Q3 2024 KinderCare Learning Companies Inc Earnings Call
Please stand by, your program is about to begin.
If you need assistance during your conference today, please press star zero.
Speaker Change: Good day, everyone, and welcome to today's Kindercare Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session.
Speaker Change: You may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star 2.
Speaker Change: Please note this call may be recorded, and I will be standing by if you should need any assistance.
Speaker Change: It is now my pleasure to turn the conference over to Ms. Olivia Kerr with Investor Relations. Please go ahead.
Speaker Change: Thank you and good evening everyone. Welcome to Kindercare's third quarter earnings call. After today's call, a replay will be available on our website.
Olivia Kerr: Joining me from the company are our Chief Executive Officer, Paul Thompson, and Chief Financial Officer, Tony Amandi.
Olivia Kerr: Following Paul and Tony's comments today, we will have a question-and-answer session. During this call, we will be discussing non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release.
Olivia Kerr: And finally, a reminder that certain statements made today may be forward-looking statements.
Olivia Kerr: These statements are made based upon the management's current expectations and beliefs concerning future events impacting the company and involve a number of uncertainties and risks, including, but not limited to, those described in our earnings release and other findings with the SEC.
Olivia Kerr: Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statement. And with that, I'd like to turn the call over to our Chief Executive Officer, Paul Thompson. Paul?
Paul Thompson: Thank you, Olivia, and thanks to everyone joining us for our first earnings call as a public company.
Paul Thompson: I'm going to start today's call with an introduction to kinder care for those we may not have met during the IPO process. I'm going to start today's call with an introduction to kinder care for those we may not have met
Paul Thompson: Overall, we are the U.S. market leader in early childhood education.
Paul Thompson: Our team of approximately 42,000 teachers and staff worked together across our more than 2,500 centers and sites to fulfill our mission to provide America's families with high-quality early childhood education and reliable care.
Paul Thompson: Together, we build confidence for kids and their families in the future we share.
Paul Thompson: We have been inspired by this mission for over 50 years. We operate in 40 states, the District of Columbia, and in nearly every major market in the country, serving children from 6 weeks to 12 years old.
Paul Thompson: We have a compelling business model and growth thesis driven by two major factors. First, early childhood industry dynamics are favorable because of a growing need for families for quality child care centers and a persistent undersupply.
Paul Thompson: This market is highly fragmented, we see tremendous growth potential as the top three providers of early childhood education make up less than 5% of what we believe is a $76 billion market.
Paul Thompson: Our scale, resources, and operational excellence position us exceptionally well to increase our market share.
Paul Thompson: We see growing challenges from many smaller providers that have received significant support from government stimulus following the pandemic. As most of you know, these stimulus dollars expire this year and KinderCare is prepared to help support impacted communities.
Paul Thompson: The second and more important factor is we have meaningful competitive advantages. Our scale and diverse high-quality offerings across our over 2,500 locations in nearly every major U.S. market allow us to meet the unique needs of working families and employers.
Paul Thompson: We are the number one provider supporting families eligible for government subsidy. Unlike most child care centers without the infrastructure to enable government subsidized tuition, Kindercare has strategically prioritized it as a core competency.
Paul Thompson: As a result, more than 30% of our revenue comes from supporting families who depend on child care subsidies.
Paul Thompson: We also benefit from bipartisan durability of the government programs that fund these grants.
Paul Thompson: Over the past 18 years, and across a mix of Democratic and Republican-controlled houses, the Child Care and Development Block Grant has grown annually by 4% on average.
Paul Thompson: We also provide customized flexible child care benefits through partnerships with over 700 employers. Our employer-sponsored tuition plans have been a growing component of our revenue and now stand at 20% of our total.
Speaker Change: KinderCare operates over 70 on-site employer-sponsored centers and offers access to tuition benefits and a backup care at our 1,500 stand-alone centers.
