Greetings, and welcome to the Bright Horizons Family Solutions Second Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Lissy, CEO of Bright Horizons Family Solutions. Thank you, Mr. Lissy. You may begin.

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

Thanks, Dave. So, as I hope everyone knows our earnings release went out today after the close of the market and it’s available on our website under the Investor Relations section at brighthorizons.com. As you just heard, this call is recorded and it’s being webcast and a complete replay can be accessed in either medium. The phone replay number is 877-870-5176, or for international callers 858-384-5517 with conference ID number 417237 and the webcast will be available at our website under the Investor Relations section. In accordance with Regulation FD, we use these conference calls and other similar public forums to provide the public and the investing community with timely information about our recent business operations and financial performance, along with forward-looking statements regarding our current expectations for the future performance. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially from those that are described in our forward-looking statements made during the call. These 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 U.S. and abroad; secondly, our ability to identify, complete and successfully integrate acquisitions and to realize the attendant operating synergies that we target; third decisions around capital investment and employee benefits that our employers are making; fourth, our ability to hire and retain qualified teachers and other key employees and management; next, our substantial indebtedness and the terms of such indebtedness; and lastly, the other risk factors that are set forth in our SEC filings. We also discussed certain non-GAAP financial measures on these calls and detailed disclosures and reconciliations of these non-GAAP measures are included in our press release, as well as on the Investor Relations section of our website. I will turn it back over to Dave for the review and update on the business.

Thanks a lot, Elizabeth and greetings again from Boston to everybody on the call today. As usual, I will kick things off and then Elizabeth will follow me with a more detailed review of the numbers and our outlook before we open it up for your questions. First, let me recap the headline numbers for the quarter. Revenue of $311 million was up 15% over the prior year and adjusted EBITDA of $57 million was up 18%. Adjusted net income doubled to $23 million, which yielded adjusted earnings per share of $0.35, up from $0.22 in last year’s second quarter. For the six months through June 2013, revenue was up 12% to $591 million and adjusted net income totaled $39 million, an increase of 93% over 2012 with adjusted EPS of $0.60 compared to $0.38 last year. As these numbers reflect, we continue to deliver strong operating performance across all of our segments as we execute on our long-term plan to grow the full service center business, while expanding our newer services and growing our footprint outside of the United States. In addition to the 64 kidsunlimited centers that we acquired in the UK in April of this year, we have added 14 new centers this year including three in the second quarter. And we have increased our full service capacity in line with our plan by 6% over last year. Our backup and educational advisory services also continued to grow in line with our plan once again this quarter. We continue to be very optimistic about the cross-selling opportunities that exist for us to expand our relationships with existing and new clients through these valuable service channels. Some of the new client addition highlights for the quarter include the University of Chicago, Carolinas Healthcare, Barnabas Health Systems, and the…

Thanks, Dave. So, my comments on our operating results will focus on revenue, gross margin and certain adjusted metrics including adjusted EBITDA and adjusted net income and EPS. As a reminder the earnings release does include tables that reconcile our U.S. GAAP reported numbers to these additional metrics which include one-time charges we recorded in Q1 of ‘13 upon completion of the IPO as well as deal costs in connection with the acquisition of kidsunlimited and costs associated with the completion of the secondary offering in the second quarter of this year. Our top line revenue growth was $39 million in Q2 or 15% with the full service business increasing $34 million backup increasing $4 million, and add advisory increasing $1 million. Revenue in our full service segment increased through rate increases and enrollment gains of approximately 1% in our mature class of P&L centers as well as through growth from new organic and acquired centers. Gross profits increased $10.9 million to $75.4 million in the quarter and as Dave mentioned were up 50 basis points to 24.3% of revenue compared to 23.8% in 2012. The largest contributor to this was in the full service segment which grew $8 million on the revenue growth that I just talked about. Excluding the one-time costs in SG&A related to the secondary offering and transaction costs for kidsunlimited which totaled $900,000, overhead in the quarter was $31.5 million and increased to 10.1% of revenue from 9.7% in 2012. The 9.7% for 2012 excludes $15.1 million charge that we recorded in the second quarter for an options exchange that’s discussed in our 10-Q – sorry in our 10-K in more detail. So, the primary driver of the 40 basis points of normalized SG&A increase is ongoing stock compensation expense which was $1.7 million in…

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Dan Dolev with Jefferies. Please proceed with your question.

