Bright Horizons Family Solutions Inc.

Greetings and welcome to the Bright Horizons Family Solutions first quarter 2023 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator 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. Please go ahead.

Thanks, Stacey, and welcome to Bright Horizons' first quarter earnings call.

Before we begin, please note that today's call is being webcast, and a 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 inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2022 Form 10-K and other SEC filings. Any forward-looking statement speaks only out of the data which is made, and we undertake no obligation to update any forward-looking statements. We also further date 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. Joining me on today's call is our Chief Executive Officer, Stephen Kramer, and our Chief Financial Officer, Elizabeth Bowen. Stephen will start by reviewing our first quarter 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 has joined the call. I am very pleased with our performance in the first quarter. We delivered 20% year-over-year revenue growth with contributions from all of our segments. Our enrollment recovery continued to progress positively with notably strong performance in the U.S. and in our younger age groups. BackUp Care delivered another outstanding quarter, building on the momentum of 2022. Traditional use increased significantly year-over-year, and the start of the year saw a healthy set of new clients launching backup care. We are off to a solid start to the year and well on our way to delivering on our 2023 full-year guidance. Revenue in the quarter increased 20% to $554 million, with adjusted net income of $28 million and adjusted EPS of 49 cents. In our full-service chapter segment, revenue increased 22% in the first quarter to $430 million. We added six more organic centers, and from a utilization standpoint, our progress within the cohorts we discussed with you last quarter is also heartening. 35% of our centers are now in the top cohort, defined as above 70% occupancy. This is up from 25% in this cohort in Q4. And encouragingly, less than 20% of our centers are now under 40% occupied. Enrollment in centers open for more than one year increased at a mid-single-digit rate this past quarter. Focusing on the US, year-over-year enrollment increased 9% in these like centers, and we continue to see improvements across all age groups and model types. Specifically, we saw low double-digit growth in the infant and toddler age groups, and mid-single-digit growth in our preschool programs. We saw good consistency across center model types, realizing just over 10% growth in our lease consortium centers and high single-digit growth in our client centers. Consumer, energy, and tech again showed the fastest enrollment growth, while our higher ed, healthcare, and industrial clients continue to show the highest overall occupancy levels. Staffing remains a constraint to our full enrollment potential in many areas across the U.S., but we do continue to make incremental progress on the labor front. Staffing levels increase through the quarter as the expanded compensation investments we made last fall, along with the initiatives to streamline the recruitment and onboarding processes, continue to drive improvement in staff retention, applications, and hires. In the UK, enrollment growth has trailed the U.S. recovery as staffing challenges constrain our ability to serve all families seeking care. The UK has seen more acute and persistent hiring gaps, which we expect will continue to challenge enrollment and operating performance for the remainder of the year. In the Netherlands, as we have talked about on previous calls, performance has been more consistent and contributory through the pandemic. Let me now turn to backup care. which kicked off 2023 with an exciting start. Revenue increased 19% over the prior year to $96 million, outpacing our expectations in the first quarter. We also continued to expand our client base with Q1 launches for Equifax, Lowe's Hotels, and The Ohio State University, to name a few. Traditional use again grew significantly year over year in Q1, We saw solid use growth in our Bright Horizon centers, extended network centers, and in-home care, as well as in our newer academic tutoring and pet care offerings. Unique users showed strong growth as more employees took advantage of the expanding menu of offerings within the backup care benefit. I remain very excited about the opportunity in the backup care segment as we work to leverage our technology and marketing investments, innovative care types, and our ongoing success in adding new clients. Moving on to our education advisory business, which delivered revenue growth of 6% to $27 million. We launched a number of new clients for Ed Assist and College Coach this quarter, including Arrow Electronics, Bank of New York Mellon, and Raytheon. We also saw a number of clients launch or expand their no-cost and direct-bill certificate and degree programs in Q1. These programs, which saw strong growth in 2022, reduced the barriers to education and increased the overall participation in their employers' workforce education programs. I remain optimistic about our opportunity across Education Advisory, given our breadth of our client footprint, the strong underlying employer need for upskilling and reskilling, and the continued demand for college admission and financial aid supports. Before I wrap up, I want to take this opportunity to reflect on this year's Senior Leadership Forum. This conference brings together our top 100 field and corporate leaders to collaborate and explore opportunities for long-term growth. This year, we focused on four of our strategic assets, our global footprint, our trusted brand, our extensive client base, and our central focus on families and learners. It was a very energizing few days fed with this talented team and a great opportunity to welcome some new leaders to this strategic planning process while harnessing the unique perspective of our many long-tenured leaders. In closing, I am pleased with the strong start to 2023 as the key metrics of our business strengthen. Full-service center enrollment, backup care use, and ed advisory participate use. While the global environment still has its challenges, I am encouraged by the ways our teams have adapted to employer-client needs and expectations, while at the same time continuing to deliver the highest quality care and education to our families and learners. We are reaffirming our 2023 full-year guidance. Specifically, revenue growth of 14 to 19 percent to 2.3 to 2.4 billion and adjusted EPS of $2.80 to $3 per share. The Q1 performance is a solid foundation to accomplish the goals we set for 2023. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook.

