Welcome to KinderCare’s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce Olivia Kirrer, Kindercare's VP of Investor Relations. Ms. Kirrer, you may begin your conference.

Thank you and good evening, everyone. Welcome to KinderCare’s first quarter earnings call. Joining me from the company are our Chief Executive Officer, Paul Thompson, and Chief Financial Officer; Tony Amandi. Following Paul 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 finally, 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 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 risk 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. And with that, I'd like to turn the call over to Chief Executive Officer, Paul Thompson.

Thank you, Olivia, and we appreciate everyone joining us today. The first quarter's results were in line with our 2025 guidance, highlighted by a 2% increase in revenue and underpinned by growth in both our early childhood education centers and champion sites. Our focus on driving profitability continues to be successful, as adjusted EBITDA came in at $84 million, an increase of 12% year-over-year, and net income increased to $21 million. Given the multiple operational levers we can pull, KinderCare is well-positioned for the remainder of the year. As you all know, the current macro-volatility can impact all businesses and overall consumer spending, but we have advantages over other sectors. To be clear, childcare is an essential life service for working families that consistently ranks as a top household spending category, and that has not changed. I was pleased to see that the importance of childcare to American families was underlined when, on May 2nd, the President delivered a budget outline to Congress containing no mentions of changes to the federal funding level of the Child Care Development Block Grant. I'll talk more about that in a moment, but overall, we continue to see that demand for high-quality care is outpacing supply. This dynamic supports our market-leading position and is durable in a range of economic environments. In Q1, we saw a delay in the time-to-enrollment decision due to consumer hesitancy and uncertainty. We believe this to be the leading driver to a modest 50-basis-point year-over-year decline in same-center occupancy. We highlighted slower enrollment progress to begin 2025 on our last call, so the first quarter was in line with expectations. We continue to monitor price elasticity and affordability as a decision factor for those families touring our facilities. Our data confirms that price has not been a friction point,…

Thanks, Paul. Our first quarter revenue of $668 million grew 2% compared to a year ago, driven by stable tuition growth and an increased number of centers and sites. On a same-center basis, our revenue grew by 1.4%. Same-center occupancy ended the first quarter at 69.1% compared to 69.6% a year ago. The 50-basis point decrease was predominantly driven by lower enrollment at same centers. The most important takeaway on occupancy is that the demand environment remains favorable, but enrollment decisions have been slower to start the year. This was factored into the guidance provided in March, specifically as we assumed occupancy to be relatively flat for the year. Overall, we remain confident that in the long term, our centers will drive 1% to 2% annual occupancy growth. As mentioned earlier, our ability to effectively price in our centers remains a key driver to sustained revenue growth. We typically make our pricing decisions before the start of the calendar year and take great care to ensure that we are managing our tuition in relation to our wage growth percentages. Our internal tools and wage strategy give us visibility into how our labor costs are going to manifest over the next 12 months. We will continue to monitor wages to ensure we are priced appropriately, such that we maintain a healthy margin. Same center revenue increased to $606 million, up from $598 million a year ago, driven by tuition rates. Our B2B portfolio continues to grow with two new centers open during Q1. The story of Montgomery County, which Paul relayed earlier, is a great example of how KinderCare’s flexibility can really help to meet families and communities where they are, especially in that amazing and unique situation. Champion's revenue grew by 7.8% to $53 million versus last year, with 88…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Toni Kaplan from Morgan Stanley. Please go ahead.

Thanks so much. Not sure if you have super visibility into this, but just given the trends of delayed enrollment start dates, and that is something that we have heard across other companies as well. But do you know what parents are doing with their kids as the alternative to enrolling in the centers, sort of starting sooner? Like what are they doing over the summer, assuming they are enrolling for August or September?

Well, Tony, I would begin by talking about January 10, as we said, to be a high infant enrollment time period. So one of the situations you might be experiencing there is the single parent or both parents are taking longer time off with their employer, and thereby delaying the time that they are enrolling, not enrolling at six weeks, but perchance when the child is a little bit older, or they have some accommodations that they are willing to continue to use until they go into full-time enrollment. So that is what we mean when we have seen the delayed enrollment speaks more towards the younger age groups. And that is why we are still encouraged with what we are seeing. We still see a high level of inquiries, a high level of tours. We mentioned in our talking points that the pricing continues to play out well for us, and then our retention numbers are trending well also. So those are all instances that point to us this is more temporary in nature. And then for our summer enrollment, we see a different experience for that as people are looking to solve. They might have older siblings that are coming out of an elementary school, and then they might be enrolled in our school-age programs or summer camps as well.

Great. And then as a follow-up, I wanted to ask about the Champions business and, the sort of cyclicality to that. Would a parent maybe pull back on sort of spending on after-school activities in a more uncertain environment? How is that? How have you experienced that business during times of maybe economic weakness? Thanks.

