Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q1 2023 Earnings Call Transcript

Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q1 2023 Earnings Call Transcript May 2, 2023

Operator: Greetings and welcome to the Bright Horizons Family Solutions First Quarter 2023 Earnings Release Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Michael Flanagan, Senior Director of Investor Relations. Please go ahead.

Michael Flanagan: Thanks, Daisy and welcome to Bright Horizons’ first quarter earnings call. Before we begin, please note that today’s call is being webcast 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 our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2022 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made and we are going to take no obligation to update any forward-looking statements.

We may also refer today to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available under the IR section of our website. Joining me in today’s call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Steve will start by reviewing our first quarter results and provide an update on the business. Elizabeth will follow with more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Steve.

Stephen Kramer: Thanks, Mike and welcome to everyone who has joined the call. I am very pleased with our performance in the first quarter. We delivered 20% year-over-year revenue growth with contributions from all of our segments. Our enrollment recovery continues to progress positively with notably strong performance in the U.S. and in our younger age groups. Back-Up Care delivered another outstanding quarter building on the momentum of 2022. Traditional use increased significantly year-over-year and the start of the year saw a healthy set of new clients launching Back-Up Care. We are off to a solid start to the year and well on our way to delivering on our 2023 full year guidance. Revenue in the quarter increased 20% to $554 million, with adjusted net income of $28 million and adjusted EPS of $0.49.

In our Full Service Childcare segment revenue increased 22% in the first quarter to $430 million. We added six new organic centres and from a utilization standpoint, our progress within the cohorts we discussed with you last quarter is also heartening. 35% of our centres are now in the top cohort, defined as above 70% occupancy. This is up from 25% in this cohort in Q4 and encouragingly, less than 20% of our centres are now under 40% occupied. Enrollment centers opened for more than one year increased at a mid-single-digit rates this past quarter. Focusing on the U.S. year-over-year enrollment increased 9% in these life centres, and we continue to see improvements across all age groups and model types. Specifically, we saw a low double-digit growth in the infant and toddler age groups and mid-single-digit growth in our preschool programs.

We saw good consistency across center model types, realizing just over 10% growth in our leads consortium centers and high single-digit growth in our client centers. Consumer energy and tech again showed the fastest enrollment growth while our higher ed, healthcare and industrial clients continue to show the highest overall occupancy levels. Staffing remains a constraint to our full enrollment potential in many areas across the U.S., but we do continue to make incremental progress on the labor front. Staffing levels increased through the quarter as the expanded compensation investments we made last fall. Along with the initiatives to streamline the recruitment and onboarding processes continue to drive improvement in staff retention, applications and hires.

In the U.K., enrollment growth has trailed the U.S. recovery as staffing challenges constrained our ability to serve all families seeking care. The U.K. is seeing more acute and persistent hiring gaps, which we expect will continue to challenge enrollment and operating performance for the remainder of the year. In the Netherlands, as we have talked about on previous calls, performance has been more consistent and contributory to the pandemic. Let me now turn to back-up care, which kicked off 2023 with an exciting start, revenue increased 19% over the prior year to $96 million, outpacing our expectations in the first quarter. We also continue to expand our client base with Q1 launches for Equifax, Loews hotels, and the Ohio State University to name a few.

Traditional use again grew significantly year-over-year in Q1. We saw solid use growth in our Bright Horizons centers, extended network centers and in homecare, as well as in our newer academic tutoring and pet care offerings. Unique users showed strong growth as more employees took advantage of the expanding menu of offerings within the back-up care benefit. I remain very excited about the opportunity in the Back-Up Care segment as we work to leverage our technology and marketing investments, innovative care ties in our ongoing success in adding new clients. Moving on to our Education Advisory business, which delivered revenue growth of 6% to $27 million, we launched a number of new clients for EdAssist and College Coach this quarter, including Arrow Electronics, Bank of New York Mellon and Raytheon.

We also saw a number of clients launched or expand their no cost and direct bill certificate and degree programs in Q1. These programs, which saw strong growth in 2022, reduced the barriers to education and increase the overall participation in their employers’ workforce education programs. I remain optimistic about our opportunity across education advisory, given our breadth of our client footprint, the strong underlying employer need for upskilling and reskilling and the continued demand for college admission and financial aid support. Before I wrap up, I want to take this opportunity to reflect on this year’s senior leadership forum. This conference brings together our Top 100 field and corporate leaders to collaborate and explore opportunities for long-term growth.

