Bright Horizons Family Solutions Inc (BFAM) 2013 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Bright Horizons Family Solutions fourth-quarter 2013 earnings conference. At this time all participants are in a listen only mode. A 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, Mr. David Lissy, Chief Executive Officer. Please go ahead, sir.

Thank you, Jan, and hello to everybody. Greetings from chilly Boston.

Joining me on the call today is Elizabeth Boland, our CFO. And, as usual, before I begin my formal remarks Elizabeth will go through the administrative matters. Elizabeth?

Thank you.

Our earnings release went out just about an hour go after the close of the market and is available on our website under the Investor Relations section at BrightHorizons.com. As mentioned, this call is recorded and is being webcast, and a complete replay is available either way.

The phone replay number is 877-870-5176, or for international callers it is 858-384-5517. The conference ID number 13576700. The webcast will be available on our website also under the Investor Relations section.

In accordance with Reg FD, we use these conference calls other similar public forums to provide the public and the investment community with timely information about our recent business operations and our financial performance, along with forward-looking statements regarding our current expectations for the future. Forward-looking statements inherently involve risks and uncertainties that may cause the actual operating and financial results to differ materially from those described in our forward-looking statements made during this call.

These risks 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. Second, our ability to identify, complete and successfully integrate acquisitions, and to realize attendant operating synergies.

Third, our 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 that indebtedness. And, lastly, the variety of other risk factors which are set forth in our SEC filings.

We also discuss certain non-GAAP financial measures on these calls, and the detailed disclosures and reconciliations related to these measures are included in our press release, which is, as I mentioned, in the Investor Relations section of our website.

Let me turn it back over to Dave to kick off the call.

Thanks, Elizabeth, and hello, everybody, again. We are pleased to be talking with you today.

Let me start with a review of Q4 and the full-year 2013's operating results, and then I will share our updated outlook and our plans for 2014. As usual, Elizabeth will follow me with a more detailed review of the numbers and then we will both be together for Q&A afterwards.

First, let me recap the quarter' headline numbers for you. Revenue of $317 million was up 17% over the prior year and adjusted EBITDA of $53 million was up 13%. Adjusted net income more than doubled to $21 million, which yielded adjusted earnings per share of $0.32, up from $0.17 in last year's fourth quarter.

For the full year 2013, revenue totaled $1.2 billion, a 14% increase over 2012. Adjusted EBITDA of $209 million was up $28 million, or 15% over last year, and increased 20 basis points to 17.1% of revenue. Adjusted net income more than doubled to $78 million for the full year in 2013, and adjusted earnings per share for 2013 was $1.19, compared to $0.71 for 2012.

During this past year, we continued to deliver on our long-term plan to grow our core center business both here in North America and in Europe, while at the same time expanding our newer lines of business. This past quarter we added 9 new centers and overall for the year, we added 148 centers, which increased our full-service capacity by 14%. Here in the US, we solidified our position as the leader in high-quality employer-sponsored childcare with the acquisition of Children's Choice back in July.

Looking back at the year, we added new centers for new clients across a variety of industry sectors, which were led by healthcare and biotech, higher education and energy. Some highlights for you for new center openings this past year included: Biogen Idec, Weill Cornell Medical Center, the University of Virginia Medical Center, two sites for the University of Chicago, three sites for Inova Healthcare Services and two locations for WellStar Health System.

We also continued to expand our relationships with existing clients, opening additional centers for clients such as the University of California system, MIT here in Cambridge and the University of Pittsburgh Medical Center. Our strategy of developing new consortium locations continued to play out as well this past year, with the addition of 17 new centers that opened across our network.

We continue to execute on our strategy of expansion and market leadership in Europe as well. In the UK, with the acquisition of Kids Unlimited, a 64 center group in April, and in the Netherlands with the opening of 5 new organic centers. Our backup business also continued to show strength having grown 11% over the prior year with the addition of 43 new clients adopting this valuable service.

Educational advising, our newest and smallest segment grew 31% over the prior year, as both existing Bright Horizons clients and new clients became convinced of the strong value proposition and the cost efficiencies we bring about toward the considerable investments companies make in tuition reimbursement for their employees.

We also continued to close centers in 2013, just over 3% of total centers, which is roughly in line with our anticipated plan for the year and roughly in line with the same percentage we have experienced over the past few years. As a reminder, the primary sources of our center closings this past year were, one, client mergers and acquisitions or internal reorganizations and the resulting consolidation of workforce locations; two, centers that were part of an acquired group that did not meet our performance thresholds, including three we closed this past quarter that were associated with the acquisitions we did this past year; and three, our usual discipline around pruning underperformers; and lastly, opportunistic relocations or consolidations of lease consortium centers at lease renewal in order to maximize future results.

On the margin side, we continued our long-term track records to improve recurring income from operations again this past year, generating a 13% increase to $127 million in 2013. As we have previewed on our third quarter call, gross margins this past quarter were impacted by the headwinds from the acquisitions we completed earlier in the year, as well as the incremental losses from the larger class of lease consortium centers that we opened in 2013, which in total was roughly $6 million more than we experienced in that same class in 2012.

Even after the impact of these factors, we grew gross margins approximately 20 basis points to 23.1%. Perhaps the best news here is how what well we are positioned for 2014 and beyond, as we expect to leverage our investment in the larger classes of lease consortium centers and also realize the full value of the acquisitions we made this past year. I will touch on that more later when we discuss our guidance for 2014.

