Q1 2024 Bright Horizons Family Solutions Inc Earnings Call

[music].

Operator: Greetings and welcome to the Bright Horizons Family Solutions first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference... Please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Vice President, Investor Relations. Please go ahead.

Greetings and welcome to the bright Horizons family solutions first quarter 'twenty 'twenty four earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

Operator: If anyone should require operator assistance during the conference call.

Operator: 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. Please go ahead.

Michael Flanagan: Thank you, Stacy, and welcome to Bright Horizons' first quarterly earnings call. Before we begin, please note that today's call is being webcast and a recording will be available under the investor relations section of our website, brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance, and outlook, are subject to the Safe Harbor Statement included in the earnings release. Forward-looking statements inherently involve risk 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, 2023 Form 10-K, and other SEC filings.

Michael Flanagan: Thank you Stephanie alright.

Michael Flanagan: Thank you Stacy welcome to bright horizons first quarter as well.

Michael Flanagan: Before we begin please note that today's call is being webcast and recording will be available.

Michael Flanagan: The Investor Relations section of our website <unk> com.

Michael Flanagan: 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 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.

Michael Flanagan: As a reminder to participants any forward looking statements made on this call, including those regarding future business.

Michael Flanagan: Turning to outlook.

Michael Flanagan: Subject to Safe Harbor statements included in our earnings release.

Michael Flanagan: Forward looking statements inherently about risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements are described in detail in our earnings release.

Michael Flanagan: <unk> Form 10-K, and other SEC filings any forward looking statements speak only as of the date on which is made and we undertake no obligation to update any forward looking statements.

Michael Flanagan: We also refer today to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available on the IR section of our website at investors not bright horizons Dot com.

Michael Flanagan: Joining me on today's 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 the call up to your questions. With that, let me turn the call over to Stephen.

Speaker Change: Joining me on Baseball's, our Chief Executive Officer, Stephen Kramer, Chief Financial Officer, Steve ill start by reviewing our results and will provide an update on the business or the business falls the 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: Thanks, Mike, and welcome to everyone who has joined the call. We are really pleased with the solid start to 2024 and our performance in the first quarter. Revenue increased double digits year over year, and earnings outperformed our expectations. With occupancy in our full service segment ticking up to greater than 60% globally, and backup use continuing its solid year-over-year growth trend, we are tracking to deliver on our 2024 guidance. So, to get into some of the specifics,

Stephen: Thanks, Mike.

Speaker Change: Welcome to everyone, who has joined the call.

Stephen Howard Kramer: Revenue in the quarter increased 12% to $623 million, with adjusted net income of $30 million and adjusted EPS of $0.51 per share. In our full-service child care segment, revenue increased 12% in the first quarter to $484 million. We launched six centers in the quarter, including client-centered transitions for Aflac and Rockefeller University. Enrollment in centers that have been open for more than one year increased at a mid-single-digit rate in Q1, and occupancy averaged more than 60%.

Stephen Howard Kramer: We are really pleased with the solid start to 2024 and our performance in the first quarter.

Stephen Howard Kramer: Revenue increased double digits year over year, and earning outperformed our expectations.

Stephen Howard Kramer: With occupancy in our full service segment ticking up to greater than 60% globally and backup use continuing its solid year over year growth trends, we are tracking to deliver on our 2020 for guidance.

Speaker Change: So again to some of the specifics.

Stephen Howard Kramer: Revenue in the quarter increased 12% to 623 million with adjusted net income of $30 million and adjusted EPS of <unk> 51 per share.

Stephen Howard Kramer: And our full service child care segment revenue increased 12% in the first quarter to 484 million.

Stephen Howard Kramer: We launched six centers in the quarter, including client center transitions for Aflac and Rockefeller University.

Stephen Howard Kramer: Enrollment in centers that have been opened for more than one year increased at a mid single digit rate in Q1 and occupancy averaged more than 60%.

Stephen Howard Kramer: The U.S. continues to see the strongest performance, with high single-digit enrollment growth driven by double-digit growth in our younger age groups and mid-single-digit growth in the preschool age groups. The U.K. led our growth outside the U.S., while our centers in the Netherlands and Australia have had more limited expansion enrollment, given they sustained higher-than-average occupancy levels over the last couple of years. Occupancy in the U.

Stephen Howard Kramer: The U S continues to be the strongest performance with high single digit enrollment growth driven by double digit growth in our younger age groups and mid single digit growth in the preschool issue.

Stephen Howard Kramer: The UK led our growth outside the U S. While our centers in the Netherlands, and Australia have had more limited expansion enrollment given the sustained higher than average occupancy levels over the last couple of years.

Stephen Howard Kramer: Occupancy in the UK stepped up sequentially on mid single digit enrollment growth.

Stephen Howard Kramer: Although the operating environment continues to be challenging, I am encouraged by the recent progress we have made to improve the efficiency of our center operations, specifically by retaining and hiring more Bright Horizons employee teachers and reducing our reliance on agency staff. While the UK remains a headwind to our overall full-service profitability, I am encouraged by the trends and the fundamentals and expect to see continued performance gains. Let me now turn to Backup Care, which delivered another strong quarter, growing revenue 16% to $115 million on solid utilization.

Stephen Howard Kramer: Although the operating environment continues to be challenging I'm encouraged by the recent progress we have made to improve the efficiency of our center operations, specifically by retaining and hiring more bright horizons employee teachers and reducing our reliance on agency staff.

Stephen Howard Kramer: While the U K remains a headwind to our overall full service profitability I am encouraged by the trends in the fundamentals and expect to see continued performance gains.

