Q4 2021 Bright Horizons Family Solutions Inc Earnings Call
[music].
Greetings and welcome to the bright Horizons family solutions fourth quarter 2021 earnings 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 being recorded I will now turn the conference over to your host Michael Flanagan Senior director of Investor Relations you may begin.
Thank you Molly Hello to everyone on the call today.
With me Dr. Stephen Kramer, our Chief Executive Officer, 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 in the Investor Relations section of our website <unk> Dot com.
As a reminder to participants any forward looking statements made on this call, including those regarding future business and financial performance, including the impact of COVID-19 on our operations are subject to Safe Harbor statement included in our earnings release.
Forward looking statements inherently involve risks and uncertainties that may cause actual operating and financial results materially differently.
Alright, and detail in our 2020 Form 10-K , and other SEC filings.
Any forward looking statement speaks only as of the date on which is made and we undertake no obligation to update any forward looking statements.
We also for non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the IR section of our website.
Even though not take us the review and update on the business.
Thanks, Mike and welcome to everyone, who has joined the call to start this evening I'll recap, our 2021 results and outline how the progress we made this past year positioned us well for 'twenty, two 2022 and beyond.
Elizabeth will follow with a more detailed review of the numbers and outlook before we open it up for your questions.
Overall, I'm really pleased with our performance in 2021 and all of that the team has accomplished over the last few years.
Prior to COVID-19, our business had been on a consistent revenue and earnings growth trajectory, which was up ended with the onset of the pandemic and the temporary closure of nearly 80% of our centers.
We responded swiftly with an immediate focus on health and safety supporting clients in their essential frontline workers and pivoting to create new backup care solutions for clients and employees to meet the incredible surge in need and demand.
Throughout 2021, we gained traction in our recovery as we reopened in hundreds of centers and welcome back thousands of families.
At the same time, we delivered hundreds of thousands of days with backup care launch services for more than 75, new clients added 44, new centers and made important investments in technology and new service offerings that lay the foundation for growth and innovation over the next many years.
As a result of all of this we enter 2022 with good momentum.
While the most recent COVID-19 very in search now appears to be waning parent and client behavior has still been impacted and will take additional time to normalize on the plus side. The long term outlook I see for our business is incredibly positive.
In fact, I believe the actions we have taken over the last two years, we will transform our opportunities in the years ahead, our long standing value proposition with clients families learners and our employees has significantly strengthened during this period.
Specifically, we have broadened our impact with the addition of more than 225, new clients extending our service opportunity to more than 10 million eligible lives.
We capped into new potential use by cross selling additional services to more than 100 existing clients, we galvanize our relationships with our more than 350 clients responding to the unprecedented care needs arising from the chaos created by the pandemic.
We let our sector in health and safety practices strengthening our long standing reputation for quality care in early education across the U S U K and Netherlands.
We rationalized our existing portfolio of early education centers, while at the same time partnering with employers to expand capacity to meet their evolving needs.
We expanded investments in technology to unify our services.
Lead and improve our end user experience and personalize our outreach to prospective and current employees.
We invested in innovation, including deployment of additional characterize in backup care and new pathways and partnerships to support adult learners that headset.
And finally now more than ever we are engaging with the CEO and Chr rows of existing and prospective clients.
This underscores the strategic importance of the solutions, we offer as organizations look to attract retain and upscale and differentiate.
With these building blocks in place and associated tailwind I am confident we are emerging from this pandemic structurally more effective strategic and impactful.
Let's now take a closer look at our quarter four segment results.
To recap the headline numbers for this past quarter revenue increased 23% to 463 million, which yielded adjusted EBITDA of $79 million and adjusted earnings per share of <unk> 65.
An increase of 81% from the prior year for.
For the full year 2021 revenue of $1 8 billion represented growth of 16%, while adjusted earnings per share of $1 99 expanded 28% over 2020.
In our full service segment revenue grew 29% in Q4 on continued enrollment recovery.
We added 14 centers in the quarter, including a second center for Houston Methodist Hospital, and a network of 12.
We acquired in the UK, expanding our footprint in the southeast of England.
Yeah.
We reopened 17 more centers in Q4 and ended 2021 with 96% of our <unk> thousand 14 centers open as.
As we look ahead. The remaining 37 temporarily closed centers are currently slated to reopen in the first half of 2022.
And our opening centers, we are encouraged by the progressive improvement in enrollment as occupancy levels ticked higher in Q4.
Like many other businesses the spread of Omicron Varian has been a disruptor spin.
Specifically for us it dampened the pace of enrollment growth as prospective families delay their start dates.
<unk> also had an effect on the staffing of early childhood educators, particularly through the holiday period and carrying into January of this year.
