Edited Transcript of BFAM.N earnings conference call or presentation 5-Aug-20 9:00pm GMT

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Q2 2020 Bright Horizons Family Solutions Inc Earnings Call Watertown Oct 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Bright Horizons Family Solutions Inc earnings conference call or presentation Wednesday, August 5, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Elizabeth J. Boland Bright Horizons Family Solutions Inc. - CFO & Treasurer * Michael Flanagan Bright Horizons Family Solutions Inc. - Sr. Director of IR * Stephen Howard Kramer Bright Horizons Family Solutions Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Charles Steinerman JPMorgan Chase & Co, Research Division - MD * Gary Elftman Bisbee BofA Merrill Lynch, Research Division - MD & Research Analyst * Hamzah Mazari Jefferies LLC, Research Division - Equity Analyst * Jeffrey Marc Silber BMO Capital Markets Equity Research - MD & Senior Equity Analyst * Jeffrey P. Meuler Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Keen Fai Tong Goldman Sachs Group, Inc., Research Division - Research Analyst * Manav Shiv Patnaik Barclays Bank PLC, Research Division - Director & Lead Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings and welcome to the Bright Horizons Family Solutions Second Quarter 2020 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Senior Director of Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Michael Flanagan, Bright Horizons Family Solutions Inc. - Sr. Director of IR [2] -------------------------------------------------------------------------------- Thanks, Jessie. Thank you, everyone, who are on the call today. Appreciate your patience. We had some technical difficulties. So thank you all for joining. With me on the call today are Stephen Kramer, Chief Executive Officer; and Elizabeth Boland, Chief Financial Officer. I'll turn the call over to Stephen after covering a few administrative matters. Today's call is being webcast, and a recording will be available under the Investor Relations section of our website at brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business and financial performance, including the impact of COVID-19 on our operations, 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 2019 Form 10-K and other SEC filings. 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 statements. 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 IR section of our website. Stephen now will take us through the review and update on the business. -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Mike. Hello to everyone on the call, and thank you for joining us this evening. I hope that you and your families are remaining healthy and safe. I'm going to begin today's call by briefly recapping our second quarter results and provide an update on our current operations. Elizabeth will then provide a more detailed review of the numbers before we open it up for your questions. The last several months have been extraordinary by any measure. Despite this, I couldn't be more proud of the incredible determination, agility and execution demonstrated by the entire Bright Horizons family. The positive results this quarter exemplified the power of our diversified employer-centric model as well as our capacity and capability to effectively serve client needs. To recap, we delivered revenue of $294 million and adjusted EPS of $0.44 per share for the second quarter. In our full-service segment, we are happy to report that we reopened 160 centers in Q2 and began welcoming back thousands of families to our centers. Our Back-Up Care business was a critical support to tens of thousands of families and at the same time delivered exceptional financial results for the company. We experienced significant utilization of self-sourced reimbursed care for both new and existing clients, nearly doubling revenue compared to last year. We also added to our education advisory client base, launching service for ADP, [Lidos] and Akron Children's Hospital this past quarter. I'm really pleased at how well all facets of our business perform through these unprecedented circumstances. As you'll recall, we started 2020 with solid momentum across all 3 business segments. But as the pandemic spread in March, we temporarily closed nearly 850 of our centers globally. With this contraction, we focused our full-service care operations on approximately 250 client and hub centers, caring for the children of health care and other essential workers. We monitor guidance from the CDC and local health authorities and create a direct relationship with a leading infectious disease physician at Boston's Children's Hospital. We marshaled our resource to develop, implement and refine enhanced COVID-19 operating protocols. These include social distancing procedures at pickup and drop off, daily health checks, the use of face mask by all staff, limited group sizes and enhanced hygiene and cleaning practices, all focused on keeping children, families and our devoted staff safe and healthy. I take great pride in Bright Horizons leadership in this area as our standards have been adopted by many state regulators. Before I get into the current state of the business, I want to commend the work by our operations and client relations teams. There's still a lot of work to do in the reopening and reenrollment process, but we have made tremendous progress over the last few months. Training teachers and staff on our COVID-19 safety protocols and welcoming back thousands of children and families. I'm grateful to all of our employees who have supported Bright Horizons during these difficult times, and I know these efforts have uniquely strengthened our organization. Getting to the specifics. As we talk today, approximately 725 of our centers globally are open, representing 65% of our total portfolio. And we anticipate that more than 85% of our centers will be opened by the end of the third quarter. Throughout our reopening process, conversations with clients and surveys of parents and teachers have reinforced their confidence in Bright Horizons, specifically around our experience with health and safety practices. The expertise we have demonstrated in operating child care in the COVID-19 environment has not only allowed us to open more safely and quickly but also provides the critical reassurance that clients and returning teachers and families deserve and require. Over time, we think this will be a key differentiator and an important reason for families and clients to choose Bright Horizons. We've also been really encouraged about the depth of conversations with employer clients, not only about their center reopening but also how our full suite of services fit within their short-, medium- and longer-term business strategy. Employers clearly recognize that regardless of the work environment, on-site or remote, it is extremely difficult for employees to remain productive while caring for a child or elder. Existing center clients have remained very supportive, and we