Earnings Call Transcript - BFAM Q2 2024

Operator, Operator

Greetings, and welcome to Bright Horizons Family Solutions Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Flanagan, Vice President, Investor Relations. Thank you, Mr. Flanagan, you may begin.

Michael Flanagan, Vice President, Investor Relations

Thank you, Raju, and welcome to Bright Horizons second quarter earnings call. Before we begin, please note that today's call is being webcast and a recording will be available under the Investor Relations section of our website, brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause the actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, our 2023 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statements. We also refer to these non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the IR section of our website at investors.brighthorizons.com. Joining me on today's call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our results and provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen.

Stephen Kramer, CEO

Thanks, Mike, and welcome to everyone who's joined the call. I am really pleased with our performance in the second quarter and first half of 2024. Revenue growth remained strong in both full service and back-up care and adjusted EPS growth of nearly 40% outpaced our expectations through better operational efficiency across all three of our segments. With the outperformance in the first half of the year and continued progress expected for the remainder of the year, we are raising our full year guidance on both the top and bottom line. So to get into some of the specifics on the second quarter. Revenue increased 11% to $670 million, with adjusted EBITDA up 25% to $103 million and adjusted EPS growing 38% to $0.88 per share. In our Full Service Child Care segment, revenue increased 11% in the second quarter to $507 million. We opened seven centers in the quarter, including new client centers for Walmart, Hormel Foods, United Health Services and the University of Arkansas for Medical Sciences. Enrollment in centers opened for more than one year increased at a mid-single-digit rate in Q2 and average occupancy percentage stepped up to the mid-60s. The U.S. continues to see strong performance with mid-single-digit enrollment growth, driven by high single-digit growth in our younger-age groups and mid-single-digit growth in the preschool age group. Outside the U.S., enrollment increased at a low single-digit rate. The U.K. continues to lead growth internationally with mid-single-digit enrollment growth while the Netherlands and Australia continue to have higher-than-average occupancy levels, and as a result, more limited expansion in enrollment. Specifically on our U.K. business, after a challenging couple of years, the first half of 2024 has been marked by steady enrollment gains, increased permanent staff and reduced reliance on third-party agencies, along with moderating inflation. The initiatives we've put in place over the last 18 months have significantly improved the efficiency of labor, delivering center operating improvements more quickly than we anticipated. Although the U.K. will continue to be a headwind to our overall full service profitability in the coming quarters, the progress we have seen this year gives me confidence that our strategy is working and our U.K. team will continue to progress towards recovery to pre-pandemic performance levels. Let me now turn to back-up care, which delivered another strong quarter, growing revenue 15% to $136 million. In addition to solid utilization across our various use types, we also continue to expand our client base with Q2 launches, including Honeywell and the Georgia Institute of Technology. Use growth in our traditional care network remains solid, underpinned by continued expansion of the number of client employees utilizing their back-up care benefit. Center-based care remains the predominant care type and continues to grow faster than in-home, even as center occupancy continues to grow. Encouragingly, we started off the seasonally high use summer period on a good note with solid use in June continuing into July. We remain very excited about the opportunity in the backup care segment as we work to leverage our technology and marketing investments and innovative care types to best serve our clients and their employees. Our Education Advisory business grew to $26 million, increasing 2.5% over the prior year, in line with our expectations for the quarter, but well below the longer-term growth opportunity we see for this segment. We continue to add new clients to the portfolio, notably launching GlobalFoundries and International Paper. While growth in participants remain challenging, the team is working diligently on product and packaging as well as marketing with the goal of driving greater client adoption and client employee participation in 2025 and beyond. Before I wrap up, I want to congratulate and celebrate the recent graduation of nearly 400 Bright Horizons employees in our Horizons Teacher Degree program. I had the honor of speaking at this year's commencement and I want to applaud this tremendous accomplishment for our educators. It takes a significant amount of time, effort and commitment to earn a CDA, AA and BA while working as an early childhood educator in a Bright Horizons Center. With more than 80% of our centers having an enrolled learner, this program is truly a win-win-win. Our teachers advance their education and grow their careers with us. The families we serve benefit from the highest quality care and education and Bright Horizons develops an even more qualified and engaged workforce. In closing, I'm pleased with our strong first half of 2024. We have executed well against the goals we set for the year and are set up well to increase our guidance. Specifically, we now expect revenue growth for the year of approximately 11%, a range of $2.65 billion to $2.7 billion and adjusted EPS in the range of $3.30 to $3.40 per share. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook.

