Q1 2020 Earnings Call

[music].

Why should require operator for technical assistance during the conference. Please press star as you're on your telephone keypad. As a reminder, this conference is being recorded but it's now my pleasure to introduce your host Michael Flanagan Senior director of Investor Relations. Thank you Mr. Flanagan you may begin.

With me on the call today, our Stephen Kramer, Chief Executive Officer, and Elizabeth Baum, Chief Financial Officer.

I'll turn the call over Steven after covering a few administrative matters.

Today's call is being webcast and recording will be available under the IR section of our website bright horizons dot com.

As a reminder to participants any forward looking statements made on this call, including those regarding future business and financial performance, including the impact of Cobot 19 on our operations are subject to the Safe Harbor statement included in our earnings release.

Forward looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2019 form 10-K, and other FCC filings.

Any forward looking statements speak only as of the date on which it has made and we undertake no obligation to update any forward looking statements.

We also referred today to 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.

Stephen will not take us through the review and update on the business.

Thanks, Mike Hello to everyone on the call and thank you for joining us this evening.

I hope that all of you were staying safe and healthy during these unprecedented times.

I would like to take this opportunity to think the first responders medical personnel and others on the front line, we're working tirelessly to ensure that our community needs and critical care of being provided.

And I want to thank our teachers and all early childhood educators, who in the face of the storm have provided com nurturing and loving environment for young children.

I'm pleased that the field of early childhood education now more than ever is seen as an essential support within our society and the teachers in the classroom are recognized as heroes.

They have for ever made a difference and I am truly inspired by their individual and collective dedication.

I'm going to begin today's call by briefly recapping, our first quarter results.

I will then discuss our response to the cobot 19 pandemic and the strategic actions, we're taking to navigate the near term challenges.

And to maintain positive momentum for the longer term.

[noise] Elizabeth.

We'll provide a more detailed review the numbers and some further context around the potential impacts from the pandemic before we open it up for your questions.

To recap.

The first quarter, we delivered revenue of 506 million, an increase of 1% and adjusted EPS of 74 cents a decrease of 9%.

These results reflect the cobot 19 related impact to our business that began in March.

Leading up to the crisis, our business was trending in line with our expectations for the quarter.

Our full service segment, we added 11, new centers, none of which were organic including client centers for fifth third bank and very early life, a subsidiary of alphabet and a second center for pioneer natural resources.

Our backup care business also started off exceptionally well running high teens growth in the first part of the quarter with over 50 client launches, including Anheuser Busch Keytrade Micron and fifth third launch backup care in connection with its new center opening.

And we also added to our educational advisory client base during the quarter launching services for Davita, T.I. Kras and Gilliat.

But the strong momentum from fourth quarter 2019, and the early part of Q1 2020 was interrupted by the outbreak of covert 19 in each of the key geographies in which we operate the U.S. the UK and the Netherlands.

Well governments and health authorities across these three geographies ordered the closure of all non essential businesses. Our child care services have been deemed critical to support a central frontline employees, such as first responders researchers health care and medical professionals, who are leading the fight against Cobot 19.

So in mid March in order to best support our clients families and staff, we began to temporarily closed a significant portion of our centers.

And to concentrate our resources on health care and other essential clients centers as well as critical hub centers to support the children of medical and other essential workers.

Before I get into the current state of our operations, let me frame my comments by observing that we have weathered many economic cycles over bright horizons 30, plus year history.

Driven by our value proposition and high quality services.

Underpinned by a culture of caring and service.

We also have a number of structural advantage is driven by our employer sponsored model in the U.S. significant government support outside the U.S. as well as the diversity of our service offerings.

Our employer sponsored cost plus centers operate with no financial risk our employer sponsored bottom line centers bear no occupancy costs and our lease consortium centers benefit from the support of various employers to backup youth and others to subsidies.

The backup and advisory segment have continued to grow that they've seen in recent quarters and with their strong operating margins and cash generation provide additional support and stability to the overall business.

So getting to the specifics.

Today, approximately 250 of our nearly 1100 centers globally remain open.

The safety and well being of our staff and the children in our care has always been and continue to be our first priority.

We closely monitor guidance from the CDC and local health authorities and take direction from medical experts, including a direct relationship with a leading physician at Boston Children's Hospital.

We've enhanced many of our existing practices and implemented new protocols, including social distancing procedures for pickup in drop off daily health checks for staffing children. The use of face masked by all bright Horizons staff limited group sizes for older children, and enhance hygiene and cleaning practices.

In the U.S. approximately 150 of our 718 centers remain open to essential Workforces.

Our early childhood professionals are enabling medical staff to treat patients at leading hospital systems.

