Q3 2019 Earnings Call
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Please night this conference it's being recorded.
I <unk> I bet, she all heist Elizabeth Cohen, Chief Financial Officer play scholar head.
Thank you shall inherit everybody on today's call.
With me today are feeding Kramer or Chief Executive Officer, Monday, Mercy or executive chair.
Turn the color were to Stephen after covering a few administrative matters.
<unk> until just mention today's call as being recorded and webcast and recording will be available under the Investor Relations section of our website at <unk> Dot com.
As a reminder to purchase offense any forward looking statements made on this call, including those regarding future financial performance are subject to the Safe Harbor statement included in our earnings were nice.
We're looking famous inherently involve risks and uncertainties that may cause actual operating results and financial results to different materially centered described in detail in our 28 came from 10-K .
Any forward looking statements makes only ends of the date on which it's made and we undertake no obligation to update any forward looking statements.
We also refer to day to non-GAAP financial measures, which are detailed in reconciled to their gap counterparts in our earnings release, which is available under the I.R. section of our website.
Stephen will now take us through to review and up down the business.
Thankfully to this and thanks to all of you have joined US This evening.
As always on today's call I'll review, our financial and operating results for this task quarter and will provide you with our updated outlook for 2019 and initial V. 120 20.
Elizabeth well then follow with a more detailed review the numbers before we open it up for your questions.
As we near the end of 2019, we continue to be really pleased with the performance against our goals for the year and with the progress we're making in our various initiatives to drive both near and long term growth across all of our bayes segments.
For the quarter revenue group, 8.5% to $512 million and adjusted earnings per share of 86 cents.
Increased 18% from last year.
We added 12 full service centres, this past quarter, including locations for Stanford University, and Jackson healthcare and expanded our backup Karen advisory climb portfolios with recent launches for Boeing and Cedar Sinai Medical Center.
Are cross selling efforts also continue to yield results.
Our sales and account management teams are working diligently to broaden our existing client relationships by extending their investment into additional services.
Several clients launched a second or third service with us in this past quarter, including beggar, Charles Schwab and linked in.
At the same time as it relates to clients deepening their commitment to existing services Biogen and the University of California, both opened additional centres and Q3.
And we're thrilled to transition the management of choose self operated centres for the Walt Disney Company.
This was a great example, the strength of our existing relationships with other Disney operating companies, including E.S.P.N. Fox our expertise in managing complex client relationships and our reputation for operating high quality programs.
Opportunities like this illustrate the addressable market potential that exists within our existing client base.
Trucking are solid top line growth. We also continue to deliver strong inconsistent operating results across the business.
And the third quarter, continuing the trend we delivered in the first half of the year adjusted operating income grew 13% and expanded 50 basis points to 12.3% of revenue.
In our full service segment, we continue to leverage solid in Roman games from mature centres and from our new or client and least consortium centers that are ramping too mature operating levels.
We also had strong utilization of services in both our backup and advisory operations and we're gratified to see the benefits from our investments in technology and targeted marketing programs.
<unk> geared towards improving the end user and client partner experience will continue to support the business in achieving our long term growth and operating leverage targets overtime.
I'm also excited to announce our acquisition of a small division of G.P. strategies focused on tuition program management earlier this month.
This acquisition expands our emphasis claim portfolio by adding a mix of new and existing clients to the bright horizon family, including M.D. and United Technologies.
As part of this transaction, we've entered into a partnership with G.P. strategies, a leader and customize training to collectively market too and support employers across the full continuum of education solutions.
We welcome the G.P. strategies tuition program management team and clients to the bright horizons family and look forward to growth opportunities in the future.
In addition to this exciting opportunity in our advisory business. Let me also touch on other strategic growth areas. We focused on his we close out 2019 and start to look ahead to 2020.
The headline is that we're really pleased with the momentum we have across all aspects of our business.
First organic growth strategy continues to be focused on cultivating new clients and expanding our existing client relationships to cross cells and additional use of current services.
The sales pipeline in each of our services remain strong with interest across industries, and with both new and existing clients.
Next or at least consortium centres.
