KinderCare Learning Companies, Inc.

Welcome to KinderCare's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. It is now my pleasure to introduce Jason Terry, KinderCare's Director of Investor Relations. Mr. Terry, you may begin the conference.

Thank you, and good afternoon, everyone. Welcome to KinderCare's second quarter 2026 earnings call. Joining me from the company are Chief Executive Officer Tom Wyatt and Chief Financial Officer Tony Amandi. Following Tom and Tony's comments today, we will have a question and answer session. 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. and within the supplemental earnings presentation, both of which are posted on our investor relations website at investors.kindercare.com. A reminder 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 which are explained in detail in the risk factors section of our most recent annual report on Form 10-K and other filings with the SEC. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. The actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. All forward-looking statements are made as of today and, except as required by law, KinderCare undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise. I'll now turn the call over to our Chief Executive Officer, Tom Wyatt.

Thank you, Jason, and good afternoon, everyone. I'm pleased to share updates on our second quarter performance review today. We deliver results largely in line with expectations, along with a few bright spots Thank you for joining us today. and KinderCare for Employers. And our premium brand, the Crim School, continued building on the progress we've seen this year. Same center occupancy for the quarter was just under 69% and benefited from our optimization work. We're encouraged by the progress we're continuing to make and we know there's more work ahead. I'll begin with our flagship brand, KinderCare. Improving our enrollment trend within our largest brand is going to be the result of more consistent performance over time. The actions we took to enhance our targeted marketing are helping us connect with more prospective families. At the same time, we are simplifying the responsibilities of our center directors to give them more time to lead their centers, support their teachers, and engage with families in a meaningful way. Those day-to-day interactions are the heart of great family experiences, and over time, they help convert interest into enrollment and retain families longer. That's how operational improvements translate into better results. We put a renewed emphasis on our small group enrichment programs called Learning Adventures. These incremental programs expand learning in our classrooms in areas like phonics, STEM, and Spanish. Family Response continues to exceed our expectations as revenue from these programs has almost doubled from a year ago. We're expanding these offerings across more centers and into additional seasonal programming, giving families even more opportunities to extend their child's learning experience beyond our core curriculum, which we believe is a key differentiator. We're also investing thoughtfully to expand our geographic footprint where we see attractive long-term potential and strong demand for high-quality early education. During the quarter, we entered our 42nd state with a new center in Bentonville, Arkansas. We also opened a center in Ridgefield, Washington, a thriving community often described as a childcare desert. Both centers expand access to childcare where it's needed most. We're applying that same discipline approach to CRIM schools, our premium brand, Expanding into markets where we see growing demand. Just after the quarter ended, we opened the CRIM School at Great Park in Irvine, our first CRIM location in California. The school features modern learning environments, elevated amenities, and personalized educational experiences. This is an important milestone and expands CRIM into a large and very attractive market. We are pleased with enrollment in our summer camp programs at CRIM, where enrollment increased approximately 26% compared to last year. It's another encouraging sign that our repositioning efforts are gaining traction. As we grow this brand, we're focused on delivering differentiated educational experiences that families value. Turning to champions, we delivered another strong quarter of double-digit revenue growth, extending our streak to four consecutive quarters. That growth reflects both the addition of 85 net new sites since Q2 of last year and improved productivity across our existing sites. Summer