Q3 2022 Bright Horizons Family Solutions Inc Earnings Call
[music].
Greetings and welcome to the bright Horizons family Solutions third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A brief 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.
A reminder, this conference is being recorded it is now my pleasure to introduce your host Michael Flanagan Senior director of Investor Relations. Thank you Michael you may begin.
Thank you Paul.
On the call.
<unk>, Stephen Kramer, our Chief Executive Officer.
Our Chief Financial Officer, I'll turn the call over to Steve and after covering a few administrative matters.
This call is being webcast and reporting will be available under the Investor Relations section of our website at 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 acquisitions and 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 fleet yourself to differ materially.
<unk> detailed one or 'twenty two.
<unk> 10-K filing.
Any forward looking statements speak only of the date on which is made and we undertake no obligation to update these forward looking statements.
We also refer today to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts and earnings release.
Which is under which is available under the IR section of our website.
Stephen who will take us through the review and update of the business.
Thanks, Mike Hello, everyone on the call and thank you for joining US. This evening I hope that you and your families are doing well.
I'll start Tonight with a review of our third quarter results and provide an update on the business and outlook for the year.
Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions.
First to recap the headline numbers for the third quarter revenue in the quarter increased 17% to $540 million with adjusted net income of $38 million and adjusted EPS of <unk> 66.
And our full service child care segment revenue increased 14% in the third quarter to $381 million.
We added organic centers, including one for our new client Kwik trip and we completed the acquisition of <unk> 75 centers in Australia.
We also reopened four of our temporarily closed centers in Q3, ending the quarter with 99% of our 1081 centers open.
Across our portfolio of like for like centers, we saw mid single digit year over year enrollment growth in Q3.
In the U S. Our centers located in the largest metro areas continued to progress enrollment recovery with New York City, San Francisco, and the Bay area, Los Angeles, Atlanta, showing notably strong year over year enrollment gains.
Our higher Ed healthcare and industrial clients that represent approximately 60% of our clients in our portfolio continue to show the highest occupancy levels, while our tech and consumer client centers experienced the fastest enrollment growth over the prior year.
In terms of the age mix.
And toddler enrollment grew 8% over the prior year more than double the rate of our preschool. Despite the more acute staffing challenges and these younger age classrooms due to tighter title teacher to child ratios.
While staffing continues to constrain enrolment in most geographies, we saw incremental progress on our retention and recruiting from this past quarter.
Our recent investments and teacher compensation have had an impact on retention and we continue to see greater interest from job seekers.
Taking together this has resulted in continued improvement in net.
Importantly, the gains made in overall staffing levels is enabling center directors to spend less time covering classroom hours and more time on traditional leadership activities.
Including engaging with prospective families do towards the visits.
These marketing activities, which have been severely curtailed during the pandemic are helping us rebuild the enrollment pipeline to drive all classrooms back towards pre pandemic occupancy levels.
Outside the U S enrollment trends were mixed in the UK and the Netherlands growth was muted as the labor market challenges continue to restrict our ability to serve all of the enrollment demand that we have.
We have several initiatives underway to drive recruitment in the face of a market that remains very challenging and the availability of qualified classroom staff.
In addition to stalling of our enrollment growth. The other short term impact of this higher labor costs, given a greater reliance on agency staff to augment directly employed teachers, which coming to any cost per unit.
In Australia, where we closed on the only about children acquisition on July one we are pleased with this initial quarters performance.
Specifically enrollment was in line with our expectations, even while Australia operations continued to experience similar labor labor dynamic that we see across our global center operations.
Let me now turn to backup care, which delivered exceptional results this quarter.
Revenue increased 30% over the prior year to $129 million outpacing expectations on strong use in the third quarter we.
We also continue to see good new client success with Q3 launches for hard Rock International Leader Corporation, Lucid group and Premier Health partners to name a few.
As we spoke about last quarter, we were encouraged to see the record used in June with that momentum continuing throughout the third quarter.
We saw used across all of our care types, resulting in our highest revenue quarter in our backup segment history.
A particular note was the contribution of <unk>.
In acquisition that we made in 2021.
Under our ownership, we expanded their footprint, enabling us to increase our available backup capacity and serve a growing number of families with school aged children.
Additionally, as part of our broader strategy to expand the utility of backup care to a broader set of eligible client employees. We recently rolled out pet care as an additional use case.
