Bright Horizons Family Solutions Inc (BFAM) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

I would not like to turn the conference over to your host, Mr. David Lissy, Chief Executive Officer. Thank you, sir, you may begin.

Thanks, Jen, and greetings to everybody from Boston. We're certainly glad you voted to be with us today.

Joining me on the call as usual is Elizabeth Boland, our Chief Financial Officer. And before I kickoff our formal remarks, I'm going to allow Elizabeth go through the Safe Harbor matters. Elizabeth?

Thank you, Dave. Hi, everybody.

As you know, our earnings release went out after the close of the market today, and it's available on our website, brighthorizons.com, under the Investor Relations section. This call is being webcast, and a complete recording will be available after the call. Phone replay number is 877-870-5176, or for international callers, it is 858-384-5517. The conference ID number is 13593208.

The webcast version is also available under the Investor Relations section of our website.

In accordance with reg 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, along with some 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 our ability to successfully implement our growth strategies, including excluding contracts for new clients; enrolling children in our centers; retaining client contracts, and operating profitably in the US and abroad; our ability to identify, complete and successfully integrate acquisitions; and to realize attendant operating synergies; our decisions around capital investment and employee benefits that employers are making; our ability to hire and retain qualified teachers and other key employees and management; our substantial indebtedness and the terms of such indebtedness; and lastly the other risk factors which are set forth in our SEC filings.

We will also discuss certain non-GAAP financial measures on this call, which are detailed and reconciled to their GAAP counterparts in our press release.

So, I'll turn it back over to Dave for the review and update on the business.

Thanks, Elizabeth, and hello again to everybody who is joining us today.

As usual, I'll kick things off. I'll talk about our financial and operating results for this quarter. I'm going to review our outlook for the rest of this year, discuss some trends in the business, and give you a little preview into 2015. Elizabeth will then follow with a more detailed review of the numbers before we open it up to your questions.

First, let me recap the headline numbers for the third quarter of 2014. Revenue of $335 million was up 9% over the prior year, and adjusted EBITDA of $55 million was up 11%. Adjusted net income of $21 million was up 16% over the third quarter of last year, yielding adjusted earnings per share of $0.32, up from the $0.28 we reported in last year's third quarter.

Our revenue growth of $26 million this past quarter reflects continued strong performance across our suite of product offerings. Full service revenue was up $20 million or 7% over last year, as we lapped our acquisition of Children's Choice back in 2013. Backup revenues increased 13% to $43 million, and ed advisory services grew 27% to $9 million for the quarter.

We added 10 new centers this quarter. Some highlights included exciting expansion in the energy sector down in Houston, with full service centers for Exxon Mobil and Shell at their new campuses, as well new centers for Boston Scientific, Vameer Manufacturing and Tufts University. We continued our long-term track record of growing operating income again this past quarter, as adjusted income from operations of $33 million expanded 30 basis points to 9.9% of revenue.

This is driven by a few factors, which include 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 the new and ramping centers, solid cost management, strong performance in our back up and educational advising segments, and overhead leverage, including the synergies we realized from the 2013 acquisitions.

These factors, which all create margin improvement, continued to be offset this past quarter by the losses associated with the class of Lease Consortium centers we opened last year and continued to open this year. While this headwind will decrease as these centers ramp up into 2015 and beyond, as we discussed in the past, the near-term losses dampen gross margins. As a reminder, on a fully ramped up basis, these lease consortium centers generate the highest margins of our full-service center models.

Another factor affecting margins is our plan to fully realize the value and resulting margin improvement from the relatively larger scale deals we completed last year. This is made up of several factors, including the ramp up of centers that were immature at the time we acquired them, which we're pleased to see tracking to our expectations in terms of enrollment and performance.

The other factor is the impact of the cohort of underperforming centers we inherited as part of these deals. As we previewed with you last time, we expect to improve the performance of some of these centers over time. In addition, we've either closed or expect to close a number of these centers.

As a result, we would typically -- as we typically expect to close approximately 2% to 3% of centers as part of our normal course of business, this year's closure number will be slightly higher, around 30 centers. It's important to note that, while this strategy impedes somewhat net opening numbers in the short term, it is an accretive process, as we had higher performing new centers and prune the underperformers.

