Bright Horizons Family Solutions' (BFAM) CEO David Lissy on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Bright Horizons (BFAM)

Bright Horizons Family Solutions, Inc (NYSE:BFAM)

Q2 2014 Earnings Conference Call

August 7 2014 5:00 PM ET

Executives

David Lissy - CEO

Elizabeth Boland - CFO

Analysts

Gary Bisbee - RBC Capital Markets

Timo Connor - William Blair & Co.

Dan Dolev - Jefferies

David Chu - Bank of America Merrill Lynch

Zach Bacall - Credit Suisse

Jason Anderson - Stifel Nicolaus

Henry Schein - BMO Capital Markets

Nick Nikitas - Robert W. Baird & Company

Operator

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. (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 Horizon. Thank you. You may begin.

David Lissy

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

Elizabeth Boland

Hi, everybody. A release was announced after the close of the market and is available on our website at www.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's 858-384-5517, with conference ID number 13586965. The webcast version will be 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 the investor 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 the 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 commitment, enrolling children in our childcare centers and retaining client contracts, and operating profitably in the U.S. and abroad; two, our ability to identify, complete 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 these calls 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.

David Lissy

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 reflects a continued strong performance across our suite of product offerings. Full service revenue was up 11% over the last year. In addition, backup revenue increased 11% and Ed advisory services grew $8 million or 47% in the quarter. We added eight 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 extended 50 basis point to 12.2% of revenue. This is driven by a few factors. The continued positive enrollment trends in mature class of P&L centers which are up 2% over the last year. Price increase averaging 3% to 4%, contribution from new and ramping centers, solid cost management, strong performance in our backup and education 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 lease consortium centers we opened last year and continue to open this year. While this headwind will decrease as these centers ramp up this year and into 2015, as we discussed in the past the near-term loss is damping gross margins. As a reminder though on a fully ramped basis, these lease consortium centers generate the highest margins of our full service center models. We expect as a class there will be strong value creator for us in 2015 and beyond. Another factor affecting margin is our plan to fully realize the value and resulting margin improvement from the relatively largest scale acquisition 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 please 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 is we previewed last time, we expect will result in a closure of as many as 10 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 center 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 of 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 it to the remainder of 2014. For the year we expect to see revenue growth in the range of approximate for 11% to 12% over 2013. In addition to the expected 3% to 4% average price increases our outlook contemplate 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 it is 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 of our backup divisions and education 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 are 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 and $1.46. Before I close I just want to highlight the result of an important study that we've recently published. For almost three decades now we parted with the leading employers who are building supportive cultures that help working parents 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 still much work to be done to create supportive workplaces. Importantly, the findings also show that those who work in organizations that have supportive environment 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 supportive working family is not just nice to do but rather a must to do for employers who is 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 details. And I'll back here during Q&A. Elizabeth?

Elizabeth Boland

Thank you, David. So as we done in our previous calls, I'll discuss our reported results as well as the metrics that we think help isolate unusual and non-recurrent charges. The earnings release includes tables that reconcile our U.S. GAAP reported numbers to these additional metrics for adjusted EBITDA, operating income, net income and EPS. Specifically quantifying non-recurring charges such as the cost associated with stock offering and deal cost per 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 and 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 of the solid performance in the full service segment from enrollment gains and the tuition to personnel cost leverage, our backup services segment continues to deliver gross margin grow consistent with the revenue growth. In addition to these factors margin for this quarter continue to be impacted by the ramping of the large class lease consortium centers that we opened over the last 18 months. And also by a handful of vendor performing centers that came with the acquisitions we completed in 2013 they 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 point decrease. As we have previewed on prior call will beginning to realize the overhead leverage that we have 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 translate 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 the 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 is again improved operating performance and the consistent networking capital which is partially offset by higher cash tax payment 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. So 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 had at June 30, 2013. We operated approximately 75% of our contracts under profit and loss arrangements. And 25% under cost plus contracts. And our average full service center capacity is 136 in the U.S. and 76 in Europe.

Before we 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 experience 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 peak. Both of these factors impact the sequential operating performance for those segments. As Dave previewed, our updated projection for the full year 2014, anticipate revenue growth approximating 11% to 12% over 2013. Organic growth approximate 8% to 10% including the estimated 3% to 4% price increase, 1% to 3% from growth in 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 to the acquisitions we completed last year. Offsetting these increases are the effective center closing which includes both legacy, organic and acquired centers approximating 2%. We expect to 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 the 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 as projected to approximate $34 million for the year assuming continued 4% borrowing rate 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 an margin leverage lead this to project 15% to 17% 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 shares 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 it will generate $160 million to $165 million of cash flow for 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 centers and development and slated to open in 2014, we expect to invest approximately $35 million to $40 million in new set of capital and we expect to fund all of these investments from operating cash there by ending the year with approximately $100 million in cash on hand.

Looking specifically to Q3 of 2014, this would be our first quarter that incorporates a full year's effect for the larger acquisitions completed in 2013. And in addition as I just mentioned we have typical seasonality impact. Therefore our estimated revenue growth for Q3 of 2014 approximate 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 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.