Including near Presbyterian Johns Hopkins Medical and Mayo clinic.

They are also supporting essential employees at leading organizations, such as SC Johnson Union Pacific and Cummins engine.

I'm also pleased with our partnership with first responders first a collaboration between Arianna Huffington thrive Global the Harvard School of public health and the creative artists Association.

To provide vital childcare in communities that have been hit, particularly hard by the virus, such as Chicago, Detroit, Seattle and DC.

We also continue to do important work with our families enrolled at centers that are currently closed.

Our educators have created an online platform, where children are able to stay connected to the other children and their class and access a variety of teacher videos made to continue the science, our and reading curriculum while at home.

In addition to facilitating virtual activities, we offer weekly Webinars on key topics and center director newsletters to keep families informed and up to date.

Each of these are valuable ways for everyone in our community to stay connected and these engagement activities will certainly aid in our reopening process.

As we plan for the reopening of our centers across the U.S.. We are following federal state and local guidelines related to shelter at home mandates.

As such we're not setting a single reopening date.

Instead, we are engaging our client partners and discussions about their plans and the supports they are seeking for their employees.

Likewise, we will make decisions about reopening our lease consortium centers in collaboration with client partners as well as insights gained two pulse surveys have enrolled in perspective families.

We have been encouraged by the discussions with clients and early indications from parents about their interest in our reopening of their centers.

We believe that the expertise that we have demonstrated an operating childcare undercover 19 protocols will not only allow us to open more safely and quickly but also to provide the critical reassurance that clients and returning families desire.

Turning now to the UK approximately 35 of our 313 centers remain open to serve those children of workers critical to the Corona virus response.

Similar to the U.S., we are continuously monitoring guidance from the UK health authorities and currently anticipate a rolling reopening which will track the lifting of shelter in place mandates.

In the Netherlands, where we continue to operate approximately 60 centers, we've seen the most government support and therefore limited disruption.

Since the outbreak our centers have been serving only parents working critical professions, but starting next week, we expect they will reopen to all children and families.

This is in line with the Dutch government updated guidance to begin reopening the economy, starting with schools and childcare centers.

Let me now moved to backup care, which has been a particular bright spot during this crisis.

As you might recall, we finished 2019 with strong momentum in the use of our backup care services and we saw those trends continue into 2020.

As the Pandemics spread during March and the need for child care supports became even more acute for both essential workers and for families affected by school closures, we experienced significant increases in demand from both current and new clients.

In particular, we've seen increased demand for in home care and reimbursements for self source care.

Our sales operations and technology teams have worked tirelessly to meet the surgeon care requests and we continue to Marshall resources, including additional investments in automation.

As we approach this summer months, we expect to see continued need for in home care.

Increasing demand at our own centers as they reopen and for summer enrichment care that we will operate along with partners.

Looking further out the increase in registered users that we have served during this crisis represent a new and larger population to whom we will market and ultimately hope to serve through traditional backup care.

Our advisory businesses also continued to deliver solid results.

Employers remain committed to education programs and participation by their employees continues to track expectations.

For those clients that have furloughed employees, we've introduced a special program education boost which is a cost effective self paced option for impacted employees to start or continue their educational pursuits.

We've also seen increased in credit interest in discussing our student loan repayment program given the tax incentive created by the cares Act.

As we play a critical role in supporting working families. During this pandemic. We at the same time have been forced to take difficult measures to ensure the financial health of the organization today and over the long term.

We are making these hard decisions consistent with our employees centric culture, and our commitment to keeping the wellbeing of our employees and staff members at the forefront.

Although we temporarily furloughed more than 22000 of our teachers and support staff in connection with center closures.

We have ensured that these team members had transition pay continued healthcare coverage and access to ongoing education benefits such as education boost the advisory program, which I just mentioned.

We have taken a number of additional steps to strengthen our financial position and to preserve cash and liquidity.

We have reduced discretionary spending and support costs and a focus our investments to prioritize the most critical operating areas.

And if suspended our share repurchase program.

I have elected to forego my salary and our executive team and board of Directors have also agreed to reductions in compensation until the majority of our centers reopened.

Following the quarters close.

We amended and expanded our revolving credit facility to 385 million and raised 250 million through an equity investment from a long term well respected institutional investor.

This set of actions ensure that we are on solid footing as the economy begins to restart and recover and that we are well positioned to proactively take steps to reaccelerate, our own growth and performance.

Before I turn the call over to Elizabeth.

I want to say that I'm honored that bright horizons continues to make a difference in the fight against Cobot 19.

And I want to extend the special thanks to those bright horizons employees across the world who are working tirelessly.

As well as to our loyal team members, who are currently on furlough.