Speaker Change: Lastly, we have unique and growing offerings beyond our core kinder care brand. Our 2022 acquisition of CREM schools increased our total addressable market to include the premium end of the spectrum, where we currently operate over 40 centers.
Speaker Change: We see the potential to grow this brand as there is a large opportunity for premium education experiences and specialized enrichment programs like Language or STEM.
Speaker Change: And through our Champions brand, we have a network of over 1,000 sites providing before and after school and summer programs for school-age children.
Speaker Change: With that backdrop, I'd like to outline our strategic priorities to create value for kinder care shareholders in the quarters and years ahead. We have three primary avenues of growth across organic initiatives, expanding B2B relationships, and through portfolio expansion.
Speaker Change: Across each avenue, Kindercare has a long history of successful execution and see a significant and diverse runway for growth in the future.
Speaker Change: We seek to drive consistent, robust organic growth, which includes both tuition increases and center occupancy optimization across our existing portfolio.
Speaker Change: Beginning with tuition growth, KinderCare and the industry have a strong history of measured and durable growth in tuition, where our strategic target is to maintain a 50 to 100 basis point positive spread ahead of our wage growth.
Speaker Change: Apart from our CREM locations where we believe our pricing is below market, we expect consistent tuition growth to be in the low single-digit range.
Speaker Change: Turning to occupancy, with the exception of the pandemic recovery, we've remained committed to our strategy to drive portfolio-wide occupancy by approximately 1% point per year.
Speaker Change: To frame the impact on our financials, each 2% occupancy gain is worth approximately 1% in annual EBITDA margin.
Speaker Change: We are actively working to directly address opportunities with the benefit of our scale and resources.
Speaker Change: With digital tools that help elevate the operational consistency across our portfolio, incremental occupancy growth to KinderCare's economics is not linear, but exponential, as better performing centers scale fixed costs and gain additional pricing power.
Speaker Change: We also plan to expand our network of B2B relationships with broader partnership for both on-site and near-home child care. The same growth paradigm holds true for our Champions Programs, where we continue to broaden our footprint for before and after school care at local school sites.
Speaker Change: Our third avenue of growth is through new centers, both new center openings and tuck-in acquisitions. As I noted, there is significant white space in our industry and KinderCare's backlog of new builds and tuck-in targets is large and highly visible as it typically takes several months to vet, approve, and launch a new center.
Speaker Change: Additionally, we have historically demonstrated that kinder care has a strong playbook to add value through M&A, and we believe there may be an increasingly viable opportunity as pandemic stimulus capital expires.
Speaker Change: Best of all, when taking each of these growth options in totality, Kindercare can fund the majority of these initiatives with our stable and growing cash flow.
Speaker Change: So, to close my remarks, I'll reiterate how excited we are about our future growth, and I am extremely proud to lead such a strong team to achieve what we know is possible for our shareholders. And with that, I will turn the call over to Tony.
Tony Amandi: Thanks, Paul, and I want to echo how excited we are to be telling this story. Let me begin with our third quarter consolidated financial highlights, which I will note exclude the impact of pandemic stimulus funds in all periods for a clean comparison.
Tony Amandi: Kindergarten grew year-over-year revenue by 7.5% to $671 million, driven by a mix of tuition rate and some fee billing that moved from Q2 to Q3 compared to last year.
Tony Amandi: The portfolio also exhibited stable same-center occupancy, inclusive of the integration of CREM and new center additions. Portfolio-wide same-center occupancy ended the quarter near 70%.
Tony Amandi: In our Champions programs, we grew in revenue nearly 17% compared to a year ago, driven by new site openings, additional summer camp off ramps, and increased tuition rates.
Tony Amandi: Cost of services was up 6% driven by a mix of personnel, marketing, and insurance costs, all of which were in line with expectations.
Tony Amandi: Turning to our profitability, we realized a positive spread between our tuition growth and wages, excluding the impact of stimulus. The spread was in line with our long-term target to drive operating leverage.
Tony Amandi: Adjusted EBITDA totaled $71.4 million for the third quarter, which is an increase of 25% compared to a year ago.
