Q3 2021 Bright Horizons Family Solutions Inc Earnings Call

November 2, 2021

[music].

Greetings.

Come to the bright Horizons family solutions third quarter 2021 earnings conference 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 that this conference is being recorded I'll now turn the conference over to your host Michael Flanagan Director of Investor Relations you may begin.

Thanks, John.

Paul.

With me here, 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.

Today's call is being webcast and a recording will be available under the Investor Relations section of our website bright horizons.

As a reminder to participants any forward looking statements made on this call, including those regarding future business and financial performance.

The impact of COVID-19 on our operations and are subject to the Safe Harbor statement included in our earnings release.

Once these savings inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially.

Driving detailed in our 2020 Form 10-K, and other SEC filings.

Any forward looking statements speaks only as of the data, which 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 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.

Hope that you and your families are remaining healthy and safe.

I'll start Tonight with a review of our third quarter and provide an update on our current operations.

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

First let me recap the headline numbers for the third quarter revenue increased 36% to $460 million with adjusted operating income of 46 million and adjusted EPS of <unk> 64.

From the operating and earnings losses, we reported this time last year.

As we continue to build back the topline to pre COVID-19 levels and beyond I'm really pleased with our recovery earnings as reflected in the delivery of 20% operating margin and 17% adjusted EBITDA.

Overall as we approach the end of 2021 I remain encouraged with the progress and trajectory of a recovery from the significant impact of Covid on our business.

Our global team has responded exceptionally well and navigate a very fluid environment. This year with resilience perseverance and compassion.

I'm very optimistic about our market position and ability to realize the many growth opportunities that lie ahead across our businesses.

Let me start with our full service segment revenue.

Revenue grew 52% in Q3, reflecting continued enrollment recovery and the ramping of recently reopened centers.

We ended the quarter with 949 centers are 94% of our 2011 centers open.

From a new center perspective, we launched 19 incurred.

Including a seven centers for Centene, a second center for Stanford University, and six centers for the mass General Brigham Health system, which had previously been self operated.

Due to the late summer early fall, we continue to reopened a number of our temporarily closed centers with 23 reopening in the third quarter and a further eight reopening in October.

That said the Delta Varian proved to be yet another disruptor to a recovery and previous expectations with.

With some clients further delaying the full reopening of offices and on site centers.

Importantly, it was just that a delay nearly all of the 54 remaining temporarily closed centers are now slated to reopen later this year or early 2022.

And our opening centers, we continue to see enrollment rebuild.

Occupancy levels in Q3 were consistent with Q2, which is better than historical seasonality, but lower than what we had expected when we talked to you on our Q2 call.

The Delta is there any peak in the late summer and early fall temporarily slowed the enrollment recovery as it coincided with the period that is typically a busy start window for new families.

Some parents across the country chose to push out their start dates and several of our more effective geographies, where those hardest hit by Delta variant.

That said the underlying demand indicators for high quality child care remains solid and recent enrollment trends continue to show steady progress.

With the Delta waves subsiding and work plans to solidifying for 2022, there has been an uptick in families requesting to start care early in the new year.

And therefore I continue to be encouraged by the demand picture. Despite some near term timing shifts.

As we discussed last quarter one of the challenges in meeting this growing demand is the fact that the labor environment broadly and in our sector remains challenging.

Although staffing challenges are not new to the childcare industry. The pandemic has created unique difficulties.

Has exacerbated the supply condition, we have worked hard for decades to manage in.

In the face of this environment, our enrollment in a minority of centers has been constrained by our ability to staff. The high quality educated educators needed to serve all of the families who requested care.

Our teams are aggressively focused on solving the labor pressures, we have taken a number of steps to further differentiate our employee value proposition, increasing compensation and benefits programs as well as investing in talent acquisition and sourcing.

We are already seeing results from these efforts, particularly with new applicant trends, which have already reached pre COVID-19 levels.

This indicates we are well positioned to capture an even greater share of the early indicator talent pool.

We are fortunate that in the near term we have government program support targeted for the chop your industry too.

Some of the inflationary labor pressures.

Over time, our consistent pricing strategy positions us to regain our historical center economics as those support programs inevitably Wayne.

So as I look ahead, I am confident that these investments and our teachers and center leaders along with bright Horizons 20 year track record as one of Fortune magazine's great places to work.

Industry, leading role as the employer of choice will ensure that we attract the early educators, we need to continue to grow for many years to come.

Let me now turn to back up care, which is well positioned to capture a growing client opportunity as we head into 2022 and beyond.

In the quarter revenue of $99 million increased 77% over 2020 strong quarter.

For context, Q2, Q3 revenue was up 24% over 2019 in line with our historical and long term annual growth rate of 10% to 12%.

We continue to lead this market by a wide margin.

Any further this quarter with new client launches for Astrazeneca.

Unum and Yahoo.

While the Delta waves certainly influenced many parents short term decisions around care provisions traditional uses were still up sharply over the prior year and we remain encouraged by the broadening of use types and users with strong uptake of virtual tutoring and school aged care to see vacate camps.

While those indicators are clearly positive the staffing constraints impacting our full service business have also been a challenge in the back up care Arena.

As a result, we have seen greater demand in certain geographies and peak periods than we have been able to accommodate and centers are within home providers.

We are working to expand our in center availability as well as our network of third party providers, particularly in home caregivers and we are making further investments in tariff and technology initiatives to ensure we can deliver the service our growing base of parents and clients need.

Turning to our education advisory business, which delivered revenue growth of 10%.

We launched a number of new clients in the quarter, including AT&T Maxim Northwestern mutual and Samsung electronics and continued to see healthy participation and activity levels.

Particularly within college coach as the demand for support during the college admissions process remains very robust.

The tight labor market also continues to drive demand for our workforce education programs as employers look for streamlined and cost effective solutions to upskill and reskill their existing workforces.

Across all of our business I'm encouraged by the depth of conversations we're having with many perspective and current clients about the additional avenues in which they can attract and support their employees through our service offerings.

As we have discussed before the pandemic has highlighted the essential nature of our services and the increasing importance childcare has and the nation's economy.

The widespread staffing challenges affecting so many industries and the reduction in availability of childcare has found new opportunities in full service backup care and Ed Advisory we are seeing employers across industries reevaluate their employee value proposition compensation levels and benefit offering.

And look at deploying creative solutions to ease what their their acute labor challenges.

These solutions are not only part of their recruitment and retention strategy, but also a newly evolving element of attracting their workforce back to the office and keeping them engaged onsite.

Overall, as we have broadened our service offering and strengthened our market position over the last year, we are very well positioned to capture a growing client opportunity as we head into 2022 and beyond.

In addition to the client opportunity that build back better plan as proposed by the by the administration is another source of potential third party support for early childhood education.

The proposed plan highlights the role high quality early education has been the development of children as well as the benefit to the economy and society as a whole.

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

Before I hand, the call over to Elizabeth I wanted to take this time to acknowledge every member of the bright Horizons family.

Over the last couple of months, we held more than 100 virtual employee recognition events, where we celebrated team and individual achievements.

I'm incredibly proud of our team's grit and dedication to deliver the highest quality education and care to our families. Despite the challenges endemic in our industry and still across much of the economy.

While this year's celebrations, where virtual they were no less special.

My heartfelt appreciation goes out to all of our more than 25000 employees, who work tirelessly each day, bringing passion and the expertise that allows us to collectively impact the lives of those we have the privilege to serve.