Hi, thanks for taking my question. If I heard correctly, you said it’s going to be about $6 million of EBITDA going forward on the new centers and £7 million on the kidsunlimited acquisition, does that mean that you are eventually – that the EBITDA per center is lower in the new Children’s Choice acquisition or am I getting the math wrong? Thank you.

So, $6 million is what we expect on the overall business for Children’s Choice at run rate, Dan. So, let me just see if I am understanding your question, right, so that translates to a figure that would be certainly in the range of what our overall full service business would do in the U.S. So, no I think that it’s fair to say that there is an array of performance and size of centers but based on the average size in this group that would be in our range. Kidsunlimited is certainly their gross margins are very well within the range of what we have for our full service business, and the UK centers are smaller than the U.S. based business. So, in general, they may not deliver the same number of overall EBITDA dollars but they are proportionate to the UK business. So, it’s consistent.

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

Okay.

Thanks.

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

Sure, good afternoon. Wanted to ask about the 2013 adjusted EBITDA guidance it looks like it’s maintained despite some upside this quarter, and I know that you guys aren’t at full run rate in terms of the $6 million on the Children’s Choice acquisition, and obviously it’s only a partial year and you have some integration expenses, but it sounds like that’s still supposed to be positive. So, I guess, why is guidance being maintained with those two factors?

So, good to hear from you, Jeff, so I think that the reiteration to guidance has taken into account a number of factors. One is, of course, we did provide a range of performance for the full year. Children’s Choice and kids are both coming in and we are pleased with the integration, but as we do learn more about those businesses I think we want to take a view of how they will perform based on what we have been able to ascertain in diligence. And we think that this is between the costs that we will incur during the integration period. This is what we have visibility on and think it’s appropriate to commit to in terms of the next several months. So, certainly, we will know more about how quickly we get to a steady-state run rate when we get to our next quarterly call. But at this stage, the contributions are as we had said on kids, no, not incremental to what was already in our plan. And our plan included an element of prototypical guidance that or prototypical acquisitions that was part of our overall plan that these two that the kidsunlimited and the Children’s Choice deals take care of. So, I think that our view is that they are going to be terrific additions and it’s really more of a 2014 story.

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

Jeff I think that we certainly have had an appetite for deals of this size over time. And as I said earlier, it’s awful hard to project the timing of when these things are going to happen. I think that I would look at it this way, we have an active pipeline of acquisition opportunities that we maintain I think which it was a little bit of a random variation that it happened all at once like this, but there is still opportunity out there in the market, both, when I say the market, I mean here and also in the each country we operate in for both deals of this size and also our more bread and butter, 2 to 10 center acquisitions to occur. And we are going to continue to be active on that and we will see where – how that shakes out over time.

Okay and then could you just remind us as we kind of go into the fall period and have the kids graduate on from you guys into kindergarten, how much – what’s the visibility in terms of the kind of new students coming in to replace them, the infants etcetera, just how much visibility do you have into that?

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

Great. Thanks a lot, guys.

Thank you.

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

Hi Jeff.

Thank you for taking my question. I wanted to ask about sort of macro comment, what do you see, what do you observe from your corporate clients, given the different operating environments here and in Europe are there any changes in the way they approach your services?

Yeah. I think, Jeff as I have commented in the past, I mean, the past year or two has been what we would characterize as a bit of a (indiscernible) recovery in terms of the behavior of how clients are thinking about our services. In some industries and sectors we have seen a nice up-tick in activity and also in closed business other areas have been a little bit slower to pick up. I think I may have made comment to that, both on the IPO timeframe and also on our last quarterly call, and I don’t think there has been much change in what we have observed. I think it’s a bit of all over the place depending on the industry, depending on the company. And so, we still feel like the environment is not as good as it was in our best of times, but better than it was a couple years ago, so that’s what informs our outlook for the rest of the year.

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

Yeah, I mean, I think in general we would say that it’s a success, and that we are very pleased with what has been achieved there. I think that in any situation like that, you both have some things that you learn and some things that surprise you for the better. And I think that we found the centers to be good quality and in the range of what we do. We have got – gotten some talent from that group that we think will be a good part of our leadership group for the future, which is good. Some of the newer centers that they had in under development, a couple of them are on time, and perform – are poised to perform really well, and a couple of them are a little behind schedule and not quite at the timeframe that we had hoped to get them open by or that they have led us to believe that they would open by, so that stuff typically happens. But when I look at it as a whole, I would say that’s been – it’s been a success.

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

In the third quarter?

Right, out of the 13% to 15%.

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

Sure. Thank you.

Okay, Roya, we can move to the next question.