This followed the successful pilot with a third party service provider over the last several months.
Along with virtual tutoring and expanded school age Kids program. This is the latest example of our product innovation designed to drive greater adoption and frequency of use.
Okay.
Moving onto our education advisory business, which delivered revenue growth of 14% to $31 million.
We added several new clients clients in the quarter, including launches with Amerisourcebergen, John Hopkins and Vmware.
We continue to see solid use levels with particularly notable participant growth and it fits in the quarter.
Continue to be excited about our opportunity in workforce education. As this remains an area of focus for employers looking to differentiate their employee value proposition and upscale employee into harvest tables.
Let me now briefly touch on our consolidated outlook for the rest of 2022.
We remain on track to achieve $2 billion in revenue.
And we are narrowing our adjusted EPS to a range of $2 60.
The $2 65.
For sure for growth of 30 to 33, 33% for the full year.
Before wrapping up I want to take this opportunity to reflect on the signature employee recognition events that had been occurring across bright horizon over the last couple of months.
This year, we had nearly 25000 award nominations from clients families and colleagues at.
And after two years of only virtual celebrations. It was great to celebrate with colleagues here in U two weeks ago.
My heartfelt appreciation goes out to all of our employees, who work tirelessly each day to make a difference in the lives of children families learners and workplaces.
So in closing we are encouraged by the continued progress we are seeing across our business.
We have met the challenges of the last two plus years head on by making investments in teachers compensation and benefits expanding recruiting more extremes further investing in technology to enable seamless client and user experiences and developing and launching new care types to reach a broader range of clients.
And employees, who have need for childcare and family support has never been greater.
I continue to believe that the strength of our client relationships and.
Unique employer sponsored business model, coupled with the acute need for our quality services position us well to execute against our short and long term objectives, all while remaining steadfast in our focus on delivering the highest quality care for education for children families and clients.
With that I'll turn the call over to Elisabeth who will review the numbers in more detail and I'll come back to you during Q&A.
Thanks Steven.
Hello, everybody and thanks for joining us Tonight.
I will recap the quarterly results and then provide some updated thoughts on the remainder of the year as well.
For the third quarter overall revenue increased 17% to $540 million.
Adjusted operating income held steady at $46 million or 8% of revenue.
Adjusted EBITDA of $81 million or 15% of revenue increased 2% over the prior year.
In the third quarter, we added 69, new centers reopened for centers that are temporarily closed and permanently close 12 centers.
Thereby ending the quarter with 1081 centers.
Our full service revenue increased 47 million to $381 million in Q3 or 14% over the prior year.
Revenue gains were driven by increased enrollment and pricing, which contributed approximately 10% revenue expansion.
As well as by the addition of only about children, which we acquired effective July one and which contributed $37 million in the quarter.
Enrollment in our centers open for more than one year decreased mid single digits with 5% enrollment growth in the U S and our European operations were narrowly positive less than 1%, reflecting the effect of having to limit enrollment due to constrained availability of staff.
Our occupancy levels averaged 65% to 60% in Q3 as the typical pre school enrollment seasonality over the summer months results and lower occupancy sequentially from Q2 to Q3.
Two notable factors or 7% headwind to this growth first the strengthening dollar resulted in a $19 million year over year headwind in Q3, and second ARPA support for child care services. So far we've received by clients we have reduced.
Clients subsidy revenue.
$10 million, which was an incremental $6 million compared to the prior year.
Adjusted operating income for the full service segment contracted 13 million to a loss of $3 million in Q3.
The third quarter is historically, our weakest quarter from an operating income standpoint.
Mainly driven by the pre slow enrollment seasonality over the summer months.
We've seen throughout the year ARPA government funding directed in the child care sector continues to provide support to the inefficient cost structure. During this ramping period.
We received $14 million of this support in Q3 up slightly from the 12 day, we received last year.
Looking at the components of operating income in this most recent quarter. It was impacted by higher labor costs, including investments in case, your compensation, which were effective mid quarter and outside spend on agency staffing internationally.
In addition center directors recovery fewer staff vacancies as has been the case over the last two years.
Been able to pivot back to leading center operation and enrollment initiatives.
This is a key driver to rebuilding that enrollment pipeline and converting new enrollments for the future.
Backup care revenue growth increased 30% in the third quarter with total revenue of $129 million.
Stephen mentioned.
