Q2 2020 Bright Horizons Family Solutions Inc Earnings Call

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Thank you for your patience your conference will be beginning.

Entirely again, when you want to thank you for your patience your top until the beginning momentarily.

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Ladies and gentlemen, we thank you for your patience.

Greetings and welcome to the bright Horizons family solution second quarter 2020 earnings release Conference call. All participants are currently any listen only mode. A question and answer session will follow the formal presentation. If I know one should require operator assistance during the conference. Please press star zero on your telephone keypad.

A reminder, this conference is being recorded it is now my pleasure to introduce your host Michael Flanagan Senior director of Investor Relations. Thank you you may begin.

Thanks Jesse.

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On the call today appreciate your patience, we got some technical difficulties.

So thank you all for joining.

On the call today are Stephen Kramer, Chief Executive Officer, and Elizabeth Boland, Chief Financial Officer I.

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

Today's call is being webcast.

Recording will be available under the Investor Relations section on 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.

Putting the impacted koby 19 on or operations are subject to the safe Harbor statement included in our earnings release.

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 data, which is made and we undertake no obligation to update any forward looking statements.

We also were for today to non-GAAP financial measures, which are detailed in reconciled to GAAP counterparts in earnings release, which is available under the IR section on our website.

Even though it will take us to 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 you when your families the remaining healthy unsafe.

I'm going to begin today's call by briefly recapping, our second quarter results and provide an update on our current operations.

Elizabeth will then provide a more detailed review of the numbers before we open it up for your questions.

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The last several months have been extraordinary by any measure.

Despite this I couldn't be more proud of the incredible determination agility and execution demonstrated by the entire bright horizons family.

The positive results this quarter exemplified the power of our diversified employer centric model as well as our capacity and capability to effectively serve client needs.

To recap, we delivered revenue of 294 million and adjusted EPS of 44 cents per share.

The second quarter.

In our full service segment, we're happy to report that we reopened 160 centers in Q2 and began welcoming back thousands of families to our centers.

Our backup care business with a critical support to tens of thousands of families. At the same time delivered exceptional financial results for the company.

We experienced significant utilization of self sourced reimbursed care for both new and existing clients nearly doubling revenue compared to last year.

We also added to our educational advisory client base launching service for ATP Lydall, an acronym children's hospital this past quarter.

I'm really pleased at how well all facets of our business performed through these unprecedented circumstances.

As you'll recall, we started 2020 with solid momentum across all three business segments.

But as the pandemic spread in March we temporarily closed nearly 850 of our centers globally.

With this contraction, we focused our full service care operations on approximately 250 client and hub centers caring for the children of health care and other essential workers.

We monitor guidance from the CDC and local health authorities and create a direct relationship with a leading infectious disease position at Boston Children's Hospital.

We marshaled, our resource to develop implement and refine enhance cobot 19 operating protocols.

These include social distancing procedures, it pick up and drop off.

Daily Health checks they use a face mask bike all staff.

Limited group sizes, and enhanced hygiene and cleaning practices.

All focused on keeping children families and are devoted staff safe and healthy.

I take great Pride in bright Horizons leadership in this area as our standards have been adopted by many state regulators.

Before I get into the current state of the business I want to commend the work by our operations and client relations teams.

There's still a lot of work to do when the reopening and re enrollment process, but we have made tremendous progress over the last few months.

Training teachers and staff on our covert 19 safety protocols and welcome back thousands of children and families.

I'm grateful to all of our employees, who supported bright horizons during these difficult times.

And I know these efforts have unique we strengthened our organization.

Getting to the specifics.

As we talk today, approximately 725 of our centers globally are open.

Representing 65% of our total portfolio.

And we anticipate that more than 85% of our centers will be opened by the ended the third quarter.

Throughout our reopening process conversations with clients and surveys of parents and teachers have reinforce their confidence in bright horizons.

Typically around our experience with health and safety practices.

The expertise we have demonstrated an operating childcare and the cobot 19 environment has not only allowed us to open more safely and quickly but also provides the critical reassurance that client and returning teachers and families deserve and require.

Overtime, we think this would be a key differentiator and an important reason for families and clients to choose bright horizons.

We've also been really encouraged about the depth of conversations with employer clients not only about their center reopening, but also how our full suite of services fit within their short medium and longer term business strategy.

Employers clearly recognize that regardless of the work environment onsite or remote it is extremely difficult for employees to remain productive well caring for a child or elder.

Existing center clients have remained very supportive and we've seen interest from both new and existing clients around investing in our lease consortium centers to supplement their onsite centers or to provide more comprehensive national solutions.

