Q2 2021 Bright Horizons Family Solutions Inc Earnings Call

Greetings and welcome to the bright Horizons family solutions second quarter 2021earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Please note. This conference is the recorded I will now turn the call over to your host Michael Flanagan. Please go ahead.

Thank you Stacey and Hello to everyone on the call.

With me Tonight are Stephen Kramer, our Chief Executive Officer, and Elizabeth Boland, Our Chief Financial Officer.

I will turn the call over to Steve and after covering a few administrative matters.

This 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 and the impact of COVID-19 on our operations are.

Subject to the Safe Harbor statement, including included in the earnings release.

Forward looking statements inherently involve risks and uncertainties and may cause the actual operating and financial results to differ materially and.

And the described the detail in our form 10-K, 2020, and other SEC filings any forward looking statements speak 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 the GAAP counterparts and the earnings release, which is available under the IR section of our website.

Steven and I will 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 and.

Ill start Tonight with a recap of our second quarter results and provide an update on our current operations and plans for the remainder of 2021.

Elizabeth will follow with the more detailed review of the numbers before we open it up for your questions.

First let me recap the headline numbers for the second quarter.

Revenue increased 50% to $441 million and adjusted operating income of $34 million was up 25% and.

Adjusted net income of 30 million yielded adjusted EPS of <unk> 49.

Up 11% from last year.

Overall as we pass the midpoint of the here and I continue to be pleased with our performance and optimistic about the trajectory of a recovery as well as the opportunity that lies ahead across all 3 of our business lines.

Let me start with our full service segment.

Revenue grew 144% and Q2, reflecting the steady recovery of our early education operation since the widespread shutdown of 80% of our centers at the same time last year.

We ended the quarter with 920 of our 1006 centers open and having added 4 new centers and reopened the total of 18 temporarily closed centers in Q2.

As I mentioned on our last call. We are starting to see several client and pull forward the of reopening time lines and more than half of our Q2 reopening where originally slated to open and the second half of the year.

The centers that we opened for auction or health and Q2 adds to our healthcare client portfolio and in that vein I'm also excited to welcome 6 previously self operating centers for the mass General Brigham Health system to the bright Horizons family and early July.

This opportunity was in large part based on our unique ability to deliver back up care to their employees at the height of the pandemic and the deep partnership we force as a result.

And they interact with clients and meters from other organizations I'm encouraged to hear their commitment to their return to office.

Even if we all continue to respond to evolving condition and impacts from COVID-19 variance that sentiment is coming through loud and clear from our clients, who are eager to reestablish interest and work and collaboration and to reinvigorate the company cultures.

We now anticipate that the majority of our remaining temporarily closed centers will reopen and the third quarter as the most clients plan for offices to the open by mid September.

We too will be officially opening our new home office to all employees September 13th and I'm thrilled that our new state of the art Childcare Center will be opening on our campus at the same time.

I couldnt be more excited to have our teams back together under 1 roof to foster collaboration and creativity, and our culture, which have always been foundational to our organization.

Within our open and full service centers I remain encouraged with the continued steady improvement and enrollment levels.

While many geographies of experienced periodic resurgence of COVID-19 over the last 12 months, our occupancy levels have demonstrated consistent quarter to quarter growth century, opening and I remain confident and our ability and return to pre COVID-19 occupancy levels.

With that said, we are navigating our business and working environment that remains fluid underscored by the precision of COVID-19, and its impact on employers and employees decision making.

In addition, as more families from quest tours and look to reserve fulltime spaces and our centers. We are working hard to stay ahead of the staffing demand as the pandemic has certainly exacerbated the labor pressures, which have long affected the childcare industry due to a shrinking supply of early educators working on the field.

Let me now turn to backup care.

Revenue of 80 million $81 million and the second quarter, when the inline with our expectations.

But it does reflect the decrease of 40% due to the significant surge and demand we experienced a year ago and the early stages of the pandemic.

The core underlying trends within our back up care business remains robust.

We saw another strong quarter of new client additions with launches from Cargill Umass Memorial health, He full financial and Synopsys to name a few.

More than 3 quarters of our new backup clients are new to the bright horizons family <unk>.

Reflecting the broadening interest among employers and the opportunity for long term growth and service cross sell.

On the used from traditional use continues to rank and self source reimbursed care as expected continues to taper with more parity and transitioning to traditional in center and in home use settings.

Although we have not fully returned to pre pandemic use levels traditional use grew sequentially through the quarter with unique user of stepping up nicely.

I'm also very encouraged by the client interest and uptake and virtual tutoring and Steven Kates camps.