This year, we focused on four of our strategic assets. Our global footprint our trusted brands, our extensive client base and our central focus on families and learners. It was very energizing a few days spent with this talented team and a great opportunity to welcome some new leaders to this strategic planning process, whilst furnacing the unique perspective of our many long tenured leaders. In closing, I am pleased with the strong start to 2023 as the key metrics of our business strengthened, full service center enrollment, back-up care use and advisory participate use. While the global environment still has its challenges, I’m encouraged by the way our teams have adapted to employer client needs and expectations, while at the same time, continuing to deliver the highest quality care and education to our families and learners.

We are reaffirming our 2023 full year guidance, specifically, revenue growth of 14% to 19% to $2.3 billion to $2.4 billion and adjusted EPS of $2.80 to $3 per share. The Q1 performance is a solid foundation to accomplish the goals we set for 2023. With that, I’ll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook.

Elizabeth Boland: Thank you, Stephen, and hello to everyone who has joined the call. To recap the first quarter, overall revenue increased 20% to $554 million – adjusted operating income of $37 million or 7% of revenue increased 18% over Q1 of ‘22, while adjusted EBITDA of $70 million or 13% of revenue increased 11% over the prior year. We added six new centers and permanently closed eight centers in the quarter, ending at March 31 with 1,076 centers. To break this down a bit further, full service revenue increased $76 million to $430 million in Q1 or 22% over the prior year, ahead of our expectations for a 15% to 20% increase. Organic constant currency revenue grew approximately 14%, driven by increased enrollment and pricing while acquisitions added 10% or $34 million to revenue in the quarter.

The foreign exchange headwind comparing Q1 of this year to Q1 of last year was in line with our expectation of 3% year-over-year. Enrollments in our centers opened for more than one year increased mid-single digits across the portfolio. As Steve mentioned, U.S. enrollment grew 9%, while our European operations were up only nominally. While average occupancy levels remain in 55% to 60% range in Q1, they did step up sequentially from Q4 of ‘22 and in each of the months during Q1. Adjusted operating income of $10 million in the Full Service segment increased $3 million in Q1. The year-over-year improvement was driven by higher enrollment, the effective tuition increases and improving cost efficiency. Partially offsetting the earnings growth with the year-over-year impact of the teacher compensation investments we made in the fall of 2022.

And as well as the continued outside expense in our international operations on agency staffing and, to a lesser extent, energy costs. Additionally, support received from the ARPA government funding program was higher than we expected in Q1. We had projected that the $30 million of ARPA funding estimated for the full year 2023 would come in more evenly across Q1 to Q3. However, we received $15 million in support in P&L centers in Q1. This was roughly $7 million more than we had anticipated for the quarter, but was also roughly $3 million less than last year. As a reminder, the ARPA program is set to expire on September 30 of this year, and funding disbursements have been tapering over the last couple of months. We estimate the remaining $15 million that we expect to receive will be split roughly evenly between Q2 and Q3.

Turning to back-up care, revenue grew 19% in the first quarter to $96 million, ahead of our expectations for 12% to 15% growth. As Stephen mentioned, we were pleased with the volume and breadth of use growth through the quarter, and we attribute some of the higher than expected use to employees utilizing their baskets earlier in the calendar year than we had expected. Operating income of $22 million was 22.5% of revenue, in line with our expectations for the quarter. Our institutional advising group reported revenue growth of 6% to $27 million on expanded use of our workforce education and college admissions advising services as well as from contributions from new client to launch. Turning to a couple of the other items in the P&L and balance sheet, interest expense totaled $11.5 million in the first quarter of ‘23, excluding the $1.5 million per quarter that relates to the deferred purchase price on our acquisition of Only About Children.

