Credit Suisse.

So my first question is just regarding the gross margin improvement that you saw in the quarter. Could you delve a little deeper into the drivers, specifically the enrollment gains? Are those proceeding in line? Are they exceeding your expectations? And also, what sort of cost management efforts might be contributing to the increase?

You know, I would say that the enrollment gains that we are seeing in our mature and in our ramp-up class are right in line with what we had planned for. So that's really contributing as we had expected.

There are no additional sort of outside of our normal discipline around costs. There are no unique cost-cutting efforts that are contributing to our results in the quarter. We have an ongoing discipline to be sure that we are managing costs wisely and step with enrollment. But, you know, we are leveraging again a another big driver. We are leveraging the tuition increases slightly ahead of our average increases in our other costs, which are mainly driven by wages and benefits.

So we continue to provide increases to our team and are managing to get some arbitrage between that and price. So but I would say it's right -- the gross margin expansion overall that we had in the quarter, the drivers of it are all pretty much in line with what we had planned. There were no extraordinary events that were driving that in the quarter.

Okay. Great. Thank you. And also, could you -- related to that question, could you comment on what utilization was like for this current quarter or for Q1?

So we have been -- I think what our goal here is to try to give you some context around enrollment improvement year over year. So it is a quarter of the year. We may take an annual view at utilization, but not at quarterly updates on that.

As we mentioned in the prepared remarks, enrollment is up in the mature class around 1%. In our mature and ramping class, we are looking to 1% to 3% improvement. So we are on track with that, but from a utilization level, there is not a tune of change since December.

Okay. Understood. And then also just regarding the international opportunity that you touched upon, what is the scope for the Back-Up and Advisory businesses and the opportunities for those businesses internationally? If you could just talk a little bit about that.

Yes, we are operational today with our Back-Up business in both the US and the UK. And the UK is a little bit behind the US in terms of its maturity and time we've been selling it.

So we think the UK has a good Back-Up opportunity going forward, and that will continue to play out and add to the overall whole.

We're still evaluating how and if Back-Up Care in the Netherlands will -- employers will jump on board to that, so that's a to be decided question. And we are not operational in our Educational Advisory services today outside the United States, although we do serve as you might expect a pretty significant -- we serve our clients with ex-pat-related educational advising services, but that's really generated through the American client. But we will be exploring that as we go forward.

Okay. And one final one if I could. You had indicated that the organic growth strategy would mature for kidsunlimited under Bright Horizons. Can we expect the same type of ramp-up period of two to three years for those centers to mature?

Yes, I don't really think that the profile of what -- we respect the kidsunlimited management team. They were a good group, and I think they know the business well. We competed in the market for a while.

So I would suspect we will have to learn more specifically when we get in there that their dynamics around ramp-up will not differ too much from what we see in our mix.

Okay. Great. That's all for me. Thanks a lot.

Jeff Silber, BMO Capital Markets.

Thanks so much. Just want to follow-up, I think, with some of Gary's questions about Ed Advisory and Back-Up Care. I know revenues were -- as we saw, the growth rates slow a little bit, but margins were down year over year. Is there anything that we need to read into that?

No, I think it's just the timing, particularly in the Ed Advisory business as we scale that in the investments that we have in systems coming online that nothing other than the investment in the growth of the business I think on the Back-Up side, its timing of utilizations and the way that the services are rendered. And so we're not seeing any weakness or change in the overall margin for the year consistent with what we were able to realize last year.

So we feel good about the overall annual performance. Just as you say, it's a little bit light this quarter.

Okay. And on the kidsunlimited acquisition, it's a pretty sizable deal. Does it change your appetite in terms of the types of companies you might be acquiring over the next year or so?

No, Jeff. Actually, you know, we have, as I commented earlier, we have a pretty robust pipeline of potential acquisitions that we are engaged with in every country which we operate. I think the dynamics of what's available size-wise in each country differ a little bit, and specifically in the UK, kids is one of a handful of companies in and around their size range that are still there in the market.

So, we have an appetite for deals that stick with us with all the same sort of attributes we look for in a small sort of 5-, 10-center operator. If we can find one that's 50 or 60 centers that the same criteria fits and we think we can add value, we're certainly interested in moving forward.

So, I think you'll see over the longer term, other deals that sort of potentially could happen in that size range, and then you'll see us continue with our bread-and-butter smaller center type deals.

And if I could just sneak one more, and I am going to apologize in advance for asking this. But it have had some folks ask me this question. With the tragedy that happened in Boston, especially what occurred around Watertown, was there any impact on your business? Were you able to get into your office, et cetera?

Yes, it was obviously a horrible tragedy, and anybody who was watching CNN, you saw our office in the background. So we were in sort of Ground Zero for the media and for the law enforcement in that horrible -- during that horrible Friday.

So, fortunately our office was locked down for one day on Friday, and then we were back up and running over the weekend and back on full board Monday. Our centers in the Boston area rose to the occasion. We think that while our employees are not first responders, they're supporting those that are. They are the people caring for the children of the firemen and the policemen and the FBI agents and the hospital, doctors and nurses that were all sort of engaged in the tragedy. And really proud of the way they stepped up. Obviously a tough time for them trying to get home, but they stepped up and did some incredible things. We saw no impact financially on our business.

