Q4 2022 Bright Horizons Family Solutions Inc Earnings Call
Greetings and welcome to the bright Horizons family solutions fourth quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will call. The formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As 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.
Thanks, Paul.
On the call today with me here, Stephen Kramer, our Chief Executive Officer, Elizabeth Boland, Our Chief Financial Officer.
I'll turn the call was even after covering a few administrative matters.
Today's call is being webcast recording will be available under the IR section of our website right rising star.
As a reminder to participants any forward looking statements made on this call, including those regarding future business.
And outlook are subject to the Safe Harbor statement included in our earnings release we're.
Forward looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in Europe .
One Form 10-K, and other SEC filings.
Any forward looking statements speak only as of date on which it is made we undertake no obligation to update any forward looking statements.
We may also refer today to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the IR section of our website.
Let me I'll take us through the review and update.
Okay.
Thanks, Mike and welcome to everyone, who has joined the call.
This evening I'll recap, our 2022 results and outlined how our progress this past year positioned us well for 2023 and beyond.
Elizabeth will follow with a more detailed review of the numbers and outlook before we open it up for questions.
I am pleased with the way we finished the year as I reflect on the past few years and in particular 2022.
Incredibly proud of all that we've accomplished recovering from the effects of the pandemic.
The last three years have been some of the most challenging our sector and our business have ever faced.
Beginning with the temporary closure of most of our centers in 2020, followed by the unprecedented disruption staffing to the unpredictable and recurring coronavirus variance that contributed to an uneven recovery in late 2021 and into 2022.
In the last 12 months, we made solid progress across our business.
We have worked incredibly hard to remain focused on our long term strategic objectives, while also adapting and reacting to this new and dynamic backdrop, let.
Let me highlight a few of our successes.
At our core we are people business and we've made significant investments in our people in the last three years.
We made strides in rebuilding staffing levels to accommodate growing enrollment.
Our culture has been a hallmark of what makes bright horizons unique in.
In 2022, we saw our turnover rates, which peaked in 2021 return to pre pandemic levels.
Alongside an uptick and formally employed teachers returning to the bright horizons family.
At the same time, we are continuing to become a tech enabled business and are dedicated to our digital transformation efforts.
As an example in 2022 or migrate gay App was relaunched with new and improved functionality for both center families.
Have we.
We also upgraded back appears booking engine to help simplify and reduce the time to make a reservation and enabling a more seamless process for both new and returning users.
My bright horizons, which has been rolled out to more than two thirds of our clients is a unified portal, where client employees can register and access all of their bright horizons benefits.
As well as the personalized recommendation that match their families life stages and interests.
Our investments in technology, and infrastructure have improved and modernized operational systems processes and most importantly user experiences.
We extended our impacts strategically into new geographies in.
In 2022, we acquired only about children, a leading provider of early education in Australia.
This beachhead acquisition provides us an opportunity for further growth and expansion in a new market that has high demand for child care a robust government funded program that provides financial support for families in.
In the highly fragmented market of providers.
We expanded our client base and deepen relationships with our client partners.
We now have more than a 1400 employer clients with a third by more than one of our service offerings.
The services, we offer are seen as a critical to the success of our employer clients ability to attract Ricky upskill and ensure the productivity of their workforce.
Okay.
Finally, we diversify innovated our product offering to enable new growth channels.
In 2022, we expanded Steven case, Kansas to more than 15 new communities.
We introduced pet care as an additional back up use case.
And we expanded our debt free degree and direct build programs and NSS.
These are just a few examples of the innovation, we are driving with our client partners.
As a result of all of this I'm excited about building on this momentum as we look ahead into 2023.
These achievements have fundamentally strengthened our long term employee value proposition grown and deepened our standing with client partners and enabled us to continue to deliver on our core mission of providing the highest quality care and education to children families and clients.
Let's now take a closer look at the Q4 results.
To recap the headline numbers for this past quarter revenue increased 14% to $530 million.
Which yielded adjusted EBITDA of $91 million and adjusted earnings per share of <unk> 77.
An increase of 18% from the prior year.
For the full year 2022 revenue was 2 billion representing growth of 15%, while adjusted earnings per share of $2 67.
Expanded 31% over 2021.
And our full service child care segment revenue increased 16% in the fourth quarter to 388 million.
We added three new organic centers through new client relationships with Diamondback energy Endeavour energy and Sacramento municipal utility.
Overall enrollment trends were as expected similar to Q3.
Across the like for like centers, we again saw year over year mid single digit enrollment growth with notably stronger performance in the U S.
Specifically in the U S year over year enrollment increased 6% with growth of 10% in the infant and toddler age groups and low single digit growth in our preschool programs.