This represents an increase of $4.5 million over 2022 on an overall increased borrowings and higher interest rates. The structural tax rate on our adjusted net income also increased to 28%, a 220 basis point uplift over Q1 of ‘22. As it relates to the balance sheet and cash flow for the quarter, we generated $67 million in cash from operations compared to $59 million in Q1 of ‘22. We made successive investments in acquisitions totaling $19 million compared to the $12 million we spent in Q1 of last year. And we also paid down $40 million outstanding on our revolving credit facility. We ended the quarter with $45 million of cash and reduced our leverage ratio to 3 times net debt to EBITDA. Moving on to our 2023 outlook, as Stephen previewed, we are maintaining our 2023 full year guidance for revenue in the range of $2.3 billion to $2.4 billion and adjusted EPS in the range of $2.80 to $3 a share.

In terms of segment revenue, we continue to expect full service to grow roughly 15% to 20% back-up care to grow 12% to 15% for the full year and an advisory to grow 10% to 15%. As we outlined last quarter, there are three discrete items affecting our reported margins and earnings growth rates in 2023, specifically related to the ARPA funding interest expense and our tax rate. We continue to expect those items to account for roughly $0.60 to $0.65 of headwind to growth for the full year, and this reflects $30 million less in ARPA funding at P&L centers $12 million more in interest expense and a 200 basis point increase to the tax rate. In our more immediate timeframe, our outlook for Q2 is for revenue growth of 17% to 21% with full service revenue growth of 18% to 22% and back-up of 15% to 18% and net advisory of 5% to 10%.

We expect Q2 adjusted EPS to be in the range of $0.57 to $0.62. In terms of the discrete items, I mentioned just above, we expect those items to account for roughly $0.17 to $0.19 of headwinds to the growth for Q2 on a year-over-year basis. And this reflects $4 million more of interest expense, $9 million less in government support from the ARPA program and approximately 200 basis point higher tax rate. So with that, we are ready to go to Q&A.

Q&A Session

Operator: Thank you. First question comes from Andrew Steinerman with JPMorgan. Please go ahead.

Andrew Steinerman: Hi, Elizabeth. Could you tell us how you expect full service utilization to trend in the second quarter and through the year to make the 2023 guide?

Elizabeth Boland: Yes. So as we talked about on the call, first quarter started off solidly with mid-single digits, and that’s what we expect to see continue in Q2 and for the rest of the year.

Andrew Steinerman: Wouldn’t you expect a step up in utilization in the kind of September timeframe?

Elizabeth Boland: Well – the seasonality that does occur in the third quarter. So there’s a little bit of that cycling that comes through with older preschoolers graduate. But other than that, we would expect the sequential performance to continue, yes.

Andrew Steinerman: Okay. Thank you very much.

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

George Tong: Hi. Thanks. Good afternoon. You’re continuing to see enrollment recovery in your full service centers. Can you outline what the average occupancy rate percentage was in the quarter, where you expect to end the year and when you expect to get back to pre-COVID occupancy rate of 70% to 80%?

Elizabeth Boland: Yes. So as we as we outlined, the overall occupancy level in centers that have been open for more than a year is in the range of 55% to 60%. It has stepped up from where we ended the year Q4 of last year it’s improved over Q1 of the prior year. So sequential improvement, year-over-year improvement and so getting – obviously, we’re in the 55% to 60% range, and we’re improving. We’re getting closer to that 60% threshold, which we would be expecting to see by the end of the year. As it relates to the profitability of the centers, I think it is important to call out that – we’re averaging a lot of variability in performance. And so, we are really pleased to see that the centers that we – as a reminder, we’ve isolated some cohorts of performance on, the last couple of calls and so in the group of centers that are operating at more than 70% occupied.

So as a threshold, you mentioned getting back to pre-COVID levels at 70% to 80% range is where we would targeted getting back to. In that group, we’re about 25% of our centers were in that grouping at the end of last year and the last half of last year now 35% of those centers are up above 70% occupied so, good progress from the middle group. The group in the 40% to 70% range continues to hold setting some of those have moved in the top – into the top cohort, and we are making progress on the lowest performing group, which is under 40% enrolled. Those have been about 20% or so of the overall mix, and they are now less than 20% in the sort of mid to high teens of the overall group. And so, those centers that just a little bit of framing for how the centers are performing.