The unique challenges to our business created by coping 19 have also provided opportunities for us to demonstrate to employers that not only do we have the scale and resources to support them in all environments, but also because that's the agility to develop and deploy creative solutions to.

Meet their real time needs.

As an example, with fewer programs available the children. This summer we worked closely with some key clients to quickly stand up school age programs within some of our temporarily closed lease consortium centers.

So their employees could remain productive over the summer months.

This is one example that showcased our ability to work collaboratively with clients to create an effective response to solve a critical pinpoint in their core operations.

Let me now turned a backup care, which delivered truly impressive results.

As we discussed last quarter, our backup business had been on track for solid growth coming into 2020.

12% to 13%.

And was tracking well in the first quarter.

With school and business closure, starting mid March the demand for backup care surge as family struggled to balance their work responsibilities and the care needs of their children.

With the majority of childcare centers closed during the second quarter in home backup care and self sourced reimbursed care became increasingly valuable for clients and employees in need of a care solution.

[noise] self sourced reimburse care has always been a value component of our comprehensive backup offering for clients to utilize in unexpected emergency type situations such as natural disasters.

Given the national scope severity and rapid onset of Kobe 19, the demand for self sourced reimbursed care offering with super charged with more than half of our backup client deploying this alternative you solution.

The surgeon demand certainly came with some growing pains as we work to accommodate the unprecedented volume of new registered users and care requests.

But our ability to quickly deploy solution for an unexpected need provide immense relief to hundreds of clients and introduced tens of thousands of stressed working parents to our services had a critical time.

Well self sourced reimbursed care proved to be the rights solution for many employers and workers during the early months of the pandemic.

We expect to see backup care demand in Q3 and beyond to return to more normalized in home and in center use.

Since some of the demand we fulfilled in the second quarter represents used it may have typically been absorbed in the second half of the year, we've been working with our client partners to expand employee use banks to ensure the parents.

Who will continue to struggle with evolving work in school practices have continued access to the service.

As we've spoken about on past calls, we continue to make advances in our technology and personalized marketing to improve the customer experience.

As demand surge over the last few months, we deployed several enhancements to our backup system to create a more robust platform and more seamless experience for end users.

In addition, we expanded bright horizons central so client leads zones could self serve reporting something that proved invaluable as clients were tracking use during this time of heightened demand.

Furthering our digital strategy I'm thrilled to share the just yesterday, we completed the acquisition of the Sittercity business, a leading online marketplace for families and caregivers.

This strategic acquisition expands our current portfolio a family focused solutions and extends our capabilities to serve families and clients.

We've enjoyed a strong partnership with Sittercity since 2013.

We know the talented team well and appreciate the quality of their services and our shared mission of supporting working families with access to high quality care.

Well the financial contribution in the near term is modest sittercity digital capabilities and the long term opportunity for cross sell at the client and family level is significant.

Turning now to our Ed advisory business, which perform well given the environment with many new client launches this year and continued solid use of our clients workforce education programs.

Well the pandemic has slowed new sales decisions learning and development remains a key investment pillar for leading employers as the challenges of attracting and retaining key talent remain high.

With college coach offering important advice and insights around how how cobot 19 is impacting the college admissions process and financially packages. We remain bullish about the continued long term growth prospects of this segment.

In closing when I look back at the last quarter. One thing that stands out is the unique strength and resiliency of our diversified employer centric model.

In response to the unprecedented crisis, we did more than just hunker down and preserve resources. We took immediate action to support clients parents and families in need we played a vital role in our communities providing care for the children to frontline workers during the early days of the outbreak.

We work diligently with local health authorities and medical experts to create safe healthy and nurturing environments for staff in children to return to.

We deployed new solutions to employers and working parents to support their care needs and businesses and schools close.

We leaned in and made important investments, including a strategic acquisition.

A silver lining from the last several months is the broad recognition of how important childcare is for our country's economic recovery and stability and the client recognition of what a responsive and innovative partner we can be.

I believe high quality childcare will be more important to the future than ever before and I remain confident that we will emerge from this crisis well positioned to capture the opportunity that lies ahead.

Okay.

Thank you Steven and I will take you through now a recap of the headlines for the quarter again and provide some thoughts on the rest of the year.

Oh for the second quarter overall revenue contract to 44% to 294 million.

Adjusted operating income declined to 27 million and adjusted EBITDA was 60 million or 20.4% of our overall revenue.

[laughter], even outlines the majority of our centers remain closed during the second quarter and centers that were open were primarily serving health care another essential workers.

As a result full service center revenue contracted 300 million or nearly 70%.