programming at Champions is going well and reinforces our relationships with families and our school district partners. We're expanding into additional schools within our existing districts while bringing our before and after school programs to new districts. Within KinderCare for Employers, We're continuing to see organizations look to partner with us to meet their employees' child care needs. During the quarter, we welcome several new partners across a range of industries reflecting continued demand for our employer-sponsored child care solutions. It's an area of the business we're excited about, and we expect it to remain an important part of our growth strategy. We're also encouraged by the opportunity we see in tuition benefits. Our large national footprint gives us a clear advantage in offering childcare benefits to employers across 42 states. And we are able to connect more families with high quality care in the communities where they live and work. We believe that combination positions us well as employer demand for childcare solutions continues to grow. Our breadth and flexible platform allow us to partner with employers in a variety of ways. For example, We have supported public safety employees in Dallas by providing 24-hour childcare during the World Cup this past quarter. Just another example of how we can tailor our childcare solutions to meet the needs of employers and communities. Quickly touching on the policy environment, the overall direction has been encouraging. We continue to see steady bipartisan support at all levels as federal policy has remained supportive. and many states are expanding child care access. For instance, New York recently announced a massive investment of $1.7 billion into ECE programs. California announced it will add another $220 million toward 20,000 new mixed delivery child care spaces. And New Hampshire is creating a child care tax credit incentivizing employers to be a part of child care solutions. We applaud these leaders for listening to the needs of the working parents. As a national provider serving working families across the country, we're continually evaluating how we best serve them. That means expanding into growing communities like Bentonville, Ridgefield, and Irvine. It also means thoughtfully consolidating centers where demand has shifted. This is an important part of how we manage our presence across the country. As part of the ongoing evaluation of our center footprint, we've identified several consolidation opportunities that we believe will better align our centers with the communities we serve as families' needs and local demand for childcare have evolved over time. While the majority of our centers continue to perform well, some are no longer in the best locations to serve communities. As a result, we're consolidating those centers, and as of today, We are approximately two-thirds of the way through this work, including 49 center closures completed during the second quarter. Those centers represented about 3% of our total center footprint and were primarily from our fourth and fifth quintile and on average were below 37% occupied. These decisions are never easy and we evaluate every center individually. Our priority is minimizing disruption for families, teachers, and the communities we serve. And wherever possible, we help families and employees transition to nearby locations. We're encouraged that both family and employee retention have exceeded our expectations through this process. We believe that the result will be a center footprint that's better aligned with where our families live and work today, and it will allow us to focus our people, our resources, and investments where they can have the greatest impact for families. As we complete the remaining consolidations this year, you should expect some quarter-to-quarter variability in our financial results. We believe that's a responsible tradeoff because these actions will strengthen kidney care and better position us to serve families, continue investing in high-quality early education, and support long-term access to high-quality child care. Looking ahead, our priorities remain the same. We'll continue improving execution across the business. We will continue to invest where we see the greatest opportunities. And we will continue supporting our center teams so they can deliver the best possible experiences for our families. We're encouraged by the progress we're making, confident in the actions we're taking, and excited about the opportunities ahead. Tony will now provide more details on the financial results.

