Bright Horizons Family Solutions Inc (BFAM) 2014 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Bright Horizons Family Solutions fourth-quarter 2014 earnings conference call.

(Operator instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Lissy. Thank you, sir, you may begin.

Thank you, Jen, and greetings from up here in Boston to everybody, or should I say from snowmageddon, where the confetti has been flying from the sky ever since the Super Bowl.

Joining me on our call today is Elizabeth Boland, our Chief Financial Officer. And, before we kickoff our formal remarks, I'll let Elizabeth go through the Safe Harbor statement, and I'll be back to you in a minute. Elizabeth.

Thanks, Dave. I hope everyone has seen our earnings release which went out today after the close of the market. This call is being webcast, and a complete replay of the recording will be available. Both the release and the webcast version are available under the investor relations section of our website at BrightHorizons.com.

In accordance with Reg 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 our forward-looking statements, on the expectations for future performance. The forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially.

These risks and uncertainties include our ability to successfully implement our growth strategies, including executing contracts for new clients, enrolling children in our 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.

Three, the decisions around capital investment and employee benefits that employers are making. Four, our ability to hire and retain qualified teachers and other key employees and management. Five, our substantial indebtedness and the terms of such indebtedness. And, lastly, the other risk factors that are set forth in our SEC filings.

We will also discuss certain non-GAAP financial measures on this call, which are detailed and reconciled to their GAAP counterparts in our press release. So, Dave, back to you for the review and update.

Thanks, Elizabeth, and hello again to everybody on our call today. As usual, I'll kick things off and talk about our financial and operating results for the quarter and the year, and then I'll discuss trends in the business as we kick off 2015. Elizabeth will then follow with a more detailed review of the numbers, and then we will be back to you for Q&A.

So first, let me recap the headline numbers for the fourth quarter. Revenue of $338 million was up 6% over the prior year, and adjusted EBITDA of $61 million was up 14%. Adjusted net income of $25 million was up 22% over the fourth quarter of 2013, which yielded adjusted earnings per share of $0.39, up 22% from last year's fourth quarter.

Our revenue growth of $19 million was in line with our expectation in Q4 and reflects continued solid performance across our suite of product offerings. Full-service revenue was up $12 million over last year. Back-up revenue increased 14% to $42 million in the quarter, and ed advisory services grew 22% to $9 million.

In the quarter, we added nine new centers with some highlights that included additional centers for Cisco in the UK, Shell in Houston, as well as several centers for three large hospital systems in North Carolina, Oklahoma, and Virginia. In addition, we acquired a two-center group in Manhattan back in November.

In our emerging back-up and ed advisory businesses, we remain excited about the growth momentum, with recent new client launches that include Apple, QUALCOMM, Direct Energy, Stanford University, and the UCLA Health System.

We continued our long-term track record of growing operating income in 2014, increasing 70 basis points to 11.1% for the full year. This past quarter, adjusted income from operations of nearly $40 million expanded 180 basis points to 11.7% of revenue, driven by the factors that we have talked to you about in the past.

These include the continued positive enrollment trends in our mature class of P&L centers, which are up 2% over last year, price increases averaging 3% to 4%, contributions from new and ramping centers, strong performance in our back-up and educational advising segments, the closure of a cohort of underperforming centers, and overhead leverage, including the synergies we realized from our 2013 class of acquisitions.

These factors, which all create margin improvement, continued to be offset, once again, this past quarter by the losses associated with the larger classes of newer lease/consortium centers we have opened. While this headwind has and will continue to decrease as these centers ramp up into 2015 and beyond, as we have discussed before, the near-term losses and the time they take to reach maturity dampen gross margins. As a reminder, though, on a fully ramped-up basis, these lease/consortium model centers generate the highest margins of our full-service center models.

In addition to our operating results, as you know, we're busy executing in a few capital markets transactions in the fourth quarter. In conjunction with the secondary offering to sell a portion of Bain Capital's stake in Bright Horizons, we bought back 4.5 million shares. Prior to that, we had amended our credit agreement in November to permit some additional flexibility with respect to share purchases. And, through that process, had also determined that favorable credit market conditions supported some modest incremental borrowing.

As a result, we borrowed $165 million and used the proceeds from that incremental term loan, along with cash available from operations, to make that block trade in December. Since we had effectively exhausted our previous authorization, today we are announcing that our Board recently authorized the new share repurchase program for up to $250 million.

As I've talked about before, our priorities for capital allocation are, first, growth-oriented investments and acquisitions in new lease model consortium centers, and second, to enhance shareholder value through our repurchase program. Overall, I am pleased with our strong operating performance in 2014 and remain incredibly proud of the work of our team in achieving consistent strong results.

So now that we've kicked off 2015, I want to update you on our expectations for the coming year and beyond. As I noted the last time, the selling environment for our services has improved over last year, and we are very pleased with the results we are presently achieving. It's now more common for us to begin a new client relationship with more than one of our services, as employers have recognized our ability to touch more of their employees with services that help them to be productive.