Overall I'm pleased with our strong operating performance through September, and I remain very proud of the work of our team in achieving consistently strong results.

Given that we are in November, I wanted to take a few minutes to provide you with a view on what we're seeing in the market, and in turn how it effects what we expect for the remainder of this year and into 2015. As we close out this year, we expect to broadly deliver on the plan was we set for ourselves at this time last year. The selling environment for our services has improved over last year, and we are pleased with the results that we are presently achieving, which position us well heading into 2015.

Industry verticals that are particularly strong for us include technology, energy, higher education, and health care. It is now more common for us to begin new client relationships with more than one of our services as employers have recognized our ability to touch more of their employees with services that help them to be productive.

Our strategy to open new lease consortium centers in urban ring locations is working, and we are seeing new centers both ramp up on plan, and help us to deliver backup care through Bright Horizon centers in key locations where the demand is the strongest. While this is currently a short-term drag on gross margins, we fully expect this to be a strong value creator going forward. Backup care and education advising services both continue to experience strong take up, with both new clients and by cross-selling to our existing clients.

On the acquisition front, we enjoyed an outside year back into 2013 and, as I said to you in the past, closing deals both big and small can be lumpy. That's been the case this year, as we've delivered on our plan to open our new organic centers, but don't expect to achieve our targeted typical number of smaller acquisitions, which explains our lower number of overall new center openings as compared to our initial target we set last year. The good news here, though, is we built the pipeline, and have good visibility into potential deal flow.

Based on our current view, we'd expect a return to a more typical run rate of acquired centers beginning in Q4 and into 2015. This translates into annual additions in the range of 15 centers, which would be our target next year.

On the operating side, we are pleased to continue to see enrollment trends in our mature basis centers continuing to improve. This is particularly true in the US where we suffered the greatest loss during the downturn, and have steadily rebuilt this year and anticipate continued expansion in 2015. Price increases continue to average 3% to 4% across our network, which are tracking ahead of center cost increases by roughly 1%.

As we look ahead to next year, we anticipate a similar spread. So all in for this year, we anticipate a topline growth that approximates 11% over 2013, which will in turn drive improvement in adjusted operating income margin by 50 to 75 basis points.

That's our guidance for adjusted EPS for the full year in 2014 is in the range of $1.43 to $1.45. As we look ahead into 2015, as I said earlier, our business is well-positioned to continue to benefit from the positive trends and operating execution that contributed to our strong performance this year.

While we're not yet providing specific guidance for next year, based on how we are trending now, we are targeting revenue growth in 2015 to be in the range of 8% to 10%. We expect to continue to drive strong earnings growth, that translates to adjusted earnings-per-share growth that we expect to approximate 20% in 2015.

With that, let me hand it back over to Elizabeth to review the numbers in more detail, and I'll come back to you during the Q&A. Elizabeth?

Thank you, Dave.

Again, the topline revenue growth in the third quarter was $26 million. The full service business added $20 million on rate increases that averaged 3% to 4%, and enrollment gains in our ramping centers as well as the mature class, which grew 2%, as Dave mentioned. Lastly, we had contributions from new centers that we've added since the third quarter of 2013.

The backup division and ed advisory services continue to grow the topline, both from new clients and from expanded utilization of services by the existing client base.

The gross profit increase was $4 million to $73 million in the quarter, and the gross margin of 21.8% compares to 22.2% in 2013. Our back up services and ed advisory services both continue to deliver strong gross margin performance that's in concert with their revenue growth. On the full service side, performance also remained strong in our mature and ramping class of centers, as the steady pace of year-over-year enrollment gains, coupled with strong cost management, drives steady margin growth.

Countering this positive trend is the continuing effect of the larger class of lease consortium model centers that we've opened the 2013 and 2014, and the other items that Dave discussed.

Overhead in the quarter was $33 million or 9.8% of revenue, compared to $31 million or 10.1% last year on an adjusted basis. Which is also a 30 basis point improvement. As we previewed on prior calls, we've completed the integration of the 2013 acquisitions and are leveraging the investments that we've made over the past several years to support growth. We expect to continue to leverage recurring overhead over time at levels similar to the 20 to 25 basis points we expect to ultimately realize in this calendar year.