Tony Amandi: For a cleaner compare, if we exclude the timing of registration fee income that aided Q3, our year-over-year adjusted EBITDA growth would have been approximately 7%, which is in line with our expectations.
Tony Amandi: For context, registration-free income hit in Q2 of 2023, but we expect those fees to occur in the third quarter and future years.
Our adjusted EBITDA margin for the quarter was 10.6%.
Tony Amandi: Excluding the impact of the registration fee income I just referenced, adjusted EBITDA margin was 9.2% up approximately 10 basis points year over year.
Tony Amandi: During the current year, Tender Care has opened 10 new centers, including 5 in the third quarter. Additionally, we have added 16 centers through tech and acquisition year-to-date.
Tony Amandi: As a reminder, our new centers typically scale in the second year of operation and achieve occupancy above the portfolio average upon stabilization.
Tony Amandi: Overall, our new centers are performing in line or better than our expectations. We have a strong pipeline of additional centers set to open over the next 12 to 18 months.
Tony Amandi: Before I turn to our balance sheet, I'd like to quickly point out that approximately $4 million of EBITDA occurred ahead of plan in Q3, tied to reserve adjustments, some of which were anticipated in Q4.
Tony Amandi: Lastly, for our capitalization, Proforma for our IPO, including the exercise green shoe, Kindercare had balance sheet cash and available liquidity of approximately $330 million and total debt principal balance of approximately $967 million.
Tony Amandi: Our effective interest rate subsequent to the repayment of principal and repricing amendment entered into the quarter with 7.8 percent.
Tony Amandi: I will end my remarks by noting that we plan to introduce our 2025 Financial Outlook with our fourth quarter report early next year.
Speaker Change: With that, let me turn the call back over to the operator to take your questions.
Speaker Change: At this time, if you would like to ask a question, please press Star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing Star 2. We ask that you please limit your questions to one initial with one follow-up so we can take as many questions as possible.
Once again, that is star 1 to ask a question.
We'll go first to Andrew Steinerman with
Andrew Steinerman: Hi, Tony. Thanks for the call. I wanted to ask you specifically if you were willing to disclose how much did M&A revenue add to the third quarter for the acquisitions that were made over the last 12 months?
Andrew Steinerman: And then I also wanted to know when it says 1% was attributed to increased enrollments in ECE, is that same center enrollments or does that also include new centers?
Yep. Hey, Andrew.
Speaker Change: So we, we disclosed their 9.1 million of the revenue in the third quarter was from centers that aren't included in same center. And so that includes both the 16 from acquisitions as well as the 10 new centers that we added as well. And for the 1% you're speaking to, that would be for all of our centers included.
Speaker Change: Okay, could you break that down for me, the 1% how much is from new centers, how much is same center enrollment growth?
Um...
Speaker Change: It's a year to date, it's relatively flat on same, and so the increase is coming primarily from the new centers.
Thank you very much.
Thanks, Andrew.
We'll go next to Tony Kaplan with Morgan Stanley.
Thanks so much.
Speaker Change: Since the election, there's been a strong focus on government expenditures, just given the efficiency programs we've heard about. What are you hearing from your people in Washington on what this could mean for the industry or your business, or just any impact from that?
Thanks.
Sure, thanks, Tony
Speaker Change: You know, right now, a lot of that is still being decided as Trump, President Trump sets his agenda. But what we can point to is over the last, you know, decades and specifically what we called out.
Speaker Change: other communications last 18 years it's increased 4% annually and we've seen strong support whether it's Democratic or Republican control in the decision making. So for that we know that there's continued support for a strong child care industry and we know that that helps a strong economy for parents being able to go back to work.
Speaker Change: That makes sense. Um, and then as I follow up during, uh, the last number of, of months, you've talked about the quintiles, uh, utilization of centers by quintile, and you've referenced it again, um, in terms of improvement, there could lead to significant EBITDA growth.
