Bright Horizons Family Solutions Inc (BFAM) 2014 Q2 法說會逐字稿

Greetings, and welcome to the Bright Horizons Family Solutions second quarter 2014 earnings conference. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Lissy, Chief Executive Officer for Bright Horizons. Thank you. You may begin.

Thanks Scott, and greetings from the Boston area to everybody on the call today. Joining me as usual is Elizabeth Boland, our Chief Financial Officer. Before we kick off our formal remarks, let me let Elizabeth go through the administrative matters. Elizabeth.

Hi everybody. A release went out earlier after the close of the market. and it is available on our website at brighthorizons.com under the Investor Relations section. This call is recorded, and it's being webcast and a complete replay will be available. The phone replay number is (877)870-5176, and for international callers, it is (858)384-5517. The conference ID number is 13586965. The webcast version will be available under the Investor Relations section of our website. In accordance with Regulation FD, we use these conference calls and other similar public forums to provide the public and the investment community with timely information about our recent business operations and financial performance, along with forward-looking statements on our current expectations for future performance.

Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially. These risks and uncertainties include, one, our ability to successfully implement our growth strategies, including executing contracts for new client commitments, enrolling children in our child care centers, retaining client contracts, and operating profitably in the US and abroad. Two, our ability to identify completely and successfully integrate acquisitions, and to realize the attendant operating synergies. Three, 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 finally, the other risk factors that are set forth in our SEC filings. We also discuss certain non-GAAP measures on this call, which are detailed and reconciled to their GAAP counterparts in our press release. So I'll turn it back over to Dave for the review and update on the business.

Thanks Elizabeth, and hello again to everybody on our call today. As usual, I'll kick things off, and I'll talk about our financial and operating results for the quarter and our outlook for the rest of the year, and then Elizabeth will follow me with a more detailed review of the numbers, before we come back and open it up to Q&A. First let me recap the headline numbers for the second quarter of 2014. Revenue of $348 million was up 12% over prior year, and adjusted EBITDA of $64 million was up 14%. Adjusted net income of $28 million was up 19% over the second quarter of last year, and earnings per share of $0.41 increased 17% from the $0.35 we reported in last year's second quarter.

Our revenue growth in the second quarter reflected continued strong performance across our suite of product offerings, full-service revenue is up 11% over last year, in addition, backup revenues increased 11%, and Ed advisory services grew $8 million, or 47% in the quarter. We added 8 new centers in the quarter, including two in the UK, and some examples of our new client additions across our full suite of solutions this past quarter included Hasbro, GoDaddy, Trulia, ING America, and Phoenix Children's Hospital.

We also continued our long track record of growing operating income again this past quarter as adjusted income from operations of $43 million increased 17%, and expanded 50 basis points to 12.2% of revenue. This is driven by a few factors, the continued positive enrollment trend 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, solid cost management, strong performance in our backup and educational advising segments, and overhead leverage, including the synergies we realized from the 2013 acquisitions. These factors, which all create margin improvement, continue to be offset this quarter by the losses associated with the class of leased consortium centers we opened last year and continued to open this year. While this headwind will decrease as these centers ramp up this year and into 2015, as we've discussed in the past, the near term loss has dampened gross margins.

As a reminder though, on a fully ramped up basis these lease consortium centers generate the highest margins of our full-service center models. We expect that as a class they'll be a strong value creator for us in 2015 and beyond. Another factor affecting margins is our plan to fully realize the value and resulting margin improvement from the relatively larger scale acquisitions we completed last year. This is made up of several factors, including the ramp up of centers that were immature at the time of acquisition, which we're pleased to see tracking to our expectations in terms of enrollment and operating performance. The other factor is the impact from the underperforming centers we inherited as part of both of those deals, which as we previewed last time, we expect will result in the closure of as many as ten centers in 2014, more than normal, including four that we've closed so far this year. As a reminder, we typically expect to close approximately 2% to 3% of centers as a normal course of business.

