Greetings, and welcome to the Bright Horizons Family Solutions Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is my pleasure to introduce David Lissy, Chief Executive Officer. Thank you, you may begin.

Thanks, Danielle, and greetings everybody from balmy New England. Joining me on today's earnings call is Elizabeth Boland, our Chief Financial Officer, as usual, and she will go through a few administrative matters before I kick off the call. Elizabeth?

Hi, everyone. As always, this call is being webcast and recording of the call as well as our earnings release are and will be available under the Investor Relations section of our website, which is brighthorizons.com. In accordance with Regulation FD, we use these conference calls and other similar public forums to provide the public and investing community with timely information about our recent business operations and financial performance. Please note that some of the information you'll hear today consists of forward-looking statements including without limitation those regarding our current expectations for future performance, business outlook and financial performance in 2015 and 2016, including revenue growth, operating margins, overhead costs, growth opportunities, acquisitions and integration, center openings and closures, capital spending, borrowings, adjusted net income and EPS, cash flow and cash on hand. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially. Factors that could cause actual results to differ include risks related to implementing our growth strategies, client demand, integration of acquisitions, our indebtedness as well as other risks and uncertainties that are described in the risk factors in our Form 10-K for the year ended 2014 as well as our other SEC filings. Any forward-looking statement speaks only as of the date on which it's made and we undertake no obligation to update any forward-looking statements. 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 and will be included in our Form 10-Q, which again is available on our Investor Relations website and it's filed with the SEC. So, I'll turn it back over to Dave for the review and update on the business.

Thanks, Elizabeth, and hello again and thanks for joining us on our call today. As usual, I'm going to update you on our financial and operating results for this past quarter as well as our outlook for the rest of 2015 and our view as we approach next year. Elizabeth will then come after me and follow with a more detailed review of our numbers and then we'll both be back for Q&A after that's done. So, first let me recap the headline numbers for our third quarter. Revenue increased more than 9% to $366 million and adjusted EBITDA of $65 million was up 17% in the quarter. Adjusted net income of $27 million was up 24% over the third quarter of last year, which yielded a 34% increase in adjusted earnings per share to $0.43. The positive trends we discussed with you earlier this year continued across all of our operating segments this past quarter. Full service revenue increased $25 million, backup was up $4 million, and our ed advisory services were up $2 million. We welcomed 22 new centers to our network this past quarter, including a group of nine that we acquired in the London area back in July. New client and cross-selling highlights across our suite of solutions this past quarter included the Dartmouth Hitchcock Medical Center, University of Scranton, Akin Gump, Union Pacific, Fresh Market and the Overlake Hospital. Once again, this quarter we continued to see some impact from foreign exchange rates, which translated to a 2% headwind on our top-line growth over last year or approximately $6 million. So, on a common currency basis, therefore, our revenue growth in Q3 would have approximated 11%. On the margin side, we continued the year-over-year leverage we reported through the first half of 2015 with 150…

Thank you, Dave. So again, to recap, top-line revenue growth in the third quarter was $31 million. Our full service center business added $25 million or 9% on rate increases, enrollment gains in our ramping centers as well as in the mature class, and contributions from the 85 new centers that we've added since Q3 of 2014. As Dave mentioned, the pound and euro FX rates have been lower in 2015 than 2014. And in Q3, this impact dampened the revenue growth in the full service segment by approximately $6 million or 2 percentage points. The impact of centers that we've closed since the beginning of last year also offset top-line growth in the full service business by about 2 percentage points. Our backup division grew 10% and ed advisory services grew 21% in the quarter from both new clients and expanded utilization of services by the existing client base. All in for the quarter, organic growth on a common-currency basis, therefore, was 7% and acquisitions added a total of 4% to our top-line growth. Gross profit increased $12.5 million to $85 million in the quarter and gross margin was 23.3% of revenue, 150 basis points higher than the 21.8% we reported for 2014. Starting with the smaller segments, our backup and ed advisory services generate gross and operating marriages that are more than double what we earn in the full service business. So efficient service delivery allows us to leverage the top-line growth and expand operating margins to approximately 30% in both backup and ed advisory services in the quarter. On a full service side, performance remained strong in our mature and ramping classes of centers. The steady base of year-over-year enrollment gains in the mature class that we've achieved starting in 2011 continues throughout 2015 and we have…

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Manav Patnaik with Barclays.

