Q4 2023 Bright Horizons Family Solutions Inc Earnings Call
Speaker Change: [music].
Operator: www. BrightHorizons.com Greetings and welcome to the Bright Horizons Family Solutions fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode.
Greetings and welcome to the bright Horizons family solutions fourth quarter 2023 earnings call. At this time, all participants are in a listen only mode.
Operator: 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Vice President of Investor Relations. Thank you, Michael. You may begin.
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.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Michael Flanagan, Vice President of Investor Relations. Thank you Michael you may begin.
Michael Flanagan: Thanks, Paul, and welcome everyone to Bright Horizons' fourth quarter earnings call. Before we begin, please note that today's call is being webcast and will be accordingly available under the Investor Relations section of our website, BrightHorizons.com. As a reminder to participants, any forward-looking statements made in this call, including those regarding future business, financial performance, and outlook, are subject to the Safe Harbor Statement included in our earnings release. Forbidden things inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release.
Michael Flanagan: Thanks, Paul and welcome everyone to <unk> fourth quarter earnings call.
Michael Flanagan: Again, please note that today's call is being webcast.
Michael Flanagan: We're going to be available under the Investor Relations section of our website bright horizons dot com.
Michael Flanagan: As a reminder to participants any forward looking statements made on this call, including those regarding future business financial performance and outlook.
Michael Flanagan: Subject to Safe Harbor statement included in our earnings release.
Michael Flanagan: What do we think is heavily involved risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statement that are described in detail in our earnings release.
Michael Flanagan: 2022 Form 10-K and other SDC filing. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement. 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 investor relations section of our website at investors.brighthorizons.com. Joining us today on the call is our Chief Executive Officer, Stephen Kramer, and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our results and providing an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen.
Michael Flanagan: 2022 Form 10-K, and other SEC filings.
Michael Flanagan: Any forward looking statement speaks only as of the date on which is made and we undertake no obligation to update any forward looking statements.
Michael Flanagan: You may also refer to the non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available under the Investor Relations section of our website at investors that bright horizons.
Michael Flanagan: Joining me on today's call are Chief Executive Officer, Steven Crane, Chief Financial Officer before you can start by reviewing our results and provide an update on the business Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions with that let me turn the call over to Steven.
Stephen Howard Kramer: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Stephen Howard Kramer: Thanks, Mike, and welcome to everyone who has joined the call. I am really pleased with how we finished the year, achieving better than expected revenue and EPS results in the fourth quarter. Performance for the full year was also strong, with full service revenue expanding nearly 20% and backup care revenue surpassing the $500 million mark, up an impressive 26% in 2023. These accomplishments were driven by the focus, dedication, and execution of our talented teams who continue to work tirelessly to deliver our high-quality services.
Steven Crane: Thanks, Mike and welcome to everyone, who has joined the call.
Steven Crane: I am really pleased with how we finished the year achieving better than expected revenue and EPS results in the fourth quarter.
Elizabeth: Performance for the full year was also strong with full service revenue extending nearly 20% in backup care revenues, surpassing the $500 million Mark.
Steven Crane: <unk> 26 per cent.
Steven Crane: In 2023.
Steven Crane: These accomplishments were driven by the focus dedication and execution of our talented teams who continue to work tirelessly to deliver high quality services.
Speaker Change: So to get into some of the specifics.
Stephen Howard Kramer: So to get into some of the specifics, in Q4, total revenue increased 16% to $616 million, which yielded adjusted EBITDA of $99 million and adjusted earnings per share of 83 cents, an increase of 8% from the prior year. For the full year 2023, revenue of $2.4 billion represented growth of 20% with adjusted earnings per share of $2.84, expanding 9% over 2022. In our full-service child care segment, revenue increased 15% in the fourth quarter to $447 million.
Speaker Change: Q4, total revenue increased 16% to 616 million, which yielded adjusted EBITDA of $99 million and adjusted earnings per share of <unk> 83.
Speaker Change: An increase of 8% from the prior year.
Speaker Change: For the full year 2023 revenue of two point for stealing representing growth of 20% with adjusted earnings per share of $2 84 things expanding 9% over 2022.
Speaker Change: In our full service child care segment revenue increased 16% in the fourth quarter to 447 million.
Stephen Howard Kramer: The drivers of this growth were enrollment and pricing, with centers that have been open for more than one year expanding enrollment at a high single-digit rate in Q4 and averaging 58 to 60 percent occupancy. In the U.S., year-over-year enrollment increased 10% in these Life Centers, with double-digit growth in our younger age groups and mid- to high-single-digit growth in preschool age groups in Q4. Outside the U.S., enrollment increased at a mid-single-digit rate in the fourth quarter compared to Q4 of 2022.
Speaker Change: The drivers of this growth were enrollment and pricing with centers that have been opened for more than one year expanding enrollment at a high single digit rate in Q4, and averaging 58% to 60% occupancy.
Speaker Change: In the U S year over year enrollment increased 10% and these like centers with double digit growth in our younger age groups and even mid to high single digit growth in preschool age groups in Q4.
Speaker Change: Outside the U S enrollment increase at a mid single digit rate in the fourth quarter compared to Q4 of 2022.
Stephen Howard Kramer: Although the operating environment in the UK continues to be challenging and a headwind to the performance of the overall full-service segment, enrollment growth in the UK improved modestly in Q4 compared to Q3, and we have seen that progress continue into the early part of 2024. At the same time, we continue to rationalize our portfolio in the UK to ensure focus on centers with the greatest long-term viability and improve momentum in regaining operating profitability over time. In our Dutch and Australian operations, enrollment was in line with our expectations in Q4, and both portfolios continue to operate with occupancy levels averaging above 70%. Let me now turn to Backup Care, which delivered an outstanding quarter to finish the year. Revenue increased 24% to $135 million on strong utilization across our more than 1,100 clients.
Speaker Change: Although the operating environment in the UK continues to be challenging and a headwind to the performance of the overall full service segment.
Speaker Change: Growth in the U K increased improved modestly in Q4 compared to Q3, and we've seen that progress continuing into the early part of 2024.
Speaker Change: The same time, we continue to rationalize our portfolio in the U K to ensure focus on centers with the greatest long term viability.
Speaker Change: Improving match and regaining operating profitability over time.
Speaker Change: In our Dutch Australian operation enrollment was in line with our expectations in Q4, and both portfolios continue to operate with occupancy levels, averaging about 70%.
Speaker Change: Let me now turn to backup which delivered an outstanding quarter to finish the year.
Speaker Change: Revenue increased 24% to 135.
Speaker Change: And on strong utilization across our more than 1100 claims.
Stephen Howard Kramer: Traditional network use trended higher than our expectations as we ended the year; use in Bright Horizons centers, network centers, and in-home was all strong, and these use cases continue to be the primary drivers for the backup business. However, we do continue to see solid growth across all care types. We're encouraged by the growth opportunity from the newer use cases that we have introduced in the last couple of years as this broader portfolio enables us to serve a wider set of eligible client employees. 2023 was a tremendous year for backup care. We saw record interest and record use.
Speaker Change: Traditional network use trended higher than our expectations as we entered the year.
Speaker Change: Using bright horizon centers network centers and eat at home were all strong in these use cases continue to be the primary drivers for the backup business.
Speaker Change: We do continue to see solid growth across all characteristics. We're encouraged by the growth opportunity from the newer use cases that we've introduced in the last couple of years as this broader portfolio enables us to serve a wider set of valuable client employees.
Speaker Change: 2023 was a tremendous year for back up care.