In total for last year, the key factors in our gross margin performance included, first, tuition rate increases averaging 3% to 4% in our full-service segment; second, enrollment growth in our mature group, which continued at 1% to 2% above prior year levels, as well as the ramp-up of our class of newer centers; third, new centers we added in 2013; and, lastly, continued growth and margin improvement in our backup business.

As I just discussed before, offsetting these positive contributors in 2013 were center closings, the losses associated with the larger class of consortium models and the impact on the integration of the two larger acquisitions we did this past year.

We also continue to remain very focused on closely managing and leveraging down our core SG&A spending. To that end, we achieved results slightly ahead of our plan and have leveraged overhead, excluding transaction related costs, by approximately 40 basis points in the fourth quarter. We are very pleased with the progress to date integrating our 2013 acquisitions and remain on track to complete that process in the first half of this year.

Speaking of this year, let me turn to 2014. Our plan for this year contemplates the addition of 50 to 55 new centers, approximately 30 net of expected closures, including new organic centers and some small tuck-in acquisitions. The organic new center growth will be achieved largely on the strength of our pipeline is centers currently under development, and as typical each year, transitions of management of centers that are either self-managed by the employer or managed by a competitor.

Broadly speaking, the mix of centers in the pipeline is representative in size, geography and operating model of our existing base. With respect to industry mix, we continue to see good representation within higher education, technology, healthcare and energy, with both new clients and new centers for existing clients in the pipeline.

In terms of our acquisition pipeline, we continue to review and evaluate a fairly steady stream of opportunities and expect that our track record of adding value in this area will continue in 2014. Our current outlook does not contemplate any larger scale acquisitions like those we completed this past year, but rather considers that, for 2014 and beyond, roughly one-third of our new center growth will continue to come through the acquisition of smaller groups of high-quality centers and providers, both here in the US and in Europe.

Another important piece of our story in 2014 and beyond will be the growth of our newer lines of business led by our backup dependent care services, which we expect to grow and contribute to our margin expansion once again this year.

One brief note on this segment, as you look at this past quarter's growth rate, we're comping in this past quarter against a few unusual factors that occurred in the fourth quarter of 2012, the most significant of which was Hurricane Sandy, which produces significant uplift in our backup revenue that was nonrecurring as clients enlisted our help to provide some incremental services during that period of crisis. Thus the year-over-year growth rate we experienced in the fourth quarter is not our typical trend, and we expect that going forward, our growth rate in this segment will return to our typical low teens pace.

We now serve more than 500 clients through our backup care advantage program, and continue to invest in the systems and operating structure that position us well to maintain our leadership in this market.

We also remain encouraged by the interest in our educational advisory services. New client additions in 2013 in this area included Liberty Mutual, Northwestern Memorial Hospital, Shell and T Rowe Price, and we now serve more than 110 clients, of which 40% also buy another Bright Horizons service.

The pipeline of new opportunities for this service remains robust, and we anticipate that this segment will begin to contribute margins at approximate our backup segment as it achieves scale in the coming years.

Overall, we are excited about the opportunities that lie ahead for us in 2014 and beyond. Our base business remains in very good shape, while our newer lines of business and our markets outside the US continue to have strong growth potential.

Our enrollment in our legacy class of profit and loss centers continues to show positive year-over-year trends, as capacity utilization continues to recover toward pre-downturn levels. The visibility on our pricing remains solid, in the 3% to 4% range, compared with more modest projected cost increases. Lastly, we believe that we will begin to realize the full value of the investments we made this past year in new lease consortium centers and in acquisitions, as we achieve the synergies we planned.

All in, our current outlook for 2014 is for revenue growth at approximately 10% to 12% over 2013 levels. We anticipate growing our adjusted EBITDA in the mid to high teens in the range of $240 million to $245 million. This will, in turn, drive adjusted net income for 2014 in the range of $96 million to $99 million, and adjusted earnings per share growth north of 20% to a range of $1.42 to $1.46 in 2014.

Before I turn it over to Elizabeth, I wanted to quickly acknowledge a critical aspect of our long-term strategy, that's the unwavering commitment we have made over the years to be the employer of choice in our field. Our intense focus on our culture and work environment is a key reason why our turnover rates remain less than half the industry average.

We were proud once again this January to be recognized by Fortune Magazine as one of the 100 best places to work for in America for the 15th time. We are similarly recognized in the UK, Ireland and the Netherlands this past year.

I want to take a moment to congratulate and thank the great group of people across the Bright Horizons family who make this all possible.

With that, I will hand it over to Elizabeth who will review the numbers in more detail, and I will be back with Q&A. Elizabeth?

Thank you, Dave.

As we have done on previous conference calls, given the various costs and charges we have in our results this year arising from the IPO and refinancing and secondary offerings and acquisitions we have done, I will discuss our reported results, as well as certain metrics that help isolate those unusual or nonrecurring charges.

I will refer you to the earnings release, which includes tables that reconcile the US GAAP reported numbers to these additional metrics, specifically for adjusted EBITDA, adjusted operating income, adjusted net income and then adjusted EPS. Specifically we'll be quantifying the one-time charges, as I mentioned, for the IPO and the deal costs, et cetera.