More than 300 clients and added virtual tutoring and their backup offerings and the last 3 months and it was truly great to see children return to in person and camps and activities in the summer after what has been a challenging year for all.

I look forward of backup care of returning to year on year growth next quarter and remained very excited about the near and longer term opportunity within the segment.

Turning to our education advisory business, which delivered solid revenue growth of 24%.

We launched a number of new clients and the quarter, including Cincinnati Children's Hospital International paper and L..3 Paris and continued to see strong activity levels, particularly with and college coach as the pandemic amplify the complex decision parents face with their children's education.

I'm also excited to announce that we joined <unk> a few weeks ago.

1 kind of the coalition of leading employers committed to upskilling hiring and promoting 1 million black individuals and America over the next 10 years and the family sustaining jobs with opportunities for advancement.

Bright horizons has the unique position of joining at both a participating employer and fewer of Edison Division and a talented developer focused on helping other 1 kind of employers still the educational and employ and pathways that support employees and working towards further educational attainment.

Continue to believe our workforce education, and advising solutions are well positioned to support the growing demand for training and upskilling of our client employees.

So in closing.

And I'm pleased that the rate of recovery and our business following the unprecedented disruption caused by the pandemic.

The team has done a tremendous job and delivering the highest quality care and education to our existing family learners and employer clients. While at the same time identifying and capitalizing on unique opportunities for client and product growth.

The combination of our early childhood education backup and Ed Advisory services and create a powerful suite of solutions for our employer partners.

I'm pleased with our solid first half of 2021, and how well we are positioned to continue to execute over the remainder of the year and beyond.

Elizabeth.

Thank you so much data and and hi to everybody on the call Tonight, Thanks for joining us.

I'll recap the quarter's results and then provide some thoughts on the rest of 2020.1.

For the second quarter overall revenue increased 50% to $441 million.

And the adjusted operating income increased 25% to 34 million or 8 percentage of revenue with adjusted EBITDA of 68 million or 15 percentage of revenue.

We ended June with 920 out of our 1006 centers open and.

And the second quarter, we added 4 new centers and reopened the 18 centers that had been temporarily closed.

We also permanently closed 13 centers.

The 86 centers of remain temporarily closed at June 30th are slated to reopen in the coming months.

Full service revenue increased 197 million and Q2 are 144% comparing favorably with our expected increase of 135% to 140% year on year.

As Stephen mentioned enrollments are tracking well and our occupancy levels now average between 50% to 60% and.

And noted, we're particularly encouraged by the sequential improvement of enrollment across all geographies.

Adjusted operating income for the full service segment also improved $59 million over 2020.2 of positive $4 million.

This represents a 30% flow through on the revenue growth.

Again. This is ahead of our expectation of approximately 20% flow through on the progressing enrollment and solid cost management as well as continued support from our client partners and the government programs that are targeted for the child care industry.

The underlying demand for backup care services continued to remain strong and the quarter with a growing list of clients and expanding user base.

And broadening of care types.

As we've discussed on prior calls back of care experienced outsized growth in <unk> of 2020 due to the significant use of self sourced reimburse character and the initial phase of the Lockdowns.

Well reimbursed care continues to be 1 of the care type of options for some clients it has significantly reduced compared to the prior year and.

As a result of our total backup revenue decreased 40% and Q2 against that outside of the comparison.

Overall for the first half of the year and backup revenue was down 25% compared to 2020 broadly in line with our expectations.

Traditional in center and and home backup use continues to progress toward.

Well its users and users are growing solidly over 2020 as a result of the expanding network of available centers and parents on increased need for additional care support.

Adjusted operating income for the segment was 25 million for the quarter or 30% of revenue broadly consistent with our longer term targeted performance.

This compares to 77 million and the prior year, which reflected the outsized margin contribution from the recognition of self sourced reimburse care, which is recognized on a net revenue basis.

Our educational advising segment also reported solid growth and the quarter with revenue up $5 million or 24% on contributions from new client launches as well as expanded use of our work Force Education College admissions advising and center City services.

Since the outset onset of the pandemic, we have also been able to limit the adverse impact of the revenue contraction on our operating income we've been measured about aligning our reopening schedule with demand for care and we've been disciplined about cost management and investment spending and we of creatively responding to client needs with expanded service offering.

<unk>.

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 the U S and other government programs directed toward the child care industry and the U K and the Netherlands have also helped to limit the deleveraging.

Interest expense of $9.6 million and Q2 of 2021 was roughly equivalent to the prior year and our structural tax rate on adjusted net income was 21% compared to 15% in 2020, primarily due to the proportionately lower tax benefit from equity activity on your assay in 2016.

And Oh 9.

Yeah.