Bright horizons has been and will always be about our people and it is the passion and expertise of each and every employee that allows us to collectively impact the lives of children families and adult learners that we have the privilege to serve through our employer clients.

So in summary, I remain very optimistic despite the difficulties presented by Cobot 19.

These challenging times highlight the best of bright horizons.

Our vital role in that business continuity plans of our client partners.

The value that our unique service offering provides to families and clients we serve.

And our ability to effectively operate during the crisis.

While we're not providing 2020 revenue or earnings guidance at this time, given uncertainty around the duration and scope of the ongoing disruption.

We draw great strength and stability from the financial contributions of our backup in Ed Advisory services as well as employer support of our centers.

It is devastating to consider that a vast number of childcare centers may never reopen as a result of the financial hardship created by this pandemic.

But for all the reasons I have described we are confident in our ability to not only reopened but to find future growth opportunities in a post pandemic environment.

We have a strong balance sheet and even more importantly, the agility and ingenuity that has been demonstrated over the last eight weeks and throughout our history to emerge from this current disruption stronger and more resilient than ever before.

Thank you Stephen I will now again recap the headlines for the quarter and provide some more detail on what actions we've taken to respond to the challenging covert 19.

Hi, first quarter overall revenue increased 5 million to 506 million.

Adjusted operating income decreased 13 million to 49 million or 9.7% of revenue and adjusted EBITDA of 81, and a half million declined 12 million.

Steven outlined to Kogan 19 impacts have been relatively confined to our full service segment.

Revenue in this segment contracted 1.7% or 7 million as high single digit growth in the first two months, whether you raised by a sharp decline in the final two weeks in the quarter as we began the temporary closure of centers beginning mid March.

Adjusted operating income compressed to 22, and a half million or 5.4% compared to 41 and a half million in 2019.

When we close centers, we determined that we would one allow parents to roll forward the partial months tuition as a credit for one centers reopen and to support our effected teachers and staff with two weeks and transition pay subsequent to their center close date as well as continued healthcare and education benefits.

We believe that both of these actions will support a quicker recovery a centers begin to reopen and as we recall our teachers from furlough and invite families back to the centers.

Our backup operations performed well in the quarter growing the topline, 15% to 74 million and generating 22 million of operating income in the quarter up 5 million from 2019.

We continue to have strong utilization levels from both existing and new clients, particularly for in home care and reimbursements for self sourced care, both of which improving to be important alternatives to center based care in school age programs at this time.

Our advisory business, which has delivered virtually and therefore not directly impacted by social distancing orders grew revenue by 11% to 21 million in the quarter and generated operating income of $4 million on new client launches and expanded used by the existing base.

Interest expense of 10 million in Q1 of 20 was down slightly over 2019 on both lower interest rates and lower average borrowings.

The Q1 20 structural tax rate on adjusted net income of 15% is down from 24% in 2019 on reduced taxable income and proportionately higher tax benefits under assay 2016 Onein.

Turning to the balance sheet and cash flow, we generated 64 million in cash from operations in the quarter and made modest investments in fixed assets in acquisitions of 13 million.

Compared to 61 million in 2019.

We ended the quarter with 49 million in cash and no borrowings outstanding on our revolver.

Annual principal payments, which approximate $11 million are on our term loans, which mature in 2023.

I'd like to now provide some additional context around the potential ongoing impacts from the coven 19 pandemic in mitigating actions that we're taking as Steven mentioned, we have a number of structural strength in our business model and we've also acted swiftly to rightsize our cost structure.

Let me provide a few examples.

First as mentioned, our backup care and advisory businesses remain fully operational and growing.

Both had been building on our extensive client partnerships and expanding our service offerings to meet new needs arising from the pandemic.

Both segments generate strong operating margins in the first quarter 2020, combined to generate 26 and a half million in operating income in more than 30 million of adjusted EBITDA.

We continue to expect these segments to contribute strong earnings and cash flow in Q2 and for the balance of the year.

Second it's important to remember their full service centers are largely employer sponsored in these centers. The clients sponsor maintains responsibility for the facility costs contributes to the operating cost of the center and we earned a management fee.

Some of our roughly 1100 centers nearly half our clients centers.

Where we generate no where we generally have no ongoing fixed expenses.

In lease consortium centers, we do have the responsibility for occupancy costs, which amounted to roughly $15 million a month prior to any potential coded related ran deferrals or abatements, which we are pursuing.

In our European operations, both the UK and Dutch governments provide substantial support for child care as well.

Third with clients varied a significant portion of our fixed center costs are full service cost structure is highly variable and we have the ability to flex that as needed.