Topline growth for the quarter was $46 million, or 17%, as Dave mentioned, with the full-service center business generating $42 million of that gain from rate increases that averaged 3% to 4%, enrollment gains of just under 2%, and our mature class of P&L centers and from new organic and acquired centers. Gross profit increased $8 million, or 13% to $71.2 million in the quarter, again, with the full-service segment adding the lions share of that for $7 million.

The gross margin for the quarter was 22.3%, compared to 23.1% in 2012. As Dave mentioned, there are a couple of factors that are affecting the full-service margins resulting in the slight decrease year over year. First is the larger class of lease consortium centers that have opened in 2013. There were 17 compared to the 4 that we added in 2012.

These new centers generate losses during their ramp-up period, and we incurred approximately $1 million more in such ramp-up losses in the fourth quarter of 2013, compared to 2012, as well as a total of about $6 million more for the full year in2013. In addition, the Kids Unlimited centers and Children's Choice centers have operated at gross margins ranging from 15% to 20%, and both of them came to us also with a class of newer centers.

They are ramping and, therefore, are not at their own mature operating contribution levels. The incremental $29 million of revenue from these two larger groups is therefore contributing slightly lower gross profit than the overall full-service margins which approximate 20%.

On the backup side, overall contributions continue to be strong in the fourth quarter of 2013 with 30% operating income, compared to 29.3% in Q4 of 2012. That trend is consistent with the full-year growth as well.

Dave discussed another recurring factors affecting the revenue growth in comparison to Q4 2013 versus 2012. The revenue growth for the full year of 11% in this segment broadly reflects our outlook on the longer-term trend or opportunity for backup growth in the low teens. The quarterly trend in revenue can vary based on the timing and scale of new client launches, as well as seasonal trends in utilization.

Excluding the one-time transaction costs for Children's Choice and the secondary offering that was pending at year end, totaling $1.2 million, overhead in the fourth quarter was $31.6 million and decreased to 9.9% of revenue from 10.3% in 2012. As we gain scale across all of our segments and geographies, we are realizing the overhead leverage that we have targeted as a long-term goal.

One other factor in 2013, and in the first 3 to 6 months of 2014, is the incremental costs that we are incurring as we complete the integration of the Kids and Children's Choice centers. For reference, we have had approximately $4 million in integration costs -- integration related costs in 2013.

Subsequent to the debt refinancing that we completed back in January of 2013, we reduced our interest expense this year, and it was $9.2 million in the fourth quarter of 2013, compared to more than $22 million last year. Amortization expense of $8 million increased $1.4 million in the fourth quarter of 2013, in connection with the acquisitions that we have been talking about of Kids Unlimited and Children's Choice.

So, in summary, adjusted net income of $21.2 million translates to adjusted EPS of $0.32 a share in the quarter, up from $0.17 a share in 2012. We generated operating cash flow of $160 million in 2013, which compares to $107 million last year.

After deducting our maintenance CapEx of $30 million, free cash flow in 2013 nearly doubled to $130 million from the $66 million that we generated in 2012. The main drivers of this increase are the improved operating performance, lower cash interest expense, which is $17 million for the full year, as well as higher net working capital of about $8 million. We ended the quarter with approximately $30 million in cash and no borrowings outstanding under our revolver.

I'm going to recap the operating stats before I get into the recap of the outlook. At the end of 2013, we operated 880 centers with total capacity of 99,700, which is an increase of 14% since 12/31/12. We operate approximately 75% of our contracts under profit and loss arrangements and 25% under cost plus arrangements, and our average full center capacity is now 137 in the US, 75 in Europe.

As Dave previewed, our updated outlook for 2014 now anticipates revenue growth approximating 10% to 12% over 2013 levels. The components of this top line growth are as follows: organic growth approximating a total of 7% to 9%, 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 backup and educational advising services.

In addition to this, acquisitions add approximately 5% to revenue in 2014, inclusive of the lapping effect of the deals we completed in 2013. As always, offsetting these increases by approximately 2% is the impact we estimate from center closings, which includes both legacy organic and in some cases, acquired centers.

We expect income that from operations in 2014 will approximate 11% of revenue, therefore expanding by 60 to 75 basis points from the 10.4% adjusted income from operations we generated in 2013. This includes the effect of approximately 20 to 40 basis points of gross margin improvement, plus overhead leverage as we realize the synergies associated with completing the integration of Kids and Children's Choice, and as we continue to scale our overall operations.

We expect amortization expense to approximate $30 million for the full year, including $20 million related to our May of 2008 LVO and for depreciation expense to approximate $51 million to $53 million. Stock compensation expense is projected to be $9 million and interest expense will approximate $34 million to $35 million for the year, assuming continued borrowing rates at approximately 4% on our term loan.

We are not expecting to have outstanding borrowings under the line of credit during 2014, based on our current projections, but what we will generate in operating cash flow and our capital and acquisition spending plans for the year.

We estimate that the effective tax rate, both GAAP and the structural tax rate, now that we don't have the anomalies of this year in the results, will approximate 37% to 37.5%, which is slightly higher than the structural rate for 2013, due to the projected higher mix of pretax income generated in the US, which has the overall highest marginal tax rate.