We generated operating cash flow of $17 million in the quarter, and $121 million year to date. After deducting maintenance CapEx of $8 million, our free cash flow for the quarter was $9 million. We ended the quarter with $109 million in cash, and no borrowings outstanding under our $100 million revolver.

Now, to quantify a few of our usual quarter end operating stats. At September 30, we operated 876 centers, with capacity of 99,900. The mix of contract types remains consistent. 75% profit and loss arrangements, and 25% cost plus contracts. As is the average full service center capacity, which remains at [137] in the US and [76] in Europe.

As Dave previewed, our updated projection for the full-year 2014 anticipates revenue growth approximating 11% over 2013.

Growth breaks down as follows. Organic growth approximates 8% to 10%, including the 3% to 4% price increase. That's about 1% to 3% growth from enrollment of our mature and ramping centers, 1% to 2% from new organic full-service center additions, and 1% to 2% growth from back up and ed advisory services. In addition, acquisitions this year add approximately 4%, just primarily the lapping effect of the acquisitions that we completed in 2013.

Offsetting these increases are the effects of center closings, which includes both legacy organic centers, as well as acquired centers. Approximating 2%.

We expect income from operations of 2014 to approximate 11% of revenue, which is an expansion of 50 to 75 basis points from the 10.4% adjusted income from ops that we reported for 2013. Going down the income statement, on a couple of the other line items, we expect amortization expense to approximate $29 million for the year, including $20 million related to our May of 2008 LBO. And for depreciation expense to approximate $49 million to $50 million.

Our stock compensation expense is projected to be approximately $8 million, and interest expense is $34 million for the year, assuming a continued 4% or so borrowing rate on our term loan, and no borrowings under the revolver, which we would not expect to be required based on our cash flow generation. Lastly, we estimate that the effective or structural tax rate will continue to be in the neighborhood of 36.5% of our adjusted pretax income in 2014, which is consistent with the projected GAAP reported effective tax rate for the full-year.

The combination of topline tax -- Sorry, the topline growth in operating margin leverage leads us to project adjusted EBITDA to increase 15% to 16% to approximately $240 million for 2014. With adjusted net income in the range of $97 million to $98 million, and 68 million estimated weighted average shares outstanding, we therefore estimate that adjusted pro forma EPS will approximate $1.43 to $1.45 for the full year 2014, which is an increase of 20% to 22%.

Lastly for the full year, we project we will generate $160 million to $165 million of cash flow from operations and $135 million to $140 million of free cash flow net of the projected maintenance capital spending of around $25 million.

Based on the centers we have in development and slated to open in 2014, as well is early 2015, we expect to invest approximately $35 million to $40 million in new center capital. And all of that would be funded from operating cash, so that we end the year with approximately $100 million to $110 million in cash on hand.

Looking briefly at Q4 specifically, we continue to see steady year-over-year enrollment growth at this important time of year, when we are rebuilding enrollment from the typical seasonal dip in Q3. We've now lapped our 2013 acquisitions and, as Dave mentioned in his remarks, we've completed fewer acquisitions this year than our original target contemplated to have a lower increment coming from new acquisitions this year.

Our outlook for adjusted EBITDA is therefore $62 million to $64 million for Q4, and adjusted net income is in the range of $25 million to $26 million, with adjusted EPS ranging from $0.37 to $0.39 for the fourth quarter of 2014.

After that detailed review, Jen, we are ready to go to Q&A.

(Operator Instructions)

Manav Patnaik, Barclays Capital.

Hi, guys this is actually Ryan, filling in for Manav. I just want to touch on the M&A a little bit. Is that more of a factor of the right deals not being there, prices be little higher, just absorbing the past deals. Just want to get a little bit more insight on what gives you confidence going into next year?

I think as I said earlier, I think timing on these have always been somewhat unpredictable. And I think coming off a year where we did a couple larger deals and spent a lot of time focusing on getting them integrated and getting them done, the pipeline on the smaller deals requires a lot of volume in order to yield results; because we take a look at a lot of things, and a lot of things don't fit our criteria either on quality or on valuation.