Elizabeth.

Great. Thank you, Steven and hi, everybody who's able to join US This evening and thanks for being here I will also recap the headlines for Q3, and then provide some thoughts on the fourth quarter.

For the third quarter overall revenue increased 36% to $460 million adjusted operating income was 46 million or 10% of revenue and adjusted EBITDA increased 163% to $79 million or 17% of revenue.

We ended September with 949 out of 1011 centers open.

In the third quarter, we added 19, new centers and we reopened 23 centers that have been temporarily closed.

We also permanently closed 14 centers.

Well service revenue increased to $114 million in Q3, or 52% within our expected increase of 50% to 60% year on year.

Our occupancy levels average between 50, and 60%, which is comparable to Q2 levels as the delta waves tempered the pace of recovery, we saw in the second quarter and early summer period.

Adjusted operating income for the full service segment improved $67 million over 2020 to positive $10 million. This represents a 59% flow through on the revenue growth.

The outperformance in relation to our expectation of approximately 45% flow through relates to improving efficiency within Robyn and lower than expected labor costs due to staffing constraints as well as the contributions from continued support from government programs.

After the childcare industry.

As Stephen mentioned back of care grew 7% to $99 million.

<unk> continued to expand our client roster with another solid quarter new client launches.

And while revenue was short of our expectations with the Delta way impacting care requests and staffing challenges constraining care supply. We did see traditional in center and then pumped back of users and usage grow sequentially and over the prior year significantly as they continue to progress towards pre COVID-19 levels.

Revenue from reimburse her while lower than the first half of the year and significantly lower than the third quarter of 2020 did helped to contribute to the relatively higher 32% operating margin in the third quarter of 2021.

Our education advising segments reported revenue of 27 million growing 10% on contribution from new client launches and expanded use of our workforce education College admissions advising and our center city services.

Okay.

Interest expense of $9 2 million in Q3 of 'twenty, one was roughly equivalent to the prior year and our structural tax rate on adjusted net income was 22% compared to 12% in 2020.

This is primarily due to a proportionately lower tax benefit from equity activity and <unk> 2016 Dash nine.

On capital allocation, our strategy continues to be first to invest in the growth of our business, both organic and inorganic and in our service delivery and product innovation.

After these growth investments, we've also allocated capital to our share repurchase program under our existing authorization.

Through September of this year, we generated $185 million in cash from operations and invested $60 million on new centers and acquisitions as.

As well as just over $100 million and share repurchases.

We ended the quarter at two five times net debt to EBITDA with $412 million of cash and 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 because the cadence of the recovery remains difficult to predict however, I will share some qualitative color on how we see Q4 unfolding.

We expect enrollment levels to gradually build in Q4 as the Covid cases, and Delta variant impact appeared to be subsiding and more families are re engaging with traditional care arrangements.

We also anticipate reopening approximately 10 centers or so in November and December adding to the eight that we opened in October and ended the year with over 95% of our centers open.

As the Delta waves fall timing disrupted our enrollment recovery cadence, we now expect utilization to fully recover to pre COVID-19 levels in 2022 with moderately higher sequential occupancy levels in Q4 of this year.

In terms of full service revenue, we are expecting growth of approximately 25% to 30% over Q4 of 2020 with incremental operating income flow through approximating 40%.

Centers continue to reopen and re ramp and we work to regain our historical cost efficiency.

As noted we remain very optimistic about back of care's growth runway, including the opportunity for new client addition.

<unk> penetration within client population and greater use by existing family.

Again, with the Delta way subsiding, and reimbursed care moderating compared to Q3, we would expect to see traditional care continued to grow significantly over the prior year and expect back up care revenue to grow approximately 12% to 15% in Q4 with operating margins in the range of 35% to 40%.

<unk>.

Finally, we expect our Ed advisory business to continue to deliver similar results in Q4 as we saw in the third quarter with revenue growth of approximately 10% and operating margins widening to about 15% to 25%.

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

Yeah.

Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the sarkies.

One moment, please while we poll for questions.

Our first question comes from the line of Andrew Steinman with J P. Morgan you May proceed with your question Hi, Elizabeth I I think I heard you say full service.

Utilization, you know getting back to pre COVID-19 levels by 'twenty two if I heard you right that that's what you said do you have a sense when within 20 chair you'll get back to those utilization levels I just wanted to kind of make sure we benchmark and I think when you say pre COVID-19 utilization rates, you're kind of talking.

About the 70% to 80% range.

Hi, Andrew Yes, when were talking pre COVID-19.

Essentially referencing that 2019 timeframe.

It started in early 2020, so that's the general benchmark.

You are correct that the the range of enrollment in our mature centers at that point in the 70% to 80%.

That would be the target that we're getting back that's what we're aiming to get back to.

In terms of when in 202022 given the.

The visibility that we have now with the disruption in the fall enrollment here, we have I would say, it's not necessarily the first half of the year would be more building through the fourth quarter modestly.

Have another enrollment cycle that comes in January and so that is one we need to have a bit more concretely in our sites, but I think with that in mind, we can more in the second half than the first half.

Got it thank you.

Yeah.

Our next question comes from the line of Hamzah, Missouri with Jefferies. You May proceed with your question.

Hey, good afternoon. Thank you my question is.

Primarily around.

You know labor constraints, so you mentioned or not being able to fulfill the demand that youre seeing out there because of labor constraints could you just give a little more color as to how pervasive is that through your system I know you mentioned certain geographies.

Looks like Q2, Q3 revenue was maybe 20 million or so shy of consensus, but I'm not sure how that was relative to your internal budget. So just trying to get a sense of you know how much demand are you losing out on because of labor constraints and then and then is this demand is going to go away or will you be able to capture.

And that's just timing.

So.

It's a I think a view on what we are constrained by.

Hamzah, we would estimate that we probably at two 2% to four percentage points or so of our what.

What we would otherwise have seen core utilization.

We were not able to fulfill due to staffing having to either not open a room or not be able to take additional enrollment because of that so it's meaningful and it had because the fall cycle. It was it's a heavy enrollment cycle heavier enrollment cycle anyway, but the combination of that with the.

With the labor shortage and unavailability did impact it that way.

Not too dissimilar on the back upside, even being able to service back up care as well.

Got it got it.

And just my my my follow up question is.

Is is largely around just you know what from a stimulus perspective.

Sort of what's in your system and and when does it kind of roll off.

And as part of that you know.

Just anything around the universal pre K.

That you're hearing and your view on how that May impact your business.

Yeah, So maybe I'll talk about the the government stimulus and what we've been able to.

Realize it it's helpful I think.

As Steve and frame that it is helpful toward deferring some of the embedded incremental costs that are in our system, whether it's some additional notwithstanding the labor constraints. We have we still do have higher level of labor hours per child because of more.

More intensive ratio on staffing and just getting back to more normalcy with parents being able to drop off.

And in center, some some incremental.

Testing for them.

Covid testing kits hygiene some of those things so there is a bit more intensive.

Cost structure that is defined by the government stimulus funds.

But we are we're talking about somewhere between five.

<unk> 15, and 25 million probably annually, but were able to realize on that.

Hum.

We're able to put toward those.

For that cost to frame it so it's helpful, but it's not transformative.

And in terms of <unk> and the other legislation that is.