Combination of top line growth and margin leverage leads us to project adjusted EBITDA of $240 million to $245 million for 2014, which is an increase of 15% to 17% over the $209 million we reported for this year, and adjusted net income for 2014 in the range of $96 million to $99 million. With respect to share count, we currently have 67 million fully diluted shares outstanding and project this to rise approximately 200,000 shares per quarter in 2014, yielding weighted average shares of approximately 67.5 million for the full-year. Based on these share counts, we estimate that adjusted EPS well therefore range from $1.42 to $1.46 for the full-year.

Lastly we project that we'll generate approximately $170 million of cash flow from operations, or $140 million of free cash flow, net of projected maintenance capital spending of approximately $30 million. This compares to the $160 million of cash flow and $130 million of free cash flow that I mentioned before for 2013.

The relatively modest increases is primarily attributable to the higher projection of cash taxes that we expect to pay in 2014, compared with this past year, which benefited from the deductible cost for the IPO and refinancing that we completed at the beginning of the year. Based on the centers in development and slated to open this year, we expect to invest approximately $45 million in new center capital, compared to the $39 million we invested this year.

Looking specifically to the first quarter of 2014, therefore, we are estimating revenue growth in the range of 15% to 17%, adjusted EBITDA of $55 million to $56 million, adjusted net income in the range of $21 million to $22 million and EPS of approximately $0.32 to $0.33 per share.

So, with that, Jan, we are ready to go to Q&A.

Thank you.

(Operator Instructions)

Dan Dolev with Jefferies & Company.

We might want to go ahead. It doesn't sound like we --

Can you hear me?

Dan, we can hear you now.

Sorry about that. Thanks for take my question. Just the obvious question on the guidance. It seems to have ticked down a percent on the lower end of the guidance from 11% to 12% to 10% to 12%. Is there anything to read into that, or what is the explanation behind that?

I think the only -- there is really nothing to read into it, Dan. I think we feel pretty similar to when we gave the broad-based view last time. It is just the only thing that has the potential to move it around has to do with timing of when some centers will open in the year, and we're just trying to give ourselves a little room with respect to particularly the timing of when things will happen within the year.

Okay, great. And ten one follow-up question, if I may. In terms of the accounts receivable and deferred revenue, it seems like accounts receivable has been growing -- is growing very fast and so is deferred revenue. Is there anything -- it has been going ahead of revenue, if I calculated correctly. Is there anything to see there, or is there any explanation for that? Or what could it be?

That's a good question. The timing of when we bill, just as a matter of reference, when we bill our backup clients, the majority of those are billed in advance of the start of the year. And we had very strong, consistent billing ahead of time, so that's where the deferred revenue comes into play. And it is tied into the receivables, so we don't recognize the revenue until the period of service being rendered.

If you are seeing a deferred revenue balance, it is comprised of the tuition that we bill and/or collect from parents in advance and it's any kind of client contractual billing that occurs prior to the service being rendered. That is arising from -- primarily from the higher backup billings that we did just timing wise in 2013 -- for 2014 versus for 2013.

Got it, thank you very much.

Thanks, Dan.

Timo Connor with William Blair.

Thank you very much. The higher mix in pretax income in the US, is the UK business, particularly Kids Unlimited, progressing as you thought it would both from a topline and bottom line perspective?

I think broadly the business is what we thought it was when we brought it in. I think that there were -- there are a couple of moving parts to just add a little color to. One is that the centers that we acquired that we are ramping are ramping broadly in line with what we had hoped when we brought them on. And we did -- as we talked about before, there were a couple of underperformers that were on and that were -- that we've either closed or are thinking about closing within that group.

And then -- but the bigger opportunity, I think, with that specific acquisition is the overhead leverage or overhead synergy that we expect to get, some of which we got slightly ahead of plan in Q4 and then the rest of which we will continue to get -- we're getting now and expect to get through the first half of this year. I would say above the revenue line, things are pretty much in line with what we had hoped or thought. And then below that, they are slightly ahead with respect to where we had hoped to be and our goal of getting through the overhead synergy, really for this one and for the Children's Choice acquisition, it is on plan to happen by the middle of this year.

I think -- let me just answer the question on the pretax income, because I might not be clear in what I said, which is because we carry the debt here in the US, we incurred all of the costs of the refinancing and IPO-related costs in the US results.

So, the US pretax income was artificially lower this year. And so in terms of the adjusted structural rate we will just have a proportionally slightly higher element next year. In terms of the adjusted structural rate, we will just have a proportionally slightly higher element next year

From a gross margin perspective, it seems like the progress internationally is going along as you thought it would.

Yes, very much so.

Okay, and then final one for me, it sounds like mature center enrollment is trending closer to 2% than 1%, or at least maybe above where you were seeing earlier in 2013. When do you expect to get back to closer to peak capacity utilization levels and then what could that do for margins?

I think as we had talked in previous calls, obviously that is an area of pretty strong focus for us. And you are right, we did experience, within the range of 1% to 2%, we experienced growth as we had hoped in this past year and the trends continue to play out in that direction for 2014. So, we believe we have roughly 5 to 6 percentage points of occupancy left to go to recover back to the levels we were pre-downturn times.

Obviously, as we have also talked before, were somewhat gated by the realities of capacity being the lowest in our youngest age groups and graduating classes of children every year in the preschool area. It takes a couple years for us to really absorb the increase through the system and have it actually get back to where we were in the past.