So going back to the centers that are the top performers, those that are above 70%, they are really on a pretty strong March to prepaid operating margins by the end of this year, really. In this group, those that are in the 40% to 70% occupied are improving. The occupancy levels improving and their margins are improving, but we would expect them to be back at pre-COVID levels in 2024 – mid-2024. And they would need one more pricing cycle. And then the lower performing group will be later than that. I expect it will be 2025 before that group is, either back to that level and overall mix and the overall mix is able to absorb that.

George Tong: Got it very helpful. And then as a follow-up, you mentioned the staffing levels are starting to normalize. Can you elaborate on what you’re seeing on the labor front? How much of a headwind, if any, it’s presenting to your current occupancy rates? And what kind of staffing levels you’re assuming in your full year guide?

Stephen Kramer: Yes. So I think when we think about the progress that we’re making from a staffing perspective, we’re focused on continuing to see improvement on the net higher front. And for us, that starts with retention. So I think we shared at the end of last year that we had returned to 2019 retention levels. What we would say is that in this first quarter, we have actually eclipsed that. So we are doing better from a retention standpoint than we saw even in 2019. In addition to that, we’re seeing good job seekers and ultimately, a nice uplift as it relates to applications that, again, are driving towards new hires. And so, the combination of better retention and new hires is helping us to get back to that cadence where we are going to approach pre-COVID levels of staffing.

Again, when we think about what it’s going to require, I think Elizabeth highlighted, here in the U.S., we are definitely closer to getting back to what that pre-COVID enrollment and ultimately staffing looks like. And then in the U.K., we are a bit further back on the curve seeing more labor shortages.

George Tong: Got it, very helpful. Thank you.

Stephen Kramer: Thank you.

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

Manav Patnaik: Yes. Good evening. I just wanted – if you could just tell us how you’re thinking about – just remind us of the seasonality, I guess, for the rest of the year. The question just being, you obviously had a solid start to the year, probably gives you a little more visibility, but just curious why you didn’t change the guidance accordingly?

Elizabeth Boland: Why we didn’t change the guidance for the rest of the year that you mean it….

Manav Patnaik: Yes. Correct. Yes.

Stephen Kramer: Well, I’d say Manav, I’ll start and Elizabeth can add color. But the quarter – we saw enrollment step-up sequentially in Q1. It’s a little bit better than we had expected. As we think about seasonality for the rest of the year, we would expect enrollment in occupancy to step up again sequentially into 2Q. Going into the third quarter, we’ve talked about in the past, you saw last year we had the older kids preschool kids that cycle through when they open out. And we backfill as many as we can, but occupancy in women’s that typically fall sequentially from 2Q to 3Q, we would expect that this year and then the fourth quarter is typically enrollment in occupancy is, flat to slightly positive sequentially into 4Q. So that’s how we ended the year and that’s kind of still how we see the year unfolding on enrollment and occupancy seasonality this year.

Manav Patnaik: Got it. Okay. And then, Elizabeth, could you help us with the operating margins by segment for the second quarter. I think – I’m guessing the full year numbers you helped us with last quarter are unchanged. So just hoping for what 2Q should look like?

Elizabeth Boland: Yes. So from a full service standpoint, I think the start of the year to the 2.5 or so percent adjusted operating margin, we have some expectations for sequence build improvement to that since its low to mid-single digits for the full year. It won’t be significant change, but progress quarter-over-quarter, and that’s inclusive of some of the challenges that we talked about in the prepared remarks about the ARPA funding being about $8 million less than Q1. That’s a couple of hundred basis points. And just the more challenging performance in the U.K. as an example, we don’t expect we’ll be adding much momentum to the Q1 to Q2 performance. So improvement in Bright spots and number of places and seeing it sequentially improve but that would be still in the low to mid-single digits in Q2.

The back-up group continuing in the pace that we saw this quarter, 20% to 25% operating margin and seeing that consistency. Because of the mix of use there that includes essentially financing more use that we’re providing care for and paying provider fees that we would have the consistency of about 20% to 25% and improving margin as the second half comes along, and that’s what gets us to the 25% to 28% for the full year. And then in the advising business carrying, a pretty consistent operating margin in the mid to high teens.

