Bright Horizons Family Solutions Inc (BFAM) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Bright Horizons Family Solutions second 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.

Thanks, Roya, and hello to everybody on the call today. Joining me as usual is Elizabeth Boland, our Chief Financial Officer. And before I kick off our formal remarks, let me let Elizabeth go through a few administrative matters and our Safe Harbor statement. Elizabeth?

Thanks, Dave. As I hope everyone knows our earnings release out today after the close of the market, and it is available on our website under the Investor Relations section at brighthorizons.com.

As you have just heard, this call is recorded and it is being webcast, and a complete replay can be accessed in either medium. The phone replay number is 877-870-5176, or for international callers 858-384- 5517 with conference ID number 417237. And 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 recent business operations and financial performance, along with forward-looking statements regarding our current expectations for the future performance. Forward-looking statements inherently involve risks and uncertainties, and may cause actual operating and financial results to differ materially from those that are described in our forward-looking statements made during the call.

These risk and uncertainties include, one, our ability to successfully implement our growth strategies including executing contracts for new clients, enrolling 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 that we target. Third, decisions around capital investment and employee benefits that our employers are making. Fourth, our ability to hire and retain qualified teachers and other key employees and management.

Next, our substantial indebtedness and the terms of such indebtedness, and lastly the other risk factors that are set forth in our SEC filings. We also discuss certain non-GAAP financial measures on these calls, and detailed disclosures and reconciliations relative to these non-GAAP measures are included in our press release, as well as on the investor relations section of our website.

I will turn it back over to Dave for the review, and an update on the business.

Thanks a lot, Elizabeth, and greetings again from Boston, to everybody on our call today. As usual, I will kick things off and then Elizabeth will follow me with a more detailed review of the numbers and our outlook, before we open it up for your questions.

First, let me recap the headline numbers for the quarter. Revenue of $311 million was up 15% over the prior year, and adjusted EBITDA of $57 million was up 18%. Adjusted net income doubled to $23 million, which yielded adjusted earnings per share of $0.35, up from $0.22 in last year's second quarter. For the six months through June 2013, revenue was up 12% to $591 million, and adjusted net income totaled $39 million, an increase of 93% over 2012, with adjusted EPS of $0.60 considered compared to $0.38 last year.

As these numbers reflect, we continue to deliver strong operating performance across all of our segments, as we execute on our long-term plan to grow the full-service center business, while expanding our newer services, and growing our footprint outside of the United States. In addition to the 64 Kidsunlimited centers that we acquired in the UK in April of this year, we have added 14 new centers this year including 3 in the second quarter. And we have increased our full-service capacity in line with our plan by 6% over last year.

Our backup and educational advisory services also continued to grow in line with our plan, once again this quarter. We continue to be very optimistic about the cross-selling opportunities that exist for us to expand our relationships with existing and new clients through these valuable service channels. Some of the new client addition highlights for the quarter include the University of Chicago, Carolinas Healthcare, Barnabas Health Systems and the Baylor College of Medicine.

Moving over to margins, gross margins improved this quarter to 24.3%. The main drivers of this improvement are consistent with prior periods and include first, tuition rate increases that averaged 3% to 4% and were paced -- will pace modestly ahead of our cost increases in our full-service segment. Second, enrollment growth in our mature centers, as well as the ramp up enrollment in our newer class of centers.

Third, the new centers we added in 2012 and the first half of this year. Fourth, continued growth of our backup business. And lastly, growth and the associated benefits of scale in our UK operations.

These contributions are partially offset by the impact of losses in the newer lease consortium model centers that we have opened so far this year, that we opened last year. As well as the immature class that we acquired from Kidsunlimited. As you may remember, we lose money in these centers during the first 18 months to 24 months of operation, as they are ramping up enrollment. As a result, margins are depressed somewhat in the near-term, but the operating contribution expands as the centers become fully mature.

Now let me update you on the integration of the Kidsunlimited acquisition. Our team in the UK has been working hard to combine our support functions. And we are pleased with the progress to date, and excited about the addition of their client relationships, centers, and the talented team of professionals that we have brought on.

As we discussed last quarter, we expect to realize significant back office overhead synergies due to the overlap in our support functions in the UK. In addition, the kids portfolio also includes several centers that are still ramping up to mature operating levels. All in, once the integration period is complete in the first half of 2014, we project that as previously discussed with you, that this business will generate EBITDA of roughly GBP7 million on an annual basis.