Speaker Change: I was hoping you might be able to share any initiatives that you've been working on to try to get those underperforming centers back to pre-COVID levels. And if you've seen any progress, any data points that we could show to, to.
hear the progress on those. Thank you.
Tony Amandi: You know, overall, Tony, what we would continue to reinforce regardless all of our
Tony Amandi: centers, call it the 1500 network of community centers, we see growth opportunities for each one of those, where they might be in the segmentation. The differences of the playbook will continue to evolve, some will be more pricing focused and others will be...
Tony Amandi: everything that we know we can continue to do to elevate the operational excellence.
Tony Amandi: What you're specifically referring to, we rolled out certain digital tools over the call it the second and third quarter of this year. We're really excited about what that brings to our center directors on up leveling their operational approach to what they're doing, the consistency that we see across centers.
And that therein allows that.
Thank you so much.
We'll move next to Manav Patnaik with
Manav Patnaik: Thank you. Tony, I know you're holding off on 25 guidance, but maybe you could just help us with maybe the fourth quarter in terms of some of the trends on, I think you said flat, same center, pricing, those kinds of things, just to set some expectations the next quarter.
Tony Amandi: Yeah, Manav, I think what I'd tell you for now is that everything that we saw through the third quarter and in our early back-to-school results suggests that everything's in line with our expectations that we've set out for this year, and everything operationally is going to where we'd expect it to be.
Speaker Change: Just a follow-up on the pricing strategy overall, can you just remind us when you set the pricing, when it goes into effect, and I know you're generally trying to keep it 50-100 basis points above your wage inflation.
So just some color there.
Speaker Change: Yep, so you have that right. So we're right now working through finalizing that over the next month or so, and then our new prices go into effect on January 1st.
Speaker Change: for new students and age-ups and so those students will see those prices as early as January 1st depending on when that happens and then all remaining students get new prices at back-to-school in September but that's a small fraction of families at that point that see those at that point.
Okay, thank you.
Thanks a lot.
Thank you.
We'll go next to George Tong with Goldman Sachs.
Thanks. Good afternoon.
Speaker Change: You've previously mentioned for your bottom quintile occupancy centers that improving the retention rates of center directors and teachers will be a key enabling factor to improving those bottom quintile occupancies. Can you elaborate on some initiatives you have to drive improved retention of staff internally? What programs you have in place or development initiatives to help them stay longer?
Speaker Change: Yeah, George, there's a number of things that we have found to be quite effective for
Speaker Change: our center directors and for our teachers and at the at the core of it is everything we've talked about in the past.
Speaker Change: of the work we do with Gallup and measuring engagement. We actually just had our engagement survey here close a few weeks ago, where we survey our own team, our families, and our clients.
Speaker Change: is a great foundation for the conversation we have at every one of our centers.
Speaker Change: And then for our center directors and teachers, part of it comes with having the right benefits and career education reimbursement that we do for them. And then there's also professional development days where we take the time to reinforce.
health and safety, educational excellence within our centers.
the assessments we're doing with our children.
Speaker Change: And so we feel really good about how we're continuing to enhance the onboarding for center directors and teachers in their first 90 days, then the relationship building and career development that we do for them until they hit their year.
Speaker Change: And then as you've heard from us in the past, once they're at a year anniversary with us, they definitely are staying with us longer and a great way for us to continue to build that out. The...
Speaker Change: The other piece that I think is really important because of our scale
Speaker Change: For teachers they can come in and be the best infant teacher for 40 years in their classroom But if they want and important to their own development
Speaker Change: to move up into an assistant director, a center director, and perhaps even to a district leader or a region leader, or move throughout the U.S. because that's what's helpful for their own family dynamics, we can provide that career growth for them individually. So we've seen and continue to see improvements in our retention, and definitely a big part of why we've been able to attract the talent that we have across our centers.
