Q1 2021 Bright Horizons Family Solutions Inc Earnings Call

May 5, 2021

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Ladies and gentlemen, you were currently holding for today's bright Horizons family solutions first quarter 2021 earnings release conference call. At this time, we're assembling today's audience. They plan to be underway in approximately two minutes. We thank you for your patience and we ask that you. Please continue to stay on the line.

Yeah.

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Please standby.

Good day, ladies and gentlemen, and welcome to the bright Horizons family solutions first quarter 2021 earnings release conference call.

Please note today's conference is being recorded.

At this time I'd like turn the conference over to Mr. Michael Flanagan Senior director of Investor Relations. Please go ahead Sir.

Thanks Ali.

With me here.

Stephen Kramer our CFO.

Before I turn the call over to Stephen after covering a few administrative matters.

Today's call is being webcast and a recording will be available under the Investor Relations 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 COVID-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 2020 form 10-K, and other SEC filings.

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

We also reported as 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 now 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 you and your families are healthy and keeping safe.

I'll start Tonight with a recap of our first quarter results and provide an update on our current operations Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions.

I am pleased with our solid start to the year and pace of the continuing recovery in our business.

For the first quarter, we delivered revenue of $391 million and adjusted EPS of <unk> 23 per share.

And our full service segment, we added seven centers, including new client centers for Regeneron Horizons Therapeutics, the University of Maryland, and Memorial Sloan Kettering as well as an organic center in the Netherlands, and two centers acquired on the West Coast.

We also made good progress in re ramping center enrollments with the positive enrollment trends, we saw in Q4, continuing through the first quarter.

Our backup and Ed advisory segments expanded their client bases and breadth of services delivering revenue growth in the quarter of 3% and 16% respectively with recent new client launches for general Motors Conocophillips dollar tree, Freddie Mac and Shopify.

Overall as we approach the midpoint of the year I remain encouraged by the consistent pace and trajectory of a recovery in 2021.

We ended the quarter with 1015 centers, roughly 900 of which are open and.

In the U S. We reopened six temporarily closed centers. In addition to the new centers added in the quarter.

Occupancy levels in the open centers continued to improve month over month in the first quarter tracking nicely to our expectations as families returned to our centers.

Importantly, several of our more heavily concentrated markets, which were also later to reopen made up solid ground this quarter.

Reducing infection rates, coupled with expanding vaccine coverage and a relaxation of COVID-19 restrictions have contributed to the increasing occupancy and the pace of recovery in all regions.

In addition to the positive trends in the U S. I'm very encouraged by the strength of our U K and Netherlands operations, which have continued to serve children and families through recurring lockdowns and COVID-19 restrictions.

In the U K the national Lockdown that was in place from most of the first quarter did result in the temporary re closure of several centers as well as a pause in the enrollment growth we had seen over the last couple of quarters.

However, with the economy again reopened we are seeing a return to steady enrollment growth going into the second quarter.

At the same time performance in the Netherlands has remained strong from a combination of solid enrollment and long standing government support for childcare.

I am so proud of our operations teams as they continue to make great strides day after day and safely enrolling and welcoming thousands of new and previously enrolled children into our bright horizons family <unk>.

Providing a measure of stability and enrichment and these children disrupted world.

For our centers that have not yet reopened our client relations team continues to work closely with clients on reopening plans Inc.

<unk> that we are strategically supporting both the employer and employee needs.

While the environment remains dynamic and many clients are looking to the fall before they fully reopened their offices, we have seen a subset of clients recently pull forward their reopening time lines from the fall to the spring and summer months.

Recognizing not only the childcare needs of their employees, but also how they are onsite center will play a critical role in attracting employees back to the office.

We also remain in close dialogue with clients at the highest levels about the additional avenues in which employers can potentially support their employees.

In short these discussions have clearly conveyed that employers of all types overwhelmingly recognize the reality that childcare solutions will be as if not more critical to their long term business strategy post pandemic.

With our scale breadth of offerings in center and in home and relationships with key decision makers, we remain uniquely positioned to be the partner of choice that can provide a range of critical solutions to employers and their employees.

Let me now turn to backup care we.

We had another strong quarter of new client launches, which strengthens our market position and will further fuel the long term growth opportunity.

Traditional in center and in home use continue to rebound, although we still trail pre pandemic levels.

We saw higher levels of self source reimbursed care in the first quarter than we expected, especially during the month of February where ongoing delays in schools returning to full in person learning temporarily shifted the mix of use from traditional to self sourced care.

Since self sourced care is recognized on a net revenue basis at.

At a lower fee per use it delivers reduced revenue growth alongside better margin performance.

We are really encouraged by the registration and use trends we have seen through the end of Q1 and continuing into April.

As we approach the second half of the year and the return to more conventional work and school schedules. We expect traditional use to continue to progress towards pre COVID-19 levels and beyond as parents increasingly transition from their pandemic patchwork of care supports two care arrangements that provide a more complete solutions.

Lucian to their care needs.

As I have discussed on prior calls the pandemic presented many unprecedented challenges.

But it also created unique opportunities for us to service clients and working families in new and innovative ways.

Which means being able to serve families in the way they need at their point of most need.

A year ago, we made self source reimburse care of use type last fall, we stood up school age programs for employees juggling hybrid school schedules and most recently we added virtual tutoring is another use type expanding the solutions for families looking to stabilize and enhance academic progress.

As a result of remote learning.

Parents backup use banks can go towards this full array of use cases meeting their evolving needs to changing work life demands across life stages.

In concert with this strategy, we made an acquisition this quarter to broaden our service reach Steven Kates camp, which has been a great partner of ours. Since 2016 provides experiential camps for school aged children across the country.

And has been a popular support for families, particularly over the summer school vacation months.

This addition to the bright horizons family along with the extension of virtual tutoring further expands our offering for school, aged children and enhances the services our clients and their employees need.

We will continue to look for ways to serve the evolving demands of families and create additional value to their employers.

Turning to our education advisory business, which delivered solid revenue growth of 16% and launched a number of new clients.

<unk> performed well again and college coach continues to see elevated activity with parents navigating another up ended college admission cycle I.

I continue to be excited about the long term growth potential in this segment and believe our workforce education and advising solutions are well positioned to capitalize on these new growth areas.

Two last items before I turn it over to Elizabeth first I want to share my excitement about our recent recognition that bright horizons received.

I am very proud that bright horizons was once again named a Fortune magazine 100 Best company to work for for the 20th time.

This recognition has always been a great honor and affirmation of the work, we do to build a strong culture and inclusive workplace.

But during this challenge of a year it is even more special.

Secondly, as the recent proposals outlined under the American family American families plan from the Biden administration clearly illustrate that.

The pandemic has spotlighted the critical importance of childcare and early education to our society, our economy and our collective future.

While the details of the various proposals are still very limited the American families plan predominantly focuses on government funding support for high need areas and low and middle income families.

Bright Horizons believes this is a great focus for the country and has the potential to help many children and families who have not historically been able to access high quality care and education.

For the working families. We serve these proposals underscore the value and importance of our employer partners, who have and will continue to make substantial investments subsidized high quality early education.

As one of the key pillars employers of choice have to attract and retain working parents.

So in closing we are making good strides in recovering from the huge disruption caused by the pandemic.

We delivered solid results in the first quarter and remain encouraged by the trajectory of all business segments.

Our client relationships are broader and deeper than ever before and our role as trusted advisor and a partner who can execute on solutions will continue to afford us unique growth opportunities.

I remain excited about what lies ahead and remain confident we are emerging from the pandemic as a stronger and more strategic organization poised for growth in the expanding market for employer sponsored services.

Elizabeth.

Thank you Stephen I appreciate that and Hello to everybody on the call. Thanks for joining us today, let.

Let me again recap the quarter results and provide some thoughts on the rest of 2021.

For the first quarter overall revenue contracted 23% to $391 million.

Adjusted operating income totaled $14 million or for percentage of revenue and adjusted EBITDA was $46 million or 12% of revenue.

We ended March with 902 out of 1015 centers open with seven new centers added in the quarter and six centers permanently closed.