As we have discussed with you in the past, due to the fragmented nature of the markets in which we operate, acquisitions continue to represent an excellent value creation opportunity for us. While we maintain an active pipeline of opportunities, the timing of closing on deals is always lumpy. However, we are pleased that we have yet again been able to execute on another strategic acquisition this year with the purchase of Children's Choice that closed on July 22.

Children's Choice operates 49 centers in 25 states in the US, with concentrations of centers in Texas and in the southwest. They currently generate $45 million of revenue on an annual basis. The purchase price was $53 million, which was inclusive of net operating loss carryforwards of approximately $10 million. So taking the NOLs into account, our purchase price was in line with our historic range.

Like Kidsunlimited, this is an organization that we have known and respected for long time, and this combination aligns us with the third largest provider of employer-sponsored centers in the US. Children's Choice manages centers on behalf of the MGM Grand, Medical City Dallas, Chesapeake Energy, and several sites for the GSA, to name a few. Many of the centers are also open to community involvement, and we are excited about adding these centers to our existing backup network.

Their centers are similarly sized to our existing US portfolio, and over the past three years they have added more than 10 new organic centers. As a result, their portfolio also includes several centers that are still ramping up to mature operating levels. As previously mentioned, the opportunity to cross-sell backup centers into this group of -- backup services into this group of client partners, gives us the potential to further leverage our investment.

For the Children's Choice centers, the gross margins at maturity are within a range of our existing employer-sponsored centers in the US. But as with many of the larger groups, we acquire, there are a handful centers which are not currently performing at our minimum return thresholds. As we have done in the past, we expect to be disciplined about attempting to fix or ultimately pruning underperformers as necessary over time.

It is still early days, but the integration process is proceeding well. And over the next 6 months to 12 months, we will combine our support functions which had brought overlap with our current structure here in the US. As a result, we expect to realize significant overhead synergies over the next year or so. Once this integration period is complete, we project that the business will generate EBITDA of approximately $6 million annually.

In the context of our updated outlook for 2013, Children's Choice will generate incremental revenue. But we expect that will have only a modest impact on our earnings outlook for this year, considering the one-time costs of achieving synergies, achieving ramp up in newer centers, and other deal-related costs.

Now let me update you on the view more broadly for the remainder of this year. Our plan now contemplates the addition of 145 to 150 new centers, 120 to 125 net of expected closures. This is -- this is inclusive of the newly-acquired centers, as well as our organic center growth.

Organic new center additions will be in line with our plan for the year, and will be achieved in large part due to the strength of our pipeline of centers currently under development. The mix of centers in the pipeline continues to be representative in geography, industry verticals, and operating model as our existing base. We continue to see good representation in the pipeline within the higher education, technology, healthcare, and energy sectors, with both new clients and new centers for existing clients in the pipeline.

Another important story in 2013 and beyond, is the continued expansion of our newer lines of business led by the growth of our backup dependent care services, which will contribute once again to our margin expansion this year. Although still our smallest sector, our educational advisory services grew over 20% this past quarter, as interest in our Ed services 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 performance, we expect to realize 3% to 4% tuition increases on average once again this year, which 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 will also contribute to our gross margin expansion.

All in, we are raising our outlook for revenue growth for 2013 to a range that approximates 12% to 14% over 2012 levels. Overall, we anticipate that this growth will allow us to lever gross margins 50 basis points to 75 basis points in 2013, which will in turn drive adjusted EBITDA to a range of $207 million to $212 million, and adjusted net income to a range of $77 million to $79 million, which is double what we achieved in 2012. Thus our guidance for adjusted earnings per share for the full year of 2013 is a range of $1.17 to $1.21.

With that, I will hand it over to Elizabeth to review the numbers in more detail. And I will look forward to talking to you again, once we get back to Q&A. Elizabeth?

Thanks, Dave. So my comments on our operating results will focus on revenue, gross margin and certain adjusted metrics including adjusted EBITDA, and adjusted net income and EPS. As a reminder, the earnings release does include tables that reconcile our US GAAP reported numbers to these additional metrics, which include one-time charges we recorded in Q1 of 2013 upon completion of the IPO. As well as deal costs in connection with the acquisition of Kidsunlimited, and costs associated with the completion of the secondary offering in the second quarter of this year.