Our strategy to open new lease/consortium centers in urban ring locations is working, as we're seeing new centers both ramp up on plan and help us to deliver back-up care through Bright Horizon centers in key locations where demand is the strongest. While this rollout is currently a short-term drag on gross margins, we fully expect this to be a strong value creator going forward.

We are also excited about the ongoing opportunity that both our back-up and our educational advising segments have to grow faster than our core business and contribute to our ability to drive margin expansion. There is great synergy between all of our services in terms of deepening the value proposition that we have to touch more of the employees of our employer clients across key life stages and in work locations across the world.

On the acquisition front, as most of you know, we enjoyed an out-sized year back in 2013, with two significant, at least for us, multi-site transactions in the US and the UK. Although we broadly delivered on our overall plan this past year in 2014, we did not achieve our targeted typical number of smaller acquisitions, which explains our lower number of overall new center openings this year, compared to our initial target.

As we've seen over the years, closing deals larger and smaller can be lumpy. But the good news here is that we've rebuilt a pipeline and have increased visibility on potential deal flow. The two-center deal we completed this past quarter is an example of the kind of high-quality, strong-contributing centers we look to acquire in these type of tuck-in deals. We, therefore, expect that this kind of activity will translate into a more typical run rate of acquired centers in 2015.

On the operating side, we're pleased to continue to see positive enrollment trends in our mature basis centers. This is particularly true in the US, where we suffered the greatest loss during the downturn, and has steadily rebuilt this year and anticipate continued expansion in 2015. We expect price increases to average 3% to 4% across the network in 2015, and to maintain a 1% or so spread between our price and our anticipated center cost increases.

As we embark onto 2015, our business is well-positioned to continue to benefit from the positive trends and operating execution that contributed to our strong performance over the past few years. Like many other multinational companies, one variable that we need to factor into our guidance relates to variability in foreign-exchange rates. When we previewed for you our outlook for 2015, it included an expectation of relatively stable pound and euro exchange rates and, as you know, we've recently seen more volatility.

Predictions for the rest of the year are now lower than our initial expectations. Therefore, we are widening the range of expectations to accommodate a potential continuation of lower FX rates, which results in a top-line growth rate target of 7% to 10% over 2014, which considers a currency headwind of approximately 1.5% to 2%.

We expect to expand adjusted operating income margin by north of 100 basis points in 2015, and to produce adjusted EBITDA in the range of $270 million to $275 million. Thus, our guidance for adjusted earnings per share for the full year in 2015 approximates 20% growth in the range of $1.71 to $1.75.

As we had announced back in January, Mary Ann Tocio, our President and Chief Operating Officer, has announced her plan to retire from her day-to-day role this coming June. After that time, she's agreed to remain on as an advisor for me and will continue to serve as a member of our Board of Directors. Mary Ann has made incredible contributions to the success of Bright Horizons over her 23-year tenure. Among her greatest accomplishments has been to develop a deep bench of operations talent that share her unique blend of compassionate leadership.

Accordingly in June, Mary Lou Burke-Afonso, a 19-year veteran of Bright Horizons, will assume overall responsibility for our US center operations, reporting to me. Chief Development Officer Stephan Kramer will continue to lead our business outside of the US and oversee our back-up, ed advising and growth teams.

Stephen and Mary Lou are among a group of very talented leaders in the Bright Horizons family who are well-positioned to help us to continue our long track record of success in all that we do. With that, I'll hand it over to Elizabeth to take you through the numbers in a little more detail, and I'll be back to you during Q&A. Elizabeth?

Thank you, Dave. Again, to recap, top-line revenue growth in the fourth quarter was $19 million. The full-service center business added $12 million on rate increases, the enrollment gains in our ramping centers and the mature class, and contributions from the 33 new centers we've added since Q4 of 2013.

We saw a modest drop in the foreign-exchange rate at the end of 2014, compared to 2013, as well, which dampened the revenue growth slightly by about $2 million. And, the impact of center closures also offset the top-line growth in full service.

The back-up division and ed advisory services continue to grow the top line from both new clients and expanded utilization of services by our existing client base. Gross profit increased $9.3 million to $80 million in the quarter, and gross margin was 23.8% of revenue, compared to 22.3% in 2013. As we've seen in prior quarters, our back-up and ed advisory services both continue to deliver strong gross margin performance in concert with their revenue growth.

And on the full-service side, performance remains strong in our mature and ramping class of centers. The steady pace of year-over-year enrollment gains in the mature class continued for the fourth straight year in 2014. We realized approximately 2% increase in both the fourth quarter and the full year of 2014.

Strong cost management alongside this enrollment growth, plus the exit from underperforming locations, contribute to the margin expansion. Countering this positive trend, as you've heard, is the effect of the two years of larger classes of lease/consortium model centers. Although we've incurred roughly similar levels of losses from this group in 2014 as we incurred in 2013, around $8 million or so, there is still a headwind to the gross margin.

