Greetings, and welcome to the First 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. Mr. Flanagan, you may begin.

Thanks, Victor, and hello to everyone on the call. 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 IR section of our website, 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 will now take us through the review and update on the business.

Thanks, Mike. Hello to everyone on the call, and thank you for joining us this evening. I hope that all of you are staying safe and healthy during these unprecedented times. I would like to take this opportunity to thank the first responders, medical personnel and others on the front line, who are working tirelessly to ensure that our communities' needs and critical care are being provided. And I want to thank our teachers and all early childhood educators who in the face of the storm have provided calm, nurturing and loving environments for young children. I'm pleased that the field of early childhood education, now more than ever, is seen as an essential support within our society, and the teachers in the classroom are recognized as heroes. They have forever made a difference, and I am truly inspired by their individual and collective dedication.I'm going to begin today's call by briefly recapping our first quarter results. I will then discuss our response to the COVID-19 pandemic and the strategic actions we are taking to navigate the near-term challenges and to maintain positive momentum for the longer term. Elizabeth will provide a more detailed review of the numbers and some further context around the potential impacts from the pandemic before we open it up for your questions. To recap, the first quarter, we delivered revenue of $506 million, an increase of 1% and adjusted EPS of $0.74, a decrease of 9%. These results reflect the COVID-19-related impact to our business that began in March. Leading up to the crisis, our business was trending in line with our expectations for the quarter. In our full-service segment, we added 11 new centers, 9 of which were organic, including client centers for Fifth Third Bank and Verily Life, a subsidiary of Alphabet, and…

Thank you, Stephen. I will now again, recap the headlines for the quarter and provide some more detail on what actions we've taken to respond to the challenge of COVID-19. For the first quarter, overall revenue increased $5 million to $506 million. Adjusted operating income decreased $13 million to $49 million or 9.7% of revenue, and adjusted EBITDA of $81.5 million declined $12 million. As Stephen outlined, the COVID-19 impacts have been relatively confined to our full-service segment. Revenue in this segment contracted 1.7% or $7 million as high single-digit growth in the first 2 months was erased by a sharp decline in the final 2 weeks of the quarter as we began the temporary closure of centers beginning mid-March.Adjusted operating income compressed to $22.5 million or 5.4% compared to $41.5 million in 2019. When we closed centers, we determined that we would; one, allow parents to roll forward the partial month tuition as a credit for when centers reopen; and two, support our affected teachers and staff, with 2 weeks of transition pay subsequent to their center close dates as well as continued health care and education benefits. We believe that both of these actions will support a quicker recovery as centers begin to reopen and as we recall, our teachers from furlough and invite families back to the centers.Our Back-Up Care operations performed well in the quarter, growing the top line 15% to $74 million and generating $22 million of operating income in the quarter, up $5 million from 2019. We continue to have strong utilization levels from both existing and new clients, particularly for in-home care and reimbursements for self-source care. Both of which have proven to be important alternatives to center-based care and school age programs at this time. Our Ed Advisory business, which is delivered…

[Operator Instructions]. Our first question comes from Andrew Steinerman with JP Morgan.

So my question is, are you willing to share with us April trends, meaning revenue trends for full-service, Education Advisory and Back-Up on a year-over-year basis. Any comment on full-service if the year-over-year trends were different at the end of April than at the beginning of April?

So Andrew, with respect to maybe adding some meat to the information that we had in the prepared remarks and to get at your question, obviously, for -- since we began to temporarily close centers in mid-March, the month of April reflects essentially the full contraction down to around 250 centers operating. And because of the -- that a relatively proportionate amount of revenue would contract in addition to there being somewhat lower utilization because of the guidelines around how many children can be in a center and social distancing rules. So there's a substantial contraction in full-service in April because of those moves. And there's -- I think that, that's the context that we can provide at this point.

And could you say how much Ed Advisory and Back-Up are up in April?

Again, I would point to the guideline that they are continuing to track with the plans that we had for the year, continued the shift away from in-center use of Back-Up Care would be more -- it would be more in the in-home side than in the in-center side because of what's available center basis wise. But I think the continued trend, we're pleased with the stability in both of those as we exited Q1 and got into Q2.

Our next question comes from Hamzah Mazari with Jefferies.

My first question is just as you come out of this, do you see any structural changes post-COVID that, that would essentially change the growth profile of your business, whether it's work-from-home population doubling or maybe the margin profile as you implement social distancing, et cetera. I know you touched on some of that in the prepared remarks, but any thoughts would be very helpful.