Our top line revenue growth was $39 million in Q2 or 15%, with the full-service business increasing $34 million, backup increasing $4 million, and Ed advisory increasing $1 million. Revenue in our full-service segment increased through rate increases and enrollment gains of approximately 1% in our mature class of P&L centers, as well as through growth from new organic and acquired centers.

Gross profits increased $10.9 million to $75.4 million in the quarter, and as Dave mentioned were up 50 basis points to 24.3% of revenue, compared to 23.8% in 2012. The largest contributor to this was in the full-service segment, which grew $8 million on the revenue growth that I just talked about.

Excluding the one-time costs in SG&A related to the secondary offering and transaction costs for Kidsunlimited which totaled $900,000, overhead in the quarter was $31.5 million, and increased to 10.1% of revenue from 9.7% in 2012. The 9.7% for 2012 excludes a $15.1 million charge that we recorded in the second quarter for an options exchange that is discussed in our 10-Q -- or sorry, in our10-K in more detail.

So the primary driver of the 40 basis points of normalized SG&A increase is ongoing stock compensation expense which was $1.7 million in 2013, as compared to $450,000 in 2012. This alone added 40 basis points to the overhead rate.

Moving on to the interest expense. Subsequent to our debt refinancing that we completed in January, we have reduced interest expense to $8.9 million in the second quarter of 2013, which compares to $20.5 million last year. Amortization expense of $7.6 million is up $1 million over last year, in relation to the acquisitions of Casterbridge in the second quarter of 2012, and Kidsunlimited in the second quarter of this year.

In summary, adjusted net income of $23.1 million translates to adjusted EPS of $0.35 a share in the quarter, which is up from $0.22 a share in 2012. We have generated operating cash flow of $98 million year-to-date, compared to $90 million last year. And after deducting maintenance CapEx of $16 million, our free cash flow year-to-date totaled $82 million, compared to $75 million in 2012. The main drivers of this increase are simply the improved operating performance, and consistent networking capital. We ended the quarter with approximately $63 million in cash.

Now I will recap a few operating statistics. At June 30, we operated 830 centers with total capacity of 92,800, which is an increase of 6.2% from the 87,400 we had at June 30, 2012. We operated approximate -- we operate at approximately 70% of our contracts under profit and loss arrangements, and 30% under cost plus contracts. And our average full-service center capacity is now 138 in the US, and 75 in Europe.

As Dave previewed before, our updated top line projection for the full year of 2013 anticipates revenue growth of approximately 12% to 14% over 2012 levels, inclusive of Children's Choice from July 22. The components of this top line growth are consistent with what we have discussed before, but I will go through them with you again. Organic growth, which includes the estimated 3% to 4% price increase, 1% to 2% 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 our backup and educational advisory businesses. In addition, acquisitions will add approximately 7% to 8% to the top line growth, including the lapping effect of the Casterbridge deal completed last year.

Offsetting these increases are the effects of center closings and variations in our cost plus revenue which approximate 2% to 3% in total. The gross margin improvement that Dave previewed of 50 basis points to 75 basis points for the full year in 2013, is dampened by approximately 30 basis points due to the losses associated with the larger class of lease consortium centers this year as compared to last year.

We expect that adjusted income from operations will improve in the range of 10 basis points to 25 basis points for the full year. The margin improvement is offset by increased overhead, including the incremental nonrecurring costs during the integration period for both Kidsunlimited and Children's Choice, as well as higher amortization expense. What this translates to for adjusted operating income margins for the full year is approximately 10.6% to 10.75%, compared to 10.5% for 2012. Again, I would point you to the earnings release, where the components of the adjusted operating income are detailed.

After factoring in an estimate of the purchase price allocation for Children's Choice, we now expect amortization expense will approximate $30 million for the full year, including $20 million related to the May 2008 LBO. And we expect depreciation expense to approximate $42 million to $48 million for the full year. We are projecting stock compensation expense of $11 million in total, which includes $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 of this year, is projected to approximate $41 million for the full year. With the acquisition of Children's Choice, we expect to have outstanding borrowings under the line of credit in the range of $15 million to $20 million for the remainder of the year. And with borrowing rates at approximately 4% on the overall term loans, we expect ongoing interest expense to approximate just over $9 million per quarter.