As we've seen in the last several quarters centers located in the largest metro areas continue to progress from the enrollment recovery with Atlanta, The Bay area, New York City, and Seattle, showing strong year over year enrollment gains.
And at a client level or higher Ed healthcare and industrial clients.
Can you just show the highest occupancy levels.
While our consumer energy and tech client centers experienced faster enrollment growth over the prior period.
We also continue to make incremental progress on the labor front those staffing remains a key strength to our full enrolment potential in most geographies.
Since the expanded wage investments were made landfall our retention rates of existing staff have improved to pre pandemic levels.
And we have seen a measurable increase in inquiries and applications from prospective employees.
Encouragingly the progress we have made over the course of the last year in classroom staffing has allowed our center directors to conduct significantly more in person tours over the last six months.
As we've discussed in the past getting more families into tour centers see the programming classrooms and meet our incredible staff is critically important as we work to rebuild the enrollment pipeline for 2023 and beyond.
Looking outside the U S enrollment gains are more challenged enrollment grew marginally but in both the UK and the Netherlands shortages and qualified staff and higher near term labor costs to utilize flexible and agency staff continue to restrict our ability to serve all families.
We request here.
In the U K, we have seen our enrollment along with the broader sector also be affected by inflation and macroeconomic dynamics, which have weighed on parents near term decision making.
In Australia, our centers currently operate at higher occupancy levels than the U S. UK business over 70% on average, but further enrollment growth has been slowed by staffing constraints and Australia experiences similar labor dynamics that we see across our global center operations.
Let me now turn to back up care, which delivered solid results this quarter.
Revenue increased 15% over the prior year to $108 million on expanded use and new client launches.
Traditional use and unique users grew significantly year over year in Q4, and we continue to see more use among those who utilize their backup benefit.
Of particular note with the continued growth in Houston Bright horizon centers, which reflects the strong interest among families seeking high quality traditional center based care and the increased spaces that are centered leadership teams.
Pinned up tobacco families.
Reflecting.
On 2022, I believe it was a pivotal year for back up here.
After onboarding more than 200 clients and rebuilding traditional use across 'twenty 2020 'twenty, one we surpassed pre pandemic use midway through 2022.
And we saw further acceleration of <unk> growth in Q4 across all traditional new sites.
With now more than 1100 back up clients, a broader set of use cases, and a more streamlined reservation system.
Couldn't be more excited about the opportunity to grow back up care double digits over the next several years.
Moving onto our Ed Advisory business, which delivered revenue growth of 11% to 33 million.
We launched a number of new clients this quarter, including Arrow electronics.
<unk> and <unk>.
We continue to see healthy participation and activity levels at both college coach and assist.
The demand for support in navigating the college admissions and financing processes remained solid and employers continue to invest and supports to upskill and reskill their workforce and achieve their broader workforce development objectives.
Before wrapping up I wanted to take a moment to thank every member of the bright Horizons family. We've made a lot of progress last year across many dimensions of our business and they could not have been achieved without their dedication and commitment to our core mission and delivering the highest quality education and care.
Children families and our employer partners.
I also want to take a moment to welcome Mandy Berman and back to the bright horizons family in the role of COO back up care and emerging care services.
Mainly with a well respected member of the bright horizons family for more than a decade. After three years away I couldnt be more excited for her to rejoin our executive team.
Looking ahead to 2023, we are well positioned to build on the momentum we had coming out of 2022.
As I've said in the past our recovery hasnt been and won't be linear, but we continue to make solid progress in recovering from the effects of the pandemic.
Enrollment is rebuilding backup uses growing and participation across advisory is expanding.
I remain excited about our growth prospects and I continue to have tremendous confidence in the resiliency of our business model.
Strength of our more than 1400 client relationships.
And our ability to drive long term value to all stakeholders.
We will continue to drive our one bright horizon vision in 2023 focused on unifying and extending the value and impact of our offerings at the client end user level.
We entered 2023 with a strong foundation and expect to grow revenue at a solid double digit rate to two three to $2 4 billion.
On the earnings side, we are projecting adjusted EPS of $2 80.
Just $3 per share or growth of approximately 8% to 15% for the year.
With that I'll turn the call over to Elizabeth who will dive into the quarterly numbers and share more details around our outlook.
Thank you, Steven and Hello to everybody Who's joined us today.
To recap again, the fourth quarter overall revenue increased 14, 5% to $530 million.
Adjusted operating income of $56 million or 10, 5% of revenue increased 19% over Q4, 'twenty, one while adjusted EBITDA of $91 million or 17% of revenue increased 15% over the prior year.
We added three new centers and permanently closed six in a quarter ending the year with 1078 centers.
Yes.
Full service revenue increased 49 million to $338 million in Q4 or 14% over the prior year.
Which was in line with our expectations.
Organic constant currency revenue grew approximately 8% driven by increased enrollment and pricing.
