Operator: Greetings, and welcome to Bright Horizons Family Solutions Fourth Quarter 2020 Earnings Release Conference Call. . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host and Senior Director of Investor Relations, Michael Flanagan.

Michael Flanagan: Thanks, Omar, and hello to everyone on the call today.

With me are Stephen Kramer, Chief Executive Officer; and Elizabeth Boland, Chief Financial Officer. I'll turn the call over to even after covering a few administrative matters.

Stephen Kramer: Thanks, Mike. Hello to everyone on the call, and thank you for joining us this evening. I hope that you and your families are healthy and keeping safe.

I'll start our call tonight with a recap of our fourth quarter results and then will outline the progress we made in 2020 against our strategic priorities, which position us well to build on this performance in 2021 and further our recovery from the COVID-19 pandemic. Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions. I'm pleased with the way we finished 2020. For the fourth quarter, we delivered revenue of $377 million and adjusted EPS of $0.36 per share. In our full-service segment, we continue to make progress in re-ramping our centers and in resuming operations at temporarily close centers.

9 of which reopened this past quarter. In addition to this, we launched 2 new centers, including a client sponsored center for SaaS. Importantly, occupancy levels at open centers modestly improved throughout Q4, in spite of increased community spread of COVID around the holidays. Our back-up care business finished the year strong with increasing in center and in-home use as well as some continued self-source reimbursed care use. As parents accessed our back-up care alternatives to help manage remote work and hybrid school schedules.

We had another great quarter of new client adoptions with Danaher, McDonald's, Nordstrom and Okta, among the many additions. Collectively, our growth in 2020 propelled us past the 1,000 back-up client milestone.

Elizabeth Boland: Thank you, Stephen. I will now recap again briefly the quarter results and then provide some thoughts on 2021. So for the fourth quarter, overall revenue contracted 28% to $377 million.

Operating income totaled $18 million or 5% of revenue. And adjusted EBITDA was $53 million or 14% of revenue. We opened two new centers and reopened 9 centers in the quarter, ending the year with 910 centers opened. While we continue to reenroll families and are encouraged by the stability and sequential improvement of enrollment at 40% to 50% average occupancy was still well below the pre-COVID periods in Q4. In addition, we've approximately 100 centers that have not yet reopened.

As a result, full-service center revenue contracted $153 million in Q4 of 2020, or roughly 37%, comparing favorably to our expected range of 35% to 40% -- 45%. Adjusted operating income for the full-service segment contracted $65 million over 2019 to a loss of $29 million. This represents a 43% flow through on the revenue reduction, also ahead of our expectations of a 50% to 60% flow through on progressing enrollment and solid cost management as well as continued support from our client partners and government programs targeted for the childcare industry.

Operator: . And our first question is from George Tong with Goldman Sachs.

George Tong: You indicated that occupancy levels in your full-service business modestly improved sequentially in 4Q despite increased COVID, it's in the trending in the 40% to 50% range. Can you elaborate on those occupancy trends, including how performance has evolved since the start of the year?

Elizabeth Boland: Well, I think headline is that the performance on utilization, George, has been measured and improving modestly month-to-month. So that has continued into the January, February time frame. I think as we have looked at this, we -- that's why we feel encouraged by the sort of sustaining and a slightly -- slight improvement month by month. That's why we talked last quarter about utilization being on average -- it ranged from 20% to 60%, but averaging somewhere around 35% to 40%.

So it has improved on that, but at a very measured pace, as I say. But it is continuing into the early part of this year, and that's what gives us the comfort to sort of look at the levels that we talked about in terms of performance in the early part of the year.

George Tong: Got it. Very helpful. And then just as a follow-up, you noted that performance in the first quarter exceeded your prior expectations.

Can you talk about what the sources of upside were in your full service business, what drove the outperformance versus your initial expectations? And if those same factors would represent tailwinds in future quarters?

Elizabeth Boland: So I think you said first quarter, but I believe you mean the outperformance in the fourth quarter.

George Tong: That's it. Fourth quarter, yes.

Elizabeth Boland: Okay. So I didn't know if it was like trying to lead the wines into about Q1.

So with respect to the fourth quarter performance in full service, so as I mentioned, enrollment was improving. And so it held, and in some cases, was slightly better. And of course, we're looking at enrollment across centers that are reopening and how that's going to trend. So it was on the better end, I'd say slightly than we had expected. I think good cost management.