have seen interest from both new and existing clients around investing in our lease/consortium centers to supplement their on-site centers or to provide more comprehensive national solutions. The unique challenges to our business created by COVID-19 have also provided opportunities for us to demonstrate to employers that not only do we have the scale and resources to support them in all environments, but also possess the agility to develop and deploy creative solutions to meet their real-time needs. As an example, with fewer programs available to children this summer, we worked closely with some key clients to quickly stand up school-age programs within some of our temporarily closed lease/consortium centers, so their employees could remain productive over the summer months. This is one example that showcased our ability to work collaboratively with clients to create an effective response to solve a critical pain point in their core operations. Let me now turn to Back-Up Care, which delivered truly impressive results. As we discussed last quarter, our Back-Up business had been on track for solid growth coming into 2020, 12% to 13% and was tracking well in the first quarter. With school and business closures starting mid-March, the demand for Back-Up Care surged as families struggle to balance their work responsibilities and the care needs of their children. With the majority of childcare centers closed during the second quarter, in-home Back-Up Care and self-sourced reimbursed care became increasingly valuable for clients and employees in need of a care solution. Self-sourced reimbursed care has always been a valued component of our comprehensive backup offering for clients to utilize in unexpected emergency-type situations such as natural disasters. Given the national scope, severity and rapid onset of COVID-19, the demand for self-sourced reimbursed care offering was supercharged, with more than half of our Back-Up clients deploying this alternative use solution. This surge in demand certainly came with some growing pains as we work to accommodate the unprecedented volume of new registered users and care requests. But our ability to quickly deploy a solution for an unexpected need provide immense relief to hundreds of clients and introduced tens of thousands of stressed working parents to our services at a critical time. While self-sourced reimbursed care proved to be the right solution for many employers and workers during the early months of the pandemic, we expect to see Back-Up Care demand in Q3 and beyond to return to more normalized in-home and in-center use. Since some of the demand we fulfilled in the second quarter, represents use that may have typically been absorbed in the second half of the year. We have been working with our client partners to expand employee use banks to ensure that parents who will continue to struggle with evolving work and school practices have continued access to the service. As we have spoken about on past calls, we continue to make advances in our technology and personalized marketing to improve the customer experience. As demand surged over the last few months, we deployed several enhancements to our backup system to create a more robust platform and more seamless experience for end users. In addition, we expanded Bright Horizon central, so client liaisons could self-serve reporting, something that proved invaluable as clients were tracking use during this time of heightened demand. Furthering our digital strategy, I am thrilled to share that just yesterday, we completed the acquisition of the Sittercity business, a leading online marketplace for families and caregivers. This strategic acquisition expands our current portfolio of family-focused solutions and extends our capabilities to serve families and clients. We have enjoyed a strong partnership with Sittercity since 2013. We know the talented team well and appreciate the quality of their services and our shared mission of supporting working families with access to high-quality care. While the financial contribution in the near term is modest, Sittercity's digital capabilities and the long-term opportunity for cross-sell at the client and family level is significant. Turning now to our ed advisory business, which performed well given the environment with many new client launches this year and continued solid use of our clients' workforce education programs. While the pandemic has slowed new sales decisions, learning and development remains a key investment pillar for leading employers, as the challenges of attracting and retaining key talent remain high. With college coach offering important advice and insights around how COVID-19 is impacting the college admissions process and financial aid packages, we remain bullish about the continued long-term growth prospects of this segment. In closing, when I look back at the last quarter, one thing that stands out is the unique strength and resiliency of our diversified employer-centric model. In response to the unprecedented crisis, we did more than just hunker down and preserve resources. We took immediate action to support clients, parents and families in need. We've played a vital role in our communities, providing care for the children of frontline workers during the early days of the outbreak. We worked diligently with local health authorities and medical experts to create safe, healthy and nurturing environments for staff and children to return to. We deployed new solutions to employers and working parents to support their care needs as businesses and schools closed. We leaned in and made important investments, including a strategic acquisition. A silver lining from the last several months is the broad recognition of how important childcare is for our country's economic recovery and stability and the client recognition of what a responsive and innovative partner we can be. I believe high-quality childcare will be more important to the future than ever before, and I remain confident that we will emerge from this crisis well positioned to capture the opportunity that lies ahead. -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Stephen, and I will take you through now a recap of the headlines for the quarter again and provide some thoughts on the rest of the year. For the second quarter, overall revenue contracted 44% to $294 million, adjusted operating income declined to $27 million and adjusted EBITDA was $60 million or 20.4% of our overall revenue. As Stephen outlined, the majority of our centers remained closed during the second quarter and centers that were open were primarily serving health care and other essential workers. As a result, full-service center revenue contracted $300 million or nearly 70%. This is modestly better than our expectations, as 160 temporarily closed centers were reopened for a portion of the quarter. Our adjusted operating income contracted $107 million over 2019 in the full-service segment to a loss of $55 million. This is in line with our expectations of a 35% to 40% flow-through