While still challenging we are seeing improving trends on the labor fronts as we discussed last quarter. The pandemic has exacerbated the staffing pressures the childcare industry has long face.
Bright horizons has always been an employer of choice for early educators, and we have let our field investing career growth underpinned by development opportunities such as our ECA Credentialing and Horizons teacher's degree program.
In this unprecedented environment. We have also taken a number of actions to specifically address the current conditions.
Including increased wages recognition bonuses and expanded employee benefits to ensure that we are attracting retaining and growing the best teachers in the industry.
While enrollment is still constrained by our ability to fully staff classrooms. We are encouraged by the early results of these measures.
We are closely monitoring the progress and our talent teams continue to deploy creative solutions, including events like the national hiring day that we hosted earlier this month to further accelerate our recruiting efforts.
Let me now turn to backup care, where revenue of $94 million increased 10% over the prior year.
Overall, we saw unique users improved sequentially in the quarter, although in home and in center use was less than what we expected heading into the quarter.
The improvement we saw in mid fall as the Delta impact started to dissipate with once again disrupted by the emergence and spread of almond crop in the latter half of the fourth quarter and continuing into early 2022.
While we have dealt with the impact of Covid spiked over the last two years and recognize this dynamic could well persist in the first half of 2022, we believe the underlying need for backup support I'm working parents has not diminished.
To that end, we have worked hard to rollout additional new sites that align with our hurdles facing working parents.
Our virtual tutoring solution that we launched mid 2021 has been highly successful, helping those parents, whose children whose children.
<unk> progress with impacted by remote learning and other disruptions to their education.
We are expanding Stephen Keith camps to new communities, where our clients employees live and work, including Austin, Atlanta, and Minneapolis, providing more outdoor and enrichment opportunities for children during school holidays, and the extended summer break.
And more recently, we launched virtual camps as another use case for parents and need to support that can be delivered remotely on demand with a similar learning opportunity as an in person experience.
We will continue to innovate on the delivery front with the goal of not only serving more working parents, but also to drive greater uptake of their youth banks provided by our client partners.
Speaking of clients the team delivered another strong quarter of new client launches, including beyond meat Mitre and the southern companies to name just a few.
Not only have we added a record number of new clients over the last two years, but those clients are also larger on average with double the number of eligible employees per client than in the past.
As a result, I remain very optimistic about the longer term trajectory of backup use and the broader opportunity within our backup care segment. Despite the disruptions that are currently impacting use of traditional in home and in center care.
Turning to our education advisory business we.
We launched a number of new clients in the quarter, including Geico, Qualcomm Synchrony financial and Wawa.
Activity levels were solid and college coach as this business continues to see high interest levels from parents needing help navigating the college admissions process.
I remain excited about our opportunity in workforce education as this remains a significant area of investment and focus for employers looking to differentiate their employee value proposition as well as upskill and reskill their employees into hard to fill roles.
Before I wrap up I want to take a moment to thank every member of the bright horizons family for their dedication and incredible resolve over the last two years.
While there has been significant impacts to our families our employees and our business I couldnt be more proud of the way in which our teams came together to deliver the highest quality education and care.
Always staying true to our mission to be a partner and employer of choice.
It is that focus and passion for our mission that will not only have a profound impact on the lives of the many children families learners and clients we have the privilege to serve.
But also allow us to realize the many goals we have as an organization over the next several years.
We believe we will emerge from this disruption financially stronger and better positioned competitively to grow and drive value for all of our stakeholders.
While the recovery in our industry hasnt been and wont be linear our resiliency as an organization and the strength of our business model positions us for long term success.
We have and will continue to weather the short term challenges, but the long term outlook for our business remains very bright.
While a number of variables continue to impact the pace and velocity of our recovery from the effects of the pandemic. We continue to execute on our long term strategy and have improving visibility to our near term performance.
Therefore, we are pleased to re introduce top level guidance on our expectations for near term operating performance.
As we look ahead for 2022, we anticipate 2022 revenue growth of 17% to 22% with operating leverage driving adjusted EPS growth of approximately 60% to 70% to $3 22.
To $3 40.
Per share.
This range contemplates a number of recovery path based on current trends and our expectations of continued normalization of enrollment in use across our three segments.
With that I'll turn the call over to Elisabeth who will dive into the quarterly numbers and share more details around our 2022 outlook.
Thank you Steven and Hello to everybody Who's joined the call Tonight.
To recap the most recent quarter overall revenue increased 23% to $463 million.
Adjusted operating income was $46 million or 10% of revenue and adjusted EBITDA increased 49% to $79 million or 17% of revenue.
In the fourth quarter, we added 14, new centers and reopened 17 centers that had been temporarily closed.