In terms of our capital deployment strategy. Our first priority is the investments and the growth of the business, both organic and inorganic followed by share repurchases under our existing authorization.

We generated 67 million and cash from operations and the quarter and made investments and fixed assets and acquisitions of around $15 million in line with the prior year.

We also resumed our share repurchase program and acquired $70 million of our shares and Q2 after a pause and over the prior year.

We ended the quarter of 3.1 times net debt to EBITDA with $419 million of cash and no borrowings outstanding on our $400 million revolver.

And that's been the case since the onset of the pandemic last year, we're not providing full earnings guidance and the cadence of recovery remains difficult to predict however.

I will share some qualitative color on how we see and the next quarter unfolded.

With most clients targeting their offices to be opened by mid September we anticipate over 95% of our centers will be open by the end of Q3 absent any unexpected client delays.

With that said our focus remains on enrolling family and ramping centers back to pre COVID-19 levels.

And as discussed we're pleased with the enrollment trends and continue to see growing interest from prospective families.

Therefore in the near term, we expect full service revenue to increase by approximately 50% to 60% over Q3 of 2020 with incremental operating income flow through of around 45%.

In addition to the typical Q3 seasonality that we experience in this segment the <unk>.

The pace of reopening and the associated inefficiency during the ramp stage along with the continuation of the Covid protocols, including an enhanced staffing levels. We will have some temporary weigh on our operating income as we finish off 2021.

As a reminder of our third quarter typically experiences some seasonal cycling of enrollment as older Preschoolers moved to the elementary school. This impacts Q3 margins as we backfill that enrollment and the younger age groups and the fall and the enrollment mix shifts toward younger cohorts.

Shifting tobacco, we remain very optimistic about backup cash growth runway, having now lapped the significant surge and reimbursed care of that we delivered at the outset of the pandemic and 2020, we expect backup care to return to year over year growth and the second half of the year.

And the near term, we expect traditional used to continue to build and grow significantly year over year driving total backup care of revenue growth of approximately 15% to 20% and Q3 with operating margins ranging around 30% to 35%.

With regard to our Ed Advisory business, we expect to continue to deliver mid teens revenue growth.

And consistent operating income in the range of 20% to 25% for Q3.

And with that we're ready to go to Q&A.

Thank you we will now be conducting a question and answer session.

And you would like to ask the question. Please press star 1 on your telephone keypad and confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you 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.

The glad glad to hear all of the all the reopening and and all of that positive commentary you talked about you know the 1 question I was curious about is you know you guys are quiet and say the city you got the Steven Kates Camp and then at Barclays and I think he just got and E. Mail. The thing you can exchange of day of backup for like 4 hours of virtual visit is something which the.

The tubing and I was just curious how the how does the economics of all that you know.

Well it doesn't change what what we've seen historically or are they just substitute just trying to understand and I think and if those can be offsets to what's continued uncertainty of reopening here.

That's a great question, Manav and and thanks to Barclays for continuing to lean in on on the backup service. So essentially as we've always described the underlying economics of our backup care service is based on the use of it we're able to achieve and that ultimately of crews to what employers are inverse.

The thing and so as we continue to increase the use types and obviously as you just described barclays's investing and virtual tutoring you have the ability to use in the home care of you have the ability to use and center care, we're just broadening.

On the kinds of services that are used within the rubric of backup care and our goal obviously is to extend the benefit to a larger swath of the employee population and at the same time make the services more relevant to that larger population. So ultimately the goal is to continue to.

And increase the investments that our employer partners are making as a result of the fact that we're having more and more impact on their employees.

Got it and.

You know just just curious.

And there's a bit just on the Ed Advisory I think I heard you give us and you know the margin expectation just curious how we should think about you know the the.

The growth in the second half of last year. There was the there was a step up there, but just curious if there's anything to call out.

So the gross do you mean the revenue growth.

Yes, correct.

Yeah, So I'm still looking at mid teens revenue growth. We did as you mentioned before the center City is has joined the family and there was a it is contributing and that group that's where it is reported in terms of the segment reporting so it will be lapping that include.

And last year as we get to the end of 2021 and so and it also has because we are ramping that business and getting it to its own maturity. It has and and it's contributed to some of that headwind on the margin being closer to 20% of what we would see as more of a long term on March.

And in that segment between 20 and 30, so near term and that's why we guided to 20 to 25 mm and think the mid teens on the top side.

Alright, Thank you very much.

Thanks and us.

Your next question George Tong with Goldman Sachs.

Hi, Thanks. Good afternoon, you meant on the occupancy rates for full service are up 50% to 60% now can you talk about how you expect that to progress and step up and speak to you.

And what's embedded into your the al.