Thank you, Stephen, and hello to everyone who's joined the call. To recap the first quarter, overall revenue increased 20% to $554 million, Adjusted operating income of 37 million, or 7% of revenue, increased 18% over Q1 of 22, while adjusted EBITDA of 70 million, or 13% of revenue, increased 11% over the prior year. We added six new centers and permanently closed eight centers in the quarter, ending at March 31st with 1,076 centers. To break this down a bit further, Full service revenue increased $76 million to $430 million in Q1, or 22% over the prior year, ahead of our expectations for a 15% to 20% increase. Organic constant currency revenue grew approximately 14%, driven by increased enrollment and pricing, while acquisitions added 10%, or $34 million, to revenue in the quarter. The foreign exchange headwind comparing Q1 of this year to Q1 of last year, was in line with our expectation of 3% year-over-year. Enrollments in our centers open for more than one year increased mid-single digits across the portfolio. As Steven mentioned, U.S. enrollment grew 9%, while our European operations were up only nominally. While average occupancy levels remain in the 65% to 60% range in Q1, They did step up sequentially from Q4 of 22 and in each of the months during Q1. Adjusted operating income of $10 million in the full service segment increased $3 million in Q1. The year-over-year improvement was driven by higher enrollment, the effect of tuition increases, and improving cost efficiency. partially offsetting the earnings group with the year-over-year impact of the teacher compensation investments we made in the fall of 2022, as well as the continued outside spend in our international operations on agency staffing and, to a lesser extent, energy costs. Additionally, support received from the ARPA government funding program was higher than we expected in Q1, We had projected that the $30 million of ARPA funding estimated for the full year 2023 would come in more evenly across Q1 to Q3. However, we received $15 million in support in P&L centers in Q1. This was roughly $7 million more than we had anticipated for the quarter, but was also roughly $3 million less than last year. As a reminder, the ARPA program is set to expire on September 30th of this year, and funding disbursements have been tapering over the last couple of months. We estimate the remaining $15 million that we expect to receive will be split roughly evenly between Q2 and Q3. Turning to backup care, revenue grew 19% in the first quarter to $96 million. ahead of our expectations for 12% to 15% growth. As Steven mentioned, we were pleased with the volume and breadth of use growth through the quarter, and we attribute some of the higher than expected use to employees utilizing their baskets earlier in the calendar year than we had expected. Operating income of $22 million was 22.5% of revenue in line with our expectations for the quarter. Our educational advising group reported revenue growth of 6% to $27 million on expanded use of our workforce education and college admissions advising services, as well as from contributions from youth clients who launched. Turning to a couple of the other items in the P&L and balance sheet, interest expense totaled $11.5 million in the first quarter of 23, excluding the $1.5 million per quarter that relates to the deferred purchase price on our acquisition of Only About Children. This represents an increase of $4.5 million over 2022 on overall increased borrowings and higher interest rates. The structural tax rate on our adjusted net income also increased to 28%, a 220 basis point uplift over Q1 of 22. As it relates to the balance sheet and cash flow, For the quarter, we generated $67 million in cash from operations compared to $59 million in Q1 of 22. We made fixed asset investments and acquisitions totaling $19 million compared to the $12 million we spent in Q1 of last year. And we also paid down $40 million outstanding on our revolving credit facility. We ended the quarter with $45 million in cash and reduced our leverage ratio to three times net debt to EBITDA. Moving on to our 2023 outlook. As Steven previewed, we are maintaining our 2023 full year guidance for revenue in a range of 2.3 to 2.4 billion and adjusted EPS in the range of $2.80 to $3 a share. In terms of segment revenue, we continue to expect full service to grow roughly 15 to 20%, backup care to grow 12 to 15% for the full year, and Ed Advisory to grow 10 to 15%. As we outlined last quarter, there are three discrete items affecting our reported margins and earnings growth rates in 2023, specifically related to the ARPA funding, interest expense, and our tax rate. We continue to expect those items to account for roughly 60 to 65 cents of headwinds to growth for the full year, and this reflects 30 million less in ARPA funding at P&L centers, 12 million more in interest expense, and a 200 basis point increase to the tax rate. In our more immediate timeframe, our outlook for Q2 is for revenue growth of 17% to 21%, with full-service revenue growth of 18% to 22%, backup of 15% to 18%, and Ed Advisory of 5% to 10%. We expect Q2 adjusted EPS to be in the range of $0.57 to $0.62. In terms of the discrete items I mentioned just above, we expect those items to account for roughly $0.17 to $0.19 of headwind to the growth for Q2 on a year-over-year basis. And this reflects $4 million more of interest expense 9 million less in government support from the ARPA program, and approximately 200 basis point higher tax rates. So with that, we are ready to go to Q&A. Thank you.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question comes from Andrew Slanerman with J.P. Morgan. Please go ahead.