This is modestly better than our expectations as 160 temporarily closed centers were reopened for a portion of the quarter.

Our adjusted operating income contracted 107 million over 2019 in the full service segment to a loss of 55 million.

This is inline with our expectations of a 35% to 40% flow through on the contracted revenue.

[noise] as Stephen went through demand for backup services drove very strong performance in the second quarter with top line growth of 94% to 136 million.

And 77 million of operating income.

A center based backup care became less accessible with center closures starting in mid March we worked closely with clients to expand the availability of self sourced reimbursed care to meet the sudden and intense needs of their employees.

We're also able to limit the decline in operating income in Q2 in part due to our highly variable cost structure. After a strong cost management as well as the actions that we discussed last quarter to mitigate the impact of our clothes centers.

We reduced labor and program expenses associated with centers that were closed we contract we contracted SGN anchor reductions in discretionary spending and personnel costs, including employee furloughs cuts in executive compensation and the elimination of other nonessential spending.

We've also been able to benefit from certain provisions of the cares act, including payroll tax deferral tax credits for retain employees and accelerated tax depreciation.

Interest expense of 9 million in Q1 of 20 with Q2 of 20 excuse me was down nearly 3 million over 29 team on lower interest rates and average borrowings.

The structural tax rate on adjusted net income of 15% is down from 23% in 2019, primarily on reduced taxable income.

Turning to the balance sheet and cash flow, we consumed a modest 13 million in cash from operations in the quarter and made limited capital investments, a 15 million compared to 30 million in the prior year.

We expect we ended the quarter with 270 million of cash which includes the 250 million of equity capital that we raised in early April and we have no borrowings outstanding on our 400 million dollar revolver.

Now briefly looking ahead to the remainder of 2020, we're not providing revenue earnings guidance at this time as the duration and the scope of the ongoing business disruption remains difficult to predict.

However, as we did last quarter I can assure some qualitative color on how we see the next several months evolving.

As discussed we anticipate the more than 85% of our centers will be reopened by the end of the third quarter.

As we reopened centers were phasing in enrollment operating with some capacity reductions to accommodate cobot 19 safety protocols.

Therefore, we initially welcome a finite number of families and a core group of staff before expanding the enrollment to additional classrooms.

The early enrollment trends from reopened centers are encouraging and we anticipate sequential improvement over the balance of the year.

We believe that the full recovery in our enrollment will happen, but it will likely take several quarters.

The near term outcome of this reopening in re ramping cadence is that we expect full service revenue to trail 2019 levels in the third quarter by approximately 45% to 50%.

With the related flow through to operating income of between 50 and 60%.

In terms of center operations, we ended the second quarter with 1076 childcare centers in the portfolio of which 409 centers to be exact we're operating.

We continue to progress centers in the development and construction phase and currently expect to add approximately 25, new centers in the full year 2020.

As part of our post Cobrand portfolio assessment. We also made the decision to permanently close 18 of our centers in the U.S. in the UK and are evaluating another 50 to 60 additional centers to potentially not reopened or to divest over the next six to 12 months.

Turning now to backup care, which has clearly been a bright spot in the first half of the year, providing great client service opportunities, while also contributing to the stability of our overall operating performance.

We continue to expect backup care to deliver strong topline growth in the mid teens for the full year 2020, though use was heavily concentrated in Q2 as many employees use a significant portion of their annual backup allowance.

Therefore, we currently expect lower overall use and revenue in the second half of the year, though we continue to engage with client partners to potentially extend their backup program there backup care program with additional use allowances.

And so to conclude although the operating environment continues to be very fluid and our results in the second quarter are a testament to the durability and strength of our diverse service offerings in employee centric model.

The deliberate and Swift actions, we've taken to combat the pandemic also underscore the financial and operating agility that we've demonstrated over 30 plus year history.

Great confidence that we have the right team partnerships and assets to not only whether the current crisis, but to capitalize on the opportunities there are financial position our scale in our brand afford us in the future.

And so with that Jesse we are ready to go to today.

Thank you, ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad. The confirmation from will indicate that your line isn't the question Q you May press star to if he would like to remove your question from the Q4 participants do you think speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Hamzah Mazari with Jefferies. Please proceed with your question.

Hi, good morning.

Sorry, not good morning. Good afternoon. Thank you very much [laughter] I I guess, you know I was hoping maybe you could address or just some of the negative narrative Ah you know how to get into earnings are around just daycare. So you know number one.

Work from home impact employer sponsored a your employer sponsored business essentially the day care centers.

In goes facilities if employees are working from home a you know there man argues those and then secondly, you know suburban migration. Most rovio centers are in urban locations and then thirdly, you know universal pre K, if if biden gets elect.