We also permanently closed 11 centers.
We completed 2021 with revenue up 16% to $1 76 billion.
Adjusted EBITDA of 21% to $272 million or 15, 5% of revenue.
And with 977 out of our 1014 centers open.
Full service revenue increased 75 million in Q4, or 29%, which is at the top end of our expected increase of 25% to 30% year on year.
Our occupancy levels average between 50, and 60% having kicked up marginally from Q3, despite the near term impact of I'm, a crime that Stephen discussed.
Adjusted operating income for the full service segment improved 36 million over 2020 to a positive $7 million.
This represents a 48% flow through on the revenue growth.
The outperformance relative to our 40% flow through her expectation relates to improving efficiency with enrollment and lower than expected labor costs due to staffing constraints as well as continued support from government programs targeted for the child care industry.
As Stephen mentioned backup care revenue increased 10% to $94 million with $31 million of operating income.
We continue to expand our client roster with another solid quarter of new client launches, although revenue growth was short of our expectations.
As Steven mentioned, we had softer use levels associated with the spread of the outer crime variant late in the quarter, which affected both the caregiver availability and apparent demand for in home and in center care.
Our educational advising segment reported growth of 5% to $30 million on contributions from new client launches and expanded use of our workforce education in college admissions advising services.
Interest expense of $8 million was in Q4 was down about $1 million over 2020 on lower overall borrowing costs.
Our structural tax rate on adjusted net income increased to 24% due to the significant increase in taxable income compared to the prior year.
Turning to the balance sheet and cash flow for the year, we generated $227 million in cash from operations, we made investments in capital and acquisitions of $112 million, which compares to $81 million in 2020, and we repurchased $214 million of common stock including 100.
$12 million in Q4.
We ended the year with $261 million of cash and our leverage ratio was two seven times net debt to EBITDA.
So moving on to our 2022 outlook.
Stephen touched on earlier, we're providing annual revenue and earnings guidance for 2022, and we'll share as much color as possible on how we see this year unfolding.
Of course impacts of the pandemic remain difficult to time and to predict and so we are providing a range of potential performance to reflect that ongoing uncertainty.
In terms of the top line. We currently expect 'twenty to revenue growth in the range of 17% to 20%, 17% to 22% excuse me or a range of 2.15 to 2.15 billion in revenue.
Which would exceed 2019, the pre COVID-19 benchmark.
At a segment level, we expect full service to grow roughly 20% to 25%.
Backup care to grow between 10 and 20%.
And Ed advisory to track to the mid teens approximately 15%.
Based on what we see now revenue will grow alongside the gradual improvement of enrollment and use trends over the course of the year.
In terms of earnings this will translate into sequential improvement similar to the cadence we saw in 2021.
For the full year. We currently expect 22 EPS to be in the range of $3 20 to $3 40.
And the more immediate timeframe, we expect our Q1 results to be impacted by this Friday Obama crime that began in the latter half of Q4 and has continued into 2022.
As a result, our outlook for Q1 is for total revenue growth in the range of 20% to 25%.
With our full service segment, recognizing growth of 25% to 30%.
Back up growth in the high single digits, and Ed advisory growth of approximately 15% similar to the full year.
In terms of earnings we expect Q1, adjusted EPS to be in the range of 37 cents a share to 42 cents a share.
Overall in summary, I share stayed in tenant sentiment that we have made significant progress on our recovery over the last two years and we had a strong diversified and differentiated business model to meet our plan by delivering the critical services that meet our client needs.
And with that.
Small we are ready for our Q&A.
Thank you and at this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from the line of Hamzah Mazar with Jefferies. Please proceed with your question.
Good afternoon. Thank you.
You know you mentioned in your prepared remarks.
A few times being better positioned competitively.
I think you also mentioned you know beans.
Structurally more impactful.
Coming out of the pandemic.
Should investors expect.
That does show up and you know better organic revenue growth.
Relative to kind of your framework.
That you had pre COVID-19 .
And if so you know where do you see new center growth growing faster because you have bigger clients you know as backup gonna be a bigger contributor or have you found kind of new adjacent services. Just just maybe talk about you know where people should be getting to Kai.
End of <unk>.
See some of those milestones I know, it's early now, but but maybe if you could flush that out a bit.
Yeah.
Sure so from a from a new center growth standpoint, I think the key thing is to consider how.
Yeah, the arc of our business and the relatively long sales and then development cycle. So we're very encouraged by the amount of activity on the front end have a number of centers that are in development and so you know this year, we'll we'll be expecting to open somewhere between 35 and 45.
Centers.
There are as I say, a number that are already in development. So we have visibility on a large number of those we do have some plans for acquisitions as well that will feed into that.
