KinderCare Learning Companies, Inc.

Following Paul and Tony's comments today, we will have a question and answer session. After market closed today, we released our financial results for the fourth quarter and full year 2024. You can find our earnings release and supplemental information in the investor relations section of our website at investors.kindercare.com. During this call, we will be discussing non-GAAP financial measures, the most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures, are available in our earnings release. Before we start the prepared remarks, note that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and involve a number of uncertainties and risks, including, but not limited to, those described in our earnings release and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statement. And with that, I'd like to turn the call over to our Chief Executive Officer, Paul Thompson.

Paul? Thank you, Olivia, and thank you to everyone joining us today. KinderCare had a strong fourth quarter, capping a successful and pivotal year, which included our initial public offering in early October and exceptional growth in the business throughout the year. Although we are already in late March, I'd be remiss if I didn't acknowledge and celebrate the tireless work our team members dedicated during 2024 to further our purpose, which is to build confidence in children, families, and in the future we share. Today, Tony and I will dive into our specific fourth quarter financials and provide color on the opportunities we see in 2025. Before that, I'll begin by emphasizing the following key drivers of our industry's long-term growth opportunities and KinderCare-specific competitive advantages. First, demand for quality early childhood education in the U.S. surpasses the supply that exists today. That has been a fact for years. We believe it will continue to be an issue into the future. We remain well-positioned to expand access to care for families who need high-quality childcare through our existing locations and through new centers and acquisitions. Second, KinderCare is by far the largest and most recognizable early childhood education provider in the US. At the end of 2024, we are 20% larger than the next closest provider. That said, the top five providers in the country only make up around 5% of the market. Clearly, there remains a massive opportunity for growth in a fragmented market where multiple players can be successful. Our 55 plus year track record of success combined with our unmatched scale is a massive competitive advantage. Scale allows us to invest in our centers and implement a proven curriculum that aids children's success. In addition, we continue to attract and retain high-quality teachers and staff through our competitive compensation, benefits, and opportunities for career advancement. Third, KinderCare provides a value to our nation well beyond our financial results. Whether it's a single parent working hard to raise and provide for their children, or one of the growing number of young American families with two working parents, KinderCare is leading the ECE industry as a critical enabler and support system for these families to remain in the workforce. We do this through the breadth and flexibility of our portfolio, with programs designed to serve families of all backgrounds and means. Beyond our core KinderCare brand, Kremp schools cater to the premium end of the market, and offer specialized enrichment programs. And our Champions platform provides critical before and after school care, as well as summer programs for school-aged children. We also support over 900 employers with customized childcare benefits meant to attract and retain employees. These benefits fit today's evolving work environment, whether that's in-office, hybrid, or 100% remote. We meet employers' needs by offering a breadth of solutions from on-site centers at workplaces or tuition benefits and backup care options. The flexibility KinderCare provides to meet families where they are is critical for parents trying to balance home and work schedules, all while knowing their children are learning in a safe educational environment. Now, we have received many questions centered on the new administration's stated goal to reduce spending within the federal budget. Based on our research and conversations with members of Congress from both sides of the aisle, We believe that broad support and funding for early childhood education will continue. Access to high quality child care is foundational to our nation's economy, and Congress continues to prioritize working families through robust investment in subsidy funds via the Child Care and Development Block Grant, CCDBG. This parent choice program provides families with direct tuition assistance through vouchers and has consistently grown over the past 20 years. with support from both Republican and Democratic administrations. Additionally, we've heard from lawmakers that expanding access to ECE programs remains a bipartisan priority to support working families and ensure employers have access to the workforce they need. Bringing all this together from an industry and competitive positioning perspective, we see even greater opportunities for long-term growth and shareholder value creation. Overall, TenderCare's purpose has never been more important. Turning to our business results, we had a strong fourth quarter. Total revenues grew 5% year over year, with approximately 1% of our growth fueled by acquisitions. We grew total adjusted EBITDA by 5%, driven by strong execution across multiple growth levers, from enrollment gains and continued tuition strength to new center openings and for both our B2B employer and champions programs. Next, the portfolio performed well on a same center basis, where we saw a 3% increase in revenue. As a reminder, same center includes early education centers that have been part of our company for at least 12 months. For clarity, this is the first quarter that our same center pool includes 41 cram centers acquired in 2022, but excludes which we report separately. We also had a strong fourth quarter with our champions business. Revenue grew 12%. driven by a mix of healthy growth in new sites and increased enrollment at existing sites. As our growth beyond the same center pool, we are executing against our expanding pipeline of opportunities. In the quarter, we signed agreements with 11 new employer clients, opened two new centers consisting of one community and one employer base, and acquired seven new community-based locations. The quarter