Particularly pleased with the strength of use growth during the quarter and a resulting operating performance, which delivered $40 million of operating income or 31% of revenue in the quarter.
Our educational advising segment delivered growth of 14% on contributions from new client launches expanded use in college.
College admissions and financing advising and our center city.
As we have spoken about in the past education advisory is that an earlier growth stage and the associated innovation very healthy required investments to execute against the growing and evolving market opportunity.
This can result in variability in the operating performance for each quarter as the business and the business and invest and grow in scale illustrating as well additional investments in technology and customer acquisition within these businesses dampened operating profit earlier. This year. This most recent quarter reflect solid operating profit growth and margin of 22.
7%.
Okay.
Turning now to a few other earnings factors Rick.
Interest expense was $12 million in Q3.
Adding one 5 million related to the accretive interest on the $106 million deferred payment for only about children, which is payable at the end of 2023.
Excluding this amount which is added back in the non-GAAP adjustments, we expect interest to tick up to around 12 12 million plus in Q4, given the current rate environment.
The structural tax rate on adjusted net income has also increased to 27% for 2022 compared to 22% in Q3 of 2021, an increase in taxable income and lower tax benefits from equity activity internationally in 2016 or nine.
Turning to the balance sheet and cash flow through September we generated $131 million in cash from operations.
Capital investments of $251 million, including the 206 million from the acquisition of <unk>.
And that takes shape share repurchases totaling $183 million.
We ended the quarter at three five times net debt to EBITDA with 33 million $32 million of cash and debt of $1 1 billion.
Moving onto our outlook for the rest of 2022.
Our updated guidance reflects the current operating trends and performance and includes a more significant foreign exchange headwinds higher interest expense and higher tax rate expectations than previously estimated.
Well as the continued inflationary pressures that we've been seeing with labor energy and food costs.
In terms of top line, we expect 2022 revenue.
$2 billion, which includes approximately $16 million year over year headwind from foreign exchange.
This is approximately $15 million higher than we had previously estimated.
At a segment level.
We are expecting full service to grow roughly 15% backup care to grow in the range of 15% to 18% and Ed advisory to increase between eight and 12%.
In terms of earnings this will translate into adjusted EPS in the range of $2 62.
$2 65 for the full year 2022.
Our range includes our updated estimate of the higher tax rate that I mentioned, 27%.
So with that Paul we are ready to go to Q&A.
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Please while we poll for questions.
Yes.
Yes.
Thank you. Our first question comes from George Tong with Goldman Sachs. Please proceed with your questions.
Alright, thanks, good afternoon.
Based on your year to date revenue performance in.
And your outlook for $2 billion in revenues in 2022, it would appear that you're guiding to <unk> revenue being slightly down from <unk> down around 5% to 6% and usually <unk> revenue was up from <unk>. So can you confirm if that's the case and if so besides FX headwinds are there any other factors that may cause <unk> revenues to be low.
<unk> and <unk>.
So the foreign exchanges.
Name change I think that you've seen in Europe in Q4.
<unk>, we do have a backup in.
And its high watermark in Q3 others.
Little bit of a pullback that we would see it back up in the 15% to 18% range.
We provided there but those are really the only factors that have NSA a downgrade in our view.
Really the same range and we have provided with me I take that back.
Okay got it that's helpful. And then secondly could you tell us how much in government subsidies you recognized.
Both on the revenue side and on the cost side and what the outlook is for Huron up.
Yes, that's what I think I commented on that in the.
And the P&L centers, we had $14 million coming through that was a cost offset that.
Cost plus type client centers, where we have an offset to the revenue that was around $10 million and so that again, because it reduces the cost and a client centered that reduces the amount of subsidy that a client needs too.
To pay us so it has that effect out of it not really.
Accruing to ask that accrues to the benefit of our clients. So we think of the P&L impact of 2014.
And and so that's the P&L effect for the rest of the year, we would be expecting that to correlate that 14 than we saw this quarter too.
Perhaps another five to 10.
For the rest of the year.
And from a client standpoint, it would be.
It's probably for four 5 million or so that they offset client revenue.
Similar similar proportionate to our society.
Got it very helpful. Thank you.
Thank you sure.
Our next question is from Andrew Steinman with Jpmorgan, Hi, It's Andrew could you could you go over in the third quarter, what the organic constant currency revenue growth post closings were and also on a year over year basis could you, let us know what's implied in the fourth quarter again.
On a constant currency post closing basis.