We have now open nearly 100 of these centres over the last six plus years, we focus on select urban settings, where we see one a concentrated population of our target demographic to a limited supply of high quality child care and three strong opportunities to meet the needs of our client partners in these locations.
We continue to be encouraged by the progress and positive contribution from this group of centers as they ramp to mature operating levels.
And we are optimistic about the significant value creation opportunity of this strategy.
With our growing density of centers in major metropolitan areas, we aren't increasingly attractive partner to leading employers located across these markets.
Finally, with regard to M&A, we continue to cultivate a solid pipeline of acquisition prospects that meet our high quality and performance thresholds, while the timing of centre acquisitions can be lumpy or diversified model provides this opportunities for from time to time to acquire non centre businesses like my family care in the.
First quarter of 2019, and the G.P. strategies tuition management Division earlier this month.
While similar and scale to the tucking acquisitions, we see in the full service business. These strategic additions enable us to further solidify our leadership position in our backup and educational advising segments.
As they have throughout our history, we expect acquisitions to continue to be a key element of our growth plan in the years ahead.
Now, let me update you on our 2019 outlook.
We expect continued strong performance with revenue growth projected in the range of 8% to 9% for the full year, including the ongoing effects of lower effects.
And adjusted earnings per share in the range of $3 in 61, <unk> $3 in 61 sense and $3.64.
Finally, I also wanted to provide some initial perspective on 2020.
We believe we're well positioned to continue the positive momentum we've demonstrated over many years.
Well, we're not yet providing detailed guidance for next year, we anticipate a continuation of this year's performance with revenue growth in the range of 8% to 10% and sustained operating margin leverage driving low to mid teens adjusted earnings per share growth in 2020.
Would that Elizabeth can review the numbers in more detail and I'll be back with you during q. anyway.
Thank you Stephen and once again recapping the headlines for the quarter overall revenue was up $40 million or eight and a half per cent in the corridor.
On a segment basis are full service business expanded 6.2% or 24 million driven by rate increases and Roman games and contributions from new centres.
Including about 1.5% from acquisitions.
Foreign exchange rates created approximately 150 basis points of head went to the full service growth for the quarter. So on a common currency basis the segment expanded 7.7%.
Or backup division generated another strong quarter with 20 per cent top line growth driven by new client launches strong utilization and contributions from my family care in the U.K.
And advisory services group, 15% on new client launches and expanded use by our existing base.
[noise] in Q3 gross profit increased 12 million to 125 million or 24, and a half per cent of revenue.
And adjusted operating income increased 7 million to 62.8 million or a Steven Steven mentioned, 12.3% of revenue up 50 basis points from last year.
Well the segment basis full service adjusted operating income expanded 20 basis points to nine per cent on gains from enrollment growth in our maturing ramping centres contributions from new and acquired centres and tuition increases.
The backup and advising segments, both generated solid operating margins in the quarter approximately 25 per cent in 29% respectively.
Disgusting to pass the top line growth in these segments contributes to merging expansion overtime, even as margins can vary from period to period, depending on the timing of our new client launches in the service utilization levels and the time in a certain marketing and technology spending which supports the gross.
And some other line items interest expense at 11 million decreased 800000, and Q3 compared to last year on lower average revolver Barnes and modestly lower interest rates.
Our current borrowing cost approximate 4% with 500 million or about half of our term lawns fixed with an interest rate swaps.
We ended a quarter at 2.6 times net debt to even though.
What are improved operating performance and positive working capital movements, we continue to generate strong cash flow through September this year cash both of operations with 273 million up 33 million per last year.
In terms of our capital allocation strategy.
First priority continues to be investments in growth of the business I would buy share repurchase is under ours. This you know optimization.
Through September of this year, we've invest in 67 million I knew centres and acquisitions and 12 million.
I'm sure repurchases.
At September 13th of 19, we operated 1083 centers with the capacity to serve more than 120000 children and across all of our service science, we partner with more than 1100 clients.
So no adding to the guidance headlines that Stephen touched on earlier, we're projecting top line growth for the full year in the range of eight to nine per cent over 2018.
This reflects approximately 2% of contribution from acquisitions, including around $8 million to $9 million from my family care and one to 2 million contribution from the G.P. strategies tuition program management.
