Greetings, and welcome to the Bright Horizons Family Solutions Fourth Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Vice President of Investor Relations. Thank you, Michael. You may begin.

Thanks, Paul, and welcome, everyone, to Bright Horizons' Fourth Quarter Earnings Call. Before we begin, please note that today's call is being webcast. The recording will be available under the Investor Relations section of our website, brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook, are subject to safe harbor statement included in our earnings release. Forward-looking statements may involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2022 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date of which it's made, and we undertake no obligation to update any forward-looking statements. We may also refer to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available under the Investor Relations section of our website at investors.brighthorizons.com. Joining on today's call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our results and provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen.

Thanks, Mike, and welcome to everyone who is joining the call. I am really pleased with how we finished the year, achieving better-than-expected revenue and EPS results in the fourth quarter. Performance for the full year results are strong, with Full Service revenue expanding nearly 20% and Back-Up Care revenue surpassing the $500 million mark, up an impressive 26% in 2023. These accomplishments were driven by the focus, dedication and execution of our talented teams who continue to work tirelessly to deliver our high-quality services. So to get into some of the specifics, in Q4, total revenue increased 16% to $616 million, which yielded adjusted EBITDA of $99 million and adjusted earnings per share of $0.83, an increase of 8% from the prior year. For the full year 2023, revenue of $2.4 billion, representing growth of 20% with adjusted earnings per share of $2.84, expanding 9% over 2022. In our Full Service child care segment, revenue increased 15% in the fourth quarter to $447 million. The drivers of this growth were enrollment and pricing with centers that have been opened for more than 1 year expanding enrollment at a high single-digit rate in Q4 and averaging 58% to 60% occupancy. In the U.S., year-over-year enrollment increased 10% in these life centers with double-digit growth in our younger age groups and mid- to high single-digit growth in preschool age groups in Q4. Outside the U.S., enrollment increased at a mid-single-digit rate in the fourth quarter compared to Q4 of 2022. Although the operating environment in the U.K. continues to be challenging and a headwind to the performance of the overall Full Service segment, enrollment growth in the U.K. increased -- improved modestly in Q4 compared to Q3, and we have seen that progress continue into the early part of 2024. At…

Great. Thank you, Stephen, and hi to everybody who's able to join us today. To recap the fourth quarter, overall revenue increased 16% to $616 million. Adjusted operating income of $64 million or 10.3% of revenue increased 15% over Q4 of '22, while adjusted EBITDA of $99 million or 16% of revenue, increased 10% over the prior year. We ended the quarter with 1,049 centers, adding 4 new centers and closing 18 centers in the fourth quarter. To break this down a bit further, Full Service revenue of $447 million, was up 15% in Q4 at the high end of our expectations on increased enrollment in pricing. Enrollment in our centers opened for more than 1 year increased in the high single digits across the portfolio. As Stephen mentioned, occupancy levels averaged in the range of 58% to 60% for Q4 as expected and consistent with Q3 levels, given typical enrollment seasonality. U.S. enrollment was up 10% and international enrollment increased in the mid-single digits over the prior year. In the center cohorts that we have discussed previously, we continue to show improvement over the prior year period. In Q4, our top performing cohort, defined as above 70% occupancy, improved from 25% of our centers in Q4 of '22 to 36% of our centers in Q4 of 2023. Our bottom cohort of centers, those operating under 40% occupied, represents 18% of centers as compared to 20% in the prior year period. Adjusted operating income of $13 million in the Full Service segment, increased $1 million over the prior year. Higher tuition, higher enrollment, tuition increases and improved operating leverage were largely muted by a $12 million reduction in support received from the ARPA government funding program over the prior year. As Stephen previewed, we are taking steps to rationalize our…

[Operator Instructions]. Our first question is from Andrew Steinerman with JPMorgan.

Stephen, you saw it in the United States this ARPA funding stated that the industry really kind of outside of Bright Horizons might struggle and there might be an opportunity for increased M&A or just winning new clients. Now that ARPA has faded, what are you seeing in the broader industry in terms of the kind of the after effect?

Thanks for the question, Andrew. So as we stated, the ARPA funding ended at the end of September. And so we had always indicated that we felt that the effects of that would transpire over 2024 and into 2025. Competitors, specifically in our industry, tend to be individual owner operators. They are very vocationally minded and they ultimately will focus on families. They'll focus on their teachers and may do things that are uneconomic for some period of time. I think at this point, given that the funding isn't available, many of them are making decisions around pricing to try to capture some of the decrement that they're seeing in their economics. Others are looking at reducing their discounting that they're doing through the COVID period. And then others are looking at their wages and trying to figure out what they can do structurally to reduce wages. So I think we're still in the early innings of the effects that we are possibly going to see from the elimination of the ARPA funding. And so there are isolated examples where owner operators are turning in the keys or deciding to be acquired. But I think at this point, it's still very early in that process, and we expect the effects to unfold over the next 12 to 18 months.