Obviously, the margins associated with that are strong, broadly across the system, the incremental margins probably twice the gross margin in our core business. So, more in the neighborhood of 40% range and -- but in getting there, we need to get our preschools back full to the levels they were in the downturn. That's just going to take us a couple of years.

But the progress is good, it is right on track with what we had hoped, the efforts we have in place to continue to be sure our centers show really well and have a good, strong reputation locally and all the marketing efforts that we do there are really positive. And we are pleased with the direction, and we expect that 2014 will yield a similar result to 2013 in that regard.

Thank you very much.

Sara Gubins with Bank of America Merrill Lynch.

Hi, thank you. I know it is small, but education advisory saw a nice tick-up in the past two quarters. Is there anything in particular here to note, and do you see that as a good run rate in 2014?

We have -- I think that you are right, it is a very new business and so the opportunity there has been good. I think as Dave cited in his prepared remarks, and he may add here, but we now are serving more than 110 clients there.

So, we have had good interest and feel like it's got a lot of momentum going into next year, and we are investing in the business too. I think that there is still a little bit of that step cost to absorb, but we are well on our way, I think, to building the pipeline of new opportunities.

We think it's got -- Sara, we continue to be sure that and prove really the value proposition in the marketplace that we can drive a strong return on investment in that area that is really -- that we can demonstrate employer by employer. And we believe that the more data that we can bring to bear in that area, the better the opportunity will continue to be to spread the word.

We are -- that service is a bit of a missionary service. It feels like when we first started doing work site childcare years ago where we have to really take time to explain the concept, because we're not -- we are typically not replacing somebody else. It is a new idea that we are bringing to bear and one that we think has good legs.

Okay great. And then as we think about the types of centers and how that will play out over the next couple of years, do think we will see a higher sku of lease consortium centers over time?

I will say you are going to see more lease consortium centers. It's not -- as a cohort, because we believe that there is really good opportunity to leverage the footprint of clients we have around major metropolitan markets across the country.

I think the trend that really supports the continued growth of consortium centers is two-fold. One is the fact that employer -- we have become a provider, a much broader and deeper provider of solutions to our clients, and our clients expect us to bring solutions to bear in more locations than ever for them so that they can serve as much of their work force as possible to the degree that we can actually continue to have our -- leverage the footprint of where our clients are, we think that is a good use of -- to invest in centers, particularly centers where we have proven we can drive really strong margins over time.

And then secondly, we also believe that the continued development of this network directly supports the backup growth, because we are able to then have a much bigger footprint of really quality center-based backup options that exist within the Bright Horizons network, in particular in areas where the supply may not be as robust. We think that the strategy is solid.

I think we will still continue to grow our other types of centers too, but we do expect that -- you saw the numbers this year, we opened 17 versus 4. We probably won't have that kind of growth year-over-year going forward, but we are still very interested in maintaining the numbers that we did this year for the foreseeable future.

Thank you.

Bhuvnesh Singh with Credit Suisse group.

Thanks for take my questions. First off, just building on the last question that was asked, do you guys anticipate the impact from the larger cohort of lease consortium centers to dissipate at any point in 2014? Or do you expect that impact to be ongoing, but perhaps at a lesser rate as those centers are just larger in number due to that opportunity you have?

I think broadly, what we would see is, as the cohort that we opened 2013 continues to ramp up, there will be a little bit of -- it will layer in a little bit of cost or loss in 2014 and then the new class opens in 2014 will also have a similar level of losses as the group we had this year. There will be a slight headwind in 2014 about that, but by the end of the year is when we would start to see the class that we are opening in 2013 really making more significant contributions. We do have one more year.

I would qualify it as, Dave is talking about the size of the classes that we would be looking to and planning to open, probably have one more year in 2014 where we are incurring a relatively high level of lease consortium ramp-up losses, but it won't be materially significantly different from this year. A couple million maybe, and then it will be embedded in the base. And so our growth against that will start to comp in a more positive way. I don't know if I answered that clearly enough, but I was --

No, that is super helpful. I appreciate it. And then another question, how much did healthcare and pharmaceuticals comprise of your total revenue for 2013? And which segments by end market did not grow that well for you guys?

Healthcare and pharmaceuticals, I think we can talk broadly about it. I don't have a revenue number for that group. Although the number of centers that we operate for healthcare and pharmaceuticals is now -- it's around 20% of the total group. It ticked up slightly in the quarter. So, it's pretty consistent.

I think broadly speaking, as I had mentioned earlier on, I think we see the most momentum in the areas of healthcare and biotech and less of the traditional pharmaceutical companies, mostly because they are already clients and new. The new business in that area is mostly with the biotech companies and then healthcare systems.

And then higher education continues to be a bright spot for us, and then energy and technology are the other areas. I would say that overall, areas of, again, traditional pharmaceuticals, financial services, of which we have a lot of already embedded depth in terms of clients, grew at rates slightly less last year than they maybe they had in prior years versus the other sectors that I just talked about.

Okay, thank you, and then one final one. Do you -- on the other educational services, the educational advisory services, why were margins so much weaker than they were last year? Are you making any concessions on pricing to drive adoption there higher, or is that coming all from the investments that you made there?

It is really coming at the overhead line and not at -- it is not pricing concessions and it's not -- it's really coming from the investments we're making in increased sales of support people and trying to perfect the back end of the service, which we are trying to invest in technology to make it less labor-intensive. And we expect that with scale over time, that we can achieve operating margins that are -- that look more like the backup business than the full-service business, but we just think we need some more time to build scale.