Speaker Change: Saw record interest in record use I'm very encouraged by our ability to capture demand and operationally deliver for families in need of care.
Stephen Howard Kramer: I'm very encouraged by our ability to capture demand and operationally deliver for families in need of care. As I mentioned earlier, we reached an important milestone in 2023, surpassing $500 million in revenue. For context, Backup Care was a $300 million business in 2019, and over the last four years, its contribution to the company's revenue and profitability profile has grown significantly, along with its impact on families, employees, and clients. Even as full service continues its enrollment and earnings recovery, Backup Care is poised to be a structurally larger contributor to our go-forward earnings profile, and we are very excited about the continued growth opportunity in this segment. Our education advisory business delivered revenue of $34 million in the course.
Speaker Change: As I mentioned earlier, we reached an important milestone in 2023, surpassing 500 million in revenue.
For context backup care with a $300 million business in 2019 and over the last four years its contribution to the company's revenue and profitability profile has grown significantly along with the impact on families employees and clients.
Speaker Change: Even as full service continues its enrollment earnings recovery backup here is poised to be a structurally larger contributor to our go forward earnings profile and.
Speaker Change: And we are very excited about the continued growth opportunity in this setting.
Speaker Change: Our education advisory business delivered revenue of 34 million in the quarter notable new client launches in the quarter for EDA, assisting college coach, including North, including Norfolk Southern standard chartered.
Stephen Howard Kramer: Notable new client launches in the quarter for EdAssist and College Coach, including Norfolk Southern, Standard Charter, and VeriSign. The transformation of this segment is underway and focused on meeting the evolving upskilling and retraining needs of employers and their employees. We continue to believe in and are investing in the large opportunities available in this market. As we turn to 2024, I want to take a moment to thank every member of the Bright Horizons family, as well as our client partners who invest in these important services. We made great progress this past year across many dimensions of our business. This could not have been achieved without their dedication and commitment to our core mission of delivering the highest quality education and care to children, families, learners, and our employer partners. A special shout out to our teachers who cared for the children of the San Francisco 49ers in Las Vegas during the big game this past Sunday. It was a great example of how we support working families to integrate work and life.
Speaker Change: I'm very sorry.
Speaker Change: The transformation of this segment is underway and focus on meeting the evolving upskilling and reskilling needs of employers and their employees.
Speaker Change: We continue to believe in and are investing against the large opportunity available in this market.
Speaker Change: As we turn to 2024 I wanted to take a moment to thank every member of the brain Horizons family.
Speaker Change: Well as our client partners, who invest in these important services.
Speaker Change: We made great progress this past year across many dimensions of our business.
This could not have been achieved without their dedication and commitment to our core mission and delivering the highest quality education and care to children families learners and our employer partners.
Speaker Change: Each special Shout out to our teachers, who cared for the children of the San Francisco 40, Niners in Las Vegas during the Big game This past Sunday.
Speaker Change: A great example of how we support working families integrate work and life.
Speaker Change: Yeah.
Speaker Change: I believe we executed well against our near term goals in 2023, while also making investments to strengthen our foundation to drive our success in the years to come.
Stephen Howard Kramer: I believe we executed well against our near-term goals in 2023 while also making investments to strengthen our foundation to drive our success in the years to come. We made significant progress in rebuilding our staffing levels, increasing enrollment, expanding capacity and capabilities to support backup growth, and in the continued build-out of the infrastructure for our One Bright Horizons vision. We enter 2024 on a solid footing and with good momentum, and we expect to see revenue growth of approximately 10%, resulting in revenue of $2.6 to $2.7 billion. On the earnings side, we are projecting adjusted EPS in the range of $3 to $3.20 per share. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our 2024 outlook. Thank you, Stephen and Heidi, and everybody who was able to join us tonight.
Speaker Change: We made significant progress in rebuilding our staffing levels, increasing enrollment expanding capacity and capabilities to support backup growth and and the continued build out of the east.
Speaker Change: Infrastructure for our one bright horizons day.
Speaker Change: We enter 2024 on a solid footing and with good momentum and we expect to see revenue growth of approximately 10%, resulting in revenue of $2 six to $2 7 billion.
Speaker Change: On the earnings side, we are projecting adjusted EPS in the range of $3 to $3 20 per share.
Speaker Change: With that I'll turn the call over to Elisabeth who will dive into the quarterly numbers and share more details around our 2020 for outlook.
Elisabeth: Great. Thank you, Steven and hi to everybody who's able to join Us Tonight.
Elizabeth J. Boland: To recap, overall revenue increased 16% to $616 million. Adjusted Operating Income of $64 million, or 10.3% of revenue, increased 15% over Q4 of 2022, while Adjusted EBITDA of $99 million, or 16% of revenue, increased 10% over the prior year. We hit the quarter with 1,049 centers, adding four new centers and closing 18 centers in the fourth quarter. To break this down a bit further, full service revenue of $447 million was up 15% in Q4, at the high end of our expectations for increased involvement and pricing. Enrollment at our center, which has been open for more than one year, has increased in the high single digits across the portfolio. As Stephen mentioned, occupancy levels averaged in the range of 58-60% for Q4, as expected and consistent with Q3 levels given typical enrollment seasonality. U.S. enrollment was up 10%, and international enrollment increased in the mid-single digits over the prior year.
Elisabeth: To recap the fourth quarter overall revenue increased 16% to $616 million.
Elisabeth: Operating income of 64 million or 10, 3% of revenue increased 16% over Q4 and 22.
Elisabeth: Adjusted EBITDA of 99 million or 16% of revenue increased 10% over the prior year.
Speaker Change: Well, yes of course, when 1049 centers.
Speaker Change: These four new centers and closing 18 centers in the fourth quarter.
Speaker Change: Did you break this out even further full service revenue of 447 million with a 15% in Q4 at the high end of our expectations and increased enrollment and pricing.
Speaker Change: Enrollment at our centers open for more than one year increase in the high single digits across the portfolio.
Speaker Change: As Stephen mentioned occupancy level on average in the range of 58% to 60% for Q4 as expected and consistent with Q3 levels given the typical enrollment seasonality.
Speaker Change: U S enrollment was up 10% and international enrollment increased in the mid single digits over the prior year.
Speaker Change: And our first cohorts as we've discussed previously we continue to show improvement over the prior year period.
Elizabeth J. Boland: In a set of cohorts that we've discussed previously, we continue to show improvement over the prior year period. In Q4, our top performing cohort, defined as above 70% occupancy, improved from 25% of our centers in Q4 of 22 to 36% of our centers in Q4 of 2020, and our bottom cohort of centers, those operating under 40% occupancy, represents 18% of centers as compared to 20% in the prior year period. Adjusted operating income of $13 million in the full-server segment increased $1 million over the prior year.
Speaker Change: In Q4, our top performing cohort defined as above 70% occupancy.
Speaker Change: Approved from 25% of our centers in Q4 of 22% to 36% of our centers in Q4 of 2023.
Speaker Change: And our bottom, California centers, those operating under 40% occupied representing 18% of the centers as compared to 20% in the prior year period.
Speaker Change: Adjusted operating income of 13 million in the full service segment increased 1 million over the prior year.
Speaker Change: I know a tuition higher enrollment and tuition increases and improved operating leverage were largely muted by $12 million reduction in support received from the government.