In addition, we expect foreign exchange Headwins for the overall business of 1.25% to 1.5% for the four year on continued lower pound in euro rates.
[noise] on the operating side for 2019, we expect to add approximately one did 2% of the top line from enrollment in our maturing ramping centres and to realize price increases in the range of three and have to 4% across our P.N.L. Central network.
Based on centres schedule to open or be acquired by the end of this year, we now expect to add approximately 40 centers.
These drivers of top line growth, coupled with cost management inefficiency in or service delivery contribute to improved operating margin performance, which we project to be in the range of 50 to 50 basis points for the year.
That's another key metrics for the for your 2019 rest made in amortization of 34 million depreciation is 17 75 million.
Compensation between 17 and 18 million.
Based on are outstanding borrowings estimates of interest rates for the rest of the year, we're projecting interest expense of approximately 46 million.
On the tax front, we're now projecting the structural tax rate to approximate 22% for the four year and lastly weighted average shares outstanding are predicted to be 59 million for the year.
At this point in the year, we're estimating it will generate approximately 310 to 320 million of cash flow for operations and have 45 million of maintenance capital, yielding 265 to 275, nine or free cash flow to invest in the ongoing growth in the business.
We expect to invest 50 to 55 million a new centre capital for centers that are opening this year and an early 2020.
The combination of all these factors lead to our projection of adjusting net income of 212 to 214 million and adjusted E.T.S. growth in a low double digits to a range of $3 in 61 sense to $3.64 a share for 2019.
So with that show until we are ready to go to your name.
Thank you.
It's time will be conducting a question unanswered session. If he would like to ask a question that place parse stop then one <unk>.
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Participants using stay car equipments, it may be necessary to pick up your handset before pressing that stock hey, it's.
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Thank you. Your first question comes from George Tong Goldman Sachs go I had place.
Thanks, Good afternoon, thanks for providing the preliminary outlook for 2020, you'd indicated expectations of revenue growth of 8% to 10% with low to mid teens EPS growth helped by some margin expansion can you discuss how the the pieces for 2020 might look different in terms of the.
Bridge to that growth compared to 2019 do you expect for instance, enrollment tuition or new center openings to have a deferring growth profile and next year versus this year.
Yes, good evening George Thank you for the question. So we have an expectation that we will continue to see very similar characteristics.
As we saw in 2019 as it relates to the composition of the growth in the margin improvement.
So again I think that we're very excited about the prospects for 2020 and feel like.
Those of you who have dialed into 2019 will see similar type performance in 2020.
Got it that's helpful and then.
To switch gears to discuss Germany can you provide some.
Preliminary updates on how the PRB partnership is progressing there and whether.
The initial expansion in Germany can potentially open up the market there further for beef him.
Sure. So it is still very early days in the relationship obviously, we've known the folks in PMC for a number of years, but now we have sort of a front row seat into the actual business and are getting a front row seat into the market. So first I'd say, it's early days.
That said, we have started to have some really good conversations with clients you're in the U.S., who have demonstrate interest in Germany and at the same time, we've started to get to understand the best ways to to leverage the position that we have to the benefit of our client base in terms of looking out.
For the future in the expansion in Germany, I would say, it's still really early to to make an assessment, but a really pleased to have the insights that we are already starting to garner about that market.
Very helpful. Thank you.
Thank you.
Thank you. Your next question comes from Manav Patnaik go ahead. Please. Thank you good evening guys.
Just on 2020 again I mean, it sounds like this you at leasing and none of the geopolitical events and uncertainties is.
Seem to have impacted your business really and that's I guess looking out next year.
I'm presuming, we should expect more of the same but does elections, one way or the other has any preference on your end.
Yes, so in terms of of the global Peace, obviously the piece with the greatest amount of continued uncertainty that we have had this year and it appears a sort of not clarity going into next year is Brexit, obviously, we have a strong portfolio that.
Forms in the UK.
That said as we shared on the last call and I'll share again today, we have seen pockets, where we believe that people transferring out of the country and or the uncertainty has caused us some.
Some challenge on the enrollment side.
That said it is at this point still again in pockets as opposed to something that we're seeing more pervasively in terms of the election here in the U.S. I think that we continue to hear a lot around childcare and other issues. Our experience suggests that both the Republicans and Democrats have along his.