Acquisitions added a further 11% or 36 million to revenue in the quarter.
Foreign exchange was a 4% headwind in Q4.
Yeah.
Enrollment in our centers opened for more than one year increased mid single digits with 6% enrollment growth in the U S and approximately 1% growth in our European operations, reflecting the ongoing effects of having to limit new enrollment due to constrained availability of staff.
Average occupancy levels were roughly flat sequentially as expected and remain in the 55% to 60% range for Q4.
Adjusted operating income was $12 million in the full service segment increased $5 million in Q4.
This gain was driven by higher year over year enrollment and improving cost efficiency.
Here is some of this improvement was the impact of a full quarter of the investment we made and teacher compensation. This past fall. In addition to the continued outsized spend on agency staffing in our international operations.
Support received it P&L centers from ARPA government funding program totaled $13 million in the quarter up slightly from the 12 million that we received in the prior year.
Yeah.
Turning to back up care revenue grew 15% in the quarter in this segment with total revenue of 108 million again in line with our expectations.
As Steven mentioned, we were pleased with the strength of use growth during the quarter and the resulting operating performance, which delivered $33 million of operating income or 30% of the associated revenue.
Our educational advising segment delivered topline growth of 11% to $33 million on expanded use of our workforce education in college admissions advising services.
As well as contributions from new client launches.
Operating income at $11 million was 33% of revenue solid performance on higher revenue and cost efficiencies.
Okay.
Interest expense, excluding the $1 5 million per quarter related to the deferred purchase price on recognition only about children totaled $11 million in Q4.
An increase of 3 million over 2021, an increased overall borrowings and higher average interest rates.
The structural tax rate on adjusted net income increased to 26%, which was a 200 basis point increase over Q4 of 21.
Yeah.
Turning to the balance sheet and cash flow.
For the fourth quarter, we generated $57 million in cash from operations compared to 42 million in the same period in 2021.
When they fixed asset investments and acquisitions of $23 million compared to $61 million in the fourth quarter of 'twenty one.
We also paid down $29 million outstanding on our revolving credit facility and ended the year with $36 million of cash and a leverage ratio of three two times net debt to EBITDA.
So now moving on to our 2023 outlook.
Okay.
In terms of the top line. We currently expect 2023 revenue can be two three to $2 4 billion, which translates to growth in the range of 14% to 19%.
At a segment level, we expect full service to grow roughly 15% to 20%.
Back up care to grow 12% to 15% and Ed advisory to grow 10% to 15%.
In terms of earnings we expect 2023, adjusted EPS to be in the range of $2 80 to $3 per share.
Similar to last year, we anticipate earnings to ramp as we progress over the year with higher enrollment and with the lapping of some of the higher wage investments and interest costs that we saw during the second half of 2022.
I want to briefly highlight a few discrete items, which will affect our reported margins and growth rates in 2023.
First as we have discussed in the past the ARPA and government funding program.
Targeted toward childcare is currently set to expire at the end of September 2023.
We received approximately $60 million of funding in 2022, and currently estimate that we will receive approximately $30 million in total support at our P&L centers in 2023.
This expected decrement translates into roughly a 40 <unk> headwind to growth in 2023.
Second given current and projected interest rates, we expect interest expense to be approximately $12 million higher in 2023 compared to 2022.
Which translates into roughly <unk> 15 headwind to growth in 2023.
Finally, we expect our 2023 effective tax rate to increase 200 basis points to 28%.
Which translates to a roughly 10 cent headwind to growth for 2023.
Taken together these three items account for roughly 60% to 65, a share unexpected headwinds to our growth for the full year.
Looking specifically at quarter one of 23, our outlook is for full service from a 15% to 20% backup growth of 10% to 12% and Ed advisory growth of 5% to 10% on the top line, which aggregates to total revenue growth in the range of 14% to 18%.
In terms of earnings we expect Q1, adjusted EPS to be in the range of 37 to 42 cents.
In terms of the discrete items as I mentioned above we expect to have $5 million more in interest expense $10 million less in government support from the ARPA program.
And the tax rate that is 220 basis points higher than in the first quarter of 2022.
So with that we're ready to go to Q&A.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for perfect.
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One moment, please while we poll for questions.
Okay.
Yeah.
Yeah.
Thank you. Our first question is from Manav Patnaik with Barclays. Please proceed with your question.
Thank you good evening all.
I was just hoping for the full year guide could you help us with you know what you're assuming on the revenue side in terms of that.
FX M&A contribution and also the <unk>.
You can do the utilization implied in that 15% to 20% growth to full service.
Okay.
Yeah, So nice to hear your voice manav. Thanks for joining today, so with respect to the full year.
God only knows Youre right the full year guide.
Revenue overall was two three to $2 4 million and with full service growth in two.