Elizabeth Boland, CFO

Thank you, Stephen. To recap the second quarter, overall revenue increased 11% to $670 million, adjusted operating income of $69 million or 10% of revenue increased 52% over 2Q of '23, while adjusted EBITDA of $103 million or 15% of revenue increased 25% over the prior year. We ended the quarter with 1,032 centers adding seven new and closing 19 centers in the second quarter. To break this down a bit further, full service revenue of $507 million was up 11% in Q2 and at the high end of our expectations on increased enrollment and tuition pricing. As mentioned, enrollment in our centers opened for more than one year increased mid-single digits across the portfolio. Occupancy levels averaged in the mid-60s for Q2, stepping up sequentially given the traditional enrollment seasonality. U.S. enrollment was also up mid-single digits, while enrollment outside the U.S. increased in the low single digits over the prior year. In the center cohorts that we've previously discussed, we also continued to show improvement over the prior year period. In Q2, our top-performing cohort, defined as above 70% occupancy improved from 43% of our centers in 2Q of '23 to 51% in 2Q of '24. And our bottom cohort of centers, those under 40% occupied, now represents 10% of centers as compared to 14% in the prior year. Adjusted operating income of $33 million in the Full Service segment increased to $20 million over the prior year. Higher enrollment, tuition increases and improved operating leverage more than offset the $9 million reduction in support that we received from the ARPA government funding program in 2Q of '23. While the U.K. full service business continues to be a headwind to the overall segment profitability, we have seen good progress in reducing the losses with improved staffing, the continued enrollment gains and the rationalization of our center portfolio that we have discussed on prior calls. Turning to Back-up Care. Revenue grew 15% in the second quarter to $136 million ahead of our expectations of 10% to 12% growth on stronger overall use. Adjusted operating income of $32 million in Q2 of '24 or 23% of revenue, was also ahead of our expectations on operating leverage from the higher utilization. Lastly, our Educational Advisory segment reported $26 million of revenue and delivered operating margin of 18%. Operating margins contracted in Q2 and the first half of 2024 over the prior year due to the investments that we are making in the team and the product suite. Interest expense of $12 million in Q2 of '24 reflects lower average borrowings, offset by higher overall net rates on our outstanding debt as compared to Q2 of '23. The structural effective tax rate on adjusted net income was 27.8%, just a touch lower than the prior year. Turning to the balance sheet and cash flow. We generated $110 million in cash from operations in the second quarter and $226 million for the first half of '24 compared to $180 million for the first half of '23. We made fixed asset investments of $23 million in the second quarter and $42 million for the first half of 2024 compared to $40 million for the first half of 2023. We ended the quarter with $140 million of cash and reduced our leverage ratio to 2.2x net debt to adjusted EBITDA. And now moving on to the 2024 outlook. As Stephen previewed, we are increasing our 2024 full year guidance for revenue to a range of $2.65 billion to $2.7 billion and adjusted EPS to a range of $3.30 to $3.40 a share. This increase in both revenue and EPS broadly reflects the flow-through of our better-than-expected performance in the first half of the year and continued strength anticipated in the backup segment for the key summer season. In terms of our updated segment growth outlook for the year, we now expect full service revenue to grow roughly 10% to 12%, backup care to grow 12% to 14% and ed advisory to be relatively flat compared to the prior year. As we look specifically to Q3, our outlook is for total top line growth in the range of 9% to 11%. This reflects full service growth of 9% to 11%, backup growth of 11% to 13% and an advisory to be relatively flat. In terms of earnings, we expect Q3 adjusted EPS to be in the range of $1.04 to $1.09 per share. So with that, Raju, we are ready to go to Q&A.

Operator, Operator

The first question comes from George Tong with Goldman Sachs.

George Tong, Analyst

You increased your full year guidance and mentioned some drivers of that increase, including the 2Q outperformance and strength in backup. Can you elaborate on some of the surprises to the upside that you saw in the quarter? And what your assumptions are around occupancy rates that you're baking into the guide?