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

Yeah, so as we talked about on the call, first quarter started off solidly with mid-single digits, and that's what we expect to see continue in Q2 and for the rest of the year.

What did you expect to step up in utilization in the kind of September timeframe?

Well, there's the seasonality that does occur in the third quarter, so there's a little bit of change that cycling that comes through as older preschoolers graduate. But other than that, we would expect the sequential performance to continue, yes.

Okay. Thank you very much.

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

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

Yeah, so as we outlined, the overall occupancy level in centers that have been open for more than a year is in the range of 55 to 60 percent, and it has stepped up from where we ended the year, Q4 of last year, and it's improved over Q1 of the prior year. So it's sequential improvement, year-over-year improvement. And so, you know, getting, obviously, if we're in 55 to 60% range and we're improving, we're getting closer to that 60% threshold, which we would be expecting to see by the end of the year. As it relates to the profitability of the centers, I think it is an important call-out that we're we're averaging a lot of variability in performance. And so we are really pleased to see that the centers that we, as a reminder, we isolated some cohorts of performance on the last couple of calls. And so in the group of centers that are operating at more than 70% occupied, so as a threshold, you mentioned getting back to pre-COVID levels, that 70% to 80% range is where we was targeted getting back to. In that group where about 25% of our centers were in that grouping at the end of last year and the last half of last year, now 35% of those centers are above 70% occupied. Good progress from the middle group, the group in the 40% to 70% range, continues to hold Teddy, some of those have moved into the top cohort, and we are making progress on the lowest performing group, which is under 40% enrolled. Those have been about 20% or so of the overall mix, and they are now less than 20% in the sort of mid to high teens of the overall group. And so those centers, that's just a little bit of framing for how the centers are performing. So going back to the centers that are the top performers, those that are above 70%, they are really on a pretty strong march to pre-COVID operating margins by the end of this year, really. In this group, those that are in the 40% to 70% occupied are improving. The occupancy level is improving and their margins are improving. Well, we would expect them to be back at pre-COVID levels in 2024, mid-2024, and they would need one more pricing cycle, and then the lower-performing group will be later than that. I expect it will be 2025 before that group is either back to that level and the overall mix is able to absorb that.

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

Yeah, so I think when we think about the progress that we're making from a staffing perspective, we're focused on continuing to see improvement on the net hire front And for us, that starts with retention. So I think we shared at the end of last year that we had returned to 2019 retention levels. What we would say is that in this first quarter, we have actually eclipsed that. So we are doing better from a retention standpoint than we saw even in 2019. In addition to that, we're seeing good job seekers and ultimately a nice uplift as it relates to applications. that again are driving towards new hires. And so the combination of better retention and new hires is helping us to get back to that cadence where we are going to approach pre-COVID levels of staffing. Again, when we think about what it's going to require, I think Elizabeth highlighted here in the US, we are definitely closer to getting back to what that pre-COVID enrollment and ultimately staffing looks like. And then in the UK, we are a bit further back on the curve, seeing more labor shortages.