Elizabeth J. Boland: Higher tuition, higher enrollment, tuition increases, and improved operating leverage were largely muted by a $12 million reduction in support received from the ARPA government funding program over the prior year. As Stephen previewed, we are taking steps to rationalize our footprint in the UK, to better position our portfolio, and to improve operating performance over time. Specifically, we've closed 12 centers in the UK in 2023, including three locations in Q4, and have currently identified an additional 20 to 30 centers to close over the next 12 to 18 months. As we've discussed on prior calls, the UK full-service business operated at margins in the high single digits in the years leading up to the pandemic but has been unprofitable in the last several years, losing approximately $30 million in adjusted outgraded income in 2023.
Speaker Change: Graeme over the prior year.
Speaker Change: And Stephen previewed, we are taking steps to rationalize our footprint in the U K to better position, our portfolio and to improve operating performance overtime.
Speaker Change: Specifically, we closed 12 centers in the U K in 2023, including three locations in Q4.
Speaker Change: And have currently identified an additional 20 to 30 centers to close over the next 12 to 18.
Speaker Change: As we've discussed on prior calls do you pay full service business had operated at margins in the high single digits in the years, leading up to the pandemic.
Speaker Change: Has been unprofitable in the last several years, we've seen approximately 30 million and adjusted operating income in 2023.
Speaker Change: We expect to reduce operating costs associated with our footprint rationalization.
Elizabeth J. Boland: We expect to reduce operating costs associated with the footprint rationalization, along with improved staffing and enrollment gains in the remaining portfolio, to drive improved operating performance in the latter part of 2024 and then into 2020. We will continue to focus on optimizing the portfolio in this new operating environment with a particular eye on the impact of expanded funding support for younger children, which is focused on defraying some of the cost of care for families. Turning to backup care, revenue grew 24% in the fourth quarter to $135 million, well ahead of the expectations we had for finishing the year. And adjusted operating income was 30% of revenue, or $41 million, growing 25% over the prior year. As Stephen detailed, use volume was higher than we anticipated, with strong use across care types, particularly in traditional center and in-home care.
Speaker Change: Along with improved staffing and enrollment gains in our remaining portfolio to drive improved operating performance in the later part of the 24 and then into 2025.
We will continue to focus on optimizing the portfolio in this new operating environment with a particular eye on the impact of expanding funding support for younger children. We just focus on the frame some of the cost of care for a family.
Speaker Change: Turning to backup care revenue grew 24% in the fourth quarter to 135 million well ahead of the expectations. We got essentially here and adjusted operating income was 7% or 41 million.
Speaker Change: 25% over the prior year.
Speaker Change: Hi, Stephen detailed used volume was higher than we anticipated and restaurant use across care times, particularly in traditional center and in home care.
Elizabeth J. Boland: Lastly, the educational advising segment reported $34 million of revenue and delivered an operating margin of 29%. Our Ed Assist and College Coach businesses grew revenue by 6% in the fourth quarter to $32 million, while the Cedar City Marketplace business declined, resulting in an overall 2% growth in this segment. Interest expense increased $2 million to $13 million in Q4, excluding the $1.5 million per quarter that we have had both in 2023 and in the second half of 2022 related to the deferred purchase price on our acquisition of Only About Children. The structural tax rate on adjusted net income increased to 28.3%.
Speaker Change: Lastly, educational advising segment reported 34 million of revenue and delivered operating margin of 29%.
Speaker Change: Our Edison and college coach businesses grew revenue by 6% in the fourth quarter to 32 million.
Speaker Change: Well the center city marketplace business declined resulting in a overall, 2% growth in this segment for the quarter.
Speaker Change: Interest expense increased 2 million to $13 million in Q4, excluding the one and a half million dollars per quarter.
Speaker Change: In 2023 and in the second half of 2022 related to the deferred purchase price on our acquisition of only about choke.
Speaker Change: The structural tax rate on adjusted net income increased to 28, 3%.
Elizabeth J. Boland: In the quarter, an increase of 200 basis points over Q4. Turning to the balance sheet and cash flow, for the year, we generated $256 million in cash from operations compared to $188 million in 2022. We invested $130 million in fixed asset investments and acquisitions in 2020. In 2222, we had invested $270 million, including the acquisition of Only About Children.
Speaker Change: For the quarter, an increase of 200 basis points over Q4 of 22.
Speaker Change: Turning to the balance sheet and cash flow for the year, we generated $256 million in cash from operations compared to $188 million in 2022.
Speaker Change: We invested $130 million and fixed asset investments and acquisitions in 2023.
Speaker Change: It's way too we had invested $270 million, excluding the acquisition of only about children.
Elizabeth J. Boland: We ended 2023 with $72 million in cash and a leverage ratio of 2.5 times net debt to EBITDA, down from 3.25 times at the end of 2020. Before I move on to guidance, I wanted to touch on a minor change in our segment reporting as the change will impact the growth comparison in both our advisory and backup segments. Effective for the first quarter of 2024, we can move the reporting of SitterCity from EdAdvisory and others to the backup care segment to better reflect our operating structure. For clarity, we recast the prior year quarterly segment revenue and associated operating income comparison in the 8K filed with our earnings review.
Speaker Change: We ended 2043 was 72 million in cash and a leverage ratio of two and a half times net debt to EBITDA down from 3.25 times at the end of 2022.
Speaker Change: Before I move onto guidance I wanted to touch on a minor change in our segment reporting as it change will impact the growth comparison in both higher Ed advisory and back up sorry.
Speaker Change: Is that good for the first quarter of 2024, we have moved to reporting in center city or Ed Advisory and other to the backup care segment to better reflect our operating structure.
Speaker Change: For clarity, we recast the prior year quarterly segment revenue and associated operating income comparison in the 8-K filed with our earnings release.
Speaker Change: Yes.
Speaker Change: Our 2020 for backup care and Ed Advisory revenue guidance does reflect growth off of these 2023 and reshape comparison.
Elizabeth J. Boland: Our 2024 backup care and advisory revenue guidance does reflect growth off of these 2023 restated comparisons. So now, moving on to our 2024 outlook. In terms of the top line, we currently expect 2024 revenue to be $2.6 to $2.7 billion, which translates to growth in a range of 8 to 12 percent. At a segment level, we expect full service to increase roughly 8% to 12% on enrollment gains and tuition increases. Backup care increased 10% to 12% with higher use, and Ed Advisory expects growth in the mid-single digits on expanded participation. In terms of earnings, we expect 2024 adjusted EPS to be in the range of $3 to $3.20.
Speaker Change: So now moving on for 2024 hour.
Speaker Change: In terms of time line. We currently expect 24 revenue to be 2.6.
Speaker Change: $2 7 billion, which translates to growth in a range of 8% to 12%.
Speaker Change: At a segment level, we expect full service to increase roughly 8% to 12% on enrollment gains and tuition increases.
Speaker Change: Backup care increased 10% to 12% with higher usage.
Speaker Change: In advisory to grow in the mid single digits unexpectedly participation.
Speaker Change: In terms of earnings we expect 2020 for adjusted EPS to be in the range of $3 to $3 20.
Speaker Change: For sure.
Similar to last year, there are some discrete items affecting our reporting reported margins and earnings growth rates in 'twenty four.
Speaker Change: With that I can relate it to the end of ARPA funding and interest expense.
Elizabeth J. Boland: The Bulletproof Executive 2013, Similar to last year, there are some discrete items affecting our reported margins and earnings growth rates in 24, specifically related to the end of ARPA funding and interest expense. In the full year 2024, we expect those two items to account for an approximate $0.55 a share headwind to growth for the full year, reflecting the lack of approximately $34 million of ARPA funding for P&L centers that we received in 2023 and an estimated increase of $10 million in its history. As we look specifically at Q1, our outlook is for total top-line growth in the range of 10 to 12% Again, with full service at that same rate, 10-12%, backup growth of 10-15%, and advisory growth of mid-single digits. In terms of earnings, we expect Q1 Adjusted EPS to be in the range of $0.42 to $0.47 a share.