We also have 113 centers that are temporarily closed including the re closures related to the short term lockdowns in the UK.

Full service center revenue contracted $121 million in Q1, or 29% comparing favorably with our expected contraction of 30% to 35%.

As Stephen mentioned enrollments are tracking well and we're particularly encouraged by the stability and sequential improvement of enrollment.

Occupancy levels stepped up nicely to $45 to 55% on average and continue to track our expectations towards pre COVID-19 levels.

Adjusted operating income for the full service segment contracted 40 million over 2020 to a loss of $18 million.

This represents a 33% flow through on the revenue recognition on the revenue reduction excuse me again ahead of our expectations of a 40% flow through on the progressing enrollment and solid cost management as well as from the continued support from our client partners and the government programs that are targeted for the childcare.

Our industry.

Demand for backup care services remained strong in the quarter with a growing client base and expanding user base and operating income growth of 20% over the prior year.

Backup revenue increased 3%, which was below our expectation of 10% to 12% due to the mix of traditional reimburse care use in the quarter.

Traditional in center and in home backup use does continue to build off of the lows that we saw last year with increasing sequential growth in users and use levels and notable gains made in March and continuing in April.

Self source reimbursed care was higher than expected in the first quarter as some clients chose to continue to make this care option available to their employees due to the family support that have continued to be disrupted by the pandemic, including ongoing delays in schools returning to full in person learning.

As we've discussed self source reimbursed care, which peaked in the second quarter of 2020 is recognized on a net revenue basis and is therefore dilutive to revenue growth even as it contributes to this segment's operating margin growth.

As a result of these factors operating income increased to $27 million or 36% of revenue in the quarter.

Yeah.

Our educational advising segment also reported solid growth with revenue up 3 million or 16% on contribution from new client launches and expanded use of our workforce education College admissions advising and center city marketplace services.

Since the onset of the pandemic, we've been able to limit the adverse impact of the revenue contraction on our operating income being.

Being measured about aligning our reopening schedule with the demand for care being disciplined about cost management and investment spending.

And by creatively responding to client needs with expanded service offerings.

Our variable cost structure and the support we received from our client partners as well as various provisions of the cares and consolidated Appropriations Act and other government programs directed toward the childcare industry in the UK and the Netherlands have further helped to limit the deleveraging.

Turning to a couple of other components on the P&L interest expense of $9 million in Q1 of 'twenty, one was down $1 million over 2020 on lower interest rates.

Structural tax rate on adjusted net income was 21% in the quarter compared to 15% in 2020 due to a lower tax benefit from equity activity under ASU 2016 on line.

Turning to the balance sheet and cash flow, we generated $68 million in cash from operations in the quarter and made investments in fixed assets and acquisitions of $22 million up up somewhat since the $13 million in 2020.

We ended the quarter with $442 million of cash and have no borrowings outstanding on our $400 million revolver.

As has been the case since the onset of the pandemic last year, we are not providing full earnings guidance as the ongoing business disruption and the cadence of recovery remains difficult to predict.

However, I can continue to share some qualitative color on how we see the next quarter.

The rest of 2021 unfolding.

With 90% of our portfolio open our focus is on enrolling families and ramping our centers back to pre COVID-19 levels.

As discussed we are encouraged by enrollment trends and we continue to expect that it will take until late 2021 before utilization recovers.

In the near term, we expect our full service segment to return to year over year revenue growth as we lap the temporary COVID-19 shutdown that significantly impacted our Q2 of 'twenty results spin.

Specifically, we expect full service revenue to increase 135% to 140% over Q2 of 2020 with incremental operating income flow through of approximately 20%.

As we look out over the balance of 2021, we expect the continued growth in full service revenue to generate positive operating income in the second half of the year.

We remain very optimistic about backup cash growth run rate, including the opportunity for new client additions broader penetration within client populations and greater use by our existing families.

In the near term, we expect traditional use to continue to build and grow significantly year over year as our care solutions meet the expanding parent needs.

Due to the significant surge in crisis reimbursed care that we delivered in the early stages of the pandemic in 2020, we continue to expect overall backup revenue in the first half of 2021 to trail 2020 levels by approximately 20% to 25%.

Likewise, we expect that battery backup operating income will continue to trend above our long term target at 30% to 35% for the first half of the year, reflecting the mix dynamics. We've previously discussed.

We are then looking to return to growth in the second half of 2021 on the top line, including the expanded camp and tutoring services that we have introduced.

Finally, with respect to our education advisory business, we expect it to continue to deliver similar results in Q2 as we saw in the first quarter on similar factors of new client launches in additional service provision.

So with that Holly we are through our prepared remarks, and we're ready to go to Q&A.

Thank you so much ladies and gentlemen, if you would like to ask a question. Please signify by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off flow your signal to reach our equipment again net of star one to ask a question. Our first question today will come from Andrew <unk> with JP Morgan.

Hi, everybody Stephen I definitely heard your comment about the American families plan, which I surely no. It's still just a proposal at this point and I surely quite your point that the details really passed the fact sheet that the white house put out really are not.

Available, but my question to you is from what we know now is the industry has experienced in Georgia with Universal pre K, a fair analogy to the way that this might move forward in other words, the industry adjusts and can serve.

This type of role.

Profitably.

Yes, it's a great question, Andrew and again I'll underscore the part that says that there is still very limited detail as it relates to this plan on the other hand, obviously, we have and will continue to spend a lot of time, making sure that we understand and prepare for any possible.

Inclusion of bright horizons, and the work of observing.

What I would say first and foremost though is.

What is really.

Great about the American families plan is it highlights what we have been certainly trying to highlight for employers for the last 35 years, which is the importance of families having access to high quality affordable care and the idea that in the absence of that.

Parents and working parents ended up dropping out of the workforce.

Specially women.

And certainly as it relates to the long term benefits of childcare I think the American families plan does a great job of outlining how it leads to increased wages improved health reduce crime et cetera.

I would say that when we look at the plan as described in again and limited detail.

Obviously, there is an allocation of funding for free Universal preschool for three and four year olds.

I think that it is also fairly clear that there is going to be a prioritization of high need areas and so when you referenced Georgia as an example.

As a state who has leaned into this.

I would say that that is a pretty good distinction between how Georgia has approached it and how on the national stage. They may be contemplating it and certainly while $200 billion seems like a breathtaking amount. When you think about that over 10 years and you think about the number of children, who are low and middle income.

Families.

You realize that.

The ability for this plan to truly provide for all children.

He is quite limited so when you think about the Georgia plant or you think about the work that we do for example, Andrew in the UK, where they have 30 hours of free childcare subsidized by the government where providers like bright horizons deliver on that care in a way that is.

Is profitable and does work economically and for families. Certainly that is a possibility, but again I think as we look at the plan. We recognize that there is some pretty specific language around focusing on the most hard pressed working families.

For those families that are earning one five times their state medium income or less so I do think that at least some of the basic tenants do look to be different from what we experienced in the U K or even as you reference in Georgia.

I understand how you answered that.

That is helpful can I just try one more clarification standpoint so.

So the proposal really is only about three and four year olds and I don't know obviously thats. Most typical entry point in the bigger population from full service care Bright horizons is infants and toddlers would you be willing to give us a sense of your mix of enrollments for three and four year olds for wholesalers.

Yeah. So Andrew I think as you may know the general mix in the center is 40% or so infant toddler and 60% in the three to five year olds.

Can vary if youre running day.

Our kindergarten classroom, many employers have maybe closer to a 50 50 mix, but in general it's about 40 60, and we tend to have.

Demand in the infant and toddler agents because there is more limited supply in the market for those spaces. So that's the capacity the enrollment may be skewed to more like 50 50 in general.

Thank you.

Mhm.

Yes.

Thank you next we will hear from Manav Patnaik with Barclays.

Thank you good evening.

Stephen I know you've been doing all these paying surveys and employee surveys and I guess I was just hoping you give us a little bit more to latest thoughts in terms of.

Okay.

What are you hearing in terms of the onsite cash if you feel like you need to hit.