Personnel costs are the primary component of the variable center expenses and they comprise roughly 70% of total costs.

Concurrent with our center closures in mid March we made the decision to furlough. The majority of our center employees. The result is that our labor expenses have been reduced roughly in proportion to the center closures.

These actions were made to preserve the financial health of the organization during the pandemic and to foster a quick return to work for those furloughed employees.

Lastly, the contributions from centers that remain operational coupled with management fees and client coverage of transition labor costs will also offset a portion of the ongoing cost in our closed locations.

Looking ahead to the remainder of 2020 as Steven mentioned, we're not providing revenue earnings guidance at this time as the duration and the scope of the ongoing business disruption, including the pace of reopening in ramping temporal enclosed centers cannot be predicted.

However, I can share some qualitative color and a few details on areas, where we have more control and therefore visibility.

Our current view is that we expect the majority of our centers to remain closed at least through the end of the second quarter.

Given the late onset of the pandemic and only a partial quarter impacting Q1 of 20, we therefore expect a negative financial impact to be more pronounced in the second quarter than it was in Q1 with full service revenue contracting in line with center closures and a related flow through to operating income of around 35% to 40%.

As Steven mentioned, we're continuously monitoring guidance and taking direction for medical experts and government authorities as it relates to reopening.

We some stay at home orders beginning to be lifted and states in community starting to reopen for certain businesses. We will look to methodically reopening reramp through the remainder of the year in early 2021.

We have prudently planned for a variety of outcomes and we believe that we have ample liquidity to fund the operations of the business in a number of reopening scenarios, including a more protracted phasing in of our centers and enrollment although that is not what we anticipate happening.

Regarding liquidity cash at the quarter end was 49 million as I mentioned.

As we've highlighted we've taken a number of steps to reduce discretionary spending and overhead costs, including the furloughing of support staff. In addition to centers employees, reducing then executive and board comp and cutting non essential spending.

We've also had early success pursuing rent abatements in rent holidays and are taking advantage of various provisions of the carriers act, including payroll tax deferrals tax credits for retain employees and accelerated tax depreciation.

We've also reduced our capital expenditures redirecting our investments to highest priority areas that support growth and performance and we'd expect to spend approximately half of our previously guided hundred 10 to 115 million.

Plan.

And finally as previously disclosed subsequent to the ended the quarter, we upsized and amended our revolving credit facility to 385 million and added 250 million in equity capital.

These actions increase our liquidity as we whether the immediate effects of cobot 19, while also supporting our longer term plans.

The commitment from our employees around the globe the economic resiliency of our durable employees employer sponsored model as demonstrated in prior cycles are experienced management team and successfully navigated prior downturns, our financial discipline and our thoughtful approach to capital allocation I'll give me, great confidence and conviction that week.

And not only navigate through the current disruptions, but also take all the necessary steps. So that we emerged from this crisis well positioned to take advantage of both near and long term growth opportunities.

And so with that Victor we are ready to go to Q anyway.

Thank you.

We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is my question Q.

Also press star to if you'd like to remove your question from the Q.

For participants using speaker equipment, it may be necessary for you to pick up your handset or pressing the star keys. One moment. Please while we now poll for questions.

Our first question comes from Andrew Steinerman with JP Morgan. Please proceed with your question Hi, everybody Hi, Andrew Andrew Thanks for hosting US today. Appreciate it. So my question is are you willing to share with Us April trends.

Meaning revenue trends for full service educational advisory and back off on a year over year basis any comment on full service if the year over year trends were different at the end of April than at the beginning of April.

So Andrew with the with respect to maybe adding some to meet to the information that we had in the prepared remarks and to get out your question.

We see for since we began to temporarily closed centers in mid March the month of April reflects you know essentially the full contraction on down to around 250 centers operating and and because of the.

You know Thats, you know a relatively proportionate.

The amount of revenue would contract in addition to they're being somewhat lower utilization of because of the guidelines around how many children can be in a center and social distancing rules. So there's a substantial contraction in full service in April because of those because of those moves in there's you know I think.

Thats fair the context that we can provide at this point <unk> and could you say how much advisory and backup are up in April.

I would I again, I would point to the the guideline that they are continuing to track with the plans that we had a for the year.

We continued the shift away from in center.

Use of backup care would be it would be more.

It would be more in the in home side than the in center side because of what's available center tender bases wise, but.

I think the continued trend we were pleased with the stability in both of those as it as we exited Q wining and got into Q2, okay. Thank you.

You're welcome and vendor.

Thank you. Our next question comes from Hamzah Mazari with Jefferies. Please proceed with your question.

Good afternoon hope everybody is healthy and safe.

I Hope my first question is just.