Third and then lastly, you know if you've seen any covert cases in your centers there are open today.

Okay, well that was a long list [laughter] or try to take notes here. So do you want to kick it off even yeah. Thank you hamzah I'm, so happy to sort of frame. The nature of your question, which is really around the different elements that could be perceived as impact.

Acting our business. So I I think if we take a step back overall I think it's important to start with the notion that through this pandemic. It has become very clear to both working parents as well as their employers that the idea that an individual employee can be both productive at work while at the.

Same time being a primary care giver or teacher for their children is really an impossible situation. So I think there is a heightened awareness around the value of childcare and the value for employers to be leaning in and investing in child care.

From our perspective in the and the conversations that we have with our clients and prospects about onsite near site Chalker centers I can tell you that there is a large amount of commitment to both the reopening and the long term sustainability of continuing to persist with the model.

And in fact, one of the interesting sort of juxtapositions is that one of the most outspoken.

Around work from home and worked from anywhere Tech companies also at the same time just committed to opening a center on their corporate campus and so I think that while there is going to be some changes in shifts a among some employers around where people work I think there.

As a general recognition by most employers certainly progressive employers of the importance of employer sponsored childcare.

I would also say that you know in terms of this idea of moving and all migrating from urban areas to suburban areas.

The first is that you know when we look at you know the limited number of centers that we plan not to reopen they tend not to be the ones in urban areas. A instead, we are seeing families look to come back in the urban areas.

They continue to persist in living in the urban areas and the urban areas quite frankly is still the place where there is the largest.

Disconnect between supply and demand. So I think that we continue to be very focused on continuing with our employer model and for those in the lease consortium, we continue to be focused on the urban in urban ring in terms of the you PK question around Biden and the plan.

And I would quickly point out the fact that we successfully operate in places like the UK, where there is universal pre K at a national level and in fact, it's one of the strong support within our model and as you know I'm, we're always interested in third party support to.

Set the cost of a child care for families here in the United States Historically for US that's been in the form of employers and then in places like the UK and the Netherlands, it's been in the form a government. So again, we applaud opportunities for government to make a child care more affordable for working.

Families and then the last piece that you mentioned was koby cases, and obviously you know our centers operate within communities that have cove, it and our reality is that over a the early months of this pandemic. We continued to operate 250 centers very successfully.

Put that down to the great work of our well trained teachers combined with a the very strong covert protocols that we've put in place and so again overall I feel really good and I think the whole team feels really good about the momentum that we have despite the.

Very difficult operating environment.

That's a very clear very very helpful. Just my follow up question and I'll turn it over.

Good could you maybe talk about how youre back up care business.

You know differs from others in the market like care Dot com and and and you know maybe not specific to them, but just just how you're back up care business, maybe differentiated relative to others in the market and if there's any way to think about how big this business could be over time.

You know, whether you want to port a addressable market number on backup or however, you want to talk about it Oh you know, we obviously have the history in terms of how how big this business was several years ago and so you know maybe be just assume that same growth rate just any thoughts as to how big this business could be and how you're offering maybe.

You know a bit differentiated.

Oh, you know relative to competitors. Thanks, so much.

Yeah. So I think the starting point for that is we we enjoyed the lion share of the market in backup care and I think that it really comes down to the fact that we have been delivering backup care longer than any other provider and we certainly have the greatest.

Resources put against that business line, along with the fact that Theres, a really symbiotic relationship between our backup care placements and the interest of our clients and their employees to utilize our centers. So again, we have real structural advantage in terms.

Of our ability to serve clients, but also serve clients within our own centers I would say the other piece that I would point to is that as we think about the backup care business. The addressable market within that particular segment is quite large and again I think we're still in early.

The innings as it relates to backup care because unlike our center base business that requires a an employee base of probably 1500 or so employees in a single location. We have the ability to serve a employers of all sizes on a national basis. So again I think that.

We are in the early innings of that business, we enjoy a market lead over any of our competitors in that in that space and finally have what our clients and their employees most desire, which is the high quality bright horizons centers in our network.

Great. Thank you so much.

Thank you. Our next question comes from Jeff Miller with Baird. Please proceed with your question.

Yeah. Thank you and good evening, so no backup there obviously off the charts this quarter and it sounds like you're calling for to largely normalize fairly quickly and I know you tried to throw a lot of the factors Atlas, but I wasn't sure which were the most important factors in terms of order of magnitude of why it would.

Normalized so quickly after the strong of a quarter. So maybe just help me with that so for instance, the self source care like it wasn't clear to me how big that was.