Thank you, Tom. I'll start with our Q2 results and then discuss our outlook for the remainder of the year. Second quarter revenue was $698 million, down slightly from $700 million the prior year. Enrollment pressure was partially offset by strong performance in Champions and contributions from KinderCare for Employers, Learning Adventures, and our newer centers. While current performance remains below prior year levels, the year-over-year gap has narrowed significantly and the underlying trend continues to improve. Overall, same-center revenue decreased by $14 million, or 2%. This was mainly driven by lower enrollment and $11 million impact from closures, $5 million of which was our footprint optimization work. Higher tuition rates and strong performance from centers newly included in the same-center cohort helped offset a portion of the enrollment headwind. Total enrollment declined by 4% year-over-year, reflecting both ongoing pressure and impact from our center consolidation action. Pricing contributed approximately 2.6% to ECE revenue during the quarter. While we see positive developments overall in subsidy reimbursement rates, we expect the benefit to remain modest through the current state budget cycle. The consolidations provided a 70 basis point benefit to same center occupancy for the quarter, which was 68.6% down 240 basis points from last year. Champions revenue in the second quarter increased 13% year-over-year driven by a mixture of new site openings and higher average revenue per site. Along with KinderCare for employers, these B2B businesses are broadening our revenue mix and supporting our overall growth strategy. We opened five new centers and acquired five new centers during the quarter. Kat's consideration for the acquisitions in Q2 was about a half million dollars, funded completely out of the $45 million in pre-cash flow generated in the quarter. New and acquired centers this year have contributed approximately $2.6 million in revenue year-to-date. As Tom mentioned, we closed 49 centers during the quarter and expect that number to reach 80 to 85 by the end of the year, with the majority of the remaining happening in the fourth quarter. on an estimated annualized basis, the optimization work would represent approximately a $57 million revenue headwind and an $8 million benefit to adjusted EBITDA. We estimate annual rent expense would decline by approximately $7 million and occupancy would improve by roughly 150 basis points once the work is fully completed. As we discussed earlier, you'll see some quarter-to-quarter variability in our financial results as we complete the remaining consolidations and we've reflected those expected impacts in our updated outlook for the remainder of the year. To help investors better understand the optimization work, we've included a supplemental slide summarizing the impacts of consolidations completed to date and our expectations for the remaining work this year. Continuing down the income statement, we reported a net loss of $8.8 million and reported a loss of $0.07 per share for the second quarter. Adjusted EBITDA was $63 million for the quarter, down from $82 million a year ago, reflecting the impact of lower occupancy on operating leverage. About $5 million of the decline was driven by adjustments to our insurance and legal reserves. Adjustment at income was $9.9 million, and adjusted EPS was $0.08, compared to $26 million and $0.22, respectively, in the prior year period. The quarter also included footprint optimization-related impacts, primarily impairment expense and accelerated depreciation, along with other transition costs, including about a half million in severance expense. While our optimization work has near-term financial impacts, we expect it to better align our center footprint and support stronger returns on capital over time. SG&A was 10.5% of revenue, down 76 basis points from last year. We remain focused on managing expenses while investing in the highest priorities. Interest expense was $18 million for the quarter, down from $20 million in the prior year, driven by our repricing last year. We expect to see favorable comparisons for the remainder of this year as well. Turning to the balance sheet, we ended this quarter with $174 million in cash and $188 million of available capacity under a revolving credit facility. Net debt to adjusted EBITDA is approximately three times. We expect modest increase in that ratio over the balance of the year as we complete the remaining consolidations and fund costs associated with exiting leases. Our balance sheet provides the flexibility to complete the remaining optimization work. Today, we have a line of sites for approximately 36 lease exits, representing approximately 20 to 25 million of expected lease exit payments. Those payments are reflected in our updated pre-cash flow outlook. The remaining leases are at varying states of negotiation, and their timing and ultimate resolution will vary by location. We'll continue to update investors as we gain additional visibility into the associated cash impacts, some of which may extend into 2027. Looking ahead, we are updating our full year outlook to reflect the expected impact of our footprint optimization work. For the full year, we now expect revenue between $2.66 and $2.7 billion, adjusted EBITDA between $200 and $220 million, and adjusted EPS between $0.05 and $0.15. Included in our updated outlook is approximately $8 million of incremental insurance related to our actuarial analysis on our workers' comp and general liability self-insurance. For our revenue growth assumptions, we are maintaining our occupancy to be down approximately 3% as reduced capacity from the optimization work partially offsets enrollment pressure. We now expect tuition contributions to revenue growth of approximately 2.5% for the year, primarily reflecting the slower pace of state subsidy reimbursement rate increases than we previously expected. We expect the revenue growth contributions from champions in B2B to be 1%, with new centers and acquisitions to both remain consistent at about 50 basis points each. Consolidations are now expected to represent about 1.5% headwind to revenue growth this year. We expect CapEx this year to be between $120 and $130 million. Free cash flow is expected to be less than $10 million, primarily reflecting elevated cash costs associated with the footprint optimization work. For modeling purposes, assume our effective tax rate to be 27% for the year. To provide better transparency as we move into the second half, we're providing an outlook for the third quarter. We expect revenue to be between $660 and $680 million and adjusted EBITDA to come in between $44 and $48 million. Occupancy for Q3 is expected to be in the mid-60s. We'll continue to provide updates on the financial impact of the remaining consolidations throughout the balance of this year. By completing this work in 2026, we expect to enter 2027 with a better line center footprint, improved occupancy trends, and a cost structure that better supports sustainable long-term growth. To wrap things up, our priorities for the second half are straightforward. We remain focused on discipline execution, completing our footprint optimization work, and investing in opportunities that matter most. We believe those actions will position as well as we enter 2027. Now, let's go ahead and open up the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeff Silver with BMO Capital Markets. Your line is open. Please go ahead.