Sure. So thank you. It's a great question. What I would say simply is that we don't expect there to be structural changes coming out of this. Certainly, from a health and safety perspective, we are and we'll continue to have very significant protocols around making sure that we do pick up and drop off in ways that are socially distanced. We'll do health checks certainly for children and staff. We will make sure that we are managing group sizes for some of the older age groups. But in terms of structural changes, we don't see actually that being the case.In terms of the demand side, which you alluded to in terms of more work from home, I think what people have come to realize through this pandemic and working at home with young children is it is incredibly challenging, to work from home and also have your children at home with you. And so I think what we're hearing from our early solicitation of input and feedback from our parent base is they are very much looking forward to having their children come back to the center to continue their milestones and progression and, at the same time, allow parents to get back to work in a more productive way. So I would say that certainly from the perspective of the demand side, we don't see that. And then from the cost structure side, as I said, I think we will certainly implement protocols over time that have small marginal cost differentials. But nothing that will be significant. And at the same time, we see employers willing to step into that additional expense, certainly to protect their employees and their families.

That's very helpful. And just my follow-up question, I'll turn it over. I know you're much bigger than your largest competitors out there. But do you expect to see M&A picking up coming out of COVID, just given not many have the liquidity that you do today with the equity raise and some of the other stuff that you've gotten ahead of? So just any thoughts on M&A coming out of this and what you're hearing competition wise?

Sure. So look, I think that there will certainly be, unfortunately, situations where many other providers do not have the financial wherewithal to make it through this crisis and ultimately reopen. With that, obviously, we expect to see opportunities for operators who have turned the keys back to landlords for us to step into their positions in strategic locations, where we believe there's a good opportunity to operate. In addition to that, as you alluded to, we do believe that there will be M&A opportunities in ways that fit our criteria, which obviously are fitting strategically, fitting geographically and then ultimately, fitting financially in the longer term. So we do believe that coming out of this, as we saw in the last recession, there will be M&A opportunities that present themselves as a result of this really unfortunate crisis.

Our next question comes from Jeff Meuler with Baird. .

Have you had any temporarily closed centers reopen? Or do you have reopening dates for any centers? Like I think you have some centers in Georgia. Just any of the states that are starting to reopen. And if you do, I'd love detail on this, otherwise, I just love the perspective on it. But I guess, what are you doing? You talked about digital learning solutions, but to stay engaged with families so that when the centers reopen, it's more like flipping a switch to get the families back in the centers?

Yes. So let me start with that, and then we can double back, Jeff. In terms of parent and child engagement, that has been a high-priority item for us. We believe it's critically important for the well-being of the children, and we also think it's an important engagement tool for the parents. So we have a cadence on a weekly basis of activities where we are continuing to keep engaged with both children and families to ensure that we are supporting them during this difficult time as they try to work from home and also be directly responsible for parenting during the day.What I would say is that we expect that, that will absolutely be an underpinning for our ability to "reenroll" these families. And as Elizabeth shared in the prepared remarks, as we came into this crisis, we took the approach of pausing enrollment and moving the unused part of their tuition to a credit for when they return. So again, all actions that are helpful as we think about standing these centers back up. In terms of reopening, we are still in the very early planning stages on reopening. We have had a handful of centers that have reopened. But again, our goal is not only to look at the lifting of the shelter in place in certain states, but also to work collaboratively with our clients, get a real sense from parents about their readiness to come back to work in a more traditional way and have their children at the center. So we are approaching it in a very, very methodical way. And early indications, Jeff, are that the families are very excited to come back. And ultimately, employers are looking forward to supporting us to get our centers opened.

Okay. And just Elizabeth, I think you said a 30% to 40% decremental EBIT margin and full-service revenue down proportional to close center count. So I just want to make sure that I have the mathematical equation that on a run rate basis, you're currently at a modest negative EBIT position consolidated. Is that the correct calculation from the segment level disclosure you gave us?

I think what I said was 35% to 40%, just to clarify on that. But with respect to -- I'm sorry, I'm just trying to find that note here that you said that was -- is the EBIT -- the combined EBIT in Q2, what was your question?

Is consolidated, yes, EBIT trending currently modestly negative just based on all the color you gave us at the segment level, then running the math through it?