Manav Patnaik: All right. Thank you very much.

Stephen Kramer: Thank you.

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

Toni Kaplan: Hi, there. Actually sort of a follow-up on the last one. The full service margin, I guess, ex the ARPA funding looked like it actually got a little bit worse just if – given that you got sort of the $15 million of ARPA, like I guess, should we be thinking – like I saw the revenue growth actually this quarter was good. So, I just having, a little trouble reconciling that?

Elizabeth Boland: And so you’re talking about Q1’s performance, Toni?

Toni Kaplan: Yes. Yes. Thank you.

Elizabeth Boland: Yes. So a couple of things affecting Q1, which are from a revenue growth standpoint and not converting as much. So the wage investment is still being absorbed. We also have – have you mentioned the U.K.’s performance it is weaker than what we would have seen historically. So that is the headwind – and I think the other find nuance to the results this year that we hadn’t acquired the Australian business. They are actually in their summer season in the first quarter so their performances that they accelerate more in their winter, which is over our summer. And so that is not a contributor in terms of their revenue contribution doesn’t convert much to the margin there. So that would be another reason why you see the revenue growth with a little bit weaker conversion on the operating side.

Stephen Kramer: And I’ll just add, we talked about a little bit in the prepared remarks, Toni, but – we saw faster growth in the younger age groups, the infants and toddlers in particular, and also our client centers were strong. And so, that both year-over-year and sequential growth in those 2 groups. It doesn’t have as much on the margin side as you may otherwise see.

Elizabeth Boland: Yes. On your challenge, but a good thing for the overall business.

Toni Kaplan: Yes. Yes. Wanted to ask my follow-up on sort of the pipeline of new centers, it sounds like there were a couple of names that you mentioned signed this quarter. But just wanted to understand the pipeline now versus maybe a year ago or even a quarter ago? Just any sort of reference points you can provide.

Stephen Kramer: Sure. So Toni, what I would think it is the pipeline continues to strengthen. I think you would note that employer-sponsored care continues to have a lot of press right? You think about the CARES Act, you think about the government and all of the talk around the importance of employers getting involved in healthcare. And then I think there has been certainly a renaissance or an awakening among employers that there is an increasing and tightening in the market for their employees to be able to find care. So they’re hearing it from their employees directly. So I think that from a pipeline perspective, we feel really good that there continues to be growth in the pipeline, especially in industries like healthcare and more industrial distribution, supply chain, manufacturing, those kinds of industries.

What I would say is that certainly, the process is a longer arc as we’ve always talked about. So the decision-making does take time. It requires space and capital and a long-term commitment. But again, I think overall, we feel good about where we sit from an employee receptivity to employer-sponsored care.

Toni Kaplan: Thanks a lot.

Stephen Kramer: Thank you.

Elizabeth Boland: Thank you.

Operator: Next question Stephanie Moore with Jefferies. Please go ahead.

Unidentified Analyst: Good afternoon, this is Harold on for Stephanie Moore. Just wanted to get an update on the current pricing environment so what are pricing expectations for this year? And how do you see any pushback on pricing so far?

Elizabeth Boland: Yes. So we have done most of our price increases as of the January cycling and have, on average, in the 6% to 7% range this year. We obviously have a fairly strong inflationary environment. And so, we have been looking to balance the efforts that we have to get enrollment and keeping the care as affordable as possible as we inherent as possible while recognizing that we have seen a pretty substantial uptick in our own cost structure with – particularly with the wage investments we’ve made. So, we’ve taken a view that’s global. That’s an average 7%, but we do vary that locally and have had, I think, good understanding receptivity. I don’t know that anyone lose the price increase, but I think this has a pretty good reception from the parent base on that loan decisions.

And I think that the opportunity is playing itself forward that I think also sets us up for – and also a needful ability to have an increase next year that continues to allow us to make progress on our economic recovery at pre-COVID levels.

Unidentified Analyst: Thank you for the color. And then I guess another question would just be on like cross-sell opportunities. So like how many of your full service customers also back-up care customers or using at EdAssist or College Coach? Thank you.