In Q2 or beyond that is it more about the use allowing feelings that you need to work through with the corporate sponsors or is I guess, just the general demand environment with schools, maybe reopening or not and a full service day care centers reopening just if you could help me roughly size up which are the.

The most important factors order of magnitude that who's the difference that old normalized.

Yeah, I mean, I think that the.

The way that to think about it without disaggregating too much you know crisis.

Crisis care, the self sourced reimbursed care.

Was a <unk> a new use category that clients were able to access and so it was a substitute for other kinds of views and also was compressed significantly into the second quarter by virtue of how many employees were accessing it in sort of utilizing the vast majority of their their full and.

Well use allowance. So that's that's the primary driver of how we're trying to characterize what are often annual cycles to the use allowances that the clients have for their employees.

We had a number of new clients that both the joined the backup care segment and or that we're utilizing the vis care category for the first time and so it it contributes to a large portion if you come into the second quarter and we were looking at <unk>.

Cadence of of 12% to 13%. We were you know we're on track for that and so this is incremental I'm used to that both in in the clients. It had more more used because they are up per use client as well as those that compressed to use a earlier in the year. So that's the in terms of size you know.

Where are the main drivers are that is a main driver full service center is of course were.

As we at the majority of our centers were close the majority of child care centers across the country. We're close to the access of use in centers was with quite dampened in the quarter and so that we see it restarting and reopening as we are reopening in the back half of the year our in home use.

Continued it started off of your quite strong with good use growth over last year.

But it is it is a third category. If you will too in center use and we would see that persisting, but it is it is located so alternative between the reimbursed care in the in centered care that we see is the main driver as well as the.

The reopening cadence so I think that are our optimism about this is the exposure.

To so many new registered users clients, who had registered users who had never are utilized backup care before have children have a need and and they awareness of clients to the opportunity for their employees to be able to be more productive and potentially accessing that older age group with school age.

Our opportunities, but we are we're in an early stage of conversations with clients about this and we certainly are working toward that but but it's it's too early to.

Really to quantify that.

Okay, and then it looks like the the latest round of fiscal stimulus proposals have some child care financial support language and differ between I think Republicans and Democrats, but.

As far as I can read that you and your family users should eligible for the proposal would just love.

Your perspective or confirmation of that says thank you.

Yes. So we certainly reviewed the proposals and you know would would generally agree with you that that there are elements in each of the proposal that could be positive for the families that we serve and ultimately then a crew benefit back to us.

Again, we we certainly are not counting on any of the proposals to come to fruition and and you know the the biggest barrier historically to any proposals such as the ones that are on the table today.

I have been financial and so you know we are certainly not baking into our plans you know positive upside in that regard on the other hand, you know, we certainly see that there are elements that could be positive.

And some of them are similar to once we've talked about in the past of increasing the de cap flexible spending account limits that make child care more affordable to parents that so that's a fundamental opportunity that that's certainly would.

Benefit us, but I think.

Those incremental elements have more chance of passage then the completely broad brushed.

You PK kinds of suggestions.

Got it thank you.

Thank you.

Thank you. Our next question comes from the line of Man as Pat Sydney patent It with Barclays. Please proceed with your question.

Thank you.

My first question just on say the city, Yeah, I think they've been an important walkman, but you guys for a long time I was just a little bit surprised that he said the acquisition I guess, one in tea like how much of the in home backup gay was sourced from city to city I was just hoping you could give it a little bit more details and maybe you know what.

We would change by acquiring them versus partnering with them.

Thanks, Manav, Yeah, I know, where we're excited about the acquisition of Sittercity I think what we were really characterizing was that their.

Economics at this point are still relatively small compared to our backup business and then certainly the broader business.

That's not to diminish the importance and the strategic intent in making that acquisition in terms of you know what they have done in terms of our partnership historically, it's really been around our ability to offer our employer clients.

And their employees bulk access to Sittercity services, so traditional sittercity services and a large number of our clients are currently undertake a that opportunity into the future. Obviously, we see good synergy in terms of beginning to serve up for example.

Our centers.

As options on the Sittercity platform. So that we can continue to provide options to sittercity users in that regard and at the same time fundamentally as we continue to build out our digital strategy and our digital capabilities, we see sittercity as a nice way forward in terms of the capabilities that they bring.

The company.

Got it.

And just to follow up beyond the suburban versus urban good deed. This dissented that I think you said you quoted BTT evaluating another 60 to close.

I mean, where oddballs concentrate in I guess, you know the reason for permanent closure with those if you believe.

As you said earlier that utilization will come back.