Let me move over to overhead, and as targeted we leveraged overhead 90 basis points to 9.5% this quarter. At this point in the year we've essentially realized our targeted overhead synergies from the two relatively larger deals we completed last year. Overall, let me say I am pleased with our strong operating performance through June, and I remain incredibly proud of the work of our team in achieving consistently strong results. Now let me turn to the remainder of 2014. For the year we expect to see revenue growth in a range that approximates 11% to 12% over 2013. In addition to the expected 3% to 4% average price increases, our outlook contemplates center additions in the range of 40 to 50 new sites, including organic new centers, and some small tuck-in acquisitions.

The new center growth will be achieved largely on the strength of our pipeline of centers currently under development and as typical each year, transition centers that are either self-managed by the employer, or managed by a competitor. Additional revenue growth drivers will be the continued ramp up of centers that we've opened prior to this year, as well as continued growth in both our backup divisions and educational advising services. As we head into the fall, the overall selling environment remains positive for us, both in the prospecting of new clients across our suite of solutions, and on cross selling and upgrading our services, and thus increasing our revenue with existing clients. We anticipate that this growth will allow us to grow our income from operations to approximately 11% for the full year, leveraging the adjusted operating income margin by 50 to 75 basis points which in turn drives adjusted EBITDA to a range of $241 million to $245 million, and adjusted net income to a range of $97 million to $99 million. Thus our guidance for adjusted earnings per share for the full year of 2014 remains in the range of $1.43 to $1.46.

Before I close, I just want to highlight the results of an important study that we recently published. For almost three decades now we have partnered with leading employers who are building supportive cultures that help working patients both manage their family responsibilities and remain productive and focused at work. In 2014 the need remains as strong as ever. Last month we released the Bright Horizons Modern Family Index, and the findings were an important reminder that there's still of work to be done to create supportive workplaces. Importantly, the findings also show that those who work in organizations that have supportive environments exhibit high levels of engagement and productivity, and are much more likely to stay with their employer, even to turn down higher paying job offers to maintain their quality child care arrangements.

The survey once again underscores that supporting working families is just not nice to do, but rather a must to do for employers who are serious about sustaining competitive advantage within the markets in which they compete. So with that, let me turn it over to Elizabeth to go through the numbers in more detail, and I'll be back to you during Q&A. Elizabeth.

Thank you Dave. So as we've done in previous calls, I'll discuss our reported results as well as the metrics that we think help isolate unusual or nonrecurring charges. The earnings release includes tables that reconcile our US GAAP reported numbers to these additional metrics for adjusted EBITDA, operating income, net income, and EPS. Specifically quantifying nonrecurring charges such as the cost associated with stock offerings and deal costs for acquisitions. So to recap, top line revenue growth was $37 million for the second quarter, with the full-service center business increasing $31 million, backup increasing $4 million, and Ed advisory increasing just over $2 million.

In addition to the new center growth, rate increases in enrollment gains that Dave discussed, favorable FX rates also contributed to our top line growth. Gross profit increased $7.7 million to $83 million in the quarter, and gross margin was 23.9% of revenue compared to 24.3% in 2013. In addition to the solid performance in the full-service segment from enrollment gains and the tuition to personnel cost leverage, our backup services segmented continues to deliver gross margin growth consistent with the revenue growth. In addition to these factors, margins this quarter continue to be impacted by the ramping of the large class of lease consortium centers that we opened over the last 18 months, and also by a handful of underperforming centers that came with the acquisitions we completed in 2013, and had identified to fix or close.

Overhead in the quarter was $33.2 million, or 9.5% of revenue, compared to 31.5% or 10.1% last year on an adjusted basis. This is a 60 basis points decrease. As we have previewed on prior calls, we're beginning to realize the overhead leverage that we had projected, due to the completion of the integration of the 2013 acquisitions as well as the ongoing leverage of investments that we've been making over the past several years to support growth. Although we expect to continue to leverage over time, the quarter-to-quarter gains won't be linear, but we do expect to improve recurring overhead by 10 to 20 basis points this year, as well as over the next few years.

In summary, adjusted net income of $27.5 million, translates to adjusted EPS of $0.41 a share in the quarter, up from $0.35 a share in 2013. We generated operating cash flow of $52 million in the quarter, and $104 million year-to-date, which is up $6 million from this same time last year. After deducting maintenance CapEx of $6 million in the quarter, free-cash flow for Q2 totaled $46 million compared to $39 million last year. The main drivers of this increase are the improved operating performance in the consistent net working capital, which is partially offset by higher cash tax payments this year, due to the increase in our pretax income. We ended the quarter with $112 million in cash, and no borrowings outstanding under our revolver.