I think that the you know just as a reminder, as I as I say that the development cycle is a long one and client activity part of the value I think of the conversations we're having with clients now is saying.
The very nature of what Theyre looking at we have a <unk>.
Tristan dedicated centers, we are interested in sharing our participation in centers, you know near site versus on site.
Supports and so being able to respond to those different needs, including you know there are opportunities for us to do consortium locations that put our capital to work in and tap into many many clients interest. So that's some of what we're saying on that practice and I.
I don't know if there's other color yeah, no I think first time. So thank you for the question I would say a couple of things I'd say first I think we.
Through this two year period as we remarked on.
Has done very well, garnering new clients and so we see good outlook as it relates to both continuing along that trajectory, but also the cross selling efforts that we have been focused on will continue to allow us to see more clients adopting more of our services.
The second element that again really speaks to the strengths of what growth into the future is going to look like.
As our innovation and our expansion of the kinds of use case.
The opportunities that we now have with our clients and their end users and then the final piece, which we had started pre pandemic.
And continue to invest really are in this pandemic period and beyond is around and investments in technology and we believe that we have become much more tech enabled set of services that will accrue really good dividends going forward. So I think overall I'm, reflecting on where we have been and where we are headed we death.
Currently feel like we are in a stronger position to deliver the kind of growth that are there that we're excited about.
Got it.
Very helpful. And then just just my follow up question is just on <unk>.
Alright, more near term on 2022.
I know you've given guidance, but maybe maybe talk about you know I think this is the first time you give annual guidance since since the pandemic.
You know I took previous communication had been.
We may reach pre Colbert and correct me if I'm wrong, we were married pre Covid revenue.
Full service on a quarterly run rate sometime.
This year, but utilization will take longer.
I think it wasn't maybe by the end of Q4 and.
And so maybe if you could sort of talk.
Talk about you know why are you comfortable establishing annual guidance right now and then.
Then just in terms of you know when you took you'll hurt pre COVID-19 revenue in the full service business.
Sure. So you know I think that the operations of the business over the last two years, but I know, we kind of hit on it a few times, there's a lot of variables theres been a lot of Oh sort of twists and turns over the last couple of years that they're there also is that through a lineup of steady progress.
Specifically to your question on the full service business we've had.
Centers reopen we've had enrollment coming back in and although it has taken a little bit of a flatter ramp back in two to toward the pre COVID-19 levels than we would've anticipated a year and a half ago, we're reopening.
It has remained a steady improver, including you know modest uptick this quarter and our visibility to that continues into 2022 and that the demand from parents is there. We are taking a number of steps to both fulfill that demand too to meet parents where are they.
There are two to get staff in the locations where the demand is is happening and so we we have the tools to work on this even as parents are making decisions over a longer period of time and clients are making decisions about their return to office decisions in AR.
You know in the course of what's going on.
The general World at large here, so our confidence comes from that steady progress and as we look out to the rest of this year end and see where we are in terms of Oh, the occupancy of the centers, we have which which ones have interest in demand. That's that's what puts us on that.
January to be you know, we're not we're not at the same level, we were a quarter or two ago looking at midyear.
For pre Covid revenue, but that by the second half end of the year. We do think that we will be our approximate end and getting back to that pre pre COVID-19 timing in terms of top line and from an overall occupancy level at this point are.
Are you now at the plan and the guidance that we laid out here it doesn't get us all the way there back to the pre Covid occupancy ranges you know we had been in the 70% to 80% range and and what this plan contemplates that that's getting close but not all the way there by the end of the year. So we think that it'll take us.
Continue to update you as the year goes along but we think that we're on a pathway to get close but will will be more measured than than.
But that that would indicate.
Got it. Thank you very much I'll turn it over it okay.
Okay. Thank you.
Our next.
Comes from the line of George Tong with Goldman Sachs. Please proceed with your question.
Hi, Thanks, Good afternoon wanted to dive into the impact that you're seeing from labor shortages can you talked about weather.
Whether or not you're your capacities.
Occupancy rates are affected at all by the current labor shortage situation.
How your pipeline for recruiting looks like.
As you look out into the rest of 2022.
Yeah. So I think I'll take the first part and then let Steven discussed colored commentary on on some of the efforts underway on the labor front. So.
We are seeing some constraints on our ability to take enrollment it is yeah.
It's spread out across our.
Our centers, it's not in only one pocket, but it's also not in every center. So some variability there but in general we would probably estimate that it's affecting our occupancy by 3% to four percentage points of.
That we are you know that we have demand and we are not able to match that with the the available staff to supply. So we are.
Working hard to address that and so soon I hope.