Currently being discussed by the binding administration look first we're very encouraged and believe that it's a great thing for early childhood education to be in the spotlight. The way. It is at the national level, It's something that we obviously have believed in for our entire existence and certain.

We operate in geographies, where government leans in.

Such places as the U K and the Netherlands, and then there are pockets here in the U S where that has been the case as well.

In terms of where that is obviously that is still in.

And the discussion and the details are not as detailed as we would like to see on the other hand, we are encouraged and are hopeful that that the money that the government is looking to put against it.

Ultimately finds its way through the states to make childcare affordable for families and make universal pre K available to families.

We still are hesitant in terms of the quantum that is being discussed.

Long enough to actually accomplish the ambition that the government hands.

So I would say that's the only offset to our enthusiasm around this program is simply whether or not ultimately the ambition that they discussed is congruent with the amount of investment that they are ultimately talking about.

Thank you.

Thank you thanks.

Our next question comes from the line of Manav Patnaik with Barclays. You May proceed with your question.

Hi, My.

First question is just the 14 centers that you've come in and you can close this quarter can you just remind us what that.

And year to date of Covid to date number is and how much of that is just the office is deciding not to have the centers anymore, just trying to understand the labor disruption.

Yeah. So.

Sorry about that.

Yes, 14 in the quarter.

Those 33.

Yeah and last year, we closed a total of 88 and so we are over 100 through the Covid cycle. If you will.

And in terms of the percentages that are.

Yeah.

Percentages are more about what whereas the demand profile as opposed to on.

Campus, Dennis I think you said campuses closing.

There are.

It's a split between our base model centers that are client centers, but I would note one one thing that's a little bit.

One notable thing about the closures. This year is that we have seen a more normalized level of closures in our UK business.

They did not close hardly any centers as it relates.

After Covid there were very strong structural supports for the workforce.

<unk> really worked hard to get centers that the whole economy was working hard to get everything reopening and so we did reopened a number of centers that have proven to be not economic over the long run in terms of the utilization of that or the demand profile and so they do feature a little bit more this year than the UK group.

Good last year. So I think that's just one piece of color commentary on that.

Okay got it and I was also hoping you could help us.

Just distinguish the performance between your lease consortium centers in the U S. Perhaps and then obviously I understand the delta there.

Location delays, but I.

I guess I'm, just trying to get a flavor whether at least on the retail side the more lease concessions I think theyre ramping up faster.

Yeah, it's actually there is not a really discernible difference there.

The client centers.

I think quite like they always do when they're opening our re ramping they tend to have a bit more enrollment than the lease consortium centers than we've seen.

A couple of percentage points different there's not meaningful change but not.

<unk> seen it different because of a client's sponsorship.

Precisely compared to our history.

Okay. Thank you.

Thank you thanks Manav.

Our next question comes from the line of George Tong with Goldman Sachs. You May proceed with your question.

Alright, thanks, good afternoon.

19, new centers this quarter given the long sales cycles for New center launches have you seen any disruption in demand for new center openings that might impact the number of new openings, one or two years from now.

No I think.

Look the quarter openings, I think actually give us quite a bit of confidence in terms of the level of interest and the speed at which these decisions continue to be made so overall.

No I think our pipeline for new centers, specifically client centers continues to be robust and those come in terms of new builds as well as the terms of transition opportunity for those who today self operate and so certainly I think the quarter's results and openings as well as as we look out.

Into the future we feel good about our continued cadence of conversation and discussion as well as a significant interest in.

On site centers.

Got it very helpful.

We plan to end the year with over 95% of your centers open when would you expect to have 100 per cent or all of your centers fully opened.

And so we have Dave George for the vast majority of the centers that remain temporarily close.

There is probably fewer than five that have data after the first half of next year or so.

It's mainly.

Between Q4, and then the first half of 'twenty two.

Got it thank you.

Thank you. Thank you.

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

Hey, good afternoon. So I wanted to go back to the labor pressures for a minute.

Thanks for sizing that that's helpful.

Can you maybe size or help us understand a little better how youre dealing with this you know obviously one of the Crown jewels of your model has always been the ability to price in excess of labor is there any risk to that end and are you having to raise wages meaningfully.

And then the second part of the question is just.

Is there anything on the horizon that you think can really help the situation now.

Now that schools are back and in many cases daycares back.

No.

I think there's an expectation that there will be more women returning to the workforce and is that likely to give you give you a help or just how are you thinking about managing this dynamic on the cost side. Thank you.

Yeah, well I can take the first part of that question Gary.

No.

I think that our view is that the underlying economics of our model are intact. Although as we've said the last couple of calls that there might be.

Relatively higher wage pressure in the near term that may take a cycle or two of tuition increases as we balance out.

Price and cost to the parents with getting enrollment back and had been attractive in that way. So we are certainly at the high end of our wage our historical wage pattern, you've heard us talk about two to three hour in a higher market, 3% to 4% wage increases and were certainly seen.

That on average three or four 5% as an average wage inflation in our sector with with that some structural more meaningful structural changes in some of our key markets where.

Our cost of living is even particularly higher or are there. Other other constraints on the labor force so were putting real money behind this are able to with our price increases that we're expecting for the early part of next year able to recoup a good measure of that but we again want to balance it out and expect that we will.

Have more meaningful tuition increases this cycle in the next cycle in order to get that back into its usual, 1% differential over time, we do think that back intact I think thats. The fundamental question that you're asking.

We'll be able to continue to price in a way that we have against the underlying cost structure, but it's out.

It is a fluid market.

And Gary I guess I would just add look.

A really important element of our model in addition to what.

You. Just described is is being an employer of choice and so we continue.

Continue to make sure that we are focused on being an employer of choice within our sector.

We are absolutely making investments in wages, we're making investments and benefits.

We are also highlighting opportunities for career progression that are made possible by things like are fully paid for CBA are fully paid for horizon Ctrip degree programs that allow individuals to join us and ultimately build a career doing really important work of carrying tour and educating young.

Children, and so again as Elizabeth said, we think it will take a couple of cycles from a cost perspective, but we believe it's absolutely the right thing to do and we believe it is going to continue to position us well to attract early childhood educators into the market.

And just to add to that.

Did mention that we do have some of this support coming in from our government.

Direct subsidies that helps too.

It is pointed towards many of these you know very initiatives. So that also I think helps to support that in this intervening time, while those programs are in place.

Are those going through the end of next year or it's not clear to me, which programs. You're are you in some of the ones that go through 'twenty, 'twenty, four or or what did you have a sense when it ends.

Well I think that it does vary state by state and it is it.

It's not always clear how quickly the states are going to find we are expecting that there will be.

Probably the bulk of the spending will be under ARPA.

The consolidated Appropriations Act has.

Had some funding into 2022, ARPA going through 2022, and some into 2023, but we're not.

I think we're not counting on it going beyond that.

Okay. That's helpful. And then just one follow up.

You know theres been this debate.

Around as your network sort of the best setup network and in our work.

Flexible work.

Environment.

I don't think I've asked you about it in more than six months. How are you thinking about that is is there a need over time do you think at this point to have more of your network be community based and if so when.

When we get back to some level of normal would you expect to accelerate from the pre pandemic pace the openings of lease consortiums or do you think the network is.

Still you know relatively optimal as you've got it set up today for a period, whether that 12 or 18 months from now when we're in sort of a new normal.

<unk>.

Yes, so we we.

We really like the positioning that we have in the network that we have.