Got it. Very helpful. Thank you.

Thank you. Next question, Manav Patnik with Barclays. Please go ahead.

Yeah, hi, good evening. I just want to, if you could just tell us how you're thinking about, just remind us of the seasonality, I guess, for the rest of the year. The question just being, you know, you obviously had a solid start to the year, you know, probably gives you a little more visibility, but just, you know, just curious why you didn't, you know, change the guidance accordingly.

Why we didn't change the guidance for the rest of the year? You mean in terms of the occupancy?

Yes.

Well, I'd say, Manav, I'll start and Elizabeth can add color, but the quarter, we saw enrollment step up sequentially in Q1. It was a little bit better than we had expected. As we think about seasonality for the rest of the year, we'd expect enrollment and occupancy to step up again sequentially into Q2. Going into the third quarter, we've talked about in the past, you saw last year we have these Older kids, preschool kids that cycle through and age up and out, and we backfill as many as we can, but occupancy and enrollment typically falls sequentially from 2Q to 3Q, and we would expect that this year. And then the fourth quarter is typically enrollment and occupancy is flat to slightly positive sequentially into 4Q. So that's how we entered the year, and that's kind of still how we see the year unfolding around enrollment and occupancy seasonality this year.

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

Yeah. So, you know, from a full service standpoint, I think the start of the year, those two and a half or so percent adjusted operating margin, we have some expectation for sequential improvement to that. Since it's low to mid single digits for the full year, it won't be a significant change, but progress quarter over quarter, and that's inclusive of some of the challenges that we talked about in the prepared remarks about the ARPA funding being about eight million less than Q1. That's a couple hundred basis points. And just this more challenging performance in the UK, as an example, we don't expect we'll be adding much momentum to the Q1 to Q2 performance. So improvement in bright spots in a number of places and seeing it sequentially improve, but that would be still in the low to mid single digits in Q2. The backup group continuing in the pace that we saw this quarter, 20% to 25% operating margin, and seeing that consistency because of the mix of use there that includes essentially by having more use that we're providing care for and paying provider fees that we would have the consistency of that 20 to 25% and improving margin as the second half comes along and that's what gets us to the 25 to 28% for the full year. And then in the end advising business, you know, carrying a pretty consistent operating margin in the mid to high teens.

All right. Thank you very much. Thank you.

Next question, Toni Kaplan with Morgan Stanley. Please go ahead.

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

And so you're talking about Q1's performance, Tony?

Yeah, yeah, thank you.

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

And I'll just add, we talked about a little bit in the prepared remarks, Tony, but the We saw faster growth in the younger age groups, the infant and toddlers in particular, and also our client centers were strong. And so that whole year-over-year and sequential growth in those two groups doesn't add as much on the margin side as you may otherwise see.

Yeah, I understand your challenge, but a good thing for the overall business.

Yep, yep. I wanted to ask my follow-up on sort of the pipeline of new centers, it sounds like. There were a couple of names that you mentioned signed this quarter, but just wanted to understand the pipeline now versus maybe a year ago or even a quarter ago, just any sort of reference points you can provide.

Sure. So, Tony, what I would say is the pipeline continues to strengthen. I think you would note that employer-sponsored care continues to have a lot of You think about the CARES Act, you think about the government and all of the talk around the importance of employers getting involved in child care. And then I think there has been certainly a renaissance or an awakening among employers that there is an increasing tightening in the market for their employees to be able to find care. So they're hearing it from their employees directly. So I think that from a pipeline perspective, we feel really good that there continues to be growth in the pipeline, especially in industries like healthcare and more industrial distribution, supply chain, manufacturing, those kinds of industries. What I would say is that certainly the process is a longer arc, as we've always talked about, so the decision-making does take time. It requires space and capital and a long-term commitment. But again, I think overall we feel good about where we sit from employer receptivity to employer-sponsored care.

Thanks a lot.

Thank you.

Thank you. Next question, Stephanie Moore with Jefferies. Please go ahead.

Good afternoon. This is Harold. I'm on for Stephanie Moore. Just wanted to get an update on the current pricing environment. So what are pricing expectations for this year, and have we received any pushback on pricing so far?