Yeah, I mean, I think that.

Framing that up with the wave you've asked a question actually is important consideration.

Only a handful less then you know, it's probably 10% of those are in a you know more <unk> large metro urban environments. There. It's not that there are nine but at the lion's share. These are in more rural suburban locations and I think that the.

You know the view is that as we look at a potentially you know it's multiple quarters into 2021 late 2021, what is the prospect for a return and recovery in some of these locations that may be coming to the end of the elite life that we can just accelerate that decision we can consolidate operate.

Actions into another location and I think it's just a matter of some rationalization of portfolio that we're trying to be prudent about as we consider that this has I noticed the conditions that were in our or certainly more forward looking positive then they they work two months ago, but it's still.

As a long road and we want to be a thoughtful about where we're investing.

Got it thank you.

Thanks enough.

Thank you for the next question comes from the line of Andrew Steinerman with JP Morgan. Please proceed with your question.

Hi, Andrew I have two questions. One is it hi, good morning. Good afternoon Q2 questions. One it's about visibility into September and the others about utilization of the factors that will be open.

September and so you know basically I'm thinking september's always an important time for families to often go back to work.

You know when you say pays Dan capacity.

Do you already have commitments from family for September what do you have to still kind of do the logistics on who's going to come in September and then assuming you have that you know visibility, though what type of utilization should we expect in September.

Yes. So it's it's an important question, Andrew and I think it points to you know what what an unusual year. This is a September is I time as you described it many families are kind of coming back into a re enrollment mode. But this year is also has.

The continued uncertainty around school reopening and and various decisions around that that is and even how businesses are making their decisions. So there continues to be a level of.

Sort of maybe base level disruption that is a adding to the the black or its reducing the visibility that we would otherwise have for September I had to answer it we were looking at the reopening a process in general so as we have identified and scheduled out those centers for.

Opening its based on surveying parents I'm getting interest levels about when they would be interested in coming back and gauging. How we can open as we said the sort of more limited scope of of enrollment initially and then adding classrooms as we as we sort of season everybody into the center.

So the visibility that we have is really all most or it's a re ramping protocol. So overall I'm you know our centers are our operating anywhere from 20% enrollment to 60% depending on when they've either didn't ever close or or reopened because of.

The the various conditions and so into September.

We would be probably in the middle about average for centers that have been opened in our just in a gradual re enrollment phase it's really different than the typical September reenrollment cycle.

<unk> is there sometimes a waitlist reopening like there's more demand that you have capacity.

There isn't in some cases, because we are opening a and input room, a toddler room, a preschool room in and so a family may need to get on the waitlist in order to be in the round. One we're opening the next classroom. So there were that's what we're trying to convey we're pleased with the demand levels.

We're pleased with the persistence from Paris.

Who are you know as it were survey now we're getting a level of interest and then making the offers and we're having good conversion of those offers but still some some parents want to wait a few months and someone to come right now and so we're trying to balance both of those out with the.

Although sort of opening and safety protocols along the way.

Understood. Thanks Elizabeth.

You're welcome.

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed with your question.

Hey, this is actually Jeff on for Tony.

Well just have to work from home question, Hey, I'm, just I want ask the work from home question, a little differently. So given the greater degree of employees working from home right now where you stand with allowing show like employee children attending centers other than their normal employer based center and so if the work from home trend becomes more permanent.

Could you see overall model adapting towards something like this.

So then there's a couple of factors that I think one need to consider as you think about that question. So the first is that there is typically a real interest of apparent in continuity of care and so therefore, if their expectation.

Is that they're going to go back to their office in September or in December or in February and their child is gonna be it a center for multiple years. They are going to go where the ball is moving as opposed to where the ball is and so they're going to make a little bit of extra effort to get to the center that is going to offer them long term comp.

No we have care, which is likely the one at their employer site I'd say the second important point on this is that when you look at the cost to that family between joining one of our lease consortium centers versus going to their employer sponsored center. There is typically you know anywhere between.

Let's call it 810, and 20% differential in that Jewish and and so there is also an economic advantage for them to continue to take advantage of the center at the workplace and then the third is just the practical reality of where they have the ability to gain a spot they obvious.

We will have priority at their employer center, where they won't have that same priority and a local lease consortium center and less their employer has bought into that center. So there are a number of reasons why in employee of a particular organization will continue to want to persist with going to.

They are on site center.

And I think the other the other factor for onsite centers of courses.

They they would have priority, but we also are typically it you know we're in a location where a client has a base of employees even in a reduced attendance mode that is far greater than what the center.

The could accommodate in enough fall environment. So there's there's going to be demand there even even in a change work environment.