Three of prioritizing and and showing and sharing commitment around childcare a with the biggest challenge over the years being the financial resources to backup the promises that that are often made during the election cycle. So at this point, we continue to listen closely but if if our 30.
Plus years of history and listening to the rhetoric in the election cycles is any indication we don't suspect that there will be large changes that would have any material impact on our business.
Got it and just to follow up on strategy and so forth. I think you guys. Just concluded youre forums session internally there and I was just curious that gives they like cross sell for example that you called out early in the call is there more often effort to get that going I mean, I know, there's a lot more new logos, but if you like the cross.
So you should be an easier opportunity or am I wrong in thinking that.
Yes, so first of all just to reference what I think youre referencing manav. So we just had our New York City client form we had over 120 of our clients.
In New York City at one of our clients the New York Times.
For a day of sessions around dependent care strategies, and and benefit strategies in general. It is the largest regional conference that we have held in terms of the number of clients who participated.
It was a very energizing experience, there's a lot of conversation around.
Employers wanting to differentiate themselves through their benefits and specifically in the area of childcare dependent care and workforce planning around education. So we're really excited to hear all of the energy around that what I would say in terms of cross selling is we continue to see really good opportunities and closing.
Opportunities in that area on this quarter, we are at nearly 25% of our client base are now.
Multi service clients, so they buy more than one service and its opportunities like these client forums, where we really allow for our clients to tell our story and their story and so it was wonderful to hear the number of clients, who we're talking about wanting to invest across the services.
All right got it thank you guys.
Thank you.
Thank you Sir your next question comes from Andrew Steinerman JP. Morgan go ahead. Please hi, Elizabeth did you say 50 to 60 basis points of margin expansion for 2019 and was it the range broader.
Kind of earlier in the year and as we look into 2020 is there anything to suggest that the range for margin expansion might be.
Tightening up.
[noise] I did say 50 to 60, it's sorta, though at this stage of the year, where we have the visibility into how the year is playing out and I think as Stephen alluded to Andrew the.
The view next year is it's preliminary we'll have.
More to say about the details of it on our next call.
I think structurally we we feel good about the components of how the growth is both in the pipeline to come in and what we what would the factors of what we can deliver in terms of the.
Contributions from the different lines of business the different geographies and the continued leverage and in our centers that are ramping in so.
I think that the reason we give a range is that the performance is has as components of it that are dependent on timing of of a variety of things and so we feel good about the long term opportunity in that range at this stage and we'll just give more details next quarter.
Okay. Thank you.
Yes, Thanks, Andrew.
Thank you Sir your next question comes from Gary Bisbee Bank of America Merrill Lynch go ahead. Please.
Hey, good afternoon, I guess, the first question Stephen you had a comment about talking about the lease consortium strategy and you said that is you're increasing the density in select markets. It.
I don't know if you sit increasingly attractive but.
Coming viewed as attractive to employers across those markets I guess.
That's it are you referring to.
Capacity to support continued backup growth or are you seeing.
What I would term new but maybe you could tell me if it's not opportunities were employers are taking capacity in the full service across multiple of those centers, what we really getting out thanks.
Yes, so Gary. Thank you. Thank you for picking up on that certainly.
As we are Densifying in these metro areas and I did say exactly what you just quoted we are becoming an increasingly attractive we've always been attractive, but an increasingly attractive partner to employers that are looking to have capacity across centers and so yes. The answer is certainly from a bad.
Backup capacity standpoint, the density in these metro areas is increasingly important for us to fulfill on the commitments that were making on the backup side of our business, but in addition to that we're seeing real interest from employers who are interested in taking capacity in these centers for the benefit.
All of their employees that are living and working in these metro areas. So I think it comes in both flavors, both backup as well as a full service enrollment commitments that employers are making and as we continue to build out and as this strategy continues to mature we think thats a real competitive advantage in these markets.
Thanks, and then it's been I guess, a year and a half since you began more than that now since you began the stepped up tech investments last year.
Can you give us a look back now that we're further into it like half your efforts around around marketing in consumer.