As you come out of this do you see any structural changes boast Goldberg that Uh huh.

But essentially change the growth profile of your business, whether its work from home population doubling.

Or maybe the margin profile as you implement social distinct saying I try to go you touched on some of that in the prepared remarks spark any any thoughts would be very helpful.

Sure. So so thank you thats a it's a great question, what I would say simply is that that we don't expect there to be structural changes coming out of this certainly.

From a health and safety perspective.

We are and we will continue to have a very significant protocols around making sure that we do a pickup in drop off in ways that our socially distance, we'll do health check certainly for children and staff, we will make sure that we are.

Managing group sizes for some of the older age groups, but in terms of structural changes, we don't see actually that being the case in terms of the demand side, which you allude to in terms of more work from home I think what people have come to realize through this pandemic and working at home.

With young children is it is incredibly challenging to work from home and also have your children at home with you and so I think what we're hearing from our early solicitation of input and feedback from our parent base is they are very much looking forward to having their children come back to the.

Center to continue there.

Milestones in progression and at the same time allows parents to get back to work in a in a more productive way. So I would say that certainly from the perspective of the demand side, we don't see that and then from the cost structure side as I said I think we will certainly implement protocols overtime that have small marginal cost.

Differentials, but nothing that will be significant and at the same time, we see employers are willing to step into that additional expense certainly to protect their.

Their employees and their families.

That's.

Very helpful and just for a follow up question I'll turn it over I know you a much bigger than you know your largest competitors out there.

But where do you expect to see M&A picking up coming out of covert just given not many have the liquidity that you do today with the equity raise and in some of the other stuff that youve gotten ahead of us. So just any thoughts on digital M&A it coming out of this and what you're hearing from a competition wise. Thank you.

Sure. So look I think that that there will certainly be unfortunately situations, where many other providers do not have the financial wherewithal to make it through this crisis and ultimately reopen.

With that obviously, we expect to see opportunities for operators, who have turned the keys back to landlords for us to step into their positions in strategic locations, where we believe there's a good opportunity to operate in addition to that as you alluded to we do believe.

That there will be M&A opportunities.

In in ways that fit our criteria, which obviously are fitting strategically fitting geographically and then ultimately fitting financially in the longer term. So we do believe that coming out of this as we saw in the last recession, there will be M&A opportunities that present themselves as a result of.

Of this really unfortunate crisis.

Great. Thank you very much.

Thank you.

Thank you.

Our next question comes from Jeff Mueller with Baird. Please proceed with your question.

Yes. Thank you have you had any temporarily closed suntrust reopen or do you have we opening dates for any centers I think you have some centers in Georgia or just any of the states that are starting to reopening.

If you do I'd love detail on this otherwise I just love the perspective on it but I guess what are you doing you talked with digital learning solutions, both to stay engaged with.

With families. So that one the centers reopen it's more like flipping a switch to to get the Sam was back in the centers.

Yes, So let me start with that and then we can can double back Jeff in terms of of parent and child engagement that is been a high priority item.

For us we believe it's critically important for the wellbeing of of the children and we also think it's an important engagement tool for the parents. So we have a cadence on a weekly basis of activities, where we are continuing to keeping gauge with both children and families to ensure that we are.

Supporting them during this difficult time as they try to work from home and also be directly responsible for parenting during the day.

What I would say is that we expect that that will absolutely be an underpinning for our ability to quote unquote, we enroll these families.

And as Elizabeth shared in the prepared remarks as we came into this crisis. We took the approach of pausing enrollment and moving the on the unused part of their tuition to a credit for when they return. So again all actions that are helpful.

So as we think about standing these centers back up in terms of reopening we are still in the very early planning stages on reopening.

We have had a handful of centers that have reopened.

But again our goal is not only to look at the lifting of the shelter in place in certain states, but also to work collaboratively with our clients get a real sense from parents about their readiness to come back to work in a more traditional way and have their children at the center. So we are approaching it in a.

A very very methodical way and early indications Jeff are that the families are very excited to come back and ultimately employers are looking forward to supporting us to get our centers opened.

Okay and.

Just.

I think you set up 30% to 40% decremental EBIT margin in full service revenue down proportional to close center count. So just want to make sure that I have the mathematical.

Right that.

On a run rate basis.

Certainly at a modest negative EBITDA position consolidated was that the clarification from.

Segment level disclosure you gave us.

I think what I said was a 35% to 40% just too.

Clarifying that but.

With respect to <unk> I'm, sorry, I'm, just trying to find out I know here that you said that was is the but that was combined EBIT in Q2. What was your question is consolidated EBIT trending currently modestly negative.

Based on all the color you gave us at the segment level than running through it.