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

Hi. This is David Chu for Sara. Thanks for taking the question.

Hi, David.

So, is there a sizable overlap in markets between Children’s Choice and the legacy Bright Horizons centers?

The Children’s Choice client base interestingly enough is representative, A, of a lot of the same sectors that we operate in and has a lot of concentration in healthcare, in energy, in higher education and to a lesser degree in the General Services Administration, GSA centers, in which we participate as well. So, there is good overlap with many of the sectors that they currently are in. Then there is a few additions to – in areas that we think have good extensions for us, hospitality, entertainment that type of thing that we think has some good potential. So, but broadly speaking, I think a lot of their centers happen to be in the sectors that we are finding the most activity in today.

Okay, but how about from a geography standpoint?

Yeah, so from a geography standpoint, those centers are spread nicely throughout the U.S. with concentrations in Texas and in the Southwest. So, there is no market that they are in per se where we didn’t have any locations, but I would say they add to our presence in the Southwest a little more deeply than they might in other parts of the country, where they may have a few centers in each state. So, that’s how it lays out from a geography point of view.

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

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

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

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

Got it. Okay. Thank you.

Thanks, David.

Thank you. Our next question comes from the line of Bob Craig with Stifel Nicolaus. Please proceed with your question.

Thanks operator. Hi, guys.

Hi, Bob.

Hi, Bob.

I know you are not venturing into the world of 2014 yet, but when you look at the combination of kidsunlimited and Children’s Choice, you have obviously thrown out a couple of thoughts on where they ultimately might end up in terms of additional EBITDA. But as far as the contribution specifically in ‘14, should it be fairly close to those numbers?

It should be – there is obviously a bit of a tale given the timing of Children’s Choice, it won’t be that for the full year, but kidsunlimited should be closer – close to that contribution for 2014 based on the pacing. There will be a little bit of a tale of costs in Q1, but largely through the integration period we would expect by the end of the first quarter. I think I would just reiterate that from a 2014 incremental contribution standpoint, these are filling some of the prototypical acquisitions that we would have in our growth plan. And so from a contribution standpoint, I just – I think that we would say that it’s somewhat incremental next year, but not 100%.

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

You mean in terms of opening in the neighborhood of 35 to 40.

Correct, yeah.

Yeah. No, Bob, I think that’s currently our view.

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

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

Okay, great. Thanks, guys.

Yeah.

Thanks Bob.

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

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

Yeah, I think with respect to organic growth, I think it’s at the higher end of our range to slightly outperforming. And then obviously the acquisitions have been larger than what our typical prototypes have been in the past. So, that’s obviously adding to the mix.

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

Yes, it’s tough to get a sort of general read through on that. As I said earlier, I would just sort of reiterate what I said earlier when the question was asked that it’s really a little bit all over the place with respect to what industry we are talking about and then even within certain industries, what company we are talking about. So, we see some bright spots in industries that aren’t – you look at financial services, which is an industry that hasn’t – it’s a strong industry for us but hasn’t grown a lot in the past year, yet there is still some growth happening in certain companies that we do business within that industry. Conversely, you look at healthcare and you look at higher education and you look at energy and there is really good growth prospects throughout those sectors for us right now. So, it really is a little bit all over the place. And my comments really are focused on what we know as of now. I can’t predict obviously what’s going to be the case six months from now or eight months from now but I am just giving you the sense of what we see now.

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

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

Alright. Thanks a lot, guys.

Yes.

Thank you.

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

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

Yes, I think as we have talked about in the past, one of our key focal points in the past two years has been working with our clients to expand our relationships to offer them more than just the traditional centers that we had done for years. And obviously we do that through backup, we do that through the educational advising services that we offer. And obviously anytime we can acquire new client relationships from organizations that did not have some of those services, then we have an opportunity to further leverage those relationships. And we believe that opportunity exists in kidsunlimited and exists with the clients we have acquired through the Children’s Choice acquisitions as well. So, as I mentioned earlier, the Children’s Choice portfolio has some concentrations in healthcare, higher ed, energy, a little bit of government services, not terribly different from where you see our client base, but we do believe that the opportunities exist to further leverage those relationships.

Yes, thank you.

Thank you.