So as we as we remarked you know certainly we have taken.
Very strong stands as it relates to making sure that we continue our position as an employer of choice.
And so we have invested additionally in wages and benefits.
As you will know we have also been very focused over a over our history on making sure that we have the most well educated workforce and so obviously continuing to reinforce our efforts around ECA and the horizons teacher's degree program, where any teacher in any one of our centers.
Schools can go back and get an associates for a bachelors degree completely free with no out of pocket expense.
And really helping to facilitate career mobility and upward trajectory for their careers.
In terms of specific actions, you'll see us really actively out there on the recruiting front and so you'll know that referrals are still our number one source of referrals from existing employees are still our number one source of of new employees and in addition to that we continue to be very active with national <unk>.
Hearing dates social media.
And other sort of technology enabled ways to make sure that the candidate experience it.
It seamless and so overall I think we've come a long way as it relates to making sure that we are out there and really finding the best.
Talent that is in the marketplace and again underscored by our employer of choice status I feel good about our ability to continue to make progress against the demand that we have and the supply shortages that had been endemic in our industry, but certainly are particularly acute today.
Got it very helpful.
Historically tuition has increased 3% to 4% a year can you talk about what kinds of tuition increases youre planning for over the next year and the current inflationary environment and how tuition increases compare or will align with wage inflation and other input cost inflation like supplies.
And facility costs.
Yeah, It's an important question George because it's obviously been a hallmark of our business model that we are you know we're in a arrangement here, where we are sharing the incremental cost with parents with clients.
And so that has been that discipline around pricing has been key to our sort of our steady and.
Predictable performance.
This environment, we are in a balance as you've heard me talk about in the past we're in a balanced environment, where we are really working hard to regain and re enroll families attract new families and and and Reroll families who've expressed interest and so we are given that we're in a 50% to 60% occupied level, where we're balancing out.
This increases with our our cost inflation and believe that we can continue to make.
Rightsize, those economics over a cycle or two.
So this year, we have we've done increases that are averaging probably closer to 5% to 6% some geographies higher than that certainly some geographies are a bit lower than that but but averaging on the higher end.
What you've seen in the last few years to reflect the inflationary environment on the wage front and if we look ahead. Another year I'd say, we're probably in a similar higher than average environment, we have made wage.
Wage adjustments as Stephen mentioned too to be addressing not only the supply challenges, but also the environment in general.
And so we are were balancing out those costs and most other inflationary costs for us are not that they're not that substantial or our occupancy costs are pretty well set. There's you know some people really supposed to come in but those are fairly well set and our sort of operating controllable costs.
Tend to be between five and 10% of overall operating costs. So we're not even though there are some inflationary impacts there.
Probably the only one I'd call out that may be more of a variable with each sort of energy costs, but that that's still manageable at this point. So as we look ahead 12 months I'd say that we're looking as I say in that similar range of somewhere between five and 6% on average perhaps next year.
And in the meantime, if we see it.
General you know further pressure and change we could look at something that's a mid year adjustment in certain locations. If it warrants. It that's not what we're planning at the moment, but we certainly have the flexibility to do that.
Got it very helpful. Thank you.
Yes.
Our next question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.
Thank you so much and your commentary about backup.
Talk about some weakness in home and in center business I'm, sorry can I, just get a little bit more color on that I didn't really hear of the specifics around that.
Yeah, I mean, I think that first when we think about in center in an in home care.
We believe in and certainly our research suggests that.
<unk> parents or.
Thinking about the use of those opportunities even more than they are thinking about it in terms of our full service centers and so when a variant for example hits, we see an increase in cancellations we see.
Resistance to making new reservations and that's really reflective of the fact that when someone is thinking about how they're going to deal with intermittent care.
They are much more careful than what they might do for permanent care, where they know there is consistency in the children and teachers in the classroom versus being an intermittent trial for the day either in home or in center. So I think that certainly as we saw through the fall with Delta and then we saw again.
And more recently with the new variant.
People were more cautious and we saw that show up in the form of new reservations and cancellations that said I think we're also really clear about the fact that we have additional use types beyond in center and in home to include things like virtual tutoring things like camps both virtually.
And in person.
And so we have seen a nice uptick as it relates to those.
Those use types along with the fact that during those more difficult times from a COVID-19 perspective, we certainly have seen an uptick versus what we would've expected as it relates to reimburse care. So again, we tried to call out the fact that as the Varian started to surge we did see some hesitate.
Among families for in center and in home for a single day or intermittent care, but again, we have good use types to compensate for some of that and also the longer term still feeling quite positive about our families continuing to use our back up care services.
Okay, great I understand that thank you.
Getting back to near term trends.