Our next question is from Stephanie Moore with Jefferies.

I was hoping you could touch a bit on your comment about footprint rationalization in 2024. I know in the quarter, you called about maybe making some changes in optimizing centers in the U.K. But as you just think of broad footprint rationalization. Maybe talk about your expectations in the U.S. and outside the U.S. and what we should be kind of thinking about as a total center count by year-end.

Sure. So I can start and see if I touch on the question and Stephen can add color. So 2024, as you say, we've called out a number of centers that we have circled up foreclosure in the U.K. and again, are keeping an eye on how the effects of the expanded funding environment in the U.K. may impact demand in certain areas, but that's the main rationalization that we see. Overall, we would expect to close globally a similar number to what we closed this year. So with a total of 49 centers overall this year, and we would expect to see that again in 2024. Openings averaged around 25, so 20 to 30 new center adds. So a net reduction in overall center footprint of net 25 down. So we ended the year at 1,049, so it would be just over -- around 1,025 at the end of the year.

Okay. And just as a follow-up on that. As you think about the cohort of your business in the centers that are kind of at that the lowest utilization level and certainly have made pretty meaningful progress year-over-year. But is there a potential to see maybe a more aggressive stance on some center rationalization just as you look at that lowest cohort or is that one aspect you could -- one lever you could pull to drive an improvement at that level? Or if not, what are the opportunities to drive enrollment improvement at that lowest cohort?

Yes. Again, I'll start and then Stephen can add color. The lowest cohort, as mentioned, is about 18% of the footprint on centers that have been opened more than -- the group that we've been talking about. And so with regard to there's closures, there's improving enrollment and there's really having an eye on some of the opportunities that we see as demand continues to rightsize. And as we are mindful of the impact of what Stephen was just talking about on the overall marketplace on centers that they close and our ability to take on enrollment from those centers that are contracting the supply, and also, as we continue to staff our centers and are able to take enrollment where demand has been persistently high. And we've been gated in taking all the enrollment demand that there is. That, along with the realization that -- we look at where we see the best intersection of supplier centers, the demand for our -- both our services, the client relationships that we have and the affordability of care and the density of children under the age of 5 and know that it takes a long time to cite a new center and to open a new center. And so we want to be careful about the rationalization timing and not get too far ahead of closing centers that are just actually need more time. And given the long lease life on some of centers, it's actually quite costly to close them, whether you're going to be waiting through this more challenging time in the interval.

Yes. And I think the only thing I would add is, going back to Andrew's question, I think there is still a bit to play out here in the United States as it relates to the competitive environment. And so we're watching that really closely on a micro market by micro market basis. And then as Elizabeth alluded to, in the U.K. the core challenge really stems from that. And so to the extent that we are able to make some progress as it relates to staffing and the costs associated with that staffing, I think we'll be able to potentially continue to see some progress of centers in the U.K. So I would just observe that some of it is about the macro environment as well as some of the competitive pressures that may ease over the next 12 to 18 months in both geographies.

Our next question is from George Tong with Goldman Sachs.

You talked about occupancy rates averaging 58% to 60% in the quarter. What occupancy rates are you assuming in your guidance for 2024? And if you could provide some perspectives by quarter that would be helpful too?

So sure George, I'll start off again. The overall, the enrollment as we look ahead to the Full Service growth for next year, it's mainly a price and enrollment expansion story. And so with price increases in the mid-single digits around that 5% range on average and enrollment also in the mid-single digits contributing to that top line growth rate offset by a bit of the headwind that would come from the closures we were just talking about, it's overall in that mid-single digits range. Of course, our highest performing centers that top cohort is already quite fully occupied. So there's not a lot more enrollment gain to be had there. It would be coming more generally from that middle cohort of 40% to 70% occupied or the real -- improve our opportunity in the 140% occupied group. So overall, that is what we are seeing from an enrollment growth standpoint. It would be 60% to 65% occupancy for the year. similar cadence to improving from Q1 is a growing quarter, Q2 is the tough quarter, Q3 is sort of the retrenchment of enrollment over the summer and then it would be pretty stable from Q3 to Q4. But that's the cadence and the cyclicality, but 60% to 65% is what we guide to.

Got it. That's helpful. And just as a follow-up, given the latest operating costs that you've been seeing with respect to labor and facility costs, what do you expect incremental margins to be for Full Service centers as enrollments continue to recover?