Pivot a little bit into more lease consortium on retail centers just curious.

Whats the latest thoughts there.

Yes. Thanks for the question Manav I think what we're hearing and I'll start with the employer sentiment first what we're hearing from employers is sort of a steady shift towards an expectation that employees will come back to the office.

I think you most recently heard.

This week from Goldman Sachs, and Jpmorgan Chase and others.

That their expectation is that they are employees will be coming back to their office locations and so I think that some of the earlier.

Rhetoric that was out was sort of this idea of that.

Offices were dead end and people are not going to be returning to the offices, but I think that that has shifted quite a bit and I think we're starting to see our clients and the broader employer populations looking to get their employees back to the office and sort of June through the end of the year timeframe. So from an employer.

For perspective, I think there is a growing.

Desire and interest to get employees back to the work site I think that from their perspective. They are again increasingly seen their childcare center as a real attraction tool to have.

Working parents come back and that supports be something that is important as a consideration to having them come back to the office I would say from an employee perspective.

They are recognizing that while flexible work arrangements may be more available than they were pre pandemic that they are not going to be either as pervasive or as liberal as they may have one thought and so the surveys that we continue to do hear more and more about near office solutions being an important.

Component of their care arrangements.

Not to say that we aren't thinking broadly about what footprint, we need both near the office and in communities, but suffice it to say, we feel really good about where the locations of our centers and will continue to build out in areas that we need additional capacity, but again feel good about where.

There are location is vis vis where we think the demand is going to be.

Okay got it that's super helpful. And then just these new services virtual tutoring cabs et cetera, I think they make sense is this all.

Because of the city's city acquisition and I guess, you just hired the cash.

<unk> Dot com co founder to run that business I'm, just curious what kind of changes. We should expect is there any kind of last scaling plans going on here just curious.

Yes, I mean look I think that first and foremost we're trying to be responsive to the needs that employees have and that their employers want to support so through our client advisory board interaction as well as through the interactions we have with employees as well as just our knowledge of the environment for school and support.

<unk>.

We are very quickly mobilizing additional care types and so we recognize for example, this summer.

A lot of families traditional camp arrangements have been disrupted so the strategic acquisition of Steven Kates as well as additional partnerships with other key providers, we think are going to position us well vis vis the disruptions that families are going to face in that area.

In addition.

As I mentioned on the virtual tutoring side that was really a recognition and an outcry from employees, who recognize that through both remote learning earlier in the year through to hybrid learning through the year that academic progress for many many children has been stunted.

And they want to make sure that their children are well prepared going into next fall and beyond and so employers have been very cooperative and in fact leaning into the idea of supporting this area for their employees.

<unk>, obviously again, a strategic acquisition that we made.

Was really timely, but really long term in nature as well, which is to say we believe that as we continue to address more and more of the care needs of families. We become that destination for all care needs. Likewise, as we think about our employer clients they continue to be.

More and more interested in supporting their employees in a broader way.

And yes, we're very excited about the hire that we made.

For the CEO of Cedar City. She was one of the co founders of <unk> Dot Com. She has a terrific background in this area, but again.

That she represents one of many talented individuals that is attracted to bright horizons.

To lead our different areas of the business.

Alright, thank you so much.

Thank you.

Thank you and our next question will come from George Tong with Goldman Sachs.

Alright. Thanks. Good afternoon, you mentioned that utilization rates for your full service centers are now, 45% to 55% and tracking towards pre COVID-19 levels. I was wondering if you could provide some additional context and perspectives around that.

How the utilization rates performed over the course of the quarter and then how you expect them to evolve over the course of the year and just confirm that by year end, you would expect utilization rates to return to pre COVID-19 levels.

Sure So I think as well.

We tried to infer in net in the comments the performance has been really quite steady.

In terms of the recovery of the enrollment.

You may look back in our history and see some more seasonality.

We are expecting to continue to build on where we are growing enrollment now.

Through the summer.

Would often be sort of a time of churn as older children go into elementary school and you're back selling younger age groups, but because we are in more of a rebuild mode. We would expect to see that.

Enrollment continue to progress as we're seeing both the penetration of all of the vaccine distribution continue to move along.

As people begin to reorient towards there.

As David was just talking about sort of dynamic work arrangements and their summer plans are a little bit different even this year than they have been in the past. So to say we are confirming our expectation is that we will be able to be back to near pre COVID-19 levels.

By the end of the year to say, we're confirming that obviously, it's part of our.

<unk> stands at the moment that it's too dynamic at the moment to be given that detailed guidance. We have a belief based on the progression that we've had that that is certainly the path that we're on and that's what we're aiming for with all of our our efforts toward.

Not only welcoming back parents, who have been in the center before but welcoming new families and introducing them to the bright horizons.

<unk> and the terrific experience that their children can have so it is it is something that we are not only focused on in the centers. One other thing George that not only centers that are.

Our open now, but we've learned a lot through that process and as we do continue to reopen centers have been temporarily closed and that we will be also working on getting those ramped up in some of those if they are opening in the last half of the year and fall in on those up assets it won't be back to pre COVID-19 levels by the end of the year.

Got it that's very helpful and I know you mentioned that you are.

Youre surveys and conversations with employers suggest that the return to office movement is pacing favorably.

In this scenario I guess that work from home does become more permanent.

Or structural in nature could you talk about maybe the strategies that you have to.

Bolster or shore up utilization rates in case people return to the office.

Fewer days of the week post COVID-19 than pre COVID-19 in other words, how can you adapt if the reality ends up being different in terms of work from home than before yes.

It's a great question. Thank you. So essentially we have been preparing for that possibility in my remarks was much more about what we're seeing and feeling.

And in terms of preparation and sort of game playing for that a few things. So the first is it's important to remember that.

On our in our onsite centers generally we had waitlist because we typically do not build centers with our clients that can support the full workforce and demand that is expected within that location and so our expectation is that even in a scenario where people come back less than full time to the <unk>.

Office, and therefore want to use the center less than full time, we will have the ability simply to serve more families.

In those locations as opposed to running it occupancy rates that are lower than what we had seen previously so that's sort of first and foremost something structural about the way we build our centers with our corporate partners I'd say the second is we've been working hard to think about ways that we can create a seamless experience.

It's across multiple centers for working families. So having the option of an onsite center and then utilizing one of our community facing centers that is typically closer to home is something that we're working hard on and that is a combination of how we structure.

The experience for the parents, so that they really feel like it's a seamless experience between two centers as opposed to.

Unique experiences in.

<unk> center for part of the week and another different experience and a second part of the week. So we're working hard in both ways. One is to make sure that we're able to serve more families in and the onsite locations and the second is ultimately trying to create that seamless experience across multiple centers for the same fab.

Molly utilizing both our on site as well as our community facing centers.

Very helpful. Thank you.

Okay.

Thank you. Our next question will come from Hamzah <unk> with Jefferies.

Good afternoon. Thank you.

My first question is on the backup business.

Just particular margins, what sort of ramp back down as your mix normalizes.

But could you give maybe investors comfort that this backup business from a revenue perspective not margins.

Has not peaked and what we mean by that is just sort of walk us through the dynamics of new client wins.

Clients, adding more days more.

Maybe some of those days are sticky maybe theyre not maybe they cut days post COVID-19 just help us understand from a revenue growth perspective, what gets you comfortable the business Hasnt peaked and let's leave margins aside obviously.

Yes, so I think from a revenue growth perspective, I'd say a few things one is.

As you will know we have added a number of new clients to the to the overall business and so we think about the long term opportunity first and foremost based on the continuation of new clients being added into the client base.

And the strong retention that we have associated with our existing clients. So the client base itself continues to go from strength to strength and I think that becomes a real confidence piece as it relates to what the future of the business is and how important employers see it as part of their overall.

Proposition.

Second is.

As we continue to add different use cases to the total portfolio of how an employee can utilize the service. We believe that is going to both attract new users to the service as well as increase the average number of uses that a particular.

<unk> employee will use and then finally, we're seeing good support for employers to keep the use banks at least at the level. They have been historically and in some cases grow the use bank recognizing that as more use cases are introduced that in certain.