In quantifying our usual quarter end statistics, at June 30 we operated 882 centers, with total capacity of just over 99,600, which is an increase of 7% from the just under 93,000 we added June 30th of 2013. We operated approximately 75% of our contracts under profit and loss arrangements, and 25% under cost-plus contracts. Our average full center capacity is 136 in the US, and 76 in Europe.

Before I get into the Q3 and full year guidance, I do want to take a minute to refresh your memory about two factors that will affect the sequential quarterly performance, this year as well as a typical seasonal effect in prior. First, we lapsed the Kidsunlimited acquisition in April, and we will lap the Children's Choice acquisition in July. Therefore, the performance will reflect those effects. Secondly, as most of you know, we experienced some seasonality over the summer months as older children age out of our full-service centers, and we rebuild that enrollment over the fall, and as our backup utilization peaks. Both of these factors impacted sequential operating performance for those segments.

As Dave previewed, our updated projection for the full year 2014 anticipates revenue growth approximating 11% to 12% over 2013. Organic growth approximates 8% to 10%, including the estimated 3% to 4% price increase, 1% to 3% from growth and enrollment in our mature and ramping centers, 1% to 2% from new organic full-service center additions, and 1% to 2% growth from backup and Ed advisory services. In addition, acquisitions add approximately 4%, including the lapping effect of the acquisitions we completed last year. Offsetting these increases are the effective center closings which includes both legacy, organic, and acquired centers, approximating 2%.

We expect the income from operations in 2014 will approximate 11% of revenue, expanding 50 to 75 basis points from the 10.4% adjusted income from operations we reported for 2013. We project amortization expense of $30 million for the year, including about $20 million related to our May 2008 LBO, and depreciation expense of approximately $50 million to $52 million. We estimate stock compensation expense of $9 million, and interest expense is projected to approximate $34 million for the year, assuming continued 4% borrowing rates on our term loan, and no borrowings under the revolver required based on our expected cash flow generation.

We estimate that the effective tax rate will continue to approximate 36.5% of our adjusted pretax income in 2014, consistent with the projected GAAP reported effective tax rate for the full year in 2014. A combination of top line growth and margin leverage leads us to project a 15% to 17% increase in adjusted EBITDA to a range of $241 million to $245 million for the full year 2014. With adjusted net income for 2014 in a range of $97 million to $99 million, and 68 million estimated weighted average stairs outstanding, we therefore estimate that adjusted pro forma EPS will range from $1.43 to $1.46 in 2014. Lastly, for the full year, we project that we will generate $160 million to $165 million of cash flow from operations, or $135 million to $140 million of free cash flow, net of the projected maintenance CapEx of $25 million to $30 million.

Based on the center's in development and slated to open in 2014, we expect to invest approximately $35 million to $40 million in new center capital, and we expect to fund all of these investments from operating cash, thereby ending the year with approximately $100 million in cash on hand. Looking specifically to Q3 of 2014, this will be our first quarter that incorporates the full year's effect of the larger acquisitions completed in 2013, and in addition as I just mentioned, we have typical seasonality impacts. Therefore, our estimated revenue growth for Q3 of 2014 approximates 8% to 9%, and our outlook for adjusted EBITDA is $55 million to $57 million for the quarter.

Using the 36.5% effective structural tax rate on the adjusted income before tax, and the 68 million weighted average shares outstanding, we are projecting adjusted net income in the range of $21 million to $22 million, and adjusted EPS in the range of $0.31 to $0.32 a share for the third quarter of 2014. So after all of that detail, Scott, we are finished with our prepared remarks, and are ready to go to Q&A.

Thank you. (Operator Instructions). One moment please, while we poll for questions. Our first question is coming from the line of Gary Bisbee with RBC Capital Markets, your line is now open, you may proceed with your question.

Hey, good afternoon.

Hi, Gary.

My first question, how should we think about growth for the Ed advisory business? Obviously it's been doing terrifically and it's comping some huge growth numbers next quarter, but is sort of a steady sequential increase the right way to think about it, or are those growth rates likely to slow down sharply, given comping the 40% growth?