Thanks so much. I'm just trying to get a little bit more color on the impact of the center closures. And forgive me, I came on the call late. If you hadn't, I guess, you know, done all these center closures, you know, what would have been the impact in terms of guidance going forward? Would it have been maintained, changed in any way? Any color you could give would be great.

We shared some information online in the presentation, so hopefully that will be helpful for you all, but I can go over a few things. So, in the quarter, it was about 70 basis points of impact to revenue. We anticipate, because you were asking more about guidance, 150 basis points of impact to occupancy. And so, obviously, that's having a positive impact of departing those centers. And we anticipate about $30 million of revenue decrease because of this closure of centers. So that's definitely weighing into our guidance, and that's the amount that kind of made the changes.

Okay, great. Were there any – I know there were other changes in guidance. Was there any other impact beyond the center closures in terms of your guidance change, whether it's tuition or subsidy impact?

Yeah, so, right, in our guide, we did reduce – Jeff, the one thing that we did change was going down to 2.5% on pricing. Okay. We're just not seeing some of the rate impact we thought we would start seeing from subsidy come through, and so that's why we brought that down from 3% to 2.5% for the back half of this year.

And is that something that you think will be delayed into next year, or is that kind of, you know, I guess a recurring item?

No, at this point, it's something that we're monitoring, and we do think it could impact the first half of next year, and so it's definitely something we're monitoring on the potential impact into the first half.

Okay, great. All right, I'll jump back in the queue.

Thanks for taking my questions.

Thanks, Jeff.

Your next question comes from the line of Jeff Mueller with Baird. Your line is open. Please go ahead.

Yeah, thank you. Just a similar question to Jeff's, but on the slide, I guess 10 in the deck, it says there's an adjusted EBITDA impact, negative 2 million in Q2 and negative 3 million I thought that you said there was like $8 million of benefit from these closures, so can you just help square that? And then on the EBITDA guidance, just any adjustments beyond kind of the closures, the $8 million of insurance headwinds, and then I don't know if there's any sort of like flow-through impact to EBITDA, presumably there is on the lower price yields.

Yeah, that's right. So on the $3 million that's on that slide, right, that is the direct impact we saw from closing those centers. So that is some severance that will come, right, on centers where we weren't able to move a center director or a teacher. We obviously would provide severance in that situation. And then as we turn keys back over outside of that kind of leases, There's occasionally some maintenance-type pickup things you need to do. Obviously, they're relatively minimal, but that's factored into that $3 million as well.

Was there an $8 million benefit that was referenced?

So, that would be the annualized benefit. So, that's something we see into the future of kind of seeing those centers depart our fleet and even now that they were pulling us down by going forward.

So there's only a partial benefit from that this year. That's right, Jeff.

Yep, that's right.

Okay, got it. And can you just comment on just the marketing initiatives and the enrollment growth in the Opportunity Region and just to what extent that progress is continuing?

Yeah, Jeff, it is continuing. The Opportunity Region is still performing well. I would tell you that the marketing that we began in the first quarter and it continues through the third quarter now. We actually added a few more million dollars to it going into back to school because all of the marketing, the target marketing we've done on paid search has put us in a position to increase year over year inquiry every single week. So we're really pleased with that. It's all about execution now, Jeff. We're waiting to see and are starting to see, as we've mentioned in the last call, we're starting to see some traction in partial centers where the clarity of their job, the lack of distractions, all the work that we did to simplify the role of center director is starting to pay off a bit.

Okay, thank you.

Yep. Your next question comes from the line of Faiza Alwi with Deutsche Bank. Your line is open. Please go ahead.

Yes, hi, thank you. So just to follow up on the closures, I think you said that there may be more costs in 2027, and that might be related to some of the cash costs. So can you just help us appreciate some of the impacts into 2027? Should we expect that $8 million benefit to come through in 2027, or would there be some lingering costs that's going to flow through the P&L?