Stephen Howard Kramer: Let me now turn to backup care, which delivered another strong quarter growing revenue, 16% to $115 million on solid utilization.

Stephen Howard Kramer: We also continue to expand our client base with Q1 launches for Lincoln National, NXP Semiconductors, and United Therapeutics, to name a few. Traditional network use remains strong, with the largest growth in our Bright Horizons owned and controlled supply. While Q1 is a seasonally lower use period for backup care, the number of employees utilizing their care benefit was solid in Q1 and serves as a positive indicator as we look ahead to the higher-use summer months.

Stephen Howard Kramer: We also continued to expand our client base with Q1 launches for Lincoln National NXP semiconductors, and United Therapeutics to name a few.

Stephen Howard Kramer: Traditional network use remained strong with the largest growth in our break horizons owned.

Stephen Howard Kramer: And controlled supply.

Stephen Howard Kramer: While Q1 is a seasonally lower use period for back up care the number of employees utilizing their care benefits with solid in Q1 and serves as a positive indicator as we look ahead to the higher use summer months.

Stephen Howard Kramer: With this expanding participation by eligible client employees, combined with our broader portfolio of use sites, we continue to track to our 2024 growth goals. Our education advisory business delivered revenue of $24 million in the quarter, flat over the prior year.

Stephen Howard Kramer: With this expanding participation by eligible client employees.

Stephen Howard Kramer: And with our broader portfolio a few sites, we continue to track to our 2024 growth goals.

Stephen Howard Kramer: Our education advisory business delivered revenue of 24 million in the quarter flat over the prior year, notably.

Stephen Howard Kramer: Notable new client launches in the quarter included Danaher, IPG Photonics, and WR Brace. As we discussed last quarter, we expect participant levels and use to be relatively stable in this segment this year. We are making strategic investments in the team, product suite, and marketing to transform both the service offering and the service experience. EdAdvisory is a youth-driven business, and I believe the investments we're making today will ultimately drive greater client adoption and client-employee participation in 2025 and beyond.

Stephen Howard Kramer: Notable new client launches in the quarter included Danaher, IPG Photonics and WR Grace.

Stephen Howard Kramer: As we discussed last quarter, we expect participant levels and used to be relatively stable in this segment. This year.

Stephen Howard Kramer: We are making strategic investments in the <unk> product suite and marketing to transform both the service offering and the service experience.

Stephen Howard Kramer: And advisory as a use driven business and I believe the investments, we're making today will ultimately drive greater client adoption and client employee participation in 2025 and beyond.

Stephen Howard Kramer: Before I wrap up, I want to share the results of our annual Modern Family Index that we are releasing next week. For the last decade, we have explored the sentiments of working parents as they balance work and their family responsibilities. What we have seen change over the last decade is working parents' new confidence in advocating for family support, as well as their increasing expectations of their employers. For 70% of employees, employer benefits that support a work-life balance are non-negotiable.

Stephen Howard Kramer: Before I wrap up I want to share the results of our annual modern family Index that we're releasing next week.

Stephen Howard Kramer: For the last decade, we have explored the sentiments of working parents as they balance work and their family responsibilities.

Stephen Howard Kramer: What we have seen change over the last decade is working parents new confidence in advocating for family supports as well as their increasing expectations of their employers.

Stephen Howard Kramer: For 70% of employees employer benefits that supports a work life balance are non negotiable ciao.

Stephen Howard Kramer: Child care in particular was at the top of parents' wish lists, trumping even remote work and increased flexibility. This new view of the relationship between employers and employees is vital for the health of families and employers, and it is a clear warning signal for employers who do not invest in family support. We are very proud to be the partner of choice for so many leading employers who are already ahead of the curve.

Stephen Howard Kramer: <unk> in particular was at the top of parents wishlist, Trumping, even remote work and increased flexibility.

Stephen Howard Kramer: This new view of the relationship between employers and employees is vital for the health of our families and employers and it is a clear warning signal for employers who do not invest in family supports.

Stephen Howard Kramer: We are very proud to be the partner of choice for so many leading employers who are already ahead of the curve.

Stephen Howard Kramer: In closing, I'm pleased with the strong start to 2024. We executed well in the quarter, and the results set a solid foundation for us to accomplish the goals we set for 2024. I believe we are well positioned to continue the positive momentum and operating discipline in Q1. As such, we are reaffirming our 2024 full-year guidance. Specifically, revenue growth of approximately 10% to $2.6 to $2.7 billion and 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 outlook.

Speaker Change: In closing I'm pleased with the strong start to 2024.

Elizabeth: We executed well in the quarter and the results set a solid foundation for us to accomplish the goals we set for 2024.

Elizabeth: I believe we are well positioned to continue the positive momentum and operating discipline in Q1.

Elizabeth: As such we are reaffirming our 2020 for full year guidance, specifically revenue growth of approximately 10% to two six to $2 7 billion and adjusted EPS in the range of $3 to $3 20 per share.

Elizabeth: With that I'll turn the call over to Melissa Smith, who will dive into the quarterly numbers and share more details around our outlook.

Elizabeth J. Boland: Thank you, Stephen, and hello to everyone who's joined the call today. To recap, for the first quarter, overall revenue increased 12% to $623 million. Adjusted Operating Income of $40 million, or 6% of revenue, increased 9% over Q1 of 2023, while Adjusted EBITDA of $75 million, or 12% of revenue, increased 7% over the prior year. We ended the quarter with 1,044 centers, adding 6 new and closing 11 centers in the first quarter. Let's break this down a bit further. Full service revenue of $484 million was up 12% in Q1.

Elizabeth: Thank you Steven and Hello to everyone Who's joined the call today.