Speaker Change: And our full year 2024, we expect those two items to account for an approximate 55 cents a share headwind to growth for the full year, reflecting the lapping of approximately 34 million of our funding for P&L centers than we received in 2023.
Speaker Change: And an estimated increase of $10 million in interest expense.
Speaker Change: As we look specifically at Q1.
Speaker Change: I look at your total topline growth in a range of 10% to 12%.
Speaker Change: Again with full service at that same rate, 10% to 12%.
Speaker Change: Got growth of 10% to 15% and advisory in the mid single digits.
Speaker Change: In terms of earnings we expect Q1, adjusted EPS to be in the range of 42 to 47 cents a share.
Speaker Change: And regarding to the three areas that I mentioned above we expect to have 3 million more in interest expense and a 15 million dollar headwind from the office support we have received in Q1 of 2023.
Speaker Change: We do expect a year over year earnings headwind from these two items to ease as we move through the year with a combined headwind falling from $18 million in Q1 to approximately 12 million headwind in each of Q2 and Q3, and then only 2 million by the time, we get to Q4 and 24.
Operator: And regarding the discrete items that I mentioned above, we expect to have $3 million more in interest expense and a $15 million headwind from the ARPA support we received in Q1 of 2023. We do expect the year-over-year earnings headwind from these two items to ease as we move through the year, with the combined headwinds falling from $18 million in Q1 to approximately $12 million in each of Q2 and Q3, and then only $2 million by the time we get to Q4. So with that call, we are ready to go to Q and A. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in question. You may press star 2 if you'd like to remove your question from the queue.
Paul: So with that Paul Oh, we are ready to go to Q&A.
Paul Oh: Thank you.
Speaker Change: We are conducting a question and answer session if you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Information Tom on the King Your line is in the question you May Press Star two if you'd like to remove your question from the queue.
Speaker Change: Participants using speaker equipment, and they would be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: Our first question is from Andrew Steinman with J P. Morgan. Please proceed with your question.
Andrew Charles Steinerman: Hi, Steven you thought it would be United States is off of a fund.
Andrew Charles Steinerman: Did that the industry really kind of outside of bright horizons might struggle and there might be an opportunity for increased.
Stephen Howard Kramer: For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star 2. One moment, please, while we follow up on questions. Our first question is from Andrew Steinerman with J.P. Morgan. Please proceed with your question. Hi Stephen, you saw in the United States as ARPA funding faded that the industry really kind of outside of Bright Horizons might struggle, and there might be an opportunity for increased M&A or just winning new clients. Now that ARPA has faded, what are you seeing in the broader industry in terms of the kind of after effects? Thanks for the question, Andrew. As we stated, the ARPA funding ended at the end of September.
Andrew Charles Steinerman: And then I would just you know winning new clients now that ARPA has faded what are you, saying in the broader industry, sometimes that because after the fact.
Speaker Change: Thanks for the question Andrew So as we stated the arc of funding ended at the end of September and so you know we had always indicated that we felt the effects of that that would transpire over 'twenty 'twenty four and into 2025 mm.
Speaker Change: Competitors specifically.
Speaker Change: In our industry tend to be individual owner operators, they're very location reminded and they ultimately are worth.
Stephen Howard Kramer: And so, you know, we had always indicated that we felt that the effects of that would transpire over 2024 and into 2025. You know, competitors, specifically in our industry, tend to be individual owner-operators. They are very vocationally minded, and they ultimately will focus on families, they'll focus on their teachers, and may do things that are uneconomic for some period of time.
Speaker Change: We'll focus on families they'll focus on their teachers and May do things that are uneconomic for some period of time I think at this point given that the funding is available many of them are making decisions around pricing to try to capture some of the decrement that they're seeing.
Speaker Change: And in their economics, how others are looking at reducing their discounting that they were doing through the Covid period, and then others are looking at their wages and trying to figure out what they can do structurally onto reduce wages. So I think we're still in the early innings of the effects.
Stephen Howard Kramer: I think at this point, given that the funding isn't available, many of them are making decisions around pricing to try to capture some of the decrement that they're seeing in their economics. Others are looking at reducing their discounting that they were doing through the COVID period, and then others are looking at their wages and trying to figure out what they can do structurally to reduce wages. So, I think we're still in the early innings of the effects that we are possibly going to see from the, you know, elimination of the ARPA funding. And so, there are isolated examples where owner-operators are turning in the keys or deciding to be acquired.
Speaker Change: We are possibly going to see from the elimination of the ARPA funding and so there are isolated examples where our owner operators are turning in the keys or deciding to be acquired but I think at this point, it's still very early in that process and we expect.
Stephen Howard Kramer: But I think at this point, it's still very early in that process, and we expect the effects to unfold over the next 12 to 18 months. Okay. Thank you.
Speaker Change: The effects to unfold over the next 12 to 18 months.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. Thank you.
Elizabeth J. Boland: Our next question is from Stephanie Moore with Jeffrey. Please proceed with your question. Hi, good afternoon.
Speaker Change: Our next question is from Stefan anymore with Jefferies. Please proceed with your question.
Speaker Change: Okay.
Stefan: Hi, good afternoon. Thank you.
Elizabeth J. Boland: Thank you. I was hoping you could touch a bit on your comment about footprint rationalization in 2024. I know in the quarter you called about maybe making some changes and optimizing centers in the UK, but if you just think of broad footprint rationalization, maybe talk about your expectations in the US and outside the US and what we should be kind of thinking about as a total center count by year end. Thanks.
Stefan: I was hoping you could touch a bit on your comment about footprint rationalization in 2020 four I know on the quarter, you called about maybe making some changes and optimizing centers in the U K, but as you just think of broad footprint.
Stefan: So you can maybe talk about your expectation in the U S and outside the U S and what we should be thinking about it the total center count.
Stefan: Thanks.
Stefan: Sure.
Elizabeth J. Boland: Sure. So I can start and see if I can catch on to the question. And Stephen, can I color?
Speaker Change: I can start and see if I touch on the question and Steven can add color.
Elizabeth J. Boland: So 2024, as you say, we've called out a number of centers that we have circled for closure in the U.K., and again, we are keeping an eye on how the effects of the expanded funding environment in the U.K. may impact demand in certain areas. But that's the main rationalization that we see. Overall, we would expect to close globally a similar number to what we closed this year. So it was a total of 49 centers worldwide this year, and we would expect to see that again in 2024. Openings averaging around 25, so 20 to 30 new center additions, so a net reduction in overall center footprint of net 25 down.
Speaker Change: So 2024.
Speaker Change: Say, we called out a number of centers that we have circled up a foreclosure in the U K.
And again are keeping an eye on how the effects of the expanded funding environment in the U K any may impact demand in certain areas, but that's the the main rationalization that we see overall, we would expect to close a globally a similar number to what we close.
Speaker Change: This year, so with a total of 49 centers overall this year and really expect to see that again in 2024 openings averaged around 25 or 20 to 30, New center adds so in that.
Speaker Change: A reduction in overall center footprint in that 25 down. So we ended the year at 1049, so it'd be just over.