Yeah, so we have done most of our price increases as of the January cycling and have, on average, in the 6% to 7% range this year. We obviously have a fairly strong inflationary environment, and so we have been looking to balance the price the efforts that we have to get enrollment and keeping the care as affordable as possible for as many parents as possible while recognizing that we have seen a pretty substantial uptick in our own cost structure, particularly with the wage investments we've made. So we've taken a view that's local. That's an average, 67 percent, but we do vary that locally and have had, I think, good understanding receptivity. I don't know if anyone loves the price increase, but I think we've had pretty good reception from the parent base on those decisions. And I think that the opportunity is playing itself forward that I think also sets us up for and also a meaningful ability to have an increase next year that continues to allow us to make progress on the center economics. recovery to pre-COVID levels.

Thank you for the call. And then I guess another question would just be on, like, cross-sell, up-sell opportunities. So, like, how many of your full-service customers are also backup care customers or using AdAssist or the college coach? Thank you.

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

Yeah, and so I'd say I think it's a little, about a third, maybe a little more than a third of our full-service clients live by backup care. We have higher tax rates with, you know, backup care and full service as well, but that's where it stands currently.

Thank you.

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

Hey, Ryan on for Jeff. We've seen some headline proposals including the CHIPS Act requiring subsidies for child care and then some free child care proposals in the UK as well. While they're just proposals and I would assume it would take some time to shake out even if it were fast, can you parse through how these might impact your business?

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

Got it. And anything on the EPA proposals?

Okay. Oh. I think the new government in the UK is next year. I think that there will be a lot of conversations in the meantime about all the different proposals. It's hard to know exactly where they're going to land. I think the UK has for a long time been very focused on subsidy for the older children in our care. Broadly, the three- to five-year-olds have gotten good subsidies from the government, or parents have gotten good subsidies from the government. Whether that goes deeper in each group, whether the subsidies become more significant in nature is yet to be seen. But certainly there's a nice track record in the U.K., and it's one of the reasons why it's a great market for us long-term.

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

Yes, I think first I would start by saying, you know, since the pandemic, earliest in terms of our reopening in the pandemic. Our client centers have typically been more highly enrolled than our least consortium centers. And so the reality for us is that there is a real value proposition for families related to the onsite centers. And so we see scenarios where people are choosing to go back to work or go back to office, rather, because that is the place they think of as the place that they can get a high quality, affordable opportunity for their child to go to a center. In addition to that, we have examples where families actually drive, drop their children off at the childcare center at the workplace and then work from home on certain days. Generally what we find is in all of these cases, the onsite center is relatively proximate to where someone lives and works and so it's a really great option for them And so I think for us, we just continue to move the ball forward across all of our model types and making sure that we're delivering great value for those who we're caring for and continue to focus on the quality of our delivery.

Next question, Jeff Mueller with Baird. Please go ahead.

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

Well, I'll start, I guess, with maybe just a clarification. From the previous guidance on ARPA funding was $30 million for the year, of which eight would be in Q1, and we had $15 million in Q1. So that was $0.08 You know, we outperformed certainly the, you know, we're pleased with the earnings performance, but $0.08 of that against where we had guided from a range standpoint is attributable to the timing of the ARPA funding. So that really hasn't shifted the underlying fundamentals. That said, coming out of the quarter, you know, certainly a couple of cents of outperformance. We outperformed revenue, outperformed earnings. Some good indicators on both the backup use side and not on the enrollment trends. They are both, you know, the summer season is coming and it's an important one with, you know, some delivery, I think some more visibility into the delivery on the scale and consumption of aquafuse over the summer and on the conversion of enrollment, the comment came through, but we did have, you know, a little bit more cyclical seasonality than we had anticipated last year. We have a good mix coming into the summer with slightly more infants and toddlers than we had last year. And so we feel like we've got that visibility. But there are some uncertainties in the market still with the economy where it is. And I think we want to see continued progress, Jeff, against what we feel good about and appreciate you recognizing the opportunity that's there. But I think that's how we say we're looking at it as, you framed it right, it's optimistic, but there are some challenges ahead.