We've also been trying to be cautious about how this is -- the enrollment will play with the -- as we're bringing families back and we have incremental labor hours as a result of changes in the way that we are accepting drop off and pick up. And so there's some additional staff to cover those kinds of things as well as the way that the ratios fall in the rooms, there some incremental labor and some incremental PPE, not -- again, not anything that's so outsized but we're just trying to plan for that well, and we did a good job managing the cost. And then I think the other aspect of this is that we have been able to participate, as I mentioned in the prepared remarks and some of the programs that have been put in place to support businesses, in particular, the childcare industry. So there were some of the state block grants and related that we were able to access that also contributed. So to the point of whether what's continuing going forward, I think many of the supports for, say, for example, in the U.K.

had quite a robust government support program that essentially wound down by the end of the year. So that program is largely behind us. Some of the other Cares Act provisions are largely completed, and there are new proposals on the table with the Biden Administration. Some of which may -- we may be able to benefit from, but that is -- some of that is to be determined. So I would say that the opportunity for us to continue to perform, we're basing it on our sort of foundational build enrollment, get families back in the center, and that's where we're trying to deliver on the operating performance rather than on some of those -- the government programs, which can be a little bit less dependable.

So I think that the headline is good fundamental performance supported by perhaps a few things that were more one off.

Operator: And our next question is from Manav Patnaik with Barclays.

Manav Patnaik: I was hoping the 100 centers that are still closed. I'm presuming most of those are just the corporate locations. And I was just wondering if you could give us some color, what you're hearing from those corporates? Have any of them just decided to maybe cancel the employees like some of the tech companies just won't come back.

I was just hoping you could give us what's the discussion like there.

Stephen Kramer: Yes. It's a great question, Manav. So you're right to say that the majority of the 100 centers that are yet to reopen are associated with our employer client partners. What I would say is that the conversations are ongoing, and we continue to expect that as they contemplate reopening their worksites that as part of that reopening strategy, they are either going to open prior at the same time as or in some small number of cases, just subsequent to the reopening of their work sites.

So we're not hearing from many of our clients that reopening is not in the offing. And so our expectation is that throughout the first half of 2021, we'll continue to see reopenings of these temporarily closed centers.

Manav Patnaik: And most of the kind of new logos or wins you called out in your script sounded like we're more back-up care. But in the full service, like are you -- are you losing some customers? I can understand why nobody wants to sign up right now, but just how do you -- has the retention been similar?

Elizabeth Boland: But we have certainly some of the centers that we closed over the course of the last few quarters, Manav, have been some clients. I'd say that concentration, if we were looking at those would have been in some government agencies, actually, some smaller centers that were in the let's say, the D.C.

area with some smaller government agencies locations that just are in a situation where there isn't a pathway to those employees coming back, and they're isolated from any other use. Also a few smaller locations that were for smaller colleges. So there've been a little bit of a theme like that, but not as much in terms of a change of heart from what we see, client interest, actually, to your point, of clients not signing up for new. We did open one new center for a client in the fourth quarter. We continue to have centers in development with clients and continue to have conversations for this as an option.

So those conversations are slower, but they have not stopped. And I'd say that some of the center culling that you're seeing is maybe some of these centers that were more of a decision from a client who just came to the conclusion that this was the time that they couldn't continue with it. So there is a little bit of attrition there, but nothing major.

Manav Patnaik: Okay. And if I could just squeeze one quick one, like any -- what was the acquisition contribution, I guess, from CDC?

Elizabeth Boland: It's a couple of million in revenue.

Operator: And our next question is from Stephanie Yee with JPMorgan.

Andrew Steinerman: It's Andrew in for Stephanie. My question has to do with your comment that you still expect to be back to normal full-service utilization by the end of this calendar year, and I know that means into the high 70s. What has to happen in the fall for that to happen?

Elizabeth Boland: Well, I think that it's actually a little bit of a different cycle, Andrew, and that typically, the fall would be a new enrollment cycle. I think that we're expecting a little bit more of a maybe linear progression over the course of the year as parents continue to gradually come back even over the summer and that we're not -- we're not seeing that same cycle.