So organic well, let me go back to I mentioned, how much revenue contribution there was from only about Kelvin Andrew that was around 37 million and we had another $3 million ourselves from other on smaller tuck in acquisition. So a total of $40 million of the growth was inorganic.
So.
The remainder constant currency I think we'd have to add Mike may have failed to do the calculations are quite big but yes.
Hum.
The first one was $19 million for three full service around 6%.
Yes.
Declining ARPA that we've received so far but obviously you know we have clients was another 300 basis points or so so no more organic constant currency looking full service was.
Around 10% growth year on year.
Did you say 10 I didn't hear you.
Full service grew about 10% constant currency organic okay, and what's implied in the fourth quarter in terms of organic constant currency again on a post closing basis.
Well we have.
The other 20 or so plus million.
Ex headwind year on year.
Sure.
Only adult children similar.
Similar performance in the fourth quarter.
And then another Elizabeth.
Hi.
$4 million to $5 million of of our book.
Okay, that's all that out Andrew, but its probably close to that 8% to 10%. Okay. I. Appreciate it. Thank you very much.
Okay.
Thank you. Our next question comes from Manav Patnaik with Barclays. Please proceed with your question.
Thank you Susan.
You mentioned you gave a lot of the things I think.
Thanks.
Infant and toddler.
Dan.
Twice preschool et cetera, I was hoping you could just maybe.
On a high level, just maybe help us appreciate what the kind.
In the quarter and the improvement in and how that ties into it.
Hearing from your clients in terms of what.
We tend to office cadence looks like that should that should help you guys or not.
So do you mind distributing the question you were a little bit.
Muscle within about yes, sorry.
Okay.
Yeah, just want the plant you build a desk either a bunch of different carve outs and income growth and pre school growth.
Without having a base grade I was just hoping you could figure it out for us in terms of what the.
Really hearing from your clients in terms of the accordion cadence up occupancy.
Well.
Maybe just I'll start here.
Just on the you talked what he's been a preschool.
Different performance within those two segments within within the third quarter the others.
Growing up.
High single digit range.
Year on year enrollment there were preschool was low single digit range. So we saw better growth in that cohort which has.
More staff fee streams.
More recently in the last year.
Year or so given the tighter featured a child ratios within those those those classrooms.
So I think we were encouraged by that.
Should bode well as we think about building a pipeline of enrollment, particularly that will feed into these older classrooms over the next.
612, 18 24 months.
So that's what some of the different performance we saw within within those.
228 groups.
And then the <unk>.
What about clients and client sentiment Manhattan, which I believe was the second part of your question yes.
Yes, we have.
Really positive sentiment from our existing client base around the centers and the importance of those centers too.
To their employees and specifically to some of their return to office plans.
In addition to that.
Certainly we have seen a very strong pipeline as it relates to them.
Prospective clients being interested in investing in childcare very specifically looking at.
New centers as well as our clients or prospective clients, who may self operate their own centers in the form of health care or higher Ed who have historically any of them have self operated being interested in the potential of.
Transitioning those centers.
Management, and so I think in all of those cases, we are very well positioned.
To continue to partner with clients on this really important topic to them into their employees.
And then Elizabeth can you just help us with how we should think about the margin and.
In the fourth quarter, especially for food service and the other one.
Perhaps.
Yeah.
The performance.
With her full service this quarter was as I talked about constrained by.
A number of the labor impacts and so we wouldn't expect those to be continuing in the fourth quarter to some degree so that full service.
The full service segment performance and should be close to breakeven.
Yeah around that range, and perhaps plus or minus mm, but close to that similar hum hopefully they improved.
But that's around where we are this quarter. So we would expect that to be similar a little bit of uptick in enrollment through the rest of the year, but on it.
And backup performance as you might know from the history of the way that backup performs.
<unk> are just overall for the year, we have a high watermark in terms of revenue and had solid margins. This quarter. Our long term view on back up would be 25% to 30% operating margins, but in Q4, it often is a bit higher and so given the way that utilization gets consumed.
People have banks have used to pay can you use it or lose it until there tends to be some opportunity there.
With our clients and so we would look to margins to be closer to.
35, maybe as high as 40% in Q4.
And then the other the advising businesses fairly fairly steady as we've said 25, 25% to 30% is where are we where we delivered this quarter. So yeah. It could be towards the higher end of that in Q4 as well.
Thank you.