Yeah, I mean with with that portion with a large portion of the business.

In in full service as as beneficial as backup and Ed advising on their margins of course are are substantially higher than what full service margins are I'd out and regular corner.

So they do contribute disproportionately to their revenue, but with 80% or 70, 580% of their full service centers.

Close then there is decremental yes.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Manav Patnaik with Barclays. Please proceed with your question.

Thank you. Good evening guys. Just you know it's kind of like a medium term looking question I guess firstly the hundred 50 cents is that you currently have opened serving the essentially employees.

What is utilization or at at those centers look like in is that kind of a glimpse of what we might see in the new future with all the social distancing rules and guidelines just curious on your thoughts there.

Yes, so first enough just to put a fine point, we have 250 centers that are opening globally.

And that is just 150 is here in the U.S. just to clarify.

In terms of how those are operating I think it's important to us focus on the fact that the population that we are serving across those 250 centers is strictly a healthcare and other essential workers and so when we have limited who we are serving through this.

Obviously, the utilization rates in these centers is quite a bit lower than what we would see at steady state coming out of this pandemic. So again, if we think about the addressable.

Group of families that we are looking to serve given how much smaller that is then from our total addressable.

We are certainly running it utilization levels that are a decrement from what we will expect to see coming out.

Got it and then then and then kind of type that you know the lease consortium strategy you know.

You know says the view that every come from the city is going to run the latest a bogey analysis space and et cetera, like any early thoughts on whether that continues to use slow that down or too early to tell.

Yes, a great question of it is not it is not a trend obviously that that we can opine on because certainly it's too early to early days.

What I would say is that you know.

We have had this lease consortium strategy over the last number of years, we have about a 100 that are really focused on the urban area.

But our expectation is that young families will continue to persist in the urban area and certainly we don't expect to see employers change course, and move out of urban areas and so taken together given our employer centric model, we have a great confidence.

In a in how that strategy will continue to perform overtime.

Alright, Thank you guys.

Thank you enough.

Thank you. Our next question comes from Gary Bisbee with Bank of America Securities. Please proceed with your question.

Yeah.

I guess I'd like to follow up on that question if utilization.

The number of job losses.

Sure.

Center utilization Frac.

On them.

How should we think about how how step down in utilization can impact the profitability.

<unk>.

The other side of it.

I think you saw 10 11 point decline in utilization during the financial crisis.

Fair to say fixed costs at least on the real estate.

Higher today so.

Should we think that that it could take a while to profitability back.

Recall that level.

Broadly opened all the centers or.

Are there ways work for that.

Operating closer to.

<unk>.

<unk>.

[music].

Sure. So thanks, Gary So why don't I started on sort of how we're thinking about it strategically and then a little bit can can follow up with a little bit more quantification.

As we think about the unemployment that is likely to be an outcome of this.

Economic challenge.

We are seeing.

Those employers with a lot of frontline employees being the first two furlough and likely separate.

So when you think about some of the harder hit industries like retail energy.

Those are not the industries that we have ever had particular focus and so you know as we as we see this crisis unfold, whether it be retailer hospitality or other industries that have a lot of frontline that ultimately.

We will be displaced those are not either our employer clients or are they typically the families and the families that we serve so different from the financial crisis back a number of years now.

We expect that the unemployment a challenge is going to be really focused in an area, where we don't currently serve and therefore, we don't expect the same implications.

In that way.

Yeah, and answered about going back to two the last and major recession that we weathered and that 2910 timeframe. Gary as you mentioned, we had substantial reduction in enrollment over that period of time. It was as you say about 10 points. So most of utilization.

And because of the variable nature of most of our cost we were able to.

Essentially.

Retain most of our full service margin profile, we contract margins by about one percentage point during that time, we were continuing to grow through new center openings and an acquisition as well. We're all the components of our growth strategy were contributing to that performance, but we we were able to.

Cost manage through a lot of the enrollment contraction.

As you say of different portion of our.

Business now, it's a slightly higher portion that is coming from now the lease consortium centers, where we have a.

The the occupancy costs as our responsibility so there is.

There is a.

Somewhat of a different cost profile, but I think that.

I'd answer that question in the in the frame that you asked which is it will take a bit of time to re ramp back to pre colgate levels that enrollment will come back with for all this idle reasons I think that we're aware of.

But also went into more time passes the more we will need to be essentially re enrolling children in an age group that they've outgrown and so we will be again in a growing our own.

Reenrollment overtime. So there will be a re ramp period that does have to happen. So it will take some time to get back to those to those margin levels, but I think the underlying components of why we have this has started a steady writer of cost plus.