The 2013 class are now generating positive gross profit, but that modest dollar contribution in their second year of operation on growing revenue for these centers is still not positive to the margin percentage. With the third year of operation for that 2013 class, and the ongoing ramp of the 2014 class, this headwind begins to abate in mid-2015, even with another class of new centers that will be opening.

Overhead in the quarter, adjusted to exclude the transaction costs associated with the secondary offering and the credit agreement amendment, totaled $2.2 million in Q4. The overhead without that was $34 million compared to $32 million last year, approximately 10% for both periods. We've reduced adjusted overhead for the full year from 10.2% to 10% of revenue for the full year, and over time, we expect to continue to leverage our overhead spend and investments to support growth at levels similar to the 20 basis points that we realized this year.

Interest expense ticked up to $8.9 million in the quarter in connection with the issuance of the $165 million term loan in mid-December. We also acquired a total of 4.8 million shares, for a total of $214 million in the quarter, including that 4.5 million share block that we acquired, that Dave mentioned. Including this additional debt tranche, we ended the year with just over 3.5 turns of net debt to EBITDA, and we would expect that to further reduce through EBITDA growth in 2015.

Looking at a couple of other elements on the balance sheet and cash flow statement, we generated operating cash flow of $53 million in the quarter and $175 million for the full year, which is up $15 million from 2013. After deducting maintenance CapEx, our free cash flow totalled $41 million for the quarter and was $143 million for the full year. We ended 2014 with $88 million in cash and no borrowings outstanding under our revolver.

For the year-end operating statistics, at December 31, we were operating 884 centers with a capacity of 101,000. That's a new threshold, we've just crossed 100,000 capacity. The mix of contract types remains consistent, 75% profit-and-loss arrangements and 25% cost-plus contracts. As is the average full-service center capacity, which is 137 in the US and 78 in Europe.

As Dave previewed, our outlook for the full-year 25 (sic - see press release, "2015") anticipates revenue growth approximating 7% to 10% of 2014. Let me break that down for you. Organic growth approximates 8% to 10%, including 3% to 4% price increase, 1% to 3% coming from growth in enrollment in our mature and ramping centers, 1% to 2% from new organic full-service centers, 1% to 2% from the back-up and educational advisory services, and in addition to that, acquisitions would add approximately 1% to 2%, as well.

Offsetting these increases are the effects of center closings, which include both legacy organic and some legacy acquired centers, as we've mentioned in the past, and that approximates 2%. The other element is projected reductions from foreign-exchange rate differences of 1.5% to 2%.

We are planning to add a total of around 45 to 50 new centers, including organic, new, and acquired centers, and our current outlook also contemplates closing in the range of 25 centers. We expect that income from operations in 2015 will expand 100 to 125 basis points from the 11.1% adjusted income from ops that we reported for 2014, on both gross margin expansion and the modest overhead leverage that I mentioned.

We expect amortization expense to be relatively consistent with the $29 million we reported in 2014, and for depreciation expense to approximate $55 million to $58 million. We would expect stock-comp expense to tick up slightly to a range of $9 million to $10 million. Interest expense is estimated to be around $42 million for the full year, including the effect of the incremental $165 million term loan that was borrowed mid-December, so including that for the full year, and it assumes continued 4% to 4.5% borrowing rates on our term loans, as well as no borrowings under the revolver.

We estimate that the effective tax rate will approximate 37% of our adjusted pretax income in 2015, which is broadly consistent with the projected GAAP reported rate for the full year 2015. The combination of top-line growth and operating margin leverage leads us to project adjusted EBITDA to increase to a range of $270 million to $275 million for 2015, and adjusted net income to be in the range of $108 million to $111 million.

While we expect the share buyback that we completed in December of 2014 to add roughly $0.03 to $0.04 a share, after considering the incremental interest expense we're incurring, this is essentially offset by the projected foreign-exchange impact that we have spoken about earlier. As a result, we estimate that adjusted EPS will increase to a range of $1.71 to $1.75 in 2015. Also for the year, we are estimating weighted average shares to range between 63.5 million and 64 million shares.

Lastly for the full year, we project we will generate approximately $180 million to $190 million of cash flow from operations, or $145 million to $155 million of free cash flow, net of the projected maintenance capital spending of $30 million to $35 million. Based on the centers in development and slated to open in 2015 and early 2016, we expect to invest approximately $50 million to $55 million in new center capital, and we would expect to fund all of these investments from operating cash, and to end the year with a range of $140 million to $150 million in cash on hand.

Looking specifically to Q1 of 2015, as Dave mentioned in his remarks, we completed fewer acquisitions in 2014 than our original target had contemplated, so we have a lower increment from new acquisitions in the early part of 2015, and would expect that, that year-over-year growth rate would pick up as the year goes on. With the impact of the lower foreign exchange rate we are already seeing this year, our estimated revenue growth for Q1 2015 is therefore similar to what we reported for this past quarter, or approximately 5% to 7%.