So what would have to happen, I think, for the fall is that we see modest building as vaccinations are more widely distributed and are more widely consumed and parents continue to return to centers and group care over the course of the spring and the summer, I think that would be the foundation that we would be looking forward to achieve that kind of fall enrollment cycle. I think two, this whole school, cadence and the way that schools have been in a hybrid situation and/or fully remote, it's obviously all over the map. So I think a more consistent school cycle would also be helpful to parents in terms of their planning. But I don't know, Stephen, if you had other thoughts about what would deliver that fall enrollment?

Stephen Kramer: Yes. No, I think that's exactly right.

I think it's going to come down to continued confidence in returning to group care. I think that one of the other elements that's worthy of note is that in the majority of the states, all childcare teachers are being prioritized earlier in the cycle for vaccination. And I think that, that will continue to propel parent's confidence in our centers and ultimately, continued persistence of seeing childcare centers as places that don't perpetuate spread of COVID-19, would also be an important marker. So again, I totally agree with Elizabeth, and I think the addition of vaccination and non-spread within child care centers are sort of helpful attributes as well.

Operator: And our next question is from Toni Kaplan with Morgan Stanley.

Toni Kaplan: .

Stephen Kramer: Toni, maybe we can maybe circle back on to the next?

Operator: Next question is from Hamzah Mazari with Jefferies.

Mario Cortellacci: This is Mario Cortellacci filling in for Hamzah. Just -- could you comment on your current client base and back-up? I know you disclosed the 1,000. Just wondering how much room there is for penetration or even, I guess, cross-selling with your existing full-service clients.

And then with that 100 -- with that 1,000 clients in back-up. I mean, could you speak to the size of your pipeline relative to that 1,000 client figure.

Stephen Kramer: Yes. So I'll sort of take a step back on that question and really characterize what we see as the opportunity. So certainly, 1,000 employer clients is a very, very small -- is very small relative to the overall set of clients that are addressable for this service.

Remembering that this service unlike our full-service child care center service is a national network solution. So it doesn't require a concentration of employees in any one location. So what we find is for employers that have greater than 500 or 1,000 employees total, we have the ability to serve them with a really robust benefit. I'd say the second thing worthy of note is in our overall client base, only 25% of our clients buy more than 1 service. So in lots of different directions, including purchasing backup and investing in backup, we have the ability to cross-sell and backup is one of the areas that we continue to focus on for those clients who buy either an advisory or full-service child care.

And then the final piece that I would say is that our pipeline continues to be robust despite the fact that we had tremendous growth in 2020 in terms of the number of clients. We will see strong momentum of prospective clients that are really interested in solving the challenges associated with both the child care disruptions that are created now and also going into the future as well as the elder care component to that service. So we see really positive momentum and continued new sales in 2021.

Mario Cortellacci: Got it. And then on margin within back-up, maybe could you help us understand some of the puts and takes of what to expect in '21 versus '20? Just from like you're expecting less reimbursement and more in-center and in-home care.

Could you just maybe help us out with understanding some of the puts and takes of margin in '21 relative to some of those dynamics?

Elizabeth Boland: Yes. So in general, our back-up business, as you say, is primarily -- it is a service delivery where care is provided either in-center or in-home and we target a return on that -- in the range of 25% to 30% operating income. And so I think broadly speaking, that's where we would expect our backup business to be able to perform in 2021. That's coming from the mix of use being in line with historic mix and us being able to deliver that, along with some continued reimbursed care, but that aspect of the use mix has distorted the margins in 2020 because it is a pass-through, and it is recognized -- the revenue was recognized on a net basis. And so it has the effect of pushing the margin level higher than normative and what we would expect in the future.

So Q2 will be a complete outlier as we compare against that. But in general, we would expect our backup margins to be able to be in the 25% to 30% range, given the overall service delivery and cost structure and what have you.

Operator: And our next question is from Gary Bisbee with Bank of America Securities.

Gary Bisbee: Let me follow-up on that last one. So if there is some tail of self-reimbursed care continuing into Q1 at some of your clients and the jumping-off point for margin on backup, it's 46% in the quarter you just reported.

I can't imagine it's going right to 25% to 30% in the short term. And so I guess, is it right to think it could persist much higher than historical, at least for another quarter or 2. And I guess then, let me just push back a little bit going back to 25% to 30%. I mean, you've had significant growth in the client base. There should be some scalability.