Okay.
Thank you. Our next question is from Jeff Silber with BMO capital markets. Please proceed with your question.
Thanks, So much I just wanted to confirm something I did you say that third quarter full service center utilization was $55 to 60% and then also what would be implied for that specific metric in the guidance for fourth.
Yeah.
So yes I did.
Overall average it's 55 to 60 as we sort of came through the seasonality. We would we would expect it to be you know lifting up a couple of percentage points on average for the rest of the year.
And and so that's fine.
A little bit of uptick now that we're through the fall cycling and where enrollment, but the bigger electricity early in 2023, and if we get into that.
More of a high watermark in Q1 Q2.
Okay. That's helpful.
And I know you go through your center footprint and you continuously call. The number of centers I think you said it was 12 this past quarter, but are there certain geographies, where maybe some centers are the utilization is so low that it might take to be a little bit more aggressive than either closing or consolidating if that's something you might be considering.
Well I mean, it's it's an important question just because we have obviously over the last couple of years and as Covid took hold and we had to take a very hard look at the portfolio and where we were seeing demand coming back as the centers reopen and we do have.
In terms of.
I'm trying to stratify, if you will how the portfolio is operating them, we have some very very high performers.
In fact, 25% of the portfolio is operating.
You talked about it last time, just maybe to clarify that we talked last time about our range with our average range was 55% to 65% enrolled.
And we noticed that about half of the portfolio was above that that 65%.
Thresholds.
Just steady Eddie that previous commentary on to one side for a second.
We have a target.
Target enrollment level that we consider mature center said you don't give me any 470, 80% has been where we operated and that's where we are targeting to get get back to if you will from a post COVID-19 recovery and so if we look at that 70% to 80%.
Range, we actually have 25% of our portfolio is operating in the third quarter. They are operating at around 80%.
We had we had good really strong performers sightlines on a quarter of the portfolio is very very.
Very well performing not all the way back in terms of any margin on deliveries, but the margin as a percentage of revenue, even though the person who uses.
He uses is backing haulage is strong and we have we have one more cycle, probably a price I said costs.
Our ratio to get back to our pre COVID-19 margin, there, but very close on that piece, but the underperformers, which is your question.
About 20%, so 25% its about like 20% or are actually very underperforming so operating at less than 48% occupancy and those are the ones that would be certainly on a a strong watch list to be sure that we are the efforts that we have.
And we are persisting right, because we see some positive signs of enrollment and staffing success striking enrollment, but those would be some that may be candidates for.
<unk> consolidation close closure potentially in the future, but we are we are still working to enroll in those centers.
Centers, because we believe in the locations.
Broadly for that for that group of it's roughly 150 centers that are in that more significantly underperforming group and.
With those we see great opportunity, but as you said, we need to be disciplined as we always have been to potentially consolidate our close if necessary in the future.
And I think.
Sorry, the only other final point I'd put on that is.
We have centers in that in that third grouping right that are underperforming that are in the same geographies as ones that are in the middle group and in the top group and so that gives us the confidence that again over time as we continue to grow our staffing levels.
<unk> continued to enroll that there is a sideline so to answer your question very directly we don't have a specific geography that we believe ultimately we are going to sort of unmask closeout. Instead, we look as we always do center by center, but the nice thing is that that we have good sight line in each of our major.
Graffiti succeed performance as it was as I said that is in that top performing category.
Okay I appreciate the color. Thank you.
Thanks.
Thank you. Our next question is from Toni Kaplan with Morgan Stanley . Please proceed with your question.
Thanks, So much wanted to ask another question about the government subsidies I believe that a number of large programs liquidity and 23. So just wanted to help understand the expectations of what this means for 'twenty three year over here and and maybe what a normal year.
For government subsidies are like maybe pre COVID-19.
Sure.
So just to recap where we are this year we were expecting.
Essentially.
On a positive income statement effect, if you will of around 15% to $15 million.
For government funding, that's primarily ARPA finding that we.
<unk> are now in the midst of receiving that Arthur finding as you suggest the sunsetting.
In September of 2023 based on the current status of the regulation. So they still have.
Money to distribute quite considerable funds can assure you that based on our our sightlines on on what we know where our footprint, Jason where we have.
<unk> applied for support there, we expect that 2023 could be could be half that and to be TBD on whether whether that is better but it is that's kind of stage two to five. So certainly we are looking ahead to a reduction in the amount of support that we've been able to receive this.