Stephen Kramer: Yes. So certainly, we have highlighted the fact that we believe there’s a lot of opportunity in our overall client base to continue to cross-sell and upsell. I would say it goes in all of the directions, right? So we have center clients that are picking up back up. We have back-up clients that are picking up centers. And certainly, as we have said before, many clients start with as advisory and then end up purchasing another service from Bright Horizons.

Michael Flanagan: Yes. And so I’d say, I think it’s a little about a third maybe a little north of a third of our full service clients with the back-up care. We have higher attach rates with back-up care – and add full service as well. But that’s where it stands Harold.

Unidentified Analyst: Thank you.

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

Unidentified Analyst: Hi. Ryan on for Jeff. We’ve seen some headline proposals, including the CHIPS Act requiring subsidies for child care and then some free child care proposals in the U.K. as well. While they’re just proposals, and I would assume it takes some time to shake out even if they were best – can you parse through how these might impact your business?

Stephen Kramer: Sure. So I think first, it is brought to the forefront, right so all of these legislative pieces that are brought to the forefront the importance of employers getting involved in childcare. Clearly, the CHIPS Act is very specific about it and that those who are going to take advantage of government subsidies from a semiconductor perspective are expected to provide childcare. And so, we are in the early days of educating these companies to the extent that they don’t already offer childcare and/or are opening new plants We are educating them about exactly the best way to do that and what the expectations are likely to be from the government. So, we see that as certainly a nice longer-term tailwind and something that we are out in front of with the market.

Unidentified Analyst: Got it. And anything on the pay proposals?

Stephen Kramer: Yes. So I think the U.K., look, the new government in the U.K. is next year, right? So I think that there’ll be a lot of conversations in the meantime about all the different proposals. And so, it’s hard to know exactly where they’re going to land. I think the U.K. has, for a long time, been very focused on subsidy for the older children in our care. And so broadly, the 3 to 5-year olds have gotten good subsidy from the government or parents who’ve got a good subsidy from the government. Whether that goes deeper in each group, whether the subsidies become more significant in nature is yet to be seen. But certainly, there’s a nice track record in the U.K., and it’s one of the reasons why it’s a great market for us long-term.

Unidentified Analyst: Thank you. And then just one follow-up over the past few years, we’ve seen some parents entertain a greater preference for retail-based centers close to their homes. Do you think as the office occupancy rates continue to creep up, you could start to recoup some market share from the retail centers? And if so, how long do you think it might take for parents to re-evaluate their center preferences and make the switch it so?

Stephen Kramer: Yes. So I think first, I would start by saying since the earliest in terms of our reopening’s in the pandemic, our client centers have typically been more highly enrolled than our lease consortium centers. And so, the reality for us is that there is a real value proposition for families related to the on-site centers. And so, we see scenarios where people are choosing to go back to work or go back to office rather, because that is the place they think of as the place that they can get a high-quality, affordable opportunity for their child to go to a center. In addition to that, we have examples where families actually drive cross their children off at the childcare center at the workplace and then work from home on certain days.

Generally, what we find is in all of these cases, the on-site center is relatively approximate to where someone lives and works. And so, it’s a really great option for them. And so, I think for us, we just continue to move the ball forward across all of our model types and making sure that we’re delivering great value for those who were caring for and continue to focus on the quality of our delivery.

Operator: Next question Jeff Miller with Baird. Please go ahead.

Jeff Miller: Yes. Thank you. Good evening. I want to follow up on Manav’s first question about why you’re not raising guidance or nearing the range or something? And what looks like a really good quarter that might be a positive inflection? And I guess I’m just trying to understand, is it legitimately just in line with your expectations or maybe a little bit better and maybe we mis-modeled around comping against Omicron headwinds or something like that? Is it that it’s better, but hey it’s been a long few years that it’s a really choppy macro still. So let’s not get ahead of ourselves. Maybe the guidance is derisked or is it that there’s some sort of like specific offset, whether that’s the U.K. challenges or I don’t know, more white collar layoffs at some clients. I’m just – I’m not really understanding the guidance in the context of the Q1 performance and the prior answer did it fully connect it for me?