You've talked a lot about using technology to reduce friction. I assume that's on your part in addition to the clients. And so wouldn't it be reasonable, given how well this business has done given that the TAM probably, is benefiting from the pandemic that you might be more profitable? Or do you just not have line of sight to that yet?

Elizabeth Boland: Yes. No, I mean, I think it's a fair question, Gary. And the opportunity there is multifold.

One is being able to obviously access more utilization within any given client arrangement. So, more employees who are able to access the care and who do. And therefore that the mix there can be beneficial because we are then leveraging that overhead across that broader penetration. So there is an opportunity, I think, for us to continue to gain efficiency here. I think we're certainly focused on rebuilding the traditional enrollment and having the access to that available and ensuring that those who want to use the care can use it.

And so in that way, the historical model has been premised on a mix of in-center and in-home use. And you're right to say that there will be a sloping back, if you will, to that level. We certainly are conscious though that clients who have an arrangement with us want their employees to use it. And so we want to be sure that we're driving that cost side of the equation, if you will, in order to make sure that, that persists. So long-winded way of saying, I think there's opportunity for us to perform better than that range.

We have made some investments. We will continue to make investments. And to the extent that the client sign up stays as strong as it is, there's certainly some upside opportunity.

Gary Bisbee: And then I'll ask you a question, similar to what I asked a quarter ago. When we think about backup, there's obviously several levers to sort of TAM expansion or long-term growth potential.

It's how many customers -- how many -- I guess, how many workers do they have, but how many of the workers are using the service? And I guess within that, what type of a service they're using. As you think to your comments you've given on the growth for this year, are you assuming that sort of usage within a client or penetration of the potential people at clients that could use it goes to historical levels? Or do you think there's some benefit from the awareness that, Stephen, that you called out earlier in the call here that could lead that number to be higher. And it's probably hard to know how much, but is that included with this year? Or is there a potential that it could really outperform if now that people understand the service is there, even if it's in the historical delivery models that you could see real lasting lift, not just for clients, but more people at the existing base using the service?

Stephen Kramer: Yes. I mean, I think it's a great call out, right? So, when we think about the levers within backup, right? There is certainly the new client growth, which we experienced nice new client growth in 2020. We have an expectation that we're going to continue to experience nice new client growth in 2021.

And then another lever, of course, is the number of registered users that ultimately turn into actual users. And so in 2020, and you take, obviously, a place like Bank of America, where many more people understood our service was available. And therefore, the potential now that they are registered users to use coming into 2021 is greater. And we have seen some in Q4 convert in that manner from some self-sourced care individuals to individuals who then use more traditional care. So overall, I think your premise is a good one.

We continue to try to make for a more seamless experience. We try to do more personalized outreach. So certainly, in our calculus is driving use within a client as well as driving new clients. So overall, that's partially baked into the plan. If we're able to outperform that, we certainly strive to.

But again, I think we've embedded some sense that, that will occur in 2021.

Gary Bisbee: And then just one, if I could sneak one more in about the center-based business. And as we think about work from home, my sense is an awful lot of community-based competitors and others are open and have opened the doors. And do you have a sense how many of your users that are in corporates that are closed or still not having a lot of people back in the office have transitioned their kids to other centers. And if there's a risk that, that could impact the reenrollment or the increase in utilization.

And I guess the second part of that, historically, there's always this transition where kids age out and you bring in a new class. How does that look this fall? Does the pandemic impact how you go about attracting that new class? And if people aren't in the office, does that impact the normal cadence of how you do that?

Stephen Kramer: Yes. So let me address the first piece. The first piece is really very much in our mind. We've been staying in very close contact with those who have previously been enrolled, that are not currently enrolled.

And what we're finding is a few things, right? So, there are 3 things that those individuals have done. Either, there's a small proportion of them that have found a different model of care, right? So they may have an in-home caregiver if they're working from home. And therefore, they've chosen a different modality of care. There are those who have chosen a community-based provider that is convenient for them. And then the third, which we've been very focused on is trying to ensure that if we have a community-based program, a community welcoming program that we welcome those individuals to our community program.