Yes, I think Gary, I think the short answer is, over time we see it as a grower somewhere in the mid-20s, maybe up to 30% for the short-term annually. So this quarter I think is a little high relative to what I think we'll see on a more normalized basis. We're executing on some of the clients we inherited through small acquisitions we did in the past, and upgrading services more to our platform, that is helping the growth rate in addition to new starts, but the good news is we still see it as a strong grower, but probably a little less than what you're seeing now on a more normalized basis.

And then you're doing more closures this year, and probably opening more in the fall, but it looks like year-to-date only two net centers for the full-service business, addition or growth of two. Is that just sort of timing, was that what you expected at the beginning of the year, and I guess you will catch up the next two quarters?

Yes, I think each year is a little different, over time, I think center timing of openings is an all over the map, and this is one of the years where it's a little bit more back weighted than front weighted, we've had years where it has been the opposite. A little tough to predict. Over time, Gary, on that one. And you're right to say that our closures are a little more deliberate this year, in terms of as many as ten potentially for the year could come from the underperformers that we've targeted from the two groups we've acquired, one here and one in the UK, which is exacerbating it.

One of the other things I would just point out for context, and this may be obvious, we are opening new centers today on average that are larger than our installed base that contribute at today's margins, and then we are closing centers mostly that are either losing money or are significant underperformers for the most part. So while the number may appear as a net, when you look at it from both I think an overall capacity perspective, and also from what the contribution will be net, it's obviously a pretty high positive. Granted some of them will take a little longer to ramp up, so I'm not talking about the front end losses associated with some of them, but what they'll contribute versus what we're closing is quite a delta, so I just point that out for contextual purposes.

One last quick we. Did I hear you right that you said mature base of centers is seeing a 2% enrollment increase? It seems like the last few years it's been more like 1%, is that just a rounding, or are you feeling some improvement along with the economy driving, I guess incrementally better performance there? Thank you.

Yes, I think this has been a strong year on the enrollment side. I think the best indicator to us is that this is the fourth year now where we're seeing year-over-year gains, but you're right to say that it's been more in the range closer to 1%, or 1% to 1.5%, and this year it's 2%, and comfortably on that, so I think we're seeing good momentum there, and as I say, comping against several years of modest gains, we feel like we're on a good trajectory to continue to recover back to the utilization levels that we had pre the recession.

Alright. Thank you.

Thank you. Our next question is coming from the line of Timo Connor with William Blair. Your line is now open, you may proceed with your question.

Thank you. Given the success that you're seeing in the Ed advisory business, I know it's still small as a percentage of overall revenue, but meaningful from an earnings standpoint, are there other services that you can tack onto your existing platform, and how are you thinking about additional offerings longer term?

Yes, Timo, I think that our view longer term is, I think we've proven to ourself over the past five years that we can leverage the relationships that we have with our clients across a variety of solutions that provide critical supports around the friction that's created between work and life. And to do that at a variety of different life stage issues, so that employers can touch, so that we can touch more of any individual employer's population, not just those with children, or not just those with college age kids, but across a variety of different things. I think that while there's nothing short-term on the horizon, I think we continue to think like that, and it's logical that we would think about new solutions over time that would meet that need, and try and adopt them to broaden our offerings to our clients.

Do you get questions from clients or requests from clients for additional services they might like to see?

Yes I mean, from time to time we do. We announced a partnership we did with a company that's pioneering a service in the area of special needs children, and providing supports to families who are struggling with getting resources to support the needs of their children who have special needs, and I think that's an area that causes additional friction to working patients trying to manage that, and we're starting to pilot that service with some clients. There are other sort of issues and areas that come up from time to time, elder care is one that we're doing on the backup side, that's an area that it's unlikely that we'll ever be a provider of, but certainly you can you can conceive of other solutions that when you think of employee as caregiver, that we might be able to bring to bear. So we'll continue to listen to our clients like we did with backup care, like we did with educational advising, and I'm confident that over the long run we'll figure out other solutions that make sense.

Okay. Thanks. Final one for me, you're approaching kind of the peak fall enrollment period, I guess what are your initial thoughts and expectations for both enrollment and pricing?