You know we've seen in a number of locales in New York City, a lot of other north east areas that the the only crime variant is really weighing pretty dramatically and I'm. Just curious you know you saw some negative impact in the fourth quarter are you starting to see that kind of shift away in certain geographic areas, where we're seeing declines in cases.
Yeah.
Yeah, I think I would start then Elizabeth feel free to play color, but I would start by saying the phenomena of the rapidly declining is really new right and so I wouldn't say that we have seen a real trend as of this point.
Because you know this is a recent scenario where the cases are coming down dramatically.
What we anticipate of course is that it will have an impact obviously.
On on our business and will continue to further paring confidence and utilizing our services.
But to answer your question directly it is still a little soon to be declaring that that will be the cause and effect and what the <unk>.
Direct impact will be so overall, we were cautiously optimistic.
But I would say in the spirit of full transparency. It is assumed to be declaring that at this point.
Okay I appreciate the color. Thanks, so much.
Thanks, Jeff.
Our next question comes from the line of Stephanie Yee with Jpmorgan. Please proceed with your question.
Hi, good afternoon.
I just wanted to clarify on the <unk>.
Utilization rate not really reaching back to that high <unk> level by the end of the year. It sounds like that's really due to constraints on the labor front as opposed to <unk>.
Kind of reopening parents wanting to put their chips back to FIS.
If it is is you know is a big change.
The labor supply situation and I guess as you look into 2023, yes that situation now.
I expect it to be maybe a first half 2023 event, when we'll see kind of that high seventy's utilization rate again.
So I mean, I think that the what you're pointing out Stephanie is is the you know the different inputs and impacts that can happen here and certainly across the portfolio.
We'll have some variability here, but we are we are looking at an environment that is is constrained on the staffing side and then the protocol. The actions, we're taking in our policies or procedures. All of those are taking hold we are heartened by the early results, but they need time to.
To bear all the fruit that we need in terms of the demand that we see out there I think it's also it's the combination of that constraint at along with what we've seen in in parents sort of gradually coming back as Steven alluded to it here, but the changes in sentiment in the head.
<unk>.
Translates to actual behavior in a non linear way and over time. So we will we will see how it unfolds, but what were prognosticating now is a gradual return from parents.
US being able to continue to gradually address the staffing constraints and knowing that there's demand. There. There was a there's need there is demand and there is our ability to service the needs of what when we can get all these things so that that's what's driving our our predictions so to the question of whether it will be the first half of 2023 weeks.
We see a path to get there, but we need to we need to get through the next couple of quarters of all of this normalizing more to be more definitive about that.
Okay.
That's helpful color and.
We've seen some news headlines suggest some employers stopping I think kind of given up on putting a date on when do you want their employees back in the office, that's certainly not the case for our firm, but we've seen headlines.
Their industry.
Matt I guess, what conversations are you having with your clients on maybe.
Maybe the kind of services that they're looking for.
This year into next year, maybe is there more geared towards expanding backup care options or you're still having conversations about wanting onsite centers. Just if you can give some color on the <unk>.
Conversations that you've been having an interest level.
Sure happy to Stephanie So first what I would say is that in our conversations with our clients and prospective clients.
There seems to be fairly pervasive ambition to get employees back to the office.
And I think that you know likely we're going to start seeing that obviously, it's been led by financial services, especially in New York, but we're starting to see that more pervasive throughout the country.
So first I think there is real ambition for employers to get employees back to the office secondly, as it relates to the conversations we're having.
We're really upbeat about the conversations we're having about onsite centers. We are certainly engaging a as I said with Ceos and <unk> of a lot of organizations, who are truly contemplating whether or not this is the time that they want to be stepping into that type of support for their employees.
And there's really two elements to the conversation the first is.
They really want to make their their office, they're worksite, an attractive place for employees to come back to and ultimately want to be back at and so they are seeing worksite.
Worksite childcare as a great amenity in addition to the attraction and retention tool. It has always been they're really seeing it as an amenity and then I think the second piece is that as they contemplate the full service centers. It is also under the guys that they recognize that there.
There is a growing shortage coming.
In terms of their employees being able to get back to work and back to the office and so they are trying to address it from the perspective that it is one of the top challenges that their employees are exciting in terms of their ability to get back to work and ultimately get back to the office that said backup.
Care has through this pandemic really been seen as a business continuity tool and so we really continue to see really good interest from prospective clients about adding backup care to their arsenal to keep their employees productive and ultimately being an employer of choice and then.
<unk>.
Overriding all of this is.
Is the the additional piece around Upskilling and Reskilling and so we're hearing from a lot of our clients and prospective clients about their need to still hard to fill jobs and using education as a key tool to not only differentiate who they are as an employer, but also to.