The weekly spend tuition per week for the Champions before and after-school program is significantly less than you see in early childhood education. So typically that parent who has to go to work before the school day begins and stay longer than the typical school day ends, it's a great solution for them to keep their child in a safe environment and also to make sure that the child's completing their homework and not having to do that when they come home. So typically Champions continue to be resilient even in a time when you might see parents choosing to be more selective about their disposable income and things that they're doing. Super.

Super. Thank you.

Your next question is from Andrew Steinerman from JPMorgan. Please go ahead.

Hi. It's Andrew. When looking at the 25 algo on slide 10, I see you're anticipating relatively flat occupancy. My question is about your medium-term algo. Are you still anticipating that occupancy on average could grow 1% to 2% a year? And where would that take the occupancy rate over time? And my second question is how much revenue from the first quarter revenues that were just reported came from M&A done in the last 12 months?

Very good. Andrew, we definitely still feel very confident in our medium-term, long-term growth algorithm that we will see occupancy growth of 1% to 2% as we continue to move into 2026 and beyond. We do also expect, then, that our occupancy itself will grow 1 to 2 percentage points. And we also expect that that's across all five quintiles, that opportunity for us remains. And we feel good about things that we're seeing and tools that we continue to roll out to our 1,500 centers across the U.S. And then I'll have Tony speak specifically to the last question.

Acquisition revenue for our tuck-ins was $5.5 million for the trailing 12 months here at the end of this quarter. And it was $4.8 for the trailing 12 months for the year before.

Thank you very much.

Of course.

Your next question is from Manav Patnaik from Barclays. Please go ahead.

Hi, how are you? This is Ronan Kennedy on for Manav. Thank you for taking my question. Can you talk about what the guidance contemplates with varying demand levels or macro uncertainty or lack thereof? And if you've seen this dynamic of persistent real demand with delays in occupancy or enrollment decisions in the past and how you would expect that to play out for the remainder of the year?

Yeah, Ronan, from the perspective that we have, we still feel confident to the full year of guidance that we provided to you all for occupancy. We also are really encouraged about our ability to manage expenses, regardless of what happens with macroeconomic conditions, so that we continue to deliver sustainable, profitable growth for the year. And then as far as experiences, within months and within quarters, we will see differences of enrollment. But the important thing for you to know, we continue to trend week-on-week enrollment growth up through May, which is our highest enrollment weeks. And so we're continuing to see week-on-week growth, albeit just a, as we mentioned before, from a delay and from the occurrence that we were seeing in the first quarter. But still feel good to the full year and our ability to pull on multiple levers on both top-line revenue growth as well as operational levels to improve our profitability.

Thank you. And a quick follow-up on that, if I may. So it sounds like, obviously the environment has gotten more complex with regards to the uncertainty and otherwise. The growth outgo assumptions, there is optionality within that to hit at different levels of contributions, whether it be the NCOs or B2B Champions acquisitions. Is there anything to be mindful of potential changes in what the guidance contemplates since the macro has gotten more complex and can continue to evolve?

The macro conditions are more specific to enrollment and occupancy. We've mentioned that on tuition, we feel very confident in what we've incorporated for guidance on 2025. For the B2B businesses of both our KinderCare For Employers and Champions, they are trending nicely against our expectations. Our NCOs continue to ramp here in 2025 and we believe are on course with the enrollment we're seeing for them. So not impacted as much with the macro situation that we're experiencing. And then we've talked about acquisitions continue to trend well. So it is more specific to occupancy with the macro conditions and that's why we love the flexibility we have to grow our top line through those different levers.

Thank you very much. Appreciate it.

Your next question is from Jeff Meuler from Baird. Please go ahead.

Yeah, thank you. I just want to understand what you're seeing on kind of the characterization around the delayed enrollment and the answer to Tony's question. So are you seeing more children be enrolled for the first time at whatever it is, 8, 10, 12 weeks instead of 6? Like is the data showing that or is it I guess maybe just any sort of support for the delayed enrollment characterization instead of potentially lost?

Yeah, Jeff. It's more that we are seeing more inquiries, more tours come in at summer times. So we're seeing still strong levels of that and more touch points with the families. So we're seeing a lot more communication happen with the families to get them to enrollments. And so not as much tracking as far as the age level they're coming in, but more so how many communications are happening with them. And we're seeing that mean a delay in their decision making.

Okay. And then can you help me understand what you're assuming in the ‘25 guidance if you're assuming like an improved conversion rate off of those inquiries relative to like the Q1 run rate? And I ask because you have occupancy down, you're guiding to it flat. And I would think the more periods you have where the intake is kind of weak and there's kind of the natural turn happening that it would kind of like the magnitude of the occupancy headwind would actually build if that's the case. Hopefully that's clear.