15% to 20%.
Let me see if I can pull over to what that you have that Mike.
Okay.
The revenue translation.
Question, but as it relates to.
As it relates to the the overall.
Performance you had asked about utilization.
We're looking at mid to high single digit enrollment growth in the full service group, so that that translates to six 8% yourself for the full year.
A little bit of ramping up this year goes on in terms of acquisition growth.
Our primary acquisition contribution comes from the only about children deal. So yeah, that's been done.
70, 75 million range in terms of its contribution.
And and so those are the components of the full service side.
Okay got it and follow up on the FX, but I.
I guess, just kind of on a broader basis.
The back upside, you're adding I guess petcare I'm guessing fits them back to Steven take camps, you talked about so.
So can you just talk about like you know, adding those extra services and back has been doing good like should that eventually you know increase the growth rate from this kind of 10 to 15 that does BNET.
Yes, so manav I think the way to think about the growth rate back up is yes.
Our goal is to certainly season.
Clients that we've added over the last several years and continue to add additional clients and then the expansion of the use cases, and you mentioned pet care, we had academic tutoring. In addition to that additional can't views, we absolutely see that is.
Continuing to build out the back up line of service.
Keep in mind right that the reason, we continue to focus on sort of the mid <unk>.
The 10% to 15% growth rate is really focused around the fact that the numbers get larger and so therefore, the actual revenue dollar contribution against those growth rates is obviously, increasing each year, but.
But we certainly see that that those use cases are going to be supplemental to the core traditional use cases that we've always had.
And we see our clients and their employees really valuing those additional services that we're providing.
Just circle back Manav, so just on the FX specifically.
It's more of a pressure in the first quarter first half of the year, so 3% or so.
For the year, so, it's a modest headwind, but really more in the first half.
Only about children like Elizabeth said is.
15% to 20% for full service, it's about 5% or so contribution there.
So the overall revenue growth for the year and full service.
Got it thank you.
Our next question is from George Tong with Goldman Sachs. Please proceed with your question.
Alright, thanks, good afternoon.
You mentioned, you're looking at mid to high single digit enrollment growth this year.
You translate that into what that would look like from an occupancy rate perspective as it relates to the 55% to 60% that you saw in <unk>.
Yeah, well as you can imagine.
There's a wide variety across the portfolio overall.
Translate to between 60 and 65% utilization on average we have obviously higher enrollment and are our best performing centers that we talked about last quarter.
Those centers or are already at pre COVID-19 operating levels.
They marched back to there.
Over 70% over 80% early a science of the enrollment gain in those centers is more limited because theyre already yet.
It's sort of full run rate so the growth of the rest of the of the centers will mainly come from from those that are still re ramping.
Our newer and that's why we end up in that call it 60%, 65% for the year.
Got it that's help.
Paul.
And you also mentioned, you're making progress on the labor front.
Those staffing still remains a constraint can you quantify how much staffing is a constraint with respect to occupancy.
And how you expect labor to perform in the coming year.
Yes, so in terms of the labor front as I shared we're.
We're very pleased that you know.
Our retention has returned to pre COVID-19 levels, which is really important to us because that continuity and consistency of SaaS really drives the quality in our centers in terms of looking very specifically at the pipeline of new potential teachers.
We are certainly seeing as a result of the wage increases but also from increased energy on the marketing side, we're certainly seeing more job seekers come to our Bruce H. We are certainly seeing an increase in the number of applications and that is ultimately resulting in an increase in the number.
Net features month by month. So again, we're really pleased with the progress that we're making on that.
I would say it still remains our number one challenge as it relates to enrollment and so as we look across both the U S as well as outside the United States. We continue to stay focused on making sure that we can ameliorate that challenge.
Yeah, and just any additional.
Commentary it's.
And they're at one point, we had probably half of our centers that were holding enrollment at some level and that has diminished it's more.
Classroom classroom Garrett classroom, Marisol, maybe 20% to 30% of centers still have some.
Some constraint going on and some have.
And acute.
It is a tale that that changes around the portfolio, but we still are seeing some classroom has not been able to be open and are not be able to take additional staff and so as much as Stephen is signing the progress that we're making.
We're not all the way there yet but it is.
Not as straightforward to translate that to invest much enrollment has been held because of the variety across the portfolio.
Got it that's helpful. Thank you.
Thanks sure. Thanks George.
Thank you. Our next question is from Andrew Steinman with J P. Morgan. Please proceed with your question.
Hi, Elizabeth It's Andrew My question is what is the implied adjusted operating margin for 'twenty, three and the first quarter.
23, and the guide and also in the fourth quarter. The adjusted operating margin for full service was notably different than the reported.
Could you just go through what's what's in there in terms of the adjustment.
Sure sure So let me.