Hi. This is Ryan (18:00) filling in for Manav.

Hey, Ryan (18:03).

Just curious on the lease – how are you doing – on the lease/consortium openings, are you picking up anything from the prior classes that make the next round of openings either more efficient or allow them to ramp further?

I think that our experience on the classes as a whole, both the newer ones we're opening and really their predecessors the past couple of years, our experience has been that we've been able to produce a slightly faster ramp than what our historic classes have produced, that we had done years ago in this model. And I think that continues to follow suit with this latest class. I attribute that to essentially better site selection in places – in urban locations or urban ring locations mostly, where the demand profile is strong, more young families, professional families living with young children. The influence of our growing backup (19:03) business and our backup customers in that area, both from the point of view of using centers for backup care and then potentially converting to full service care. And then lastly, I think our team has – from an execution point of view, I think we'd ramped up several years ago to put a lot of extra marketing and focus on this area. And I think the combination of all those things have produced the better ramp – or a slightly faster ramp on average than what we've experienced in the past. And as we've talked about, that's really helpful because these locations are in areas that have the potential to produce more than what our average installed base produces. And if they don't ramp, they have the potential to lose on the margin more than what our historic class would. So, the results so far have been positive. And as we open newer classes of centers, we're still witnessing what we saw in those first couple of classes of centers.

Great. Thanks. And just on the M&A pipeline you mentioned, are there still similar-sized Hildebrandt-type networks out there in the U.S. or is it going to be kind of smaller deals going forward and any larger type acquisition would have to be outside the U.S.? Thanks.

Well, I think from a straight numbers count point of view, that is numbers of centers, there aren't too many others out there that fit the model that Hildebrandt looks like in terms of numbers of center or that Children's Choice looks like. There are certainly some larger groups, but they haven't been targets of ours – the larger groups, the community-based centers, that is. I think we do have regional competitors and good quality providers out there that, even though they might not have the same numbers of centers, what they may produce in terms of both revenue and earnings could be at a similar level, or even higher, than something like Hildebrandt or other larger groups, just because they might be in geographies where tuitions are higher and they may have P&L centers that can produce more than what the group of cost-plus centers in more rural areas can produce. So, size-wise, in terms of numbers of centers, probably not too many; but size-wise, in terms of revenue and in earnings, we still think there is some out there, in terms of regional chainlets.

Our next question comes from Gary Bisbee with RBC Capital Markets.

Hey, Gary.

Hey. Good afternoon. So, I guess just on lease/consortium, I understand the concept of maybe more pressure in Q4 just because of the seasonality of when you open them within a year. But aside from that, are we at the point where the losses have flattened out and it shouldn't get much better or much worse in terms of margin drag going forward, assuming of course you keep opening that same 15 a year, or is there still – it could get a little better or a little – in the next year?

Yeah. So, you're right in general that we've seen some flattening out. It's just I think the comment in the prepared remarks was about what we expect to see in the very near term, with just a big cohort that's opening this quarter and will be in the comps year-over-year against last year's fourth quarter. I mean, there is – the continued upside there, Gary, is that the 2014 class is just really getting through its breakeven point. So, the full contribution from those centers at full maturity is yet to come into the margin. So, we do see some ongoing tailwind from those classes just getting to their full maturity. And with the 2015 class adding another layer of that, the strategy will continue to pay dividends, in terms of its ability to expand gross margins at a little bit higher pace than what would otherwise just be a year-over-year gain in a mature center.

Okay. Great. And then, Dave, you made a reference about the strong job market having positive impact. Obviously, we know the mature center enrollments have been growing. And it sounds like year-to-date they're doing a little better than the last couple of years. But what about demand on the employer side? I think you quickly referenced that. Can you give a little more color? Are they more receptive to you? Are they feeling like they need to offer these things to attract the most diverse and best workforce? And is that likely to have a material impact in bookings or is that more on the margin? It's a little easier to sell stuff.