As always our first priority is continuing to work with employers to.

To support their employees directly and that comes in the form of employer sponsored sites that are on site at their work locations, which as we've shared continues to be an attractive model from both our perspective, but equally importantly from the employer's perspective, and so we're continuing to see good demand in that regard.

In addition to that we are continuing to partner as we always have on the lease consortium side to find locations that are attractive to our employer partners, where they can invest alongside of us and ultimately those lease consortium models get approved on the basis that the community around them.

Can be sustained and provide the economics that we're looking for but at the same time, we know that we're citing in locations that are attracted to our employer partners and so ultimately we continue to see the mix.

Look very similar to what the mix has been and we continue to evolve with our client partners as it relates to where we are citing.

Locations going forward, but feel really good about the locations as they exist today moving into the future.

Thank you.

Okay.

Our next question comes from the line of Jeff Silber with BMO capital markets. You May proceed with your question.

Thanks, so much.

I was wondering if you can talk about the competitive environment I know a lot of the smaller players ran into trouble last year some of them didn't reopened but we're seeing some of the larger players get larger I know they do more on the retail side than the Worksite.

But some of them also have sizeable worksite components can you just talk about the dynamics, what's changed over the past year or so.

Yeah, I think look.

The research suggests that about 10% of the center capacity has been permanently closed. So I think it's safe to say that there has been a contraction in the overall size of the market I think it is also true to say that.

Again, we continue to be focused on our growth profile as do others in our sector.

And ultimately believe that there will be additional consolidation opportunities within our industry I think there have been fewer in the sort of near term then we may have expected and it comes back to the fact that there has been very directed government programs to support childcare and so I think that during the intervening.

<unk> period.

Providers have been able to sustain on the basis of some of that additional government support that said over time, we do believe that there'll be consolidation. We do believe that we are well positioned to ultimately be one of the key consolidators as we have historically been from a competitive standpoint.

We still.

Have a market market share advantage over any of our competitors and so to the extent that for example, one of the large retail competitors has.

Somewhere less than 100 centers.

It's still is a small base compared to our employer sponsored focus.

And ultimately I think they continue to see opportunity on the retail side and less so on the employer side and as we've stated time and time again, our focus really continues to be on that employer sponsored piece, where we think we continue to lead by a fairly wide margin.

Okay. That's helpful.

Just wanted to follow up comment.

Comment you mentioned earlier to the question about wage inflation and passing that through.

Elizabeth instead of it going to take a cycle or two can you just clarify what you mean when do you typically raise prices.

Be done you know if I get a new customer coming in can be done fairly immediately just talk about that dynamic that would be great.

Yeah. So we typically raise prices once a year.

And given the.

The Covid disruption, we actually is calibrated to a January cycle. So that's why we're looking at our next <unk>.

Increase and so it's not to say that we couldnt do a midyear increase if there were.

Some exigent circumstances.

Or changing what was going on but we typically do it just at that times have new families who are joining join on the rate whenever they do if they come in July they pay that rate until the next cycle.

In January our when their child ages.

Got it so when you set a cycle or two you mean like a year or two to recoup those costs, yes, exactly that that we have in the environment. We're in now we've been monitoring it there as well.

2020 was obviously a non typical year. This year, we are seeing the wage inflation coming in more coming on stronger in the last several months and so we can now with that information calibrate the increases for January and then be able to how is how is it actually playing out through through next year.

To set the rates for 2023.

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

Yeah.

As a reminder, we were in the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.

One moment, please when we pull for more questions.

Our next question comes from the line of Jeff Mueller with Baird. You May proceed with your question.

Yeah. Thanks for taking the question.

In terms of back up care, what's fulfillment channel was.

Stuffing constrained and did you pivot the delivery to other channels or other partners I ask because the year over year growth in Q4 sounds like it's good so not sure. If the issue has been resolved or if it's on going Europe.

The year over year trend is more about the seasonal contribution from Steven Kates or.

The easier comp or something like that.

Yes, so Jeff Thank you for the question.

What I would say is that we did have.

Staffing challenges in centers and in home more pronounced on the in home side, because obviously there is much less leverage right. It's one caregiver to to one child in that format and so certainly on the in home side, we felt more pressure in certain markets on uncertainty PK.

With.

That said as we mentioned earlier.

We're taking significant action to try to ameliorate some of those staffing challenges, but nonetheless, I would say it was more on the in home side, we are expanding our network of in home agencies, we're definitely putting more investment into CNS and those in home caregivers that we employ directly and so ultimately.

But we feel like we are going to overcome those challenges in.

In that way.

Okay and then.

<unk> for back up care margins it sounds quite good is less than the home delivery as well.

On used.

Capacity that you get something like catch our breath of our core just what's what's driving out the 35% to 40%.

Yes. It is on obviously on the higher end of where we would typically see longer term margins. There Jeff. It is down to Q4 sequentially have some relatively relative out pledged to the rest of the year. So there's a bit of that playing in but it is as we've come back to more normal.

Sized level of actual traditional use and are paying those third party providers and what that mix is it's just our.

You know what the essentially what the flow through would be in this environment. While we are still rebuilding two.

More.

Traditional use consumption against the revenue.

Okay, and then just last how is back up care.

Sales planning with clients looking for 2022 there was.

A lot of clients sign up through the pandemic.

Yeah, I think there's been some hope that there would be an up sell at some point just are you seeing that or what are you seeing for 2022 back up herself.

Yes, so I think that.

This quarter demonstrated in and what we continue to see in the pipeline is that despite the increase that we saw through COVID-19 in terms of interest and sales in our back up line of business. We continue to see a robust pipeline going into 2022.

Employers make decisions at different rates in a different cadence and so we continue to have really productive conversations.

We continue to work on our cross selling.

Hence those who today by Ed advisory or our centers.

And at the same time, we continue to attract through our backup line of service a number of new clients to the bright horizons family. So I would say, Jeff very specifically going into 2022, we feel good about our pipeline and we can continue to feel good that we're going to be closing a number of new back.

Back up clients.

Okay. Thank you.

Thank you.

Our next question comes from the line of Toni Kaplan with Morgan Stanley You May proceed with your question.

Thanks, so much.

You mentioned the occupancy levels are being flattish sequentially and you talked about a slower ramp very utilization versus previously and this seemed like a bit of a change versus last quarter on the call you talked about sort of sounded very positive around reopening post labor day, maybe plus.

30, or 60 days Sofia to sort of parse out what the drivers of the change.

Talked about the Delta variant and and the labor impacts.

Impacting sort of the staffing levels are there other factors that you would call out beyond those or were those Israeli bulk.

Bulk of of what's somewhat changed here.

Yeah.

Those are the two those are the two primary drivers Tony the Delta variant, having an impact on sort of the general apparent behavior.

The Delta variant in particular, having some higher elevated level of anxiety around its effect on children are the exposure for children that I think brought a level of response from from parents that was different than some of the previous variance or things like that.

<unk> and all of that came at the time when when many would've otherwise been signing up to enroll and then employers were making <unk>.

Decisions about work arrangements and and so the disruption to routine and what people were planning for how it had a variety of effects, but we've sort of I'll put it under the rubric of the delta variance in that timing.

The staffing challenges then added to that and.

Have become they've been coming along but as enrollment has come back and there is more demand we do feel very good notwithstanding what I just said about parents, we do feel good about all the parents who have come back. They have expressed interest are enrolling. So there is good momentum there and in many respects with with the demand side and the interest.