Our outlook for adjusted EBITDA approximates $64 million to $66 million and for adjusted net income to be in the range of $25 million to $26 million. With approximately 63.5 million shares outstanding, this would translate to adjusted EPS in the range of $0.40 to $0.41 a share for the first quarter of 2015.

Thanks, Elizabeth, and with that, Jen, we are ready to turn it over to you for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator instructions)

Sara Gubins, Bank of America Merrill Lynch. Please proceed with your question.

This is David Chu for Sara Gubins. Elizabeth, I'm sorry, I missed the margin guidance for the year. Can you just repeat that please?

We had said that the operating margin would expand 100 to 125 basis points.

Okay, great. And then in terms of the gross profit that we saw -- the gross profit in the fourth quarter saw some nice leverage. It just appears that there were some outsized gains, and I don't know if it's just an easier comparison, but can you speak to that?

Part of it, as you said, is the comp, but the other pieces really are what Elizabeth talked about before, enrollment trends and mature business continued to be positive, slightly outpacing what we had anticipated in the quarter. Which is a positive against solid cost management. And then, also, the closing of the cohort of underperforming centers that we had closed, as we had talked about in the past, that has a sort of decrement effect to revenue, but is a accretive on the margin side. And then, lastly, back-up and ed advisory services continue to, I think, contribute nicely to it, so add all that together and ultimately you have the reasons that we saw that nice pick up on the margin side.

Okay, great. Last question. Some good color in terms of acquisition timing, but just overall in terms of new center timing, should we think about it pretty evenly spaced over the course of the year or would it be back-half loaded?

I think the acquisition piece of things is likely to be lumpy as it always is and hard to project in terms of exactly when it would hit in the year. On the organic side, it's also slightly lumpy. We have some control over that with respect to the lease consortium models that we opened, but on the client centers, its a little bit subject to their own construction schedules. So, I would say broadly speaking slightly more in the sort of middle to third quarter-ish time frame if I was looking right now. But that sort of what we see for now.

Okay, great. Thank you.

Thank you. Gary Bisbee, RBC Capital Markets. Please proceed with your question

So the ed advisory business, it continues to do really well. The growth on the top line decelerated a little bit, but still obviously really strong. The margins were really pretty spectacular in the quarter. Can you give us a sense how we should think about just the -- what would be reasonable expectations for the business at point fifteen, is that that same ballpark 20% -- or area they've been growing the topline reasonable? And how about the margins? Is this a sign that investments are really getting leverage or is there likely to be more investment next year that maybe makes the margin not be this high?

So, broadly, on the ed advising businesses, we do obviously continue to believe there's a lot of white space left in what we're doing there, and you know we've really brought and expanded an idea to market that we're very much still in the missionary phase of trying to sell and gain momentum in the market. We're expanding the resources we have dedicated to selling that service in 2015.

But I would say that given what we can see now, we do see north of 20% growth in that line of business, in that range for 2015. And, as you noted, in Q4 you saw a pickup in terms of the operating margin in that line of business and I think we're beginning to see leverage. We're clearly going to make some investments that I just noted in the growth of it because it's still early stage, and we want to be sure we're trying to grab as much share as we can given the strong value proposition. So, I don't think you'll see -- it may not continue to rise at the level it did Q4 versus Q3, but what we're targeting ultimately for ed advising is an operating margin that mirrors back-up. We think that's probably a good analog for it. But obviously, it's a much smaller business today. So I would expect that there will be a slight pick up in 2015 on the margin side over what we produced in 2014, but probably won't realize its full margin potential for another two or three years.

Okay. And then, just on back-up, how do we think about where you are in terms of the growth of this? It continues to grow double-digits. Obviously the margins there are good, but are you feeling like you're getting close to having penetrated at least a decent portion of the potential clients, or is there still an awful lot of potential for this business over the next several years?

Yes, we still believe there's good white space left on the back-up side. We think, again, the value proposition there allows us to both go upmarket to the largest employers and also to even smaller employers than are center-based business had traditionally been attracted -- was able to attract. So I think it's a much broader market in terms of the size of employer that we can engage with on the back-up side. So I think, we feel good that the back-up business will grow double digits in the range of where it did this year in 2015. And still, from what we can see now, we still feel like there's good growth opportunities for a while out there.

Okay, and then just one on the leased consortium centers. You talked for a long time about the model having better gross margins. Two questions on that. Number one, is that largely because they are bigger on average than a lot of the single sponsor centers, or is that also becoming partly because they are able to be leveraged through the back-up business? And, I wonder, you've talked a lot about the gross margin. I've never really heard you comment on potential on the operating margin level. I realize they are sub-scale today because you've opened a lot recently and they're not mature, but should we think that that growth margin premium flows through to better operating margins for the whole center-based segment for the next couple of years? Thank you.