Yeah, no, good question, Faiza. As far as direct impact to adjust the EBITDA, we would expect the benefits to start flowing through in 27. And as I related to Jeff's question earlier, even start to see that partially in the back half of this year. So we'll start to see those benefits. I did call out a $20 to $25 million number for continued cost foreclosures. That's right now our best estimate on cash costs. as we look to buy out of the right leases that we can buy out that are a great ROI for us to buy out of. So those would be one-time cash costs. And based on the general accounting principles on that, We would see those not hit EBITDA, but they would potentially a portion of that hit net income as we go through. So we're working on those as we speak today. We'd like to get those finished up as soon as possible, but I did allude to the fact that we just know with negotiations that some of that might flow into 27, but we're hoping to get it done as soon as we possibly can.

Got it. Got it. Understood. And then, Tom, just wanted to ask more about, you know, all of your efforts around strengthening the execution and the business. So where would you say, I know it's early days, but where would you say you are and what are some of the focus areas been for you right now? And what is there sort of are you at stage one? And is there a second stage that's to follow? And, you know, how should we think about the impact of all of your efforts and when that sort of starts helping enrollment in a more meaningful way?

Good question. Obviously, to turn 1,600 centers is going to take some time, although I can tell you that we have seen good progress in some of our centers that have eliminated a lot of that extracurricular distraction, if you will, more quickly than others. And so we see that in some of our centers. I would tell you that we're hoping to see some of that. Thank you. Thank you. Thank you. continue to invest where it makes sense in additional paid search, if you will, targeted marketing to continue that year-over-year increase in inquiry.

Great. Thank you so much.

You bet.

Your next call comes from the line of Manal Patnaik with Barclays. Your line is open. Please go ahead.

Hi, this is Ronan Kennedy. I'm from Manaus. Thank you for taking our questions. Previously discussed, you know, the quantiles, the opportunity regions, remediation efforts, and now obviously an acceleration of center consolidations. Can you just walk through again the specific criteria used to evaluate a center and determine whether it receives investment, is remediated, consolidated, closed? I know I think you talked about 37% occupancy level. Is there anything else from an enrollment trend, local supply, demand dynamics, labor availability, pricing, anything else? If you could just walk us through that thought process.

Yeah, of course. Let me make sense of where you're going. I mean, look, as we looked at the fleet, we went through, we talked about this back in March, but we went through one by one and looked at every single one for, frankly, most of the things you're talking about there, right? The biggest one that we're really looking at is We have a pretty good feel on when we're building a new center, when we're acquiring a center, what we expect to have success with as far as demographics go. And there's a number of demographics to go into there. And so we took a peek at that and qualified our portfolio against those same ones. That got a much smaller subset of the centers that are like, we need to take a deeper dive on those. And at that point, we weren't looking at anything else. We weren't looking at financial results. We weren't looking at engagement or anything there. From there, then we took it and looked at each one of those things. So to your point, we're looking at what our inquiry level has been and what are the demographics looking at? What's the engagement level in the center? Where has it historically been? Where has it financially been trending? Frankly, you brought up labor. Labor is really not an issue almost anywhere. It's a day-to-day battle, but it's not something that's preventing us from growing ever. But really looked at all those individually and made some decisions center by center on what we needed to do. and then we're always looking at the kind of that drive time map of it's usually 10 to 15 minutes and so we are all we were looking at is there any sister centers within that 10 to 15 minutes for any of those centers that we flagged that might make sense to do what we call a magnet center and be able to serve those families at a magnet center and so that was definitely a consideration as well.

You indicated about the two-thirds of the optimization effort is done. Is there a possibility for more to be done post FY26? Because, say, there are centers with similar characteristics, but you think they could potentially improve, et cetera. Is there any risk of still further remediation consolidation next year?

Yeah, I mean, look, here's what I think. We historically, I think since 2014 at least, have always looked to close centers. We're running this business like a multi-location business while also making sure we're taking great care of our families and our teachers. But every year, we're constantly looking at that. So I would anticipate we're still going to close more centers next year, and so we will still keep our pulse on that, and we're going to continue to see closures, much like we have in the past as well.

Thank you, and if I may, I'll ask another one. Can I just please reconfirm if there's a, so to speak, clean enrollment trend? If you can comment to that and the inquiry and conversion, you know, anything of note from an enrollment standpoint for the retained portfolio?