Yes. I mean with that portion, with a large portion of the business in full-service as beneficial as Back-Up and Ed Advisory are and their margins, of course, are substantially higher than what full-service margins are in a regular quarter. So they do contribute disproportionately to their revenue. But with 80% -- or 75% to 80% of the full-service centers close, then there is a decremental, yes, overall.

Our next question comes from Manav Patnaik with Barclays. .

Just kind of like a medium-term looking question, I guess. Firstly, the 150 centers that you currently have open serving the essential employees, what is utilization at those centers look like? And is that kind of a glimpse of what we might see in the new future with all social distancing rules and guidelines? Just curious on your thoughts there.

Yes. So first, Manav, just to put a fine point, we have 250 centers that are opened globally.

And 150 is just in the U.S.

150 is here in the U.S., just to clarify. In terms of how those are operating, I think it's important to focus on the fact that the population that we are serving across those 250 centers is strictly health care and other essential workers. And so when we have limited who we are serving through this, obviously, the utilization rates in these centers is quite a bit lower than what we would see at steady state, coming out of this pandemic. So again, if we think about the addressable group of families that we are looking to serve, given how much smaller that is than from our total addressable, we are certainly running at utilization levels that are a decrement from what we will expect to see coming out.

Got it. And then kind of tied to that, the lease/consortium strategy, if there's a view that everyone from the city is going to run away to Suburbia now or space and et cetera. Like any early thoughts on whether that continues or you slow that down or too early to tell?

Yes. It's a great question, Manav. It is not a trend, obviously, that we can opine on because certainly, it's too early days. What I would say is that we have had this lease/consortium strategy over the last number of years. We have about 100 that are really focused on the urban area. But our expectation is that young families will continue to persist in the urban area. And certainly, we don't expect to see employers change course and move out of urban areas. And so taken together, given our employer-centric model, we have great confidence in how that strategy will continue to perform over time.

Our next question comes from Gary Bisbee with Bank of America Securities.

I guess I'd like to follow up on that question of utilization. Given the number of job losses in the U.S. and how historically, center utilization has tracked with unemployment. How should we think about, how a step down in utilization could impact the profitability of your business on the other side of it? It -- I think you saw 10, 11 points decline in utilization during the financial crisis for, I think, fair to say, fixed costs, at least on the real estate front with the lease/consortium strategy are higher today. And so, should we think that it could take a while to get profitability back to pre-COVID levels than when you broadly open all the centers? Or are there ways to work through that leverage you can pull to get the business operating closer to how it was historically back to sort of portfolio.

Sure. So thanks, Gary. So why don't I start on sort of how we're thinking about it strategically and then Elizabeth can follow up with a little bit more quantification. As we think about the unemployment that is likely to be an outcome of this economic challenge. We are seeing those employers with a lot of frontline employees being the first to furlough and likely separate. So when you think about some of the harder hit industries like retail, energy, those are not the industries that we have ever had particular focus. And so as we see this crisis unfold, whether it be retail or hospitality or other industries that have a lot of frontline that ultimately will be displaced, those are not either our employer clients or are they typically the families and the families that we serve. So different from the financial crisis, back a number of years now, we expect that the unemployment challenge is going to be really focused in an area where we don't currently serve. And therefore, we don't expect the same implications in that way.

Yes. And sort of echoing back to the last major recession that we weathered the 2009/'10 time frame, Gary, as you mentioned, we had substantial reduction in enrollment over that period of time. It was, as you say, about 10 points, so most of utilization. And because of the variable nature of most of our costs, we were able to essentially retain most of our full-service margin profile. We contracted margins by about 1 percentage point during that time. We were continuing to grow through new center openings and acquisitions as well where all of the components of our growth strategy were contributing to that performance, but we were able to cost manage through a lot of the enrollment contraction. As you say, a different portion of our business now, it's a slightly higher portion that it's coming from the lease/consortium centers where we have the occupancy cost as our responsibility.So there's a somewhat of a different cost profile. But I think that I'd answer the question in the frame that you asked, which is it will take a bit of time to re-ramp back to pre-COVID levels. That enrollment will come back with -- for all the societal reasons I think that we're aware of. But also the more time that passes, the more we will need to be essentially reenrolling children in an age group that they've outgrown. And so we will be, again, in growing our own reenrollment over time. So there will be a re-ramp period that does have to happen. So it will take some time to get back to those margin levels. But I think the underlying components of why we have the sort of steady rider of cost-plus the contributions from our bottom line client centers and then the upside opportunity in the lease/consortium centers will all help to contribute to that -- the pace of that growth over time, and each can contribute in their own way.