But not being able to service all of it.

Is it just sort of maintenance and ironic.

[laughter] sort of additive to an environment, where we're we're also seeing parents pause.

Yeah, that's great that makes sense.

I wanted to ask a follow up on hi, Brad So just curious about your thoughts on.

Offering employers the option of going to any of your community centers instead of like assuming that they do have an on site center.

So just sort of opening up that flexibility I imagine the employer could still or maybe offer a subsidy.

Like they do for the onsite centers, and obviously that would maybe detract from some demand for the on site. So maybe that's why they don't do it but just is that a possibility at all is that being sort of thrown out there till employers I'm just how should we think about that.

Yeah. So we certainly evaluated that and had conversations with our employer clients about the network of centers that we have that could serve their employees more broadly and at the same time, we've done a lot of survey work with parents directly and what I would say is the outcome of both the conversations in the survey.

Work and also just the actions that parents have taken is suggestive that while families and working parents may decide to work a hybrid schedule.

They want consistency of care for their children and so ultimately what we're finding is whether a family chooses their onsite center or in those cases, where an onsite center is not available and they are choosing a center close to home or close to work. They are choosing a single center the.

The other thing that's really interesting about both our inquiry and enrollment profile is the vast majority of our enrollment and inquiries are for full time care and so that's very consistent with what we saw pre COVID-19 and that continues to persist because again I think the overriding.

Factor for families is that consistency of care for their child. They know that that's the highest quality experience to have a single set of teachers consistency of classmates and so that is the the prevailing decision that theyre, making irrespective of what they are deciding to do with their own.

Work accommodations.

Got it thank you.

Excellent well. Thank you very much we appreciate everyone who joined the call and hope everyone has a great night. Thanks, Karen could you talk again.

Yeah.

Okay.

Yes.

Sure.

Okay.

Yes.

[music].

Okay.

[music].

Greetings.

Welcome to the bright Horizons family solutions third quarter 2021 earnings conference call.

Please note that this conference is being recorded I'll now turn the conference over to your host Michael Flanagan Director of Investor Relations you may begin.

Thanks, John and Hello to everyone on the call.

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

I will 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.

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 statement speaks only as of the data, which 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 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 remaining healthy and safe.

I'll start Tonight with a review of our third quarter and provide an update on our current operations.

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

First let me recap the headline numbers for the third quarter revenue increased 36% to $460 million with adjusted operating income of $46 million and adjusted EPS of <unk> 64.

Up from the operating and earnings losses, We reported this time last year.

As we continue to build back the top line to pre COVID-19 levels and beyond I'm really pleased with our recovery in earnings as reflected in the delivery of 10% operating margin and 17% adjusted EBITDA.

Overall as we approach the end of 2021 or maybe encouraged with the progress and trajectory of a recovery from the significant impact of Covid on our business.

Our global team has responded exceptionally well and has navigated a very fluid environment. This year with resilience perseverance and compassion.

I am very optimistic about our market position and ability to realize the many growth opportunities that lie ahead across our businesses.

Let me start with our full service segment revenue grew 52% in Q3, reflecting continued enrollment recovery and the ramping of recently reopened centers.

We ended the quarter with 949 centers or 94% of our 1011 centers open.

From a new center perspective, we launched 19 centers, including a seven center for Centene.

Second center for Stanford University, and six centers for the mass General Brigham Health system, which had previously been self operated.

Through the late summer early fall, we continue to reopened a number of our temporarily closed centers with 23 reopening in the third quarter and a further eight reopening in October.

That said the delta very improved to be yet another disruptor to a recovery and previous expectations.

With some clients further delaying the full reopening of offices and on site centers.

Importantly, it was just that a delay nearly all of the 54 remaining temporarily closed centers are now slated to reopen later this year or early 2022.

And our opening centers, we continue to see enrollment rebuild.

Occupancy levels in Q3 were consistent with Q2, which is better than historical seasonality, but lower than what we had expected when we talk to you on our Q2 call.

The Delta very peak in the late summer and early fall temporarily slowed the enrollment recovery as it coincided with the period that is typically a busy start window for new families.

Some parents across the country chose to push out their start dates and several of our more effective geographies, where those hardest hit by Delta variant.

That said the underlying demand indicators for high quality childcare remained solid and recent enrollment trends continue to show steady progress.

With the Delta waves of signing and work plans are solidifying for 2022, there has been uptick in families requesting to stock care early in the new year and.

And therefore I continue to be encouraged by the demand picture. Despite some near term timing shifts.

As we discussed last quarter one of the challenges in meeting this growing demand is the fact that the labor environment broadly and in our sector remains challenging.

Although staffing challenges are not new to the childcare industry. The pandemic has created unique difficulties.

Exacerbated the supply condition, we have worked hard for decades to manage in.

Our teams are aggressively focused on solving the labor pressures, we've taken a number of steps to further differentiate our employee value proposition, increasing compensation and tailoring benefits programs as well as investing in talent acquisition and sourcing.

We are already seeing results from these efforts, particularly with new applicant trends, which have already reached pre COVID-19 levels.

This indicates we are well positioned to capture an even greater share of the early indicators talent pool.

We are fortunate that in the near term we have government program support targeted for the chop your industry too.

Some of the inflationary labor pressures.

Over time, our consistent pricing strategy positioned us to regain our historical center economics as those support programs inevitably Wayne.

So as I look ahead, I am confident that these investments and our teachers and central meters, along with bright Horizons 20 year track record as one of Fortune magazine's great places to work in our industry, leading role as the employer of choice will ensure that we attract the early educators, we need to continue to grow for many years to come.

<unk>.

Let me now turn to back up care, which is well positioned to capture a growing client opportunity as we head into 2022 and beyond.

In the quarter revenue of $99 million increased 77% over 2020 strong quarter.

For context, Q2, Q3 revenue was up 24% over 2019 in line with our historical and long term annual growth rate of 10% to 12%.

We continue to lead this market by a wide margin.

Any further this quarter with new client launches for Astrazeneca.

Unum and Yahoo.

While those indicators are clearly positive the staffing constraints impacting our full service business has also been a challenge in the back up care Arena.

As a result, we have seen greater demand in certain geographies and peak periods than we have been able to accommodate and centers are within home providers.

We are working to expand our in center availability as well as our network of third party providers, particularly in home caregivers and we are making further investments in tariff and.

<unk> initiatives to ensure we can deliver the service our growing base of parents and client feed.

Turning to our education advisory business, which delivered revenue growth of 10%.

We launched a number of new clients in the quarter, including AT&T Maxim Northwestern mutual and Samsung electronics.

And continue to see healthy participation and activity levels.

Particularly within college coach as the demand for support during the college admissions process remains very robust.

Across all of our business I am encouraged by the depth of conversations we're having with many prospective and current clients about the additional avenues in which they can attract and support their employees through our service offerings.

As we have discussed before the pandemic has highlighted the essential nature of our services and the increasing importance childcare has and our nation's economy.

And look at deploying creative solutions to ease what their their acute labor challenges.

These solutions are not only part of their recruitment and retention strategy, but also a newly evolving element of attracting their workforce back to the office and keeping them engaged onsite.

In addition to the client opportunity the build back better plan as proposed by the by the administration is another source of potential third party support for early childhood education as.

The proposed plan highlights the role of high quality early education has been the development of children as well as the benefit to the economy and society as a whole.