Well, I think, Gary, as I may have commented in the past, over the course of the past couple years, it's been an interesting sort of rebound. We've been at this a long time, so we've been in several economic cycles, as you know. And I think, just generally speaking, obviously, the demand for our services tends to increase the appetite amongst employers for our services, gets better as the labor market tightens, particularly the labor market for highly-educated professional white-collar employees, that's sort of the – most of who we serve. And so, yeah, I think that, although it took a while, in terms of this rebound has been a little slower than what we had seen in past rebounds of economic cycles. We feel like the appetite for employers for what we do is strong. And on the margin, stronger than it was a year ago, and a year ago it was slightly stronger than it was the year before that. So as we head into 2016, we feel like we're doing so with good momentum and a good pipeline of prospects that hopefully will continue to convert over time.

And then, I guess, the potential downside question around all of that positive is, can you give us an update on labor costs? Is it getting harder to find qualified people? Are you having to pay them more, are you still pretty confident in the ability to be able to price a point above your labor cost inflation? Thanks.

Yeah. I mean I think the headline is, we're comfortable with our ability to price-in what we expect to be the pressures that we're seeing from a salary perspective. I think we've been – I've been at this a long time, and I think that I've talked in the past to you about the issues around the supply of qualified caregivers and teachers shrinking, regardless of what the economy is like, that was a challenge no matter what. We're having to train more people ourselves for skill and certification and qualification than we ever have in the past. And I expect that to be a reality for our industry and for us for many years to come. And we've invested a lot in that – really heavily in that over time. That said, on the margin, certainly in this kind of labor market, depending on what geography you're talking about, we've continued to be mindful that we have to have our salaries be competitive. And as we've done so far this year and as we've started – and we're in the throes of our budgeting and finishing up our budgeting for 2016, we feel like we can price-in what we'll need to do on the salary side for next year.

Great. Thank you.

Thank you.

Our next question comes from Sara Gubins with Bank of America Merrill Lynch.

Thanks. Good afternoon.

Hi, Sara.

Just to follow-up on that question, as you think about pricing salary increases in for next year, would that suggest higher price increases than the normal 3% to 4% that you typically do?

Sara, I'm not sure we're in a position to give specific guidance yet for 2016. But I think broadly that I think we have had, as you know, a pretty defined sort of history in terms of pricing and also wage increases in the 3% to 5% range on both, on average, really going back a long period of time. And some years we've been on the lower end of that. And other years we've been on the higher end of that. And I don't know exactly where we'll land yet. We're not ready to give guidance. But I would say, given the current economy, it leads more to the higher end of what I think where we've been traditionally.

Okay. Got it. And then in backup care, the growth is still obviously really strong in the quarter, but it was a little bit light versus what you did in the first half. Is there anything that's worth noting there?

No, I just think it's comp. It's really not to do with long – I think the long-term prospects are still what I've talked about in the past.

Okay. And could you give us an update on what you're seeing around cross-selling services, any pickup versus recent trends? And if you have any stats on how many customers are using multiple services today, that would be great.

Yeah. So, we have at this point more than 1,000 clients, Sara. And the figures on the cross-selling to multiple – multiple services to clients is still 15%, as we've continued to increase that denominator, we've added to that cohort and continue to see good growth in all of the sectors in terms of cross-selling to backup, ed advisory and coach, or back to full service. So, the needle is tough to move when the denominator's moving that way, but....

Yeah, I think it's fair to say that we have many more clients, in terms of absolute numbers, that we continue to sell with multiple services, both upfront or add to them. But as Elizabeth said, we've having a good year in terms of adding new clients and many more still come in with one service than come in with two, although more than in the past come in with two. It's just hard to move the actual percentage. So, we'll think about how we can present in sort of absolute numbers maybe in the future in ways that sort of illustrate what we're saying, because we still believe that the multiple services is an important competitive advantage and we're having good success in terms of – as compared to the past in convincing clients upfront to add more than one of our services and some of our legacy clients adding a second, third or fourth service.