Elizabeth Boland, CFO

Certainly. Occupancy is a crucial factor to note. In the second quarter, our performance exceeded expectations, primarily due to both the full service and backup segments. We highlighted several specifics in the U.K., where we experienced earlier than anticipated cost savings, mainly related to the utilization of agency staff and an increased reliance on permanent staff. This, combined with steady enrollment growth, has allowed us to see improvements in operating performance sooner than expected. Additionally, the increased usage in the backup segment and the mix of operations there contributed to better EBIT performance despite only modest revenue outperformance. Looking ahead to the rest of the year, we observed mid-single-digit enrollment growth in full service, which we expect to continue. While the full service business does experience some seasonal enrollment declines in the quarter, we anticipate that year-over-year gains will remain in the mid-single digits. From the backup perspective, as we mentioned, we have increased our revenue guidance due to a strong start to the summer season.

George Tong, Analyst

Great. That's very helpful. And just the point on occupancy rates, what percentages are you assuming for the rest of the year and exiting into next year?

Elizabeth Boland, CFO

Yes. We are expecting mid-single digit growth compared to where we finished last year. Our utilization for the full year should be in the low 60s to mid-60s.

Operator, Operator

Next question comes from the line of Manav Patnaik with Barclays.

Manav Patnaik, Analyst

Elizabeth, regarding the backup guidance of 11% to 13%, can you discuss July's strong performance and the visibility you have for the third quarter in relation to that number? While 11% to 13% seems accurate, I'm aware it's a challenging comparison as well. Could you provide any insights on that?

Elizabeth Boland, CFO

Yes, we experienced nearly 30% revenue growth in the third quarter last year, making for a tough comparison. The second half was around 25%. While it's a challenging comparison, we anticipate strong sequential growth. We're just starting to see July results, which have shown solid usage so far this quarter. This gives us confidence in our revenue guidance and some projected earnings growth for the third quarter, which is why we have made a slight increase to our earnings forecast.

Manav Patnaik, Analyst

Okay. Got it. And then just like you kind of helped us with the quarterly cadence on the revenue growth by segment. Can you just help us with the margin expectations for third quarter and the full year?

Elizabeth Boland, CFO

The backup business is expected to improve as we move into the third quarter. Both revenue and earnings reach their highest point in Q3 before tapering off in Q4. For the second half of the year, particularly the third quarter, we anticipate backup margins to be in the low 30s. This expectation is driven by several factors, including performance and the operating leverage that brings us to the higher end of our forecast range. We've also adjusted our overhead cadence for a more consistent view throughout the year, which presents a slight burden on overhead for backup in the first half, but we expect a positive effect that will add a couple of hundred basis points to our margin, pushing it above 30%. As for the full-service business, it typically declines seasonally. We see transitions with older children moving on to elementary school, leading to a natural drop in enrollment from the reported 6.5% in this quarter. Additionally, more overhead costs are accounted for in full service during the second half compared to the first, impacting margins by about 50 to 75 basis points each quarter. The shift from Q2 to Q3 accounts for roughly 100 to 125 basis points of change, and we expect to finish the year with margins in the low to mid-single digits range.

Operator, Operator

Next question comes from the line of Andrew Steinerman with JPMorgan.

Andrew Steinerman, Analyst

Elizabeth, what is the current percentage wage inflation year-over-year of the Bright Horizons teachers and staff? And do you feel like the percentage tuition increases will be ahead of wage increases on a going-forward basis?

Elizabeth Boland, CFO

Yes, we are seeing wage inflation at around 4%. It's been a bit firmer, with inflation persisting in the wage sector. While the labor supply environment has improved, we are still noticing strength in wage inflation. The average we are seeing is about 4%. We have managed to price ahead of that by approximately 100 basis points on average this year. Though it is early to provide guidance for 2025, we believe we can maintain that 100 basis points gap. However, it's premature to predict the specific rate at this point, but we are noticing that we have pricing power.

Andrew Steinerman, Analyst

That's great. Could I just ask a quick follow-up on that. You said labor supply of teachers and staff seems to be improving. Is that because maybe other centers are closing, not Bright Horizons centers but other centers are closing kind of post ARPA? Or do you feel like there might be more new entry into early childhood education or less pull away from childhood education to other industries? What's driving the labor supply?

Stephen Kramer, CEO

Yes. So I think there's a few things at work here. I think, first, I think we are just candidly getting better at getting an even greater share of those who are available and interested in the field and that comes in two flavors. The first is folks who are already in the field and attracting them away from their current employee. And then secondly, again, because of our education program and the wages that we offer, being able to incent people to come into the field and ultimately be growing our own. So going out, hiring for attitude, training for skill and using our programs in that way. So I would say it's that combination that really has been helpful for us in particular, to be able to attract more educators to Bright Horizons.