So we have a couple of factors, of course, coming into play with Full Service. I mentioned in the prepared remarks that the cessation, if you will, of the ARPA funding, so that's a $34 million headwind and all in the Full Service segment. We would be looking at operating margins to be in the low to mid-single digits overall for the year taking into account that ARPA -- sort of ex ARPA results that we will have in '24. And that is -- that's representative of the mix of centers that we have in the performance that top-performing cohort is back to our pre-COVID operating margin levels in that high single digits, 8% to 10%. They are certainly performing there as we had expected. The group that's in the middle, that 40% to 70% cohort has a bit more room to go, both with enrollment and because of the headwind that we see in the U.K., in particular, that's where a lot of the U.K. centers exists. They have a group that is in the bottom cohort, but a number of the centers are in that middle group as well. And so with the underperformance and the cost structure in the U.K., we would see more like a mid-single-digit plus in that group. And then, of course, the bottom cohort is not positive yet. At the end, they're 40% occupied. They need to be certainly over 40 and closer to 50% to be more profitable range. So overall, we would see that blending out to pencil out to the low to mid-single digits for the year, but with some good green shoots from both the top cohorts and just looking at the portfolio without the headwind that we see in the U.K.

Our next question is from Manav Patnaik with Barclays.

I just wanted to focus on Back-Up. So the 26% growth that you had this year. I was just hoping you could help just break that out by how much of that was new clients, the credit utilization phenomenon you talked about before? How much was it the addition of Steve & Kate's’ Camp and all these other services and acquisitions you've thrown in and just why you're guiding to such a big deceleration for '24?

Yes. So thanks, Manav. So certainly, we're excited about the 26% growth that we achieved in 2023. Look, this is a utilization-based service. So the vast majority in any given year of improvement is really from more use. And so that is both the combination of existing and new clients. But at the end of the day, the number of new clients as well as the fact that they take time to season in are really a small portion of that growth. Most of that growth comes from increasing usage among our clients that have been with us. I'd say the other piece of it is that the majority of the growth was from our traditional in-center and in-home use cases. Certainly, we saw a nice growth in the newer use cases, but that was not the majority of the growth. So really thinking about it as the installed base, growing use in traditional care types as the vast majority of the growth that we achieved. When we look out to 2024, first, just observing that we did 26% growth in '23, we did 17% growth in '22. So this is sort of a double year of increasingly difficult comps. And so we're mindful of that. And as I just said, as a utilization-based service, we're really focused on continuing to drive greater penetration of users and use, but we need to be mindful of continuing to build out supply ahead of the use as well as being mindful of the continued acceleration of client budgets that have occurred over the last several years. So that's where we land on a delivery of 10% to 12% growth in our Back-Up segment for '24.

Okay. Got it. And Elizabeth, maybe just on the margins, if you could help us how we should think about the margins of that growth or what the incremental margins are? I know you said you were going to keep kind of investing in that business, but any help there for the year would be nice.

And you're asking about Back-Up Care, is that what you said?

Yes, Back-Up Care, yes, correct.

Yes. So Back-Up Care, we would continue to expect a 25% to 30% EBIT margins similar to what you've seen us do. I think that's the balance of both the expanded use and then the fact that we are investing in both the systems and the user experience that much of that is baked into the cost structure. And then we have the third-party providers that we pay as the other direct costs. So we think we can sustain that level of 25% to 30%. In the Advisory business, it would be a little bit -- if there's more investment on that front in '24, so it would be closer to 20% operating margin we would expect for the year.

Our next question is from Josh Chan with UBS.

Maybe continuing the discussion on Back-Up Care. As you look out a couple of years, how sustainable do you feel like the double-digit type of growth rate is? And to what extent will the opportunity then be comprised of new clients as opposed to continuing to drive up the usage?

Yes. So we certainly see the opportunity to continue to drive 10% to 12% growth over many years. And a lot of that will continue to come from expanding the number of users and then ultimately expanding the use. I think something that certainly we will continue to do R&D around is continuing to broaden the number of use types as well -- use cases. So we really see it as something where we have the ability to continue to increase the penetration among the eligible lives along with continuing to broaden the number of use cases being a predominance of the growth. And then on top of that, obviously, there continues to be interest at the client level. So adding new clients over time is the other component to the growth algorithm.

Okay. And on the Full Service side, I think you called out the EBIT headwind from the U.K. in 2023. Is there a way to kind of ballpark how much that loss could potentially narrow based on the actions that you're contemplating for '24?