on the contracted revenue. As Stephen went through, demand for our Back-Up services drove very strong performance in the second quarter with top line growth of 94% to $136 million and $77 million of operating income. As center-based Back-Up Care became less accessible with center closures starting in mid-March, we worked closely with clients to expand the availability of self-sourced reimbursed care to meet the sudden and intense needs of their employees. We were also able to limit the decline in operating income in Q2, in part due to our highly variable cost structure and through strong cost management as well as the actions that we discussed last quarter to mitigate the impact of our closed centers. We've reduced labor and program expenses associated with centers that were closed. We contracted SG&A through reductions in discretionary spending and personnel costs, including employee furloughs, cuts in executive compensation and the elimination of other nonessential spending. We have also been able to benefit from certain provisions of the CARES Act, including payroll tax deferrals, tax credits for retained employees and accelerated tax depreciation. Interest expense of $9 million in Q1 of '20 was -- Q2 of '20, excuse me, was down nearly $3 million over 2019 on lower interest rates and average borrowings. The structural tax rate on adjusted net income of 15% is down from 23% in 2019, primarily on reduced taxable income. Turning to the balance sheet and cash flow. We consumed a modest $13 million in cash from operations in the quarter and made limited capital investments of $15 million compared to $30 million in the prior year. We ended the quarter with $270 million of cash, which includes the $250 million of equity capital that we raised in early April, and we have no borrowings outstanding on our $400 million revolver. Now briefly looking ahead to the remainder of 2020. We're not providing revenue or earnings guidance at this time as the duration and the scope of the ongoing business disruption remains difficult to predict. However, as we did last quarter, I can share some qualitative color on how we see the next several months evolving. As discussed, we anticipate that more than 85% of our centers will be reopened by the end of the third quarter. As we reopened centers, we're phasing in enrollment, operating with some capacity reductions to accommodate COVID-19 safety protocols. Therefore, we initially welcome a finite number of families and a core group of staff before expanding the enrollment to additional classrooms. The early enrollment trends from reopen centers are encouraging, and we anticipate sequential improvement over the balance of the year. We believe that the full recovery in our enrollment will happen, but it will likely take several quarters. The near-term outcome of this reopening and reramping cadence is that we expect full-service revenue to trail 2019 levels in the third quarter by approximately 45% to 50%, with the related flow-through to operating income of between 50% and 60%. In terms of center operations, we ended the second quarter with 1,076 childcare centers in the portfolio, of which 409 centers, to be exact, were operating. We continue to progress centers in the development and construction phase and currently expect to add approximately 25 new centers in the full year 2020. As part of our post-COVID portfolio assessment, we also made the decision to permanently close 18 of our centers in the U.S. and the U.K. and are evaluating another 50 to 60 additional centers to potentially not reopen or to divest over the next 6 to 12 months. Turning now to Back-Up Care, which has clearly been a bright spot in the first half of the year, providing great client service opportunities, while also contributing to the stability of our overall operating performance. We continue to expect Back-Up Care to deliver strong top line growth in the mid-teens for the full year 2020, though use was heavily concentrated in Q2 as many employees used a significant portion of their annual backup allowance. Therefore, we currently expect lower overall use and revenue in the second half of the year, though we continue to engage with client partners to potentially extend their backup program -- their Back-Up Care program with additional use allowances. And so to conclude, although the operating environment continues to be very fluid, and our results in the second quarter are a testament to the durability and strength of our diverse service offerings and employee-centric model. The deliberate and swift actions we've taken to combat the pandemic also underscore the financial and operating agility that we've demonstrated over our 30-plus year history. I have great confidence that we will have the right team, partnerships and assets to not only weather the current crisis, but to capitalize on the opportunities that our financial position, our scale and our brand afford us in the future. And so with that, Jessie, we are ready to go to Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Hamzah Mazari with Jefferies. -------------------------------------------------------------------------------- Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- I guess I was hoping maybe you could address just some of the negative narrative heading into earnings around just daycare. So number one, work-from-home impact, employer-sponsored -- your employer-sponsored business, essentially the daycare centers in those facilities. If employees are working from home, they may not use those? And then secondly, suburban migration, most of your centers are in urban locations? And then thirdly, universal Pre-k if Biden gets elected? And then lastly, if you've seen any COVID cases in your centers that are opened today? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [3] -------------------------------------------------------------------------------- Okay. Well, that was a long list, Hamzah. We're trying to take notes here. So do you want to kick it off, Stephen? -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [4] -------------------------------------------------------------------------------- Yes. Thank you, Hamzah. So happy to sort of frame the nature of your question, which is really around the different elements that could be perceived as impacting our business. So I think if we take a step back, overall, I think it's important to start with the notion that through this pandemic, it has become very clear to both working parents as well as their employers that the idea that an individual employee can be both productive at work, while at the same time being a primary caregiver or a teacher for their children is really an impossible situation. So I think there is a heightened awareness around the value of childcare and the value for employers to be leaning in and investing in childcare. From our perspective and the conversations that we have with our clients and prospects about on-site and near-site childcare centers. I can tell you that there is a large amount of commitment