Moving onto the tax section, we estimate that the effective or structural tax rate will continue to approximate 37% of our adjusted pretax income in 2013, similar to that we illustrated for our results in 2012. The tax rate that we will report for GAAP purposes, for the US GAAP reported earnings is expected to approximate 15% in each of Q3 and Q4 of 2013.

The combination of our top line growth and margin leverage leads us to project adjusted EBITDA for the full year of $207 million to $212 million, which is an increase of 14% to 17% over the $181 million we reported for 2012. And adjusted net income for 2013 in the range of $77 million to $79 million.

With respect to share count, as you can see in the release, we currently have 66.6 million fully diluted shares outstanding, and we project that that will rise approximately 200,000 shares per quarter in Q3 and Q4. For the first quarter weighted average shares were 62.75 million, including the IPO shares weight-averaged for their issuance dates. We therefore estimate that for the full year weighted average shares will approximate 66 million shares. And based on this count, we estimate that adjusted pro forma EPS will range from a $1.17 to $1.21 for the full-year 2013.

Lastly for the full-year view, 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. By way of comparison, 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 last year.

Based on the centers under development and slated to open in 2013 or early 2014, we expect to invest approximately $40 million in new center capital, compared to $29 million in 2012. On the acquisitions front as mentioned, we spent $64 million for the Kidsunlimited deal in April net of cash acquired, $53 million for the Children's Choice acquisition in July. As Dave mentioned in connection with the Children's Choice transaction, we did also acquire significant net operating loss carryforwards that we expect to be able to utilize over the next several years. Based on our estimates of this, we expect that it will translate to cash tax savings in the neighborhood of $10 million over time.

So moving on to the third quarter guidance, as a reminder for those of you who are newer to our story, our third quarter is the time of year when we experience some seasonal fluctuations in enrollment in our full-service centers, as well as higher utilization of our backup services, both of which results in modest dips in our operating performance relative to the first half of the year. Therefore our guidance for the third quarter reflects this normal decline, with the fourth-quarter projections reflecting the usual pickup in enrollment in the fall.

With that background and then looking specifically to the third quarter of 2013, we are therefore estimating revenue growth in the range of 13% to 15% for the quarter, and adjusted EBITDA in the range of $49 million to $50 million. Using the 37% effective structural tax rate on the adjusted income before tax, we are projecting adjusted net income in the range of $18 million to $19 million. And with 66.8 million diluted shares outstanding, EPS would therefore approximate $0.27 to $0.28 a share for the third quarter of 2013.

So with that exhausting list of details for you, that is the end of our prepared remarks. And I will ask the operator if we can go to Q&A?

(Operator Instructions)

Thank you. Our first question comes from the line of Dan Dolev with Jefferies. Please proceed with your question

Thanks for taking my question. If I heard correctly, you said is going to be about $6 million of EBITDA going forward on the new centers, and GBP7 million on the Kidsunlimited acquisition. Does that mean that you eventually, that the EBITDA per center is lower in the new Children's Choice acquisition? Or am I getting the math wrong? Thank you.

So $6 million is what we expect on the overall business for Children's Choice at run rate, Dan. So let me just see if I am understanding your question right. So that translates to a figure that would be certainly in the range of what our overall full-service business would do in the US.

So, no, I think that it is fair to say that there is an array of performance and size of centers, but based on the average size in this group, that would be in our range. Kidsunlimited is also, certainly their gross margins are very well within the range of what we have for our full-service business. And the UK centers are smaller than the US-based business, so in general, they may not deliver the same number of overall EBITDA dollars. But they are proportionate to the UK business, so it is consistence.

Yes. No, thank you. All I did is -- I really divided by took the average exchange rate and then divided that by 64. And then I said well, what would imply on the 49 centers. And you come up at like 8% or so percent. So it sounds like somehow you are projecting lower EBITDA, but we can take it off line.

Okay

Thanks

Thank you. Next question comes from the line of Jeff Meuler with Robert W Baird. Please proceed with your question.

Good afternoon. I wanted to ask about the 2013 adjusted EBITDA guidance. Looks like it has maintained despite some upside this quarter.

And I know that you guys are at full run rate in terms of the $6 million on the Children's Choice acquisition. And obviously, it is only a partial year and you have some integration expenses. But it sounds like that still supposed to be positive. So I guess wise guidance being maintained with those two factors?