Elizabeth J. Boland: To recap the first quarter overall revenue increased 12% to 623 million.

Elizabeth J. Boland: Adjusted operating income of 49 or 6% of revenue.

Elizabeth J. Boland: Kris 9% over Q1 of 'twenty three.

Elizabeth J. Boland: Adjusted EBITDA of $75 million or 12% of revenue increased 7% over the prior year.

Elizabeth J. Boland: We ended the quarter with 1044 centers, adding six new and closing 11 centers in the first quarter.

Elizabeth J. Boland: If you break this down a bit for full service revenue of 484 million was up 12% in Q1 at the high end of our expectations and increased enrollment and tuition pricing.

Elizabeth J. Boland: on Increased Enrollment and Tuition Pricing. Enrollment in our centers open for more than one year increased by mid-single digits across the portfolio. As Stephen mentioned, occupancy levels averaged over 60% for Q1, stepping up sequentially given normal enrollment seasonality and the growth we saw. U.S. enrollment was up high single digits, and international enrollment increased into low single digits over the prior year. In the center cohorts we've discussed previously, we continue to show improvement over the prior year period.

Elizabeth J. Boland: And how many new centers opened for more than one year increased mid single digits across the portfolio.

Elizabeth J. Boland: As Susan mentioned, the occupancy levels averaged over 60% from Q1 stepping up sequentially, given a normal enrollment seasonality and a grocery shop.

Elizabeth J. Boland: Enrollment at U S enrolment was up high single digits and international enrollment increased in the low single digits over the prior year.

Elizabeth J. Boland: And the center cohorts. We've discussed previously we continue to show improvement over the prior year period.

Elizabeth J. Boland: In Q1, our top performing cohort, defined as above 70% occupancy, improved from 35% of our centers in Q1 of 23 to 44% of our centers in Q1 of 24. And our bottom cohort of centers, those under 40% occupancy, now represents 14% of centers as compared to the high teens in the prior year period.

Elizabeth J. Boland: Q1, our top performing cohort defined as above 70% occupancy improved from 35% of our centers in Q1 of 23% to 44% of our centers in Q1 of 'twenty four.

Elizabeth J. Boland: And our bottom cohort of centers those under 40% occupancy now represents 14% of centers.

Elizabeth J. Boland: Turning to the high teens in the prior year period.

Elizabeth J. Boland: Adjusted operating income of $21 million in the full-service segment increased $11 million over the prior year. Higher enrollment, tuition increases, and improved operating leverage more than offset the $15 million reduction in support received from the ARPA government funding program in Q1 of 2023.

Elizabeth J. Boland: Adjusted operating income of 21 nine in the full service segment increased 11 million over the prior year.

Elizabeth J. Boland: Higher enrollment and tuition increases and improved operating leverage more than offset the $15 million reduction in support received from the Argos government funding program in Q1 2023.

Elizabeth J. Boland: As Stephen discussed, while the U.S. full service business continues to be a headwind to our overall segment profitability, we are seeing good progress in reducing the losses with improved staffing, continued enrollment gains, and the ongoing center portfolio rationalization. Turning to backup care, revenue grew 16% in the first quarter to $115 million, a touch ahead of the high end of our expectations, with adjusted operating income of $16 million, or 14% of revenue.

Elizabeth J. Boland: As Stephen discussed while the U S. Full service business continues to be a headwind to our overall segment profitability. We are seeing good progress in reducing the losses improve staffing continued enrollment gains and the ongoing center portfolio rationalization.

Elizabeth J. Boland: Yeah.

Elizabeth J. Boland: Turning in backup care revenue grew 16% in the first quarter to $116 million a touch ahead of the high end of our expectations with adjusted operating income of 16 million or 14% of revenue.

Elizabeth J. Boland: Adjusted operating margins in the quarter were affected by the closeout of the Stephen Cates Camp earn-out, which resulted in a one-time $2.3 million charge in the quarter, and by the timing of quarterly overhead spending allocations. However, our estimates of overhead support costs for the backup segment for the full year are unchanged.

Elizabeth J. Boland: Adjusted operating margins in the quarter were affected by the close out of the Steven Kates camps earn out which resulted in a one time $2 $3 million charge in Q4.

Elizabeth J. Boland: And by the timing of quarterly overhead spending allocation.

Elizabeth J. Boland: Our estimates of overhead support costs for the backup segment for the full year is unchanged, but the phasing of these costs is reflected more radically as the spending occurs resulting in a relatively higher overhead allocation in the first half of the year as compared to the prior year with the second half extract.

Elizabeth J. Boland: But the phasing of these costs is reflected more radically as the spending occurs, resulting in a relatively higher overhead allocation in the first half of the year as compared to the prior year, with the second half expected to see a relatively lower allocation as compared to 2023. Lastly, the educational advising segment reported $24 million of revenue and delivered an operating margin of 10%. The operating margins contracted over the prior year, driven in large part by the investments we are making in the team and the product suite.

Elizabeth J. Boland: Good to see it relatively lower allocation as compared to 2023.

Elizabeth J. Boland: Lastly, educational advising segment reporting $24 million of revenue and delivered operating margin of 10%.

Elizabeth J. Boland: The operating margins contracted over the prior year driven in part a large part by the investments we are making in the team and the product suite.

Elizabeth J. Boland: Interest expense increased $2.5 million to $14 million in Q1, excluding the $1.5 million per quarter in 2023 of deferred purchase price interest accretion that we've previously discussed. The Structural Effective Tax Rate on Adjusted Net Income was 28.3%, roughly consistent with Q1 of 2023.