Yes. So we did call that out and it was around a $30 million -- was a loss at that level in 2023. So we would expect that to ease by $5 million to $10 million likely in 2024. So still not getting fully profitability, but making more headway in the back part of the year -- back half of the year against that objective and the view then, of course, is that we'd be looking into 2025 and beyond for really a full return to profitability across the Full Service portfolio back to kind of where we were pre-COVID in the high single digits.

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

I was hoping you could give a little bit more color on the $36 million impairment. And what assets are being impaired? Is this just underperforming centers? And I guess what's the rationale from being able to add back those expenses? I know you did it last year as well, but just wanted to understand it better.

Sure. So the impairment relates to centers and so this would be the right-of-use asset on -- from a lease standpoint and the ability to recover the lease obligation and then the leasehold improvements associated with centers that have -- either are slated to close. That's a good chunk of those that have been impaired, but also centers that having an operating performance and a cash flow generation that doesn't clear the sort of accounting convention of the long-term recovery of the right-of-use asset and improvements. And so from the standpoint of adding it back, I think our view is that it is a standout expense that is non -- it's recurring in the context of recovering from the pandemic. We have had some impairments over the last couple of years as we've continued to refine the book that we are operating and the portfolio as we see it evolving over the years of recovery, but it is certainly an outsized expense that is not predictable. And so feel like it is -- it's best to isolated so that people can see it and understand where it's coming from. One of the things to point out about, of course, it is an accounting convention, how this is determined and some of the challenge in a market, that we are in is to long-life assets with leases to estimate what you may be able to sublease the space for in an environment where landlords are being fairly sticky with their desire to negotiate. And so that certainly comes into play.

Got it. And for Ed Advisory, the last couple -- 2 quarters, the margins were down year-over-year. Is that related to technology investments that you've been making? And maybe if it is, if you could give some color on what technology investments you're making in that area?

Sure, Toni. So yes, so the quick answer is that we've been making investments in people, we've been making investments in technology. And we've called out the fact that this is an area that we are focused on transformation. It's going to be a multiyear transformation, and we believe that we are going to be able to deploy a similar playbook that we used for Back-Up Care in that we're going to invest in the product, we're going to invest in the technology, we're going to invest in the personalized marketing efforts. but really see quite a large opportunity in the concept of supporting our employer clients to upskill and reskill their employees and believe that we're particularly well positioned. So as Elizabeth stated, our expectation in 2024 is that we'll run at a 20% margin, and that represents a degradation in margin with a clear focus on investing in this particular segment.

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

I think you said something about expanding funding support in the U.K. I'm not sure if I got that right. But if I did, can you just give us a little bit more color on that?

Sure. So the U.K. has had -- has long had a funding support that is -- to parents. So it is called , that's an overstatement of what it is. But it generally provides 15 hours of care and has provided 15 hours of care and a supported tuition rate for 3- to 5-year olds. That was expanded or has been expanded now to encompass 2 year olds starting in April of this year, and then it will be further made available down to the infant age groups 9-month-old and above as the U.K. is looking to make childcare more affordable to families. And they have also expanded the funding for families that are in more economic strain. So some families are eligible for up to 30 hours, but general availability for 15 hours of care is supported for 38 weeks a year. And so what -- the upside of it is that it can help parents pay for 25%, 35% or so of the care that they may need. And so it has the opportunity to drive more demand for us. It is not a revenue enhancer per se because the funding is to support the parents' tuition, but it is an opportunity to drive more demand.

Okay. That's great. I know you've talked about this before, but just good to get more of the color. And then at a higher level, probably more in the U.S., but maybe this can apply globally as well. I know there's been some arguments back and forth in terms of working from home and the move back towards the office, how that impacts your business. It seems like more companies -- maybe they're not going back to 5 days a week, but 3 to 4 seems to be more of a push at least this year. Any impact on your business that you've seen or you think you're going to see?

So look, I think we have had sort of a really good flow of information from our client base, right? So we have quite a number of clients who have been sharing with us what their return to office plans have been over the last several years. It certainly feels like, as you pointed out, Jeff, that 3 to 4 days a week seems to be pretty standard at this point. And ultimately, we have always indicated that where someone is working the majority of the time is where they ultimately are going to want care for 5 days a week. And so on the margin, we have had stronger occupancy in our client-based centers actually over many quarters now because there is a real reason for our clients' employees to leverage the high-quality opportunity to use their on-site centers. And so ultimately, we feel good about the portfolio that we have and footprint that we have in this evolving landscape. But again, I think that in the same way that we always describe our business as sort of a longer arc kind of business. It's not that we saw or are seeing a significant increase based on this trend, but it is something that ultimately has upward positive benefit to it. Okay. Well, thank you all for joining us this evening, and have a great rest of the day.

Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.