So, good to hear from you Jeff. So I think that is -- the reiteration of guidance taken into account a number of factors. One is, of course, we did provide a range of performance for the full-year. Children's Choice and Kids are both coming in, and we are pleased the integration.

But as we do learn more about the those businesses I think we want to take a view of how they will perform based on what we have been able to ascertain in diligence. And we think this is between the cost that we will occur during the integration periods, this is what we have visibility on, and think we think it is appropriate to commit to in terms of the next several months.

So certainly, we will know more about how quickly we get to a steady-state run rate, when we get to our next quarterly call. But at this stage, the contributions are as we have said on Kids, not incremental to what was already in our plan. And our plan included an element of prototypical guidance that -- our prototypical acquisitions that was part of our overall plan, that these two -- that Kidsunlimited in the Children's Choice deals take care of. So I think that our view is that they are going to be terrific additions, and it is probably more of the 2014 story.

Okay. And then just in terms of the M&A in the last 15 months or so you have had three fairly large deals. Should we view this as you that have an increased appetite for those types of deals? Is this just kind of a normal variance in deal flow, and it just happened to be out that way, just how should we think about that?

Jeff, I think that we certainly have had an appetite for deals of this size over time. And as I said earlier it is awful hard to project the timing of when these things are going to happen.

I think that, I would look at it this way, we have an active pipeline of acquisition opportunities that we maintain. I think it was a little bit of a random variation that it happened all the once like this, but there is still opportunity out there in the market. Both -- when I say the market, I mean here and also in each country we operate in, for both deals of this size, and also our more bread and butter, 2 to 10 center acquisitions to occur. And we are going to continue to be active on that, and we will see where -- how that shakes out over time.

Okay. And then could you just remind us, as we kind of go into the fall period, and have the kids graduate on from you into kindergarten, how much -- what is the visibility in terms of the kind of new students coming in to replace them, the infants et cetera? Just how much visibility do you have into that?

I think that, our projections for the year are informed by the data we look at, not only of the levers, but the children that are signed up to start in the fall. So while you can never predict it exactly, I think over the course of time and doing this for a long time and in managing the business as closely as we do, we look at a projection of what we think is feasible for the fall. That contemplates what we have now in terms of children that age up, and children that we have teed up to start with us in September. So that's all -- all that data informs the guidance that we gave you for the year.

Great. Thanks a lot.

Thank you.

Thank you our next question comes from the line of Jeff Volshteyn with JPMorgan. Please proceed with your question.

Thank you for taking my question. I wanted to ask about your macro comment. What do you see -- what do you observe in your corporate lines, given the different operating environment here and in Europe? Are there any changes in the way they are approach that your services?

Yes, I think Jeff, as I have commented in the past, I mean the past year or two has been, what we would characterize as a bit of a schizophrenic recovery, in terms of the behavior of how clients are thinking about our services. In some industries and sectors we have seen a nice uptick in activity and also in closed business. Other areas have been a little bit slower to pick up.

I think I may have made comment to that, both on the IPO timeframe and also on our last quarterly call, and I don't think there's been much change and what we have observed. I think it is a bit of all over the place, depending on the industry, depending on the company. And so we still feel like the environment is not as good as it was in our best of times, but better than it was a couple years ago. So that is what informs our outlook for the rest of the year.

That's helpful, thank you. On the Casterbridge acquisition, it is now the organic numbers and organic part of revenues, how do you assess the success of the integration? Are there any surprises, positive or negative that came out of that process?

Yes, I mean, I think in general we would say, that it is a success, and that we are very pleased with what has been achieved there. I think that in any situation like that, you both have some things that you have learned, some things that -- things that surprise you further better. And I think that we found the centers to be good quality and in the range of what we do. We have got some talent from that group that we think will be a good part of her leadership group for the future, which is good.

Some of the newer centers that they had in --under development, a couple of them are on time, and perform -- are poised to perform really well. And a couple of them are a little behind schedule, and not quite at the time frame that we had hoped to get them opened by, or that they have led us to believe that they would open by. So that stuff typically happens, but when I look at it as a whole I would say it is been a success.

Great. And a last question for me Elizabeth, could you give us a breakdown of organic and acquired growth -- revenue growth in the third quarter?