Got it. Thanks a lot.

Yeah.

Thank you.

Our next question comes from Brandon Dobell with William Blair.

Thanks. Good evening.

Hey, Brandon.

Same kind of questions actually, but focused on backup for a second. Maybe what the pricing dynamics and labor cost dynamics look like there. And as you think about center growth in backup, both in terms of new as well as center closings, maybe address some of the puts and takes we should think about there, both kind of on the near term, but especially on kind of a multi-year basis.

Yeah. I mean, I think the pricing and salary dynamics are different in the backup segment relative to the way we think about full service. When you think about our backup offering more broadly, it utilizes both our full service centers to degree they have capacity, our dedicated backup centers and element of in-home care. And so, there's multiple sort of mix of use in those elements of how people utilize backup care.

Yeah.

But in terms of thinking about backup top-line growth, a big portion of it comes from just the addition of new clients that add to the mix. The second sort of piece of the pie in terms of growth comes from the adding – expanding the service with existing clients. That is a client buys X one year and buys X plus 25% the next year, based on their increased need for more service, more use. And then thirdly, price increases escalators just on our base business. But the component of labor is different – differs depending on what the mix is between in-home, our full service centers and our backup centers. And we contemplate the labor in – to the degree most of our use happens in our full service centers, the labor costs are already contemplated for within the context of the individual center. Backup sort of adds revenue to that within the center – in center mix and it's a very efficient way for us to deliver care. So, I think in backup, we feel good that it's still growing faster than the core business, levels I've talked about in the past. And although we're not bullish on the expansion of the margin in terms of pushing that ultimate margin that much more than it already is, because it's already pretty healthy, we are bullish on the top-line growth contributing to strong operating margin contribution in the next couple of years.

Okay. And have you guys noticed in your conversations around, I guess, the pipeline in particular with new clients, any wobble in what HR managers or corporates are talking about relative to their confidence in hitting the marks in terms of when centers may open, the size of those centers, where they should be? I guess I'm just trying to get a feel for the confidence. I know in the number that's within the sales pipeline, especially for centers that will be opening, but around the timing or size of those things, given some macro economy indicator (32:42) hasn't been the greatest last handful of weeks?

Yes, I mean I think we feel good, as I said earlier, in response to what's happening out there. I think we – there's obviously certain sectors that are hit worse than other sectors. But if I look at overall kind of where we are, feel good about the early-stage pipeline, which is – that is the stuff that's not yet converted. And we have the pipeline of centers that are under development that we know of that will open over the course of the next 18 months to 24 months. And that is -- that's – we feel good about not only the volume there to drive the kind of results we've talking about, but also the quality of the pipeline in terms of the names in there and the mix of industries. In terms of size of centers, I don't know that we've seen a lot of change in terms of the employer-sponsored side of centers. I think it's a little bit all over the map in terms of center size. Broadly speaking, it's representative in the same mix. Elizabeth talked before about roughly a third being cost plus and two-thirds being P&L. And that's probably indicative of – I don't know the exact numbers, but roughly speaking what we see in the pipeline. So, I think that just gives you a little color hopefully on where we're at.

Yeah. All right. Great. Thanks a lot.

Yeah.

Our next question comes from Jeff Meuler with Robert W. Baird.

Thank you and good afternoon.

Hey, Jeff.

Can you talk about the lease/consortium addressable market? And is the right way to think about it is continuing to add 15 or 20 per year as far as the eye can see or just any way to size up that addressable market for us?

Yeah. I mean, I think when we take a look at it, we see 15 to 20 centers as being viable at least for the next five years in terms of our view. If we choose – if things continue to line up for us and we feel like the economy stays strong and we still feel like it's a good opportunity for us to invest in, I would say that there is still plenty of white space out there in terms of not only fill-ins in existing geography, but other potential geography where that could play out. Right now, we're focused on probably eight or nine sort of metro geographies and sort of surrounding ring areas. And just in the next few years, that's probably where we'll stay focused and feel like there is plenty of room to grow.