Operator, Operator

Next question comes from the line of Jeff Meuler with Baird.

Jeff Meuler, Analyst

Can you talk maybe through some of the things you're doing from an initiative perspective to better capture, I guess, the seasonal summer demand? I know Steve & Kate's is a part of it, but your CAGR over the last three years looks like it's pretty incredible for Q3. And then just beyond the tough comp, any other rate-limiting factors we should consider. I don't know where you're at in terms of capacity constraints or anything else?

Stephen Kramer, CEO

Yes. I would say that the summer is definitely showing an increase in peak usage each year. We're really excited about the various use types we have. In the summer, we're seeing significant engagement in centers and camps. We've been proactive in addressing this growing demand to ensure we can meet it effectively. I feel confident about our personalized outreach campaigns within our client base, and we're also focused on enhancing our supply to accommodate the increasing demand. Overall, I feel optimistic about the summer. We have clear visibility for July and August and are looking forward to how this summer will unfold.

Jeff Meuler, Analyst

Got it. And then on Full Service, the enrollment step down that you saw seasonally at the beginning of this summer, does it look pretty similar in terms of order of magnitude to prior summers and then as we think about back-to-school, are you assuming kind of like the historical average? Or is there any sort of benefit assumed because you have greater mix of younger children in the mix relative to the longer-term trend?

Elizabeth Boland, CFO

Yes, the trend appears to align closely with historical patterns. We have a slight overrepresentation in infant toddler enrollment, but that has decreased as preschool enrollment has increased. We anticipate seeing a return to more typical levels over time, particularly as we head into the fall. A positive aspect of the consistent enrollment growth over the past couple of years is that by enrolling children across all age groups, we are effectively creating a strong pipeline of future preschoolers through our current infant enrollment. Additionally, we have the capacity to accommodate all the preschoolers we can attract through marketing, and, as mentioned by Stephen, we can also provide backup care. Even as enrollment at our centers increases, we are still able to manage more backup care in response to ongoing demand.

Operator, Operator

Next question comes from the line of Josh Chan with UBS.

Josh Chan, Analyst

Congrats on a good quarter. I guess on the Full Service margin front, could you bridge us from last year's 3%; this year's 6.5% in terms of factors that are most helpful? Was it utilization? Was it the 100 basis point gap between wage and tuition, did the U.K. help? Just kind of help us understand what were the most impactful drivers there?

Elizabeth Boland, CFO

Yes. The key point regarding the leverage opportunity in Full Service is that enrollment is driving significant improvement. We faced a challenge from ARPA, which affected our expectations. However, with an average enrollment increase in the mid-single digits and ongoing pricing power, these are the main factors. The improvement in the U.K. and the better cost structure contributed positively to this quarter's results, and these are the primary drivers. Additionally, I want to mention the overhead situation we discussed; after this year, it will be integrated into our assessment. There is a slight benefit of about 50 to 75 basis points in Q3 related to how overhead is allocated between the segments during the first half of the year compared to the second half. Thus, Full Service will face more of a headwind in the latter half, with an additional benefit of 50 to 75 basis points in Q2. That's the other point I wanted to highlight regarding the 6.5% that we reported.

Josh Chan, Analyst

And then on the U.K., what's the level of embedded profitability improvement now within the updated guidance that you just put out?

Elizabeth Boland, CFO

Yes. As a reminder, we discussed the challenges in the U.K. Full Service business specifically. Last year, that business incurred a loss of around $30 million, and we entered this year not only hoping for improvement but also expecting it to be more pronounced in the latter part of the year. We anticipated that the early part of the year would involve ramping up and realizing some benefits from the initiatives already in place. Some of those benefits have materialized sooner than expected, but we always planned for overall improvement throughout the year. Given the current outperformance, we estimate a reduction in losses to the mid-teens, from $30 million down to about half that amount in our outlook for the rest of the year. Although it remains a headwind, with an impact of over 200 basis points last quarter and likely 100 to 200 basis points in the current quarter, we are seeing improvement and feel optimistic about this progress.

Operator, Operator

Next question comes from the line of Jeff Silber with BMO Capital Markets.