And then exiting the year are you still on track to get back to pre COVID-19 occupancy rates and what are those suites and your review of structurally has changed post COVID-19 versus pre COVID-19.

Yeah, I mean, and I think the.

The headline answer of the the initial answer to that is the where.

Broadly similar to what we have talked about on prior quarters. We are on track that we were pleased with in terms of the sequential progression of.

The Q3 results will have some.

And turnover if you will of that enrollment is the older Preschoolers do go to elementary school and we're back filling with new family. So even though we would seasonally typically see enrollment declining and Q3, we were expecting some continued modest improvement and continuing that into the fourth quarter.

So that we are you know getting at right to near pre Covid levels by the end of this year and that is certainly what we see is given the demand profile that we're hearing from parents of what they are requesting and and the the conversations.

And we're having with clients. So I think we're on and on pace for a similar to what we have talked about in the past.

Got it that's helpful. You mentioned that you're going to see some weighing on the operating income as we finish off 2021 with full service suite of ramping costs.

You also talked about the flow through for operating income is going to be 45 per cent and free Q. So that does that suggest that margins will come under particular pressure in <unk> and <unk>.

Some of those costs come back on line.

I I think what what of the the message and there is that we are in some respects Inc. In Q3, we will be at the apex of the inflection on the comparison to last year. So we were reopening and centers in Q3 of last year, we had sort of the highest inefficiency of any.

<unk> and cost structure. So the the flow through as we continue to ramp will be at and at the top now as we compare to Q4 and we're not giving detailed guidance on on Q4 at this point, but certainly it will pull back from that level, because we had already seen quite of bit of improvement last year from Q3 the Q4.

So I think just trying to make sure that everyone's understanding that we we still have some COVID-19 COVID-19 protocols, we're not going to be back to our margins and.

And in pre Covid, even as we are approaching our enrollment levels by the end of the year, we need to and you'll get all of these are the the sort of stability and the consistency of the cost structure to align with the enrollment and and have the opportunity to have the tuitions and cycle through as well. So there's just a few moving parts.

That debt or are contributing to our meeting and a few more quarters to be getting back toward the the pre COVID-19 gross margin or operating margin that is aligned with having the enrollment levels would be of close to where we were.

Got it very helpful. Thank you.

Uh huh.

Next question Hamzah, Missouri with Jefferies.

Hey, good afternoon and Ah My My question was on on backup of you know your your Q3 guide, which seems very positive your 2020 revenue base was like I think pre 88 million I guess the question is you know how big could this business be over time do you have.

A sense of how we should look at the addressable market. Given you know you've added more clients. During this COVID-19 time frame than you've ever done before on AR, and AR and and and you know is there any competition here or not really.

Yeah, a lot lot and there hamzah and I'll take each 1 and churn.

In terms of of the addressable market and and you know sort of what we see of the opportunity and we think the opportunity within and backup care is great right. So different from our on site childcare central business, which requires a sort of a minimum of 1500 employees and a single site location.

And our backup care service is really can address the needs of employers really any employer of greater than 500 employees. So the addressable market. There is quite a bit larger in terms of the number of employers and you're right to point out that we have added a large number of additional employers into the.

Segment and as they season, we'll continue to see greater amounts of use coming from from those employers and at the same time as Manav pointed out we continue to extend the number of use cases that are attributable to our backup care service. So again I think there are a number of very positive.

Tributaries that we're heading down as it relates to the back up care service.

In terms of competition.

We obviously do have competition in this marketplace.

That said, we are by far and away of the leader and we pioneered this space and certainly have continued a fairly dominant position within the marketplace. We take the innovation within the service body and incredibly seriously because we ultimately always 1 of you providing best in class service to our employer clients.

And and their employees and.

And you feel incredibly positive about both of the opportunity as low as our competitive position.

That's a very helpful and I forgot to mention Jefferies's of back up clients too just in case, but.

But also just a follow up question and I'll turn it over.

You know the the hundred employer of centers that you had called out I guess, a few quarters ago that were the worst short I think the we're short in Q4, there were short and Q1.

I think the new disclosure is that you know you expect 95% of your of centers to open by Q3.

And I'm just curious as to the hundred employer centers, maybe that's the old definition, but are any of them open now and and and and are you expecting all of them to reopen by the end of Q3 I'm just I just wanted to get a sense of if any of those centers you expect the remain true.

Dark forever or our impaired I guess, here's the question. Thank you.

Yeah. So just to clarify we have a total of 86 centers that are still temporarily closed and and you know it's not the say never say never there may be a handful of those that the ultimately don't reopen but in general we think they all are going to reopen they all have a play of sketch.