Great. And then just one follow-up, if I could, on Back-Up, that's encouraging to hear that continues to do quite well, even with a lot of the in-house capacity, obviously being closed. I guess as we think about the mix shifting to in-home and then also this concept of reimbursed self-chosen care however you framed it, which I know is Bank of America's third offering, by the way. But should we think that there's major profitability differences? Or is it pretty similar? And as part of that, is this concept of reimbursing self-chosen care. Is that new? Did you do that sort of because of this? And is that a new opportunity? Or is that something you've done in the past that I've just never heard about?

Yes. And so if we start with the reimbursed self-sourced care, which we call Crisis Care Assist, that is something that we have had, but it typically has been both episodic and very focused. So if you think back to Hurricane Katrina or the Wildfires in California, we have supported employers and their employees with reimbursements for self-source care. In our history, clearly, we have whenever...

When care is disrupted....

Yes. When care is disrupted. But we have never seen, obviously, the need like we have seen in the current pandemic, and we've never seen it as pervasive across the country, clearly, as we are seeing it today. So self-sourced care that is reimbursed to us is something that we've done. It's been a modest contributor historically. We have seen certainly unprecedented demand for that in the current climate. What I would say is that, combined with our in-home care provision, has really supported employees and their employers quite well. And Bank of America, thank you for being a great client.We have had a number of our clients lean into that and the way Bank of America has with the understanding that in the current circumstance, where centers are closed and other schools are closed, it is a very good option for employers and employees. In terms of the margin profile, I would say that on the in-home care side, clearly, the economics -- the margin economics are not as strong as what we'd see in center, given the increased cost. On the other hand, in many of our client contracts, we also see a differential in the rate that is being reimbursed? And then secondarily, on the Crisis Care Assist side, you'll see us reporting the revenue associated with that on a net basis. Because again, the reimbursement that goes to the employee is truly a pass-through. And so because it's on a net basis, the revenue per care instance is lower. But the margin associated with it is more emblematic of what we'd see traditionally in that business line.

Right. So you may see those -- the effects of those would counter each other. So there'd be not a dramatic difference.

Our next question comes from Jeff Silber with BMO Capital Markets.

You had mentioned that you opened up some new centers in the quarter. Can we talk about the new center pipeline for the rest of the year? I'm assuming, right now, that's on hold, but if you could just confirm that, that will be great. And just wondering how discussions are going for future center build-outs?

Yes. So on the existing center pipeline, what we are finding is our employer clients who are in process, who have made the commitment and are in the process of construction. They continue to persist with their projects. And so we will continue to see centers open up on that basis. Because obviously, as we always talk about, there's a longer sales cycle, but there is also a development process of opening up a new center. And so you'll continue to see us open new centers that were in-flight and started pre-COVID. The second thing that I would observe is that as we look out into our sort of "newer" pipeline, we are, as we saw in the last economic downturn, we saw a pivot of our opportunities away a bit from new capital and new centers that would be being sold to those that were going to be transitioned. So we see both health care and university opportunities, in particular, where they self-operate centers, have found it incredibly challenging to operate those centers in the current environment and have instigated conversations with us about taking over the management of those programs post-COVID.

Okay. That's helpful. I appreciate that. And you mentioned in your prepared remarks how the company has been through a number of economic cycles. And obviously, we're in unchartered waters here. But I'm just curious how do you think your business is different going into and coming out of this crisis when we compare it to the Great Recession? I know you are private, but just in terms of the business overall.

Well, I think that one of the things that we -- I think Stephen touched on this, that this kind of a crisis is different than the Great Recession, where we were part of a very broad-based -- I mean, we're part of a broad-based economic impact now, too, but we are able to really demonstrate to our client partners what we can do at a time that may actually pivot them to embracing more services with us in the future more quickly. I think that the recession of 2009/'10 was a slower ramp-down and then a slower ramp-up. And we were certainly building and growing the Back-Up business substantially through that time. And Ed Advising, and we entered European -- a new European country in the Netherlands shortly thereafter.So there are a number of stakes in the ground that we -- that did propel us to a very strong growth coming out of that recession as well. But now we have even, I think, better foundational underpinnings that we can both amplify, capitalize on and continue to -- while we are running the business that we have now, continue to look ahead to what may be down the pike. And I think that the -- it may be the question of what is the cadence and the duration of the shutdown and then the reopening cadence. All of that is to be determined, but there still may be some quicker decisions that are coming out of it because of the quickness of the contraction. So I think that's one of the differences that I'd say now versus then. We have, obviously, a more substantial business in Europe than we had before. So some more diversification there, diversification of our service line offerings. And so I think all of those are strong underpinnings as well.