Circumstances employees, especially in an environment like we're in may need access to more days rather than the standard <unk> fewer so I think taken together.

We feel really good about where the backup business is and where it's headed and need to again continue to see the environment stabilized from a health perspective. So that there is continued confidence in using our traditional care arrangements.

And obviously in this past quarter, we saw an increased or elevated use of.

Re self source reimburse care, which again comes at a lower revenue value per use and therefore is reflected in the revenue growth that we experienced but again I think is not anything that we would expect would be.

Something over the long term.

Net.

David if I can add one other thing to that Hamzah.

Question of comfort on.

Who is being served I think the <unk>.

Variety of services too.

Sure.

Is that we are able to serve children of different ages.

And being able to have not only different services that might touch different parents in an employer, who may otherwise not have been a backup user candidate.

Offers us the opportunity to go deeper with the client on breadth of users age of children types of care and that's another way that we can gain additional penetration if that wasn't already coming out in Stephen's remarks.

That's great. Thank you for that additional color.

The other question.

It was just again just coming back to universal.

Thanks for all the detail, but just to simplify and dumb it down.

Are you not impacted even though you have a.

A bunch of <unk>.

Sort of three and four year olds, because theres going to be you expect there to be an income thresholds and your customer base is high wage earners and Oh by the way there's not enough capacity in the system to take on 5 million more kits. So you view this as.

Net neutral or maybe even a positive to you. If you can get involved in creating capacity for this system.

Is that fair just in simple terms.

Yes, I think so first again limited detail. So we don't want to get over our skis in terms of opining on what might be but I think what you've outlined is is a fair characterization characterization from what we know which is if there are income limits right to lower and middle income families. We.

No that those who we serve tend to be higher income and therefore likely would be outside of the scope of the program I would say in addition to that in our experience.

For working parents dual income working parents.

Who need full day full year Universal pre K generally does not fit as a service to the needs that they have to incomplete certain incomplete solutions, it's incomplete, whereas what we provide to three and four year olds is full day full year, which really does map with there.

With their traditional care needs and then the final piece is that in the event where income is not a factor and where the government provides rates that are sustainable then we of course would be a participant in providing the preschool education and believe that we would be.

The provider of choice for families, where some of the costs were offset by the government. They would have the ability to step into a high quality solution offered to bright horizons.

Okay, Great that's very clear thank you so much.

Okay.

Thank you and our next question will come from Gary Bisbee with Bank of America Securities.

Hey, good afternoon, if I could start off with one on the back up can you just tell us in the quarter how much how much.

How much was the number of days of usage up year over year I understand you have a mix issue right and it makes the revenue growth.

Look weak, but the margins strong.

What's the underlying volume growth trending at.

So we.

Youre, a little bit faint here, Gary but I think your question was what is the underlying use metrics for the first quarter. So we havent ever quantified exactly what our backup use is it is.

I think the.

The feature of the traditional use in centers and in home in our network partners.

It has not yet recovered to two last.

Last year's level so.

The substitution for that has been more reimbursed care, but it comes at a fraction of the revenue so from the standpoint of overall use.

Certainly are seeing a trend toward higher use levels based on the volume of clients, but we haven't quantified it.

I mean, what I'm trying to get assets, what's the business growing outside of this mix is there any way to frame that I guess I asked on the third quarter call. If you thought there was a case that the addressable market for the business could grow in the other side of the pandemic caused more parents potentially within an employer have used the service and had a good.

Experience and.

You've talked about having had strong client growth.

Okay.

Not at not understanding you won't give the volume number is it safe to say the trajectory.

Of.

Over like let's say now versus 2019 taken last year's bump and the fallout of it is faster than what the trajectory has been in a couple of years prior to.

The pandemic, yes, so that is a way that we're thinking about it as well. So if we look back to that timeframe and how is the growth against that and we are.

I think that the the noise. That's in there is that many clients have a they have a basket of use in total in their arrangement and then the individual employees have certain limits to what they can use and so to the extent that.

That they are utilizing reimbursed care it can until Youre at day limited those baskets and buying up above that it can it can be.

Sort of to just look at that one figure, but I think from a velocity of where we see the numbers of clients. The numbers of eligible employees they have and the opportunity for penetration at the levels that we are seeing who employees who are using.

Care.

Those levels applied to the number of clients that we have in getting.

The marketing effort out to that population and having them begin the newer clients begin to season into the mix and existing clients.

Spanned and returned to the level of traditional care Thats, where we see the underlying growth opportunity and that's why when we look to the back half of the year, we talk about the growth at the levels that we see so we're coming off of obviously a.

Annoys me noisy number of quarters and so certainly take the point of if we look back a couple of years is the growth coming off that is but we're not quite there yet either because of the.

Sort of.

Maybe pause a reluctance apparent fully re embrace.

The kinds of traditional center care, and that's where we feel confident that we can be a real solution for them over time.

Great and then just one on the full service center business, when we talk to people, who run more retailer community share.

Our sense is utilization is.

90% in some cases pre pandemic levels.

And I understand the centre mixed at the corporate leads years to be a lot lower but how are you thinking about the risk that parents moved their kids to a local center and might not bring them back to your synergy I asked you. This last quarter, but do you have any updated.

Formation survey data, what Youre seeing as you reopen just to support that.

Fact that you think youll get a lot of them back and maybe as part two of that.

How many of the centers in the U S. Today are community accepted community enrollment versus are purely corporate thank you.

So I'll take the first part of that question. So.

So first of all.

Our data is not suggestive of what you just outlined.

The market data that is available in the sort of checks that we've made in the market are suggestive that community welcoming centers across the country, especially in the markets in which we operate which is where we tend to focus our research are very much in line with where we are.

And so that percentage is is in line what I would say is that it is possible that.

When others are suggesting something very different they are talking about staffed rooms. For example, as opposed to available capacity within a center and so again I think some of those numbers can get very misleading, but I have a great degree of confidence that where we are run.

And where the market is running is is quite commensurate I'd say the second point that I would make is that we have done very well attracting our previously enrolled families back to the center and that has tracked consistently over time as our centers have reopened and so I think that.

We enjoy a market position, where working parents truly appreciate the value of a bright horizons experience for their child, whether that be at the work site or whether that be in one of our lease consortium models and so we don't have concern that families are leaking.

Two other providers instead, we believe that our families who were previously enrolled have stayed with us and likewise, we are garnering more than our fair share as it relates to new families. New infants for example, but new families in general that are coming and joining.

<unk> childcare arrangements.

And in the U S carry about two thirds of our centers are community facing so welcome enrollment from the <unk>.

Community in one form or another and in our European operations basically all of the centers do there are some employer sponsor, but even they are welcoming to community members.

Okay. Thank you.

Thanks.

Thank you so much our next question will come from Jeff Silber with BMO capital markets.

Thanks, So much sorry to go back to government funding, but we did have.

I guess a plan that has passed and that was the American rescue plan, where the child care tax credit was expanded I'm. Just curious did you see any benefit from that and historically when pre tax credits like this our expanded or contracted how does that impact your business.

Well I think that you are referring to the tax credit to families where they will be getting a.

Funding monthly.

Toward their childcare that they can use toward childcare cost so I would say that it's difficult.

I think it's difficult to know that we see yet a material bump in that I don't know that the funding has had enough of that trickle down.

FX the families are juggling a variety of supports even some of the stimulus payments certainly have come into but we have.

I think our view on it is that apparent who may be getting $300 a month.

In a childcare credits that they previously had not would be able to buy more time in a center, Andrew or buy up in quality of the center type of care that they would.

That they would seek and so that over time, we would see a benefit could see a benefit from that.

Certainly and it's a little too soon to attribute it to that versus all the other sort of varieties.

Variables in the enrollment.

Okay Fair enough and then going back to the American family plan and again I know, it's still a proposal, but there was a provision about establishing I think a $15 minimum wage per childhood staff.

I know you've historically say that you pay you know typically above market rates can you give us an indication roughly what the average wages are I know they are going to differ by geographic segment and if we do see this enforced how would that impact your business. Thanks.