Elizabeth J. Boland: Interest expense increased two and a half million to $14 million in Q1, excluding the one and a half million per quarter in 2023, a deferred purchase price interest accretion that we've previously discussed.

Elizabeth J. Boland: The structural effective tax rate on adjusted net income was 28, 3% roughly consistent with Q1 'twenty three.

Elizabeth J. Boland: Turning to the balance sheet and cash flow, we generated $116 million in cash from operations in the first quarter, compared to $67 million in Q1 of 2023. We made fixed asset investments of $19 million, consistent with the prior year period, and in early January, we paid the remaining $106.5 million due for the OAK acquisition that had been deferred for 18 months. We ended the quarter with $64 million in cash and reduced our leverage ratio to two and a half times net debt to adjust Adhibita. Now, moving on to our 24-hour look.

Elizabeth J. Boland: Turning to the balance sheet and cash flow, we generated 116 million in cash from operations in the first quarter compared to $67 million in Q1, 'twenty three we named fixed asset investments and $19 million consistent with the prior year period and in early January and the remaining 106 and a half million due for the oak.

Elizabeth J. Boland: Acquisition that had been deferred for 18 months.

Elizabeth J. Boland: We ended the quarter with $64 million in cash and reduced our leverage ratio to two and a half times net debt to adjusted EBITDA.

Elizabeth J. Boland: Now moving onto our 24 outlook.

Elizabeth J. Boland: As previously announced, we are maintaining our 2024 full-year guidance for revenue in the range of $2.6 to $2.7 billion and adjusted EPS in the range of $3 to $3.20 a share. At a segment level, we expect full service to grow roughly 8 to 12 percent, back-up care to grow 10 to 12 percent, and ed advisory to grow in the low single digits. As we outlined last quarter, there are two discrete items affecting our reported margins and earnings growth rates in 2024.

Elizabeth J. Boland: As previewed we are maintaining our 2020 for full year guidance for revenue in the range of $2 $62 7 billion and adjusted EPS in the range of $3 to $3.20 a share.

Elizabeth J. Boland: Segment level, we expect full service to grow roughly 8% to 12% backup care to grow 10% to 12% and Ed advisory to grow in the low single digits.

Elizabeth J. Boland: As we outlined last quarter, there are two discrete items affecting our reported margins and earnings growth rates in 2024.

Elizabeth J. Boland: Specifically, we expect those items to account for an approximately $0.52 to $0.55 headwind to growth for the full year, reflecting the lapping of approximately $34 million of ARPA funding for P&L centers that we received in 2023 and an estimated increase of $8 to $10 million in interest expense for the year. As we look specifically at Q2, our outlook is for total top-line growth in a range of 9 to 11 percent, full service growth of 9-11%, backup growth of 10-12%, and advisory growth of low to single digits. In terms of earnings, we expect Q2 Adjusted EPS to be in the range of $0.70 to $0.75 a share.

Elizabeth J. Boland: Secondly, we expect those items to account for approximately 52 to 55 cent headwind to growth for the full year.

Elizabeth J. Boland: Reflecting the lapping of approximately $34 million of Archiphoneme for P&L centers that we received in 2023.

Elizabeth J. Boland: And an estimated increase of eight to 10 million in interest expense for the year.

Elizabeth J. Boland: Yes.

Elizabeth J. Boland: As we look specifically at Q2, our outlook is for total topline growth in a range of 9% to 11%.

Elizabeth J. Boland: With full service of 9% to 11% backup of 10% to 12% and Ed advisory and although the single digits.

Elizabeth J. Boland: In terms of earnings we expect Q2, adjusted EPS to be in the range of 70 to 75 cents a share.

Operator: Regarding the discrete items I mentioned above, we expect a $9 million headwind from the ARPA support we received in Q2 of 2023, as well as approximately $2 to $3 million more in interest expense than last year. So with that, we are ready to go to Q&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.

Operator: 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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Andrew Charles Steinerman: Your first question comes from Andrew Steinerman with J.P. Morgan. Please go ahead. Hi, I really was

Elizabeth J. Boland: Thanks Andrew. We are encouraged as well by that performance in the quarter both in the U.S. and a bit better in the U.K. than we had expected this early in the year. We had predicted that we expected the U.K. to be improving in 24 against 23, and that would have been, you know, it's ramping up during the year so there was a bit better performance from the U.K. We're recurring, and we see that as sustained improvement as we go along, but I think that what you're seeing is solid performance there.

Elizabeth J. Boland: One thing I would call out is as we are readily distributing the overhead, as I mentioned in backup, there's a little bit of a headwind for backup. There's a slight benefit to the full service segment but a fairly small portion of that gain. Same overall expense for the year, but the first quarter benefited by, you know, something half a percent or so.

Elizabeth J. Boland: Half a percent yourself.

Operator: Next question: George Tong with Goldman Sachs. Please go ahead.

Keen Fai Tong: Hi, thanks. Good morning. You mentioned that your occupancy rates are now over 60%. Can you please provide your latest views on how you expect occupancy to play out over the course of the year, taking into account seasonality trends and where you hope to end the year by?

Elizabeth J. Boland: Yeah, so as alluded to maybe in your question, George, the first half of the year is the stronger portion of the year for full-service enrollment. So we would expect to see some gain on that in the second quarter, improving enrollment in Q2 and then tapering some with the seasonality in Q3 and into Q4. So likely expected for the year being in the 60% to 65% range but ending the year close to where we are at this stage. So tapering, you know, growing a bit in Q2 and then tapering back to a similar level to where we see in the first quarter.