In the third quarter?

Right. Out of the 13% to 15%.

Let me just come back to you on that Jeff, I had my notes on second quarter but let me take a look.

Sure. Thank you.

Okay, Roya. We can move to the next question

Thank you. Our next question comes from the line of Sara Gubins of Merrill Lynch. Please proceed with your question

Hi, it is David Chu on for Sara. Thanks for taking the question. So is there a sizable overlap in markets between Children's Choice and the legacy Bright Horizon centers?

The Children's Choice client base, interestingly enough is representative of, A, a lot of the same sectors that we operate in and has a lot of concentration in healthcare, and energy, in higher education, and to a lesser degree in the General Services Administration GSA centers, in which we participate as well. So there is good overlap with many of the sectors that they currently are in.

And then there is a few additions to -- in areas that we think have good extensions for us, hospitality, entertainment, that type of thing, that we think have some has some good potential. So -- but broadly speaking, I think a lot of their centers happen to be in the sectors that we are finding the most activity in today.

Okay. But how about from a geography standpoint?

Yes. So from a geography standpoint, those centers are spread nicely throughout the US, with concentrations in Texas and in the Southwest. So there is no market that they are in per se where we didn't have any locations. But I would say be at your presence in the Southwest a little more deeply than they might in other parts of the country, where they may have a few centers in each state. So that is how it lays out from a geography point of view.

Okay, thanks. And just as a follow up, so among your existing centers, what percent would you classify as mature versus ramping today?

it is about 85% or so would be mature, mainly because centers that come to us through acquisition would function as mature.

And if you could just remind us, like the typical time periods for it to go from, I guess from ramping to mature, how many years would that typically be?

So we would typically consider a center in ramp up stage for three years, and it would be mature after its third year.

Got it. Okay, thank you.

Thanks, David.

Thank you. Our next question comes from the line of Bob Craig from Stifel Nicholas

Thanks, operator, hi.

Hi, Bob

I know you are not venturing into the world of 2014 yet. But when you look at the combination of Kidsunlimited and Children's Choice, you have obviously thrown out a couple of thoughts on where they ultimately might end up in terms of additional EBITDA. But as far as the contribution specifically in 2014, should it be fairly close to those numbers?

It should be -- there is -- obviously a bit of a tale given the timing of Children's Choice it won't be that for the full year. But Kidsunlimited should be closer -- close to that contribution for 2014. Based on the pacing, it will be a little bit of a tale of cost in Q1, but largely through the integration period we would expect by the end of the first quarter.

I think -- I would just reiterate, from a 2014 incremental contribution standpoint, these are filling some of the prototypical acquisitions that we would have in our growth plan. And so from a from a contribution standpoint, I just -- I think that we would say that it is somewhat incremental next year, but not the 100%.

And is there any reason to assume that the organic center opening schedule that you have set aside here, is going to be markedly changed based on this acquisition activity next year?

You mean in terms of opening in the neighborhood of 35 to --

Correct, yes.

40?

No Bob, I think that is currently our view.

Okay. And last one, do you have a capacity utilization number at the moment?

We -- it is not something that we are quoting Bob. But I think the good news on the enrollment front, is that we have been reporting sort of this steady 1%-ish range of enrollment gain year-over-year. That continues to be the case, even as the economy sputters a little bit here in our outlook for that, continues to be strong to slightly up from that, for the full year in the mature base. So we continue to see slow progress back to the high 70%s utilization, but we are still in the low 70%s.

Okay, great. Thanks.

Yes.

Thanks, Bob.

Thank you. Our next question comes from Manav Patnaik with Barclays.

Thank you. Good evening, everybody. The first question I had was just on the total -- and thank you for all those different ranges -- but the -- I guess, does the net organic growth number of I think 6% to 8% from last time, it seems like that might be creeping up a bit, or is that being maintained? Just wanted to confirm that.

Yes. I think with respect to organic growth, I think it is at the higher end of our range to slightly -- to slightly outperforming. And obviously the acquisitions have been larger than what our typical prototypes have been in the past, so that is obviously adding to the mix.