Great, thank you so much.

Thanks.

Manav Patnaik with Barclays Capital.

Hi, good evening.

The first question, just on the backup services. Is there any way to quantify about Hurricane Sandy impact from last year to normalize what that growth rate would have been, and if there was any seasonal aspect to a normal fourth quarter that we should consider?

I think that with respect to Q3 versus Q4 in general, we would expect to see slightly -- it tick down slightly because the Q3 is a particularly higher utilization month generally speaking -- excuse me, quarter, for backup care than what we would see typically in Q4. But I think that between -- to be clear about it, Hurricane Sandy accounted for quite a bit of it, and there were a handful of clients back at the end of 2012 that were on contract -- contractual arrangements that were the way we used to do it that required year-end true-ups associated with overuse.

They have been since redone to contemplate it on a more regular basis. So, the quarter was also -- was part oversized in Q4 2012 by Hurricane Sandy and the other part by a handful of these larger clients. They have since been -- contractual changes have been changed.

But I think had they not been there, those two factors, you would have seen a more normalized growth rate in the 10%-ish, 11%-ish range this quarter, and that's what we expect to see going forward. There is always going to be some quarterly fluctuation in this. Some of it also has to do, going forward, with when we sign up new business and when that happens timing-wise in a year versus prior year and that could affect things. But on a more normalized basis, we see the low teens growth rate returning in 2014, and that's where we are trending towards thus far this year.

Got it, helpful. And then it sounds like obviously the integration of those two acquisitions are going maybe even ahead of plan. Just out of curiosity, the 5% acquisition contribution that you have for 2014, how much of that -- is the bulk of that, basically those two acquisitions and how much is the one-off smaller ones that you guys plan on acquiring?

In a normalized year, I think if we look at a long-term growth rate construct, you would see typically 1% to 2% coming from a typical class of acquisition. So, that is the order of magnitude, the difference 5% versus 1% to 2%.

Okay, fair enough. And then just one last one, just in light of the care.com IPO, just wondering if you could explain your relationship with the Sittercity that you have, I think you have a JV with them, and how that adds to your service offering to the employers.

Manav, we obviously have been working at ensuring that our service, the backup care suite of services that we offer, offer clients the most breadth and depth of any backup care offering in the market. And I think over time, the care sites like care and Sittercity and others have come to market, it is not a new thing, they have been out there for a while. And I think there is a certain segment of the population within our client companies who want to use those offerings and the value that they bring.

So, our desire with Sittercity was to form a partnership whereby all of our backup clients can have Sittercity packaged into our service and thus again continues to make the Bright Horizons Care Advantage program the most -- the deepest and the broadest service available in the market with everything we are ready had to offer, plus the addition of that.

Frankly, from other than -- if you remove marketing and a lot of things, the caregivers that exist on these sites are pretty much the same. And so the idea would be for people who are looking for, or interested in having care arrangements go in that area, we felt Sittercity was a great option, and they're a great partner, and will just make our -- round out the services I just talked about before.

Fair enough, thanks a lot.

Trace Urdan with Wells Fargo.

Thanks very much.

I wanted to go back once again to the lease consortia centers, if I could, and maybe ask you to comment on what you see as the drivers of growth. Because it sounded like from your answer to Sara's question that a lot of that is from your own prospecting internally with your existing clients. I wonder if you can talk to that, and maybe what level you can sustain in terms of growth in that, if that is a major source, or maybe it is not.

I think, Trace, to be clear about it, it is largely driven to leverage the footprint of where our clients are, but also those centers have to be able to exist, if you will, in places that we think that for the rest of the spaces that can't be used by clients or used for backup, that there is a good strong demand in the area of parents who desire our type of service and that can afford it. Our focus in this area has been in and around major metropolitan areas like New York and Chicago and San Francisco and other -- Seattle, other select cities where we think that can happen.

And also following the trend that obviously, many unprofessional families are choosing to live closer in or in cities versus making a mad dash for the suburbs as soon as the child is born. So, I think all these trends work in our favor and produce, we think, a good runway for this area for us. And not just in the United States. This is true in places like London and Amsterdam and other places that we operate in. We think we have a good runway or visibility to continue to do order of magnitude the number of sites globally that we achieved this year for the foreseeable future.

Dave, how do you identify opportunities in that segment and how do think about forecasting? Is there a pipeline? It strikes me that the pipeline would be pretty different from the pipeline for corporate-sponsored centers. Can you talk to that?

Yes, the pipeline is derived through a combination of a real estate team that is actually actively looking at sites combined with a sales team which -- and our client management team which is actively managing both the interests of new clients and existing clients to where they would be interested. And then it is the collision of those two efforts that produces the best site prospects for us, and then obviously the real estate team goes and executes on them.

Some of it is -- it is a pipeline of prospects that exist out there. And then obviously once we sign a lease on something like that, we then consider that in our pipeline of centers under development. And then obviously it opens with pretty similar characteristics to the timeline a corporate-sponsored center would open.

Okay, and then last question, since the last time you guys had a call, we've had a lot of discussion of universal childcare the President talked about in the State of the Union. New York managed to elect Bill DeBlasio, who's got that as a high priority.

Can you speak to that phenomenon? To what extent do you see it as any kind of a threat in terms of peeling off four -year-olds from your centers, if you do? Or maybe conversely, to what extent could it be a future opportunity for you?