Yeah, so, right, we talked about that the quarter was down 240 basis points, and the closures had about a 70 basis point impact, right? So, we're still right around that, down 3%, kind of as clean as you can get it, if you will.

Okay, thank you.

Of course. Your next question comes from the line of Tony Kaplan with Morgan Stanley. Your line is open. Please go ahead.

Thanks so much. I wanted to ask about the tuition reduction in the guide. I think you talked about it being related to state subsidies. Is that a timing issue or could you just maybe explain what's going on there?

Is it timing, Tony? I don't think I would necessarily classify it as timing, right? So as we go into the year and then go, you know, when we talk to you back in May, we have certain expectations where state budgets are going to land and what they're going to do about it. It's still not 100% clear to us what all the states are going to do as far as tuition increases related to subsidy. But at this point, based on what we know, we believe it's not going to come in quite as high as we were expecting it to in the first half of the year. Now, to your timing question, there is a potential that states make some different decisions, and we do get some more monies related to that later in the year, and we'll update it as we go. But based on what we know today with our connections and knowing what the governments are thinking, that's why we chose to reduce that related to subsidy revenue.

Tony, the only thing I would say is, as you know, we've sort of reversed the trend in Indiana, which penalized us last year, and we're seeing solid growth in Indiana at this point in time. And also, you heard us talk on the prepared remarks, both New York's $1.7 billion infusion and the $200 million in California on mixed delivery, as well as tax incentives in New Hampshire. All of our wind in our back. So we may gain it in one place and lose it in the other, but all in all, this year has been a lot more stable than was last year.

Understood. And I wanted to ask about when you think about the back-to-school environment right now and the strategies that you're deploying, you know, we've talked in the past about the opportunity regions and marketing changes. Anything else we should be thinking about that you're doing differently in the back-to-school market push this year?

No, I would tell you that it's the focus on the marketing, and that is a two-prong approach. We have an amount of marketing that's going throughout our 42 states now, not 41, but 42 states. Along with that, we have a target-marketed program program and a number of states. We've actually increased that from the first half of the year. So all that should give us wind at our back. The other thing that we are just testing, and it's new for us, Tony, but we work on and have since adopted and executed an AI program that's helping us with the quality of the tour, quality of the interaction with the center director and new parents as they inquire for enrollment, which is showing us Quite frankly, in real time, the quality of the call, the quality of the follow-up, all the way through to enrollment. And we are very encouraged, as is the field management team, about what that can do for us. And that's literally started just weeks ago. So more to come on that in the next call, but something that we are increasing exposure to right now.

Terrific. Really, really quickly, Tony, you mentioned a third quarter revenue range. I think we didn't catch it, and it differs in the transcript. So just wondering if you could just repeat that range for 3Q. Thanks.

Yeah. So we're at $660 to $680 million for revenue, $44 to $48 million for adjusted EBITDA, and occupancy in the mid-60s.

Thank you.

of course. Your next question comes from the line of George Tong with Goldman Sachs. Your line is open. Please go ahead.

Hi, thanks. Good afternoon. You discussed the qualitative criteria that you used to select centers for consolidation. Can you quantify or estimate how many centers in your current retained portfolio have occupancy or profitability that's comparable to the centers that are being closed?

I don't have an exact figure for you there, George. I mean, like we shared, out of the closures we've done so far, about nine out of ten of them, right, are out of quintile five. A strong portion of the remaining ones that we'll do this year are also coming out of quintile five. So we're definitely exiting a, not a majority, not quite a majority yet, but a strong portion of those. And so we're definitely exiting some of our lowest performers. and any ones that we have left, if they were at a level of occupancy similar, we are still keeping them because of demographic reasons or potentially and most often it is a center director change or something like that that we still see there is the ability to grow back. But again, to some of the questions we had earlier, those are going to be some of the centers that are on the top of our watch list that we're seeing if some of these actions that Tom's talking about will allow them to turn around.