Year I'm looking ahead to 'twenty three.
Prior to Covid, we were not.
A very small footprint.
Our families who are receiving support through various government programs.
So while it may be it may be half of a percentage of 1% of our revenue in a pre COVID-19 environment that we have.
Such support in the U S.
Of course in our international operations is a national program has so families access.
The support for the three to five year olds in the U K and for all families in the Netherlands, and Australia. So those support systems aren't eligible for working adult working parents and so those.
Their support factor, it's really built into the tuition structure.
Terrific and just as a follow up you know I know you mentioned the utilization you know 55 to 60 I think previously is 55% to 65% and so is it the.
Backfill issue that is really driving this down is it the staffing issues that have.
Bin bin.
<unk> you know.
Like leading to an inability to open more classrooms like I guess I guess, what's sort of the main drivers of of stuff sort of decrease.
Yeah, it's actually it's a seasonal.
The sequential decline is quite consistent with where we.
We've seen there's growth over last year, so year over year increase that sequential change from Q2 to Q3 is based on the preschooler.
Cycling out into elementary school and so that's why we decided they again and enrollment is higher in our infant and toddler groups and a little bit lower in the preschool first because that's a net no net gain in preschoolers it is about half or 334%, whereas infant and toddler growth is more like seven.
<unk>, 8%.
Averaging out to around that mid single digit so.
The change from 55 to 65 on average is it simply that sequential seasonality in that.
It's not weakness per se from staffing I think R. R.
Staffing challenges are constraining their growth from being more than that and so that's why we get then I'm talking about that.
Our investments in and the wage construct benefits contract in order to attract and staff in and really take advantage of the demand that we have to to move that at corporate Center said wasn't didn't they.
The strongest performing group that I mentioned that is at 80% enrolled or the weaker performing group just under 40% enrolled so to get that 40 42 70 per cent group. If you will up to its target, that's where we got a real opportunity.
Okay, that's very helpful. Thanks.
Thanks.
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Our next question comes from Faiza <unk> with Deutsche Bank. Please proceed with your question.
Yes, hi, good evening. So I was wondering if you could maybe indulge us a little bit in terms of how we should be thinking about 'twenty 'twenty three obviously, it's early and and you know.
I'm sure you have been to you you're probably in the middle of their planning process, but you know how how are you approaching 2023, what are some of the things that we should we should keep in mind as it relates to enrollment pricing.
Ages staffing sort of anything you'd like to address would be very helpful.
Sure.
Happy to start and Stephen can can weigh in as well. So as we look ahead to 2020 theoretically RNA in the throes of our our planning process for that and we will.
Of course have more more specific information to provide when they talk to you on that but as.
As we as we look at the that's closing out 2022, we haven't been making progress as we said on the enrollment front. We've invested in our recruiting efforts are you know teacher attraction and retention marketing, we're investing in wages et cetera. So we would expect pricing increases.
In our full service business certainly to see pricing increases above our historical average so certainly how can we haven't finalized this but certainly would be looking to ranges in there at least at the mid to higher single digit so 5% to 7%.
Knowing that we need to remain competitive and we're in a marketplace and we are certainly aiming to get enrollment back as well.
Maintaining a pricing that we believe are appropriate for the service we're delivering.
So pricing this is around that.
Good.
We would expect wage inflation to be ameliorated.
Ameliorating, some maybe reverting to a more typical range of around 3% to 4%, although our wage costs will be higher.
Higher than that because we did make a substantial investment in compensation this summer and fall and so the knock on effect of that would be that that labor costs will likely be in the more of the high single digits to 8% to 10% likely overall because of the that knock on effect.
With a more modest wage inflation. Other inflationary costs are you know are coming through it seems like energy and and some other consumer goods that we have although those are smaller portions of our overall cost structure.
From a.
You know from our backup business standpoint.
This year, we are looking at growth in the mid to higher <unk>.
Double digit 15% to 18%.
<unk> has been as you know it's been a very strong year, we're coming off of you know coming off of the Covid lapping your tax we have a good we have good strong client accounts that we can continue to build on and so we would expect that to grow in the double digits, but probably more like low to mid single digits.
Oh that again, we will refine as the year goes on.
But that's what we're looking at probably from the backup business standpoint.
Hmm.
And that's that's probably the the array of.