Yes.

As you say the salary is one of the challenges of course with any kind of a national minimum wage or mandated wage like that is that the economy. In this country is not unitary.

There are.

Many different cost structure, so we experienced that too.

With our.

Wage rates in general.

Internationally, we would be.

That but it does depend on the local areas. There are some areas, where we're a couple of dollars below that an average because that's what the market is in other areas, we're well above that.

I think the challenge with any kind of a minimum wage like that is it causes wage compression at all levels and and.

So it can become quite a different cascade and in fact in just bringing people to to a minimum wage but.

I think that our.

<unk> hallmark over time has been to be an employer of choice Stephen side of this.

In the prepared remarks about being Unfortunately 100 best list I think we've always prided ourselves on being not only a great place to work but book.

Paying a professional wage and having professional benefits for our teachers, who are critical educators and children's lives and so we will continue to do that and work to partner frankly, that's what the partnership with employers.

Has been about over the years, making childcare accessible and and so we will continue to do that and to be a leader here and think that we can adapt as we have in places like Seattle or New York to these kinds of regulatory and frankly, the UK and the Netherlands also have <unk>.

Living wage and minimum wage kinds of thresholds like this that we have been able to adapt to overtime.

Okay. That's really helpful. Thanks, so much.

Youre welcome. Thank you.

Thank you and just a reminder, ladies and gentlemen is star one to ask a question at this time. Our next question will come from Toni Kaplan with Morgan Stanley.

Thanks, so much.

I wanted to ask about the roughly little over 100 centers that are closed are those employer based centers, where their offices haven't reopened or are those centers, where you're evaluating whether you should open then.

Generally because of some other some other issue.

Yes, Tony it's generally the former.

These are primarily client centers, there's a handful that are.

Our decision community facing where we either have consolidated the enrollment just to be efficient.

And are looking for continued momentum.

Momentum to reopen those locations, but the vast majority are our client locations, where the the employers looking at their worksite reopening <unk> at what time, they want to begin to bring bring people back onto the campus.

For more than sort of.

Skeleton type crew is that.

Yes, I mean, I think the only thing I would add is that a lot of them are tied into locations where physically the location is closed and so therefore the opportunity to reopen the childcare center uniquely from the building or the campus is not possible because obviously the majority of our centers at this point are open and that is not to.

Say that all of those work sites are reopened but it is to say that they were able to open because they had a different entrants and therefore could open separately and uniquely from the actual office, but totally agree with Elizabeth the majority of them are employer sponsored centers and for the most part we have.

Good sight line through the remainder of the year to get those reopened.

That's great and I wanted to hear about just the pipeline of future employers.

Is it I guess is converting the pipeline going as quickly as it normally is or just because of COVID-19 and unclear.

From home arrangements or whatever it may be like is there a little bit of a longer.

Lead time to opening centers or and then also if there is there anything different about the sort of pipeline overall versus just your typical.

Pipeline in general like whether it's skewed to share an si.

Size or industry or or any any other factor I might be missing.

Yes, no that's great. So first.

We were really pleased to open four new client centers in the quarter and I am hopeful that that is sort of a strong indication that unlike some of the.

Malaise, if you will and the.

Reduction in velocity on making decisions that we saw in 2020 is back for 2021, I think we feel good about the pipeline we feel good about the interest that employers are demonstrating towards onsite near site child care centers and other supports that they can be providing to their employees. So ultimately I think.

We feel good about that area, we feel good about our ability to continue to engage employers on the topic and ultimately open new centers and transition other centers from self operated opportunities. So overall, Tony feeling good about where we are in the pipeline for both centers as well as backup and our advisor.

<unk> services.

That's great. Thank you.

Excellent. Thank you very much and and thanks for everyone for joining the call. This evening I appreciate all the great questions and look forward to continuing the great operations that we have here bright horizons. Thank you. Thanks, everybody have a good night.

Thank you and again that concludes today's call. Thank you for your participation you may now disconnect.

Okay.

[music].

Yes.

[music].

Yes.

[music].

Good day, ladies and gentlemen, and welcome to the bright Horizons family solutions first quarter 2021 earnings for these conference call.

Please note today's conference is being recorded.

At this time I would like to the conference over to Mr. Michael Flanagan Senior director of Investor Relations. Please go ahead Sir.

Thanks, Holly and Hello to everyone on the call with.

With me here is our CEO, Stephen Kramer, and our CFO Elizabeth Boland, I'll turn the call over to Steve and after covering a few administrative matters.

Today's call is being webcast and a recording will be available under the Investor Relations 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 from COVID-19 on our operations are subject to the Safe Harbor statement included in our earnings release.

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

We also refer 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.

We will now take us through the review and update on the business.

Okay.

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

I hope that you and your families are healthy and keeping safe.

I am pleased with our solid start to the year and pace of the continuing recovery in our business.

For the first quarter, we delivered revenue of $391 million and adjusted EPS of <unk> 23 per share.

And our full service segment, we added seven centers, including new client centers for Regeneron Horizon Therapeutics at the University of Maryland, and Memorial Sloan Kettering as well as an organic center in the Netherlands, and two centers acquired on the West Coast.

We also made good progress in re ramping center enrollment with the positive enrollment trends, we saw in Q4, continuing through the first quarter.

Our backup and Ed advisory segments expanded their client bases and breadth of services.

Delivering revenue growth in the quarter up 3% and 16% respectively with recent new client launches for General Motors Conocophillips dollar tree, Freddie Mac and Shopify.

Overall as we approach the midpoint of the year I remain encouraged by the consistent pace and trajectory of a recovery in 2021.

We ended the quarter with 1015 centers, roughly 900 of which are open.

In the U S. We reopened six temporarily closed centers. In addition to the new centers added in the quarter.

Occupancy levels in the opening centers continued to improve month over month in the first quarter tracking nicely to our expectations as family to return to our centers.

Importantly, several of our more heavily concentrated markets, which were also later to reopen made up solid ground this quarter.

Reducing infection rates, coupled with expanding vaccine coverage and a relaxation of COVID-19 restrictions have contributed to the increasing occupancy and the pace of recovery in all regions.

However, with the economy again reopened we are seeing a return to steady enrollment growth going into the second quarter.

At the same time performance in the Netherlands has remained strong from a combination of solid enrollment and long standing government support for childcare.

Providing a measure of stability and enrichment and these children disrupted world.

For our centers that have not yet reopened our client relations team continues to work closely with clients on reopening plans Inc.

During that we are strategically supporting both the employer and employee needs.

Recognizing not only the child care needs of their employees, but also how they are onsite center will play a critical role in attracting employees back to the office.

We also remain in close dialogue with clients at the highest levels about the additional avenues in which employers can potentially support their employees.

Let me now turn to backup care we.

We had another strong quarter of new client launches, which strengthens our market position and will further fuel the long term growth opportunity.

Traditional in center and in home use continue to rebound, although we still trail pre pandemic levels.

We saw higher levels of self source reimburse care in the first quarter than we expected, especially during the month of February where ongoing delays in schools returning to full in person learning temporarily shifted the mix of use from traditional to self sourced care.

Since self sourced care is recognized on a net revenue basis at a lower fee per use it delivers reduced revenue growth alongside better margin performance.

We are really encouraged by the registration and use trends we have seen through the end of Q1 and continuing into April.

<unk> to their care needs.

As I have discussed on prior calls the pandemic presented many unprecedented challenges.

But it also created unique opportunities for us to service clients and working families in new and innovative ways.

Which means being able to serve families in the way they need at their point of most need.

A year ago, we made self source reimburse care I use type last fall, we stood up school age programs for employees juggling hybrid school schedules and most recently we added virtual tutoring is another use type expanding our solutions for families looking to stabilize and enhance academic progress as a.

<unk> of remote learning.

Parents backup use banks can go towards this full array of use cases meeting their evolving needs to changing work life demands across life stages.

In concert with this strategy, we made an acquisition this quarter to broadened our service reach.

Steven Kates camp, which has been a great partner of ours. Since 2016 provides experiential camps for school, aged children across the country and has been a popular support for families, particularly over the summer school vacation months.