Okay that all makes sense for May and then you need 35% conversion margin looks like in the quarter with ample service, which I think with a bottom of your prior range and I think I'm thinking guidance that 50% to 60%. So I just wanted to understand exactly what's driving that figure higher and is there any.

Kind of variable there come back and make that number come in better than the unexpected.

Sure well the main living variable there is that as interest in the second quarter with.

The vast majority a 80% of the centers were closed.

Until we started reopening in late May in early June. So we had 70% revenue contraction and we had a large number of our employees were furloughed accordingly.

So as we start to reopen and had 160 to reopen by June Thirtyth and we had another several hundred that opened in July. So we're now at a 725 I'm at the end of July we have brought back staff at all at a pace that is ahead of the the revenue and the enrollment that would.

Typically go with you know completely optimize staffing and so we are now as I think we sort of previewed. This last quarter. We're now in a mode, where the revenue contraction is going to be left so we were at 70% now it's down to 45% to 50% revenue contraction, but we have a less efficient labor.

Structure Accordingly, we will will gain on the on the occupancy cost to the fixed cost that we have in our lease consortium centers that will now will become.

More leveraged, but we will have some de leverage with labor as we just are back in this reramp mode. That's the main driver and and you know where it will as we continue to ramp it will continue to tick tick.

Pinch rail what we were able to do in Q2 as we continue to ramp through the rest of the year.

All right. Thanks, a lot.

Thank you.

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

Hi, Thanks, good afternoon.

Hey, you're targeting to have more than 85% Andrew centers opened by the end of Threeq, you with utilization rates ranging somewhere between 20% to 60% as you look beyond Threeq you. How quickly do you expect utilization rates the recovered to the more traditional 70% to 80%.

Yeah, I think we're well into 2021 before were at those levels. So some centers you know maybe.

Maybe back to that level, but I think on average we would be looking to later in 2021 for that but it's it's early to predict.

We you know I think we'll have I've, obviously, we'll have better visibility over the next couple of quarters, but I think getting getting the centers opened and and parents back for that.

You know for the near term I think it though the goal to rebuild everyone's sort of regular activities their confidence in the protocols and what have you, but we we see that is certainly achievable overtime.

But it is going to be a bit of time before we're back to that.

Got it and you mentioned that the decremental margins for Threeq, you will be 50% to 60% can you perhaps frame what the relationship might be between detrimental margins in capacity utilization rate in other words, where would rates have to go for decrementals to improve.

Well they'd be improving over that you know that range of 20% to 60%. So I you know I think on average.

What we are we plan for a good steady increase in enrollment, but to the extent that it's faster than than those metrics had another we have any anything more specific that we would lay out right now.

Okay got it thank you.

Thank you.

Thank you once again, ladies and gentlemen, if he would like you asked a question at this time. Please press star one on your telephone keypad.

Our next question comes from the line of Gary Bisbee with Bank of America. Please proceed with your question.

Hey, Good afternoon, let me just follow up on that good questions on the full service.

Center.

I understand the dynamics of bringing stuff back and that will you know that that will be that a pressure but.

As you think about operating and more in the code with world other than that timing as refilled. The centers. How are you thinking about your operating costs versus where they were before you know is is do you need higher staffing levels to have smaller class sizes is yes, I would guess cleaning and other supplies is a cost.

But not material one but are there the process and the changes you made or do those lead to higher cost structure.

As we look out a few quarters a year to yeah.

Yeah, I mean, I think I think you've touched on the two primary ones scary that there is there is an incremental cleaning sanitation cost that we we think is you know it it's important and its you know it's not nothing but it's it's manageable.

As it relates to the labor cost Theres, a couple of components of that one is.

By virtue of having.

What I'll call remote pick up and drop off where parents are not taking their children to the classroom we have.

We have had some incremental labor for that sort of management of movement in the center. So there's a little bit of that and otherwise I think from the the staffing in the classroom. If that's more a matter of how we are saying you know more contained in a room rather than combining group sizes. So I think from an incremental.

Labor standpoint, as we as we do get through this phase of re ramping where there will be.

Some adaptation to the cost longer term I think that the incremental labor cost that we have any incremental cleaning sanitation cost we have will be manageable.

Either through some slightly slightly incremental pricing and or some slightly incremental enrollment it's not a it's not so significant that we we don't think than we can we achieve though the kinds of operating thresholds we were up before.

Okay, and then you know.

I last quarter ask your questions about about my employer apologies, but they've they've since so many emails about you guys and obviously that's robust performance. So I want to ask about it one more time, which is just yeah. They have expanded the backup usage that we as employees can use several times year to date and.