Okay, fair enough. And then sort of a follow up, on the capacity utilization question. Just based on what you are seeing, and you talked about the past 18 months being schizophrenic from an economic perspective. But is there any read-through, like do you get enough data points from employees, just to get some sort of a read on how the situation might be in the future?

it is tough to get a sort of general read through on that. As I said earlier, I would just reiterate what I said earlier, when the question was asked. That it is really a little bit all over the place, with respect to what industry we are talking about. And then even within a certain industry, what company we are talking about.

So we see some bright spots and industries that aren't -- you look at financial services, which is an industry that hasn't -- it is strong industry for us, but it hasn't grown a lot in the past year. Yet there still some growth happening in certain companies that we do business within that industry. Conversely, you look at healthcare and you look at higher education, and you look at energy and there is really good growth prospects throughout those sectors for us right now.

So it really is a little bit of all over the place. And my comments really are focused on what we know as of now. I can't predict obviously what is going to be the case six months from now, or eight months from now. But I am just giving you a sense of what we see now.

Okay. And one last one. I mean you mentioned the active acquisition pipeline. I mean is it fair to say that that's mainly a characteristic of UK and US, and less so of some of the other countries, or is that not a fair characteristic?

I think we maintain an active pipeline on every country in which we operate in. So while it is fair to say that the pipeline is most robust in the US and the UK, it exists of other opportunities in other countries as well. And we are certainly continue to keep focused on what's happening in The Netherlands, what is happening in India, Canada, and other countries that we operate in. And we will continue to maintain discussions across the board, as well as over the long run evaluate new opportunities in countries that we are not in yet.

Okay, thanks a lot.

Thank you

Thank you. Our next question comes from line of Brian Zimmerman with Goldman Sachs. Please proceed with your question.

Hi, this is [Malek] in for Brian. Thank you for all the color on Children's Choice. I was wondering if you can give us a little more information about the customer concentration? And just what your perspective is on that, and the opportunity with the advisory services with Children's Choice along with integrating backup services?

Yes, I think as we have talked about in the past, one of our key focal points in the past two years, has been working with our clients to expand our relationships, to offer them more than just the traditional centers that we have done for years. And obviously we do that through back up. We do that through the educational advising service that we offer.

And obviously anytime we can acquire new client relationships from organizations that did not have some of those services, then we have an opportunity to further leverage those relationships. And we believe that opportunity exists with Kidsunlimited and it exist with the clients we have acquired through the Children's Choice acquisitions as well.

So as I mentioned earlier, the Children's Choice portfolio has some concentrations of healthcare, higher ed, energy, a little bit of government services, not terribly different from where you see our client based. But we do believe that the opportunities exist to further leverage those relationships.

Thank you.

Thank you.

(Operator Instructions)

Thank you. Our next question comes from line of Jeff Silber with BMO Capital Markets. Please proceed with your question

Thank you so much. I wanted to talk about the environment, in terms of attracting staff. With the unemployment rate going down, and I know it is going down because people are leaving the labor force, but are you finding it difficult more difficult to attract staff, and if so, what are you doing to offset that?

Jeff, from a recruitment point of view, this is -- has been a macro challenge for us for a while. I mean, we have both economic influences that affect this, and we also have realities with respect to qualified teachers graduating from degreed programs shrinking, in early childhood education. So we have talked about in the past we have taken a lot of those matters into our own hands, developed our own credentialing program, our own online university. And have invested in a network of recruiters that really work, and try to develop early-stage pipelines with students coming out of schools in our key markets around the country.

So a lot of activity and a lot of focus on it. I would say that, it is at a place now that's slightly more heightened, if I had to compare to where it was two years ago, so we continue to put a lot of time and energy into it. I wouldn't say it is to the point where it is causing issue at our ability to run quality programs. But I would certainly put it out there as a challenge, that we take seriously. And that we are going to be fighting hard and investing in, to be sure we get our fair share of quality teachers over the next couple years.

Is there any pressure on you to raise wages?

Yes, I don't -- we are not seeing it as a wage issue per se, as much as it is a just a supply issue -- a general supply issue in some markets. I think as we have talked before, we tend to -- when you factor in benefits and wages, be at the higher end of the market for compensation, with comparable centers in most markets. So we are not seeing as much as wage pressure as it is just fighting harder for fewer people, and it being just supply issue of already qualified teachers.