Okay. And then what's the current thinking on the pace of full service margin expansion over the intermediate term just given that you continue to talk about the backup care center margins as being relatively full, but you're talking about 20% EPS growth for next year? Any framework you can provide us?

So, the leverage at the full service side – in the full service segment, Jeff, we would be looking at 50 basis points or 75 basis points to 100 basis points of margin improvement coming from the – we do have some remaining ramp in the mature P&L class to get to our sort of targeted steady state. And we have these contributions from the – not just the newer lease/consortium centers that we've talked about a lot, but any centers that are new and ramping in the cost plus or bottom-line center (36:14) class also contribute to new growth, as do acquisitions. So, the margin expansion is coming from all of those contributions, plus the arbitrage between price and cost structure. And that is, over the longer term, as we have a higher and higher class of, not only mature centers, but our mature class has gotten back to steady state, we would see that tapering back down into the 50 basis points or 25 basis points to 50 basis points range. But we think we have a couple more years to go with the higher tailwind on that margin expansion.

Okay. And then, I know this is not formal guidance, since it's a (36:58) higher level framework, but the 20% EPS growth for next year, does that contemplate additional share repurchases? Meaning, is it already factoring in additional share purchases or not?

That's factoring in just the knock-on effect of what we have done in any kind of our outlook with – there's an active repurchase program, as you know. So, it's not factoring in something major like we did at the end of last year. We would expect to have some repurchases, but it's in the rounding there, I would say.

Okay. Enjoy that balmy weather while it lasts.

Thanks. Thanks.

The next question comes from Anj Singh with Credit Suisse. Zachary Bakal - Credit Suisse Securities (USA) LLC (Broker) Thanks for taking my question. This is actually Zach Bakal in for Anj.

Hi, Zach.

Hey, Zach. Zachary Bakal - Credit Suisse Securities (USA) LLC (Broker) Yeah. Hi. On the last call, you reiterated your low-teens growth guidance for the backup centers, while noting there might be some quarter-to-quarter noise. You said that the comp is creating difficulties this quarter, but it only gets tougher in the fourth. Is low teens still the right way to be thinking about that segment this year? And if so, can you help us understand the factors causing performance to accelerate next quarter?

Yeah. So, I think our view is that the growth in that sector will continue on the track that you just outlined. The low teens, I think, our guidelines have been pretty consistent there. And what we have coming in – difference in Q4 versus earlier in the year just has to do with relative levels of client upsells and utilization and some new client launches. But we've got reasonable visibility on being in that range. So... Zachary Bakal - Credit Suisse Securities (USA) LLC (Broker) Perfect. Yeah. That works. And let me preface this by saying, I know we're talking about small numbers, but if you look at the year-on-year change in revenues and operating income and ed advisory, the increments (39:03) performance there is pretty spectacular. And then that's despite the revenue recognition issue, which I would have expected to be a little bit of a headwind on the margin front. Can you talk about these all-time high margins in ed advisory and what drove the flow-through there?

Yeah. So, the ed advisory business has a couple of elements to it, both the side that does tuition reimbursement management as well as advisory services and college coach. So, there's an element there of additional utilization by existing clients, and we had a strong quarter with that. And it's also – there's a little bit of an element of how the – as you say, it's a small business and the comps year-over-year. But it has to do with a business that's beginning to get to maturity and had a very efficient cost structure this quarter. And there will be some variability in that as we continue to invest in the structure to deliver the service. But it was a good client launch and use quarter. Zachary Bakal - Credit Suisse Securities (USA) LLC (Broker) Great. And then on the bigger picture front, with acquisition opportunities coming down a little bit, and the pipeline, while still strong, missing some of those larger opportunities like Hildebrandt, is there anything strategically that you might consider adding to the portfolio, aside from backup services, educational advisory services that you might see opportunities in?