I think first off, I think good discussion about the value of quality early education is good for all of us who have believed in this for a long time and all providers, I believe. I think that the reality, of course, of where this all will go will come down to the fiscal realities that states and cities have and how they ultimately choose to take whatever finite resources they have and execute.

Most of the universal pre-K efforts that we are currently used to, like those that we see in Georgia and in Florida, represent a partial day offering for four-year-olds that doesn't fully meet the needs of working families. And those systems do allow for us and other providers -- private providers to participate.

And I would anticipate that in most places around the country, whatever universal pre-K legislation is conceived of that can be afforded, first resources will go to those most in need and after that -- which isn't really our market, but after that, to the degree it becomes universal, it will probably represent some portion of what we provide and that we could wrap around that like we do in Georgia and Florida.

In those cases we actually take the state funding for part of the -- part of a few days of a week for children that participate in that and then our program is wrapped around it because the parents that we are serving need a full-day option. They can't go with just a partial day a couple days a week. And that is, broadly speaking, the same way we operate in London and in the Netherlands, too.

That is my view on it. I think I'm a little skeptical that there will be enough places that have enough money to fully execute on it. But where that does happen, I feel good about our opportunity to participate in whatever system happens.

Great, thank you for that.

Jeff Meuler with Robert W. Baird.

Yes, thank you. The flavor of the day, lease consortium centers, can you remind us what percentage of full-service enrollment at the lease consortium centers come to through an employer -- one of your employer partners?

I'm not sure, Jeff, we have that stat across the board to give you today. Broadly, those centers, though, are a real combination. If you looked at it across the system, you have those that are fully -- on each end you have those that are fully enrolled through sponsorship or backup care all the way to the other side, which there is just a mild bit of backup use and many of the spaces are enrolled through the community, to what I would call a more usual situation where you would have centers that are sponsored with one-quarter to one-half of the spaces and the rest in the community plus backup on top of that.

So, it is really a broad spectrum. I'm not sure we can -- we can probably do some work on that in the future, but I'm not sure we have the stat you are looking for today.

Full-service (technical difficulty) rolling on and rolling off.

Jeff, we are having a little trouble hearing you.

Sorry, can you hear me now?

A little better.

The full-service, can you just give us a sense of the organic revenue growth trend there?

Full-service centers in the -- let me see if I can pull that back up. In the organic growth in the year we outlined briefly --

What I'm wondering is the step-up in the growth rate in Q4.

Right There is a bit of -- that's part of the momentum behind the additional enrollment and on a gross basis, the organic growth is around 7%. Net of closures, the effect of closures is around 5%. So, we did see a bit of an uptick in Q4 for that.

Okay, and just finally there was a fairly sizable add back to cash flow that was comprised as other. What is that?

Sorry, let me just get over to the -- . That -- the changes in assets and liabilities. That is primarily the change arising from deferred revenue that was -- that Dan Dolev asked about earlier. We had fairly significant -- you can see the uptick in receivables, as well and deferred revenue due to the billing -- primarily the billing in backup care.

Got it, thanks, stay warm, I sympathize.

Thanks, Jeff.

Jeff Volshteyn with JPMorgan Chase.

Thank you for taking my question. Hi. I wanted to ask on the international side, what are the dynamics in -- for your centers in the Netherlands? You mentioned five new centers. How do they compare to the ones in the UK or US? And perhaps can you update us on your methodology for looking at other international markets?

Jeff, the metrics that we would use to evaluate a center in the Netherlands fall closer to the way we would look at a consortium center here in the US or the UK. The Netherlands has a funding scheme, as we've talked about in the past, where an individual's funding comes through -- partially through the government and partially through a fund that employers contribute to, such that the amount that parents pay is pretty subsidized there.

So, in effect, what we are doing in the Netherlands is finding the best possible locations, both located near employment generators and also near good communities that can support our growth, our type of parent, and looking for the right location that can return the returns that we would look for in a consortium model. Generally speaking, when we are investing our capital in a consortium model we are looking for IRRs north of 20%. And that metric is a metric that we use here in the US, in the Netherlands and in the UK with respect to investing our capital in these sites. Did that get to your question?

That is perfect, that is very helpful. And just a couple of model questions. Elizabeth, in the past, you have given us for the current -- for the fourth quarter, for the reported quarter, contribution from acquired revenues. So, asking another way what Jeff was asking before in dollar terms.

In dollar terms, it was $29 million. I think I had said that in the prepared remarks, $29 million from the acquisitions in the fourth quarter.

Great. And just to clarify, embedded in your 2014 guidance, what are the dynamics for segment margins?

From a forward-looking view, I think on balance we would be seeing some expansion in the full-service business for the various reasons we cited on where we have leverage with tuition, tuition ahead of costs, enrollment, ramp -- in our ramping centers as well as in the mature class, and then offset by the effect of some lease consortium center impacts.

So, there's margin expansion in full-service, there are stable margins in the backup business. That is really a growth story and it's a more mature sort of business compared to, for example, the advisory business, which is still very much a nascent developing business where we would expect to see the margins expanding. We have some step cost investment there, but on balance, as we add clients, we are leveraging both at the gross margin and at the operating margin level.

Perfect, thank you very much.

Thank you.

Jerry Herman with Stifel.