George, you should also know that we had a number of centers that graduated from the Opportunity Region this year, and we're really proud of that. We also added a couple back in. So, I mean, we really are seeing movement in the Opportunity Region, and candidly, through this part of the year, it's been positive from a standpoint of successful turnaround. So, we're encouraged by that. Not that we always have a quintile five that we're going to focus on, but hopefully it's improving as the mix improves itself.

Got it. That's helpful. And going back to a point that you just mentioned, for centers that you're looking to retain, even if it's in the lower quintiles, what improvement do you need to see and over what timeframe? before you decide whether or not to continue remediation or pursue a closure.

Yeah, I mean, as you'd imagine, George, it's really a center by center determination, right? How long we've had that center, what lease price left, how much lease is on are all some of the quantitative, just financial reasons we're looking at. Center director and DL time with that center, whether they're in the opportunity region might give them a little bit more time. and then it's just trajectory we see, right? We've kind of always talked about getting to about 45 to 50% is generally great even for a center and so a center's short trajectory to that and then hopefully pulling out of that that gets them more ability to kind of buy themselves a little bit more time. So there's not a perfect equation for it but we're obviously looking at those quantitative factors and then the last one I just say because we continue to say it and it's very true is where engagement levels look at because those generally tend to be a leading indicator. So if we're seeing engagement levels increase, and we'll do pulses mid-year sometimes to get a check on those, if we're seeing them go in the right direction, usually that's a leading indicator that good things are to come.

And one more thing just on that subject. We look a lot at density. I mean, these centers are centers that are sometimes 30, 40, even 50 years old. and families have moved out of or migrated out of that area. So just density. If we have a high density and we're a low performer, then it's on us. But if we have a low density center, occupancy is low, inquiry is low, future enrollment doesn't seem to be there, then it's on us to say, look, families have left this community. It's more mature and we need to find those families and move to where they are.

Very helpful. Thank you.

Your next question comes from the line of Josh Chan with UBS. Your line is open. Please go ahead.

All right. Good afternoon, Tom and Tony. Thanks for taking my question. I guess on the centers that you decided to close, you know, in terms of how they got to the occupancy levels that they were, would that primarily be COVID? Like, is that the main reason, you would think?

I don't think it's necessarily COVID, Josh, right? I mean, I guess we can all have a different interpretation of COVID and what that means. I would say these were centers that pre, you know, whatever time period you want to say, were successful for us. And they were doing well by us. And some of them have been in the fifth quintile, potentially, but still performing well. And demographics have changed. Would some of those, would somebody say it's because of COVID that demographics changed? Potentially, but it's more just demographics. Generally, to Tom's point, have changed, and the families just aren't there for us to serve anymore, and it's time to let them go.

Sure.

Okay. That makes a lot of sense. And then maybe on guidance, I know that it's been asked a little bit earlier, but, you know, could you just bridge for us why, as you close these unprofitable centers, that instead of EBITDA going up by a portion of that $8 million, that it goes down by $15 million? Like, I know there's some insurance in there and some costs, but can you just bridge us that difference, please? Thank you.

Oh, yeah, of course. So, yeah, look, I mean, we called out the insurance things that are impacting it. We did call out the kind of $3 million kind of one-time cost related to those closures. That's definitely impacting it. The reduction of tuition from 3 to 2.5 is definitely impacting the downward trend of EBITDA as well. So we're definitely factoring in a portion of that 8 million run rate we talked about in the back half. As a reminder, Q1 and Q2 are generally our highest EBITDA quarters, so we're not getting quite as much here in the back half out of that. So the number is definitely in there. It's just a couple of other factors that are working against us.

Thank you for your time. Thank you, Josh.

There are no further questions at this time. I will now turn the call back to Tom Wyatt for closing remarks.

Ben, thank you very much. And to all of you, thank you for your questions. Thank you for your support. And we wish you a very good night. We are really, really proud of the progress we've made. I hope you see it. I hope you see the traction we have. I hope you look hard at the businesses like CREM. and Outwork Business, which are both performing very nicely, and the trends, if you will, the new shoots, if you will, the green shoots within KinderCare. So have a great night. We appreciate your interest and we look forward to talking to you next quarter.

This concludes today's call. Thank you for attending.

You may now disconnect.