Let me maybe address the last question first so.
We had oh.
A couple of things that happened in.
In Q4, we had some impairments.
That were taken in.
With respect to centers that either have closed or have had.
Significantly contracted performance so that was a.
A charge.
Just get the specific amount here.
That was a charge of about $14 million.
<unk> added back into.
And to the adjusted operating income.
And then.
We also had some minor costs associated with the cyber incident that we.
You know in terms of the examination.
The forensic examination that we've had in <unk>.
Support costs for that so those were the two primary sledding large anyone in overhead.
Okay.
Thank you.
Looking forward on the.
The overall margin that's implied.
We we've talked just maybe going through the segments.
Backup standpoint overall, our long term goal for back of margins to sustain its 25% to 30%.
We expect given the more normalized performance with utilization, where we're delivering the care itself, we have more more provider fees in an environment where that's.
That's bouncing back and it's positive for the type of use that it does have a little bit of a headwind to the margin would be 25% to 28% herself and backup for the year.
So in the range, but on the slide on the slightly lower end of our target range.
I agree.
In the 20% to 30%.
We have some ongoing investments there, particularly in Australia, where we are.
Continuing to modernize those systems and a participant experience so some variability there, but 20% to 30% in the Ed Advisory.
Group and in full service we.
We are we are still in a recovery mode. Here. So overall for the year, we expect to be in low low single digits to mid single digits on the operating margin for full service.
The couple of components that go into that our strong performance in our emotional centers, but the headwind from ARPA.
And about half of what we had this year.
And.
More challenged performance in our international operations.
And then the ramp up of centers that are still under the 70% is keeping us in those low low to mid single digits, rather than where we would target long term to be more high single digits.
8% to 10% overtime.
Yeah.
And did you want to make our first quarter comment about operating margins implied in the guide.
Yeah.
Yes.
In the first quarter, Andrew I'd say.
We basically we start with back at their first let me just add for the year, 25% to 28.
First quarter little bit on lower under there call it.
20% to 25%.
The first quarter is a lower.
Just use quarter overall for us and so but again those were in there in the in Q1.
For full service.
Given some of the ARPA headwinds Elizabeth talked about year on year.
Slightly positive breakeven around that range in Q1 for for full service.
And then Ed.
Yeah, it's in the lower end of the full year 2013 results. We said for the full year is going to be below that in Q1, probably 10, 15% ish range, we're making some investments there to grow that business. So that's kind of some rough parameters for Q1 perfect. Thank you appreciate it.
Thank you.
Thank you. Our next question is from Jeff Silber with BMO capital markets. Please proceed with your question.
Thanks, So much I wanted to go back to a full service center business can you talk about the price increases that are embedded in your guidance and how that compares to the different inflation items the wage inflation going forward.
Yeah.
Sure so.
As we had talked about last last time, Jeff that we were mostly cycling or our price increases in January and so we have now obviously executed on those across most of our portfolio.
So average price.
Increases are in the six 7% range.
With some spread.
Higher end of that high single digit.
Where appropriate and in some areas, we are more modest than that but it's averaged six 7%.
And I guess wage increases we are expecting a more normalized wage increase this year.
But we are still lapping the investment of the wage.
The wage step up that we did last year. So overall this year they increased average wage will be high single digits.
10% yourself back that will be the net effect.
Of those two steps so we have.
We have a.
A right sizing of the price increases the wage minimum wage would be more like 3% to 4%.
Okay.
Apples to apples, but again with the embedded lapping effect its a bit higher so we are an attractive.
Making progress against that investment this year and have one more year of those higher expected higher tuition increases against wages in 2024 to be.
More fully right sized in the center economics profile.
That's helpful and I wanted to drill down a bit in terms of the staffing constraints you've been facing obviously.
Increasing wages is one way of helping to mitigate that a bit.
But can you talk about anything else that you're doing or contemplating not only to attract staff, but to retain them as well.
For sure.
So I think that as we had shared in the previous two.
We have absolutely focused a lot on the candidate experience and so we're working hard to create a more seamless experience for the candidates starting with.
Our much improved web.
Portal for candidates and then driving to faster interviewing and then ultimately fast tracking individuals that have either ETE background and Gore educational profile that meets our criteria. So I think we're doing a lot in terms of that candidate experience piece in addition to that.
<unk>.
We have been working really hard on on boarding and so we have what's called the 100 days apart and so we're really working on that first step in the new hires experience and so we're certainly seeing an impact.
In those first 100 days in terms of being able to.
Get individuals through that first segment of their employment with us and trying to see more of those people continue to stay at bright horizons, because as we know and have a long history of <unk>.
When someone has gotten through that first 100 days and really understands and field equipped to do their job well they are going to stay with us much longer and so it's things like that that we're really focused on in terms of making sure that on the front end, we're doing everything we can to provide a white glove experience to candidates and then ultimately.