Yes. I think the only thing that I would add to that is there is a tremendous appreciation from working parents about how difficult it is to both work and care for their children. And so certainly, we are in a position where we are hearing from our families and from our employer clients about their keen interest to get back to a situation where they are able to get back to work. And at the same time, their children are able to have the kinds of experiences that they can only have at a Bright Horizon center.

[Operator Instructions]. Our next comes from Toni Kaplan with Morgan Stanley.

You mentioned signing 50 new clients for Back-Up Care. Could you talk about what the contribution from that would be and the length of the arrangements? Are these sort of temporary until the employers start to sort of resume their original -- in terms of original care arrangements? Or would you be able to sort of expand on the relationship for a longer term?

Well, speaking more broadly, actually, these clients are sort of conventional new Back-Up clients that we've launched. And so an average Back-Up client may range from $100,000 to $250,000 annual contract value. So that's sort of the general magnitude of what -- without speaking to any one of these individual clients, that's generally what we would be seeing launched. And so they are not temporary. These arrangements aren't temporary. These are sort of conventional new adds to the Back-Up portfolio.

Okay. That's great. And then just my second question is around pricing. I guess as we're sort of in this challenging environment, does pricing become more challenging post-COVID? I guess how are you thinking about you usually get about 3% to 4% pricing a year, just wondering how you're thinking about that going forward this year?

Sure. So absolutely, we are spending a lot of time thinking about pricing. And as you'll know, we are very disciplined about ensuring that there is a differential, typically 1% between our price increases and our wage increases. And so we continue to be focused on that metric that we have over the last 30 years continue to perpetuate. It is not completely clear at this point, where on the scale, our price increases will be and where the wage increases will be. On the other hand, we continue to be confident that we'll be able to have a differential between those two.

Our next question comes from George Tong with Goldman Sachs. .

I appreciate the helpful update on the business. Can you maybe elaborate on what kind of guidance you're currently receiving from your medical experts and the CDC and when it would be appropriate to begin reopening your centers?

Yes. So we are in very close contact. So first and foremost, we're following the guidance from the CDC. We have a medical expert that we have retained, who has been incredibly helpful in our COVID protocols and is also helping us to think about our reopening. What I would say is that the protocols that we're focused on look a lot like what we have been operationalizing to date through the last 8 weeks. So again, not huge differences between how we're operating in the current environment into sort of this next phase. So overall, again, the guidance is really around making sure that we're doing social distancing at pickup and drop-off that we're doing health checks to make sure those who are entering the centers, both staff and children are well. We're making sure that our staff are wearing masks. We're making sure that we are appropriately limiting group sizes, which really only has impacted the older age groups. Because in the younger age groups, the typical group size is smaller than the sizes that are being recommended by the CDC and our medical expert. So I think all in, we feel really good about the experience that we've had through this and truly believe that we'll be able to operate in a safe and healthy way going forward.

Got it. If the centers in the Netherlands be opened as planned and centers in the U.S. and the U.K. stay closed through the end of the second quarter, what would the potential revenue impact be in the second quarter? In other words, what would be a good downside-case scenario for revenues?

Sorry, you said if the Netherlands centers open and the remaining -- the centers in the U.S. that are closed now remain closed through the end of the second quarter.

Stay closed. Yes. That's right. The U.S. and the U.K's. centers that are closed today remain closed through the entire second quarter. What would the potential downside case for revenues be?

I think the thumbnail I'd use is that, that's about 80% of our centers. So the proportionate revenue would be contracting in that way.

And that's even taking into account the different business models between cost plus, P&L, lease/consortium and other mix factors that could differentiate the number of centers versus the revenue flow-through?

Yes. I mean there's certainly a lot of puts and takes in the numbers of children that are being served, which centers are open, where they're located in terms of the relative tuition levels and the client support, but that is a -- I think that's a relatively representative for what you're asking in terms of a broad rush since we're not -- that's as much guidance as we're giving at this stage, there's too many variables.

Wonderful. All right. Well, thank you all very much for participating this evening. We hope you and your families stay safe and healthy. And I look forward to being in touch soon. Have a good night.

Thanks very much. Take care.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.