Stephen Howard Kramer: So we end the year at 1,049, so it would be just over around 1,025 at the end of the year. Okay, and just as a follow-up on that, as you think about your business cohort and the centers that are kind of at that lowest utilization level and certainly have made, you know, pretty meaningful progress year over year, but, you know, is there a potential to see maybe a more aggressive stance on some center rationalization just as you look at that lowest cohort? Or, you know, is that one aspect you could, one lever you could pull to drive an Or if not, you know, what are the opportunities to drive enrollment improvement at that low, lowest cohort thing?
Speaker Change: 1025 at the end of the year.
Speaker Change: Okay, and then just as a follow up on that as you think about you know the the cohort of your of your business in the centers that are cut off at that lowest utilization level and certainly have made me a pretty meaningful progress year over year, but no is there a potential to see maybe a more aggressive stance on that.
Speaker Change: Center rationalization, just as you look at that Louis cohort or is.
Speaker Change: Is that one aspect you put E. One lever you could pull to drive an improvement at that level and if not what are the opportunities to drive enrollment improvement at that low that Louis cohort. Thanks.
Speaker Change: Okay.
Speaker Change: Yeah, again, I'll I'll start it and then Steven can add color. If you like the lowest cohort as mentioned is about 18% of the of the footprint I'm on centers that have been open more than now that.
Stephen Howard Kramer: Yeah, again, I'll start and then Stephen can add color, but the lowest cohort, as mentioned, is about 18% of the footprint on centers that have been open more than, you know, the group that we've been talking about. And so, with regard to, there are closures, there are improving enrollment, and there's really having an eye on some of the opportunities that we see as demand continues to right size. And as we are mindful of the impacts of what Stephen was just talking about in the overall marketplace, on centers that may close, and our ability to take on enrollment from those centers that are contracting the supply, and also, as we continue to staff our centers and are able to take enrollment where demand has been persistent, and we've been gated in taking all the enrollment demand that there is.
Speaker Change: The growth that we've been talking about and so.
Speaker Change: But with regard to there's closures, there's improving enrollment and theres really having an eye on some of the opportunities that we see is it demand.
Speaker Change: Continues to rightsize as we are.
Speaker Change: Mindful of the impacts of what Steven was talking about them on the.
Speaker Change: The overall marketplace on centers that may close in our ability to take on enrollment from those centers that are contracted to supply them.
Speaker Change: And also as we continue to staff our centers and are able to take enrollment where demand has been persistently high and we've been gain has been taken on the enrollment demand if there is.
Speaker Change: That along with the realization that.
Speaker Change: We look at where we see the best intersection of.
Stephen Howard Kramer: That goes along with the realization that we look at where we see the best intersection of supply and demand of centers, the demand for both our services, the client relationships that we have, and the affordability of care and the density of children under the age of five, and know that it takes a long time to site a new center and to open a new center. And so we want to be careful about the rationalization timing and not get too far ahead of closing centers that just actually need more time. And given the long lease life on so many of these centers, it's actually quite costly to close them when you can be wading through this more challenging time in the interim.
Speaker Change: Suppliers centers the demand for our both our servicing the client relationships that we have and the the affordability of care and the density of children under the age of five and know that it takes a long time to site, a new center and opened a new center and so we want to be careful about the rationalization.
Speaker Change: Tiny and not get too far ahead of closing centers that are just actually need more time and given the long lease lifetime. So in Asia et cetera, or is it it's actually quite costly to disclose them.
Speaker Change: What do you think you're going to be waiting through this more challenging time in the interval. So yeah and I think the only thing I would add is you know going back to Andrew's question. I think there is still a bit to play out here in the United States as it relates to the competitive environment and so we're watching that really closely on a micro <unk>.
Elizabeth J. Boland: Yeah, and I think the only thing I would add is, you know, going back to Andrew's question, I think there is still a bit to play out here in the United States as it relates to the competitive environment, and so we're watching that really closely on a micro market by micro market basis. And then, you know, as Elizabeth alluded to, in the UK, the core challenge really stems from staffing, and so to the extent that we are able to make some progress as it relates to staffing and the cost associated with that staffing, you know, I think we'll be able to potentially continue to see some progress with centers in the UK. So I would just observe that some of it is about the macro environment as well as some of the competitive pressures that may ease over the next 12 to 18 months in both geographies. Great, thank you.
Speaker Change: By a micro market basis.
Speaker Change: And then you know as Elizabeth alluded to in the U K The court challenge.
Speaker Change: Really stemming from staffing and so on to the extent that we are able to make some progress as it relates to staffing and the cost associated with that staffing you know I think we will be able to potentially continue to see some progress of our centers in the U K. So I would just observe that some of it is about.
Speaker Change: The macro environment as well as some of the competitive pressures that may ease over the next 12 to 18 months in both geographies.
Speaker Change: Great. Thank you.
Elizabeth J. Boland: Thank you. Our next question is from George Tom with Goldman Sachs. Please proceed with your question. Hi, thanks, good afternoon.
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question is from George Tong with Goldman Sachs. Please proceed with your question.
George Tong: Hi, Thanks, good afternoon.
Elizabeth J. Boland: You talked about occupancy rates averaging 58 to 60% in the quarter. What occupancy rates are you assuming in your guidance for 2024? And if you could provide some perspectives by quarter, that'd be helpful too. Thanks. So, sure, I'll start off again.
George Tong: <unk> talked about occupancy rates, averaging 58% to 60% in the quarter what occupancy rates are you assuming in your guidance for 2024, and if you could provide some perspective by quarter that'd be helpful too. Thanks.
George Tong: Yeah.
George Tong: So I'm sure Derik I'll I'll start off again.
Speaker Change: The overall the enrollment as we look ahead to the full service growth for next year is it mainly had pricing enrollment expansion story and so with our price increases in the mid single digits. So around that 5% range on average and enrollment also in the mid single digits contributing to that topline.
Elizabeth J. Boland: Overall, enrollment, as we look ahead to full-service growth for next year, it's mainly a price and enrollment expansion story. And so with price increases in the mid-single digits, so around that 5% range on average, and enrollment also in the mid-single digits, contributing to that top-line growth rate offset by a bit of the headwind that would come from the closures we were just talking about, it's overall in that mid-single digit range. Of course, our highest-performing centers, that top cohort, are already quite fully occupied, so there's not a lot more enrollment gain to be had there.
Speaker Change: Both rate offset by a bit of a headwind doesn't come from the closures were just talking about its overall in that mid single digits range and of course, our highest performing centers that top cohort is already quite fully occupied so there's not a lot more enrollment gains to be had there it was becoming a more generally friendly that.
Speaker Change: Middle cohort of 40% to 70% occupied or the real improver opportunity any under 40% occupied group. So overall that is what we are seeing from an enrollment growth standpoint, it would be 60% to 65% occupancy for the year similar cadence Joe improving from Q.
Elizabeth J. Boland: It would be coming more generally from that middle cohort of 40% to 70% occupied, or the real improver opportunity in the under-40% occupied group. So overall, that is what we are seeing from an enrollment growth standpoint. It would be 60% to 65% occupancy for the year, similar to improving from Q1. Q2 is the top quarter. Q3 is sort of the retrenchment of enrollment over the summer, and then it would be pretty stable from Q3 to Q4. But that's the cadence of the cyclicality, but the 60% to 65% is what we would guide to. Got it.
Q1 is the growing quarter Q2 is the top quarter Q3 is sort of a retrenchment of it or all of that over the summer and then it would be pretty stable from Q3 Q4, but that's the cadence of the cyclicality, but.
Speaker Change: The second thing is 65% and swiftly when the guy too.