I think the 3% to 4% price increases that we have previewed with you in the past are holding throughout the year, and we expect that's what will happen for the remainder of this year. Many of them go into effect in the fall, and that's what we expect. And with respect to enrollment this is always the challenging time of year as Elizabeth pointed out, the seasonality that we experience in the full-service business comes from the aging out of the preschool, a lot of the preschool children who are graduating into school, and so that enrollment rebuilds into the fall, and we reach a peak in the beginning of next year, and while it's too early to fully know where it's trending, I think our indicators are that we're on pace to continue along the trajectory that we've been experiencing with enrollment, particularly in the centers where we own the profit and loss.

Alright. Thank you very much.

Thank you.

Thank you. Our next question is coming from the line of Dan Dolev with Jefferies. Your line is now open, you may proceed with your question.

Hi, thanks for taking my question. Hey guys. Really just a housekeeping question. Can you provide us with the organic growth figures for the center base, and also for the total in Q2?

The Q2 figures, Dan, are pretty similar to the full year targets. We had growth in the second quarter of 12% and the acquisition growth was also in the neighborhood of 4%, so those same statistics apply, we're a little closer to 2% gain in enrollment in the full-service business in terms of those ranges, but those same stats hold.

Okay. Great. I appreciate it. Thank you.

Thanks, Dan.

Thank you. Our next question is coming from the line of Sara Gubins with Bank of America. Your line is now open. You may proceed with your question.

Hi, this is David Chu for Sara Gubins. So what led to the 2Q revenue beat, was this primarily driven by ed services?

I think it was really across the board with respect to, as Elizabeth mentioned, enrollment being, continuing to be strong, back up continuing to contribute at the levels that we had hoped, and obviously a little outperformance on the education advising, but as I think I commented in the formal remarks, I think we're pleased across the board with the performance in all of the segments.

Okay. That's great. And in terms of the backup care, revenue continues to grow nicely. Can you discuss how much of this is from pricing versus new clients?

The pricing on the backup care side is relatively similar to the pricing on the full-service side. It comes a little different obviously in the neighborhood of 3-ish to 4-ish percent on average, that comes from pricing, contractual price increases each year from our backup clients. The backup, the rest of the backup revenue growth is a combination of, as you mentioned, new clients adopting the service, so new starts, and also increasing the revenue, existing client revenue. So oftentimes we'll have clients start out the backup service, offering it to a portion of their workforce, and then if it goes successfully, which we feel good that it typically does, they'll then choose to roll it out more broadly, they might roll it out in the UK, lots of different ways to expand revenue. They might increase the usage that their clients are, that they buy from us because the utilization is good. So there are a number of ways we increase revenue by client. So I would say that you have price, you have new starters, which is a good chunk of it, and then the remaining piece of it as, as I just mentioned, increasing revenue, increasing use essentially with existing clients.

Okay. That's helpful. Just one housekeeping question. Dave, did you say you expect 30 to 40 net new centers for the year?

No, I said we expect 40 to 50 gross new centers for the year.

And so what would that number be on a net basis?

We expect closures, we expect our typical 2% to 3% closures, and as many as 10 additional, so it could be as many as 35 total, somewhere in the 30 to 35 range on the closure side, given as many as 10 that we might close in addition to the typical 20 to 25 that would be normal course of business.

Okay. Great. Thank you.

Thanks, David.

Thank you. Our next question is coming from the line of Anj Singh with Credit Suisse. Your line is now open you may proceed with your question.

Thank you very much, this is actually [Zach Bacall] calling in for Anj. First off, earlier you said, David, that you were going to be closing smaller centers and opening up larger ones. I noticed even though you have a net opening of two new centers, the actual capacity hasn't changed, and has in fact actually gone down about 100. Is that just timing or is there something else going on there?

One element of that is, there were a couple of particularly larger centers in the class of, that we had acquired that were part of the closure group, so that's a factor there. I think Dave is correct in describing the overall, when you're looking at a cohort of centers that we're closing versus centers that we're opening, they tend to be larger now, and they tend to be what we're closing is older and smaller. And so I think a better way to look at it is a 7% capacity gain from 12 months ago, in terms of the overall growth in what we're able to serve in terms of full-service families.