On the other side of it, we are -- we have been pretty successful in recruiting assistant teachers that are not yet qualified to be teachers, and helping them to get credentialed through our program. And if they are successful at doing that, they can earn a higher wage just within our own a wage schedule by becoming teacher-qualified. We find that when we can do that successfully, we create a lot of loyalty, and the turnover rates are even less than people that we recruit, who already come to us qualified. So that will be -- continue to be an important piece of our future

All right, great. Just couple a quick numbers questions, were there any center closures during the quarter?

There were. We actually closed 11 centers in the quarter. So we -- so there is net opening -- sorry was just --

So I think Jeff, I previewed what our total number centers was for the year, and also I think gave you net of closures earlier. Closures are always lumpy by quarter. We had obviously a lot less in the first quarter, we had 11 happen in the second quarter. But for the year, I think we are on track to the numbers I gave earlier.

All right. And Elizabeth, you mentioned something about an options exchange cost in the SG&A? Could you just repeat how much that was?

Sure, that was in the second quarter of 2012 and it was $15.1 million. So that was an unusual SG&A charge last year.

Got it. Thank you so much

Sure.

Thank you. Our next question comes from the line of [Aang Swing] with Credit Suisse. Please proceed with your question.

Thank you for taking my questions. The first one, could you just help me understand, the gross margin dampening of 30 bips that you mentioned related to the losses of lease consortium centers versus last year? Was earning thing in particular that caused that dampening this year versus last year? Were there just more of them?

Yes, Aang, that is really all it is. There is no difference in our -- sort of the way our centers ramp up or anything or quality of the pool. It is just simply that we have made investments in more lease consortium models that are going to open in 2013 than we did in 2012.

And as Elizabeth mentioned, whenever we have a larger class compared to a smaller class of those kinds of centers, you end up with more dilution in year one, than you had in the prior year. And so the 30 bips is just representative of the comparison between what the dilution -- the actual losses this year versus what we experienced in that same type of center class last year.

Okay, thank you. As a follow up, on the question regarding the profile of your centers. You noted that about 85% of your centers are mature mostly due to the acquisitions.

And I am just trying to reconcile, because you noted also that roughly 10 of the children Children's Choice were new organic centers. And there are still several that are ramping up to mature operating levels. So our acquisition centers typically more mature, less mature? Are they in line with your overall center profiles?

So I mean, it is a good question. The figures I was quoting would not have included Children's Choice, because that happened after the end of the quarter. But you are on the exact right track there, that if we bring in a portfolio of centers like the Children's Choice, and 10 of them are in a group that is still in ramp, we would slot them into the maturing ramping class, not just put them all into mature.

I was just describing the 85% in a context of, how from a modeling standpoint, how the centers will perform. Because typically acquisitions will come in, and they will operate as if they at maturity even though they are new to us.

Okay. That's helpful. Also regarding the acquired centers, are a similar percentage of the acquired centers accredited, versus what the overall is for your Bright Horizons centers or are they lower? And how do you determine a center's eligibility for accreditation?

Yes. So every group is a little bit different, both in terms of the type of accreditation that they ascribed to. And also how many of their centers they have actually put through that process, and the preferences of the clients that they serve, with respect to that accreditation. So I think as we talked about before, traditionally Bright Horizons ascribes to the National Association for the Education of Young Children's accreditation scheme, which is probably the most rigorous accreditation, and most costly accreditation scheme to pursue of any of the ones that exist here in the US.

And as with respect to the Children's Choice portfolio, I think that there is less than our percentage, our overall percentage that are accredited through NAEC. But still enough of them that have that accreditation, others that have other types of accreditation that exist, and yet others that we will put through accreditation for the first time under our management eventually.

When we evaluate acquisitions, accreditation is one factor. Obviously it helps us to judge programs, but accreditation itself is not enough. We do a pretty rigorous diligence process. We visit all centers, as part of diligence, our operations team really does to a look-see. And we look at all their metrics, understand licensing history.

And we have a great deal of confidence in what the Children's Choice team has been about, what they done at their centers. And do expect that over time their group of centers will approximate our accreditation rate under our management.

Okay. That was super helpful, and that's all for me

Okay

Thanks.

Thank you. There are no further questions at this time. I will now turn the for back over to Mr. Lissy for closing remarks.

Well, thanks, Roya, and we appreciate everybody today that our call. As always, we will be here for any further questions and look forward to seeing and in talking to many of you in the fall. Have a good summer.

Thank you

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