Bright Horizons Family Solutions Inc.

Greetings and welcome to the first quarter 2020 earnings release conference call. At this time, all participants earn a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator or technical assistance during the conference, please press star zero on your telephone keypad. 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 Bolin, 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 referred 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 community's 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 that 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 74 cents, 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, nine of which were organic, including client centers for Fifth Third Bank and Verily Life, a subsidiary of Alphabet, and a second center for Pioneer Natural Resources. Our backup pair business also started off exceptionally well, running high team growth in the first part of the quarter with over 50 client launches, including Anheuser-Busch, E-Trade, Micron, and Fifth Third, who launched Backup Care in connection with its new center opening. And we also added to our educational advisory client base during the quarter, launching services for DaVita, TI Craft, and Gilead. But the strong momentum from fourth quarter 2019 and the early part of Q1 2020 was interrupted by the outbreak of COVID-19 in each of the key geographies in which we operate, the U.S., the U.K., and the Netherlands. While governments and health authorities across these three geographies ordered the closure of all non-essential businesses, our childcare services have been deemed critical to support essential frontline employees, such as first responders, researchers, healthcare and medical professionals, who are leading the fight against COVID-19. So in mid-March, in order to best support our clients, families, and staff, we began to temporarily close a significant portion of our centers. and to concentrate our resources on healthcare and other essential client centers, as well as critical hub centers to support the children of medical and other essential workers. Before I get into the current state of our operations, let me frame my comments by observing that we have weathered many economic cycles over Bright Horizon's 30-plus year history, driven by our value proposition in high-quality services, underpinned by a culture of caring and service. We also have a number of structural advantages driven by our employer-sponsored model in the U.S., significant government support outside the U.S., as well as the diversity of our service offerings. Our employer-sponsored cost-plus centers operate with no financial risk. Our employer-sponsored bottom-line centers bear no occupancy costs. And our lease consortium centers benefit from the support of various employers through backup use and other subsidies. The backup and ed advisory segments have continued the growth that they've seen in recent quarters, and with their strong operating margins and cash generation, provide additional support and stability to the overall business. So getting to the specifics. Today, approximately 250 of our nearly 1,100 centers globally remain open. The safety and well-being of our staff and the children in our care have always been and continue to be our first priority. We closely monitor guidance from the CDC and local health authorities and take direction from medical experts, including a direct relationship with a leading physician at Boston Children's Hospital. We have enhanced many of our existing practices and implemented new protocols, including social distancing procedures for pickup and drop-off, daily health checks for staff and children, the use of face masks by all Bright Horizon staff, limited group sizes for older children, and enhanced hygiene and cleaning practices. In the U.S., approximately 150 of our 718 centers remain open to essential workforces. Our early childhood professionals are enabling medical staff to treat patients at leading hospital systems, including New York Presbyterian, Johns Hopkins Medical, and Mayo Clinic. They are also supporting essential employees at leading organizations such as SC Johnson, Union Pacific, and Cummins Engine. I'm also pleased with our partnership with First Responders First, a collaboration between Arianna Huffington's Thrive Global, the Harvard School of Public Health, and the Creative Artists Association to provide vital childcare in communities that have been hit particularly hard by the virus such as Chicago, Detroit, Seattle, and DC. We also continue to do important work with our families enrolled at centers that are currently closed. Our educators have created an online platform where children are able to stay connected to the other children in their class and access a variety of teacher videos made to continue the science, art, and reading curriculum while at home. In addition to facilitating virtual activities, We offer weekly webinars on key topics and center director newsletters to keep families informed and up to date. Each of these are valuable ways for everyone in our community to stay connected, and these engagement activities will certainly aid in our reopening process. As we plan for the reopening of our centers across the U.S., we are following federal, state, and local guidelines related to shelter-at-home mandates. As such, we are not setting a single reopening date. Instead, we are engaging our client partners in discussions about their plans and the supports they are seeking for their employees. Likewise, we will make decisions about reopening our leaks consortium centers in collaboration with client partners, as well as insights gained through pulse surveys of enrolled and prospective families. We have been encouraged by the discussions with clients and early indications from parents about their interest in our reopening of their centers. We believe that the expertise that we have demonstrated in operating childcare under COVID-19 protocols will not only allow us to open more safely and quickly, but also to provide