The schedule and the plan there are a handful that are into early 'twenty 2.

The vast majority are this year and the vast majority are expected for <unk> for Q3. So of those you know there are a number of client centers in that group and we do have a few that are our lease models that are under our discretion that we haven't been on managing the opening but for the the large portion.

And these are client decisions.

And that's why we framed it as the majority of being in Q3.

Chris Thank you so much.

And it sounds like.

Next question and your standard with Jpmorgan.

Hi, I actually have 2 questions I hope that's okay. The first 1 is it's good to see the occupancy rates from full service centers heading back to pre COVID-19 levels by a year and this year. My question is past that sort of into next year, what needs to happen to get full service revenues back to pre COVID-19 levels.

And then my second question, which is really a different question is are you seeing full service demand from bright horizons family is closer to where they live and that work and how is bright horizons addressing that dynamic.

Sure. So I think the the answer the first question is and into 2020.2 of course, and we target to be yeah, and as we said and no near pre COVID-19 levels by the end of the year that we would be in into early next year of before we are seeing revenue.

The comparable to pre Covid levels, we have the advantage of <unk>.

Some and it depends on where the enrolment is concentrated in terms of the relative tuition levels and some of those things but in the long.

And you measure we would expect to be.

Laughing that comparably at the revenue level.

On sometime in the first half probably of 2020, 2 and as it relates to continuing to grow enrollment from there I think the opportunity for us as we've talked about on prior calls Andrew and you know we were talking about pre COVID-19 levels and that's certainly a threshold of 1 of them.

But from there as we continue to work and an environment, where the supply is contracted and the awareness of the need of childcare is increasing and employers are continuing and be supportive.

We will also be working hard to continue to grow past.

What was the pre COVID-19 levels and that will also have the opportunity to drive revenue a bit higher than that but I'll, let Steven answer the second part of your question Craig and Thank you Elizabeth So Andrew in terms of.

As our enrollment tending towards closer to home or to work.

The answer is yes, the reality for us is that our enrollment tends to be either at the workplace.

Or in a community facing center, but in both cases of the individual who's enrolling lives typically within 10 miles and so we are finding that a lot of our families and enroll.

Our living within 10 miles of the Worksite, and therefore enrolling and their work site and are ultimately for those who are enrolling and our community facing centers again. They are living are relatively close to the center and so you know to get sort of underneath the question. What we're finding is that again, where our centers are located are very proximate to.

And we're on enrollment lives and ultimately those centers are very well located for them. So overall feeling really good about where the portfolio is we continue to look for additional employer clients that are looking to subsidize and finding good success and at the same time continuing to look for new developments that allow us to.

The continued to infill and then finally looking for acquisition targets to do the same so overall feel really good about where our where we're located and the enrollment trends related to.

Those who are choosing of bright horizons experience.

Perfect. Thank you.

Thank you Matt next question, Gary Bisbee with Bank of America Securities.

Hey, good afternoon, I guess true to sort of risks that appear to be out there I wondered if you could comment on the the first is just are you hearing any change and plan as it relates to the Delta variant and I think there'd been a number of large company instead of publicly sort of pushed off when they're bringing.

The back a lot of employees and so as that conversation happening do you see that as the timing risk as we think about the next several months and quarters and secondly, you know just labor inflation and tight labor markets, maybe Elizabeth that was part of your comment on costs will you know the high.

And margins will take longer to come back and revenue, but how are you working through that.

Is that and issue or are you able to price.

And cover that you know and.

As you've done in the past or is that is that somewhat of a headache and the moment. Thank you.

Yeah, great. So Gary on the question around timing of return to office.

Thank you know look we have been on the front end of this information.

The information flow from our clients, because obviously and they.

And they see our support is of critical elements of their return to office strategy. So you know we were very early to recognize and employers were anxious to get their employees back even though some of the rhetoric and the news was different from that we heard very early but that was the direction of travel.

We continue to hear that that is very much of a focus for employers is to by and large get their employees back to the office irrespective of that I think there is certainly a tone change as it relates to irrespective of the you know few employers that may delay their day.

Past labor day, or just after labor day, and there is real intent to make sure that employees have full support and coverage and sort of the flexibility that employers.

And are moving forward with is certainly narrowing.

But that said what we're hearing is perhaps you know.

And the news you heard about and Apple moving it off by a month, that's still has them within the window of the labor day schedule and I think there's a lot of focus around that just after labor day return to the office.

And then as it relates to labor inflation, and Gary and and you I would say that we are certainly seeing wage inflation and in our industry like many other industries. We've were not of minimum wage pair, we average well above that and even though our wages do vary by geography.