Great. Thanks. And then on enrollment, 2% is great to hear. Back in 2007 you said that you had an enrollment of about 78% to 80%. Is that still your long-term target, and if so, how much further do you think you have to go to there?

Yes, I think that's our current target, is to get back to where we were previous session as you mentioned, in that range. We find ourselves today in and about the 74-ish% of occupancy in that P&L class, again we're referring to the centers where we have P&L responsibility. So there's in the neighborhood of 5-ish more points to go to get back to where we were back then.

Great. And then just one last short question. When you were stating the things that impacted your performance, you mentioned FX rates. I'm just wondering for the rest of the year, are you still guiding based on $1.60 to $1.65 US dollars a pound, or pound to US dollar?

Yes I mean, largely it's been tracking closer to, it's slightly over $1.65 so we've engaged up closer to that than the $1.60 but closer to that range, yes.

Alright. Got you. Thank you very much.

Thank you.

Thank you. Our next question is coming from the line of Jason Anderson with Stifel. You line is now open, you may proceed with your question.

Good evening everybody. I guess I want to get your thoughts on maybe the market. Obviously your business is doing well. What I ask and I'll give you a little frame of reference, just a recent study out in the last couple of months from the Society of Human Resource Management, they do a benefits survey, and it shows declines in certain categories that would line up with your offerings, and I'm just wondering, are you seeing anything further out down the road, any concern on the market, and that's a decline of companies offering the benefits, whether it's certain child care types, or even tuition assistance and that sort. Are you seeing anything that would mesh with that? It would seem like your business is not seeing that, but I'd just ask you to comment?

Yes, I think that, I can't speak for the survey itself, I'd have to take a look at it, also have to take a look at the size of employers that they are talking with. But our view on it is, we look at the selling environment that we're in now, we look at the behavior of our existing clients, and we're seeing positive trends with respect to prospecting on the new business side, even relative to a year ago, and then we're also seeing continued positive movement with respect to our existing clients adopting more service. That means expanding backup care, as I said earlier, more broadly across their population, or expanding use, or developing new sites, or adopting our educational advising business.

I don't have the latest data in front of me with respect specifically to tuition assistance, but I know that on that front, I think there is a pretty large installed base of prospects for that service, given that really that business, we're pioneering something very new, and that business isn't really asking them necessarily to provide the benefit of tuition assistance, it's really providing a smarter way and a more economical way to provide the benefit, so I think that is such a big market potential in terms of prospects, I'd have to look at whether or not there are trends with respect to companies, new companies offering that benefit or not, but in terms of what we're chasing now, which is the installed market, of companies that do offer that benefit, I think it's a pretty big market for us, given the penetration that we or anybody else has in our kind of service.

Great. Thanks for all of that. And then one other one for me. Have you seen any pressures in the, usually we ask every quarter on wage inflation, or any cost issues there that you're seeing?

We continue to monitor, as we've talked about in the past, the appropriate sort of level of what we're going to need to be doing as we head into whatever period of time, to be sure that we continue to price ourselves appropriately ahead of what we'd expect, and I think that average in the 3% to 4% is what we see for this year, we'll be taking a look the that for 2015, and looking at what we think the labor market is telling us will be the appropriate both wage increases for existing employees, and sort of what we'll need to be looking at with respect to hiring, but overall I think we feel good that our wages are in the right place, and that while the continued challenges of early education in terms of supply of talent is shrinking, and has been shrinking for 10 or 15 years, that our place within the industry is a strong one. So we feel like we're in a good place, just pretty consistent with what we might have said to the same question last quarter or last year at this time.

Great. Thank you.

Thanks.

Thank you. Our next question is coming from the line of Jeff Silber with BMO. Your line is now open, you may proceed with your question.

Hi. It's Henry Chien calling in for Jeff. Thank you guys. I just wanted to ask a little briefly about operating margins, it seems like you have gained over the past few quarters, I'm just wondering looking out maybe a little next couple of years ahead, are you sort of at a target level that you're looking towards?