Speaker Change: Got it. Very helpful. And you mentioned earlier that new center openings is a contributing factor to your growth. Can you talk about what your expectations are in general for new center openings going forward, if the pace of new center openings should accelerate or stay similar to where it is now, and if the growth should accelerate, what are the key drivers of new center opening growth acceleration?
Speaker Change: Yeah, we'll get a little more specific, George, with our fourth quarter on specific expectations there, but in general, we expect them to accelerate. The primary reason about that is that we're still feeling some of the impacts of our pandemic-related decisions now on our new center openings as far as what we were willing to commit to capital back during those days, and so that's still contributing to some of our openings now. And so with what we have in our pipeline that we've already approved and they're under construction, we know that we will be accelerating from where we are now, and we'll share a little bit more details with that here with our fourth quarter results.
Speaker Change: And then just to build on that, you know that we have a separate team that...
Speaker Change: does all of our new center openings and our acquisition transitions. So if we do see an increase in the number of centers we're doing, to scale up that team with one or two or three additional head count is easy for us to do and meet the opportunity in the best way.
Got it. Very helpful.
We'll go next to Jeff Mueller with Baird.
Jeff Mueller: Yeah, thank you. Just on champions, it's still growing really well, but it did decelerate a bit. Can you just address that? And were there any unusual factors impacting it, like any sort of hurricane impact or anything that we should know about?
Thank you very much.
Speaker Change: There wasn't anything specific to Champions. We continue to see that as a strong double-digit growth business. As you know, with a thousand sites today, the opportunity across the U.S. are there's 90,000 schools for us to expand into and albeit that obviously is a high watermark.
Speaker Change: but we definitely see Champions with its higher quality and the way it fits the needs for principals and superintendents and resonates so well with parents as a strong solution to extending the learning day. The double-digit growth of Champions will continue to continue to occur over the many, many years to come.
Speaker Change: got it and then Tony you mentioned something about some reserve adjustments just can you help us size that up and what exactly was that
Tony Amandi: Yeah, so it's about four million dollars Just kind of they were out of what we were kind of expecting in the in the quarter a little bit of that came in from the other from the fourth quarter Nothing really specific to call out Jeff just normal course reserves nothing operationally related at all at all I just wanted to make sure we were giving color for the impact to q3 and what might happen in q4
Okay, thank you. Of course.
We'll go next to Jeff Silber with BMO
Speaker Change: Thank you so much. I wanted to get back to the pricing question that was asked about earlier. In your press release, I think you talk about average tuition going up about 6%. I know some of that might be because of mixed.
Speaker Change: But then I think you talked about over the longer-term pricing being low single-digit increases. Is that going to be a general ramp down, or is it something that might be a little bit steeper over the next few quarters or so?
Speaker Change: Yeah, Jeff one of the things that's happening in that 6% is the impact of
Speaker Change: registration fees in the Q3 this year versus Q3 last year. So that is as we you know classified the kind of tuition versus volume that's involved in that. And so that obviously over time is going to bring that down because that's kind of a one-quarter blip that won't happen in the future with us having those registration fees in Q3 in the future as well.
Speaker Change: Okay, that's helpful. If I could go back to an earlier question about the potential impact of the Trump administration. We've been getting some questions in terms of if there is, you know, some potential immigration reform, how that might impact finding staff for the overall industry, and I'm just wondering your thoughts on that.
Speaker Change: Yes, for us Jeff with the scale that we have and with our recruiting team and the success that we've
Speaker Change: Seeing about everything that we offer in wage and benefits and career development. We feel very confident about our ability to have the right teachers and staff throughout our centers and sites and across our many brands. So not seeing or expecting an impact that that would have to us uniquely.
We'll go next to Faiza Ali with Deutsche Bank.
Faiza Ali: Yes, hi, thank you. I wanted to ask about M&A a bit more again. I think you mentioned that there is an increasingly viable opportunity as pandemic stimulus capital expires. So maybe provide an update on what you are seeing in terms of valuation, and how you are thinking about M&A versus new store bills.