Murphy, where we're well above that and across the geographies and we operate but it is still the last year of 2020 was quite of disrupted labor of year and so there is both of them market constrained with people differing timing of coming back to work with either concern or are you now.

Their own exposure of their own health concerns and or unemployment benefits.

Benefits continuing and so we are seeing that they the labor inflation is on on the higher end of where we would've framed.

Framed it typically in the past so we've been in the last few years and we've been and more of a 2 and 3% and I'd say, we're more and our 3% to 4% range on average with some areas of higher than that but from a pricing standpoint, we have to date and been able to continue to price ahead of that and to to consume.

And that even in markets, where it's higher than that 3 of 4% average we've been able to do that and expect that we would continue to where we've talked about a potential of longer cycle of recouping all of the costs that the navy and the and the model of our you know and the sort of typical of full service centers.

Going forward is.

As we get.

Get through this COVID-19 pandemic period, and the extra costs that are in the model now with protocols that are kept up not just from the health and hygiene standpoint, but also from some of the incremental staffing and it is required on that.

And that will need to work its way out as we get more to of returned to normal and so that is where we may see a little bit of time and the headwind on margins as well, but overall structurally.

Labor inflation. We think is is on the higher and we do have some support for that and the near term debt. The government programs that are geared toward toward directing some of the consolidated Appropriations act or ARPA of finding to to labor. So we were able to defray some of the cost with that but it is still.

Something that is.

Part of the calculus, and we're working through for a plant and the rest of this year and next.

Okay. So is it reasonable to think that some of some of those costs like the Covid protocols, you mentioned and whatnot bleeds.

Bleeds in the next year that that comment maybe wasn't just thinking about the next 4 months is that as the.

Net fair or is it I think the yeah.

No not of lot of it I think we what we're expecting now is and we will be tapering of that down as the year ends, but they're made and maybe some ongoing protocol for that but the again, we're trying we're looking to government support for some of those costs to offset the majority of index. If there's like a bleed into next year.

And then if I if I could just sneak in 1 more on your balance sheet is obviously quite strong profits are coming back to the leverage is going down and I've heard from a lot of people.

Thinking that you'd likely be active and the M&A markets you know looking at busy.

Businesses that are and weaker position and the full service center business to take share there and maybe maybe even transition of your mix a bit more to the community based market.

And we haven't seen any any meaningful activity, yet is that of real opportunity and sort of what's what's the gating factor to moving on on those kinds of opportunities. Thank you.

Sure. So we absolutely are very actively seeking acquisition opportunities is and has been our history on this topic and we are looking both in the geographies and which we operate the U S. The UK and the Netherlands as well as more broadly as we've shared before we look at markets where there is.

Some form of third party support whether that'd be government employer or some combination thereof.

So I think that you can count on us for continuing to focus and and look and make sure that debt. We are evaluating good opportunities that are of strategic fit of quality fit and the financial fit and I would say that part of the the delay and if if there has been a delay has been in just the amount of disruption.

Option that providers in our sector have experienced and so I think that as we have built and continue to build enrollment many of you know our providers.

Providers are trying to do the same thing and so that they can bring back some of the value that they felt they had and a pre pandemic level.

Level and ultimately achieve valuations that are more in line with their expectation and so I would say that's the piece.

That's important to consider is just the timing around that and and when that will occur but absolutely. We are focused on continuing to look at both the acquisition as well as the organic growth opportunities both in the markets that we're in today as well as more broadly.

That's helpful.

Yeah.

Thank you.

Next question, Jeff Silber with BMO capital markets.

Thank you so much Steve and I just wanted to clarify something you had said earlier I think you had mentioned that the majority of your of full service center clients. The employees live I think it was within 10 miles of the center and then also even the ones that May go on to the lease consortium models also live of similar proximity.

And if I'm, taking my child to a worksite childcare.

Childcare Center, and then I'm working from home 2 days of week I. If I wanted if I cannot track the due for a whole month or for a week and I can still kind of pick and choose which center to take my child based on the proximity is that correct.

Yeah, I think so there's sort of 2.2 ways to think about that the first is that we have many many examples of at this point of families who are.

Hmm.

Who are having their children and 5 days of week within a Worksite center, and maybe working 2 or 3 or 4 days at the work site and there are real advantages for our family to think that way. The first is they recognize from a continuity of care perspective, right. The that is likely the best for their child to have that continuity.

And what he of teacher as well as classmates within our center and addition to that.

As you all know it's important to recognize that often they are receiving a quality of care and a lower cost because there is an inherent subsidy being provided by the employer. So there was a real draw for employees to utilize their Worksite center.