to both the reopening and the long-term sustainability of continuing to persist with the model. And in fact, one of the interesting sort of juxtaposition is that one of the most outspoken around work-from-home and work-from-anywhere tech companies, also, at the same time, just committed to opening a center on their corporate campus. And so I think that while there is going to be some changes and shifts, among some employers around where people work, I think there is a general recognition by most employers, certainly progressive employers of the importance of employer-sponsored childcare. I would also say that in terms of this idea of moving and all migrating from urban areas to suburban areas. The first is that when we look at the limited number of centers that we plan not to reopen, they tend not to be the ones in urban areas. Instead, we are seeing families look to come back in the urban areas. They continue to persist in living in the urban areas. And the urban areas, quite frankly, is still the place where there is the largest disconnect between supply and demand. So I think that we continue to be very focused on continuing with our employer model. And for those in the lease/consortium, we continue to be focused on the urban and urban ring. In terms of the Pre-K question around Biden and the plan, I would quickly point out the fact that we successfully operate in places like the U.K. where there is universal Pre-K at a national level. And in fact, it's one of the strong supports within our model. And as you know, we are always interested in third-party support to offset the cost of childcare for families here in the United States, historically for us, that's been in the form of employers. And then in places like the U.K. and the Netherlands, it's been in the form of government. So again, we applaud opportunities for government to make childcare more affordable for working families. And then the last piece that you mentioned was COVID cases. And obviously, our centers operate within communities that have COVID. And our reality is that over the early months of this pandemic, we continue to operate 250 centers very successfully. I put that down to the great work of our well-trained teachers, combined with the very strong COVID protocols that we've put in place. And so again, overall, I feel really good, and I think the whole team feels really good about the momentum that we have despite the very difficult operating environment. -------------------------------------------------------------------------------- Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [5] -------------------------------------------------------------------------------- That's very clear, very helpful. Just my follow-up question, and I'll turn it over. Could you maybe talk about how your Back-Up Care business differs from others in the market, like care.com and maybe not specific to them. But just how you're Back-Up Care business may be differentiated relative to others in the market? And if there's any way to think about how big this business could be over time, whether you want to put an addressable market number on Back-Up? Or however you want to talk about it. We obviously have the history in terms of how big this business was several years ago. And so maybe we just assumed that same growth rate. Just any thoughts as to how big this business could be? And how you're offering maybe a bit differentiated relative to competitors? -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [6] -------------------------------------------------------------------------------- Yes. So I think the starting point for that is we enjoy the lion's share of the market in Back-Up Care. And I think that it really comes down to the fact that we have been delivering Back-Up Care longer than any other provider. And we certainly have the greatest resources put against that business line, along with the fact that there's a really symbiotic relationship between our Back-Up Care placements and the interest of our clients and their employees to utilize our centers. So again, we have real structural advantage in terms of our ability to serve clients, but also serve clients within our own centers. I would say the other piece that I would point to is that as we think about the Back-Up Care business, the addressable market within that particular segment is quite large. And again, I think we're still in early innings as it relates to Back-Up Care because unlike our center-based business that requires an employee base of probably 1,500-or-so employees in a single location, we have the ability to serve employers of all sizes on a national basis. So again, I think that we are in the early innings of that business. We enjoy a market lead over any of our competitors in that space, and finally, have what our clients and their employees most desire, which is the high-quality Bright Horizon centers in our network. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from Jeff Meuler with Baird. -------------------------------------------------------------------------------- Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8] -------------------------------------------------------------------------------- So Back-Up Care, obviously, off the charts this quarter, and it sounds like you're calling for it to largely normalize fairly quickly. And I know you tried to throw a lot of the factors at us, but I wasn't sure which were the most important factors in terms of order of magnitude of why it would normalize so quickly after the strong of a quarter. So maybe if you could just help me with that. So for instance, the self-sourced care, like, it wasn't clear to me how big that was in Q2 or beyond that? Is it more about the use allowance feelings that you need to work through with the corporate sponsors or is, I guess, just the general demand environment with schools maybe reopening or not and full-service daycare centers reopening? Just if you could help me roughly size up, which are the most important factor is order of magnitude that leads you to think it will normalize? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [9] -------------------------------------------------------------------------------- Yes. I mean I think that the way that -- to think about it without disaggregating too much, crisis -- the sort of crisis care, the self-source reimbursed care was a new use category that clients were able to access, and so it was a substitute for other kinds of use and also was compressed significantly into the second quarter by virtue of how many employees were accessing it and sort of utilizing the vast majority of their full annual use allowance. So that's the primary driver of how we're trying to characterize what are often annual cycles to the use allowances that the clients have for their employees. We had a number of new clients that, both that join the Back-Up Care segment and/or that we're utilizing this care category for the first time. And so it contributes to a large portion if you come into the second quarter, and we were looking at a cadence of 12% to 13%. We were on track for that. And so this is incremental use to that, both in the clients that had more use because they are a per-use client as well as those that compressed the use earlier in the year. So that's the -- in terms of sizing up where the main drivers are? That is a main driver. Full-service centers, of course, were -- as we -- the majority of our centers were closed. The majority of childcare centers across the country were closed. So the access of use in centers was quite dampened in the quarter, and so that we see it restarting and reopening as we are reopening in the back half of the year. Our in-home use continued. It started off the year quite strong with good use growth over last year. But it is a third category, if you will, to in-center use, and we would see that persisting. But it's the alternative between the reimbursed care and the in-center care that we see as the main driver as well as the reopening cadence. So I think that our optimism about this is the exposure to so many new registered users, clients who had registered users who had never utilize Back-Up Care before, have children, have a need and the awareness of clients to the opportunity for their employees to be able to be more productive and potentially accessing that older age group with school age are opportunities. But we are in an early stage of conversations with clients about this, and we certainly are working toward that, but it's too early really to quantify that. -------------------------------------------------------------------------------- Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10] -------------------------------------------------------------------------------- Okay. And then it looks like the latest round of fiscal stimulus proposals have some childcare financial support language in them differ between, I think, the Republicans and the Democrats. But as far as I can read it, you and your family users should be eligible for that proposal, but would just love your perspective or confirmation, if that is the case. -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [11] -------------------------------------------------------------------------------- Yes. So we've certainly reviewed the proposals and would generally agree with you that there are elements in each of the proposals that could be positive for the families that we serve and ultimately then accrue benefit back to us. Again, we certainly are not counting on any of the proposals to come to fruition. And the biggest barrier historically to any proposals, such as the ones that are on the table today have been financial. And so we are certainly not baking into our plans, positive upside in that regard. On the other hand, we certainly see that there are elements that could be positive. -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [12] -------------------------------------------------------------------------------- And some of them are similar to ones we've talked about in the past of increasing the DCAP flexible spending account limits that make childcare more affordable to parents. That's a fundamental opportunity that certainly would benefit us. But I think those incremental elements have more chance of passage than the completely broad-brushed UPK kinds of suggestions. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from the line of Manav Patnaik with Barclays. -------------------------------------------------------------------------------- Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [14] -------------------------------------------------------------------------------- My first question is just Sittercity. I think they've been an important partners with you guys for a long time. I was just a little bit surprised that you said the acquisition, I guess, was immaterial. Like how much of the in-home Back-Up Care was sourced from Sittercity? I was just hoping you could give us a little bit more details? And maybe what you would change by acquiring them versus partnering with them? -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Thanks, Manav. Yes. No, we're excited about the acquisition of Sittercity. I think what we were really characterizing was that their economics at this point are still relatively small compared to our Back-Up business and then certainly the broader business. That's not to diminish the importance and the strategic intent in making that acquisition. In terms of what they have done in terms of our partnership historically, it's really been around our ability to offer our employer clients and their employees bulk access to Sittercity services, so traditional Sittercity services. And a large number of our clients currently undertake that opportunity. Into the future, obviously, we see good synergy in terms of beginning to serve up, for example, our centers as options on the Sittercity platform so that we can continue to provide options to Sittercity users in that regard. And at the same time, fundamentally as we continue to build out our digital strategy and our digital capabilities, we see Sittercity is a nice way forward in terms of the capabilities that they bring to the company. -------------------------------------------------------------------------------- Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [16] -------------------------------------------------------------------------------- Got it. And just a follow-up on the suburban versus urban debate. Just the centers that -- I think you said you closed 18, and you're evaluating another 60 to close. I mean where are those concentrated? And I guess the reason for permanent closure of those, if you believe, as you said earlier that utilization will come back? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [17] -------------------------------------------------------------------------------- Yes. I mean I think that framing that up, the way you've asked the question actually is important consideration, only a handful, less than -- it's probably 10% of those are in more large metro urban environments. There are -- it's not that there are none, but it's -- the lion's share of these are in more rural suburban locations. And I think that the view is that as we look at a potentially -- it's multiple quarters into 2021, late 2021, what is the prospect for return and recovery in some of these locations that may be coming to the end of a lease life that we can just accelerate that decision. We can consolidate operations into another location. And I think it's just a matter of some rationalization of portfolio that we're trying to be prudent about as we consider that this has -- the conditions that we're in are certainly more forward-looking positive than they were 2 months ago, but it still is a long road, and we want to be thoughtful about where we're investing. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- The next question comes from the line of Andrew Steinerman with JPMorgan. -------------------------------------------------------------------------------- Andrew Charles Steinerman, JPMorgan Chase & Co, Research Division - MD [19] -------------------------------------------------------------------------------- It's Andrew. I have 2 questions. One is about visibility into September and the other is about utilization of the centers that will be opened in September. And so basically, I'm thinking September is always an important time for families to often go back to work. And when you say phased-in capacity. Do you already have commitments from families for September? Or do you have to still kind of do logistics on who's going to come in September? And then assuming you have that visibility, what type of utilization should we expect in September? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [20] -------------------------------------------------------------------------------- Yes. So it's an important question, Andrew. And I think it points to what an unusual year this is. September is a time, as you described that many families are kind of coming back into a reenrollment mode. But this year is -- also has the continued uncertainty around school reopenings and various decisions around that, that -- and even how businesses are making their decisions. So there continues to be a level of -- sort of maybe base level disruption that is adding to the lack -- or it's reducing the visibility that we would otherwise have for September. I'd answer it the way we're looking at the reopening process in general. So as we have identified and scheduled out the centers for reopening, it's based on us surveying parents, getting interest levels about when they would be interested in coming back and gauging how we can open, as we said, the sort of more limited scope of enrollment initially and then adding classrooms as we sort of season everybody into the center. So the visibility that we have is really almost -- it's a reramping protocol. So overall, our centers are operating anywhere from a 20% enrollment to 60% depending on when they've either didn't ever close or or reopen because of the various conditions. And so into September, we would be probably in the middle of that average for centers that have been open and are just in a gradual reenrollment phase. It's really different than the typical September reenrollment cycle. -------------------------------------------------------------------------------- Andrew Charles Steinerman, JPMorgan Chase & Co, Research Division - MD [21] -------------------------------------------------------------------------------- And is there sometimes a wait list for reopening? Like there's more demand than you have capacity? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [22] -------------------------------------------------------------------------------- There is, in some cases, because we are opening an infant room, a toddler room, a preschool room. And so a family may need to get on the wait list in order to be in the round when we're opening the next classroom. So we're -- that's what we're trying to convey. We're pleased with the demand levels. We're pleased with the persistence from parents, who are -- we're surveying them. We're getting a level of interest and then making the offers, and we're having good conversion of those offers, but still some parents want to wait a few months and some want to come right now. And so we're trying to balance both of those out with all the sort of opening and safety protocols along the way. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from the line of Toni Kaplan with Morgan Stanley. -------------------------------------------------------------------------------- Unidentified Analyst, [24] -------------------------------------------------------------------------------- This is actually Jeff on for Toni. I'll just ask a work-from-home question. I'll just -- I want to ask the work-from-home question a little differently. So given the greater degree of employees working from home right now, where do you stand with allowing like employee children attending centers other than their normal employer-base center. And so if the work-from-home trend becomes more permanent, could you see the overall model adapting towards something like this? -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [25] -------------------------------------------------------------------------------- So there's a couple of factors that I think one needs to consider as you think about that question. So the first is that there is typically a real interest of a parent in continuity of care. And so therefore, if their expectation is that they're going to go back to their office in September or in December or in February and their child is going to be at a center for multiple years, they are going to go where the ball is moving as opposed to where the ball is. And so they're going to make a little bit of extra effort to get to the center that is going to offer them long-term continuity of care, which is likely the one at their employer site. I'd say the second important point on this is that when you look at the cost to that family between joining one of our lease/consortium centers versus going to their employer-sponsored center. There is typically anywhere between, let's call it, a 10% and 20% differential in that tuition. And so there is also an economic advantage for them to continue to take advantage of the center at the workplace. And then the third is just the practical reality of where they have the ability to gain a spot. They obviously will have priority at their employer center where they won't have that same priority in a local lease/consortium center unless their employer has bought into that center. So there are a number of reasons why an employee of a particular organization will continue to want to persist with going to their on-site center. -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [26] -------------------------------------------------------------------------------- And I think the other factor for on-site centers, of course, is they would have priority, but we also are typically at -- we're in a location where a client has a base of employees even in a reduced attendance mode that is far greater than what the center could accommodate in a full environment. So there's going to be demand there even in a changed work environment. -------------------------------------------------------------------------------- Unidentified Analyst, [27] -------------------------------------------------------------------------------- Okay. That all makes sense to me. And then you did a 35% conversion margin. It looks like in the quarter within full service, which I think was the bottom of your prior range. And I think on the 3Q guide, you said 50% to 60%. So I just want to understand exactly what's driving that figure higher? And is there any kind of variable there that can make that number come in better than expected? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [28] -------------------------------------------------------------------------------- Sure. Well, the main variable there is that as -- in the second quarter with the vast majority, 80% of the centers were closed until we started reopening in late May and early June. So we had 70% revenue contraction, and we had a large number of our employees were furloughed accordingly. So as we start to reopen and had 160 that reopened by June 30, and we had another several hundred that opened in July. So we're now at 725 at the end of July. We have brought back staff at a pace that is ahead of the revenue and the enrollment that would typically go with completely optimized staffing. And so we are now -- as I think we sort of previewed this last quarter, we are now in a mode where the revenue contraction is going to be less. So we were at 70%, now it's down to 45% to 50% revenue contraction. But we have a less efficient labor structure accordingly. We will gain on the occupancy costs, the fixed costs that we have in our lease/consortium centers that will become more leveraged, but we will have some deleverage with labor as we just are back in this reramp mode. That's the main driver. And it will -- as we continue to ramp, it will continue to trail what we were able to do in Q2 as we continue to reramp through the rest of the year. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes from the line of George Tong with Goldman Sachs. -------------------------------------------------------------------------------- Keen Fai Tong, Goldman Sachs Group, Inc., Research Division - Research Analyst [30] -------------------------------------------------------------------------------- You're targeting to have more than 85% of your centers opened by the end of 3Q, with utilization rates ranging somewhere between 20% to 60%. As you look beyond 3Q, how quickly do you expect utilization rates to recover to the more traditional 70% to 80%? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [31] -------------------------------------------------------------------------------- Yes. I think we're well into 2021 before we're at those levels. So some centers may be back to that level. But I think on average, we would be looking to later in 2021 for that. But it's early to predict. We -- I think we'll have -- obviously, we'll have better visibility over the next couple of quarters. But I think getting the centers open and parents back for the for the near term, I think is the goal to rebuild everyone's sort of regular activities, their confidence in their protocols and what have you, but we see that as certainly achievable over time. But it is going to be a bit of time before we're back to that. -------------------------------------------------------------------------------- Keen Fai Tong, Goldman Sachs Group, Inc., Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Got it. And you mentioned that the decremental margins for 3Q will be 50% to 60%. Can you perhaps frame what the relationship might be between decremental margins and capacity utilization rates? In other words, where would rates have to go for decrementals to improve? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [33] -------------------------------------------------------------------------------- Well, they'd be improving over that range of 20% to 60%. So I think on average, what we are -- we've planned for a good, steady increase in enrollment. But to the extent that it's faster than those metrics, I don't know that we have anything more specific that we would lay out right now. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Gary Bisbee with Bank of America. -------------------------------------------------------------------------------- Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [35] -------------------------------------------------------------------------------- Let me just follow-up on the questions on the full-service center. I understand the dynamics of bringing staff back and that will be a bit of pressure. But as you think about operating in the COVID world, other than that timing as you refill the centers, how are you thinking about your operating costs versus where they were before? Is -- do you need higher staffing levels to have smaller class sizes? Is -- I would guess, cleaning and other supplies is a cost, but not a material one, but are there the process and the changes you made, do those lead to higher cost structure as we look out a few quarters a year or 2? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [36] -------------------------------------------------------------------------------- Yes. Yes. I mean I think you've touched on the 2 primary ones, Gary, that there is an incremental cleaning, sanitation costs that we think is -- it's important and it's nothing, but it's manageable. As it relates to the labor cost, there's a couple of components of that. One is by virtue of having, what I'll call, remote pickup and drop off where parents are not taking their children to the classroom. We have some incremental labor for that sort of management of movement in the center. So there is a little bit of that. And otherwise, I think from the staffing in the classrooms, that's more a matter of how we are staying more contained in a room rather than combining group sizes. So I think from an incremental labor standpoint as we do get through this phase of reramping, where there will be some adaptation to the cost. Longer term, I think that the incremental labor cost that we have and the incremental cleaning sanitation costs that we have will be manageable either through some -- slightly incremental pricing and/or some slightly incremental enrollment. It's not so significant that we don't think that we can reachieve the kinds of operating thresholds we were at before. -------------------------------------------------------------------------------- Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [37] -------------------------------------------------------------------------------- Okay. And then I -- last quarter, I asked you questions about my employer, apologies, but they've sent so many e-mails about you guys. And obviously, they're thrilled with the performance. So I want to ask about it one more time, which is just they have expanded the Back-Up usage that we, as employees, can use several times year-to-date. And I understand the concept that you look at your base and a lot of them are bumping up against those maximum usage levels. But do you have any visibility into how often and what factors would determine if they -- if employers broadly could extend them more? I mean is it -- does it have to do with when offices are reopening? And then, okay, we don't need it. And so you're seeing that pick up. So you think it's less likely. And really, what I'm getting at is, is there some possibility that we just see further expansion such that, that business doesn't repeat 2Q, but maybe persists somewhat more strongly than you've planned for in the back half? -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [38] -------------------------------------------------------------------------------- Yes. Well, first, Gary, thanks