Speaker Change: Got it that's helpful and then just as a follow up.
Speaker Change: Given the latest operating costs that you've had.
Speaker Change: Been seeing with respect to labor and facility costs.
Elizabeth J. Boland: That's helpful. And just as a follow-up, given the latest operating costs that you've been seeing with respect to labor and facility costs, what do you expect incremental margins to be for full-service centers as enrollments continue to recover? So we have a couple of factors, of course, coming into play with full service. I mentioned in the prepared remarks the cessation, if you will, of the ARPA funding.
Speaker Change: What do you expect incremental margins to be for a full service centers as enrollments continue to recover.
Speaker Change: So we have a couple of factors of course coming into play with full service I mentioned in the prepared remarks and <unk>.
Speaker Change:
Speaker Change: The cessation if you will of the ARPA funding, so that's a $34 million or so headwind at all in the full service segment, we would be looking at operating margins to be in the low to mid single digits overall for the year, taking into account that ARPA sort of X ARPA resolved and then we will have.
Elizabeth J. Boland: So that's a $34 million or so headwind and all in the full service segment. We would be looking at operating margins to be in the low to mid-single digits overall for the year, taking into account that ARPA, so the ex-ARPA result that we will have in 2024, and that's representative of the mix of centers that we have in our performance. That top-performing cohort is back to our pre-COVID operating margin levels in the high single digits, 8% to 10%. They are certainly performing there as we had expected. The group that's in the middle, that 40% to 70% cohort, has a bit more room to go, both with enrollment and because of the headwind that we see in the U.K., in particular. That's where a lot of U.K. centers exist. They have a group that is in the bottom cohort, but a number of their centers are in that middle group as well.
Speaker Change: In 'twenty four and that.
Speaker Change: That is that that's representative of the mix of sensors that we have and the performance that top performing cohort as you know back to our pre COVID-19 operating margin levels and that you know that high single digit safety 10 per cent, they're certainly performing there actually had expected the group that's in the middle of that 40% to 70%.
Speaker Change: Cohort has a bit more room to go both with enrollment and because of the headwinds that we see in the U K in particular, that's where a lot of the UK centers is that they have a group that had hit the bottom called worth it.
Speaker Change: A number of our centers are in that rental growth as well and so with the underperformance of the cost structure in the U K, we would see more like a mid single digits plus in that group and then of course the bottom cohort is is not not positive yet one like that.
Elizabeth J. Boland: And so with the underperformance and the cost structure in the U.K., we would see more like a mid-single digits plus in that group. And then, of course, the bottom cohort is not positive yet. With the under 40% occupied, they need to be certainly over 40 and closer to 50% to be in a more profitable range. So overall, we would see that blending out.
Speaker Change: The other 40% occupied they need to be certainly over 40 anything closer to 50% more profitable range. So overall, we would see that blended out at me in my pencil out to go low low to mid single digits for the year, but with some good green shoots from the both the top cohorts and just looking at the portfolio.
Elizabeth J. Boland: We penciled out to the low to mid-single digits for the year, but with some good green shoots from both the top cohorts and just looking at the portfolio without the headwind that we see in the U.K. Got it. Very helpful. Thank you. The next question is from Manav Patnaik with Barclays. Please proceed with your question. Thank you. I just wanted to focus on backup.
Speaker Change: The headwind that we can in the U K.
Speaker Change: Got it very helpful. Thank you.
Speaker Change: [laughter].
Speaker Change: Our next question is from Manav Patnaik with Barclays. Please proceed with your question.
Thank you I just wanted to focus on back up so the 26% growth that you had this year I was just hoping you could help just break that out but you know how much of that was you know new clients. The credit utilization phenomena, you talked about before how much was it. The addition of Steven Kay camps and all these other services and acquisitions, you've thrown in and and just.
Stephen Howard Kramer: So the 26% growth that you had this year, I was just hoping you could help just break that out by, you know, how much of that was new clients, the credit utilization phenomena you talked about before, how much was the addition of Stephen, Kate Camps, and all these other services and acquisitions you've thrown in, and just why you're guiding such a big deceleration for 24? Yeah, so thanks, Manav. So, certainly, we're excited about the 26% growth that we achieved in 2023. You know, look, this is a utilization-based service, so the vast majority of any given year of improvement is really from more use, and so that is both a combination of existing and new clients, but at the end of the day, the number of new clients, as well as the fact that they take time to season in, are really a small portion of that growth.
Speaker Change: Why you're guiding to such a big deceleration for 'twenty four.
Speaker Change: Yeah. So thanks, Manav, so certainly where we're excited about the 26% growth that we achieved in 2023, you know look this is a.
Speaker Change: A utilization based service. So you know the vast majority in any given year of improvement is really from a more use and so that is both a combination of existing and new clients, but at the end of the day the number of new clients as well as the fact that they take time to see if any are really a small portion.
Speaker Change: Of that growth most of that growth comes from.
Speaker Change: Increasing usage are among our clients that have been with us.
Speaker Change: I'd say the other piece of it is that the majority of the growth was from our traditional in center and in home use cases, I certainly we saw nice growth in the newer use cases, but that was not the majority of the growth so really thinking about it as the installed base.
Stephen Howard Kramer: Most of that growth comes from, you know, increasing usage among our clients that have been with us. I'd say the other piece of it is that the majority of the growth was from our traditional in-center and in-home use cases. Certainly, we saw a nice growth in the newer use cases, but that was not the majority of the growth. So, really think about it as the installation-based, growing use in traditional care types, as the vast majority of the growth that we achieved. When we look out to 2024, you know, first, just observing that, you know, we did 26% growth in 23, and we did 17% growth in 22. So, you know, this is sort of a double year of increasingly difficult comps, and so we're mindful of that.
Speaker Change: <unk> use in traditional care types.
Speaker Change: The vast majority of the growth that we achieved when we look out to 2020 for them.
First just observing that you know we did 26% growth in 'twenty three we did 17% growth in 'twenty. Two so you know this is sort of a double year of increasingly difficult comps and so we're mindful of that and as I. Just said you know as a utilization based service.
Speaker Change: We're really focused on continuing to drive greater penetration of users and use but we need to be mindful of continuing to build out supply ahead of us as well as you know being mindful of the continued acceleration.
Stephen Howard Kramer: And as I just said, as a utilization-based service, we're really focused on continuing to drive greater penetration of users and use, but we need to be mindful of continuing to build out supply ahead of demand, as well as being mindful of the continued acceleration of client budgets that have occurred over the last several years. So, that's where we land on delivering 10% to 12% growth in our backup segment for 2024. Okay, I got it.
Speaker Change: Of client budgets that have occurred over the last several years, So that's where we land on.
Speaker Change: A delivery of 10% to 12% growth in our backup segment between four.
Speaker Change: Okay got it and I know, there's a bit maybe just on the margins. If you could help us how we should think about.
Elizabeth J. Boland: And Elizabeth, maybe just on the margins, if you could help us think about the margins and that growth or what the incremental margins are. I know you said you were going to keep kind of investing in that business, but any help there for the year? And are you asking about back-up care? Is that what you said?
Speaker Change: The the margins at that growth or what the incremental margins. I know you said you were going to keep that kind of investing in that business, but any help desk of the yoga it would be nice.
Speaker Change: And you're asking about backup here.
Speaker Change: She says got backup K yet right.
Speaker Change: Yeah. So so I'm not sure we would continue to expect a 25% to 30% EBIT margin similar to what you've.