Before I hand, the call over to Elizabeth I wanted to take this time to acknowledge every member of the bright Horizons family.

Over the last couple of months, we held more than 100 virtual employee recognition events, where we celebrated team and individual achievements.

I'm incredibly proud of our team's grit and dedication to deliver the highest quality education and care to our families. Despite the challenges endemic in our industry and it's still across much of the economy.

While this year's celebrations, where virtual they were no less special <unk>.

Elizabeth.

Great. Thank you, Steven and hi, everybody who's able to join US. This evening. Thanks for being here I will also recap the headlines for Q3, and then provide some thoughts on the fourth quarter.

For the third quarter overall revenue increased 36% to $460 million adjusted operating income was 46 million or 10% of revenue and adjusted EBITDA increased to 163% to $79 million or 17% of revenue.

We ended September with 949 out of 1011 centers open.

In the third quarter, we added 19, new centers and we reopened 23 centers that had been temporarily closed.

We also permanently closed 14 centers.

While service revenues increased to $114 million in Q3, or 52% within our expected increase of 50% to 60% year on year.

Our occupancy levels average between 50, and 60%, which is comparable to Q2 levels as the delta waves tempered the pace of recovery, we saw in the second quarter and early summer period.

Adjusted operating income for the full service segment improved $67 million over 2020 to positive $10 million. This represents a 59% flow through on the revenue growth.

The outperformance in relation to our expectation of approximately 45% flow through relates to improving efficiency with enrollment and lower than expected labor costs due to staffing constraints as well as the contributions from continued support from government programs.

The child care industry.

As Stephen mentioned back up care grew 7% to $99 million.

Continued to expand our client roster with another solid quarter of new client launches.

And while revenue was short of our expectations with the Delta way impacting care request and staffing challenges constraining care supply. We did see traditional in center and then pumped back of users and usage growth sequentially and over the prior year significantly as they continue to progress towards pre COVID-19 levels.

Revenue from reimbursed care, while lower than the first half of the year and significantly lower than the third quarter of 2020 did helped to contribute to the relatively higher 32% operating margin in the third quarter of 2021.

Our educational advising segment reported revenue of 27 million growing 10% on contribution from new client launches and expanded use of our workforce education holiday admissions advising and our center city services.

Interest expense of $9 2 million in Q3 of 'twenty, one was roughly equivalent to the prior year and our structural tax rate on adjusted net income was 22% compared to 12% in 2020.

This is primarily due to a proportionately lower tax benefit from equity activity under ASU 2016 Dash nine.

On capital allocation, our strategy continues to be first to invest in the growth of our business, both organic and inorganic and in our service delivery and product innovation.

After these growth investments, we've also allocated capital to our share repurchase program under our existing authorization.

Through September of this year, we generated $185 million in cash from operations and invested $60 million on new centers and acquisitions as.

As well as just over $100 million and share repurchases.

We ended the quarter at two five times net debt to EBITDA with $412 million of cash and 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 because of the cadence of the recovery remains difficult to predict however, I will share some qualitative color on how we see Q4 unfolding.

We expect enrollment levels to gradually build in Q4 as the Covid cases, and Delta variant impact appeared to be subsiding and more families are re engaging with traditional care arrangements.

We also anticipate reopening approximately 10 centers or so in November and December adding to the eight that we opened in October and ended the year with over 95% of our centers open.

As the Delta waste fall timing disrupted our enrollment recovery cadence, we now expect utilization to fully recover to pre COVID-19 levels in 2022 with moderately higher sequential occupancy levels in Q4 of this year.

In terms of full service revenue, we are expecting growth of approximately 25% to 30% over Q4 of 2020 with incremental operating income flow through approximating 40%.

Centers continue to reopen and re ramp and we work to regain our historical cost efficiency.

As noted we remain very optimistic about back of care's growth runway, including the opportunity for new client addition.

<unk> penetration within client population and greater use by existing families.

Again, with the Delaware Subsiding, and reimbursed care moderating compared to Q3, we would expect to see traditional care continued to grow significantly over the prior year and expect back up care revenue to grow approximately 12% to 15% in Q4 with operating margin in a range of 35% to 40%.

<unk>.

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

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the <unk>.

One moment, please while we poll for questions.

Our first question comes from the line of Andrew Steinman with J P. Morgan you May proceed with your question Hi, Elizabeth I I think I heard you say full service.

Utilization getting back to pre COVID-19 levels by 'twenty two.

If I heard you right that that's what you said do you have a sense when within 20 chair, you'll get back to those utilization levels I just wanted to.

Got to make sure we benchmark and I think when you say pre COVID-19 utilization rate, you're kind of talking about the 70% to 80% range.

Hi, Andrew.

Yes, when were talking pre COVID-19.

Essentially referencing that 2019 timeframe.

Covid started in early 2020, so that's the general benchmark.

You are correct that the.

The range of enrollment in our mature centers at that point in the 70% to 80%.

That would be the target that we're getting back that's what we're aiming to get back to.

In terms of when in 2012 2022, given the.

The visibility that we have now with the disruption in the fall enrollment here, we have I would say, it's not necessarily in the first half of the year would be more building through the fourth quarter modestly we have another enrollment cycle that comes in January and so that is one we need to have a bit more.

Concretely in our sites, but I think with that in mind, we can more in the second half than the first half.

Got it thank you.

Our next.

<unk> comes from the line of Hamzah, Missouri with Jefferies. You May proceed with your question.

Hey, good afternoon. Thank you my question is.

Primarily around.

Labor constraints.

You mentioned not being able to fulfill the demand that youre seeing out there because of labor constraints could you just give a little more color as to how pervasive is that through your system I know you mentioned certain geographies.

It looks like Q2 Q3 revenue was.

20 million or so shy of consensus, but I'm not sure how that was relative to your internal budget. So just trying to get a sense of how much demand are you losing out on because of labor constraints and then and then is this demand is going to go away or will you be able to capture it and that's just timing.

So.

I think our view on what we are constrained by.

So we would estimate that we probably at two 2% to four percentage points or so of our.

What we would have otherwise have seen core utilization.

We were not able to fulfill due to staffing having to either not open around or not being able to take additional enrollment because of that so it's meaningful.

Because the fall cycle with it's a heavy enrollment cycle heavier enrollment cycle anyway.

The combination of that with the with the labor shortage and unavailability did impact it that way.

Not too dissimilar on the backup side, even being able to service back up care as well.

Got it got it.

And just my follow up question.

Is is largely around just.

While from a stimulus perspective.

Sort of what's in your system.

When does it kind of roll off.

As part of that.

Just anything around universal pre K.

That you're hearing and your view on how that May impact your business.

Yeah, So maybe I'll talk about the government stimulus and what we've been able to realize it is helpful. I think as Steve and frankly it is helpful toward deferring some of the embedded incremental costs that are in our system, whether it's from additional notwithstanding.

Labor constraints, we have we still do have higher level of labor hours per child because of Maureen.

More intensive ratio on staffing and just getting back to more normalcy with parents being able to drop off children in centers some incremental.

Testing for.

Yes.

Covid testing kits hygiene some of those things so there is a bit more intensive.

Cost structure that is defined by the government stimulus funds, but we are we're talking about somewhere between.

<unk> 15, and $25 million, probably annually, but were able to realize on that.

Hum.

We're able to put towards those.