Yes. So what we're seeing currently is still nice levels of retention of our current families that we have with us through the first quarter and what we've seen so far. We are seeing that slower decision making we just talked about. But as we get a purview into early peaks towards the back half of the year, and based on what we're seeing there, and based on our historical trends, that's what's giving us the ability to kind of give the guide to the flattest for the year, despite the start of the first quarter.

So are you assuming that, I guess, conversion rates will remain where they were if you kind of seasonally adjust them? Or are you assuming some sort of improvement?

It would assume some slight improvement, as well as utilizing kind of the inquiry levels we have, but also utilizes what we are seeing on retention as well to date, and utilizing that as a benefit as well.

Got it. Thank you.

Your next question is from George Tong from Goldman Sachs. Please go ahead.

Hi, thanks. Good afternoon. Going back to the topic of delayed enrollment decisions, do you have a sense for how long these delays typically are? In other words, would you expect to see a catch up in enrollments in a quarter or two?

Hard to say, George. But what we have dug in deeper with our teams of how do you elevate the conversations that we're having with parents? How do you improve the value proposition that you're sharing with parents? And then how do you activate them to make the decision because of the occupancy that's existing in those centers? So what we are focused on is giving more specific guidance to our center directors based on the quintiles of the occupancy that they have so that we can drive stronger behaviors. And so there's certain digital tools that we've mentioned to you in previous phone calls that continue to give us confidence of the coaching that we're giving to our center directors and how they're thinking about the interactions with those parents so it ultimately does drive to the decisions being made here in the second quarter and third quarter leading into back to school.

Got it. That's helpful. And then you mentioned that pricing has not been a friction point with customers. To what extent do you have room to raise prices beyond the low end of the 3% to 5% range?

It is something that we'll evaluate, George. But you know we start our price increases at January 1st for age ups and for new student enrollment. And the reason for that is then it allows far less price increase conversations for a center director with our existing parents, which can be a distraction or challenging for the center director and parents. So we'll always take a look that if we think it's necessary to do an in-year price increase. But right now with the way we're trending and things that we're seeing with our ability to maintain cost controls, labor specifically, we're still on track that our next price increase to the system will be in January 1st of 2026, even though new families and age ups will be experiencing that all through the balance of this year.

Got it. Very helpful. Thank you.

Your next question is from Jeff Silber from BMO Capital Markets. Please go ahead.

Thanks so much. Is it possible to go back and just unpack your revenue growth for the first quarter by the different components of the growth algorithm that you show from a long-term basis? I'm just curious what they were in the first quarter.

Yeah, sure. The occupancy was down 50 basis points. We discussed that. Tuition was about 2.5 for the period. B2B grew about a 0.5. Our NCOs were about a 0.5, about 50 basis points. M&A, about 100 basis points. And then our closures had offsetting 100 basis points on them as well.

Okay, great. That's helpful. And then if we switch the discussion to M&A, I'm just curious, given the macro environment and some of the uncertainty out there, are you seeing more potential sellers coming to market? And also, what kind of prices are you paying have multiples changed at all this year?

Same as we've seen over the last couple quarters, Jeff. So the market's been about the same, which is very robust, and still seeing those multiples being anywhere from 3 to 5 on average. So we definitely see some below that at times where we're getting it for virtually free because the real estate's carrying the deal. We've had a couple that have kind of got up into the sixes now that we believe were really good deals and still really good value for us.

All right. Appreciate the call. Thanks so much.

Your next question is from Josh Chan from UBS. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. On the enrollment slowness, I guess, are you seeing any differences between children that are coming in through subsidies versus the private page? I'm wondering if there's a discrepancy there.

For our subsidy families, once they receive approval to be covered by the block grant, then it's a family choice. And they're looking for a high-quality provider. So the hesitation for a subsidy family is less impacted once they've been approved for receiving the voucher and taking that to the provider in their community. So it is much more where a private pay family, bearing the full cost of the tuition, is thinking about their personal situation and how they might cover the care for their child before they do their first enrollment.

That makes a lot of sense. Thanks for that color. And then maybe a question on the pricing. I think you mentioned 2.5 points this quarter. I think the guidance is around 3. So do you expect some sort of acceleration in pricing through the year? Or I guess is that 2.5 kind of close enough to 3 in your mind?

We'll see acceleration from the 2.5. So we're guiding the 3 to 5 for the year. And so where we see some of those age-ups and new students coming on board, and we see those obviously in the system from what Paul talked about. We'll see those pull that number up, and that gives us the ability to guide to the 3 to 5 and the low end of that 3 to 5. So it'll be up a little bit.

Great. That's great to hear. Thanks for the time, and good luck.

[Operator Instructions].

All right. Well, thank you all for joining us today. We hope to have an opportunity to speak with many of you in person at these upcoming conferences or otherwise in partnership with your bank's corporate access teams. KinderCare’s business performed well in the first quarter despite the macro conditions around us. Our team is focused on driving continued profitability growth for all stakeholders as we move through the second quarter. We look forward to connecting you with everyone again soon. Thank you all.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.