Elizabeth J. Boland: Yeah, back-up care. Yep, correct. Yeah, so back here, we would continue to expect a 25% to 30% EBIT margin, similar to what you've seen us do. I think that's the balance of both the expanded use and then the fact that we are investing in both the systems and the user experience. Much of that is baked into the cost structure, and then we have the third-party providers that we pay. That's the other direct cost.
Speaker Change: You've seen us do I think that that's the balance that voting expanded Houston any the fact that we are investing in both their systems and user experience. That's you know how much of that is baked into the cost structure and then we have the.
Speaker Change: The third party providers that we paid off the other direct cost. So we think we can sustain that level of 25 to 30.
Speaker Change: Oh in the Indiana advising business it would be a little bit.
Elizabeth J. Boland: We think we can sustain that level of 25% to 30%. In the advising business, it would be a little bit, you know, there's more investment on that front in 24, so it would be closer to 20% operating margin. Our next question is from Josh Chan with UBS. Please proceed with your question.
Speaker Change: There is more investment on that front in 'twenty for them. So it would be closer to 20% operating margin, we would expect for the year.
Speaker Change: Our next question is from Josh Chan with UBS. Please proceed with your question.
Joshua K. Chan: Hi, Good afternoon, Stephen and Elizabeth maybe continuing the discussion on backup care as you look out a couple of years you know how sustainable do you feel like the double digit type of growth rate is and.
Stephen Howard Kramer: Maybe continuing the discussion on backup care, as you look out a couple of years, you know, how sustainable do you feel the double-digit type of growth rate is? And to what extent will the opportunity then be comprised of new clients as opposed to continuing to drive up usage? Thank you. Yeah, so we certainly see the opportunity to continue to drive 10-12% growth over many years. And a lot of that will continue to come from expanding the number of users and then ultimately expanding the use. I think something that we will certainly continue to do R&D around is continuing to broaden the number of use types as well as use cases.
Joshua K. Chan: To what extent will the opportunity then be comprised of new clients as opposed to continuing to drive up the usage. Thank you.
Joshua K. Chan: Yeah.
Speaker Change: Yeah. So we certainly see the opportunity to continue to drive a 10% 12% growth over many years.
Speaker Change: And a lot of that will continue to come from expanding the number of users and then ultimately expanding.
Speaker Change: Use I think something that certainly we will continue to do R&D around is continuing to broaden the number of use types as well use cases, so we really see it as something where.
Stephen Howard Kramer: So we really see it as something where we have the ability to continue to increase the penetration among the eligible lives along with continuing to broaden the number of use cases being a predominance of the growth. And then on top of that, obviously, there continues to be interest at the client level, so adding new clients over time is the other component of the growth effort. Okay, thank you for the color.
Speaker Change: We have the ability to continue to increase the penetration among the eligible lives along with continuing to broaden the number of use cases.
Speaker Change: Being a predominance of the growth and then on top of that obviously there continues to be interest at the client level, so adding new clients over time is the other component to the growth algorithm.
Speaker Change: Okay. Thank you for that color and then on the full service side I think you called out the EBIT headwind from the U K in 2020 three it is there a way to kind of ballpark the how much that loss could potentially narrow based on the actions that you're contemplating with 24.
Elizabeth J. Boland: And on the full service side, I think you called out the EBIT headwind from the UK in 2023. Is there a way to kind of ballpark how much that loss could potentially narrow based on the actions that you're contemplating for 2024? Yeah, so we did call that out that it was around a $30 million loss at that level in 2023. So we would expect that to ease by $5 or $10 million, likely in 2024. So still not getting fully to profitability but making more headway in the back part of the year, the back half of the year against that, against that objective. And the view then, of course, is that we'd be looking into 2025 and beyond for really a full return to profitability across the full-service portfolio back to where we were pre-COVID on the high-tickled agenda. Okay, thank you for the color and thank you both for your time.
Speaker Change: Yeah, So you're right.
Speaker Change: We did call that out then it was around a 30 million dollar Oh, it was a loss at that level.
Speaker Change: In 2023, so we would expect that to a five five or $10 million likely in 2024, or so still not getting bluish profitability by making them more headway in the back part of the year or back half of the year.
Speaker Change: Hum against that.
Speaker Change: Against that objective and the view that it's a question that's maybe looking into 2025 and beyond for really a full return to profitability across the.
Speaker Change: The full service portfolio back to kind of where we were pre COVID-19 in the high single digits.
Speaker Change: Okay.
Speaker Change: Thank you for the color and thinking about for your time.
Elizabeth J. Boland: Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question is from Tony Kaplan with Morgan Stanley. Please proceed with your question. Thanks very much. I was hoping you could give a little bit more color on the $36 million impairment. You know, what assets are being impaired? Is this just underperforming centers?
Speaker Change: Thank you.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Our next question is from Toni Kaplan with Morgan Stanley. Please proceed with your question.
Toni Kaplan: Thanks, very much I was hoping you could give a little bit more color on the $36 million impairment and.
Toni Kaplan: What assets are being impaired is there.
Toni Kaplan: Just under performing centers.
Elizabeth J. Boland: And I guess what's the rationale for being able to add back those expenses? I know you did it last year as well, but I just wanted to understand it. So, the impairment relates to centers, and so this would be the right of use asset from a lease standpoint, and the ability to recover the lease obligation, and then the leasehold improvements associated with centers that are either slated to close, that's a good chunk of those that have been impaired, but also centers that have an operating performance and a cash flow generation that doesn't clear the sort of accounting convention of a long-term recovery of the right of And so, from the standpoint of adding it back, I think our view is that it is a standout expense that is recurring in the context of recovery from the pandemic.
Toni Kaplan: And I guess, what's the rationale from being able to add back those expenses I know you did it last year as well, but just wanted to understand that better.
Toni Kaplan: Sure.
Toni Kaplan: So.
Speaker Change: The impairment relates to two centers and so this would be they are the right of use asset on a from a lease standpoint, and the ability to recover the the lease obligation that then the leasehold improvements associated with centers that have.
Speaker Change: Either are slated to close them that that's a good chunk of those that have been impaired, but also centers that have a an operating performance and cash flow generation that doesn't clear they sort of accounting convention of a of a long term recovery of the the right of use asset Michelle in front of us.
Speaker Change: And so from the standpoint of of adding it back I think our view is that it is it's a stand out expense that is.
Speaker Change: Nine if it's recurring in the context of a recovery from the pandemic we have had some.
Elizabeth J. Boland: We have had some impairments over the last couple of years as we've continued to refine the book that we are operating and the portfolio as we see it evolving over the years of recovery, but it is certainly an outside expense that is not as predictable, and so I feel like it is best to isolate it so that people can see it and understand where it's coming from. One of the things to point out about our course is that it is a... It is an accounting convention how this is determined, and some of the challenge in a market like we are in is to, with long-life assets with leases, to estimate what you may be able to sublease the space for in an environment where landlords are being fairly sticky with their desire to negotiate, and so that certainly comes into play.
Speaker Change: Southern chairman over the last couple of years as we've continued to refine the book that we are operating in the portfolio as we see it evolving over the years of recovery, but it is certainly an outsized expense it is not.
Speaker Change: Predictable and so feel like it is best to isolate it so people can see it and understand where we're semi truck.
Speaker Change: You know one of the things just to point out is that of course is it's it is a.
Speaker Change: If it is an accounting convention how this is determined then.
Speaker Change: Some of the challenge in a in a market like we are in this too.
Speaker Change: With long life assets with leases to estimate.
Speaker Change: He may be able to sublease the space for now in an environment, where landlords are gains.