to you, and thank you to Bank of America for being an exceptional client, but more importantly, an exceptional employer, really supporting your employees through what is a very difficult time. What I would say is that BofA is really exemplary in terms of the way they've thought about sort of expanding use banks. And since you stated it, I can restate it, which is, yes, they have increased their use banks and really made more opportunities for their employees to lean in and take advantage of this important service. I think that more broadly, how employers are thinking about it, it's less about the work from home versus work at the office because, again, I think we've established the fact that it's not really where you're working, it's really a need to be productive and ultimately not be the primary caregiver for your child. And so I think what's happening is employers are really trying to be thoughtful as we enter into the fall about what supports are going to be required. And there is real emphasis not only on young children, right, who are not self-sufficient, not independent and need a level of care, but they're also thinking about school-age programs. And so as we look to the fall, we're really having good conversations with employers about what they can be doing to serve their employees across that continuum. Some are, like Bank of America, deciding to offer additional service, others are deciding to reopen their center before they reopen their work site. And so each employer were coming to different decisions with. But nonetheless, the one commonality is that employers are really being thoughtful about what their employees need because while this pandemic came on very quickly and employees needed to juggle both they're at-work and their at-home lives, everyone recognizes that is not sustainable going into the fall. And so employers like BofA are really trying to be thoughtful, and we're really working hard to be a good partner to organizations such as yours. -------------------------------------------------------------------------------- Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [39] -------------------------------------------------------------------------------- That's helpful. And just one final one on Back-Up, and I'll turn it over. You commented on the profitability of full service in how you're seeing things unfold. You did not -- or I missed it on Back-Up in this scenario where the revenue declines in the back half. Would -- if the full year is up sort of in line with what you thought on revenue, does the profit at that level? What we might have thought is that a good proxy? Or is there -- how do we think about the margin in that scenario? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [40] -------------------------------------------------------------------------------- Yes. It's a good question. I would frame it up that because the self-sourced reimbursed care is captured as sort of a net revenue item. It's a bit distortive to what the margin profile is in the second quarter. In the back half of the year, even with the revenue profile that we mentioned. I'd say that our expectation is that our operating margins would be able to persist in our sort of targeted range of -- in the 30% range, so high 20s to 30%, consistently with what you've seen in the past. So that's how we would think about the margin performance against that revenue. -------------------------------------------------------------------------------- Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research Analyst [41] -------------------------------------------------------------------------------- That's for the back half or the full year. That was back half? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [42] -------------------------------------------------------------------------------- That's just the back half. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Our next question comes from Jeff Silber with BMO Capital Markets. -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [44] -------------------------------------------------------------------------------- On utilization, did you disclose roughly what the utilization was in 2Q '20, and I'm curious how that compared to 1Q '20? -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [45] -------------------------------------------------------------------------------- We didn't -- I mean, I can just describe it to you, Jeff. We didn't disclose it because with 80% of the centers closed most of the quarter. And those that were open to very limited enrollment for the first responders. So the attendance was in the -- that was probably in 30% to 50% range of utilization as opposed to where our normal utilization in Q1 was 70% to 80%. -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [46] -------------------------------------------------------------------------------- Okay. Great. That's helpful. And I wanted to move on to the, I guess, the portfolio rationalization, you talked about earlier, I want to take the opposite tact. Are there potential areas that maybe you're looking at where you don't have centers right now? And maybe if we do see folks working from home, they stay in their suburbs, would you be anticipating maybe some of the smaller centers that might be under some financial issues right now? Are those acquisition opportunities or potential lease it takeover opportunities for you? -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [47] -------------------------------------------------------------------------------- Yes. So we definitely anticipate that, that will be the case. And our expansion strategy is certainly to continue to look for good opportunities on the lease/consortium side as well as on the acquisition side. As we've stated previously, here in the U.S., we think that those will come in the profile of single sites or small groups of well-located centers that are in strategic locations for us. But absolutely, we intend to continue to grow our portfolio overall, even within the context of continuing to rationalize as well. And thanks to all of you for joining the call this evening. And appreciate your support. -------------------------------------------------------------------------------- Elizabeth J. Boland, Bright Horizons Family Solutions Inc. - CFO & Treasurer [48] -------------------------------------------------------------------------------- Thanks, everyone. Appreciate your patience, too. We were a little bit late, but we appreciate all the questions, and we'll talk to you virtually. I don't think we're going to see anybody on the road for a little while, but we'll see you virtually. Take care. -------------------------------------------------------------------------------- Stephen Howard Kramer, Bright Horizons Family Solutions Inc. - CEO, President & Director [49] -------------------------------------------------------------------------------- Take care. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time.