Apps and whatnot is is that having an impact on utilization are you seeing whether its satisfaction scores or other improving what what what's the what's the update on how that's done in a while well later.
Sure so as it relates to the tech investments, we've been really focused in two areas. One is around user experience and making the user experience more seamless and then the second has been around.
Marketing efforts digital marketing efforts, specifically that are personalized to the end user and I think in both regards we're seeing really good outcomes. So on making the experience more seamless we're really proud we just recently our reintroduced in relaunched our mobile app on the backup side and again.
The feedback has been quite strong we're already seeing nice increases in terms of the number of backup users that are leveraging the mobile app.
As a complement to both our web portal as well as contacting our contact center. So that's an example of creating that seamless experience and we believe that with that we have instant book in other ways that we're making our experience more real time on demand and ultimately easier for the end user at.
The same time on the digital marketing side I think we are absolutely seeing good progress and I think it's already showing itself. For example, again in the in the backup growth rate, where we're starting to see a slight step up as it relates to use and I think a lot of that comes down to the fact that we are finding.
Strong personalized messages that are really resonating with the end user and prompting them to use the service more than they would do on an unprompted basis and so examples of that are we're certainly going back to registered users who haven't used in six months.
I would never used since they've registered we have examples where we're helping employers who are really focused on getting employees, who are on maternity leave back to work with maternity and transition to work programs and really targeting individuals that have a particular profile or need and helping them to see the.
Value of using that service. So I hope that gives you a flavor of the kinds of outcomes that we're seeing.
In terms of use and then also in terms of enhance user experience and feedback.
That's great and then just one quick one for Elizabeth just any comments you can give on the size of this tuition program management acquisition.
Yes, so they they contribute on its about one to 2 million in the fourth quarter. This year, so sort of in that range of call. It five to five to seven 8 million of annualized revenue.
Great. Thank you.
Welcome.
Thank you once again, if you wish to ask a question. Please press Star then one on your telephone and flight feel named they announce your next question comes from Henry chain.
I am I capital markets go ahead. Please.
Hey, guys. Thanks, good afternoon, I Uh huh.
Hi, I'm very impressed by the consistency of the model.
I was just curious to get your sense of.
Perhaps the demand from corporate your corporate customers for child care, whether that's.
Changing at all.
Im just sort of thinking out loud and in terms of weather demographics are having an impact of more families having children or perhaps more working mothers.
Joining the workforce.
Just kinda again, when I get your sense of that just add some color I'm sure that consistent guidance that you think.
Yes, so in terms of the corporate market and the employers that we are selling into and servicing.
We see really good strength in their interest in the services that we provide.
As you will appreciate we're in environment, we're in an environment, where there is a real focus on the war for talent and differentiating yourself as an employer and being attractive to individuals that have a different needs a different life stages and so the proposition that we have whether that.
In early childhood education, whether that be in the teams transitioning to college, whether that be employees going back to work I, sorry going back to school, you'll certainly see that employers are very interested in the kinds of things that we have on offer in terms of the backdrop to that.
We are certainly seeing that as employees and parents are older a when they have their first child that has certainly been a positive trend for us over a number of years because certainly they are more valuable to their employer as they are later in their career and losing them.
Is is a is a bigger financial challenge for the employer I think the other the other piece of it is that as the benefits that we offer become.
More pervasive in employers it becomes a real competitive necessity, whether that be on a geographic basis or whether it be within industry and so we are certainly seeing that play out geographically and within industries, where people are looking to be competitive from unemployment proposition with other employers.
So we're finding certainly the current market and context to be a real positive for our business.
Got it okay. That's great. Thank you so much.
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Thank you.
Thank you next question comes from Jeff Mila from Baird Go ahead. Please.
Yes. Thank you two follow ups to Daojia turret Gary's first question how much of the.
The lease consortium center capacity has some sort of enrollment commitment from employer partners or other sponsors.
[noise] across the system.
Yes, I think that it's.
From a statistic statistical standpoint, Jeff, it's probably doesn't add up too much across the system, but in these particular markets, where we have this concentration so looking at that as a subset.
May be anywhere from.
5% to 10% of the capacity may be taken up in this way and that obviously varies by center, but thats, probably the order magnitude.