Speaker Change: Being fairly sticky with their their desire to negotiate and so that certainly comes in.
Speaker Change: Got it and for that advisory So last couple of two quarters I'm.
Stephen Howard Kramer: Got it. And for Ed Advisory, the last couple of quarters, the margins were down year over year. Is that related to the technology investments that you've been making? And maybe if it is, if you could give some color on what technology investments you're making in that area. Thanks.
Speaker Change: Margins were down year over year that related to technology investments that you've been making and maybe if it is if you could give some color on what technology are investments, we're making in that area. Thanks.
Speaker Change: Sure Tony So yeah. So the quick answer is that we've been making investments in people, we've been making investments in technology.
Stephen Howard Kramer: So the quick answer is that we've been making investments in people, we've been making investments in technology, and we've called out the fact that this is an area that we are focused on transformation. It's going to be a multi-year transformation, and we believe that we are going to be able to deploy a similar playbook that we used for backup care, in that we're going to invest in the product, we're going to invest in the technology, we're going to invest in the personalized marketing efforts, but really see quite a large opportunity in the concept of supporting our employer clients to upskill and reskill their employees, So, as Elizabeth stated, our expectation in 2024 is that we'll run at a 20% margin, and that represents a degradation in margin with a clear focus on investing in this particular segment.
Tony: And we've called out the fact that you know this is an area that we are focused on transformation.
Tony: It's gonna be a multiyear transformation and we believe.
Tony: But we're gonna be able to deploy a similar playbook that we used for backup care and that we're going to invest in the products, we're going to invest in the technology, we're going to invest in the personalized marketing efforts.
But really see quite a large opportunity.
Tony: In the concept of supporting our employer clients to Upskill and Reskill their employees.
And we believe that we're particularly well positioned so as Elizabeth stated.
Our expectation in 2024 is it will run at a 20% margin and that represents.
Tony: A degradation in margin with a clear focus on investing in this particular segment.
Elizabeth J. Boland: Terrific, thank you. Thank you. Our next question is from Jeff Silber with BMO Capital Markets. Please proceed with your question.
Speaker Change: Terrific. Thank you.
Thank you.
Speaker Change: Our next question is from Jeff Silber with BMO capital markets. Please proceed with your question.
Jeffrey Marc Silber: Thank you so much.
Elizabeth J. Boland: Thank you so much. I think you said something about expanding funding support in the UK. I'm not sure if I got that right, but if I did, can you just give us a little bit more color on that? Sure.
Jeffrey Marc Silber: I think you said something about expanding funding support in the U K I'm not sure if I got that right, but if I did can you just give us a little bit more color on that.
Jeffrey Marc Silber: Sure. So the UK has had has long had a a finish before it then is it to Paris. So it is a it's called it's called for entitled Land, That's an overstatement.
Elizabeth J. Boland: So the UK has long had funding support that is for parents, so it is a call-free entitlement. That's an overstatement of what it is, but it generally provides 15 hours of care at a supported tuition rate for three- to five-year-olds. That was expanded or has been expanded now to encompass two-year-olds starting in April of this year, and then will be further made available down to the infant age groups to nine-month-olds and above, as the UK is looking to make child care more affordable for families. And they have also expanded the funding for families that are in more economic straits. So some families are eligible for up to 30 hours, but a more general availability is for 15 hours of care and support for 38 weeks a year.
Jeffrey Marc Silber: What it is but it's generally provide 15 hours of care and has provided 15 hours of care.
Jeffrey Marc Silber: It is supported tuition rate.
For three to five year olds that was expanded or has been expanded out to encompass two year olds. Starting in April of this year and then we'll be further made available down too.
Jeffrey Marc Silber: It's been a six to nine months, a little bit about the U K is looking to make child care more affordable for families and they have also extended state funding.
Jeffrey Marc Silber: Funding for families that are in more.
Jeffrey Marc Silber: Economic strain. So some families are eligible for up to 30 hours, but in a more general availabilities for 15 hours of care is supported for 38 weeks a year and so what is the upside of it is that they can help parents.
Elizabeth J. Boland: And so the upshot of it is that it can help parents pay for 25%, 35% or so of the care that they may need, and so it has the opportunity to drive more demand for us. It is not a revenue enhancer per se, because the funding is to support the parents' tuition, but it is an opportunity to drive more demand.
Pay for 25 35 per cent yourselves the care that they may eat until it has the opportunity to drive more demand for us is not a revenue enhancer per se because the funding is to is to support the parents tuition, but it is an opportunity to drive more demand.
Stephen Howard Kramer: Okay, that's great. I know you've talked about this before, but it's good to get more of the color. And then at a higher level, probably more in the U.S., but maybe this can apply globally as well, I know there's been some arguments back and forth in terms of, you know, working from home and the movement of staff towards the office, how that impacts your business. It seems like more companies aren't going back to five days a week, but three to four seems to be more of a push at least this year. Any impact on your business that you've seen, or do you think you're going to see?
Speaker Change: Okay. That's great I know you've talked about this before but it is going to get more of the color.
Speaker Change: And then at a higher level, probably more in the U S. But maybe just can apply globally as well.
Speaker Change: I know theres been some argument back and forth in terms of working from home and they move back towards the office how that impacts your business. It seems like more companies, maybe they're not going back to five days a week, but you know three to four it seems to be more of a push at least this year any impact on your business that you've seen or you think youre going to.
Speaker Change: C.
Speaker Change: So look I think we we've had sort of a really good flow of information from our client base right. So we have a quite a number of clients who have been sharing with us what their return to office plans had been over the last several years and it's certainly.
Stephen Howard Kramer: So, look, I think we have had sort of a really good flow of information from our client base, right? We have quite a number of clients who have been sharing with us what their return to office plans have been over the last several years. It certainly feels like, as you point out, Jeff, that three to four days a week seems to be pretty standard at this point. And ultimately, we have always indicated that where someone is working the majority of the time is where they are ultimately going to want care for five days a week.
Speaker Change: Feels like as you point out Jeff that three to four days a week seems to be pretty standard at this point.
And ultimately we have always indicated that were someone who is working the majority of the time, it's where they ultimately are going to want care for five days a week and so on the margin we have I had stronger occupancy in our client base centers acts.
Stephen Howard Kramer: And so, you know, on the margin, we have had stronger occupancy in our client base centers for actually many quarters now because there is a real reason for our client employees to leverage the high-quality opportunity to use their on-site centers. And so, ultimately, you know, we feel good about the portfolio that we have and the footprint that we have in this evolving landscape. But again, I think that in the same way that we always describe our business as sort of a longer arc kind of business, it's not that we saw or are seeing a significant increase based on this trend, but it is something that ultimately has, you know, an upward positive benefit to it.
Speaker Change: We over many quarters now because there is a real reason for our clients' employees to leverage the high quality opportunity to use their onsite centers and so ultimately.
Speaker Change: We feel good about the portfolio that we have an offering that we have in this evolving landscape, but again I think that in the same way that we always describe our business as sort of a longer our kind of business.
Speaker Change: It's not that we saw or are seeing a significant increase based on this trend, but it is something that ultimately has has upward a positive benefit to us.
Stephen Howard Kramer: Okay, that's very helpful. Thanks so much. Thank you. Okay, well, thank you all for joining us this evening, and have a great rest of the day. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Okay.
Speaker Change: Very helpful. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Okay, well. Thank you all for joining us this evening and how they all have a great rest of the day.
Speaker Change: Thank you.
Speaker Change: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.