We will continue to look for ways to serve the evolving demands of families and create additional value to their employers.

Turning to our education advisory business, which delivered solid revenue growth of 16% and launched a number of new clients.

<unk> performed well again and college coach continues to see elevated activity with parents navigating another up ended college admission cycle.

I continue to be excited about the long term growth potential in this segment and believe our workforce education and advising solutions are well positioned to capitalize on these new growth areas.

Two last items before I turn it over to Elizabeth.

First I want to share my excitement about our recent recognition that bright horizons received.

I am very proud that bright horizons was once again named a Fortune magazine 100 Best company to work for for the 20th time.

This recognition has always been a great honor and affirmation of the work, we do to build a strong culture and inclusive workplace.

But during this challenge of a year it is even more special.

Secondly, as the recent proposals outlined under the American family American families plan from the Biden administration clearly illustrate.

The pandemic has spotlighted the critical importance of childcare and early education to our society, our economy and our collective future.

Bright Horizons believes this is a great focus for the country and has the potential to help many children and families who have not historically been able to access high quality care and education.

For the working families. We serve these proposals underscore the value and importance of our employer partners, who have and will continue to make substantial investments since dusted is high quality early education.

As one of the key pillars employers of choice have to attract and retain working parents.

So in closing we are making good strides in recovering from the huge disruption caused by the pandemic we.

We delivered solid results in the first quarter and remain encouraged by the trajectory of all business segments.

Our client relationships are broader and deeper than ever before and our role as trusted advisor and a partner who can execute on solutions will continue to afford us unique growth opportunities.

Elizabeth.

Thank you Stephen I appreciate that and Hello to everybody on the call. Thanks for joining us today.

Let me again recap the quarter results and provide some thoughts on the rest of 2021.

For the first quarter overall revenue contracted 23% to $391 million.

Adjusted operating income totaled $14 million or 4% of revenue and adjusted EBITDA was $46 million or 12% of revenue.

We ended March with 902 out of 1015 centers open with seven new centers added in the quarter and six centers permanently closed.

We also have a 113 centers that are temporarily closed including the re closures related to the short term lockdowns in the UK.

Full service center revenue contracted $121 million in Q1, or 29% comparing favorably with our expected contraction of 30% to 35%.

As Stephen mentioned enrollments are tracking well and we're particularly encouraged by the stability and sequential improvement of enrollment.

Occupancy levels stepped up nicely to $45 to 55% on average and continue to track our expectations to our pre COVID-19 levels.

Adjusted operating income for the full service segment contracted 40 million over 2020 to a loss of $18 million.

Industry.

Demand for backup care services remained strong in the quarter with a growing client base and expanding user base and operating income growth of 20% over the prior year.

Backup revenue increased 3%, which was below our expectation of 10% to 12% due to the mix of traditional reimbursed care use in the quarter.

As we've discussed self sourced reimbursed care, which peaked in the second quarter of 2020 is recognized on a net revenue basis and is therefore dilutive to revenue growth even as it contributes to this segment's operating margin growth.

As a result of these factors operating income increased to $27 million or 36% of revenue in the quarter.

Our educational advising segment also reported solid growth with revenue up 3 million or 16% on contributions from new client launches and expanded use of our workforce education College admissions advising and Sittercity marketplace services.

Since the onset of the pandemic, we've been able to limit the adverse impact of the revenue contraction on our operating income.

Being measured about aligning our reopening schedule with the demand for care.

Being disciplined about cost management and investment spending and by creatively responding to client needs with expanded service offerings.

Further helped to limit the deleveraging.

Turning to a couple of other components on the P&L interest expense of $9 million in Q1 of 'twenty, one was down $1 million over 2020 on lower interest rates.

Structural tax rate on adjusted net income was 21% in the quarter compared to 15% in 2020 due to a lower tax benefit from equity activity under ASU 2016 on line.

Turning to the balance sheet and cash flow.

We generated $68 million in cash from operations in the quarter and made investments in fixed assets and acquisitions of $22 million.

<unk> up somewhat since the $13 million in 2020.

We ended the quarter with $442 million of cash and have no borrowings outstanding on our $400 million revolver.

As has been the case in sales net of the pandemic last year, we are not providing full earnings guidance as the ongoing business disruption and the cadence of recovery remains difficult to predict however.

However, I can continue to share some qualitative color on how we see the next quarter.

Rest of 2021 unfolding.

With 90% of our portfolio open our focus is on enrolling families and ramping our centers back to pre COVID-19 levels.

As discussed we are encouraged by enrollment trends and we continue to expect that it will take until late 2021 before utilization recovers.

In the near term, we expect our full service segment to return to year over year revenue growth as we lap the temporary COVID-19 shutdown that significantly impacted our Q2 of 'twenty results spin.

Specifically, we expect full service revenue to increase 135% to 140% over Q2 of 2020 with incremental operating income flow through of approximately 20%.

As we look out over the balance of 2021, we expect the continued growth in full service revenue to generate positive operating income in the second half of the year.

We remain very optimistic about backup cash growth run rate, including the opportunity for new client additions broader penetration within client populations and greater use by our existing families.

In the near term, we expect traditional use to continue to build and grow significantly year over year as our care solutions meet the expanding parent needs.

Likewise, we expect that battery backup operating income will continue to trend above our long term target at 30% to 35% for the first half of the year, reflecting the mixed dynamics. We've previously discussed.

We are then looking to return to growth in the second half of 2021 on.

On the top line.

Including the expanded camp and tutoring services that we've introduced.

So with that Holly we are through our prepared remarks, and we're ready to go to Q&A.

Thank you so much ladies and gentlemen, if you would like to ask a question. Please signify by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off flow your signal to reach our equipment again that is star one to ask a question. Our first question today will come from Andrew <unk> with JP Morgan.

Hi, everybody Stephen I definitely heard your comment about the American families plan, which I am showing no. It's still just a proposal at this point and I surely.

Your point that the details really passed the fact sheet that the white house put out really are not available but my question to you is from what we know now is the industry has experienced in Georgia with Universal pre K, a fair analogy to the way that this.

Move forward in other words, the industry adjusts and can serve and this type of role profitably.

Solution of bright horizons, and the work of observing.

What I would say first and foremost though is.

What is really great about the American families plant is it highlights what we have been certainly trying to highlight for employers for the last 35 years, which is the importance of families having access to high quality affordable care and the idea that in the absence of that.

Parents and working parents ended up dropping out of the workforce, especially women and certainly as it relates to the long term benefits of childcare I think the American families plan does a great job of outlining how it leads to increased wages improved health reduce crime et cetera.

I would say that when we look at the plan as described in again and limited detail.

Obviously, there is an allocation of funding for free Universal preschool for three and four year olds.

It is also fairly clear that there is going to be a prioritization of high need areas and so when you referenced Georgia as an example.

As a state who has leaned into this.

<unk>.

You realize that.

The ability for this plan to truly provide for all children.

He is quite limited so when you think about the Georgia plan or you think about.

The work that we do for example, Andrew in the UK, where they have 30 hours of free childcare subsidized by the government where providers like bright horizons deliver on that care in a way that is it.

Is profitable and does work economically and per families. Certainly that is a possibility, but again I think as we look at the plan. We recognize that there is some pretty specific language around focusing on the most hard pressed working families.

I understand how you answered that and that is that is helpful. Can I just try one more clarification same point.

The proposal really is only about three and four year olds and I don't know obviously thats. Most typical entry point in the bigger population from full service care bright horizons as infants and toddlers would you be willing to give us a sense of your mix of enrollments for three and four year olds for wholesalers.

Yeah. So Andrew I think as you may know the general mix in the center is 40% or so infant toddler and 60% in.

Three to five year olds and it can vary if youre running a kindergarten classroom. Many employers have maybe closer to a 50 50 next but in general it's about 40 60, and we tend to have.

Demand in the infant and toddler agents because there is more limited supply in the market for those spaces. So that's the capacity the enrollment may be skewed to more like 50 50 in general.

Thank you.