So, I think we found ourselves later in the year trying to get stuff to move, and the timing on that sort of pushed out. So, I think -- I don't think you'll see us move much on price in terms of the deals we end up doing; and I think we have visibility as I said earlier beginning in Q4 on some smaller things. Timing is always a question of exactly when they'll close, but enough to see that we're back on track, with what I would call, a more predictable run rate.

Great, that's perfect. Thanks, and just on an ed advisory, obviously a great growth number against a tough comp in 3Q, and the comps almost identical in 4Q, is that something that we should expect the same type of growth in the fourth quarter?

I think the growth in the ed advisory segment in the 20%'s is probably the right sort of view as we go into Q4.

Great, thanks a lot.

Thank you.

Jerry Herman, Stifel.

Thanks, good evening everybody. I was wondering if you could quantify the losses on the consortium centers, either an absolute or the margin impact, and the basis of that question is really if your trending in a way that makes that a bigger piece of the business, will that be is sustainable item, i.e. the dilution from that activity?

I'll just jump in with the first part of the question at least, Jerry, and see if we can answer the question, if I'm understanding it right. The dilution from the lease consortium class is in the neighborhood of about $8 million or so in margin. So it is a margin loss headwind, and the centers that opened in 2013 are beginning to contribute, depending on the timing of when they opened. There's some continuation of that -- that loss as they ramp up although they get to breakeven at around the 15 to 18 month timeframe.

So the fact that we've made two years of investment in this and this is part of our base growth strategy we see as building the right long-term contribution. Just as a reminder, the base business for these lease consortium centers has centers in the range of $1.5 million on average in revenue. But the newer centers that we've been opening over the last three years, four years, are more like $2 million to $3 million of annualized revenue when they are at fully ramped up enrollment levels. So they're much, much larger, and then the contribution from them in the 25% range puts the dollars that they deliver to the bottom line as much more substantial.

It just takes a little bit of time for them to get to that full ramped up level, which we will see some of the 13 centers getting to that level in 2015, but it's really the building up of the classes year-over-year that give us the view the longer-term, they're good margin contributors.

Great, thanks. And I know that your cross-sell opportunity is an important one for you guys, and some of the newer businesses, they're still pretty small, but help us with regard to the penetration of multiple service clients? I think previously that was around 15%, is the needle moving on that at all?

Jerry, the needle is moving in the right direction. The challenge on this sort of percentage is that the denominator continues to grow as we bring in new clients that have just one of our services. So, in absolute numbers, the number of clients that now have multiple services continues to grow. Maybe to add some more color to that, I would tell you that one out of every two new ed assist clients that we add or advisory clients that we add, is an existing client. So for every two we're getting one that's a cross-sell and one that's a new one. I think that if you look at the new clients and the sales that we're now achieving, it's roughly half of the new sales clients are starting with more than one of our services to begin with. The trends are all moving in the right way.

That said, there still remains good whitespace. It's not like -- I think the trends are all moving positively, but I think we still have several hundred clients that we circle up as having the opportunity for -- to have at least one if not more of our other services.

Great just one real quick one, and then I'll turn it over. How about customer count in each of these businesses at this point?

We've got more than 600 backup clients, more than 120 Ed Advisory clients, and on the full service side its 400, 450 or so. We are in the neighborhood of north of 1000 clients now.

Great. Thanks, guys. I will turn it over.

Thanks.

Dan Dolev, Jefferies and Company.

Thanks for taking my question.

So hey, guys. Quickly on the revenue, 11% versus, call it 11.5% at the midpoint, is that just a result of lower M&A or is there something else that you didn't think about earlier in the year that happened?

I think when we've guided, the last time we guided to 11% to 12%, Dan, then we were sort of -- timing as I said earlier, on some smaller deals can move that, swing that a little bit one way or the other. We were sort of projecting that if anything gets done this year it will be a little later than we thought initially, so it just drops down to approximate 11%. No other change in our projections.

Got it. And can you quantify, maybe, the organic growth in the full-service centers in Q3 versus what you expect in Q4?

I'll have to take that off-line, Dan, and get that quantified for you.

Okay. Fair enough. Thanks a lot.

Thanks, Dan.