Okay. Appreciate the color. Thanks so much.

Tim Conner, William Blair. Bob Craig, Stifel Nicolaus.

Dave, I know you're no longer quantifying or breaking out the number of centers in the development pipeline. You can if you want, by the way. But could you just offer some commentary there? Is it you find it growing with I guess what everybody tells us is an economic tailwind? We don't see it in our coverage universe, but that's what the pundits are saying.

Yes, Bob, I think it's consistent with everything we've said in the past. I wouldn't tell you that things are much different than they were when we talked a couple of months ago when I said that we continue to add to it with things that are largely in line with where we've been before. And then the sectors that I talked about before are the ones that are -- if I were to pick a few out -- the energy sector, health care, higher education, technology -- are the ones that sort of seem to stand out. Not just for centers, but also in the Back-Up and Educational Advising areas.

So we think it's consistent, and as I said in my comment to whomever asked before, we are not sort of banking on any kind of recovery. I view the time that we have been in as sort of a bit all over the place and, as I said earlier, schizophrenic in terms of the recovery itself.

So it's steady and we continue to be confident in what's in the pipeline as it relates to the projections we're giving you for center growth.

Okay. And the overall sales cycle is staying fairly flat, I take it then?

Yes.

Okay. Elizabeth, we've taken a stab at this, but can you give us any idea in terms of your numbers, which I'm sure are better than ours of the profitability profit sensitivity or impact of improving capacity utilization on your business, the incremental margin of that additional kid?

Yes, I mean obviously it's in my nature to caveat almost anything with, of course, each situation has its own nuance, and it depends on the ages of the children and when you have the step variability of a classroom that needs to be staffed when you reach a ratio threshold of 1 to 5 or 1 to 8 where you need to open another classroom. But in general, across an enrollment, a general class of enrollment, if our typical margins are in the 20% range, the marginal improvement when you have when you pass breakeven, it is going to be more like 40%. So a doubling ratio, and on any one child, that can be more than that. But, in general, you really do have to look at it collectively because of the nature of the incremental staffing in those step variable thresholds.

Last one for me. David, I've seen some articles about the potential changes to childcare ratios in the UK. Any thoughts on that?

Well, the discussions that I've read, Bob, really relate to trying to ease, if you will, some of the restrictions in order -- in their view to maybe try to make it more affordable for families.

I have mixed views on that. Obviously if that were to happen, one could argue that gives us some opportunity financially. Obviously we're used to operating at the high end of quality. And while there might be some of those opportunities depending on where you are in the UK and how we would run things, I would say that probably won't have much of an effect on our business just because we would tend to already operate at ratios that we think are appropriate to drive the level of quality that we stand for.

Tim Connor, William Blair.

So, in the UK, it looks like you're sort of neck and neck for your number one/number two overall market share. What about in the employer-sponsored market? Do you have any sense of what your share is within that segment?

I would say -- and I would have to calculate the numbers, so I am going to -- like Elizabeth just caveated some things, I'm going to caveat mine by saying I'm going to give you an anecdotal answer.

But with the combination of us and kidsunlimited, it is like the US very fragmented in that there are a lot of small providers that have contracts. We are by far and away the largest provider of scale, and I would guess our market share is probably two-thirds at this point.

Okay. And do you think over time you can get the margins in the UK up to US levels? I believe they're a little bit lower right now.

Yes, I think that the longer-term opportunity in the UK will be to continue to scale the overhead structure there to be in line with the US.

Now it's not fair necessarily to compare exact apples to apples because in the US overhead structure, we have other businesses in there. So you would have to kind of isolate the center business only, Full-Service Center business. The Back-Up business in the UK is really relatively small compared to the US.

So overall, I think we still have a little bit of room with respect to levering our overhead structure to have operating margins get closer or meet the US. So there's still some opportunity there over time.

What I would add to that just from a color standpoint is, of course, the addition of a group like kidsunlimited and Casterbridge last year adds centers of a slightly larger size. And so to the extent that we are able to do that and so grow the average unit size, we have more opportunity to keep leveraging to that consistent level.

Okay. Thanks. And then someone touched on it earlier, but the margins in Back-Up, is that -- what do you feel -- how far along do you think you are in terms of you are getting the scale necessary in that business, and then what are the scale opportunities in that business? Do you have significant opportunities in Back-Up Care?

I think our view on Back-Up is that we will continue to maintain the margins that we had achieved last year in Back-Up in 2013. We're not banking in our plan on expansion of the Back-Up margin if you were to isolate that on its own. But obviously we are banking on Back-Up continuing to grow at rates that are slightly faster than the core center business so that it is contributing to overall margin expansion in the year.

But we think when you look at the gross margins on Back-Up, they are strong, and the overhead level necessary for that is slightly more on a percentage of revenue than it takes to manage the Full-Service business at scale.