<unk> once we onboard to make sure that that works well.
Alright, great ill get back in the queue. Thanks, so much.
Thank you.
Thank you. Our next question is from Stephen anymore with Jefferies. Please proceed with your question.
Hi, good evening. Thank you.
I wanted to touch.
Hi, there I wanted to touch on you know as you kind of evaluate your portfolio on the full service side, you know maybe for those centers that are underperforming kind of the the current utilization.
Average here and maybe just your appetite for maybe kind of reevaluating does it makes sense for those centers to be opened. So my first question is has there been kind of an ongoing evaluation process. You know to what are you seeing with some of these underperforming centers that gives you comfort that you know we are still in this recovery.
Stage and I'll leave it at that thank you.
Yes, so first of all yes, we continue to evaluate that sort of lowest performing cohort that Elizabeth described earlier the ones that are less than 40% occupied.
But to get very specific to the competence piece.
First of all we are seeing increases in enrollment in that cohort right and so we continue to see enrolment into those centers and so again in the category of something that is demonstrable that gives us confidence I would say that is first and foremost important for us to be seen I would say the second is.
That we continue to see inquiries and ability to continue to add staff Ido centers. So again from a forward look perspective I think that's also really important and then the third component just in terms of timing is as we've talked about the ARPA program is going to be sunsetting as it.
According to the current legislation.
In September of this year and so as we start to move towards that.
And our per funding starts to dry up in the sector. Overall, we believe that some of these underperforming centers.
We will be in markets, where there is additional consolidation that happens due to the fact that owners decide that without the ARPA funding. Their particular centers are no longer financially viable and of course, we have the ability to sustain.
Through this period and we'll obviously benefit from that so I think this will be an interesting year as it relates to continuing to track enrolment in staffing and then ultimately see what the impact of a sunsetting ARPA program is going to do to the sector at large.
Yeah.
Great No. That's really helpful. And then just switching gears just sit back up care and must as more of a point of clarification. So I think you said early on 1400 employer partners and a third are buying more than one service. So is that assuming that there on the full service side any of their doesn't back up care or other.
Some other education or just can you I'm just trying to get a sense of your current full service customers that are all for back up care customers that's easy.
Yes.
So Stephanie it's a mix of the most common overlap. So we see all of those working on our clients as clients who are.
Back appliances, our largest segment 1100 clients as Stephen said.
Clients, who goes back up care and full service or clients or back up care and our advisers back to your emphasis or a college coach.
I'd say overall the largest overlap is back up here in minimizing is well north of.
30% third bye.
Both of those products on the full service side.
Give or take about.
The third.
And 30% third full service clients will also have that in here as well so.
I think thats part of the opportunity, we see over time to be able to grow that that mix of clients. We have a full service center, but also can are able to add back appears low.
Great. Thank you so much.
Thank you.
Thank you. Our next question is from Geoff Miller with Baird. Please proceed with your question.
Yes. Thank you.
Hum.
The differences in the portfolio in terms of utilization can you give us any sense like what are the losses on the less than 40%.
Bucket that are weighing down full service profitability and or the higher utilization centers are they operating at the target 8% to 10% operating margin level currently.
Yeah, so starting starting with.
The second is that Jeff.
That group is.
We expect it to be operating.
At that level in 2023, not fully there yet the best performers are are still absorbing some of the labor investment.
But they are they are certainly within a range of being at our targeted operating performance there, they're the highest enrolled and some of that certainly could be above.
10% is where we're trying to be sure that we're thinking about things with them without the ARPA funding.
So that's that's what I'm describing here is that looking at them sort of excluding that benefit that they have now they're.
Very they're either in that 10% operating income or are within spitting distance of that in terms of the group that is that some 40% enrolled cohort yesterday.
They are losing money.
It is it is a headwind.
Any almost any center is going to be breakeven until they're 50% enrolled or so.
Yes.
Not all of these centers are losing.
Morris amounts of money, but the fact that there are 150 or so on centers in that portfolio in 2022 is a headwind to the margin.
For them as well.
Looking ahead to 2023, and how we expect them to continue to grow their enrollment we would look to.
Probably half of having migrated out of that sub 40 and into the middle cohort, making that kind of progress given what we're seeing over the last couple of quarters. So.
We do see them.
Contributing beginning to contribute by the end of the year.
But they are still losing money.
In the first half for sure.
Got it and then just on the catch up to the labor inflation are you now at the point in.
The industry at the point, where you would expect that going forward, but on a fairly sustained basis. Your tuition price increases are going to outpace cost base in <unk>.
<unk>.
And then just anything else you can say on the path to getting back to 8% to 10% margins I would think on the negative and you still have an incremental $30 million ARPA run off after this year.
