Q3 2020 Bright Horizons Family Solutions Inc Earnings Call
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Our 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 SEC filings.
Any forward looking statement speaks only as of the date on which is made and we undertake no obligation to update any forward looking statements.
Here in the quarter.
In addition, we added to our educational advisory client base launching service for atrium health cognizant Enzo edits this past quarter.
Overall, I'm really pleased with the progress we have made and with our teams exceptional response through this very challenging time.
As a reminder, at the end of March we temporarily closed nearly 850 centers globally.
We marshaled resources to develop and implement industry, leading COVID-19 operating protocols and we focused our full service operations on caring for the children of essential workers in 250 centers that remained open.
In short order, we started collaborating with our employer clients to plan for Ciena Reopenings, so that as stay at home orders began to lift in the early spring we were ready to deploy resources to safely welcome back families in staff.
I recognize that regardless of the work environment onsite or remote it is impossible for employees to remain productive while caring for young children.
Overall use in our fourth quarter.
Turning now to our Ed Advisory business.
As we discussed last quarter learning and development have remain critically important to our employer partners as investments in this arena help attract and develop a productive and engaged workforce and also help build diverse and inclusive work cultures.
Had to deal with managing a virtual or hybrid environment. This fall for their school age children.
We work with several key clients, including Accenture Bank of America, and Microsoft to create highly subsidized learning pods to help relieve parents of the stress of managing their work life and virtual school.
It has been encouraging to see just how progressive many of our clients have been.
They recognize the need is great and are investing in real solutions to help their employees.
So in closing, we're making good progress recovering from the disruption caused by the pandemic.
Adjusted EBITDA was positive 30 million or 9% of revenue.
No borrowings outstanding on our $400 million revolver.
<unk>, we are focused on re enrolling families and ramping our centers back to pre covid levels.
We remain encouraged by the enrollment trends and reopened centers and continue to open more classrooms, as well as demand returns and as families and staff acclimate to the new operating procedures.
Since has presented us with both opportunities and challenges and the team has responded extremely well.
We've taken a lot of deliberate actions to combat the challenges that we faced.
At the same time, we've used the strength of our employer centric model, our balance sheet and our market leading position to capitalize on opportunities and we will continue to do so in the periods ahead.
So stacy with that we're ready to go to Q and a.
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, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
Before pressing the star Keys. Our first question comes from Manav Patnaik with Barclays. Please go ahead.
Thank you. Good evening My question <unk>, you know he stated that equals the U.S. Lee that typically.
Yeah.
But we need to see if youre looking at different guidance is big and I know you mentioned the mom and so forth in the press release I guess, just a broader question. How do you know whether you see any risk on the organization and maybe if you know relocated think strategically different basically [noise].
In our enrollments between our are more densely urban centers and are more suburban centers, it's something that we've always tried to really to locate our centers where.
Were working parents are living where employers are located and therefore, where demand will be the most persistent and so you know I think that we will continue to adapt to that if those trends continue but I think with the footprint. We have we're able to serve.
The variety of parents in both both locations. Many many parents live very proximate to where they work.
The vast majority of parents are within a few miles in our you know in our population of where they work so even even with this I think that though the ability to serve the parent needs. Even as these these demographics may may shift in some areas and not others, but more of that has to be to be seen and at this point, we're not we're now.
I've seen that as a big driver yet.
Okay, that's really helpful and then.
But the backbone bombed before they get most of the employees, but we do that.
Great and maybe delayed but is there a little bit into the you know corporate good sign up.
More you know be and.
And there could be some upside to it believed as guidance.
Oh, you know I I think it's certainly possible the conversations with our client partners are ongoing Manav I think it is you know can be varied by employers and how they're.
Both how their appetite is and how their budget for the year is at this stage in the year I'd say that we're seeing more clients looking ahead to 2021 then.
Okay. The I think that the fall.
Last time, we talked early August the timing of what was going to happen with school reopening how businesses are responding to the pandemic, how it's playing out.
I think there is continues to be some hesitation so.
There will be developments that happen over the next 369 months that could change the trajectory of what we're estimating but I think on the on the pace that we're seeing parents coming back and assuming that things continue along we do see it as a.
Improvement quarter by quarter, but still a a number of quarters to go so.
If it's if it's changed a bit of a nuance to last last half of the year until later in 2021, but I think we all have to see what else occurs over the next three six months because.
A lot of this is dependent on factors outside of of our operation.
Okay. Thank you.
Well commander.
Next question comes from Jeff Silver with BMO capital markets. Please go ahead.