Gary Bisbee, RBC Capital Markets.

Hi, how are you doing? I guess couple questions. I guess the key thing to this ongoing, how much dilution or accretion in the margin there is from the lease consortium is, do you open the same number every year, or do you plan to keep growing the number you opened, so the absolute dollar amount of dilution would grow? Should we think of it -- I think last year and this year, if I remember correctly, it's about the same number? Is that a number you think you likely target opening in 2015 and 2016? Or should we think that you probably keep growing the number in absolute terms that you open each year, such that we might not get to this point where the margins really start rising from that dilution leveling off and declining?

I think in broad strokes, Gary, we would typically plan for them to be a similar proportion of our growth openings year over year, so it would rise modestly year over year. But I think where the margin velocity comes in, is that because of a three-year ramp-up stage, ultimately the lease model Consortium centers are lapping each other as well; so they are layering in a more profitable level and will have only a year or year and a half's worth of headwind at a time.

Once we get to this level of more than, this is just a second year of a little bit more of a stepped up program. So we get into 2015, and we'll see the contribution start to come in from those we opened in 2013.

I go back and it seems to me like we should be seeing this now, or at least a lessening based on when you started talking about this in 12 to 18 -- or I'm sorry, 15 to 18 months to breakeven. I'm surprised that it is not incrementally less of a drag yet. I guess you are talking the first half of 2015, is that the right timing?

Yes, I think we're seeing, in our own outlook, we would see some better contribution coming in in Q4 from the cohort already Q4 this year, and then starting to see it contribute more next year. I just think that from -- I think when we see the entire view roll up with all the growth in the timing of when the centers that are slated to open in 2014 are coming in, we'll be able to be more precise about that. But I think conceptually, we should see it beginning to convert next year.

Okay, great. And Dave, you said the selling environment has improved year over year. Are you referring to the commentary you made about better success cross-selling and selling more services to new clients, or was that -- what went into that? Is that a relevant statement as well for the full service center business?

When I look across the suite of solutions, and I look at -- we've been in the time, now, we consider to be sort of our prime sales season, which tends to be late summer into fall as clients make decisions for 2015, in some cases even later on in 2015. I would say that what we're witnessing, both in the full service center business, and the backup side, and also in educational advising is just good momentum in terms of -- both in terms of activity, but also in terms of close rates.

So, compared to what I saw last year, I've been asked over time to describe the sales environment post downturn, and compare it to what we experienced in years before, and I've always described it as sort of a schizophrenic recovery. And I'm still not ready to describe the environment that we sell into today as being like it was pre-downturn, but I can certainly say with confidence that it's better than it was this time last year.

Okay, great and lastly, any sense of how we should think about the FX impact? I guess it is mostly the pound with a touch of euro, and it is mostly in full center business with a bit in backup. Is that the right -- half a point or something like that drag the next few quarters if rates stay where they are? Does that sound about right?

Yes, it's probably -- that's probably the right way to think about it as it starts to taper down from the earlier part of this year.

Okay. Thank you.

Thanks.

Sarah Gubins, Bank of America Merrill Lynch.

Hi, thanks. Just to follow-up on some of the revenue and margin discussion. The fourth quarter guidance suggests revenue growth of a little over 5.5%, which is pretty good slowdown. Is that really just, you are lapping the acquisitions and you are not getting as many new tuck-in acquisitions in the near-term as you might have expected, or is there anything else in that?

I don't really think there's much in that, Sara, other than what we've talked earlier. Which is, as we thought about the year before and saw it coming out, we're not seeing some of the contribution coming from the acquisitions that we had hoped in Q4. And again as we looked out and tried to provide you a little bit of view into what we'd see happening as we head into 2015, I think we have a view towards Q1 and beyond in 2015 to return to a more normalized 8% to 10% topline growth.

And should we see revenue growth then ramp throughout 2015, just as those new tuck-in deals get layered in?

I think we're not providing quarter to quarter trending. I think it's a little premature to say, Sara.

Okay. Then the fourth quarter margin guidance actually suggests pretty significant leverage in the fourth quarter. Is that help from these consortium maturing, or is it something else?