But again, remember, the vast majority of our employer centers at this point are now open. And so, there's a real incentive we find for individuals who have enjoyed the center experience at their work site, to continue to divert back to those work sites. And so, they're either going back and working hybrid model at work or fully at work. And therefore, the most convenient option for them is the on-site work site center. The second is that the vast majority of our customers we find live within 10 miles of their center.

And that includes both work site and community welcoming parents. And so it may be that they're continuing to work from home, but because the vast majority of our employer-based centers are open, they may still choose to drive their child to the center and then go home for work on some days. So, I do think we're looking very specifically at what that -- what those patterns are, are staying in really close contact with those, who have either not chosen to go back to in their employer center and/or one of our community facing centers and are looking to make sure that we maximize those to come back to the Bright Horizons Family if they've chosen to go elsewhere in the interim.

Operator: And our next question is from Toni Kaplan with Morgan Stanley.

Toni Kaplan: I wanted to ask about M&A.

This year was a relatively limited year for you, which makes sense just given everything happening with COVID. Just curious if we could see that tick up in the near term? Or if we should assume that your current focus is really on your internal strategy and just waiting to see the recovery before looking for new acquisitions?

Stephen Kramer: Yes. So on the acquisition front, we continue to be actively out in the market talking to high-quality providers and owners. And that's both in the 3 geographies in which we currently operate, the U.S., the U.K. and the Netherlands, but we're also continuing, as you would expect, to look in geographies that today we don't operate.

And so we believe that through 2021, the possibility for high-quality acquisition opportunities will continue to present themselves and we'll continue to uncover those. So we are absolutely committed to continuing with that leg of our growth strategy and believe that there should be opportunities within 2021 for us to come together with high-quality providers.

Toni Kaplan: That's great. And then just looking at full-service margins, you've been guiding to about 50% to 60% conversion for 4Q, but you came in a lot better than that. Is that better expense control or lower start-up costs? Or was there something else? And how should we think about the conversion margin in full-service in 2021?

Elizabeth Boland: Yes.

So Q4 had a better conversion. Some of it was good cost management. I think also we had continued support from clients and centers that were in a ramp-up mode that we hadn't been necessarily counting on, but it continued to come. And then we also were able to access some of the Cares Act state block grants that had an impact in the quarter. To be -- as we look ahead, what we said in the call in the prepared remarks is, it's going to be -- the first quarter is going to look -- we expect somewhat similar to Q4, and then we have a revenue contraction in the 30%, 35% range with a flow-through in the neighborhood of 40%.

We are still in an enrollment building mode. We have step variable costs and all that coming through. So haven't really reached a the sweet spot of pure operating leverage. But we would expect, as the year goes on, as we lap Q2 and the contraction of all the centers closing, revenue growth will resume by Q2 and continue over the course of the year. And then we would be getting to a positive operating income performance by the second half or in the second half.

So it's a bit of a tale of 2 cities as we get to the lapping stage and then continue to rebuild the enrollment.

Operator: . And our next question is from Jeff Silber with BMO Capital Markets.

Jeff Silber: Just a follow-up from a couple of the prior questions. If we're talking about post-pandemic, and I know nobody really knows what's going to happen.

But we're seeing a lot of surveys where a lot more employees are planning on working remotely, either part-time or kind of on a hybrid schedule or whatever. You mentioned having some affiliations with some community-based programs. I'm curious in the areas where you have holes, are you looking to acquire or maybe take over leases of some of the centers that might have closed up?

Stephen Kramer: Yes. So we certainly are continuing to think as we always have, holistically about our portfolio. We believe that we're very well positioned, obviously, with a combination of employer centers, so at the work site alongside of our lease consortiums that are in the communities, typically where our employer clients have employees living and working.

So ultimately, feel well positioned. On the other hand, we continue to look for new lease/consortium centers. We continue to look at acquisition opportunities that will round out our portfolio so that we continue to be increasingly well prepared as employees make choices about where they're going to live, where they're going to work and ultimately, where the employer is looking to support their childcare needs.

Jeff Silber: Okay. That's helpful.

And forgive me, I came on late, so if you talked about this, you can just skip over it. But one of the proposals in the stimulus plan is an increase in the tax credit. And I'm just curious historically either when the tax credit, the child care tax credit was started or when it may change. Does that have an impact on parents? Or -- I mean I know, obviously, it will help them financially, but do you find that really has an impact between kind of a go and no go decision whether to use external child care?