Thanks, So much one of the script over to your back up to your business I understand there's you know a little bit of volatility in terms of folks using the residual care, but but but stepping back I mean, it's really phenomenal offering that you have.
Are you or would you consider offering this to non corporate clients I guess two individuals give them the technology that you have to make it available.
Jeff Thank you so.
So we agree it is an absolutely.
Critical and important.
Support for working families.
We really differentiate ourselves by partnering with employers, we view that the financial subsidy and support that they provide to backup care is critical to the use profile and in addition to that I think we all recognize that employers gain a great benefit in terms of their employees productivity in this equation. So.
Ultimately, we're big believers in staying with backup care focused on the employer channel and think that is the best way for us to continue to grow this market.
Okay fair enough.
And given what's going on politically I'd have to have the election question, let's assume.
That bite and we'll win the presidency I know these proposed.
Done something dealing with childcare.
Whether it's providing universal childcare or maybe provoke racing with some sort of tax benefits I'm. Just curious how you think if these proposals go through it might impact your business. Thanks.
Yeah. So certainly we've reviewed the biden proposal thoroughly and believe that government involvement in child care can be a positive is done in the right way.
The idea of Universal pre K and other supports that Biden has suggested would be in his plan or things that broadly would support childcare and therefore, we would be supportive of we operated environments like the UK in the Netherlands, where financial support of childcare exists and it's a very important part of it.
The overall model that we have in those countries I think for better or worse, we have a long history of evaluating.
Political plans and unfortunately, the fiscal reality tends to be where the plans fall apart and ultimately don't get implemented so wall.
We like the idea of the U S, having more financial support in the area of childcare.
We never count on that in our model, we don't count on that and are going forward and I've always believed that given the absence of that that employers are really the third party support that we can most count on here in the U S and it's been certainly the standard for us over the last 30 years.
Okay really helpful. Thanks, so much.
I gotcha.
Next question comes from Gary busy with Bank of America. Please go ahead.
Hey, guys good evening.
I guess.
I would love to start with the backup business can you help at all sort of disaggregate. The groceries delivered either a year to date or the 25% you are targeting and what I'm trying to think about is is sort of what's the contribution from new customers who are engaged you.
Offer backup versus.
Listing customers, where you've had a broader penetration of their employees are more and more of their base of employees using the service versus versus employers increasing their usage limits.
Due to the.
First year to have a program is not is not when the client has the most used they grow into a program and it becomes something that's embedded into their employees.
Benefit program and its something they really come to value overtime. So we see the real long term value of those relationships as happening over the.
The five eight tenure lifecycle of those contracts relationships. So I think you're right to point out the new versus the expanded use there certainly is a large portion of the growth that's above our target. This year. That's just related to that expanded use in that unusual circumstance of covance, but.
I think I'd be broadly characterized it to say that maybe a quarter to a third of it is that you know expanded new growth opportunity that could play itself out over time.
Whereas.
No a quarter or three quarters two to two thirds is is that you know bubble of covance spend but those some parameters I don't know Stephen if you.
Yeah, I think the only other thing I would add to it is that even within.
It's around 30 or yeah, Yeah, I mean, I think that's the headline that we would expect to see them moving back toward that that 30% range. I think we've stated sort of our long term expectation with backup would be being able to keep in the high high 20% to 30% is operating income the reason in part of the.
Reason is because of reimburse care, which is accounted for on a net revenue basis. So.
So it does have very high margins, just because it's a reimbursement model. So that's a factor, but I think the other factor is what we.
Pointed to in terms of the relative use levels as parents need to they're shifting back to more traditional use what would have otherwise been.
A much higher.
Traditional use.
And sort of the provider's that would be paid for that traditional use.
That was dampened some so the cost structure was therefore.
Bit lower than that.
Again as I don't think that that's the recurring condition, but that was the condition of this quarter.
And then just one last one if I could on back up the.
You said clients are starting to look forward to 21, I know a lot of businesses have already gone through benefit open enrollment what does that looking like R. U R.
It's not going in December 31st Sadly So are you seeing.
Expanded commitments for next year are they generally going back to the pre pandemic levels.
How are those conversations and those engagements going thank you.
Sure. So first as you might expect our renewal rate is incredibly high.
The clients, who have been with us through this are certainly very very much willing to continue to commit going into into 2021, that's at the client macro level than at the program level. We are seeing that employers are returning back to their traditional use banks that they provide employees.