Elizabeth Boland: I’ll start, I guess, with maybe just clarification. From the previous guidance on ARPA funding was $30 million for the year, of which $8 million would be and we had $15 million in Q1. So that was $0.08. We outperformed certainly though we’re pleased with the earnings performance, but $0.08 of that against where we had guided from a range standpoint, is attributable to the timing of the ARPA funding. So that really has been shifted to underlying fundamentals. That said, coming out of the quarter, certainly a couple of cents of outperformance. We outperformed revenue, outperformed earnings, some good indicators on both the back-up used side and on the enrollment trends. They are both – the summer season is coming, and it’s an important one with some delivery, I think, some more visibility into the delivery on the scale and consumption of that so in summer and the conversion of enrollment that the comment came through, but we did have a little bit more cyclical seasonality than we had anticipated last year.

We have a good mix coming into the summer with more – slightly more infants in toddlers than we had last year. And so we feel like we’ve got that visibility, but there are some uncertainties in the market still with the economy where it is, and I think we want to see continued progress, Jeff, against what we feel good about and appreciate you recognizing the opportunity that’s there. But I think that’s how we say we’re looking at it as you framed it right that optimistic, but there are some calendars that I had closed. Stephen are you adding anything else to.

Stephen Kramer: Yes. I mean I think I would just underscore the – I think it was your middle point, Jeff, which is we are really pleased with the way the year started, right? So I think we shouldn’t get lost in the detail around the fact that we are pleased with the way the year started. I think that we do want things to play forward. We do want to make sure that we’re taking into consideration all of the positives as well as some of the headwinds that we outlined right? I think we feel really good about the way enrollment is coming back. We feel really good about the way back-up use came in and advisory is on plan. I would say that the U.K. is something that we called out on this call, it’s something that is certainly on the challenging side.

On the other hand, within the total I think that we were very capable of absorbing that this quarter. But I want to make sure that we’re not getting ahead of our skis and make sure that we’re giving ourselves the appropriate amount of runway to have a really successful year. So I think – reaffirming for the full year is something that we feel good about. We feel good about the quarter. And so, I appreciate your sort of upfront complement.

Jeff Miller: Awesome. And then just on the summer and fall seasonal churn, are you seeing any forward signs that you could have a repeat of last year? And then just how much forward visibility do you have? Like at what – like kind of like as we get to what month will you know with like high confidence what the churn is going to seasonally look like that?

Elizabeth Boland: Long as you can imagine, the visibility forward is reasonably good for two to three months’ parent interest generally is you can get the longest lead time with infants. And I think as it stands as it relates to the churn for summertime, it can vary. And I think that unless a lot of time or I think that our expectations around the age – the sort of ingoing into the preschool rooms didn’t hit the mark as it needed to. And so we do have – we do a lot of eyes on this and digital. We are not only looking to monitor closely, but ensure that we are clear on where we have levers, so we can be filling those spaces with starters. And so, I think that the when we will know how the fall churn actually plays out, when we’re talking to you this time next quarter is when we will have a reasonably good visibility for that. It will be it can be kind of variable over the summer. But generally, we have visibility a few months into the future.

Jeff Miller: Okay. Thank you.

Stephen Kramer: Thank you.

Operator: Your next question comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Faiza Alwy: Yes. Hi. Thank you. So I guess, first, I just wanted to clarify, you talked about mid-single-digit growth occupancy how is that relative to prior years? And I just want to clarify, is that on a year-over-year basis or were you talking about sequential seasonality from 4Q into 1Q?

Michael Flanagan: Well, as I say for the year, we’re talking about mid-single digit overall enrollment growth to mid to high single-digit of overall year-over-year enrollment growth. I’d say, historically, you wouldn’t be looking at that normally in pre-COVID when our centers were mature in full, you’d be looking at more of a low single-digit 3% or 4 type percent, 3-ish percent type of year-over-year enrollment growth.

Elizabeth Boland: Yes. Across all – including 10 more centers ramping up so fully mature centers would be growing more or less 1%.

Michael Flanagan: Yes. Good news. So certainly much better we’re rebuilding, and we’re starting from 55% to 60% occupancy versus pre-COVID that 70% to 80% range. So it’s a lower starting point.