the critical reassurance that clients and returning families desire. Turning now to the UK, approximately 35 of our 313 centers remain open to serve those children of workers critical to the coronavirus response. Similar to the US, we are continuously monitoring guidance from the UK health authorities and currently anticipate a rolling reopening which will track the lifting of shelter-in-place mandates. In the Netherlands, where we continue to operate approximately 60 centers, we have seen the most government support and therefore limited disruption. Since the outbreak, our centers have been serving only parents working in critical professions. But starting next week, we expect they will reopen to all children and families. This is in line with the Dutch government's updated guidance to begin reopening the economy, starting with schools and childcare centers. Let me now move to backup care, which has been a particular bright spot during this crisis. As you might recall, we finished 2019 with strong momentum in the use of our backup care services, and we saw those trends continue into 2020. As the pandemic spread during March and the need for child care supports became even more acute for both essential workers and for families affected by school closures, we experienced significant increases in demand from both current and new clients. In particular, we've seen increased demand for in-home care and reimbursements for self-sourced care. Our sales, operations, and technology teams have worked tirelessly to meet the surge in care requests and we continue to marshal resources, including additional investments in automation. As we approach the summer months, we expect to see continued need for in-home care, increasing demand at our own centers as they reopen, and for summer enrichment care that we will operate along with partners. Looking further out, the increase in registered users that we have served during this crisis represent a new and larger population to whom we will market and ultimately hope to serve through traditional backup care. Our Ed Advisory business has also continued to deliver solid results. Employers remain committed to education programs, and participation by their employees continues to track expectations. For those clients that have furloughed employees, we have introduced a special program, Education Boost, which is a cost-effective, self-paced option for impacted employees to start or continue their educational pursuits. We have also seen increased interest in discussing our student loan repayment program given the tax incentive created by the CARES Act. As we play a critical role in supporting working families during this pandemic, we at the same time have been forced to take difficult measures to ensure the financial health of the organization today and over the long term. We are making these hard decisions consistent with our employee-centric culture and our commitment to keeping the well-being of our employees and staff members at the forefront. Although we temporarily furloughed more than 22,000 of our teachers and support staff in connection with center closures, we have ensured that these team members had transition pay, continued health care coverage, and access to ongoing education benefits, such as education boosts. the Ed Advisory Program, which I just mentioned. We have taken a number of additional steps to strengthen our financial position and to preserve cash and liquidity. We've reduced discretionary spending and support costs, and have focused our investments to prioritize the most critical operating areas, and have suspended our share repurchase program. I have elected to forego my salary, and our executive team and board of directors have also agreed to reductions in compensation until the majority of our centers reopen. Following the quarter's close, we amended and expanded our evolving credit facility to $385 million and raised $250 million through an equity investment from a long-term, well-respected institutional investor. This set of actions ensure that we are on solid footing as the economy begins to restart and recover, and that we are well-positioned to proactively take steps to re-accelerate our own growth and performance. Before I turn the call over to Elizabeth, I want to say that I'm honored that Bright Horizons continues to make a difference in the fight against COVID-19. And I want to extend a special thanks to those Bright Horizons employees across the world who are working tirelessly, as well as to our loyal team members who are currently on furlough. Bright Horizons has been and will always be about our people. And it is the passion and expertise of each and every employee that allows us to collectively impact the lives of children, families, and adult learners that we have the privilege to serve through our employer clients. So in summary, I remain very optimistic despite the difficulties presented by COVID-19. These challenging times highlight the best of Bright Horizons, our vital role in the business continuity plans of our client partners, the value that our unique service offering provides to families and clients we serve, and our ability to effectively operate during a crisis. While we are not providing 2020 revenue or earnings guidance at this time, given uncertainty around the duration and scope of the ongoing disruption, we draw great strength and stability from the financial contributions of our backup and ed advisory services as well as employer support of our centers. It is devastating to consider that a vast number of childcare centers may never reopen as a result of the financial hardship created by this pandemic. But for all the reasons I have described, we are confident in our ability to not only reopen, but to find future growth opportunities in a post-pandemic environment. We have a strong balance sheet, and even more importantly, the agility and ingenuity that has been demonstrated over the last eight weeks and throughout our history to emerge from this current disruption stronger and more resilient than ever before.