And I think their approach on this is the belief that they're going to start there and depending on how the pandemic unfolds next year. They will reserve the right to increase you spanked. If that is what is required but certainly to start the year, they're starting with program parameters that look very similar to how they started 2020.
And if I could just sneak one more in on full service to 50 to 60 decremental margins is there is there like a revenue decline level, where that would moderate to a lower level as I recall a quarter ago, the commentary with sort of like we got to bring people back a little bit at a demand does that get better as that.
Okay, Yeah I mean.
It will it will get better as we continue to move the enrollment past.
Sort of a 50%, 60% 50, 55% level. That's generally when centers are on average breaking even but there is sort of a step variable cost AD. So we're still in that mode and of course, some centers are further along than that but that.
Detrimental effect will we would expect that to abate as as we do continue to enroll in as I say get past that sort of 50% level and.
And then we're we're able to infill with enrollments in a more efficient way than we are now because we're.
Both.
We need a new classroom and then we're just sort of bringing people along as you say ahead of the actual revenue fall.
Thank you very helpful.
Thanks, Karen.
Next question comes from hops of Missouri with Jeffries. Please go ahead.
Hi, This is mario filling in for homes.
I appreciate the time and you're just.
Looking at what the what the risk of re closer would be I was just wondering what what was what's it gonna take for you to close centers that that you already reopened is it just a function of the law or I mean, the UK is walking down right now.
How much impact is that going to have to you I'm, assuming you have to follow that or is it that you're centers will remain essential services I'm just trying to gauge again to the.
Exposure to the UK Lockdown and then also what it would take for you to re closed areas in the U S. If there were any other type of lockdown.
Absolutely Mario Thanks for the question. So if we look to the UK and they have gone into lockdown for the month of November, but very specifically the prime minister exempted schools in childcare and I think that that exemption was based on two things. One is that there is a recognition that schools and childcare critical.
And foundational to society and therefore, they want to keep those supports available for families. I think the second piece is from a health perspective, I think the research is is fairly conclusive that <unk>.
Schools in childcare centers are not Super Spreaders and therefore, they from a health perspective are are safer to have open then other other things in the community if we sort of translate that back to.
The U S.
We really don't think about the scenario, where we would be closing centers I think that in the.
Rare cases, where we are having.
Covid impact in a particular center. It is typically isolated to a classroom because again the way we are doing our protocols is very specific we have social distancing at pick up and drop off we are ensuring that there's consistency of staff and children within classrooms that there is no.
Interconnectivity between classrooms, and children and teachers between classrooms. So in the case, where somehow covid does enter into a center, it's really isolated to a classroom. So I think what you would see is perhaps a classroom closing, but I don't see a scenario.
In the current environment, where we would be closing a full center.
Great. That's super helpful. And then just on some of the bigger wins that you've had.
That you would actually mentioned those them a call and I think I mean, just looking at what the pipeline looks like today versus say a year ago or C versus at the at the height of Covid in April could you just kind of give it give just give us an idea of.
What's that pipeline looks like and compare those those three different timelines just to get a sense for I guess, how larger opportunities are going forward I think that obviously that this is the most demand that you've seen in almost inbound traffic you've seen just again I'm just trying to keep the pipelines moving forward.
Sure. So clearly it varies by the service that we offer so on the center side of our business. We're seeing a pipeline that is very much in line with traditional times I think some employers are on a decelerated time horizon in terms of their decision and at the same time, we have other employers.
That are on an accelerated timeframe. So I'd say on balance we have a similar pipeline and it's moving at a similar cadence then we'd see in typical times.
We certainly have an increased pipeline on the backup side of our business.
Certainly there has there was a pretty good spike in the early days of the pandemic as it relates to new client commitments on the other hand, we continue to see an elevated level of pipeline against what we would see them more typical times and then on the Ed Advisory side of our business, it's it's pretty much business as usual and so we're seeing.
A fairly consistent pipeline as it relates to what it is today versus what we see and more typical times.
Great. Thank you.
Thank you ask.
Next question comes from Jeff Mueller was Dan. Please go ahead, yeah. Thank you good evening everyone.
Just love some more detail on kind of the waterfall that you described so you're talks about first kind of enrolling the previously enrolled children and the Waitlisted finally, the new families, which makes sense, but I guess, what I'm curious to is is there a lot of demand that you're choosing to more gradually fulfill in terms of weightless.
To demand or marketing to new families.
Just love any perspective on if that's what's happening and how meaningful it is.
Yeah. So I think the reason we chose to approach it that way is obviously.