Stephen Howard Kramer: Got it. That's helpful. And then, in the UK business, you mentioned it's still seeing some headwinds. Can you talk about some of the latest initiatives you've undertaken to try to improve performance there? And what the timing would look like for when enrollments and occupancy in the UK improve?

Stephen Howard Kramer: Sure. As Elizabeth just alluded to, we're obviously pleased with the progress that we are making. Certainly, 2023 was a particularly challenging year in the UK, and we put a number of actions in place that we said were going to take time to start to bear fruit. Examples of that were recruiting efforts that really focused on enlarging our apprenticeship program, ensuring that we had a seamless candidate experience, and really trying to move that to something that was a bit quicker and a bit more seamless for the candidate, and then finally doing some international recruiting

Stephen Howard Kramer: And I think that what we saw in the first quarter is some of those actions really starting to benefit our ability to attract and retain the staff that we have and need, and then certainly starting to reduce the reliance that we had, to a certain extent, on our agency staff. So, we continue those efforts, and then at the same time, what we're finding is the macro environment there, especially on the labor side, is starting to ease a little bit. And so, I think it's the combination of those two things that gives us confidence that we're going to continue to see good improvement through 2024 and into 2025.

Joshua K. Chan: Got it. Very helpful. Thank you. Thank you. Next question, Josh Chan with UBS, please go ahead. Hi, good afternoon. Thanks for taking my questions.

Joshua K. Chan: Next question, Josh Chan with UBS, please go ahead. Hi, good afternoon. Thanks for taking my call.

Stephen Howard Kramer: Sure, so I think the conversations with our prospective and current clients continue to be positive. Specifically on the center side of our business, as we've shared in the last few quarters, there has certainly been an elevated level of interest, specifically in the centers. And the reality is that along with that has been an elongated sales process. So while we've seen elevated interest, certainly employer clients are being even more deliberative about coming to a decision.

Stephen Howard Kramer: I'd say a bright point in that, and we certainly saw this in the first quarter, is that some of that elevated interest is in the form of transitions of management. So for centers that are currently self-operated, we are seeing, again, interest in examining the possibility of outsourcing centers that exist today, are self-managed, often in healthcare and higher education, and at least considering outsourcing. So I would say overall positive, but, on the other hand, certainly deliberative as it relates to timing.

Stephen Howard Kramer: And we see that certainly in our current client base as well, which is that our current clients are really pleased with the services that we're delivering for them and believe that we will continue to see the kind of retention rates that we have enjoyed historically.

Operator: Next question is Manav Patnaik with Barclays. Please go ahead.

Manav Shiv Patnaik: Thank you. Good evening. First question, just on maybe a similar thing on the backup side, can you just talk about the, you know, underlying conversations, health, maybe pipeline, and maybe just remind us of just the seasonality of the course of the year in terms of, you know, backup usage typically?

Manav Shiv Patnaik: Underlying conversations helped maybe pipeline and maybe just remind us of just the seasonality through the course of the year in terms of you know the backup usage typically.

Elizabeth J. Boland: Sure. So first, I'll make a natural observation, which is that we were really pleased with the performance of the first quarter. It was a touch above the high end of our estimate, so that's a really positive way to start the year. As you alluded to, Manav, it was the smallest quarter in terms of use and revenue, and so certainly, the comps in the second half of this year are stronger and off of a larger base.

Speaker Change: Sure. So so first I'll make the natural observation, which is we were really pleased with the performance of the first quarter.

Elizabeth J. Boland: Touch above the high end of our estimate so that's a really positive way to start the year as you alluded to my knowledge. It is the smallest quarter in terms of you see him revenue.

Elizabeth J. Boland: And so, again, I think that it is prudent for us to stick with our guidance that we have in place. What I would say in terms of the existing client base and the pipeline, I think our existing client base continues to be strong and very committed to the services that we are delivering for their working parents. And then on the pipeline side, we continue to see good interest among a large cross-section of industries and employer sizes.

Elizabeth J. Boland: What I would say in terms of the existing client base in the pipeline.

Elizabeth J. Boland: Our existing client base continues to be strong and very committed to the services that we are delivering for their working parents and then on the pipeline side. We continue to see good interest among you know a large cross section of industries and employer size.

Elizabeth J. Boland: Okay, and then maybe just the same thing on the margin side, Elizabeth, maybe like, so that earn out payment, that was just one time for the year, I guess, or do you see that repeat? Just, I know you basically sounded like you said you pull forward the expenses, but just wanted to get some comfort on, you know, whether it's still on track. Yeah, the settlement of the urn out was a big deal.

Speaker Change: Okay, and then maybe just the same thing on the on the margin side or is it just maybe like so that earn out payment that was just one time for the year I guess so.

Elizabeth J. Boland: What do you see that repeat just I know you said you basically call. It sounded like you said you pulled forward the expenses, but just trying to get some comfort on that.

Elizabeth: We're still on track, but yeah.

Elizabeth J. Boland: Yeah, the settlement of the earnout was a one-time payment, so that's all there is on that. It was a settlement of the deal that we had made with Stephen Cates in the early phases of COVID. It was a 2021 deal, and we wanted to have alignment with the business performing, so we structured the acquisition with an earnout, and so it came to a place where it was appropriate to settle that. That's behind us, and so it won't affect the margins going forward.

Elizabeth J. Boland: The settlement of the earn out was a one time payment. So that's.

Elizabeth J. Boland: That's all there is on that it was a.

Elizabeth J. Boland: The settlement of the deal that we have made on Steve I came to in the early phases of Covid. It was a 2021 deal.