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

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

Yes, Jeff, from a recruitment point of view, this has been a macro challenge for us for a while. I mean, we have both economic influences that affect this and we also have realities with respect to qualified teachers graduating from degree programs shrinking in early childhood education. So, we have, as I have talked about in the past, we have taken a lot of those matters into our own hands, developed our own credentialing program, our own online university, and have invested in a network of recruiters that are really working, trying to develop early stage pipelines with students coming out of schools in our key markets around the country, so lot of activity and a lot of focus on it. I would say that it’s at a place now that’s slightly more heightened if I had to compare it to where it was two years ago. So, we continue to put a lot of time and energy into it. I wouldn’t say it’s to the point where it’s causing issue with our ability to run quality programs, but I’d certainly put it out there as a challenge that we take seriously and that we are going to be fighting hard and investing in to be sure that we get our fair share of quality teachers over the next couple years.

Is there any pressure on you to raise wages?

Yes, we are not seeing it as a wage issue per se, as much as it’s just a supply issue a general supply issue in some markets. I think as we have talked before, we tend to when you factor in benefits and wages, be at the higher end of the market for compensation with comparable centers in most markets. So, we are not seeing as much as wage pressure as it is just fighting harder for fewer people, and it being just a supply issue of already qualified teachers. On the other side of it where we have been pretty successful in recruiting assistant teachers that are not yet qualified to be teachers and helping them to get credential through our program. And if they are successful in doing that, they can earn a higher wage just within our own wage schedule by becoming teacher-qualified. We find that when we can do that successfully we create a lot of loyalty and the turnover rates are even less than people that we recruit who already come to us qualified. So, that will be – continue to be an important piece of our future.

Alright, great. And just a couple quick numbers questions, were there any center closures in the quarter?

There were, we actually closed 11 centers in the quarter, so there is the net opening sorry, I was just...

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

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

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

Got it. Alright, thank you so much.

Sure.

Thank you. Our next question comes from the line of Anj Singh with Credit Suisse. Please proceed with your question.

Hi, guys. Thank you for taking my questions. The first one, could you just help me understand the gross margin dampening of 30 bps that you mentioned related to the losses from lease consortium centers versus last year? Was there anything in particular that caused that dampening this year versus last year or there were just more of them?

Yes, Anj that’s really all it is. There is no different scenario sort of the way our centers ramp up or anything or quality of the pool. It’s just simply that we had made investments in more lease consortium models that are going to open in 2013 than we did in 2012. And as Elizabeth mentioned whenever we have a larger class compared to a smaller class of those kinds of centers, you end up with more dilution in year one than you had in the prior year. And so the 30 bps is just representative of the comparison between what the dilution – the actual losses this year versus what we experienced in that same type of center class last year.

Okay, thank you. As a follow-up on the question regarding the profile of your centers you noted that about 85% of your centers are mature mostly due to the acquisitions. And I am just trying to reconcile, because you noted also that it’s roughly 10 of the Children’s Choice were new organic centers and there are still several that are ramping up to mature operating levels. So, are acquisition centers typically more mature, less mature, are they in line with your overall center profiles?

So, I mean, it’s a good question. The figures I was quoting would not have included Children’s Choice, because that happened after the end of the quarter, but you are on the exact right track there that if we bring in a portfolio of centers like from Children’s Choice and 10 of them are in a group that is still in ramp, we would slot them into the maturing ramping class, not just put them all into mature. I was describing the 85% in a context of how – from a modeling standpoint, how the centers will perform because typically acquisitions will come in and they will operate as if they are at maturity even though they are new to us.

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

Yeah. So, every group is a little bit different, both in terms of the type of accreditation that they ascribe to and also how many of their centers they have actually put through that process and the preferences of the clients that they serve with respect to that accreditation. So, I think as we have talked about before, traditionally Bright Horizons ascribes to the National Association for the Education of Young Children’s accreditation scheme, which is probably the most rigorous accreditation and most costly accreditation scheme to pursue of any of the ones that exist here in the U.S. And with respect to the Children’s Choice portfolio, I think that there is less than our percentage, our overall percentage that are accredited through NAEYC, but still enough of them that have that accreditation, others that have other types of accreditation that exist, and yet others that will put through accreditation for the first time under our management eventually. When we evaluate acquisitions, accreditation is one factor. Obviously, it helps us to judge programs but accreditation itself is not enough. We do a pretty rigorous diligence process. We visit all centers as part of diligence. Our operations team really does do a look-see. And we look at all their metrics, understand licensing history, and we have a great deal of confidence in what the Children’s Choice team has been about, what they have done at their centers and do expect that over time their group of centers will approximate our accreditation rate under our management.

Okay, that’s super helpful and that’s all for me.

Okay.

Thanks.

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

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

Thank you.

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