So that cost to frame it so it's helpful, but it's not transformative.

And Honda.

In terms of the <unk> and the other legislation that is.

Currently being discussed by the by administration look first we're very encouraged and believe that it's a great thing for early childhood education to be in the spotlight. The way. It is at the national level, It's something that we obviously have believed in for our entire existence and certain.

We operate in geographies, where government leans in <unk>.

Such places as the U K and the Netherlands, and then there are pockets here in the U S where that has been the case as well.

In terms of where that is obviously that is still in.

In discussion.

And the details are not as detailed as we would like to see on the other hand, we are encouraged and are hopeful that that the money that the government is looking to put against the.

Ultimately finds its way through the state to make childcare affordable for families and make universal pre K available to families.

We still are hesitant in terms of the quantum that is being discussed.

Enough to actually accomplish the ambition that the government has.

So I would say that's the only offset to our enthusiasm around this program is simply whether or not.

Ultimately the ambition that they discussed is congruent with the amount of investment that they are ultimately talking about.

Thank you.

Our next question comes from the line of Manav Patnaik with Barclays. You May proceed with your question.

Hi.

My first question is just for.

Centers that you've come in can you closed this quarter can you just remind us what that.

To date of Covid to date number is and how much of that is just the offices deciding not to have the centers anymore, just trying to understand the labor disruption.

Yes so.

Sorry about that.

Yes, 14 in the quarter.

Closed 33.

To date, yes.

And last year, we closed a total of 88 and so we are over 100 through the Covid cycle. If you will.

And in terms of the percentages that are.

Yes.

Percentages are more about.

Whereas the demand profile as opposed to.

The campuses I think you said campuses closing.

There are.

The split between our base model centers on our client.

But I would note one one thing that's a little bit.

One notable thing about the closures. This year is that we have seen.

Our normalized level of closures in our UK business.

They did not close hardly any centers as a music immediately after COVID-19 there were very strong structural supports for the workforce.

<unk> really worked hard to get centers. The whole economy was working hard to get everything reopening and so we did we opened a number of centers there that have proven to be not economic over the long run in terms of the.

One of them or the demand profile and so they've been feature a little bit more this year than a U K group did last year. So I think that's just one piece of color commentary winner.

Okay got it and I was also hoping you could help us.

Just distinguish the performance between your.

Consortium centers in the U S. Perhaps and then obviously I understand the delta there.

Location delays, but I.

I guess, just trying to get a flavor whether at least on the retail side the more lease concessions I think theyre ramping up faster.

Yes, it's actually there is not a really discernible difference there.

The client centers.

I think like like they always do when they're opening our rig ramping they tend to have.

<unk>.

Bit more enrollment than the lease consortium centers that we've seen.

A couple of percentage points different that its not meaningful change but.

Not seen it different because of a client sponsorship.

Fortunately compared to our history.

Okay. Thank you.

Thank you thanks Manav.

Our next question comes from the line of George Tong with Goldman Sachs. You May proceed with your question.

Alright, thanks, good afternoon.

19, new centers this quarter, given the long sales cycles for New center launches.

Are you seeing any disruption in demand for new center openings that might impact the number of new openings, one or two years from now.

No I think.

Look the quarter openings, I think actually give us quite a bit of confidence in terms of the level of interest and the speed at which these decisions continue to be made so overall I.

I think our pipeline for new centers, specifically client centers continues to be robust and those come in terms of new builds as well as in terms of transition opportunities for those who today self operate and so certainly I think the quarter's results and openings as well as as we look out.

For the future we feel good about our continued cadence of conversation and discussion as well as significant interest in <unk>.

On site centers.

Got it very helpful.

Plan to end the year with over 95% of your centers open when would you expect to have 100% or all of your centers fully opened.

And so we have dates George for the vast majority of the centers that remain temporarily closed.

There is probably fewer than fewer than five that have data. After the first half of next year. So.

It's mainly.

Between Q4, and then the first half of 2010.

Got it thank you.

Thank you. Thank you.

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

Hey, good afternoon. So I wanted to go back to the labor pressures for a minute.

Thanks for sizing that that's helpful.

Can you maybe size or help us understand a little better how youre dealing with this obviously one of the crown jewels of your model has always been the ability to price in excess of labor is there any risk to that end and are you having to raise wages meaningfully.

And then the second part of the question is just.

Is there anything on the horizon that you think can really help the situation.

Now that schools are back and in many cases daycares back.

No.

Yeah, well I can tell.

The first part of the question Gary.

No.

I think that our view is that the underlying economics of our model are intact. Although as we've said the last couple of calls that there might be.

Relatively higher wage pressure in the near term that may take a cycle or two of tuition increases as we balance out.

Price and cost to the parent.

With getting enrollment back and been attractive in that way. So we are certainly at the high end of our wage our historical wage pattern, you've heard us talk about two to three hour in a higher market, 3% to 4% wage increases and we're certainly seeing.

That on average 345%.

And average wage inflation in our sector with with that some structural more meaningful structural changes in some of our key markets where.

We're contemplating anything in particularly higher or are there other other constraints on the labor force so were putting real money behind this are able to with our price increases that we're expecting for the early part of next year able to recoup a good measure of that but we again want to balance it out and expect that we will.

Have more meaningful tuition increase at this cycle in the next cycle in order to get that back into its usual, 1% differential over time, we do think that back intact I think thats. The fundamental question that you're asking and if we.

We will be able to continue to price in a way that we have against the underlying cost structure.

<unk>.

It is a fluid market.

And Gary I guess I would just add.

Look.

Really important elements of our model in addition to what.

You just described is.

Being an employer of choice and so we continue to make sure that we are focused on being an employer of choice within our sector.

We are absolutely making investments in wages, we're making investments in benefits.

Yes, just to add to that.

You did mention that we do have some of this support coming from our government.

<unk> that helps too.

It is pointed towards many of these various initiatives to that also I think helps to support that in this intervening time, while those programs are in place.

And are those going through the end of next year or it's not clear to me, which programs. You are are you in some of the ones that go through 2024 or what do you have a sense when it ends.

Well I think that it does vary state by state and it is.

It's not always clear how quickly the states are going to find we are expecting that there will be.

Probably the bulk of the spending will be under ARPA.

Holiday Appropriations Act has.

Had some funding into 2022, ARPA going through 2022, and some into 2023, but we're not.

<unk>.

I think we're not counting on it going beyond that.

Okay. That's helpful. And then just one follow up.

There's been this debate.

Around as your network sort of the best setup network.

<unk>.

Flexible work.

Environment, how have your I don't think I've asked you about it in more than six months. How are you thinking about that is is there a need over time do you think at this point to have more of your network be community based and if so.

When we get back to some level of normal would you expect to accelerate from the pre pandemic pace the openings of lease consortiums or do you think the network.

It's still relatively optimal as you've got it set up today for a period, whether that 12 or 18 months from now when we're in sort of a new normal. Thank you.

Yes, so we we.

We really like the positioning that we have in the network that we have.

As always our first priority is continuing to work with employers.

Can you sustain and provide the economics that we're looking for but at the same time, we know that we're citing in locations that are attracted to our employer partners and so ultimately we continue to see the mix looked very similar to what the mix has been and we continue to evolve with our client partners as it relates to where we are citing.

Locations going forward, but feel really good about the locations as they exist today moving into the future.

Thank you.

Okay.