There's a number of elements. I think from a time of year, there is the lease consortium contributions is part of it. I think it's the contributions from the backup and ed advisory businesses, as they continue to contribute and mature; and just the centers that we have opened and are ramping up that are getting to a level where they make a difference.

I think we've alluded to the closings as well in the prepared remarks, and as you know, centers that close also are often underperformers. And so to the extent that we have exited programs that have been a drag on margins, that is an element of headwind, not just because of having to grow against it. But when those centers are underperforming they drag down the margin, so that's another factor. It's not huge factor, but it certainly helps.

Great, okay. And then last question, can you talk about retention levels that you are seeing as kids age up, and how it compares to last year?

Yes, I think that we're seeing similar trends in terms of retention within the centers. Children stay with us an average of three years in our centers, and that really hasn't changed much, Sara. I think, obviously, as Elizabeth talked about in her prepared comments, parts of our continued enrollment trend was to be sure that we had a -- this is kind of a critical time where we rebuild the enrollment that we lost in the preschool over the summer. Based on what we saw this quarter and what -- our visibility into Q4 we see that -- the trend there continuing to be a positive trend in terms of growth, both recovering the enrollment, but also maintaining the growth in enrollment that we've achieved so far this year.

Okay, thank you.

Jeff Silber, BMO Capital Markets.

Thanks so much. Dave, you started off the conversation by thanking us for voting to be on this call. I'm just wondering on that theme, are any issues in the state elections today that we need to be aware of that might impact your business?

I'm glad you picked that up, Jeff. I was trying to be subtle. No, I don't think that we have much out there. There are, in some localities, on I think ballot initiatives around minimum wage at local levels, but as we've talked about before, minimum wage is really not a big threat for us in the sense that our salaries -- there is some distance between minimum wage and our wages. So I think that would be one out there -- it's there but won't have much of an effect on us. So no, I think broadly, I'd say the answer is very little effect, if any at all.

And nothing going on in the universal pre-K area?

Nothing more than what we've already talked about. Obviously, we're watching New York, and we've chosen not to participate, as I've talked about before, for a year to just see how that plays out, and whether or not that becomes something we want to participate in going forward. We'll monitor it, and in other localities we do participate in Georgia and in Florida, as we've said before, and certainly there are places where that conversation is definitely a topic. Not on the ballot per se, but just as an issue, and as we always do, we try to participate in those discussions as that's being aired whether it's at a state level or a city level around the country.

All right, great. Elizabeth, I know you're not giving official guidance for next year, but any gauge on what capital spending will be in 2015?

Probably pretty similar to this year's spending based on the typical protocol that we have on the new center openings and maintenance CapEx, so I'd say it would be in a similar range in the $80 million total for new center business and maintenance.

Okay, great. Thanks so much.

Thanks, Jeff.

Jeff Volshteyn, JPMorgan Chase.

Thank you for taking my question. For 2015, it seems that you expect some level of margin expansion. At this point, are you able to update the longer term margin target given the larger percentage of consortium centers?

Jeff, I think your right by the broad guidance we gave, that we do anticipate margin expansion into 2015. But at this point, as I said earlier, we're not going to -- we'll wait until February to give the more specific guidance, as we typically do.

Understood.

Just to tack onto that, I think from then, we can also update -- we've provided the longer-term view of how that plays out over time as we continue to ramp up our mature centers to their pre-downturn levels of enrollment and how that stabilizes in the margin.

Understood. I have a few numbers questions, and I apologize if I repeat myself. I missed a portion of the call. What is the number of centers that were closed in the third quarter?

We opened 10, and closed 16.

What is implied in your fourth quarter guidance as of year-end for the center count?

Overall, we would expect to open 8 to10 or so in the fourth quarter, and close a total of 30 for the year; so that implies around two. So I think the range is 30, 33, 35 centers open for the year, and net closures of 30. So it would be net openings of two to five, three to five.

That's helpful. Last question, what is the utilization of your full-service centers now?

We're now, as we've been ticking up this year, more in the range of two percentage points, so we're now in the range of 74% or so, 74%, 74.5% utilized.

Perfect, thank you so much.

Thank you.

Jeff Meuler, Robert W. Baird.