Yes, I think that the expectation that we have over the next couple of years is to continue to see similar operating margin improvement that we are realizing this year, in that range of 50 to 75 basis points. It will come from margin improvement as we continue to regain the enrollment that we've been talking about, and get into more of a steady state level of operations on these larger classes of lease model centers that we have been adding, and so those are a couple of contributors on the full-service side, and then steady performance in the other segments. But also maintaining some overhead leverage in that 10 to 20 basis points range, so we would look at 50 to 75 basis points in the near term, a couple of years, and then once we have regained, and are at that sort of targeted utilization in our mature class of full-service centers, it would more likely taper to a 25 to 50 basis points of leverage, but continued growth.

Got it. And then is that sort of near the end of 2015 or early 2016?

No, to be clear, I think the 50 to 75 basis points is probably a two to three-year outlook, so 2015, 2016, 2017 kind of time frame is when we think we would be able to get back to that level of enrollment, and then it would taper, so that it's more of a near term, meaning a couple years' view.

Got it. Okay. That's it for me. Thanks so much.

Thanks.

Thank you. Ladies and gentlemen, our final question is coming from the line of Mr. Nick Nikitas with Robert W. Baird. Your line is now open. You may proceed with your question.

Yes, thanks, just looking at the slightly higher number of closures in 2014, are those evenly split across the two acquisitions, and then looking at 2015, would you expect that to step down, or is there some excess capacity that still needs to be rolled off?

I commented earlier that we can close as many as 10. It's hard to know for sure that, how many of them we'll do for sure this year versus some that might spill over into 2015. Some of them are contractual, and we have to negotiate sort of the exit. So we want to do that appropriately, and we want to do it right. So it could be a little bit of spillover, but I would expect that the majority of them we probably would get through this year. Then on an ongoing basis, I think you should expect that we would close 2% to 3% of our centers as a normal course of business. That's really consistent with 10 or 15 years' worth of operating experience, of what has happened. And those closures tend to be a combination of either underperforming centers just generally speaking, also client M&A, and/or downsizing of locations can lead to closings of centers. So a lot of different reasons, but that's more of a normal thing. Lastly, with respect to evenly split, I would say it's more weighted towards the US than the UK.

Okay. That is helpful. Thanks. I guess looking within full-service in the US, are there any geographic trends you guys are noticing, or is it pretty similar across the board?

I think the geographic trends that we have talked in the past, that is, in and around major metropolitan areas recovering faster and continuing to be more robust than more rural areas is the trend for us, so in and around New York City, in and around the Boston area, Washington DC corridor, Chicago land, San Francisco, Seattle, those places, a little bit down in Texas in the energy industry, those places have been obviously more robust and faster rebounders than some other places in the country.

Okay. And just one last one for me. With the greater percentage of lease consortium centers coming online and ramping, can you just remind us of the profitability ramp for those and how we should expect that to scale over the back half and probably more so in 2015?

Sure. So, a typical lease model center will open and ramp to around 30% to 40% occupied in its first year, and so it will become, it will reach break-even point at around 15 to 18 months, and therefore in the first year, it's losing a few hundred thousand, in the second year it's getting to breakeven once you factor in the full year's view, and then on a mature basis, once it reaches the end of the sort of third year and is at full maturity, those centers that we've been opening the last couple of years are averaging in the range of $2 million to $3 million in revenue, and at 20% to 25% margin, they're doing in the neighborhood of $500,000 to $750,000 of contribution.

Great. And the centers today kind of follow that similar trend?

Yes, the installed base is a lower average than that, if you've seen our Investor presentation, the road show view is one of the existing installed base, I'm talking about the more recent class of centers which tend to be, they have a higher revenue profile because of where they're located, and the tuitions that we can charge in those geographies, as well as being, as Dave mentioned before, the slightly larger scale, but they deliver, as a result of that they deliver a higher absolute dollar margin as well, they're in the range of our lease model consortium targets, but they also just deliver more dollars because of the revenue profile.

Okay. Thanks for taking the questions.

Sure. Thanks.

Thank you. At this time there are no further questions. I would like to turn the floor back over to our management team for any closing remarks.

Thanks Scott, and thanks everybody for joining us in our call today, and we'll be seeing you on the road throughout the year I'm sure, and obviously here with any additional questions. Have a good night.

Yes, thanks for your interest in Bright Horizons. Bye.

Ladies and gentlemen, this does conclude today's teleconference, you may disconnect your lines at this time. Thank you very much for your participation, and have a wonderful afternoon.