With those families who were previously enrolled we set an expectation when we did temporarily close that we would prioritize their enrollment when we reopened and so we stood by that commitment and made sure that we went out.
And continue to go out to each and every one of those families that was previously enrolled as.
As we've shared on previous calls we're taking a very methodical approach center by center to reopen classroom by classroom and so the first priority was provided to those previously enrolled families.
In addition to that at the time of temporarily closing many of our centers did have weightless and so once we have gone back to.
Those who had previously enrolled we drove we do go back and we talk to those who are on the waitlist again people who have already toward experienced and we're excited to start within our centers and again, depending on when the center opened we are in different stages of where we are between.
Previously enrolled and those who are on the wait list and then in the centers that have been open the longest.
We are onto the phase, where we are starting to.
Increase our marketing activities and do marketing activities to attract new enrollment into the center and so that's really been our approach and and feel very good about.
The way, we've approached re enrolling our centers.
Okay, and then uhm any more detailed you're willing to provide in terms of what you're hearing from serving the previously enrolled family. So those that have not yet re enrolled and I recognize some are going to Egypt to pre kindergarten or something somewhere else, but what are you hearing in terms of how many it's just a matter.
Of time and is it that they are not back in the office yet is it health and safety concerns just what are you hearing on those that were enrolled in I'm not yet returned.
Yeah, So I would say that the two primary areas that families who are choosing to wait and that's really the feedback we're getting from families. It's not that they are saying.
No. Thank you forever. They are really saying now is not the time for me and so there for perhaps deciding that they're going to start in January or after the first quarter and typically what we're hearing back from them is first and foremost.
I do have concerns around the health and safety not.
Not about bright horizons in particular, but just about community spreading their particular community or just don't have.
The confidence to to return out into the community and have their children in in care I would say that the second piece right. So if if health and safety is sort of one psychological barrier I'd say the second is that they may have either other children that are at home or.
Or their work situation has changed and so there is the occasion, where a person has either reduced their hours because they have a school age child that they need to support with learning on a virtual or or hybrid basis and so therefore, they are taking on more of the caregiving responsibility, but I would.
Say that those are the two factors that we're hearing.
Those who are deciding not to come back now and only a small proportion are saying that they don't plan to come back we are not hearing.
Some of the things that that that you implied in your question which are around.
Their work arrangement. So we're not hearing for example that because they are working from home. They therefore don't need care I think that our formerly enrolled families are very clear that it is impossible for them to manage both working life. So the idea of the.
The fact that they may be still working remotely as a reason there are coming back is not ranking high in our service.
That's very helpful. And then just one more if I could squeeze it in Elizabeth what what was the cash flow from ops number and the quarter I think I heard a pretty high number and I think it might have even been up year over year. So any additional detail on what drove cash flow from ops from a quarter.
Yeah, So with 170 year to date. So it was about 120 million just in $120 million in the quarter.
And that was largely on a collection of receivables that had been outstanding through June so we.
We typically have very strong cash flow in the first quarter first half of the year and then.
R.
It is not generating net net very much in the second half based on other business typically operates but this year, we had a higher level of receivables much of it was driven through the backup care.
Surge of activity in Q2, so those collections in Q3 at the main driver textbook.
Smoke.
Thank you. Thank you.
As a reminder, if you would like to ask a question. Please press.
Or one on your telephone keypad. Our next question comes from Georgetown with Goldman Sachs. Please go ahead.
Hi, Thanks, Good afternoon, you talked about utilization rates, 35% to 40% that you're newly reopened centers can you discuss how much the utilization is being driven by customer demand versus local legislation on maximum capacity versus self imposed capacity restrictions.
Well.
Let me see if I'm understanding the question right, George you're asking whether our utilization is gaining based on.
Based on state regulations or other other restrictions on.
On now capacity is that what your question is correct, whether it's a state state legislation or whether it's something that the families choosing to self imposed through the state is along there's some of it to pass through your choosing go below that or if it's just simply.
Kept my demand the demand isn't there yet.
No. So I mean I think there are there are certainly some circumstances, where we.
We may not have we may be fully.
Enrolled in a classroom and so we can't take any more because of this.
Absolute capacity or the restricted capacity, but I think in large measure this as a matter of us re enrolling in the demand coming back. So we are opening classrooms. So if we have a center that has 100 capacity 120 capacity unusually and it may have a restricted capacity because of group sizes.
That is 110.
We would be we wouldn't have every classroom opening if our demand was was for 50 children. We would have classrooms open to accommodate that demand and we would open additional classrooms as the demand comes in so.