Speaker Change: Yeah, it's perfect. So, valuations continue. We continue to see the tuck-in acquisitions in the low to mid single-digit EBITDA multiples, which is a nice point for us. Like you've seen, we've had 16 year-to-date so far this year. Q3 only had the single one in there, so it was a little lighter, mostly just timing there. We continue to see a really nice flow of opportunities coming in, both the ones that we're out hunting, but also the ones that are coming in directly to us and are really excited about.
where we'll see them continue to go going forward.
Speaker Change: Okay, got it. And then Tony, I know you're not giving us any guidance for 25, but I'm curious if you can help us with just some housekeeping things to make sure we have them right. I know you did the refinancing post IPO. Can you just confirm for us how we should think about, you know, interest expense and like the diluted share count. Now that's fine.
You know, the IPO is all done.
Just those things, if you could share some color there.
Yes, of course
Speaker Change: So, we're down to 7.8% effective interest rate now on the current debt levels with that pay down, and the debt level is at just under $970 million after the pay down as well. And as far as share count, if you take within the Q3 balance sheet, which is just a little over $90 million, and you can get the exact number there, and then add on the IPR 24 million shares plus the $3.6 million green shoe, that would put us...
Faiza Ali: just under 118 million shares, FISA. We do have a few RSUs that will vest in the fourth quarter, but they're very immaterial to the total. And so I think if you just use what's on the balance sheet, plus the IPO, plus the green shoe, that should get you to a really good spot.
All right. Great. Thank you.
We'll go next to Josh Chan with UBS.
Good afternoon, Paul. Thanks for taking my questions.
Faiza Ali: You mentioned that your same center occupancy is relatively flat. I think your goal is to grow that by a point every year, you know, recognizing those fluctuations and maybe it's a very small difference, but what would you say is kind of constraining the near-term enrollment growth and how do you see those constraints kind of maybe unwinding as we go into the future years?
Thanks, Josh.
Speaker Change: You know, the headline is we still feel very confident over, you know, each year achieving a 1% enrollment growth. What you're seeing still in the third quarter is a continuation of our the 2023 back to school that we spoke to you about in the first half had us flattened. So you're still seeing the impact of that in July and August of our third quarter.
Speaker Change: What we would tell you is we feel good about our back to school here and as we come out of the third quarter and go into the fourth quarter, and it's in line with everything that we talked to you about, the long-term opportunity for us to continue to grow our enrollment in a healthy way. So that's the confidence that we have.
Speaker Change: Thanks for the call, Dale. That's great to hear. And then on the margin front, I think, Tony, you mentioned that excluding the registration fee, margins were up like 10 basis points or something. Did I hear that correctly? And how would that kind of line up versus your expectations for margin improvement? Thank you.
Speaker Change: Yep, yep, you heard that right. And so that the third quarter was just up slightly. I think the guide I give you all there is that we really look at it obviously over a longer period and the quarters ebb and flow a little bit with the various things happening in enrollment levels, as there is a little bit of seasonality to the business as you all are aware of. So we still.
Speaker Change: See it very in line with margin improvement in the margin improvement. We have opportunity from our enrollment from our tuition outpacing costs
Speaker Change: And then also, as we continue to leverage our GNA levels as well to still feel really good about our ability to increase margin on the go forward and don't want to take that one single quarter as a guide of where we're going as a group.
Speaker Change: That makes a lot of sense. Thanks for the time and thanks for the color.
All right. Thanks, Josh.
Speaker Change: And that will conclude the Q&A session. I'd like to turn the conference back to Mr. Paul Thompson, CEO, for any additional or closing comments.
Paul Thompson: All right. Thank you, everyone, for joining us this afternoon. We appreciate your support and interest, and we remain very excited and committed to the opportunities we have to grow this business, both in organic growth, B2B, and for our total portfolio. So thanks to you to all, and have a wonderful afternoon.
Speaker Change: This does conclude today's program. Thank you for your participation. You may disconnect at this time.
Music