And then just on the increased recognition to the value to the employer from having that density.
Yes is it extending the recognition of that is it extending into sales for.
Full service employer sponsored centers meeting getting over the hurdle that I think you faced in the past around benefits a quality benefits and the if you only have a benefit for headquarters employees.
Yes, I think that is certainly the case, Jeff So what we have in terms of the network and the breadth of our network is certainly something that is attractive to employees that have employees in disparate locations around the country.
But likewise for those who have concentrated populations and may not have real estate for example of their own.
It also is another opportunity for them to get involved in childcare without providing space that they have otherwise allocated in a different way. So I think it comes in both of those two ways one.
For those that have disparate employees and making sure that network works for their employee base and at the same time for those that have a concentrated workforce and have a need within a particular geography.
But may not have space. It also is very helpful to them.
And then just last from me.
Just kind of give us your views on how you perceive Brexit risks to the business either from potentially clients.
Moving headquarters out of the UK or I don't know if theres any risk in your employee base. Thanks.
Yes, so on the on the Brexit side, a different from our business here in the us where the majority of our centers are for specific.
Single sponsor employers in the UK, we have much more of a lease consortium model. So the majority of our centers that we operate in the UK or lease consortium that have the benefit of sponsorship either from a broad range of client and or individuals who are enrolling in the community.
In which they live in work who work at different employers. So I would say that the risk concentration in the UK related to Brexit is fairly modest so.
The number of centers that are for single sponsors who may decide to exit London. For example is pretty low. So we believe that if for example, certain employers started to exit.
Our hope would be that.
Individuals that are working for other firms would come in behind them and enroll in our centers. So again, because we don't have as many single sponsor relationships in the UK.
We think that the risk is much more federated.
Thank you.
Thanks, Jeff.
Thank you Sir your next question comes from Toni Kaplan Morgan Stanley Go ahead. Please.
Thanks, very much and your comments on the guidance you mentioned that you're expecting to open 40, new centers this year and I think last quarter.
A number more like 45 to 50 and just wondering what the cadence is in terms of that change you know, what's driving that slower change of pace.
Pace of opening centers.
Right, yes, it pretty much comes down to the the number of acquisitions in the full service segment that we expect to complete this year Tony.
Capital year, we would be looking to add acquisition overall acquisition growth the contributes to revenue in the range of about 2% of our topline growth 1% to 2%.
We have that this year, but it's coming from some acquisitions in the backup and and the advising business and on the full service side. We we think we will complete somewhere more like six to eight center acquisitions. This year, rather than maybe a more normalized range of.
13 to 15, a in a typical year. So it really comes down to the numbers of acquisitions that were closing and I guess just as a note I think it's one of the the hallmarks of our strategy. We certainly do grow through acquisition, there's a lot of great high quality providers out there, but we want to be very.
Disciplined about the centers that were adding to the portfolio and so that that takes a fair amount of cultivation of prospects and sort of really a lot of screening. So it'll be it will continue to be a bit lumpy, even though we plan to execute on them each year.
That's great and that he's in perfectly and my next question. So just given your leverage is comfortably within your target level.
Talk about that you're propensity to do a large deal if there any adjacent sees that you'd be particularly interested in or geography.
How how to think about.
<unk> M&A <unk>.
Sure so.
We absolutely are open minded as it relates to the acquisitions that we do assuming that they are high quality and and meet our financial parameters.
What I would say is that.
In the geographies in which we currently operate there are.
Really good examples of smaller tuck in acquisition, some larger acquisitions as well, especially outside the United States.
Certainly our propensity as we think about expansion beyond the countries that we currently operate in that would likely be through acquisition and so could very well be sort of a small and medium or a larger sized acquisition.
We also worked really closely with our clients to understand what are the services that they would naturally be looking for from us to be delivering on and so the client form that Manav mentioned earlier was a great example of us being out in the market listening to our clients to understand what adjacent sees exists to.
Existing services to to be really thoughtful about how we broaden our portfolio of services.
Thank you.
Thank you. Thank you.
Alright, well a thanks, everyone for joining the call and I hope everyone has a great night and a nice Halloween tomorrow, yes. Thanks, everyone talks the on the road.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you. So your participation.
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