Elizabeth J. Boland: What we would expect to see more aligned to the, say, 20% range in operating margin, stepping up from where we would otherwise, barring that, we would have seen Q1 in the mid to higher teens range, stepping up a bit in Q2 as the use begins to pick up toward the summer, and then margins well over the 30% level in Q3 with the growth of the use, and then this ratable alignment of overhead for the year, Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES

Elizabeth J. Boland: The mid to higher teens range stepping up a bit in Q2 as he used against you pick up towards the summer and then margins.

Operator: Next question, Jeff Mueller with Baird, please go ahead.

Jeffrey P. Meuler: Yeah, thank you. I'm sorry, I know you just gave some of this, but can you just be any more specific quantification by quarter on the Overhead Alignment or Allocation Changes and kind of... the quarterly impacts for each of the segments.

Elizabeth J. Boland: So, essentially, the view is that overhead is fairly ratable; we incur it on a pretty ratable basis throughout the year. It's not a perfect 25% per quarter, but it's closer to that than on a revenue basis where we have the kind of seasonality that we do now with backup, you know, sort of much more amplified in Q3 and even partially into Q2 compared to particularly Q1. So the effect is most outsized in Q1.

Elizabeth J. Boland: It's, you know, 300 basis points or so effect in Q1, where it's a couple hundred basis points in the second quarter, likely, and then it reverses in the back half of the year. So it's the same, again, same amount overall for the year. It's just allocated differently to the quarters and the same amount, obviously, a quarter that we're reporting actual.

Stephen Howard Kramer: Okay, and then just how big is the self-managed center market, and of that, what is the, I guess, serviceable addressable market for you, meaning roughly what percentage of that market would you view as a potentially good fit for Bright Horizons so that you'd be interested in managing them if you had the opportunity?

Stephen Howard Kramer: Sure, so what we have identified, and we focus on sort of an addressable market where the size of the center, the quality of the center, and the employer themselves, you know, would be appropriate for us, is, you know, I would say the low thousands, but it is of significance. And typically, these programs have been in existence for, you know, quite a number of years. And so that's why I really highlight the fact that these are very deliberative in terms of decisions because, in many cases, these centers have been operated by, you know, call it the higher end institution or the healthcare institution for, you know, as much as 10, 20, even 30 years.

Stephen Howard Kramer: As you know I would say low thousands but is is there a significant and typically these programs have been in existence for you know quite a number of years and so that's why I really highlighted the fact that these are very deliberative in terms of decisions because in many cases these centers.

Stephen Howard Kramer: Have been operated by you know call it the hiring institution or the health care institution for.

Stephen Howard Kramer: As much as 10 20, even 30 years on the other hand them I think that what we certainly saw in terms of transitions.

Stephen Howard Kramer: On the other hand, I think that what we certainly saw in terms of transitions, you know, pre-COVID, and what we project going forward is an opportunity that, certainly, we are focused on, given the fact that, you know, like operators in general, it has been a difficult operating environment for a number of years. And so I think that there is more open-mindedness among employers where their core business is not, you know, running a child care center for their employees. It makes sense for them to at least examine the possibility of working with experts like ourselves.

Stephen Howard Kramer:

Stephen Howard Kramer: Pre COVID-19 and Covid and what we project going forward is an opportunity that certainly we are focused on given.

Stephen Howard Kramer: Given the fact that you know like operators in general isn't been a difficult operating environment for a number of years and so I think that there is more open mindedness among employers where their core business is not you know running a child care center for their employees it makes sense for them too.

Stephen Howard Kramer: You are at least examine the possibility of working with experts like ourselves.

Elizabeth J. Boland: Got it. And then I hear you that the younger cohorts are growing at a higher rate from an enrollment perspective than the older cohorts. But as it stands today, just how much has your mix kind of shifted towards the older cohorts versus what it was kind of pre-COVID just as we think through kind of the age-out dynamic later this year? So, we're actually...

Speaker Change: Got it and then I hear you that the younger cohorts are growing at a higher rate from an enrollment perspective than the older cohorts, but that's.

Elizabeth J. Boland: As it stands today just.

Elizabeth J. Boland: How how much is your mix kind of shifted towards the older cohorts versus what it was kind of pre COVID-19 just as we think through kind of the age out dynamic later this year.

Elizabeth J. Boland: So we're actually slightly overweight in the younger age groups at the moment; by slightly, I mean a couple hundred basis points weighted toward the infant-toddler two group versus the older age group.

Elizabeth J. Boland: So what we're actually slightly overweight in the younger age groups at the moment Hum by that by slightly I mean, a couple of hundred basis points weighted toward the infant toddler to route versus the older age group.

Elizabeth J. Boland: Okay.

Speaker Change: Awesome. Thank you.

Elizabeth J. Boland: Yeah.

Operator: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Elizabeth J. Boland: Once again, if he would like to ask a question. Please press star one on your telephone keypad.

Operator: Next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Toni Michele Kaplan: Thanks so much. I remember last year in the second and third quarter, you benefited from the Stephen Cates camps. And I know this wasn't a 23 deal, but could you just remind us why you ramped up the marketing there and what the reason was for that huge ramp in 23? I'm only asking from the perspective of it seems like the comp is a little bit tough. And I know you guided earlier to being back to sort of more of a normal growth range and backup for next quarter. But just wanted to make sure I remembered the dynamics of what went on in the second and third quarter of last year with regard to the camp.

Toni Michele Kaplan: Thanks, so much.

Toni Michele Kaplan: I remember last year and I believe it was the second and third quarter you benefited from the Steven Kates camps, and I know this wasn't a twenty-three deal but could you just remind us did you ramp up the marketing there and you know what what the reason was for that.