Jeff Silber, Analyst

Wanted to focus on the center closures. If I look over the past few quarters, it looks like you've been ramping up the number of centers that you're closing. I'm assuming that they're mostly in this lower occupancy cohort, if you could just confirm that. And I'm just wondering how they disperse geographically. And if you could just also tell us where you think you'll end up the number of years. Is the number of centers that are going to be closed this year?

Elizabeth Boland, CFO

Yes, we began the year aiming to close between 40 and 50 centers, and we're still on track for that range. So far, we've closed about 30 in the first half of the year, with the first quarter having a stronger focus on the U.K. and the second quarter being more focused on the U.S. Overall, approximately 40% of these closures are in the U.K. and 60% in the U.S. Regarding your question about the performance of these centers, there is a mix among the lowest-performing cohorts, particularly those with occupancy under 40%. However, some of the centers we identified in the U.K. fall into the middle cohort, as the economics for those centers, even those with reasonable enrollment between 40% and 70%, were not sustainable based on potential occupancy levels. Many small centers in the U.K. require very high occupancy rates to be economically viable. We have been careful in our closure decisions, looking for opportunities to consolidate. This involves combining families into nearby centers or taking advantage of lease actions to exit lower-performing centers while combining enrollment to enhance the feasibility of others, which may not always be the most underperforming centers in terms of utilization.

Jeff Silber, Analyst

All right. That's really helpful. And if I could switch gears to some of the new center openings. I know it's a long sales cycle, but we're starting to see signs of a cooling labor market. And I'm just wondering how your conversations are going with potential new customers. Are they still really excited about potentially opening up new centers? Or do you see some of them holding back given what's going on in the labor market?

Stephen Kramer, CEO

Yes, it's a great question. So I think, look, the conversation with prospective center clients continue to be strong. There continues to be good interest out there in terms of at least exploring, understanding that this is both a long sales cycle but it also is reflective of long-term decision-making because, again, once someone opens a center, they generally are opening that center with a long-term commitment. So I would say that last quarter, for example, was a number of the openings were transitions. This quarter, a number of them were new builds. But in terms of the sort of texture of the pipeline, I would say we certainly are more heavily weighted towards transitions. So those are existing centers that are self-operated, typically by health care organizations or universities. And so again, I think those conversations continue to be strong on the basis that they've been through a very difficult period of operations. By and large, they recognize that they may benefit from having an expert operator. And so rather than closing, which they are not minded to do, they are considering a third-party operator like ourselves. And we're very well positioned as they make those decisions to capitalize on it given our strong leadership position.

Operator, Operator

Next question comes from the line of Stephanie Moore with Jefferies.

Harold Antor, Analyst

This is Harold Antor, speaking for Stephanie Moore. Regarding the U.K. business, could you provide more details about the pricing discussions you're having there and the enrollment trends? Also, what is the average occupancy rate in that region?

Elizabeth Boland, CFO

Yes. If I understood the question correctly, the average occupancy in the U.K. is slightly lower than the overall average, which is in the low to mid-60s. In the second quarter, it is in the mid-60s, but for the year, it would be low to mid-60s. The U.K. typically sits a couple of points below that average. The centers tend to be smaller on average, so the number of children corresponds to that utilization in a different manner. In terms of pricing, it's quite similar to our overall averages, where we have been able to implement price increases. While decisions are made locally and individually for each center, we've generally seen about a 5% increase in the U.K. We've also experienced similar wage dynamics to the U.S., with wages increasing faster than prices over the past few years, and we've been addressing that with our recent pricing decisions. However, the labor market there has faced more challenges, and we have relied more on agency staff, which has led to higher labor costs due to the staff composition. We are now moving towards a more balanced labor structure.

Operator, Operator

Next question comes from Toni Kaplan with Morgan Stanley.

Toni Kaplan, Analyst

Maybe just following up on the topic of price increases. I guess when do you start communicating next year's price increases to clients? Is it just January 1 they get the bill? Or do you discuss that sort of ahead of time? And also with regard to camp, do you typically raise camp prices by a similar percentage to the school increases?