But we are not -- there may be over time some smaller technology advances that help us on the sort of contact center staffing side. But right now on the current view, it is to maintain the ultimate operating margins of Back-Up and then increase it through volume on the revenue side. Increase the (multiple speakers)

Okay and final one for me. Did you -- maybe you already said this, the net new center growth expectations for this year, what are those now will including kidsunlimited? I think last quarter you had gone through a breakout on that. I just wanted to confirm that you had a new estimate for that.

Yes, we're estimating 100 to 105 total new centers. 75 to 80 net of closures.

Thank you very much. Appreciate it, guys.

(Operator Instructions). Brian Zimmerman, Goldman Sachs.

Hi, thanks and good afternoon. You've talked in the past about government sector opportunities, and with government spending cuts coming from sequestration, have you seen any impact in Q1 from this on your part of the business exposed to government jobs, and how are you thinking about this going forward for the remainder of the year?

Brian, we have a pretty small exposure to government revenue. You know, we do operate some centers for the GSA. We have a few for the military, the Defense Logistics Authority. But overall it's a relatively small amount comparatively to the whole.

So the exposure in general really isn't that large, and the way those centers are funded, there's no ongoing funding coming to us from the government. The only exposure we can potentially have is if people who are enrolled there lose their job, then they obviously would not -- it could impact enrollment, I guess, potentially. But to answer your question directly, no impact in the first quarter.

Thanks. That's helpful. Then can you give us a bit more detail on the investments you have made in IT and marketing in the quarter, and how should we think about these costs going forward?

So we have -- I am not really answering so much in the quarter because it's been a process that we've been going through in terms of our IT spending.

So with respect to the Back-Up services, it is a matter of some investment in both the specific software that allows us to handle calls from such a wide variety of both clients and parents and place families into the Back-Up Care that they need on either the emergency or short-term timeframe, so to be able to, you know, question and solicit the space available and respond back to the parents.

On the Full-Service side, we have also invested in updating our systems there for, you know, it's just its center operations management systems. In the Ed Advisory business, of course, these are newer, nascent businesses. So we have invested in. These are mainly software applications and the attendant business drivers that go with being able to utilize both automated processing and automated service delivery.

And I would just add, Brian, that although we are not breaking out specific line items by quarter like IT and marketing, that everything Elizabeth just said is baked into our 2013 plan. So there's been no extraordinary expense beyond that.

Okay. Thanks a lot, guys.

Jeff Meuler, Baird.

Good afternoon. I wanted to ask about the enrollment growth at existing mature centers. I think you said it was up 1% in Q1, and the guidance for the full year is 1% to 3%. I guess, what would have to happen to accelerate towards the middle or upper end of the guidance on a full-year basis, and are you seeing any sort of leading indicator signs that that is starting to occur or anything around registration rates or anything like that?

So let me -- I'm glad you asked the question because I want to make sure that I'm clear on the distinction between those two statistics.

So the 1% year-over-year growth in the mature class is what we would typically be referring to as the same center, same stores kind of growth in the group of centers that has been open for more than two years. So we've got centers that are in a mature class that are growing 1% year over year. This is the class where we have the most opportunity over the next several years. This is the long-term trajectory that we are going to recover the enrollment that was -- that we saw under so much pressure in 2009 and 2010 and that we've been gaining back a 1% or 2% a year.

So we're continuing with that in 2013 -- 1% growth in that mature class. The 1% to 3% -- so admittedly it includes the 1% on the lower end, so probably is closer to the 1.5% to 2% to 3%. That is including centers that are ramping. It's obviously a smaller group of centers in our mature class, but the 1% to 3% is ramping and mature centers gaining enrollment year over year.

So not a real shift in our thinking or catalysts for change in the rate of enrollment growth over the course of the year. But really just reiterating that we are seeing good growth in our ramping centers. We've been really pleased with the centers we've opened over the last couple of years that have been doing very well and ramping quickly. And then our mature class is also gaining year over year.

Got it. And then did you say kidsunlimited is going to in 2013 be net neutral on an EPS basis, or was it EPS and EBITDA?

Yes, I think we said that it was going to be net neutral to the guidance that we had previously given, to be clear about it, on both levels, both on an EBITDA basis and on an EPS basis.

So the point that I made earlier, Jeff, was that we had already had something in our plan for the year for acquisitions. So it's not that the deal itself overall was net neutral. It's just net neutral to the guidance we previously gave.

Got it. Thank you.

Gary Bisbee, Barclays Capital.

Just one quick follow-up. Can you give us a sense what the annualized amortization expense from the kidsunlimited will be?

We have not really done the detailed purchase accounting, Gary, but I will give you the estimate is in the range of $1.5 million or so.

Okay. All right. Thank you very much.

Sorry. Let me actually clarify if that is GBP1.5 million or $1.5 million because that's obviously important.

Thank you, Mr. Lissy. There are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Okay, Roya. Thanks so much. Thanks to everybody for being on our call today, and as usual, we will be here with follow-up questions and look forward to talking to you next quarter and seeing you on the road in between. Thanks.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.