Toni Michele Kaplan: Huge ramp in 'twenty, three and I'm only asking from the perspective of it seems like the comp is a little bit tough and I know you had guided earlier to you know being back to sort of more of a normal.

Toni Michele Kaplan: Gross range and backup for next quarter, but just just wanted to make sure I remember the dynamics of what went on in second and third quarter of last year with regard to that campus.

Elizabeth J. Boland: Let me start, Toni, and maybe if Stephen adds some color, I'll just double-check some of my specific statistics here, but Stephen Kates brought in a, they were a partner of ours prior to the acquisition, and they provided camp programs typically in the summer and then for us in addition during break times and throughout various off days or particular pop-up arrangements where we can deploy a school-age type program for older children, you know, So it opened up an opportunity to serve more children, and with the expansion of the capacity for that kind of a use case and the provider expansion from both having them with us opening more camps than they had operated and then being able to provide that in other venues besides just in the summer camp time frame, we've been able to expand that school-age type programming in a broader way as an additional use case.

Toni Michele Kaplan: And so I can what.

Toni Michele Kaplan: Let me start I'm, Tony and and maybe even add some color around just double checking on my specific statistics here, but Steven case.

Elizabeth J. Boland: Brought in a they had been a partner of ours prior to the acquisition and they provide a camp programs typically in the summer and then for US in addition in great times and throughout.

Elizabeth J. Boland: Various various off days or particular pop up arrangements, where we can deploy at school age type program.

Elizabeth J. Boland: Our older children in kindergarten through younger school or you know young to Middle School. So it opened up an opportunity to serve more children.

Elizabeth J. Boland: And with the expansion of the the capacity for that kind of a use case and a provider expansion from the both having him with us opening more camps and they had operated and then being able to provide that.

Elizabeth J. Boland: Their venues besides just in the summer camp timeframe, we've been able to extend that school age type programming in a broader way of as an additional use case. So we did see with the concentrate.

Elizabeth J. Boland: So we did see with the, it's concentrated in the summer, but with those programs coming into their second to third year after the acquisition maturity, if you will, there was an opportunity to serve more families that way. We also last year had more use from other care types as well. We introduced pet care in the latter part of 2022, and so that was also seeing good uptake from a number of our clients who introduced it as a new use type that opened the door to many new users who may not have ever used backup care before. It's also an intermittent use case. And then also academic tutoring continued to be an opportunity for parents who had school-age children to access both virtual and in-person tutoring. We also introduced in-person tutoring.

Elizabeth J. Boland: Concentrated in the summer, but with those programs coming into their second second to third year after the acquisition.

Elizabeth J. Boland: Maturity. If you will there was an opportunity to serve more families that way. We also last year had more use from other care types as well we had introduced pet care in the latter part of 2022 and so that was also seeing good uptake from a number of our clients who introduce it as a new U S.

Elizabeth J. Boland: That opened the door to many new users who may not have ever used backup care of before it's also an intermittent use case and then also academic tutoring continue to be an opportunity for parents, who had school as you wish to access both virtual and.

Elizabeth J. Boland: We also introduced in person tutoring, so you'll remember of of incremental use cases that were available last year.

Elizabeth J. Boland: So there were a number of incremental uses. So, we've got a couple of cases that were available last year in a more robust fashion that drove some of the backup use. But as you say, by the back half of this year, we're stacking pretty robust two-year growth rates in backup, which we know, you know, each year we're replenishing the backup use. We've got a lot of happy users who return, but it's something we're cognizant of in terms of making sure that we've got the, you know, the network, the provider, the use cases, et cetera, to deliver on the kind of growth we're talking about.

Elizabeth J. Boland: And maybe a more robust fashion that drove some of the backup use but as you say we were we're stacking them by the back half of this year, we're stacking pretty robust two year growth.

Elizabeth J. Boland: Growth rates in backup, which we we know you know this year, we're replenishing the backup use we've got a lot of happy users who returned but its something were cognizant of in terms of making sure that we've got that you know the the network the provider they use cases et cetera to deliver on the kind of growth we're talking about.

Stephen Howard Kramer: Yep, makes sense. And then, just wanted to ask about the M&A pipeline. Are you starting to see any more willingness from small providers to sell given that ARPA's behind us now? Any just commentary on how the pipeline looks and your appetite for M&A? Thanks. Sure. Thanks, Toni.

Speaker Change: Yeah makes sense and then just wanted to ask about the M&A pipeline.

Speaker Change: Are you starting to see.

Speaker Change: Any more willingness from small providers to sell given the ARPA as you now behind US now you know any any.

Speaker Change: Just commentary on how the pipeline looks and and your appetite for M&A. Thanks.

Stephen Howard Kramer: Thanks, Toni. I think that we are still early on that curve. ARPA ended in September 2023. We have always sort of forecasted that this would be sort of a 12 to 24 months from the end of ARPA before owners started really making either decisions or different decisions than they otherwise would have made. I would say, in terms of being really specific about the acquisition pipeline, I would say that we continue to cultivate those relationships.

Speaker Change: Sure. Thanks Toni.

Speaker Change: So I think that we are still early in that curve ARPA ended September of 2023, and we have always sort of forecasted that this would be sort of a 12 to 24 months from the end of ARPA.

Stephen Howard Kramer: Before owners started really making either decisions are different decisions than they otherwise would have made them.

Stephen Howard Kramer: I would say in terms of being really specific about the acquisition pipeline I would say that we continue to cultivate those relationships. We continue to look at some smaller opportunities, especially where we are looking to densify near high performing centers and so overall.