Our next question comes from the line of Jeff Silber with BMO capital markets. You May proceed with your question.

Thanks, so much.

I was wondering if you can talk about the competitive environment I know a lot of the smaller players ran into trouble last year some of them didn't reopen but we're seeing some of the larger players get larger I know they do more on the retail side than the Worksite, but.

Some of them also have sizeable worksite components can you just talk about the dynamics, what's changed over the past year or so.

Yes, I think look.

Again, we continue to be focused on our growth profile as do others in our sector.

<unk> period.

We still.

Have a market market share advantage over any of our competitors and so to the extent that for example, one of the large.

Retail competitors has.

Somewhere less than 100 centers.

It's still is a small base compared to our employer sponsored focus and ultimately I think they continue to see opportunity on the retail side and less so on the employer side and as we've stated time and time again, our focus really continues to be on that employer sponsored piece, where we think we can.

Continue to lead by a fairly wide margin.

Okay. That's helpful.

Wanted to follow up comment.

Comment you mentioned earlier to the question about wage inflation and passing that through.

Elizabeth instead of it going to take a cycle or two can you just clarify what you mean when do you typically raise prices.

Be done if I get a new customer coming in can be done fairly immediately just talk about that dynamic that would be great.

Yes, so we typically raise prices once a year.

And given the.

The Covid disruption, we actually is calibrated to in January cycle. So that's why we're looking at our next increase.

And so it's not to say that we couldnt do a mid year increase if there were.

Some exigent circumstances.

Or change in what was going on but we typically do just.

At that time to have new families who are joining join on the rate whenever they do what they come in July they pay that rate until the next cycle in January or when their child ages.

Got it so when you set a cycle or two you mean like a year or two to recoup those costs, yes, exactly that that we have the environment. We're in now we've been monitoring it there is.

2020 was obviously a non typical year issue, we are seeing the wage inflation coming in more coming on stronger in the last several months and so we can now with that information and calibrate the increases for January and then be able to how is how is it actually playing out through <unk>.

Year to set the rates for 2023.

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

Tom.

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One moment, please when we pull for more questions.

Our next question comes from the line of Jeff Mueller with Baird.

You May proceed with your question.

Yes, thanks for taking the question in terms of back up care.

So still mid channel was.

Staffing constrained and did you pivot the delivery to other channels or other partners I ask because the year over year growth in Q4 sounds like it's good so not sure. If the issue has been resolved or if it's on <unk>.

<unk> are the Dutch.

Year over year trend is more about the seasonal contribution from Steven Kates or.

The easier comp or something like that.

Yes, so Jeff Thank you for the question.

What I would say is that we did have.

Staffing challenges in centers and in home more pronounced on the in home side, because obviously there is much less leverage right. It's one caregiver too.

One child in that format and so certainly on the in home side, we felt more pressure in certain markets on uncertainty peak dates.

That said as we mentioned earlier.

CNS and those in home caregivers that we employed directly and so ultimately feel like we are going to overcome those challenges.

In that way.

Okay and then.

Q4 back up care margins it sounds quite good is less in the home delivery as well.

On used.

Capacity that you get some like catch our breath of our core just what's what's driving up to 35% 40%.

Yes. It is on obviously on the higher end of where we would typically see longer term margins. There Jeff. It is down to Q4 debt sequentially have some relatively relative are pledged to the rest of year. So theres a bit of that plan, but it is as we come back to more normal.

This level of actual traditional Houston are paying those third party providers and what that mix is just our.

You know what the essentially what the flow through would be in this environment. While we are still rebuilding two.

Traditional use consumption against the revenue.

Okay, and then just last how is back up care.

Sales planning with clients looking for 2022.

You had a lot of clients sign up through the pandemic.

I think there's been some hope that there would be an up sell at some point are you seeing that or what are you seeing for 2022 backup herself.

Yes, so I think that.

With this quarter demonstrated in and what we continue to see in the pipeline is that despite the increase that we saw to COVID-19 in terms of interest and sales in our backup line of business. We continue to see a robust pipeline going into 2022.

Employers make decisions at different rates in a different cadence and so we continue to have really productive conversations.

We continue to work on our cross selling.

Against those who today by Ed advisory or our centers.

And at the same time, we continue to attract through our backup line of service.

Number of new clients to the bright horizons family. So I would say, Jeff very specifically going into 2022, we feel good about our pipeline and we continue to feel good that we're going to be closing a number of new back.

Back up clients.

Okay. Thank you.

Thank you.

Our next question comes from the line of Toni Kaplan with Morgan Stanley You May proceed with your question.

Thanks, so much.

You mentioned the occupancy levels being flattish sequentially.

And you talked about a slower ramp for utilization versus previously and this seemed like a bit of a change versus last quarter on the call you talked about sort of sounded very positive around reopening post labor day, maybe plus 30 or 60 days. So if you had to sort of parse out the drivers of the change.

You've talked about the Delta variant and the labor.

Impacting sort of the staffing levels are there other factors that you would call out beyond those or are those really the bulk.

Bulk of of what's.

What changed here.

Yes.

I think those are the two those are the two primary drivers telling me the delta variant, having an impact on.

The general apparent behavior.

The Delta variant in particular, having some higher elevated level of anxiety around this effect on children are the exposure for children and I think brought a level of response from from parents that was different than some of the previous variance or things you guys have seen.

And all of that came at a time when when many would've otherwise been signing up to enroll and that's employers we're making.

Decisions about work arrangements.

And so the disruption to routine and what people were planning for.

It had a variety of effects, but we've sort of I'll put it under the rubric of the delta variance in that timing.

The staffing challenges then added to that.

It has become.

Coming along but as enrollment has come back and there is more demand we do feel very good notwithstanding what I just said about parents, we do feel good about all the parents who have come back. They have expressed interest are enrolling. So there is good momentum there in many respects.

The demand side, and the interest level, but not being able to service all of it.

Is it just sort of maintenance and ironic.

Sort of additive to an environment, where we're we're also seeing parents pause.

Yeah.

That makes sense.

Wanted to ask a follow up on hybrid.

So just curious about your thoughts on <unk>.

Employers the option of going to any of your community centers instead of.

Assuming that they do have an on site center.

So just sort of opening up that flexibility I imagine the employer could still maybe offer a subsidy.

I'd like thank you for the onsite centers, and obviously that would maybe detract from some demand for the on site. So maybe that's why they don't do it but just is that a possibility at all is that being sort of thrown out there till employers just how.

How should we think about that.

Yeah. So we certainly evaluate that and had conversations with our employer clients about the network of centers that we have that could serve their employees more broadly and at the same time, we've done a lot of survey work with parents directly and what I would say is the outcome of both the conversations in the survey.

Work and also just the actions that parents have taken is suggestive that while families and working parents may decide to work a hybrid schedule.

They want consistency of care for their children and so ultimately what we're finding is whether a family chooses they are onsite center or in those cases, where an on site center is not available and they are choosing a center close to home or close to work. They are choosing a single center.

Factor for families is that consistency of care for their child. They know that that's the highest quality experience to have a single set of teachers consistency of classmates and so that is the.

Prevailing decision that theyre, making irrespective of what they are deciding to do with their own work accommodations.

Got it thank you.

Excellent well. Thank you very much we appreciate everyone, who joined the call and hope everyone has a great night.

Thanks, everyone just happening.

Q3 2021 Bright Horizons Family Solutions Inc Earnings Call

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