Thank you. I guess I don't if you're going to give any more comments on the 2015 guidance, but just anything you could help us out with. It sounds like you're expecting similar EPS growth in 2015, despite slower revenue growth and less acquisition contribution. So anything can help us with to bridge the similar EPS growth, slower revenue growth?

I think as Elizabeth talked about before, Jeff, I think we expect a return to some margin improvement that in a slightly more robust way than we enjoyed this past year. And I think that comes from a combination of factors many have which we have already talked about before, but playing out into 2015. And again, as I said earlier, we're not going to get into specifics in terms of that margin leverage, but we do expect to see it both at the gross margin line and the overhead line.

Okay. Then on the backup care margins. In the past, you guys have talked about those as being relatively full, yet they continue to expand, and it looks like you're setup for a pretty nice year, this year. Any change in the thinking on the longer-term margin target for back up care?

I think we framed the backup business as a gross story and not a margin expansion, margin leverage story, like the full service businesses because of the nature of the service that we're providing there. So, I think that we would continue to look out and work to sustain the margins, but grow the contribution by a higher revenue base.

I think what you are seeing in the business as we've continued to scale it, is both operating efficiency as we do scale it and we have more of the infrastructure in place that needs to support the kind of service delivery that we have. We've continued to effectively and efficiently deploy those investments. But, I think our view is that it's not in the same kind of service delivery that full-service is, with a tuition level salaries, everyday salaries at the centers, so we would just be more cautious about planning for growth expansion on the margin line. They're more just from more revenue.

Okay, thank you.

Sure.

Trace Urdan, Wells Fargo Securities.

Moving into their hair splitting section of the call. I just wanted on the back up care theme, it look like there was some, a modest acceleration of growth, in the quarter that looked pretty nice against the prior year comp, which was -- which also saw a surge. I'm wondering, David, if that speaks to what you mentioned in your prepared remarks about selling more products in to customers or is there something else going on there?

I think backup has been and continues to be a strong growth engine for us. Both with -- in three ways. One, selling to new clients for the first time. Secondly, cross-selling it into our legacy existing clients. And thirdly, lots of times with backup care, once we sell it into a company, we have a good shot at expanding it beyond what was initially sold. By that, I mean either by geography, sometimes it is piloted in geography initially and then a company will roll it out either nationally or globally. Or, sometimes it will just increase the number of uses by employee that they're allowing. Any number of ways, all yielding us more revenue per client.

Those three things really explain why backup has continued to grow, and why we anticipate it to continue to be a strong growth engine in 2015.

Is there anything seasonal related to the sales of backup care?

Just out on the very large -- on the largest backup clients, the ones that we have backup clients that range in several million dollars a year in revenue down to $50,000 year in revenue. So in a very largest kinds of clients, who would be our largest potential spenders, users of backup care, they would tend mostly to make their decisions around now for next year. Or have already made it for next year, because they tend to think like that from a benefits budgeting perspective. So, that's the only seasonality. Other that we can sell the middle to smaller size clients pretty evenly throughout the year.

Got it, okay, thank you.

(Operator Instructions)

Anne Sing, Credit Suisse.

Thanks for taking my questions.

I guess first one, just on the center closures. Could you just help us with understanding which regions are they in? Are you finding any in urban locations that are underperforming? Or are these more often lease consortium or single sponsor, and if the upside to your prior closure expectations is coming primarily from the acquisitions, the big acquisitions last year, or other centers?

Yes, so I think the closures, as I said in the past, the normal closures that you can expect in the business typically either come from those that are coming to the end of their contractual life or lease life that we've had for awhile that are underperforming and that we would close. There are those, obviously, where we are out of our control, where a client merges with another employer, or they downsize a location to a point where the center's no longer viable.

Then there are those that are associated with that past acquisitions as we've talked about before, that we circled up at the time of the deal and said we needed to fix these or close these, because we are not going to sustain, we're not going to live with these as long-term underperformers. So, I think this year obviously, that last piece made up for more of the -- drove the total closing number up.