<unk> be really a prescriptive about educational opportunities that will enable their current employees to ultimately be ready to fill those kinds of rules. So I think we are incredibly well positioned vis vis the strategic challenges that employers are having today across all of our service segments.
And are having really robust conversations on that basis.
Okay, Great that's very good color. Thank you.
Thank you.
And as a reminder, if anyone has any questions you May press star one on your telephone keypad in order to join the queue.
Our next question comes from the line of Toni Kaplan with Morgan Stanley . Please proceed with your question.
Great. Thanks, I wanted to follow up on that last question actually it's definitely I. Appreciate your comments on employers wanting to provide more benefits them and so I guess how does.
And obviously universal pre K is is maybe sort of less in the news right now after you know what's been.
You know not passing but like basically how does how does universal pre K fit into the employer thinking on whether it's worth you know starting up a new center like does that come up at all or is that just something that yeah, maybe investors are thinking about it and not employers.
Yes, I don't think that is a focus for employers I think that what employers recognize is the largest shortage in care is very specific to the younger age groups and so into typically in communities. The largest percentage of availability is at the preschool.
Level, and so where employers have historically and certainly as they look out into the future wanted to place. The most emphasis is in infant care, where it is in shorter supply and then progressively from there and so I think there is very little intersection between.
Sort of where the government is focused in terms of potentially moving downstream from elementary education into preschool, which as you rightly point out Tony seems to at this point be stalled, but rather thinking about the return to work getting both mothers and fathers back.
To work after maternity or paternity leave having a high quality onsite childcare experience to return to and then ultimately providing what is available what is affordable and what is most importantly high quality care.
The work site and so again I think there is sort of on two very different patents. The employer is really focused on getting employees back to work and ensuring that there is a high quality space available for young children and the government is thinking about whether or not they want to come down from public early child early education.
Sorry elementary education into early childhood education at the preschool level. So again, two really different concepts.
Yeah got it and just for my follow up just wanted to ask about M&A you mentioned a few times on the call that you know maybe we should expect some of the increased number of centers this year to be driven by M&A.
Shall we expect that to be bigger this year, especially as the Huron This recovery path or you know what.
When should we start to see them you know that gets bigger as for or should it not that thing right you know you're telling me.
Well just have to to clarify we did actually complete.
<unk> in the fourth quarter of a of a 12 center group in the U K. So.
With that and in a couple of other single site locations that we did earlier in the year, we actually did add.
Add a pretty typical average number of centers by acquisition in 2021, that's sort of a.
Tuck in size of around aiming for around 15 centers. There are so many years so I.
I think our plan.
Calls for a similar level of acquisitions, so nothing outsized, but also are certainly a handful of either single sites or.
Anywhere from two to four or five center for things that would comprise.
Comprised that kind of a cohort to add in 'twenty, two and I think more to the point of what you're asking is how is the market for M&A in and is it coming back in I think.
Our perception.
Perception of that would be that in selective markets as it's coming back.
More readily than others. Many many sellers are still waiting for their performance to return to a pre COVID-19 level to be able to realize a value that they have their their mind and heart set on and so there's been more waiting on the sidelines and certainly in the U S. There's been some more support for some of these.
Facilities longer than we would've anticipated so owners are hanging on a bit longer and we're trying to be both disciplined about prices, we pay them, but also.
It's an opportunity to really be.
We're laser focused on where it is and we want to be over the next many years and so we're being careful that way or the other about their thoughts on the markets. Yeah. Yeah, I would say the only thing I would add because I completely agree with all of those sentiment is that very specifically as we are seeing.
Markets progress towards pre Covid levels.
Sellers are absolutely becoming more interested in the conversation.
And the good news is we have teams on the ground in the U S. The UK and the Netherlands.
We're seen as a an acquirer of choice and so we have strong belief that as the recovery continues to take shape.
We will be in the right place as it relates to being able to find some really high quality acquisitions.
And then the other piece that is just worth observing is we continue to look globally at markets that today, we don't operate in and we believe that there may be opportunities over the coming years to continue to expand our footprint outside of the three main areas that we operate today. So again in the three.
Geographies, we believe that there'll be some good opportunities forthcoming and then likewise, we continue to be mindful of other places where there is some form of third party support either in the form of employers or in the form of government or both for us to continue to track and build relationship.
Terrific. Thanks.
Thanks, Tony.
And our next question comes from the line of Jeff Miller with Baird. Please proceed with your question. Yes. Thanks. Good afternoon wanted to ask about the implied step up in the expense base into Q1, and then I guess subsequently it actually looks like.
Pretty good margins over the balance of the year following Q1 so.