But just any other considerations on the path to get to 10.
Yeah.
Yeah, I mean, you've touched upon it right we do see.
Pricing power return as we can.
Few reasons for that one is we've made a significant investment in the wages and we are focused on being measured on the price increases with.
The focus on enrolling firsthand and pricing.
Pricing fairly back.
More continuous with the price increases as the enrollment comes back. We've also seen we've talked about this the supply of childcare is continue to contract over the last couple of years and although there has been what we didn't predict that the level of support that that ARPA would have provided for.
The industry that has allowed many operators to hang on longer than we would've predicted to two years ago or a year ago.
We do expect that there will be some further fallout from that as the program rolls off and as it does both being able to enroll those families in our centers and or take over the operations of the center and are being able to acquire quality locations that had heretofore not been.
No not been interested in selling are all opportunities for us to grow our footprint and our capacity to serve families. So all of those things will help.
Help too.
Keep us in a leadership position and enable us to maintain the pricing power that we've had.
High quality provider in a market that has potentially less supply.
Got it and then last one for me Steven I think correct me if I'm wrong I think one you site some of the new client wins those are like centers that are actually in the opening process.
So correct me one correct me if I'm wrong on that but if that is correct yes.
You said you can say on kind of the.
The bookings trends or the pipeline for new employer sponsored centers and if youre seeing any uptick lately. Thank you.
Yes of course chef.
So when we sign new client wins on these calls.
Those are.
Centers that are open right. So we announced that the timing of opening as opposed to commitment from the client.
The ones that I mentioned today for example are now open and operational and accepting children. So we take a really conservative approach to sharing those wins and thats. The same on the backup and Ed advisory side of our business, where we talk about clients, who have launched and as the benefits are now available to those.
Client employees.
As we look at our pipeline.
It's interesting the two questions that you asked are actually related which is I think there is growing concern among employers about the affordability access and quality of childcare, which again I think as they look at the landscape and as they hear from their employees.
The contraction in supply about the difficulty of accessing affordable high quality childcare, we certainly continue to see interest in learning more about our services.
So we continue to have good conversations on the new client center side I would say at the same time. They are also trying to balance that against what is an economic climate to add a little bit of uncertainty to it and so what I would say I would characterize the pipeline we see it as a strong <unk>.
<unk>, but we're also making sure that we're being realistic about the timeframe under which our commitments will come through but certainly the backdrop right. Now is is certainly heavily weighted towards employers thinking about how they can invest in this area.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Our next question is from Toni Kaplan with Morgan Stanley . Please proceed with your question.
Thanks very much.
First I wanted to maybe talk a little bit more about the 14 million of impairment. It looked like maybe you closed six centers in the quarter because I know you talked about opening three organically.
So I guess, how many centers actually did you take impairment losses on is that sort of that full 150, though you talked about on the lowest cohort or is it the half that probably won't get into the mid <unk> just wanted to understand a little bit better. Thanks.
Yeah.
So it's.
It's a good question, Tony I think the way that the accounting rules sort of government. When you taken impairment has to do with existing cash flows trend over the last few years in the near term outlook and so that that write off that impairment includes a right of use asset.
And the underlying portion of fixed assets and a variety of centers some of which are <unk>.
Open and operating and are not on the close to listen or not.
Certainly some of that may be in that potential to close because they're they're more protracted underperformers, but theres no. There is no hard and fast rule and it's certainly not covering 150 centers.
And it's not.
It is not intended to be.
Sure.
On a same same.
<unk> approach to all of those that are not yet back to their pre COVID-19 operating.
So I think <unk> seen that the last couple of years. We've had we've had some impairments that have come out of COVID-19 because of it.
They are sending a protracted underperformance is the main driver.
Got it.
You also asked about margins I know you gave the full service our guidance for the year and for the first quarter, but I'm just I wanted to make sure I understand it right fourth quarter, you won't get the ARPA benefit.
The longer and and and what should sort of the normalized margin be exiting 'twenty three.
So we're looking at low single digit to mid single digit for full service for the year is this you're asking about full service.
Yeah, Yeah, so I'll start with yes, yes, and so it will our expectation is we would be.
Be improving throughout the year.
Say ARPA will fall away by Q4, but it would be captured by that improving performance. So exiting the year similar to that.
That's all the single digit to mid single digit range because fleet, we have as an underlying better performance and a lots of ARPA counteract that so.
Does the outlook then in 2020 forward would be for that to be.
And as Jeff pointed out then.
Coping with the fact that the remainder of our compelling way, but the ongoing cohort improvement and.
The ability to pricing another cycle ahead of the labor costs that is now embedded in the overall cost model.
Got it and then just lastly back up margins I know you were expecting to be.
About 35% for Q, and maybe even 40%.