But again, just to give you some color on this, we look at this pretty closely. You will notice, for example, like in this quarter, our capacity actually increased even our net closings was a negative. The net openings was negative. So that is one way to look that -- that we're opening larger centers and closing smaller centers. And the other way to look at it is, if you look at all the -- if you were to take all the centers that we closed in 2014 against all the centers that we opened in 2014, and just take their first year or the 2015 if you will revenue -- expected revenue from that newer class of centers; it's double.

So it's about double the revenue between the centers that closed in what they contributed in their last full-year. So, there's lots of ways to look at it, but in the end, we think the strategy to be prudent around closing centers and to be disciplined about it, is accretive and is in the good long-term interest of the business.

Okay, that's helpful. I appreciate the details there. I guess another question. When we look at the overhead costs, they were slightly down, basically flat year over year on a dollar basis. Is there anything else you can call out aside from the synergies that you've captured from the acquisitions that are driving that trend? Has the pace of investments in people and systems that you mentioned, has that remained the same?

It has actually remained the same. I think the overhead trends tend to be much less -- there aren't any particular seasonal effects that go into that. And so I think it's just the timing of when certain initiatives may play out, but it is pretty stable all year round as you can even see looking back in the history.

Okay, great, and one final one from me. Regarding wage pressure, I realize that this comes up often, but asked another way, I'm wondering if there's any ebb and flow between the arbitrage that you get on your average price increases, versus average cost increases, and if you can share the trends that you might be seeing now?

I think the one element to this, and one of the reasons we've been successful in being disciplined around the difference between the tuition increases and the wage increases, is that we typically are increasing price once a year, and wages do come in throughout the year. Wage increases are on employee's anniversary dates and/or their hire dates. So, there is and can be, either a leading or lagging indicator on both of those, but it does give us visibility into the trends in wage rates, so that when we are preparing for tuition increases we have some sense going in for what the kinds of wage rates we are paying in relation to the existing base.

There isn't a large amount of ebb and flow, as you describe it, between those two that we can't manage through the tuition rate increase process. And I think that it's been -- by keeping that targeted 1% differential, we're able to absorb both whatever slight timing, forward or lagging time may occur and/or absorb the other personnel costs that our rising at a pace that's faster than wages. We feel pretty good about that cost management side of things.

Okay, great. That's all for me, thank you.

Brian Zimmerman, Goldman Sachs.

Good evening, this is Alex Karpos, on for Brian.

What is your view on the acquisition environment in the US versus abroad? Are there any particular markets that are more attractive right now than others?

I think that our view on my comments with respect to the flow and the visibility that we have is split pretty evenly between the UK, the Netherlands, and the US. Or said differently, about split evenly between the UK and Netherlands, and the US half and half. So Europe and the US, I think in both places they remain good opportunities.

The one thing that I would point out is, I think the UK and the Netherlands probably -- well, the UK specifically, probably has more opportunity for deals that are in the range of what we did last year at that size, than are left in the US. The US has a couple, but not many left at that size. And so -- but on the smaller stuff, I think the flow looks pretty similar between countries.

Okay and just a quick follow-up, could you remind us on how the various markets compare from a growth and margin perspective?

You mean the US and the UK?

Right.

So, the UK has had a slightly higher growth rate because of the significant acquisition that we did last year. But I think longer-term, if we look more agnostically to the outsized acquisitions, the top line growth opportunity is pretty consistent between the two countries in terms of unit growth; where we would be adding between 2% and 5% of revenue coming from new unit growth of either organic or acquired centers, and rate increases on top of that and 3% to 4%.

On a margin basis, also very similar margins. The UK business has in the range of the same 15% to 25% depending on the contract model type as the US, and I think the only difference is the size of the centers. In the UK and the Netherlands tend to be smaller, they are about 60% of the overall size of the US full-service business. Then, once you look at the countries with all of the businesses rolled in, of course the US has a significantly higher contribution on the margin side from the backup business and the ed advisory business.

So I think when you are looking at gross margin in the range of 23%, it'd be broad strokes, it'd be five percentage points difference on average maybe between the US and the UK.

Great, thank you, that's it for me.

Thanks.

There are no further questions at this time. I would now like to turn it back to Mr. David Lissy for closing comments.

Okay, thank you all for your questions and for being with us on the call. I hope you had a chance to vote, and we look forward to seeing you on the road. Have a good night.

Thank you.

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