And after all that detail, Scott, we are finished with our prepared remarks and are ready to go to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) 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.

Gary Bisbee - RBC Capital Markets

Hey, good afternoon. First question. How should we think about growth for the Ed advisory business? Obviously it's been doing terrifically and is comping some huge growth numbers next quarter. But is sort of a steady sequential increase the right way to think about it, or is that -- those growth rates likely to slowdown sharply given coming the 40% growth?

David Lissy

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

Gary Bisbee - RBC Capital Markets

And then I know you are 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 to addition or growth of two-- is that just sort of timing, was that you expected at the beginning of the year and I guess you will catch up for next two quarters?

David Lissy

Yes. I mean I think each year is a little different as you know over time I think center timing of opening is an all over the map and this is one of the years with a little bit more back weighted and front weighted. We had years worked in the opposite, little tough to predict over time Gary on that one. And you are right to say that our closures are little more deliberate this year in terms of as many as 10 potential for the year could come from the underperformers that we've targeted from the two groups we required, one here and one in the UK which is exacerbating it. I guess one of the other things I would just point out for context and this maybe 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 under performers for the most part. So while the number may appear as a net, when you look at it from both I think in overall capacity perspective and also from what the contribution will be net. It is obviously a pretty high positive. Granted, now some of them will take a little longer to ramp up so I am not talking about the front end losses associated with some of them. But they will contribute versus what we are closing is quite delta so I just point out that for contextual purposes.

Gary Bisbee - RBC Capital Markets

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

Elizabeth Boland

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

Operator

Our next question is coming from the line of Timo Connor with William Blair & Co. Your line now is open. You may proceed with your question.

Timo Connor – William Blair & Co

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

David Lissy

Yes, Timo. I think that our view longer term is I think we've proven to our self over the past five years that we can leverage to relationships that we have with our client across a variety of solutions that provide critical support 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 employers population not just those with children and not just those with the college age kids but across the variety of different things. I think that we -- while there is 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 trying to adopt them to broaden our offerings to our clients.

Timo Connor – William Blair & Co

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

David Lissy

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 need children and providing support for 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 where that causes additional friction to working parents trying to manage that. And we are starting to pilot that service with some client. There are other sorts of issue areas and that come up from time to time. Elder care is one that we are doing on the backup side. That's an area that it's unlikely that will ever be a provider but certainly you can see those other solutions that when you think of employee as care giver, we might be able to bring to bear so we will continue to listen to our clients like we did with backup care, like we did with education advising and I am confident that over the long run we will figure out of the solutions that make sense.

Timo Connor – William Blair & Co

Okay, thanks and final one for me. You are approaching kind of the peak fall on enrollment period. I guess what are your initial thoughts and expectations for both enrollment and pricing?

David Lissy

So I think 3% to 4% price increases that we have previewed with you in the past or holding throughout the year. And we expect that sort of happen for the remainder of this year. Many of them going to affect in the fall and that's what we expect. And with respect to enrollment, this is always the challenging timing of year as Elizabeth pointed out; 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 rebuild into the fall and we reach a peak in the beginning, beginning of next year and while it's too early to fully know where it's trending, I think our indicators are that we are on pace to continue along this trajectory that we've been experiencing with enrollment particularly in the centers where we own the profit loss.

Operator

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

Dan Dolev - Jefferies

Hi, thanks for taking my question. 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?

Elizabeth Boland

So 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 the same statistics apply we are little closer to 2% gain in enrollment in the full service business in terms of that, those ranges but the same stats hold

Operator

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

David Chu - Bank of America Merrill Lynch

Hi, this is David Chu for Sara Gubin. Hi, Dave. So what led to the 2Q revenue beat, -- was this primarily driven the Ed services?

David Lissy

I think it was really across the board with respect to as Elizabeth mentioned enrollment being continuing to be strong, backup continuing to contribute the levels that we had hoped and obviously little out performance on the education advising. But as I think I commented in the formal remarks, I think we are pleased across the board with the performance in all the segments.

David Chu - Bank of America Merrill Lynch

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

David Lissy

The pricing in 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 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 often times we 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 will then choose to rollout more broadly. They might roll it out in 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 is a number of ways we increase revenue by clients. 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 is as I just mentioned increasing revenue, increasing use essentially with existing clients.

David Chu - Bank of America Merrill Lynch

Okay, that's helpful. And just one housekeeping question. David, did you say you expect 30 to 40 net new centers for the year?

David Lissy

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

David Chu - Bank of America Merrill Lynch

And so what would that number be on net basis?

David Lissy

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 the kind of as many as 10 that we might close in addition to the typical 20 to 25 that would be normal course in business.

Operator

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.

Zach Bacall - Credit Suisse

This is actually Zach Bacall [ph] calling in Anj. First off, earlier you said David that there going to be -- you are going to be closing small centers and opening up larger ones. I noticed even though you have net opening of two new centers, the actual capacity hasn't changed and has in fact actually gone down about 100. Is that still just timing or is it something else going on there?