Faiza Alwy: Great. Thank you. And then if you could just help with a few housekeeping things in terms of how much did the acquisition in Australia contributed. I’m sorry, if I missed this in the prepared remarks, I think that would be helpful. And then I know on the government funding, there’s a revenue contract revenue component and an operating profit component. I’m just trying to back into organic growth ex the funding and ex any acquisitions. If you could help us with those two impacts on the top line that would be really helpful?

Elizabeth Boland: Yes. So the acquisitions contributed about $34 million to the quarter. The vast majority of that was the Australian acquisition. And so that was the contribution to the revenue. Overall, there was about a $3 million headwind on revenue growth for the ARPA funding that contributed to advance as a contract against the revenue. And then the P&L centers where we are able to offset costs for the funding was about $15 million of cost reduction — in the quarter.

Faiza Alwy: Great. Thank you. And then just one last one on capital allocation you mentioned that you paid down some debt. I’m curious what’s your approach is towards capital allocation? Should we expect more sort of debt pay downs? And I believe in 4Q, there’s a cash payment that’s due for the Australia acquisition if it meets sort of criteria. So curious how that’s trending relative to what those benchmarks might be? Is that an expectation that you will be making that payment?

Elizabeth Boland: Yes. Our focus now is on revolver paydown. We ended the quarter with just over $40 million on the revolver. So we’re focused on paying down the revolver — we’ve got really favorably priced debt. So I think it would be – that would be not on the immediate term to paydown that very favorably priced debt. But we do have two things in the site. One is just the ongoing where the capital allocation between now and the end of the year when the payment for the deferred payment for Australia is due at the end of the year. There aren’t any criteria for it. It was simply an agreed deferral of timing of the payment. So that will be just over $100 million that will be due at the end of this year. And so we are building cash toward that.

And we are also making selective investments, both in the existing business to refurbish and freshen up the center portfolio that we have and also to invest in new centers. We have a number of lease models that we are opening this year. We continue to look for quality acquisitions to round out our growth strategy. And so, are executing on some of those this year. So there will be some capital deployment for that in the interval between now and the end of the year when we have the deferred payment due. But this – we’re not looking at share buyback in the near term.

Faiza Alwy: Excellent. Thank you so much.

Operator: Next question Tom Singlehurst with Citi. Please go ahead.

Thomas Singlehurst: Yes. Good evening. It’s Tom here from Citi. Thank you very much for taking the question. A bit of a relief not to be talking about AI unless you want to make any comments, but one of the questions I had was on some of the sort of government support falling out towards the end of the year and the impact that you anticipate this will have on the competitive landscape? I was just wondering whether you think – I mean, obviously, that’s bad news in terms of support, but I wonder whether you think that might result in some capacity coming out of the market more broadly, especially among smaller players and that was my question? Thank you.

Stephen Kramer: Sure. Thank you for the question. Yes. So just to clarify, the expectation is that come September, the ARPA program is going to sunset and the funding will have been distributed. So again, there are some programs that are in place, but again, much more focused as they historically have been on families that are most disadvantaged and providers that serve that constituent. What we would say is that we obviously have been very disciplined about pushing price and also really thinking about our center economics in a post ARPA world. What we have seen in the marketplace is mix as it relates to that. So I think there are a number of providers that have not prepared their cost structures and/or their pricing strategy reflective of ARPA coming out of the market.

And so we, as well as the market in general, believes that there is a potential for a second wave. We saw a wave of about 15% to 20% of centers who came out of the market early in COVID. There is an expectation that there may be another wave come the fall, winter and into next year, where providers just aren’t able to cope with the price cost structure that they have against the tuitions that they charge. And so two responses, right? One is that they could significantly increase their tuitions all at once, with the hope of getting to a place that’s more economic. And then, the second is that there may be some providers that simply decide that they either need to sell or close in which case, there would be a contraction in the overall number of centers in the country.

So I think what you implied in your question and I’m saying directly is that there is certainly going to be some level of rightsizing around pricing and/or the number of centers that are able to ultimately work in the new environment come this fall, winter and into next year.

Thomas Singlehurst: That’s quite clear. Thank you very much.

Stephen Kramer: Thank you. Okay. Well, thank you all very much for joining the call. I appreciate the thoughtful questions and wishing you all a good night.

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