I understand the concept that you look at your base and a lot of them are bumping up again.

Those.

Maximum usage levels, but.

You know do you have any visibility in into how often and what factors would determine if they if employers broadly could extend the more I mean as it does it have to do with when when offices are reopening and then okay. We don't need it and so you're you're seeing that pick up so you think its leslie.

Equally and really what I'm getting at is is there some possibility that we just see further expansion such that that business doesn't repeat to Q, but maybe persist somewhat more strongly than you've been venue you planned for the back out.

Yeah, well first Gary Thanks to you and and thank you to bank of America for being a an exceptional client, but more importantly, an exceptional employer really supporting a your employees through what is a very difficult time, what I would say is that you know be available.

It's really a exemplary in terms of the way they've thought about sort of expanding use banks and no. Since you stated that I can restate it which is yes. They have increased their use banks and really made.

More opportunities for their employees to lean in and take advantage of this important service I think that more broadly how employers are thinking about it it's less about the work from home versus work at the office because again I think we've established the fact that it's not really where you're working.

It's really a need to be productive and ultimately not be the primary care giver for for your child.

And so I think what's happening is employers are really trying to be thoughtful as we enter into the fall about what supports are gonna be required and there is real emphasis not only on young children right, who are not self sufficient not independent and need a level of care, but they're all.

Also thinking about school age programs and so as we look to the fall, we're really having good conversations with employers about what they can be doing to serve their employees across that continue on some are like bank of America deciding to offer additional service others are deciding to.

To reopen their center before they reopen their worksite and so each employer, we're coming to different decisions with but nonetheless, the one commonality is that employers are really being thoughtful about what their employees need because while this pandemic came on very quickly and in.

Please needed to juggle both there at work in there at home lives everyone recognizes that is not sustainable going into the fall and so employers like be they are really trying to be thoughtful and were really working hard to be a good partner to organizations such as yours.

That's helpful and just one final one of them on backup and I'll turn it over the you commented on the profitability of full service in how you are seeing things unfold, you did not or I missed it on on backup in this in that scenario, where the revenue declines in the back half would if the full.

Here is up sorta inline with what you thought on revenue does the profit at that level.

You know what we might have thought is that a good proxy or is that how do we think about.

The margin in that scenario. Thank you yeah, yeah. It's a it's a good question I would frame it up that because the.

The cell source reimbursed care is is captured a as sort of a net revenue item, it's a bit distortive to what the margin profile is in the second quarter and in the back half of the year, even with the revenue.

Profile that we mentioned I I'd say that our expectation is that you know that our operating margins would be able to persist in our sort of targeted range or you know in a in the 30% range. So high twentys to 30% consistently with what you've seen in the past. So that's how we would think about on the margin performance against that revenue.

Huh.

That's for the back half of the full year that was back that's what it did that just the back half yes, Okay alright, great. That's helpful. Thanks.

Okay. Okay.

Thank you. Our next question comes from Jeff Silber BMO capital markets. Please proceed with your question.

Thanks, So much for squeezing me and I and utilization did you disclose roughly what the utilization was into Q 20, and I'm curious how that compared to one to 20.

We didnt I mean, I can just describe it too Jeff we didnt, we didn't disclose or because with 80% of the centers close most of the quarter.

And those that were open we're open to very limited enrollment for the first responders. So.

The be attendance was you know in the that was probably in that 30% to 50% you know range of utilization that as opposed to where our not well utilization Q1 was.

70% to 80%.

Okay, Great. That's helpful and I wanted to move on to the portfolio rationalization and you talked about earlier I want to take the opposite path.

Are there potential areas that you know maybe you're looking at where you don't have centers right now and maybe we do see folks working from home they stay in their suburbs.

Would you be anticipating maybe some of the smaller centers that might be under some financial issues right now are those acquisition opportunities or potential leasing takeover opportunities for you.

Yes, we definitely anticipate that that will be the case and our expansion strategy is certainly to continue to look for good opportunities on the lease consortium side as well as on the acquisition side as we've stated previously here in the U.S., we think that those will come in the pro.

File of single sites are small groups, Oh, well located centers that are in strategic locations for us.

But absolutely we intend to continue to grow our portfolio overall, even within the context of continuing to rationalize as well.

Okay, great. Thanks, so much.

Thank you and thanks to all of you for for joining the call. This evening and appreciate your support.

Thanks, everyone. Appreciate your patience to we were a little bit Lipa. We we appreciate all the questions and we'll we'll talk to virtually I don't think we're going to see anybody on the road and while that well see virtually take care.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.