capped another year of positive performance for KinderCare across all our key metrics, as revenue grew to $2.7 billion, up 6% from 2023. An adjusted EBITDA was $298 million, up 12% year-over-year. Same-center revenue increased 5% to $2.4 billion, while average weekly full-time enrollments were up slightly to $145,000. We continue to see steady demand for our centers given stretched supply across the U.S. We believe that macro dynamic paired with our differentiated offering and brand recognition led to continued strong tuition growth and occupancy expansion over the course of 2024. During this past year, we grew occupancy by 90 basis points to 69.8%. The performance was relatively broad based across the portfolio, and Tony will share additional disclosure on occupancy in a minute. Overall, we are pleased with the performance and expect our centers to accelerate occupancy over the long term as our operational initiatives gain momentum. We grew tuition rate by approximately 5% during the year and maintained a healthy spread above our wage growth, in line with our long-term target to continuously drive operating leverage. Concurrently, we continue to see high levels of teacher retention at our centers in 2024, which is a testament to our dedication of fostering a highly engaged work culture. Our passionate and talented teachers are the heart and soul of KinderCare, and we know that supporting their development and competence is crucial for continuity of care. This all leads to enhanced outcomes for children and overall performance of our centers. Many families continue to choose us for our focus on a safe environment and the positive benefits we have on their child's academic, social, and emotional development. Families appreciate the stability and flexibility that KinderCare provides. Some families enroll because of our expertise in helping them navigate and access subsidy funding. That subsidy funding represented about 35% of our total revenue for 2024. KinderCare also supports families in partnership with employers through our tuition benefit program. This program enables families to receive a discount to KinderCare through the agreement that we have negotiated with their employers. This represents 20% of our revenue in 2024. We are proud to offer this broad support to families and believe KinderCare's flexible mix of community and on-site centers is highly unique in the industry. This differentiated service offering allows KinderCare to help families and employers where many other providers cannot. Moving on to our 2024 portfolio highlights. We opened 77 incremental champion sites during 2024, and look forward to continuing that strong momentum in 2025. These additions grew our Champions portfolio by 8% over the year, and given our scale and capabilities, we see significant white space to continue growing our platforms at schools across the US. For the year, we added six new KinderCare for Employer locations and now have partnerships with over 900 employers around the country. We are a valued partner for employers given we have a variety of offerings designed to meet unique employee needs. One key aspect of these partnerships is how companies are able to support their employees and are increasingly likely to prioritize the needs of our young families, which we believe is a secular change in the U.S. It is a win for everyone involved and speaks to the importance of employment broadly in this country. Additionally, KinderCare opened six new community centers in the year, dispersed across areas of our footprint where we identified a need within the community and an opportunity for successful growth. In addition, we acquired 23 centers in diversified geographies across the U.S. Looking ahead, we have a robust pipeline of growth opportunities across the entire portfolio, including new employer-sponsored centers, new locations for CREM, and expanding our footprint into new U.S. geographies. We'll share these exciting updates with you as they occur over the next few quarters. As I close out my comments, I'd like to once again emphasize that we are extremely proud that 2024 marked the year of our successful IPO. Congratulations and thank you again to all of our KinderCare employees for your hard work that got us this important milestone. Your consistent dedication to our culture, our purpose, and most importantly to the families and children we serve inspires me each and every day. I'm excited to see what more we can do together in the years to come. With that, I'll turn the call over to Tony for a more detailed look at the fourth quarter and discussion on our outlook for 2025. Tony?

Thanks, Paul. I'll begin with a review of our fourth quarter where consolidated revenue came in at $647 million, a 5% increase from last year. Adjusted EBITDA was $66 million for the quarter and adjusted EPS was $0.09. Diving into the business, Our early education centers grew fourth-quarter revenue by 4% year-over-year to $593 million, driven by a healthy balance of enrollment expansion, tuition and growth, and new center contribution. The majority of the growth is attributed to same-center revenue, which is up 3% year-over-year. As Paul noted, our CREM centers are now included as part of our same-center population, and we see opportunity to grow this premium portion of our portfolio, both through conversions of existing KinderCare centers, as well as through tuck-in acquisitions and new center openings. Moving to Champions, year-over-year revenue expanded 12% in the fourth quarter, totaling $54 million. At year-end 2024, our sites totaled $1,025, an increase of 8% compared to a year ago. The business is very healthy, and the opportunity across the country's elementary schools remains attractive for Champions, especially given our expertise and ability to efficiently stand up a new location. Recall that Champion sites have a higher level of seasonality than our early education centers due to largely the pacing of each site's individual school calendar. So for modeling purposes and trend analysis, we suggest thinking about the business and its associated revenue on a rolling 12-month basis. During the quarter, we expanded the KLC portfolio with two new center openings, bringing the total ECE new center openings to 12 for 2024. Note that both our community-based and employer-based centers are included with our ECEC center count. In addition, we acquired seven centers in Q4, totaling 23 for the year. As I mentioned, our fourth quarter adjusted EBITDA was 66 million, growing by 5%. Our adjusted EBITDA margin for the quarter was 10%, which