Both from a continuity of care, but also from a financial and quality perspective sort of irrespective of how many days, they're working and the office versus at home and having their child at the Worksite, but yes, we do have other families that make the decision that they're going to go and mirror their scheduled within the work.

Workplace and also have a child a couple of days and 1 of our community banking centers that may be closer to home, but again, we offer both options, but we are certainly seeing much more of a draw to utilize the onsite center for their employer of center as opposed to splitting the week between 2 sir.

Yes.

Yeah, and and that makes a lot of sense and I do appreciate your debt you're clarifying that if I could switch over to your Ed Advisory business.

We're seeing a lot of companies really focus on offering education oriented benefits to their employees I think target just made another expanded announcement today.

Are you seeing a lot more interest and that kind of business and you know if I kind of combine all of your edge of other educational advisory services as the whole shall we expect that to be a bigger percentage of your business going forward.

Okay.

Yeah, So I'll take each of those in turn so.

So first on that area of our business is certainly growing more quickly than our full service area in particular, and and likely and our backup area as well and so increasingly just that growth rate will cause of that could become an increasing percentage of the overall granted it's still relatively nascent today compared to the on.

And the 2 businesses, but we do expect to continue to see a healthy growth rate as it relates to our Ed advisory in terms of the market.

Look on the works workplace education side.

Most of them.

Major employers most leading employers have had tuition assistance programs since the IRS tax code came in to be that said given the need for Upskilling and Reskilling. There is absolutely a real focus on making sure that they are doing this work and are really strategic way and that's where our edits the flatness.

Service comes into play is our ability to take something that has historically been manage internally and do it and a much more progressive and employee centric way. So I think that overall employers of recognizing that and they look to fill hard to fill jobs as well.

And look to the future.

For jobs that are going to be needed and hard to fill our they are absolutely looking more specifically and how they develop their workforce through education, and we believe we're incredibly well positioned within this market as well as across our client base to continue to grow this business.

Okay. That's really helpful. Thank you so much.

Once again, if you would like to ask a question. Please press star 1 on your telephone Keypad next question comes from Toni Kaplan with Morgan Stanley.

Thanks, so much I.

So wanted to ask of at the center Count It went down and the quarter by 9 I was just hoping you could go into what the primary drivers were of the 13 not closed looseness of more permanent shift from employers towards like more of flexibility and the work schedule or are there other reasons.

That we should be thinking about on why are the employers want to close the centers.

Yeah. So thanks.

Thanks for the question Tony We we had a number of centers, obviously and that were temporarily closed and we were still assessing whether they were viable for the long term, whether we could accommodate families and other centers. So it's certainly a good portion of those are at least models and we also had control over so not all of it.

This centers, where client decisions there are a handful of of client centers, where the population was.

And it has maybe a lighter and print to going in and so they were not as viable as the ongoing support location for that client and they have made the decision. So I don't I think as we've looked at each case. It does not come come to us as any kind of a fundamental are indicative shift it's really.

And then on location.

The location by location decision that you know and some cases may have been reflected in any normal year and not just COVID-19. The COVID-19 gave the impetus for that client and make a decision.

That's great and and as a follow up to that I guess, how should we be thinking about new center grows and as we sort of go through the rest of the year and into 2020, 2 like versus history and <unk>.

And I guess is there a a longer I imagine during COVID-19 you were seeing a longer.

Got you no timeframe for someone to really pull the trigger on of New center like has that short and you know now that once the case count started going down and the uncertainty lifted a little bit just just trying to understand the debt.

And the timeline.

Yeah. So I mean look the the full service center on site Center of business has always had a long sales cycle I would say that we had a number of clients who were further along in the sales cycle. When COVID-19 hit obviously many of them and put that on pause as they were focused on other priorities.

That said and what I would observe is that we've also had some clients through COVID-19, especially those who currently self operate their center and make decisions more quickly right and I mentioned the mass general Brigham earlier on.

And you know they are a great example, where you know that sales cycle was relatively short given the fact that we you know impress them with the work that we did with backup care and the midst of the pandemic. They self operated 6 centers and made the decision that we were the right partner to transition those centers given how difficult they were finding of operating.

And through the pandemic. So I think it's sort of a combination of Tony where we definitely saw positive decisions through Covid and I think that you know.

Keep in mind, there is a long sales cycle on the other hand, especially on the self op transition opportunity side, we hope to see some good opportunities coming out through 2022 is the result of Covid.

Covid.

Specifically.

Super Thank you.

Next question, Jeff Mueller with Baird.

Yeah. Thank you good afternoon and.

And just so that I'm kind of interpreting your commentary on setting expectations appropriately when youre talking about getting back towards pre COVID-19 enrollment and full service centers.