Mhm.

Thank you next we'll hear from Manav Patnaik with Barclays.

Thank you good evening.

Stephen I know you've been doing all these paying survey and employee surveys and I guess I was just hoping you could give us a little bit more to latest thoughts in terms of.

No.

Kind of what are you hearing in terms of the onsite cash if you see like you can too.

Pivot a little bit into more lease consortium, our retail centers just curious.

What's the latest thoughts there.

This week from Goldman Sachs, and Jpmorgan Chase and others.

That their expectation is that they are employees will be coming back to their office locations and so I think that some of the earlier.

Rhetoric that was out was sort of this idea that.

Our perspective, I think there is a growing <unk>.

Desire and interest to get employees back to the Worksite I think that from their perspective.

They are again increasingly seen their childcare center as a real attraction tool to have.

<unk> parents come back and that supports be something that is important as a consideration to having them come back to the office I would say from an employee perspective, I think they are recognizing that while flexible work arrangements may be more available than they were pre pandemic that they are not going to be either as pervasive or.

As liberal as they may have one thought and so the surveys that we continue to do hear more and more about near office solutions being an important component of their care arrangements, it's not to say that we aren't thinking broadly about what footprint, we need both near the office.

And in communities, but suffice it to say, we feel really good about where the locations of our centers and will continue to build out in areas that we need additional capacity, but again feel good about where our location is vis vis where we think the demand is going to be.

Okay got it that's super helpful. And then just these new services virtual tutoring cabs et cetera, I think they make sense is this all.

Because of the city's city acquisition in I guess.

Tight cash dot com co founder to run that business I'm, just curious what kind of changes we should expect us day in and kind of last scaling plans going on here just curious.

Support.

We are very quickly mobilizing additional care types and so.

We recognize for example, this summer.

A lot of families traditional camp arrangements have been disrupted so the strategic acquisition of Steven Kates as well as additional partnerships with other cam providers, we think are going to position us well vis vis the disruptions that families are going to face in that area.

In addition.

<unk> City, obviously again, a strategic acquisition that we made.

More and more interested in supporting their employees in a broader way.

And yes, we're very excited about the hire that we made.

For the CEO of Cedar City. She was one of the co founders of <unk> Dot Com. She has a terrific background in this area, but again.

That she represents one of many talented individuals that is attracted to bright horizons.

To lead our different areas of the business.

Alright, thank you so much.

Thank you.

Thank you and our next question will come from George Tong with Goldman Sachs.

The utilization rates performed over the course of the quarter and then how you expect them to evolve over the course of the year and just confirm that by year end, you would expect utilization rates to return to pre COVID-19 levels.

Sure. So I think is.

We tried to infer in net in the comments the performance has been really quite steady.

In terms of the recovery of the enrollment.

You may look back in our history and see some more seasonality.

We are expecting to continue to build on where we are growing enrollment now.

Through the summer.

Would often be sort of a time of churn as older children go into elementary school and your backfill in younger age groups, but because we are in more of a rebuild mode. We would expect to see that.

Enrollment continue to progress as we're seeing both the penetration of all of the vaccine distribution continue to move along.

As people begin to reorient towards there.

As David was just talking about sort of dynamic work arrangements and there are summer plans are a little bit different even this year than they have been in the past. So to say we are confirming our expectation is that we will be able to be back to near pre COVID-19 levels.

By the end of the year to say, we're confirming that obviously, it's part of our.

Stands at the moment that it's too dynamic at the moment to be given that detailed guidance. We have a belief based on the progression that we've had that that is certainly the path that we're on and that's what we're aiming for with all of our our efforts toward not.

Not only welcoming back parents, who have been in the center before but welcoming new families and introducing them to the bright horizons.

<unk> net terrific experience that their children can have so it is it is something that we are not only focused on in the centers. One other thing George that not only centers that are.

Our open now, but we've learned a lot through that process and as we do continue to reopen centers have been temporarily closed and that we will be also working on getting those ramped up in some of those if they are opening in the last half of the year and the fall in on those up average they won't be back to pre COVID-19 levels by the end of the year.

Got it that's very helpful and I know you mentioned that you are.

Your surveys in conversations with employers suggest that the return to office movement is pacing favorably.

In this scenario I guess that work from home does become more permanent.

Or structural in nature could you talk about maybe the strategies that you have to.

Bolster or shore up utilization rates in case people return to the office.

Fewer days of the week post COVID-19 than pre COVID-19 in other words, how can you adapt if the reality ends up being different in terms of work from home than before yes.

It's a great question. Thank you. So essentially we have been preparing for that possibility in my remarks was much more about what we're seeing and feeling.

And in terms of preparation and sort of game playing for that a few things. So the first is it's important to remember that.

Office, and therefore want to use the center less than full time, we will have the ability simply to serve more families.

In those locations as opposed to running at occupancy rates that are lower than what we had seen previously so that's sort of first and foremost something structural about the way we build our centers with our corporate partners I'd say the second is we've been working hard to think about ways that we can create a seamless experience.

Across multiple centers for working families. So having the option of an onsite center and then utilizing one of our community facing centers that is typically closer to home is something that we're working hard on and that is a combination of how we structure.

The experience for the parents, so that they really feel like it's a seamless experience between two centers as opposed to <unk>.

Unique experiences in.

One center for part of the week and another different experience and a second part of the week. So we're working hard in both ways. One is to make sure that we're able to serve more families in and the onsite locations and the second is ultimately trying to create that seamless experience across multiple centers for the same fab.

Emily utilizing both our on site as well as our community pacing centers.

Very helpful. Thank you.

Thank you. Our next question will come from Hamzah <unk> with Jefferies.

Good afternoon, and thank you.

My first question is on the backup business.

It's just a particular margins what sort of ramp back down as your mix normalizes.

But could you give maybe investors comfort that this backup business from a revenue perspective.

Margins.

It has not peaked and what we mean by that is just sort of walk us through the dynamics of <unk>.

New client wins clients, adding more days.

Maybe some of those days are sticky maybe theyre not maybe the cut days post COVID-19 just help us understand from a revenue growth perspective, what gets you comfortable the business Hasnt peaked and let's leave margins aside obviously.

Yes, so I think from a revenue growth perspective, I'd say a few things one is.

Proposition the second is.

<unk> employee will use.

And then finally, we're seeing good support for employers to keep the use banks at least at the level. They have been historically and in some cases grow the use bank recognizing that as more use cases are introduced that in certain circumstances employees, especially.

In an environment like we're in may need access to more days rather than the standard <unk> fewer so I think taken together.

And obviously in this past quarter, we saw an increased or elevated use of.

Something over the long term.

Net.

Good day.

If I can add one other thing to that Hamzah to the question of comfort on.

Who is being served I think the <unk>.

Variety of services too.

<unk>.

Is that we are able to serve children of different ages.

And being able to have not only different services that might touch different parents in an employer, who may otherwise not have been a backup user candidate.

That's great. Thank you for that additional color.

The other question.

It was just again just coming back to universal.

Thanks for all the detail, but just to simplify and dumb it down.

Are you not impacted even though you have.

A bunch of.

Sort of three and four year olds because.

There's going to be you expect there to be an income threshold.

In your customer base is high wage earners, and Oh by the way, there's not enough capacity in the system to take on 5 million more kits.

So you view this as.

And net neutral or maybe even a positive to you. If you can get involved in creating capacity for this system.

Is that fair just in simple terms.

Yeah.

Yes, I think so first again limited detail. So we don't want to get over our skis in terms of.

Opining on what might be but I think what you've outlined is a fair characterization characterization from what we know which is if there are income limits right to lower and middle income families. We know that those who we serve tend to be higher income and therefore likely would be outside of the scope.

<unk> of the program I would say in addition to that in our experience.

Working parents dual income working parents.

Provider of choice for families, where some of the costs were offset by the government. They would have the ability to step into a high quality solution offered to bright horizons.

Great that's very clear thank you so much.

Okay.

Thank you and our next question will come from Gary Bisbee with Bank of America Securities.