Elizabeth Boland

There was one element to that is there was 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 corrected describing the overall -- when you are looking at a cohort of centers that we are closing versus centers that we are opening, they tend to be larger now. And they tend to be more of closing as older and smaller. And so the 7% -- I think a better way to look at is the 7% capacity gain from 12 months ago in terms of the overall growth in what we are able to serve in terms of full service family.

Zach Bacall - Credit Suisse

Great, thanks. And then on enrollment. 2% is great to hear, back in 2007 you said that you had proud moment 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?

David Lissy

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

Zach Bacall - Credit Suisse

Great. And then just one last question. When you were stating things package or performance, you mentioned FX rate. I am just wondering for the rest of the year. Are you still guiding based on $1.60 to $1.65 U.S. dollar to pound, compound U.S. dollar?

Elizabeth Boland

Yes. I mean largely it's been tracking closer to -- so slightly over $1.65 so we add up closer to that in the $1.60 but closer to that range yes.

Operator

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

Jason Anderson - Stifel Nicolaus

Good evening, everybody. Just I guess what to get your thoughts on maybe the market. I mean obviously business is doing well. What I am asking, 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 benefit survey, it shows decline in certain categories that would be -- they would line with your offerings. And I am just wondering are you seeing anything further out down the road any concern on the market and that's decline of companies offering the benefits, whether it's certain child care type 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?

David Lissy

Yes. I think that and I can't speak for the survey itself. But I have to take a look at it. And also I 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 are in now, we look at the behavior of our existing clients and we are seeing positive trends with respect to prospecting on the new business side even relative to a year ago. And then we are 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 education 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 pretty large and installed base of prospects for that service given that really that business, we are probably hearing something very new. And our business really isn't -- that business isn't really asking them necessarily to provide the benefit of tuition assistance. It is really providing a smarter way and more economical way to provide the benefits. So I think that such a big market potential in terms of prospects. I have to look at whether or not they are trends with respect to companies, new companies offering that benefit or not. But in terms of what we are chasing now which is an 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.

Jason Anderson - Stifel Nicolaus

Great, thanks for all 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 that you are seeing there?

David Lissy

I think that we continue to monitor --as we talked about in the past the appropriate sort of level of -- what we are going 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 would expect. And I think that average into 3% to 4% is what we see for this year. We will be taking a look at 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 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 while there continued challenges of early education in terms of supply, a talent is shrinking and has been shrinking for 10 or 15 years that our place within the industry is strong one. So we feel like we are in a good place. This is pretty consistent with what we might have said to the same question last quarter or last year at this time.

Operator

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

Henry Schein - BMO Capital Markets

Hi, it's Hendry Schein calling in for Jeff. Hi, guys. I just wanted to ask little quickly about offering margins, it seems you could gain over the past two quarters, I was just wondering looking out maybe little bit next couple years ahead, are you sort of at target level that you are looking towards?

Elizabeth Boland

So we are -- yes, I think that the expectations 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 leased model centers that we've been adding. And so those are couple of contributors on the full service side and then steady performance in the other segment. But also maintaining some overhead leverage in that 10 to 20 basis points range. So we would -- we look at 50 to 75 basis points in the near term couple of years and then once we have regained and are at that sort of target to utilization in our mature classes of full service centers it would more likely to taper a 25 to 50 basis points in leverage but continue growth.

Henry Schein - BMO Capital Markets

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

Elizabeth Boland

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

Operator

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

Nick Nikitas - Robert W. Baird & Company

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's still need to be rolled off?

David Lissy

I commented earlier that we can close as many as 10. It's hard to know for sure that how many of them we will do for sure this year versus some that might still 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 still over, but I would expect that the majority of them, we probably get through this year. And 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 we -- what has happened. And those closures tend to be a combination of either underperforming centers just generally speaking, also client M&A or downsizing a location can lead to closing of centers. So those-- a lot of different reasons but that's more of normal thing. And then lastly with respect to evenly split I would say it's more weighted towards the U.S. than the UK.

Nick Nikitas - Robert W. Baird & Company

Okay, that's helpful, thanks. And I guess just looking within full servicing U.S., are there any geographic trends you guys are noticing? Or is it pretty similar across the board?

David Lissy

Well, I think that the geographic trends that we've talked about in the past that is in and around major metropolitan areas recovery faster and continue 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 D.C. corridor, Chicago land, San Francisco, Seattle, those places 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.

Nick Nikitas - Robert W. Baird & Company

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

Elizabeth Boland

Sure. So 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 breakeven 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 due. And then on a mature basis once it reaches the end of the sort of third year and it head for maturity, those centers that we've been opening in the last couple of years are averaging in a range of $2 million to $3 million in revenue, and at 20% to 25% margin they are doing in the neighborhood of $500,000 to $750,000 of contribution.

Nick Nikitas - Robert W. Baird & Company

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

Elizabeth Boland

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

Operator

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.

David Lissy

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

Operator

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your line at this time. Thank you very much for your participation. And have wonder afternoon.

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