Should we be thinking about that more on like a per center basis. Since I think your center count still probably down something like I don't know, 8% from pre COVID-19 by the.

And of this year in terms of like what it's not permanently closed and then do we also need the buffer for the the centers that are reopening and the second half of this year that would take some typical ramps on.

So it's and it's a great clarifying question Jeff.

And we've been trying to be descriptive of of comparative set so that occupancy level its worth 50% to 60% now and and we are looking to me back at or near pre COVID-19 levels by the end of the year. That's for those centers not as an absolute number of total enrollments.

Compared to total so you know how is the occupancy and the centers and we are operating on.

So then to the question of centers that are opening in Q3 or of Q4 of those would not be part of that cohort. They wouldn't be starting out you know at 10, 20, and 30% occupied unless you know they they may have a different weightless, but they'd be starting out at the lower end of that and ramping up as we get on with the other centers that were.

Reopening and so that's intended to be of what they say is sort of a same center comparison.

Okay and.

And then maybe at a broad and Gary's wage inflation question out of little just if you could comment on how your teacher and caregiver employee retention has been trending over the last year or and did this year following a really challenging and.

Set of circumstances for those individuals and then I guess related to that.

Got it.

Is the ability to hire qualified.

Labor of meaningful constraint, if if I look at the overall utilization rate I would think not but I don't know, if there's meaningful pockets and and those meaningful pockets. If that's a constraint for you at all or not.

So plausible I'll start it off and Stephen kind of.

Play of color I think the the short answer to the the question about labor you know the labor pool. If you will is that we have long been an a and a constrained labor pool of the.

The numbers of folks entering the early childhood space has been declining and shrinking for years and so we have for many years been working hard to not only be and employer of choice where were those committed teachers and and and caregivers want to work and that we are unemployed or of choice for many many of them.

Reasons, including our total employee value proposition from pay and benefits to our environments and are a career opportunity. So we have long invested and that but the labor pool is in a it's and and Ah.

A very challenged state right now.

And we are certainly seen those you know the.

Between the the people who are affected by the work that they're doing so they're they've got their own health concerns and questions and want to be careful about that and and they are dealing with the stressful and job environment. We have seen you know relatively where we're pleased with the turnover of status and it's it's not markedly.

Different and prior years, but the hiring environment is challenging and we're in a reroute mode and and there are folks who have you know ultra.

Ultimately left the industry and this kind of an environment, where it's just become on.

And more challenging than what they want to continue and so I think the as I said the headline is we've been dealing with this kind of and environment and thank the we can continue to do so but it is quite challenging there is and economy, where where wage rates are or are part of the equation and there and they are rising and we think we can.

And as I talked about before we can manage through that with our our business model, that's been proven and and parents and clients understand it well and they are supportive of it but the labor supply yourself as another part of that equation and that is 1 that is needs to be sort of thought with the long game.

Yeah, and I think of the only thing I would add to that is I think we were especially proud of after what was the very difficult set of circumstances. When we temporarily closed centers and were forced to furlough such a large number of employees I think we were incredibly proud of the.

And the vast majority coming back on when we were of reopening and asking them to come back on that that to US was sort of the first sense of the kind of retention and the kind of culture and employer of choice status that we enjoy and the relationship that we enjoy with our employees. So that was a real.

You know sort of force in terms of allowing us to get to the place that we are is the ability to attract those employees who are with US you know pre COVID-19 and I think that it's fair to say that many other employers both within our industry and outside of our industry did not enjoy that and therefore have found already in place to be.

Very difficult 1 and so we were very pleased at the ability to attract back our or previously employed folks from pre COVID-19 and have them be the basis of our work force yet again.

Okay, and then last 1 from me I know the.

Backup care margin this quarter was and the range that you've been talking us too.

However.

And it's lower than it's been and the other quarters that have had contribution from self sourced reimbursed care. So I don't know of self sourced reimburse care of is just getting too small.

The matter and to help your margin or if there's another factor that goes into that.

And the the sole source of carriers as I mentioned of care type and it is diminished significantly and it's still as you know there there still is some component there that it's higher than prior years, but it's on a much more modest portion of the us and so as traditional use comes back and we have that that supply chain.

If you will of of caregivers, providing care, that's where the the the costs come back into the system and a slightly different way so that would be both of our bright horizons centers, where we're providing care and that take a benefit of a full service, but its a cost to the backup group or our third party network.

And home or are other center providers would drive that.

Okay. Thank you.

Thank you Joe.

Yeah.

Great.

Thanks, again for everyone joining the call and wishing you all a great rest of the summer and a good night.

And just talk to you all and thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

[music].

Okay.

[music].