Yeah. Let me clear, I don't think the acquisition opportunities are shrinking, not here in the U.S. and not abroad. So, while there may – as I said earlier, may not be numbers, in terms of one single operator with the numbers of centers, we think there are plenty of smaller regional opportunities that are nice tuck-in acquisitions for us, both here in the U.S. – and obviously that's where there is the most volume. And then in the U.K. and the Netherlands, there are sort of larger and smaller opportunities. So, I just want to be clear that that – we're not in a position where we feel like there's a sense of urgency to look for something new. We feel like just what we're doing today in terms of the services that we deliver, both today in terms of new services that are growing, core business is growing nicely and acquisitions still remain a good opportunity. That said, we're always looking for where we can add value to our client – to what we do with our clients, and things that we can bring to market. It's possible we'll land on something. But there's no sense of urgency around that. It's about finding the right thing that we think is the right thing to invest in a long term. And if we find that over time, that's great, but in the near term, we feel good about what exists in front of us. Zachary Bakal - Credit Suisse Securities (USA) LLC (Broker) Thanks.

You're welcome.

Our next question comes from Andrew Steinerman with JPMorgan.

Good evening, all. I wanted to ask – hi there. I wanted to ask about the FX assumption and the acquisition assumption in the 8% to 10% growth both in the fourth quarter and in 2016.

Yes. So, our expectation, Andrew, for the full year this year is that acquisitions will contribute just over 2.5% of our overall growth. So, that translates to a similar level of growth in Q4, just over 4%, similar to what we had in Q3. For next year, it would be – our assumption would be that it would fall into the usual range of 1% to 2% on our revenue algorithm, that we would be planning on a typical level of acquisitions around 1% to 2% and have a little bit of the – I'm sorry, of 15 centers to 20 centers and have a little bit of a knock-on effect from the lapping of this year's. So, it could be at that 2% range.

Right. And Elizabeth, could you mention another thing, in case I was – (42:55) assuming a 2% FX drag in the fourth quarter, what about – did we assume something in the 8% to 10% for 2016, like on current rates it's a drag?

I don't think we have a discrete item for foreign exchange next year contemplated in that 8% to 10% yet.

Okay. Thank you.

Our next question comes from Jeff Silber with BMO Capital Markets.

Thank you so much. I believe it was earlier this week; The Wall Street Journal had an article explaining what they believe was sluggish wage growth this cycle seeing a shift from wage increases to more benefits being given by corporations. I'm wondering if you think that that's accurate and has to do with maybe the secular growth being stronger for your company this cycle than in prior cycles.

Well, Jeff, I don't know if I could say specifically whether what their sort of hypothesis and what that article said was broadly – was accurate. What I can say is, I do think that, as I said earlier, we are seeing an increased appetite for the work we do and the services and the benefits that we offer. That started two-and-a-half-or-so years ago and has just increased sort of year-over-year, as I've talked about it before. So, our view is that what we do is – has the ability to be sort of high impact, particularly with the millennial generation, at what is a relatively low cost compared to the traditional benefits that are installed. So, I think that we try to focus on those things that are around improving productivity on those friction issues between work and life. And I think that continues to resonate with employers. And that's what – I can only comment on what our own experience is. I can't know more broad than that other than what we see every day.

Okay. That's fair. And just a couple of quick numbers questions in modeling for next year, what should we be assuming for capital expenditures and tax rate? Thanks.

Yeah. So, I would say, on tax rate, we would expect to see a tick up slightly from this year, so preliminary range would be in the 36% to 36.5% range. I would say, although that again is – I'll caveat that with it being preliminary until we finish up the full-on budget with all the geographies accounted for. And with respect to CapEx, I would say similar range to what we have this year with a total of probably between $80 million and $90 million between maintenance CapEx and new center build-out.

Okay. Great. Thank you so much.

Yeah.

Thanks, Jeff.

Okay, Danielle, I don't think – I think that may be all the questions we have on the board. So, I want to thank everybody for participating in our call tonight. As always, we're here for further questions and many of you we'll see on the road in the coming months and have a great night. Thanks.

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