That's what what happened there that led to you know a lower margin quarter.
Yeah.
So as we mentioned we're pleased with the back half performance.
Overall that returned to a more traditional used care types and we were we.
We're in the range of what we had guided to for backup for the quarter, but.
Useless, we had this.
This cyber.
Cyber incident was with minor, but altogether, we do expect there was a little bit of disruption to some of the use that.
Got.
It doesn't change the overall trajectory it just was a little bit of a disruption in the quarter.
But overall I think the.
It's a mix of the type of Houston, we had and.
The other element to this that we are in in.
In process of absorbing two similar to the full service side as we we see some inflation on the provider.
Provider network there are.
We.
Engage with a number of third party providers, who support our bright horizons network and saw some increased costs on that front as we as we are able to.
Expanding is had some effect on our margins to some of our cost structure that was out of it.
I think the good news on back up similar to the full service business as we we do have pricing power and are able to to.
To continue to take take some price increase on those back up arrangements not not at the same level as we're seeing on tuition.
Ray just as time ticks at 6% to 7%, but we certainly see some reasonable cost inflation.
Price inflation that we're able to get on back up to help offset those costs.
Perfect. Thank you.
Thank you. Thank you.
Yes.
Thank you. Our next question will be from Faiza <unk> with Deutsche Bank. Please proceed with your question yes.
Yes, hi, thank you.
So I wanted to talk about the company's sensitivity to the macro environment at this point.
So you know many economists are projecting a recession later this year and historically I believe there is a demand headwind during recessionary periods.
At this time it seems like I'm curious on your view given.
You're supply constrained to the extent there is a recession do you think the labor environment would improve and how do you think about sort of supply demand factors at this moment in time, what are some of the puts and takes from your perspective.
Yes, so I think as we think about the macroeconomic environment I would offer a couple of things. The first is that we.
Would expect that it would have.
A positive impact on our ability to attract and retain teachers right, which is again our largest.
Impediment to.
Taking the full enrollment that we have available to us for enrollment request that we have available to us.
I would say that from a demand perspective, youre right to point out. The fact that there is real supply demand imbalance in the market today, and we expect that that will continue.
And I think if we sort of harken back to the.
The great recession of 2008 910.
I don't think that people think it will be a deeper severe does that but even in the midst of what was a very deep recession, while we did see some contraction on the enrollment side.
We have the ability to cost manage on the labor side, and so saw almost no impact from a margin perspective, and so what I would say overall is the market today is really different is even more constrained from a supply perspective.
So while we always think of our business is relatively recession resistant we think that given the dynamics that exist in the market today going into any kind of difficult macroeconomic environment, we should be able to persist quite well.
Great. That's very helpful. And then just wanted to talk about the international business. It sounds like enrollment is not is not progressing the way it has in the U S in in those markets.
Is there so how are you planning on addressing now do you think it will automatically you know readjust in progress or do you plan to make certain you know wage investments or other type of investments in those markets.
Yeah.
Yes, I mean, certainly what we're seeing especially in the UK and the Netherlands.
Is that the labor constraints is even more significant than it is here in the U S. So availability of labor is even more challenged.
In those markets, we do have the ability to use some what they call agency staffing, which is sort of third party staffing.
And that comes at quite a premium in terms of cost and even that is not in plentiful supply. So the impediment of our labor shortages.
Is impacting enrollment.
In those markets and so we have made some wage investments in both the UK and the Netherlands.
And also in Australia, and the reality is that that will get us that has gotten us some progress on the other hand, it really does come down to availability of labor at this point as opposed to even.
What the price might look like so what I would say is we continue to look for signs of our ability to.
Garner more high quality teachers in those markets, but that is certainly the experience we've had thus far in and therefore the impact on our results.
Got it and then just last question from me was around the Pet initiative. So I know you talked about that previously and you mentioned it on this call sort of where where are you in that process. Like have you have you have you started to do you have a center currently that you've already opened is it still in the planning phase.
Just talk to us about how we should see that progressing.
Thank you.
Oh sure so hey fish.
The pet care offering that we have is is actually through our back up segments. So it's one of the use type setting.
And employers eligible employees can elect to use their back conditions for that same kind of intermittent petcare. So we don't have a center of any kind, we're not we're not running directly any kind of pet care doggy daycare type of things, where we're partnering with third party providers should do this.
For for any consumer and we're doing it through an employer sponsored benefit and it is intended to be my God are back on an intermittent basis saw unemployed can use one of their 20 users are finding that their 'twenty uses for.
For a day of coverage for their pet when they need that on an emergency basis or an unexpected basis.
Perfect. Thank you so much.
Okay. Thank you.
Okay, well. Thank you all very much for participating the call and appreciate your time and interest.
Have a good evening.
This concludes today's conference.
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Okay.