Brian Broadbrush metrics of how we're looking at next year, but any thoughts on sort of client.
Interesting yeah.
Absolutely. Thank you. So I think that you know as we are heading into the final parts of this year moving into next we continue to feel really good about our pipeline from a client perspective that both for new.
New centers as well as for backup and Ed Advisory.
I think that the core services that we are offering are very much in the interest of our employers as they continue to see stressors as it relates to their own workforce and their own return to office plans.
I'd say that.
From a reception on our existing client base.
What I would say is that especially on the backup side of our business.
Use cases, new use cases are being adopted really well and so when we think about the virtual tutoring to getting implemented call. It two thirds of our clients.
Care already being adopted by a good minority of the clients I.
I think that what we're showing is our ability to through both centers back up care and through advisory to continue to extend across a broader set of life stages and career stages for our employees and then finally, we continue to do research among our parents that are users of our centers and continue to hear.
About the importance of health and safety as well as the important to continuing to focus on socialization and education.
Given what disruption has occurred through the pandemic. So overall feel really good going into 2023 as it relates to those who we serve.
Thank you that's very helpful.
I guess just a follow up question as it relates to foodservice.
Is it fair to say that from here the incremental enrollment is it's more it's going to more come from you know filling the staffing gap.
As opposed to.
As opposed to going to a different or more return to work and less of a hybrid arrangement and things like that is that is that a fair way to think about it.
Yeah, and I think that it.
It is safe to say that at this point in the cycle. Our staffing is a real constraint in our ability to serve.
Increasing numbers of families. So it's fair to say that more than half of our centers.
We have a demand that outstrips, our ability to actually service.
Who's interested families I would say in addition to that we continue to as Elizabeth alluded to earlier, we continue to work really hard to.
Improve our retention rates two things our staff retention rates through things like our wage increases and other benefits enhancements and at the same time get really specific about improving our top of funnel for new recruits and then ultimately streamlining the process to higher so I would say that yes.
Staffing is the larger part of the impediment in terms of our ability to grow enrollment and at the same time year to date and continues to be a major area of focus for us where we believe we continue to make strides.
Great. Thank you and finally just to ask one more quickly on just the margins on educational advisory I know you've made some some tech investments earlier in the yard.
Those are you past those investments because they see a pretty big increase in margins. This quarter like is this I know that your long term is 25% to 30% margins is that are we sort of past investments and is this sort of the new run rate.
Oh, you know I I. It is our that's in a range of what our long term expectation of that segment would be.
Cited 20 to 30.
It's a wide range of weeks beside the 20th 30th.
Range for it.
Technology backbone less labor intensive.
These technologies delivered service.
But I think it's fair to say that they are in a more emerging type of a segment like like the Ed advising businesses. All are there are periodic and episodic investments that need to be made so I wouldn't say that that the investments are in the rearview mirror just at the earlier part of the year between some technologies.
<unk> enhanced.
The buildup of the some of the elements of the center city marketplace. The ongoing investment in our <unk> business, which is.
Both doing advising for for adult learners and administrative processes.
Hum.
Hum.
College College work it is an ongoing investment and I think keeping up with the development and innovation in that sector will require ongoing investment. So I think we're just trying to point out why it might be lumpy, yeah, well a couple of quarters may have some investments and then you may see them.
It is a short term pay off for a longer term payout strategy.
Got it. Thank you so much really appreciate it.
Welcome.
Thank you. Our next question is from Jeff Mueller with Baird. Please proceed with your question.
Yes. Thank you for taking my question.
A question on full service margins, So I hear you on seasonality in <unk>.
Temp stuff in cost on the other side, the ARPA kind of fit.
Is there anything else, that's worth calling out but one that would.
They come to mind for me or anything on the Australia acquisition I understand you're excluding the transaction costs, but are there any upfront cost sub brands it onboard but lower margin.
There was acquired deferred revenue write off but my question just anything else that would be unusual what's going into the back half margins.
Yeah.
It's a great question and not to.
I don't think we want to have to don't want to sound like we're just giving a litany of things that could be headwinds, but there are we did have some we have some integration costs with me, that's showing a condition which are.
Not the transaction costs themselves, but just as you say some caution.
Onboarding.
Team and you know, whether it's a one time system conversions and things like that so there's there's about a million.
Dollars just under a million dollars in the second half that would be.