The contributions from our bottom line client centers and then the upside opportunity in the lease consortium centers will all Oh helped to contribute to that very you know the pace of that growth overtime and each can contribute in their own way.

Great and then just one follow up if I could on on backup.

That's encouraging to hear that continues do quite well.

Even with with a lot of the in house capacity.

As we think about them mix shifting.

In home and then also this concept of reimbursed so doesn't care with them.

Which I know its bank of America's third offering by the way but.

Should we think that there's major profitability differences are pretty similar and and as part of that.

This concept of reimbursing self.

Chosen carriers that.

To that sort of.

And as data.

For two years, that's something you've done in the past.

Yeah.

Thank you very much yep yep, and so if we start with the reimbursed self source care, which we call crisis care assist that is something that we have had but it typically has been both episodic and very focused so if you think back to hurricane Katrina or the wildfires.

In California, we have supported employers and their employees with reimbursements for self source care.

In our history clearly we had whenever it was disrupted that when it when care has disrupted.

But we have never seen obviously.

On the need like we have seen in the current pandemic and we've never seen it as pervasive across the country clearly as we are seeing it today. So you know self sourced care that is reimbursed to us is something that we've done it's been a modest contributor historically, we have seen certainly unprecedented demand for.

With that in the current climate, what I would say is that combined with our in home care provision has really supported employees and their employers I'm quite well.

And bank of America. Thank you for being a great client you know we have had a number of of our clients lean into that in the way Bank of America has with the understanding that in the current circumstance.

You know where our centers are closed and other schools are closed it is a very good option for employers and employees in terms of the margin profile you know I would say that on the in home care side clearly the economics. The margin economics are not as strong as what we'd see in center.

Given the increased cost on the other hand in many of our client contracts. We also see a differential in.

The rate that is being reimbursed and then secondarily on the prices care assists side, you'll see us reporting the revenue associated with that on a net basis.

Because again the reimbursement that goes the employee is truly a pass through and so because it's on a net basis the revenue per care instances lower but the margin associated with it is more emblematic of what we'd see traditionally in that business line.

Hi, Tastemade he knows the effects of those would would.

With counter each other so there'd be a you know not dramatic difference.

Great. Thank you.

Thank you.

Thank you.

Next question comes from Jeff Silber with BMO capital markets. Please proceed with your question.

[noise], taking so much.

You had mentioned that you opened up some new centers in the quarter can we talk about the new center pipeline for the rest of your I'm assuming.

Right now that's on hold but if you could confirm that that'll be great and just wondering how discussions are going for future center buildup.

Yes, so on the existing center pipeline, what we're finding is our employer clients who are in process, who have made the commitment and are in.

In the process of construction they continue to persist with their projects and so we will continue to see.

You know centers open up on that basis.

Because obviously as we always talk about Theres a longer sales cycle, but there is also a development process of opening up a new center and so you'll continue to see US open new centers that were in flight.

And started pre coven. The second thing that I would observe is that as we look out into our sort of quote unquote newer pipeline.

We are as we saw in the last economic downturn, we saw a a pivot of our opportunities away a bit from new capital in new centers that would be being sold to those that were going to be transitioned. So we see.

Both health care and University opportunities in particular, where they self operate centers have found it incredibly challenging to operate those centers in the current environment and have instigated conversations with us about taking over the management of those programs post coven.

Okay. That's helpful. Appreciate that and you mentioned it in your prepared remarks, how the company had been through a number of economic cycles and obviously, we're in unchartered waters here, but I'm just curious how you think your business is different.

Tom going into and coming out of this crisis, when we compare to the great recession, I mean were private.

But just in terms of the business overall thanks.

[laughter].

Well I think that one of the one of the things that we I think Stephen touched on this that.

Does this kind of a crisis different than the great recession, where we were.

Part of a very broad based I mean were part of approximates.

Economic impact now too, but we are able to really demonstrate to our client partners. What we can do at a time that that may actually pivot them to embracing more services with us in the future more quickly.

I think that though the recession of 2910 was you know a slower ramp down and then a slower ramp up and we were we were certainly building and growing the backup business substantially through that time, and and Ed advising and we entered European a new European country in the Netherlands. Shortly thereafter, so there are number of.

Stakes in the ground that we didnt propel us to a very strong growth coming out of that recession as well, but now we have even I think better foundational underpinnings that we can both amplify capitalize on and.

And continue to why we are running the business that we have now continue to look ahead to what.

Maybe down the Pike and I think that they.

It maybe then the question of went into the cadence in the duration of the of though shut down and then the reopening cadence all of that is is to be determined but there they're still maybe some quicker decisions that are coming out of it because of the quickness of the contraction. So I think thats one of the differences that I'd say on now.