Anything unusual in Q1.
Just wondering if theres any sort of like temporary.
Surge labor rates, given the omicron anything in terms of the full year guidance around what's assumed for the timing of government support benefits or just anything else other than the enrollment ramp that follows.
Q1 that would help with the margin ramp from there or just.
Better understanding about the expense base sequence I guess there goes.
Yeah, No it's certainly Oh.
A fair point and question and a number of things do happen in the first quarter that are a little bit different than the fourth quarter, we have.
Obviously, there are there resets of everything from payroll taxes payroll tax limits, which.
I have an impact theres there certainly are some plans.
Plant that we are launching and have been in place that has gotten launching in Q1. So there's some cost step up there, but your point about the government funding is an important one we had in.
In 2021, we had a back end weighted.
Result is more states open up there with their grant applications and and they were deploying funds are more in the third and fourth quarter. So in Q3, we had about.
$11 million or so similar in Q4.
And that we you know we are we are planning for some continued government funding in in 2022 but it is very dependent on these states are rolling out their funds and some of them have gotten further along in that process than others. So there is a a bit of a lower assumption I'm going on Oh.
Both throughout the whole year and comparing Q4 to Q1, so we're looking at more like call It 25 million.
Million herself for the full year, and it's pretty straight line and that view. So that that's one element and I think the other is that we are.
You know from a.
And overall backup use standpoint when.
When we have more backup Houston, we are look we're looking at having them having that continue to progress there's more cost as we deliver the care.
Then there then there would be in an environment, where we're more of a pause and experiencing what Steven talked about a few minutes ago.
And the last thing I'd point out is that we are we did mentioned last year, we acquired a business in late 2020 and call Center City.
And it is a platform investment that's.
And parcel of our service delivery of enhanced our family's supports and so we have some investment going on there that's more enhanced in Q1 then.
And then if it was in Q4 that the latter part of 2021. So that's a step up of several million dollars as well so there's components like that.
Okay helpful. Thank you.
And then okay.
It isn't one backup care usage normalizes or goes back to clay.
Pre COVID-19 .
Hillman.
Percentages and mix so more in home and in center and I don't know to what extent you expect some of the new services to be additive on a lasting basis versus where theres, a cannibalistic effect self source reimburse care, so important preamble, but.
Just had.
One backup care usage normalizes, what does that mean for your revenue relative to kind of the current trend line or what's assumed in that 10% to 20% growth in.
Our 2022.
So I I had you right up until the last part of your question, where I think you were asking about what's the revenue trend line or is it with no sorry, yeah. Yeah. Like if you would look at back up care going back too.
Like some more normalized mix.
Is that because there are like a step function higher for you in terms of backup care revenue or are you assuming you largely normalized in the 'twenty two guidance just not sure how mix is impacting you at this point relative to what you would expect a more normal.
Yeah, I mean, the you know for the for the overall year, where the comparative in Q1 is a bit lighter in that high single.
And so we do expect as use continues to pick up over the year. What we are looking to do in the different use cases, along with the natural.
High use areas.
Over the summer.
Then it would be progressing more towards that you know.
If it's in the 10% to 20% range for the full year would be stepping up against Q1, accordingly, so pretty steady growth there I think that they the elements. There are more around how you know how we manage the costs against that and the different kinds of news.
And I'm sorry.
Sorry, yeah.
Yeah, well I guess just the the view is like your full service business is pretty clearly under earning in 2022, and your margin and utilization or are not where theyre going I'm wondering if there's a similar dynamic in backup care, where because mix hasn't yet normalized for you.
Is it two is under earning considering how many new clients who've onboard at the last few years through the pandemic.
Well I think if I, if I could start maybe I'm not sure. If it's table was going to add there but.
It's.
True to say that we don't have we have not been able to capture.
Capture and deliver all of the use that would be implied by having added all of those clients that we've added over the last couple of years. They are still under utilizing to a target then we would have to what we we know their populations could consume. So there is absolutely an opportunity there to have to drive even more used than we're planning for for this year as those.
This season, and so theyre under earning in absolute dollars in terms of the performance of backup against the revenue and we have in in this 10% to 20% range that we're expecting for this year, we do expect margins to be.
Performing <unk>.
In the range of our long term guide of 25% to 35% overall for the year. So we do think that the performance for the revenue we have will be consistent it's not really under earning for us for that but there is opportunity for more revenue and then for that to convert to more operating income.
Got it thank you.
Thanks, Jeff.
Yeah.
Excellent well, we appreciate everyone joining the call this evening and wishing you a great night.
Thanks, everyone take care.
And this concludes today's conference and you may disconnect your lines at this time thank.
Thank you for your participation.
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