So, just to be clear about this -- it's a really good question and one that I think sometimes is misunderstood. It's not that the new lease consortium models are that much bigger in terms of larger capacity. It's that where they are being located in and around major metropolitan areas like the New York area or Boston or San Francisco are places where tuition on average is much higher than the rest of the country. And so, the actual -- what they generate in terms of revenue and ultimately margins, not just on a percentage basis, but an actual dollar amount, is more significant. In many cases, you know 40%, 50% more than what we generate in actual dollars of margin from our historic base of those kinds of centers. So that's one major factor. The other factor, the other two factors, that really play in our aside from back-up many of our lease model consortium centers enjoy direct sponsorship from a variety of different employers on the full service side. So that, obviously, helps and adds to the mix. And then lastly, as you noted Gary, back-up is the third sort of leg and allows us to actually add more to what those centers can produce. I would expect that once those centers can reach maturity, much like their peers in that type of center, that that will flow to the bottom line. So, it's not like these have so much a radically different overhead structure associated with them that wouldn't allow that to flow through. So that's why we're excited about the value creation that they can produce over the course of the next couple of years.

Great. Thank you.

Thank you. Manav Patnaik, Barclays Capital. Please proceed with your question.

Good evening. So firstly, you mentioned you had some pretty good visibility into your typical acquisitions that you make. So, I think if I look at the guidance you provided, is it fair to assume that your sort of acquisition spend, that you've typically got it to before, is going to be in the $40 million to $50 million range?

I'm not sure I follow your question. You mean in revenue?

No, I mean just the amount of dollars you are going to spend for those acquisitions, I guess.

So for this year, we have sort of a typical cohort which would be in the range of the equivalent of 15 to maybe 20 centers. I think it depends, the center count would probably -- is equivalent to 15, and that would translate to something more like $25 million to $30 million of acquisition spending.

Fair enough. Thank you. And then you gave us the operating margin expansion. Any color on gross margins, what sort of range we should think about there?

So, the gross margin range would be -- I mentioned that we would expect to see some overhead leverage in the 20 basis points arena, so gross margins are going to expand in the neighborhood of 50 to 75 basis points. We've got some steady amortization expense, and so that helps us leverage the operating income as well.

Okay. And then in the press release, you mentioned the Obama's mention in the State of the Union speech. I was just wondering if you could give us some color on how you could take advantage of those initiatives and how that would play out for you guys?

Yes, I mean my mention of it was really in line with sort of -- whenever early childhood education is talked about in that way and really put in economic terms, which is how we've being trying to frame it for almost thirty years, I think it's good for us and the attention that people pay to it just gets that much more increased. For us, it's been more of a -- we've used that as a way to try and engage more employers and more people on the subject.

I'm not optimistic that federal government initiatives or spending around in this area will have a big impact directly on Bright Horizons because I think that most of what's been announced goes to children most in need, which I would agree with in terms of priority of where to spend first. And many of the programs that exist today that support children in need in communities and cities across the country, I think will see some increased funding and, hopefully, we can broaden the quality and impact of those programs.

I'm not very optimistic that they'll be much change. We don't get today much of our revenue from government sources, and I don't foresee a big change in that. So my comment there was more around -- I think it's always good for us when this issue gets framed in economic terms and watching that happen at the State of the Union, I think, was good for us. And, the sort of contact we've had with clients around that has been really positive.

Again, if I can just squeeze one more quick one in here. In terms of -- obviously you've got the strengthening dollar. Any plans of using that to your advantage to build your international footprint?

I think building our international footprint with respect to the countries that we're in today is part of our strategy. So, we are very much interested in expanding our business in the UK and Ireland and the Netherlands, where we exist today and thinking about what to do in India, where we are today. With respect to where we're not today and where there might be opportunity in the future, I think that it's a broader question than just the sort of exchange rate.

I think we are interested in someday expanding our footprint beyond the countries that we currently operate in. And we have done some early stage work on that and continue to be engaged in several places around what opportunities might exist. But, again, I don't foresee that as a 2015 event based on what I know now, but rather a longer-term opportunity for us down the line.

Okay thanks, guys.

Nick Nikitas, Robert W. Baird. Please proceed with your question.

Following along the lines of that international question. Just looking at the full-service centers, I know you mentioned the continued strength in larger city locations within the US, but any differences you call between your US and UK locations currently?

Well, the main difference between the US and the UK has been the recovery of the enrollment. We suffered more of an enrollment decline back in 2009, 2010 in our mature class of profit and loss centers. We didn't see quite the same effect in the UK. In fact, it might have decreased 1% or something, but nothing near what we saw in the US.

So the main difference has been the effect of recovering a lot of that enrollment and the positive impact that that's had on our US gross margin. So there just wasn't as much to pick up in the UK. And although we see steadiness in the mature base, it's not the same effect in terms of what's happening in the US.

Okay. And just with the strong growth in back-up and all this weather talk, was there any outsized benefit in 4Q or just going into early in 2015, any increased demand from the current weather that's going on.