Now versus then we have a obviously a a more substantial business in Europe than we had before so some more diversification there diversification of our service line offerings and.

And so I think all those are our strong underpinnings as well yeah. I think the only thing that I would add to that is there is a tremendous appreciation.

From working parents about how difficult it is to both work and care for their children and so certainly we are in a position where we are hearing from our families and from our employer clients about their keen interest to get back to a situation where they are able to.

Get back to working at the same time their children are able to have the kinds of experiences that they can only have at a bright horizons center.

Okay. That's helpful. Thanks, so much thanks, Jeff.

Thank you.

Ladies and gentlemen, as a quick reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question comes from the Toni Kaplan with Morgan Stanley. Please proceed with your question.

Thank you.

Thanks, Jonathan.

Hi, you mentioned shining, yes, 50, new clients for backup care could you talk about what the contribution from that it would be and the length of stay arrangements are these sort of temporary until the employers start to sort of resume their a rich.

No so and in terms of original care arrangements or would you be able to sort of it spend on that relationship for a longer term.

Well speaking more broadly I'm actually these these clients are sort of conventional new backup clients, a we've launched and so.

An average backup client may range from.

From 100200, $50000 van annual contract value.

So that's sort of the general magnitude of what without speaking to anyway. These individual client that's generally what we would be seen launched and so they are not temporary. These these arrangements are temporary these are sort of conventional new adds to the backup portfolio.

Okay. That's great and then just my second question DRAM pricing, yes, as we're sort of in this challenging environment.

Racing become more challenging closed coal that I guess, how are you thinking about you usually get about 3% to 4% pricing here I'm, just wondering how you're thinking about that gone sorry.

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Sure.

So so absolutely we are spending a lot of time thinking about pricing and as you'll know we are very disciplined about ensuring that there is a differential typically 1% between our price increases in our wage increases and so we continue to.

Focused on that metric that we have over the last 30 years continue to perpetuate it is not completely clear at this point, where on the scale our price increases will be and where the wage increases will be on the other hand, we continued to be confident that we'll be able to have a differential between those two.

That's great. Thank you I'm glad you guys are doing well.

Thank you. Thank you you too.

Thank you. Our next question comes from George Tong with Goldman Sachs. Please proceed with your question.

Hi, Thanks. Good afternoon appreciate that helpful update on the business can you maybe elaborate on what kind of guidance you're currently receiving from your medical experts in the CDC and what it would be appropriate to begin to be opening your centers.

Yes. So we we are in very close contact so first and foremost we're following the the guidance from the CDC. We have the medical expert that we have retained who has been incredibly helpful. In our coated protocols and is also helping us to think about.

Our reopening.

What I would say is that you know the protocols that we're focused on look a lot like what we have been operationalizing to date through the last eight weeks.

So again not not huge differences between how we're operating in the current environment into sort of this next phase. So overall again the guidance is really around making sure that we're doing a social distancing at pickup and drop off that we're doing health checks to make sure those who are entering the centers both staff in children.

Our well or making sure that our staff are wearing masks for making sure that we are appropriately limiting group sizes, which really only has impacted the older age groups because in the younger age groups. The typical group size is smaller than the sizes that are being ready.

Commended by the CDC in our medical experts. So I think all in we feel really good about the experienced that we've had through this and truly believe that we'll be able to operate in a safe and healthy way going forward.

Got it if the centers in the Netherlands reopened as planned and centers in the U.S. or the UK stay close <unk> ended the second quarter, what would the potential revenue impact be in the second quarter in other words, what would be a good downside case scenario for revenues.

Sorry, you say, if the Netherlands centers open and the remaining the centers in the U.S. that are close now remain close through the course important yeah. That's right, but you estimate UK centers that are close to date remain closed through the entire second quarter, what would the potential.

So Keith revenues be.

I think I think the Fen phen Allied uses that that's about 80% of our centers.

So.

Though proportionate revenue would be contracting in that way.

And that's even taking into account the different business models between cost plus you know Oh lease consortium and other mix factors that could differentiate the number of centers versus the revenue flow through.

Yeah, I mean, there's there's certainly a lot of puts and takes and they you know numbers have chosen that are being served which which centers are open where they're located in terms of though you know the relative to mission levels and on the client support but that is a I think that's a relatively representative for white yeah.

It's you're asking in terms of Oh for broad brush since we're not that's as much guidance is we're giving at this stage there's too many variables.

Got it very helpful. Thank you.

Welcome. Thank you.

Wonderful alright, well. Thank you all very much for participating this evening, we hope you in your family stay safe and healthy and look forward to being in touch and have a good night.

Thanks, very much take care.

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

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