Thanks guys, I'll be quick, I know its late. I just wanted to follow-up on that. You guys indicated in your guidance that you are expecting a 3% to 4% price increase. Just wondering what you are seeing on the cost side, given some discussion about minimum wage increases and the strengthening job market, if you are starting to see any signs on the cost side for wage pressure.

Yes, we still believe, Jerry, that the cost increases will average about 1% less than our average pricing increases, based on what we see this year. We feel good about the compensation packages that we have in place.

I think we have talked about this in the past. Combining our wage rate with the benefits package that prioritizes offers, we feel -- obviously we feel good about that. Overall, obviously everybody follows the minimum wage debate. We don't believe -- while it will have some mild impact, it's not a real big impact on us, given where our wage tends to sit in the centers that we operate.

Just one real quick follow-up. We miss the days when you'd give some metrics on the pipeline. I know you're not going to give any numbers, but can you talk conceptually about further trends and your feelings in the pipeline?

Like I said in my remarks, Jerry, I feel like the pipeline is representative of the industry's -- slightly higher representative of the industries that I talked about before. Healthcare, technology, energy, higher education.

And I think that we obviously have in the pipeline some new lease consortium models that we feel good about that are taking advantage of some of the client relationships that I talked about earlier when previous questions were asked. We think that the pipeline continues to give us visibility that the center targets that we have for 2014 are in line.

Thanks very much, appreciate it.

Gary Bisbee with RBC Capital.

Good afternoon.

Hi, Gary.

Let me first follow-up on two -- quickly on two questions that were asked earlier. And probably too many people are asking about the lease consortiums, but if you continue to grow that as a percent of the mix, at some point in the future, does this make the business at all more volatile? Like if the economy turns down, given that those seats are not all accounted for, or is that really, do you not expect them to act much different than the rest of the mature days?

I think, Gary, to the degree -- obviously the place where we are more vulnerable in a downturn, when you look at the overall portfolio of the business, is the centers in which we have P&L responsibility for, and that's what we experienced in 2008, 2009, 2010 timeframe in that class. I think that the key for us is the centers obviously combine both community backup and corporate sponsorship in them.

So, we are not -- we still remain, I think with this model, less exposed than a straight retail model would because of the corporate sponsorship and because of the backup business. And again, I think we will continue to grow other models too. Maybe on the margin slightly, but I still think many of the -- I would still anticipate that overall, the way the Company performed during the last downturn is probably indicative of what we might expect should we experience something similar in the future.

Okay, great. And then on the whole universal pre-K concept, you talked about Georgia and Florida. Can you give us a commentary, are your margins the same despite probably getting the lower state fees for part of the week as they are in the rest of the business?

I think our margins are in line in those states with the rest of the business. I think, again, the key there is that we are wrapping around whatever the reimbursement is in those places in order to complete essentially a view of what our tuition would average in those areas when you take what is paid for with what is subsidized and what the parents would have to pay to wrap around for care for whatever hours they want to wrap around.

Okay last one on, any updated thoughts on leverage and the leverage target? I know you brought the leveraged down a lot with the IPO. It hasn't come down a lot since then, obviously, with you investing all of the -- all of your cash flows through M&A and the internal investment.

But is -- would you be comfortable just having the leverage come down going forward just from the growth of your cash flow? And continue to invest all of excess cash flow? Any thoughts on how we might think about it over the next couple years?

I will let Elizabeth in a second, Gary, comment on the specifics of what we see on that and what we expect in 2014.

I would say broadly that we believe the first and foremost, to the degree we can find acquisitions and/or new center growth opportunities that meet our investment thresholds or return thresholds, that is probably the best way we can drive value for everybody with the cash that we generate in the business. To the degree that we are in a situation in the future, and that's what happened this year. We were able to do that, essentially deploy all of our cash and with a little bit of cash, but not much, and not really have anything on the revolver. And we did see some modest deleveraging just with growth.

We'll continue to see that, as Elizabeth can add color to. But I think going forward, if we find ourselves with a high-class problem of not -- having too much cash that we generate more so than we can invest with good investments back in the business, then I think we would look at the three options that would exist there, whether that be a dividend, a buyback plan or paying down some debt.

The caveat on paying down the debt is we feel very good at the 4% rate that we have now, that is a pretty -- it is efficient for us at that level. If it stayed that way going forward, it would be more likely that our choice would be either buyback or a dividend.

I agree, and I think that the -- we are ending the year at under 4, 3.75 without even considering the full year contribution that we would get from the acquisitions that done mid year. By the end of this year, we'll be close to three turns on our adjusted EBITDA, and we feel like that is very comfortable to just continue to grow into it with our natural -- the natural deleveraging that occurs there, for the short foreseeable future.

Great, thank you.

Jeff Silber with BMO Capital Markets.

Thanks so much, just a real quick one. Elizabeth, the $29 million you mentioned in acquired revenues, was that all the full-service center segment?

Yes, it is.

Okay, great, thanks so much.

Just to clarify a question that came through earlier, so our backup and advisory growth in the quarter was in the neighborhood of 1.5 point. And so full-service organic growth is just over 7% growth and then their our closures against that that bring it down to around 5%. That was just the full-service business, not the other organic growth. I think we're out of time.

I appreciate everybody's time, and thanks for the questions, and we will be talking to you, I am sure, in the near future. Have a good night.

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