I don't think it will have a material impact on our financial results, Nick. But I think that obviously when weather like this happens, the demand for back-up care becomes extremely strong and we get a chance to sort of show our stuff, in terms of the value that we create for our employer clients with back-up care.

We are proud of the fact that we got our centers open faster and kept them open when many other providers were closed across the various places where we saw severe weather, so our team really rallied and our clients count on us, and we stepped up. So it's always good for us to prove our value proposition during these times. I'm not clear, though, that it'll have a major effect on the financial results.

I think it's a good client relationship builder, for sure.

Makes sense. Good to hear. Thanks.

Thank you. Jeff Silber, BMO Capital Markets. Please proceed with your question.

Just a quick follow up from, I think, Manav's question. You had mentioned the acquisition impact, or potential acquisition impact, in terms of cost. Incorporated into your guidance, what is the impact on revenues?

It's between 1% and 2%, so it would be the equivalent of $20 million or so of revenue.

Okay. Great. We can back into that. And then from an FX impact, can you just remind us where your exposures are and in which three of your segments has the most exposure?

So, it's mainly in the full service segment. We have a bit of back-up in the UK, but it's not significant enough probably to move the needle here. So, it's full-service. We have pound exposure and euro. So we have the euro in the Netherlands and a smaller chunk in Ireland. And the pound is the bigger exposure with our UK operations being -- it's the lion share of our European business.

Again, is there a rough percentage breakdown in terms of percentage of revenues?

Roughly -- I'm trying to do the math. It's probably 80% in the UK.

Okay. 80% in the UK. And, again, international as a total percentage is roughly what?

International as a total is just under -- it's around 20%.

Great, and then just one more follow up. I'm sorry. One of your competitors had a measles outbreak in one of their centers in Illinois, and I know that they are vaccinating all the staff. Is that something that your company does or will be doing?

Yes. We obviously were paying attention to this long before that -- we heard about that. We haven't cases in our centers, but certainly once we heard about the outbreak in California, we got on it.

Our biggest concern, of course, is that we care for children under the age of one year that don't have the choice to be vaccinated. And so what we've done to be sure were doing our best, as we've done in other situations where we've had these kind of things happen, is we've taken the steps to ensure that all the caregivers and teachers that interact with those children are vaccinated and that there's no interaction with others that aren't vaccinated. So we've taken steps, Jeff, to ensure that happens.

We provide vaccinations covered through our health plan, so it's not a -- it's always been something our employees can take advantage of. But, yes, across the country, we're ensuring that anybody working with children who don't have the choice to be vaccinated, any adult who is working in that scenario is vaccinated. And that's a process we've been going through for a while.

That's great to hear. Thanks so much.

Thank you. Andrew Steinerman, JPMorgan. Please proceed with your question.

Elizabeth, I wanted to ask about the margin expansion that is associated with the utilization of the full-service centers. How much has utilization come up and where could utilization of full-service centers go?

So, in the class, the mature class of centers, the utilization is -- has been increasing this year, was about 2% year over year. We are at roughly 75% utilization in those centers in the core enrollment. So we would target -- what we've seen is the sort of stabilized mature center level would be 78% to 80%, so we have, call it, 3% to 5% points still to gain back.

I think our projections, our longer-term plan, would look to around 1%, 1.5% continued year-over-year gain in that cohort of centers over the next three years, maybe, that we would reach steady state after that point. And we would still have the enrollment gain from the ramping classes that are opening each year, but that mature class would be targeted to be back to its mature level in another three years.

Understood. I'd like to ask about extreme childcare. We read about more demand for night shifts in the UK. Is this something that Bright Horizons is offering? Is this an interesting opportunity?

I haven't heard it, Andrew, called extreme before, but that's interesting. Our view on when we provide care and how we provide care tends to really be in line with the employer clients that we're serving and the needs of their work force. So for example, at several automotive plants around the US, we operate 24 hours a day to accommodate shift work.

We may even operate -- I don't think we have 24 hours outside of the US, but we certainly have, in other manufacturing environments in places like the UK, 16, 18-hour type operations to accommodate shift work. The challenge, of course, is there's always a lot of interest in these things as we interact with our employer clients. And then it comes down to, kind of, the cost-benefit of how much of their workforce will actually invest in it.

To directly answer your question, I don't see it as a commercial opportunity, in that's something I'd be comfortable taking a lot of risk on in order to earn our earnings through taking risks. At each of these situations, we tend to run these, call it extreme programs if you will, on a cost-plus basis. And we partner with our client, and we earn a fee for it because the demand -- predicting demand in those sort of off hours proves hard to do. And while it can be really important for an employer to serve a certain number of employees no matter what, it can be very hard to earn a fair amount for what the effort is that we have to put in to make it happen. So, we continue to look at it employer by employer, but I don't see it as a big opportunity.

I understand. Thank you.

You got it.

Thank you. Jerry Herman, Stifel. Please proceed with your question.