Factoring the margins a little bit of that continuing next year, but it would begin to abate as we complete the complete the integration early in 2023 and the other thing I'd call out Jeff is it in the U S. I think we've been experiencing of course, some inflation, but the energy cost in the U K and then angolans have been particularly high.
And yes, there are smaller portions of our business, but they certainly are adding several million dollars to the to the.
Second half of the of the year in terms of overall cost inflation that did that.
Has had the opportunity to get people persisting Angela abating as things settle down a bit more in Europe . So that's another headwind I guess that I'd call out.
Thanks for that and then on backup care.
I get that the tier type expansion is broader than summer camps in the other areas of growth for did I hear that the momentum and record usage for traditional services, continuing but just given the seasonality can you quantify Steven kates.
For us in the quarter and the year ago from a revenue perspective.
And is that is there any tail of that into Q4.
And is there any like outsized margin benefit from.
From that business during Q3.
Okay.
So you know we.
We don't really tend to pull out and quantify these smaller groups, but I would say that what you you've hit on an important element, which has seen a case can have a very.
High utilization over the summer and the revenue actually falls away.
And they have intermittent caps for different events for yonker for Russia.
Over the holidays and school school vacation times, there are opportunities there, but it's not the same intensity as we.
Variance over the summer so they turned to contributed several million to the revenue growth in the quarter, but that.
That would be much more de minimis in Q4.
Okay and then just last for me can you just talk through balance.
Balance sheet management plans.
You're thinking about steady state leverage currently kind of managing fixed versus floating exposure et cetera, given rising rates.
Yeah.
Sure. So we had obviously.
Obviously, some significant investments in the third quarter with the acquisition of Coke and also had some substantial share repurchases worried about three and a half times of death right now and yeah. That's certainly a comfortable level for us given given our EBITDA profile et cetera, but we might be.
We would be looking to try to continue to grow into that at this point we are.
You know looking at we've always said that we can out of the two and a half to three and a half times with our general leverage target.
The Beacon acquisition.
It has come out or outer edge that is certainly something.
Something that is right in our our strategy and our debt is we.
We are seeing some escalation to the interest cost, but we do have caps on our debt one eight.
80% of it that is protecting us from the variability of interest rates.
And those caps roll off next call and then we got sequential harvest started caps kick tail on after that so we have R. R.
Essentially 80% to 90% of.
Covered and converted to catch up with those cats.
In place and a little bit of variable comp.
Got it.
Very helpful. Thank you.
Thank you. Thank you.
Thank you. Our next question is from Stefan anymore with Jefferies. Please proceed with your question.
Hi, This is Hans Hoffman.
There is definitely more I was just wondering.
Financial services and health care.
Seeing any verticals, where employer sponsored daycares doing to ramp I guess a bit more than you thought and then just sort of what the sales cycle.
Sure.
Yeah. So when we think about industry verticals I think we've we've shown really good success over the years across verticals.
Certainly in the current day, there is particular strength that we've announced over the last 18 months.
In health care and higher Ed, but in addition to that we certainly are seeing it in manufacturing and distribution as well, which are two industry verticals that historically were not as much a focus of our efforts.
But again I think given.
The challenges that they see and and the Workforces that they are looking to attract and retain.
On site child care centers have become a more attractive element. So overall in terms of the pipeline we feel good about it and as I mentioned earlier, we feel good about some new ground up opportunities as well as the transition of management from self operated programs. So again over.
We feel good about the pipeline we feel good about the interest.
Inbound and us are approaching and so overall.
Out of the year into next year, feeling feeling good about the interest.
Got it that's helpful. And then if you could just provide us with an update I guess, you know how youre thinking about capital allocation priorities.
Yeah. So.
You said, maybe primary we did some pretty significant capital investment in Q3 with our acquisition of only about children and 180 million or so of share repurchases. So we are G&A absorption digestion mode. Certainly are continuing to look at smaller tuck in acquisition.
<unk> will continue to be judicious about it but.
At this point, we are you know.
Our focus on growing enrollment and and recovering.
In the primary based business.
Have a number of these models that are in development and so those are new center growth between the two.
$35 million to $50 million of spend in the next 12 month period and that's the primary focus of capital allocation at the moment and it will be.
And down the revolver that we have outstanding is about 100 million or so and that would be the near term deal.
Got it thank you.
Welcome.
Okay, well. Thank you all very much for joining us on the call. This evening and wishing you a good evening.
Thanks, everyone take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.
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