Stephen Kramer: Yes. It's a great question.

I mean first of all, it's fair to say that we've always believed in our employer model because the government level of support, aside from the support that they provide to the most disadvantaged families, has never really stimulated demand for our childcare centers. On the other hand, we're cautiously optimistic that the Biden plan has a bit more teeth than what we've seen in the past, granted it is still a proposal. So it's still going to get its edges rounded out. So we're not sort of counting on what that might do. But where we see the opportunity, if there is to be an opportunity, is that the level of support is potentially going to increase.

And the other interesting facet of this is that it could be provided on a monthly basis. So those 2 factors on the margin could tip someone who is evaluating either a lower cost option or a different modality of care to potentially find that Bright Horizons as part of their consideration set. So that's really how we're thinking about it. But again, early days in the proposal, and so we'll see ultimately what comes to pass.

Operator: And our next question is from Jeff Meuler with Baird.

Jeffrey Meuler: What have you been doing for full-service pricing and employee wages and benefits, I guess, in the fall or into the new calendar year?

Elizabeth Boland: So we have -- it's been an interesting year for that. We have continued through the pandemic. We actually continued access to our employee benefits for employees who were active and those who were furloughed. Sorry, did I misunderstand the question?

Stephen Kramer: So I thought the question was focused on tuition and wage increases.

Elizabeth Boland: Exactly, exactly.

I'm sorry, like I had a complete audio recording error there in my head, sorry, Jeff. So as it relates to the tuition and labor relationship. 2020, I think, was a disrupted year. So we certainly had some geographies where we were in a mode where we were open, we had centers that were operating and we had unusual pay structures as we had premium pay and sort of hazard pay for front line workers. So we've looked at a reset for this and similar with tuitions, which were disrupted during the year.

So we have, I think, resumed a view looking at the overall structure of a center's operations. Looking ahead to 2021 and have sort of calibrated the tuitions alongside what we see as the labor cost structure. So I would -- I guess I'd characterize it as 2020 was a bit of a disruptive year. We did -- we had some wage increases, but it wasn't across the board. We had some tuition increases, but they weren't always across the board either.

And so there's not a uniform answer to that. But we are looking at a similar business model structure in 2021, what we have established for the tuition labor relationship has resumed there. And so I think that's how I'd try to frame it for you.

Jeffrey Meuler: Okay. And then a follow-up on, I think Gary's last question.

But so from a new enrollment perspective, I'm guessing a lot of your enrollments, correct me if I'm wrong, were prior children coming back to your centers, but how has new enrollment been? And how is the current mix of the infants and newborns to age up with you?

Elizabeth Boland: No. I mean, it's actually -- I don't know, like, if you have a step that can go behind this. But I think actually, we have had good returning enrollment from families who were with us, but we have had new enrollment as well. So it's a meaningful portion of the enrollment that has come back to centers as they have reopened. And I think, in general, the enrollments are happening across all age groups, but they are slightly tipped toward older children where parents in terms of their comfort level have, I'd say, been slightly more comfortable with the preschool 4, 5-year olds than a new infant.

But we do have we have good infant enrollment. It's just if we were balancing out what's the relativity across the age groups. It's a bit more in the older age groups than younger.

Jeffrey Meuler: Okay. And then last one, I just want to make sure I'm understanding the accounting.

So you recognized the block grant support from the state and federal government as revenue, if you could just clarify or confirm that? And can you give us a rough sizing of how much that was in the quarter?

Elizabeth Boland: Yes. So the -- essentially, those grants are in support of expenses, and so they do not represent revenue, they represent the reduction cost. And so in the quarter, it was south of $10 million for those that were recognized. I think that what we would characterize, though, too, with this and similar to the U.K. support, much of this was directed toward incremental spending that was occurring, whether it was for labor or PPE as opposed to -- certainly, businesses are incurring things like rent, but incremental costs that would not have otherwise perhaps been in the mix.

So just put that out there as a part of the equation here is that some of it is in and out as opposed to just incremental.

Stephen Kramer: All right. Well, thanks again for joining us on the call. And I hope everyone has a good evening and stay safe and healthy.

Elizabeth Boland: Talk to you all soon.

Thanks very much.