I just wanted to ask about acquisitions again. Dave, what do you guys see on acquisition pricing, particularly in light of sort of the strengthening economy, and is that -- is there any reason for this slowdown in acquisition activity in effect because of price inflation on deals?

I think, Jerry, in the latest deals that we've done, and just broadly in what I see in the pipeline today, I think that we will end up paying pretty similar to what we have traditionally paid, five to seven times EBITDA, which is our typical range, historically.

Of course, the differences become on the smaller stuff where there's no pipeline, there's no real growth opportunity, there's not a lot of overhead synergy, that tends to be in the sort of five, six-ish range. And then on the larger things that we look at, where there is multiple sites and some overhead structure, that's where we can be effective in gaining some synergy. Not that we want to pay for all that synergy, but certainly I think in those ranges, it tends to be more six or seven times is what we're paying.

And we really haven't seen a big challenge to that competitively. So, it's not as if in the cases where we felt competition for any acquisition that we're doing, that we're seeing at least in the US, much difference. In the UK, every once and a while on the larger deals there may be someone who's being a little more aggressive. But usually it's not just about the multiple, as you know, it's the multiplier and what you're sort of factoring in.

So it's hard to know kind of where they're being aggressive. But sometimes in the UK, will see a little bit more aggressiveness than we see here in the US.

Great, thanks. And this one for Elizabeth. Elizabeth, you mentioned the dilution, let's say, associated with the lease consortium at roughly $8 million, I think, last year and probably the year before. How should we think about the swing factor for 2015? How much should those come down in that particular cohort, or those cohorts?

The way to think about is that, essentially, the 2013 class is now contributing slightly. So, if they had $8 million of losses in 2013, they're contributing modestly in 2014. And the 2014 class is losing around $8 million or so, and then in 2014, the 2014 class begins to break even mid-2015. So, in terms of the swing factor, what you'd have -- the 16, 17 centers or so would be getting toward their mature revenue levels. They wouldn't be all the way.

The range is around, call it $2 million,$2.5 million in revenue at maturity, so they'd be in the range of $2 million maybe for the year in their third year; and then they would be contributing probably in the range of 15% to 17% or so in their third year, and then they reach their full maturity by the end of the year. So the swing -- it's a little bit of math there, but I think the point is that there's contribution in the third year that is now producing margin as a percentage of revenue to the overall mix that's modestly positive in that third year of this investment.

Okay. I think I got that. But thanks.

Thanks Jerry.

Thank you. Jeff Lee, Wells Fargo. Please proceed with your question.

First let's talk about industry mixed trends. Are there any notable points of weakness to fix there?

I think broadly what I've commented on before still is the case. I think I would point most recently to technology and hospital and healthcare and higher education as being three of the top areas for us. Biotech, another one. So, broadly speaking, I think it's pretty similar to what I had commented on the last time.

Okay. Great. Could you also talk about the opportunity for cross-selling and give us a quick update there?

As I said earlier, I think it's more common for us now to bundle some subset of our services with new clients than ever has been in our past. So that's been a strategy that's working really well. It's hard to deal in percentages because every year we acquire a number of clients, and some start out with multiples, but a lot start out with one, too; and so the denominator keeps sort of increasing on us. But I would say that were happy to see the number of multiple site clients that we have continue to tick up. It puts us in a good position to try, when we only start out with one service, to try to convert them later on.

So, I feel really good that the suite of services, as I said earlier, have a lot of -- they make a lot of sense to be offered together. They are hitting different key life stages of any given employer's population, so, much differently than five, ten years ago when we essentially dealt just with the section of the employer's population that had children under the age of five. We now serve -- can help an employer really with people at every stage of life with services that help them to be more productive or have a healthier integration between work and life.

So, I think it's working really well. I'm pleased with it and I expect that as we go forward, more and more clients will start with multiple services, and we'll sort of catch up with a lot of the ones that only have one with us when we didn't have all these services.

Great. Thank you. I'll turn it back over.

An Singh, Credit Suisse. Please proceed with your question.

Thanks for taking my question. I wanted to reference an earlier question on utilization. I wanted to see if you think the gap to the historical norm of the 78%, 80% level that you're targeting, what's involved in closing that gap? Is it all more just a question of the cycle gaining more strength, or do you believe that there still might be more pruning that you need to do of underperforming centers?

I think that when we talk about the 78% to 80%, we talk about that broadly across the mature base of P&L centers as the enrollment levels that we were at pre- the downturn. And so, of course in that portfolio of mature centers are centers that are -- there's always going to be some, I think, some small amount that might turn into underperformers over the course of a long period of time. But that number sort of includes the whole portfolio as a whole.

Some that are obviously producing better than that and some that are producing less than that to get to that average. I think what's really involved is both, as you say, economic recovery, but also remember that most of our excess capacity, at this point, that exists in the system is in the preschool classroom which are serving three- to five-year-old children. A lot of the initial pickup we got was in the younger age groups in infant and toddler. Well, we're capacity constrained most in the youngest groups. We have the fewest spaces for infants, where there is the greatest demand.