Stephen Kramer, CEO

Yes. So Toni, a large number of our price increases go into effect in January, and we tend to like to give families, call it, 60 days notice ahead of when that price increase is going to happen. I do think it's important to recognize that as children age up, right, their actual out-of-pocket tuition fee goes down. That's across the industry, right, as the child ages up and the ratios expand, we do see a natural decrease. So while we do provide them the insight on the increase, call it, 60 days ahead, they're also recognizing in many cases, as their child ages up, a lower actual out-of-pocket expense associated with our service. So I would say, 60 days is the standard. In terms of camps, again, we operate under the brand of Steve & Kate's and the Steve & Kate's camp generally is during the summer, although we are offering more schools out type break camps as well. That is typically only aligned with backup care for our summer camp. Again, typically, those decisions happen annually, and they happen ahead of when the season actually starts. So it's not really about communication as much as the price is shared when individual retail families are interested in the service.

Elizabeth Boland, CFO

I would like to add that regarding the client question, we usually engage in an annual budget discussion with clients sponsoring a center. They participate in determining the level of support they want to provide. We will explain the necessary price increase based on the current cost environment, especially regarding labor, and consider the expected enrollment, which affects their subsidy. The client then has the option to decide whether to provide additional support or share costs with families. Ultimately, how price impacts families is a collaborative decision with the clients. This process takes place well in advance, typically starting from now until late fall, in line with the budget cycle.

Toni Kaplan, Analyst

Yes. Understood. And then Elizabeth in prior six quarters, you closed a net of 37 centers but your capacity had stayed at 120,000. In this quarter, you closed 12 centers net but lowered capacity by 5,000. And so I was wondering, if they were particularly large centers that were closed this quarter? Or was this just rounding and a function of that?

Stephen Kramer, CEO

Just rounding, Toni, yes. The closing centers capacity has been, as you would imagine, on a net basis solely shrinking with those closures, and we just rounded down to 115.

Operator, Operator

Next question comes from the line of Faiza Alwy with Deutsche Bank.

Faiza Alwy, Analyst

I wanted to follow up on the question around full service margins. And I was wondering if you could share with us like how the U.S. centers are performing from a margin perspective? And secondly, any color you can provide around margins for the various cohorts. I think at one point, you had talked about the cohorts that are above 70% enrolled are at margins that are in line with pre-COVID levels or near. So give us just some color on how things have trended, just focusing on the U.S. business, in particular?

Elizabeth Boland, CFO

We don't provide specific margin breakdowns by geography, but the full service margins are facing a challenge from the U.K. business, which is impacting margins by about 100 to 200 basis points. This suggests that U.S. performance is better than that of the U.K. To some extent, our other international businesses, like those in the Netherlands and Australia, are small compared to the full service sector. Consequently, these markets don't have an overhead structure optimized for their size as we continue to grow. The U.S. full service business is currently at the forefront of overall margins, and the U.K. headwind can give you a sense of the performance dynamic. Looking ahead to the remainder of the year, we've noticed a decline in performance to low single digits compared to the first half. However, from a cohort perspective, our top-performing centers, those with over 70% occupancy, have essentially returned to pre-COVID operating levels. The composition of these centers is changing, with some centers that were in the mid-range improving and moving up into the top-performing group, resulting in a dynamic mix. The performance of these groups is not fixed, but the top-performing centers are doing well. The middle cohort, with occupancy between 40% and 70%, is showing decent progress. While the overall average occupancy is in the low to mid-60s, the middle cohort falls slightly behind. We expect them to finish 2024 with a mid-single-digit EBIT margin. The challenges in the full service segment are mainly due to the lowest-performing centers, but as we enhance enrollment and promote more centers to the middle group, we can optimize our portfolio, ultimately working towards achieving a high single to 10% operating margin in full service over time.

Faiza Alwy, Analyst

Great. Very helpful. And then I just wanted to follow up on backup. You alluded to mix of business that maybe helped margins this quarter. So just remind us about the mix sort of what might be some of the factors there in back-up?

Elizabeth Boland, CFO

Yes. The primary reference there is the amount of use that we're able to serve in centers and in our own controlled providers versus in-home care. And so that mix has continued to migrate away from in-home back to really the levels that we had seen pre-COVID, which would be something like 1/3 of the use being in-home and 2/3 not being in-home. And so that improving mix has driven that just relatively lower provider fee mix, which is the sort of cost of delivery.

Stephen Kramer, CEO

Okay. Thank you very much for joining the call this evening. I hope everyone has a wonderful rest of the summer.

Elizabeth Boland, CFO

Thanks, everyone.

Operator, Operator

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