Stephen Howard Kramer: We continue to look at some smaller opportunities, especially where we are looking to densify near high-performing centers. And so overall, it's definitely a part of the growth algorithm, although again, at this point, we continue to be very focused on continuing to enroll within our existing centers and moving ahead on that front.

Stephen Howard Kramer: It's definitely a part of the growth algorithm, although again at this point, we continue to be very focused on continuing to enroll within our existing centers and moving ahead on that front.

Speaker Change: Super Thanks.

Stephen Howard Kramer: Yeah.

Operator: Next question, Jeff Silber with BMO Capital Markets, please go ahead.

Stephen Howard Kramer: Next question, Jeff Silber with BMO capital markets. Please go ahead.

Jeffrey Marc Silber: Thanks so much. You talked a little bit about what you're doing from a labor perspective in the UK. I'm just curious if you could address what's going on in the U.S. in terms of labor supply availability and wage inflation.

Jeffrey Marc Silber: Thanks, So much you talked a little bit about what you're doing from a labor perspective in the U K I'm. Just curious if you can address what's going on in the U S. In terms of labor supply availability and wage inflation.

Stephen Howard Kramer: Yeah, so I would start by saying we're really pleased with the retention rates that we are achieving here in the U.S. So again, in the depths of COVID, that was a real challenge in terms of our ability to retain and, therefore, the need to attract more new staff to Bright Horizons. So we still continue at a level that is stronger than what we enjoyed even in 2019. So for me, any conversation around talent starts with retention, and I feel really good about where we are from that perspective.

Jeffrey Marc Silber: Yeah, So I would start by saying.

Stephen Howard Kramer: Longer than what we enjoyed even in 2019. So for me any any conversation around talent. It starts with retention in and feel really good about where we are from that perspective.

Stephen Howard Kramer: In terms of the labor market, there are still pockets of, you know, sort of hot spots in the country where it is still challenging to recruit the full complement of staff that we would like to have. On the other hand, broadly, we feel good about the progress that we continue to make here in the U.S. And then, in terms of wage rates, you know, I think that we feel really differently than we did in the depths of COVID when we needed to accelerate wages in a more significant way.

Stephen Howard Kramer: We'd like to have on the other hand broadly we feel good about the progress that we continue to make here in the U S.

Stephen Howard Kramer: And then in terms of wage rates I'm, you know I think that we feel really differently than we felt again and the depth of COVID-19, when we needed to accelerate wages and a more significant way. It feels like we are now in a place.

Stephen Howard Kramer: It feels like we are now in a place where we, you know, are paying really competitively. And therefore, at this point, I expect that wage increases will be much more in line with what we had seen previously as opposed to the significant stepped-up basis that we incurred in the depths of COVID.

Stephen Howard Kramer: Where we are.

Stephen Howard Kramer: We're paying really competitively and therefore at this point expect that wage increases will be much more in line with what we had seen previously as opposed to significantly stepped up basis that we are that we incurred in the depths of COVID-19.

Elizabeth J. Boland: Okay, that's helpful. There was an earlier question about center closures, and forgive me if I missed the answer, but I think the question was about, you know, your goal for center closures this year. I think you had previously said it would be the same as last year. Is that still the same, and are they skewed to any specific geography, and if they're more in the U.S., is there any specific region

Stephen Howard Kramer: Okay. That's helpful. There was an earlier question about center closures and forgive me if I missed the answer but I think the question was about you know your golfer center closures. This year I think you had previously said it'll be the same as last year is that still the same and all these.

Elizabeth J. Boland: Thanks.

Elizabeth J. Boland: Skewed to any specific geography, and if theyre more in the U S.

Elizabeth J. Boland: Is there any specific region. Thanks.

Elizabeth J. Boland: Yeah, so we would still expect to be in the range of what we closed in 2023. We closed 49 centers last year, so still in that range. You know, some disproportionate skew to the UK could be, you know, the UK is not 40% of our overall business, but they certainly could be 40-45% of those closures. But there are still some underperformers in the U.S. that we are looking at addressing in the same way that we've talked about rationalizing the portfolio in the UK.

Elizabeth J. Boland: Yeah. So we would still expect to be in the range of what we closed in 2023, we closed 49 centers last year. So still in that range you know some disproportionate skewed to the U K could be you know in the U K.

Elizabeth J. Boland: It is not not 40 percentage of our overall business, but they certainly it could be 4% to 845% of those closures, but there are still some.

Elizabeth J. Boland: Underperformers in the U S. But we are looking at it crashing in the same way that we've talked about rationalizing the portfolio in the U K. So.

Elizabeth J. Boland: Those are the two geographies where we're seeing the more outsized closures. There's no particular reason; we closed 11 this quarter, so there's, you know, there's a cadence that we're following against overall performance when the leases are up, what we can exit, and the timing of all that for parents.

Elizabeth J. Boland: Okay, that's really helpful. Thanks so much.

Elizabeth J. Boland: Those are the two geographies, where we're seeing I'm seeing that more outsized closures and.

Elizabeth J. Boland: That's there's no particular, we closed 11 this quarter. So there's you know there's a cadence that we're following against overall performance when the leases are up what we can exit and the timing of all of that for parents.

Speaker Change: Okay. That's really helpful. Thanks, so much.

Elizabeth J. Boland: Sure.

Stephen Howard Kramer: Excellent. All right. Well, thank you all very much for your time. We appreciate it and look forward to seeing you soon.

Speaker Change: Excellent alright, well. Thank you all very much for your time and we appreciate it and look forward to seeing you soon.

Operator: Thanks, everyone, have a good night. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

Speaker Change: Everyone have a good night.

Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Operator: This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Operator: Yeah.

Operator: [music].