And so, the pre-schoolers have to grow up with us over the course of two, three years. And then, of course, every year we graduate a class of those pre-schoolers into school. So there's this process of rebuilding those pre-school classrooms that's a multi-year process and keeping those pre-school classrooms full or at the levels that we would consider full, really is the challenge. We are certainly on our way there and, as Elizabeth mentioned, we've probably picked up five points of occupancy over the course of the past few years.

But probably have three to five points left. It's a combination of the economy being stronger in the places where these centers exist, and also employment being a bit stronger in the places where these centers exist. And then, also, the natural cycle that it takes, just by nature of how enrollment typically grows through out centers.

Okay. I appreciate the detail there. Thank you. Dave, another one for you. The strong selling environment that you referenced, could you just help us break that down a little bit more in detail. Is that primarily just helping your cross-selling initiatives or are you finding the missionary sell also easier to close? And is it doing anything on the front of pricing to the individual families, as well?

Well, when I reference the strong selling environment, I'm talking about the employer market and kind of the activity levels of the sales team. We measure our pipeline and look at past volume in the pipeline and time to close and all the things that I'm sure every organization looks at. And when I look at those sort of front end things, really since into the third quarter of last year, our prime selling season for the beginning part of this year, we started to see pick up, and that momentum is continuing.

And mostly what I'm talking about, what I'm hoping that results in is organic new employer-sponsored centers, which is a piece of that and, as you know, those take a long time, both to get to yes, and then ultimately to sit in the pipeline and get built. Also, new back-up clients, new ed advisory clients, and new clients across the suite of services. So that's what I'm referring to when I said that the employer market -- we obviously talked about enrollment direct to consumer as it relates to parents enrolling in our P&L centers. And what's going on there and all the past comments we've made.

Great. I appreciate that. Thank you.

Thank you. Brandon Dobell, William Blair. Please proceed with your question.

Thanks for squeezing me in here at the end of the day. Maybe back to the industry comments, Dave. How important has Texas and, I guess, and/or the energy industry been, as a growth driver of the past couple of years? From a 2015 perspective, what assumptions have you made about either adding centers in that industry or seeing any weakness in utilization from those kinds of companies?

That's a good question. We did see some momentum in the energy sector in the past couple years, and that's resulted in new centers for several clients. Exxon Mobil, Shell, a number of the big oil companies, we've been fortunate to open centers for. And those centers are doing well. They're on large campuses, and who knows what's going to happen in terms of employment sizes, but I think the center sizes are of an ilk where the demand is really strong and feel fine about the footprint there.

I suspect that the place that we'll see some downward trend is in the prospecting phase of new energy clients. We haven't seen it yet, per se, in any kind of pervasive way, but I suspect that it won't be as robust for us, in terms of converting new business in that sector in the next year or two, until things sort out as it might be in the long run. So in terms of the installed base, energy is a de minimus amount of our installed clients. I had highlighted it before because it was -- there were some newer ones, but in terms of the installed base of clients it's very small.

Okay. And then going back your commentary about the trajectory of the mature center utilization. Looking back the past handful of years, when you've got a center that hits up against that high 70%s, 80% level where it gets pretty full, how often have you guys taken advantage of an opportunity to increase the center size, maybe move it to a location where you've got another 10 or 15 or 20 available seats? Or is it just, it hits that high 70%s, 80% and that's going to be it?

Again to my earlier comment, the high 70s, 80s percentage is an average across a wide number of centers, so some centers will get to 85%, 86%. So that depends on the location, it depends on the timing of enrollment, age mix, as I talked about before.

Ever year, Brandon, we've historically done this. We do try to work with our clients where we see demand to be strong or centers that we have control of ourself to look at expanding rooms, adding capacity. And we do add some capacity to existing centers across the network in every year. And of course we're going to do that in places where not only demand is strong in the present, but where we suspect it will be strong a year or two, three, four, five down the line. So, we'll continue to do that in 2015, and I think there will be some opportunistic ways to increase capacity in certain centers. But, again, it's something we've done historically.

Got it. And a final quick one for me. You talked about growth opportunities in the ed advisory business. From a sales perspective or business development perspective, headcount-wise, are you guys adding people there, or is it just giving them a broader opportunity to go do what they're doing already.

I think we're very focused on being sure we don't under-invest in sales and marketing resources to take advantage of what we see as a big opportunity out there. Both this past year and again in 2015, we're going to increase our investment, as I talked about earlier, in the resources that are chasing clients for that business.

Okay. Perfect. Thanks a lot.

Okay, Brandon, thanks. Good to have you back. Okay, I think, Jen, we're pretty much to the end of our timeline. Let me close by thanking everybody for joining us on our call today. We look forward to seeing you on the road at sometime soon. And of course we're here questions. Have a good night.

Thanks everyone.

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