So Steven, I don't know if there's anything else you... Yeah, I mean, I think I would just underscore the, I think it was your middle point, Jeff, which is, you know, we are really pleased with the way the year started, right? So I think we shouldn't get lost in the detail around the fact that we are pleased with the way the year started. I think that we do want things to play forward. We do want to make sure that we're taking into consideration all of the positives as well as some of the headwinds that we outlined. I think we feel really good about the way enrollment's coming back. We feel really good about the way backup use came in and advisory is on plan. I would say that the UK is something that we called out on this call. It's something that is certainly on the challenging side. On the other hand, Within the total, I think that we were very capable of absorbing that this quarter, but want to make sure that we're not getting ahead of our skis and make sure that we're giving ourselves the appropriate amount of runway to have a really successful year. So I think reaffirming for the full year is something that we feel good about. We feel good about the quarter, and so appreciate your sort of upfront compliments. Awesome.

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

Well, as you can imagine, the visibility forward is reasonably good for two to three months. Parent interest generally is, you get the longest lead time with infants, and I think as it relates to the churn for summertime, it can vary, and I think that less Last summer, I think that our expectation around the age ups and the sort of infilling into the preschool rooms didn't hit the mark as it needed to. And so we do have a lot of eyes on this and vigilance. We are not only looking to monitor closely, but ensure that we are clear on where we have leavers so we can be filling those spaces with starters. And so I think that the when we will know how the fall churn actually plays out. When we're talking to you this time next quarter is when we will have reasonably good visibility for that. It can be kind of variable over the summer, but generally we have visibility a few months into the future.

Okay. Thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from Frisa Alwi with Deutsche Bank. Please go ahead.

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

Well, you know, I'd say for the year, we're talking about, you know, mid-single digit, you know, overall enrollment growth, you know, mid to high single digit or overall year-over-year enrollment growth. I'd say historically, you know, you wouldn't be looking at that normally, you know, in pre-COVID, you know, when our centers were mature and full, you'd be looking at more of a low single digit, three to four type 300% type year-over-year momo growth. Oh, no.

Across all the centers, including more centers ramping up. So full and mature centers would be growing more or less 1%.

Yes, it is. So it's certainly much better. We're rebuilding, and we're starting from 55% to 60% occupancy versus pre-COVID, you'd get that 70%, 80% range. So it's a lower starting point.

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

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

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

Yeah, our focus now is on revolver pay down. We ended the quarter with just over $40 million on the revolver, so we're focused on paying down the revolver. We've got really favorably priced debt, so I think it would be, you know, that would be not on the immediate term to pay down that very favorably priced debt. But we do have two things that you cite. One is just the ongoing, where is the capital allocation between now and the end of the year when the deferred payment for Australia is due at the end of the year. There aren't any criteria for it. It was simply an agreed deferral of timing of the payment. So that will be just over $100 million that will be due at the end of this year. And so we are building cash for that. And we are also making selective investments both in the existing business to refurbish and freshen up the center portfolio that we have and also to invest in new centers. We have a number of lease models that we are opening this year. We continue to look for quality acquisitions to round out our growth strategy. and so are executing on some of those this year. So there will be some capital deployment for that in the interval between now and the end of the year when we have the deferred payment due. But at this time, we're not looking at shared buybacks in the near term.

Excellent. Thank you so much.

Next question, Tom Singlehurst with Citi. Please go ahead.

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

Sure. Thank you. Thank you for the question. Yes. So just to clarify, the expectation is that come September, the ARPA program is going to sunset and the funding will have been distributed. So again, there are some programs that are in place, but again, much more focused as they historically have been on families that are most disadvantaged and providers that serve that constituent. What we would say is that we obviously have been very disciplined about pushing price and also really thinking about our center economics in a post-ARPA world. What we have seen in the marketplace is mixed as it relates to that. So I think there are a number of providers that have not prepared their cost structures and or their pricing strategy reflective of ARPA coming out of the market. And so we, as well as the market in general, believe that there is a potential for a second wave. We saw a wave of about 15% to 20% of centers who came out of the market early in COVID. There is an expectation that there may be another wave come the fall winter and into next year where providers just aren't able to cope with the price cost structure that they have against the tuitions that they charge and so two responses right one is that they could significantly increase their tuitions all at once with the hope of getting to a place that's more economic and then the second is that there may be some providers that simply decide that they either need to sell or or close, in which case there would be a contraction in the overall number of centers in the country. So I think what you implied in your question, and I'm saying directly, is that there is certainly going to be some level of right-sizing around pricing and or the number of centers that are able to ultimately work in the new environment come this fall, winter, and into next year.

That's very clear. Thank you very much. Thank you.

Okay. Well, thank you all very much for joining the call. Appreciate the thoughtful questions and wishing you all a good night.

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