Hey, good afternoon, if I could start off with one on back up can you just tell us in the quarter how much how much how much was the number of days of usage up year over year I understand you have a mix issue right that makes the revenue growth.

We put the margin strong but.

What's the underlying volume growth trending at.

So we.

We're a little bit faint here, Gary but I think your question was what is the underlying use metrics for the first quarter. So we havent ever quantified exactly what our backup uses.

<unk>.

The feature of the traditional use in centers and in home in our network partners.

<unk> has not yet recovered to last year's level. So.

The substitution for that has been more reimbursed care, but it comes at a fraction of the revenue so from the standpoint of overall use.

Certainly are seeing a trend toward higher use levels based on the volume of clients, but we haven't quantified it.

I mean, what I'm trying to get at is what is the business growing outside of this mix is there any way to frame that I guess I asked on the third quarter call. If if you thought there was a case that the addressable market for the business could grow in the other side of the pandemic cause more parents potentially within an employer have used the service and how.

Have a good experience and.

And you've talked about having had strong client growth is.

Yes.

If not.

Not at not understanding you won't give the volume number is it safe to say the trajectory.

Of.

Over like let's say now versus 2019 taken last year's bump in the fall out of it is faster than what the trajectory had been in a couple of years prior to.

Through the pandemic, yes.

That is a way that we are thinking about it as well. So if we look back to that timeframe and how is the growth against that and we are.

I think that the the noise thats in there is that many clients have a they have a basket of use in total in their arrangement and then individual employee have certain limits to what they can use and so to the extent that that.

That they are utilizing reimbursed care it can.

Until Youre at day limited those baskets and buying up above that it can it can be disorder to just look at that one figure, but I think from a velocity of where we see the numbers of clients. The numbers of eligible employees they have and the opportunity for penetration at the levels that we are seeing employees who are using.

Care.

<unk> levels applied to the number of clients that we have in getting.

The marketing effort out to that population and having them begin the newer clients begin to season into the mix and existing clients.

And noisy noisy number of quarters and so certainly take the point if we look back a couple of years is the growth coming off that it is but we're not quite there yet either because of the.

Sort of.

Maybe pause a reluctance apparent fully re embrace.

The kinds of traditional center care, and that's where we feel confident that we can be a real solutions for them over time.

Great and then just one on the full service center business, when we talk to people who run more retailer community channel.

<unk> our sense is utilization is 90% in some cases pre pandemic levels.

And I understand that center mix at the corporate leads years to be a lot lower but.

How are you thinking about the risk that parents moved their kids to a local center and might not bring them back to your synergy I asked you. This last quarter, but do you have any updated.

Information survey data, what Youre seeing as you reopen just to support.

The fact that you think youll get a lot of them back and maybe as part two of that.

How many of the centers in the U S. Today are community accepted community enrollment versus are purely corporate thank you.

So I'll take the first part of that question.

So first of all.

Our data is not suggestive of what you just outlined.

And so that percentage is is in line what I would say is that it is possible that.

Two other providers instead, we believe that our families who were previously enrolled have stayed with us and likewise, we are garnering more than our fair share as it relates to new families. New infant for example, but new families in general that are coming and joining.

<unk> childcare arrangements.

And in the U S carry about two thirds of our centers are community facing so welcome enrollment from the <unk>.

Community in one form or another and in our European operations basically all of the centers do there are some employer sponsor, but even they are welcoming to community members.

Okay. Thank you.

Thanks.

Thank you so much our next question will come from Jeff Silber with BMO capital markets.

Thanks, So much sorry to go back to government funding, but we did have.

I guess a plan that has passed so that was the American rescue plan, where the child care tax credit was expanded I'm. Just curious did you see any benefit from that and historically when tax credits like this our expanded or contracted how does that impact your business.

Well I think that you are referring to the tax credit to families where they will be getting.

Funding monthly.

Toward their childcare.

Can use toward childcare costs, so is that to say that it's difficult.

I think it's difficult to know that we see yet a material bump in that I don't know that the funding has had enough of that trickle down.

<unk> the families are juggling a variety of supports even some of the stimulus payments certainly have come into but we have.

I think our view on it is that apparent who may be getting $300 a month.

In a childcare credits that they previously had not would be able to buy more time in the center and or buy up in quality of center type of care that they would.

That they would seek and so that over time, we would see a benefit could see a benefit from that certainly and it's a little too soon to attribute it to that versus all the other sort of varieties are variables in the enrollment.

Okay Fair enough and then going back to the American family plan and again I know, it's still a proposal, but there was a provision about establishing I think a $15 minimum wage per child could staff.

I know you've historically say that you pay you know typically above market rates can you give us an indication roughly what the average wages are I know theyre going to differ by geographic segment and if we do see this enforced how would that impact your business. Thanks.

Yes, so we as you say the salary is one of the challenges of course with any kind of a national minimum wage or mandated wage like that is that the economy. In this country is not unitary.

And there are many different cost structure, so we experienced that too.

With our.

Wage rates in general.

Internationally, we would be above.

Above that but it does depend on the local areas. There are some areas, where we're a couple of dollars below that an average because that's what the market is in other areas, we're well above it I think the challenge with any kind of a minimum wage like that is it causes wage compression at all levels and.

And so it can become quite a different cascading effect and just bringing people to to a minimum wage but.

I think that our arm hallmark over time has been to be an employer of choice Stephen side of this.

In the prepared remarks about being Unfortunately 100 best list I think we've always prided ourselves on being not only a great place to work but book.

Paying a professional wage and having professional benefits for our teachers, who are critical educators and children's lives and so we will continue to do that and work to partner and frankly, that's what the partnership with employers.

It's been about over the years, making a childcare accessible and and so we will continue to do that and to be a leader here and think that we can adapt as we have in places like Seattle or New York to these kinds of regulatory and frankly, the UK and the Netherlands also have.

Moving wage and minimum wage kinds of thresholds like this that we have been able to adapt to overtime.

That's really helpful. Thanks, so much.

You're welcome thank you.

Thank you and just a reminder, ladies and gentlemen, it is star one to ask a question at this time. Our next question will come from Toni Kaplan with Morgan Stanley.

Thanks, so much.

Generally because of some other some other issue.

Yes, Tony it's generally the former days these.

These are primarily client centers, there's a handful that are.

Our decision community facing where we either have consolidated the enrollment just to be efficient.

And are looking for continued.

For more than sort of sky.

Skeleton type curve is that.

To say that all of those work sites are reopened but it is to say that they were able to open because they had a different entrants and therefore could open separately and uniquely from the actual office, but totally agree with Elizabeth the majority of them are employer sponsored centers and for the most part we are.

Good sight line to the remainder of the year to get those reopened.

That's great and wanted to hear about just the pipeline of future employers.

Is it I guess is converting the pipeline going as quickly as it normally is or just because of COVID-19 and unclear.

Work from home arrangements or whatever it may be like is there a little bit of a longer.

Lead time to opening centers or and then also if there is there anything different about the sort of pipeline overall versus just your kept us all.

Pipeline in general like whether it's skewed to share and size or industry or or any any other factor I might be missing.

Yes, no that's great. So first.

We were really pleased to open the four new client centers in the quarter and I am hopeful that that is sort of a strong indication that unlike some of the.

Malaise, if you will and the.

The reduction in velocity on making decisions that we saw in 2020 is back for 2021, I think we feel good about the pipeline we feel good about the interest that employers are demonstrating towards onsite near site child care centers and other supports that they can be providing to their employees. So ultimately.

We feel good about that area, we feel good about our ability to continue to engage employers on the topic and ultimately open new centers and transition other centers from self operated opportunity. So overall, Tony feeling good about where we are in the pipeline for both centers as well as backup and our <unk>.

Reis services.

That's great. Thank you.

Excellent. Thank you very much and.

And thanks for everyone for joining the call. This evening I appreciate all the great questions and look forward to continuing the great operations that we have here at bright horizons. Thank you. Thanks, everybody have a good night.

Thank you and again that concludes today's call. Thank you for your participation you may now disconnect.

Q1 2021 Bright Horizons Family Solutions Inc Earnings Call

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