is flat year over year. Moving to operating expenses, our comparable cost of services, which excludes pandemic-related stimulus, increased 3% in the fourth quarter compared to last year and reflects an increase in teacher salaries as well as our new center growth. Moving to G&A, note that we now incur public company costs and would reiterate our message from the IPO that we believe these largely fixed expenses will decline as a percentage of revenue over time. Our interest expense of $51 million partially reflects the impact from the use of IPO proceeds to pay down existing debt. In conjunction with the debt pay down, we also achieved favorable repricing of our remaining first lien debt to drive further reduction in interest-related expenses and support additional cash flow. In 2024, we made strong progress on occupancy across the portfolio, especially in lower performing centers. Quintile 4 and 5 improved occupancy on average by approximately 310 basis points over the year. Our focus on engagement with teachers and center directors across the portfolio has continued to ramp since the end of the pandemic. To be clear, we see room for occupancy growth across all quintiles, which gives us confidence in our ability to drive long-term annual occupancy gains in line with our target of 1 to 2%. In the supplemental slides available on our website, we have provided quintile occupancy detail on our Early Education Center portfolio, giving you the exact way in which we think about our centers. This level of disclosure was part of our IPO prospectus and it is our plan to provide this update on an annual basis. Before moving to guidance, I'll provide an update on KinderCare's balance sheet and capital allocation strategy. As we mentioned last quarter, our post-IPO use of proceeds was to deleverage the company, which at year end, has net debt to adjusted EBITDA of 2.9 times, well in line with our plans, and below our expected post-IPO leverage of 3.3. At year end, our net debt totaled $864 million, down significantly from the $1.38 billion at the start of Q4. I'll pause here to note that in early February of this year and subsequent to year end, we increased our line on our revolving credit facility by $22.5 million to enhance our ability to further support our growth strategies. That said, We believe that as we grow, leverage will continue to stay around our long-term target of 2.5 to 3 times. Our capital allocation approach will be to continue to fund new center openings, conversions, and tuck-in acquisitions through free cash flow. We believe this is the most attractive return on invested capital. At the same time, we also expect to naturally deleverage the company through our expanding profitability. As we noted during the IPO, we believe the compounding free cash flow embedded in our model will drive an expanding value creation flywheel and allow for additional M&A and shareholder return opportunities in the future. Finally, we'll conclude the prepared remarks with our outlook for 2025, starting with our guidance for revenue, adjusted EBITDA, and adjusted EPS. We expect revenue to range from $2.75 to $2.85 billion, which represents growth of 3% to 7% over the prior year and is consistent with our long-term growth algorithm. We are guiding adjusted EBITDA on a range of $310 to $325 million for 2025, or a 4% to 9% increase from 2024, which is driven by continued growth, cost controls, and expanding scale on our overall G&A. Adjusted EPS is expected to end the year between $0.75 and $0.85 and increase to $0.40 at the midpoint versus last year. Keep in mind that for modeling purposes, the 2025 outlook includes a 53rd week, which should contribute 45 to 50 million of revenue and 10 to 12 million of adjusted EBITDA. In line with our growth algorithm and the associated evergreen targets, we expect growth to continue to be multidimensional across both organic and inorganic drivers. For the full year of 2025, we expect occupancy to be relatively flat year over year. As we manage our portfolio, note that we can flex our capabilities, serving different age groups to meet local demand where it's most needed, and in addition, putting special focus on our lowest occupancy centers. Tuition for the year will land toward the low end of our 3% to 5% long-term growth target. A mix of stable hiring trends and taking price in selective markets will allow us to maintain our spread between tuition and wages. Even more important, we see our high retention rates among teachers continuing through 2025, specifically with our tenured teachers who have been with us for over a year, which will provide further continuity in our centers and sites. Moving to our B2B and champions pipelines, they are strong and ramping. We expect revenue contribution from these centers and sites to contribute 1 to 2% of our consolidated revenue growth in 2025. Our new center community pipeline for early education centers has us on pace to open 10 to 15 centers by the end of 2025. In aggregate, we expect growth from the pipeline initiatives to contribute approximately 1% of revenue at the lower end of the range. Previously, we've mentioned that we made decisions in the year following COVID to slow our development pipeline. We have a strong pipeline of centers in development, and as this continues to ramp up, we will be within our 1 to 2% long-term growth algorithm. Due to the nature of acquisitions, we will not be guiding on volume of tuck-ins for 2025. However, we do have visibility into a strong pipeline and continue to anticipate contribution to our growth algorithm of 1 to 2%. As a reminder, the revenue contribution for additions to our portfolio will vary based on whether they are Greenfield NCOs or tuck-in acquisitions. Closures continue to be a portfolio management tool. It's important to note that we view these actions as consolidations because we make every effort to support those families and our teachers at nearby sister centers. Finally, we see adjusted EBITDA margin improvement through our spread between tuition and expenses and continued leveraging our GNA to efficiently support operations and growth initiatives. To summarize and echo Paul's commentary, the overall industry dynamics continue to be favorable for us due to our broad and diversified offerings to families and employers, and KinderCare has significant competitive advantages to drive meaningful growth because of this positioning. As a management team and organization, we're excited to execute our growth initiatives for 2025. With that, I'll turn the call over to the operator for your questions.