I think that restricted capacity isn't isn't governed by.
States are.
Imposing in terms of any kind of a group.
Group size restriction, we are we are in the.
Motive re enrolling families based on on there.
Their own personal situation to come back as we said families need care, but they also need to feel like their health and safety is protected and that they have.
That that that makes their family thing.
Got it that's helpful. And then I wanted to dive deeper into a margin performance can you elaborate on how detrimental margins for full service in the quarter compared to your internal expectations and where do you expect detrimental margins to land next quarter for full service.
Sure I mean, we I think we online that in the script fit that we we did estimated date or flow through in the quarter would have been 50% to 60% for.
For the fall service revenue detriment and we.
He came in at the low end of that at around 50%.
We also came in.
Close to our when where are within the range of our expectation on the revenue.
Traction so in queue for.
We've estimated the year over year revenue contractions.
35% to 45%.
And that the detrimental performance will also be in the 50% to 60% range and that is driven by the.
The question came it earlier, though.
To show Labor that we bring on ahead of the enrollment or as we are enrolling children and if not and its most efficient level.
On top of the other sort of costs that we have with hygiene and health.
Health and safety is and the other unusual program costs. So.
Our expectation would be for that kind of performance for full service and it sounds.
Not terribly dissimilar were Q3 was but we do see some incremental enrollment continuing into the quarter. So there'll be some improvement evidenced the comparison over the prior year.
Is similar.
Oh, thank you.
Uhm.
X question is Tony Kathleen with market Stanley. Please go ahead.
Thank you very much I was hoping you could update us on that M&A front are you seeing any financial pressure on some of the smaller players in the industry that could drive some acquisitions just please hang in terms of valuations and opportunities.
As we look at at M&A.
It's a great question, Tony and what I would say is that.
In terms of.
Acquisition targets and candidly. This this is true for landlords as well I think that people are still in a wait and see a little bit.
And are trying to sort of continue to persist through this environment. So we're certainly continuing to.
Build relationships make sure the owners understand that were here when they make that decision that they want to exit the business, but what I would say is that.
Many of the owners that are out there are still contemplating their situations as opposed to deciding at this point to exit we do think.
That through 2021, those opportunities are going to start to come out in more significant ways and more significant numbers and.
And so we are not either trying to pressurise, Andrew a rush the opportunity and instead are making sure that we are in a relationship building.
Wood and are taking opportunities that are coming.
Towards us in a in a serious way, but ultimately think that the 2021 is going to have more opportunity than than what we'll close the euro at.
Very helpful. And then I wanted to ask about the educational advisory business.
It's been really strong through through Covid and obviously, there's no reason why you can't conduct the services.
Most of it is probably over the phone anyway.
Are you advising people on whether to take like whether their kid should take a gap year or something like that in addition to just the regular college enrollment type of.
Questions with regard to where they should be telling our financing things like that.
I guess given softness around college enrollments because of Covid should that pick up next year more. It's so then now and just wanted to understand that different moving pieces within that business. Thanks.
Yeah. It's a great question, So alright advisory business really comes in two flavors. One is the work that we do with employers who are having.
Or providing the opportunity for their employees to go back to school and will very strategically manage that workplace education. The second part of that business as what you describe which is for employers who are supporting their employees with high school students to transition to college, we really are stepping in and providing expert guidance.
And on that score I would say that within the context of a very.
Choppy environment in college admissions and in college evaluation, our experts are coming into a really important place for families and ultimately therefore for employees and their employers.
As it relates to the decisions that are being made.
You raise a number of important points not the least of which is that many students are coming into this fall having not visited colleges not having standardized tests and are making decisions.
In in ways that we've never seen before likewise. This spring we're anticipating that students are going to be selecting colleges and they may or may not have the opportunity to visit those schools and or have a really good sense of what college is going to look like in the following fall.
So there are a whole host of conversations that are going on about gap years about transfers about.
Which schools are in session versus doing hybrid or.
Learning and so it's been really impressive to watch our experts on the college admissions and college financing side do their work with families to support them to make good decisions and what is a really difficult environment.
Thanks, so much.
Thank you.
There are no further questions I would like to turn the floor over to Stephen Cramer for closing comments.
Great well. Thank you all very very much for for your questions and also for joining us on this evening's call, hoping everyone stays safe and healthy and has a nice Thanksgiving holiday coming up take care. One of these days, we'll say we will see you on the road.
Living hope living home take good care.
Thanks to everybody.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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