Ladies and gentlemen, we thank you for your patience. Greetings and welcome to the Bright Horizons Family Solutions Second Quarter 2020 Earnings Release Conference Call. All participants are currently in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Michael Flanagan, Senior Director of Investor Relations. Thank you. You may begin.

Thanks, Jessie, and thank you everyone. We are on the call today. I appreciate your patience. We had some technical difficulties. So thank you all for joining. With me on the call today are Stephen Kramer, Chief Executive Officer, and Elizabeth Boland, Chief Financial Officer. I'll turn the call over to Stephen after covering a few administrative matters. Today's call is being webcast and a recording will be available under the Investor Relations section of our website, brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business and financial performance, including the impact of COVID-19 on our operations are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2019 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statements. We also refer today to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release which is available under the IR section of our website. Stephen now will take us through the review and update on the business.

Thanks, Mike. Hello to everyone on the call and thank you for joining us this evening. I hope that you and your families are remaining healthy and safe. I'm going to begin today's call by briefly recapping our second quarter results and provide an update on our current operations. Elizabeth will then provide a more detailed review of the numbers before we open it up for your questions. The last several months have been extraordinary by any measure. Despite this, I couldn't be more proud of the incredible determination, agility, and execution demonstrated by the entire Bright Horizons Family. The positive results this quarter exemplify the power of our diversified, employer-centric model as well as our capacity and capability to effectively serve client needs. To recap, we delivered revenue of $294 million and adjusted EPS of $0.44 per share for the second quarter. In our full-service segment, we are happy to report that we reopened 160 centers in Q2 and began welcoming back thousands of families to our centers. Our back-up care business provided critical support to tens of thousands of families and at the same time delivered exceptional financial results for the company. We experienced significant utilization of self-sourced reimburse care for both new and existing clients, nearly doubling revenue compared to last year. We also added to our education advisory client base, launching services for ADP, Lighthouse, and Akron Children's Hospital this past quarter. I'm really pleased with how well all facets of our business performed through these unprecedented circumstances. As you will recall, we started 2020 with solid momentum across all three business segments. But as the pandemic spread in March, we temporarily closed nearly 850 of our centers globally. With this contraction, we focused our full-service care operations on approximately 250 client and hub centers caring for the children of healthcare and other essential workers. We monitor guidance from the CDC and local health authorities and created a direct relationship with a leading infectious disease physician at Boston Children's Hospital. We marshaled our resources to develop, implement, and refine enhanced COVID-19 operating protocols. These include social distancing procedures at pickup and drop-off, daily health checks, the use of face masks by all staff, limited group sizes, and enhanced hygiene and cleaning practices, all focused on keeping children, families, and our devoted staff safe and healthy. I take great pride in Bright Horizons' leadership in this area as our standards have been adopted by many state regulators. Before I get into the current state of the business, I want to commend the work by our operations and client relations teams. There's still a lot of work to do in the reopening and re-enrollment process, but we have made tremendous progress over the last few months, training teachers and staff on our COVID-19 safety protocols and welcoming back thousands of children and families. I'm grateful to all of our employees who have supported Bright Horizons during these difficult times and I know these efforts have uniquely strengthened our organization. Getting to the specifics, as we talk today, approximately 725 of our centers globally are open, representing 65% of our total portfolio, and we anticipate that more than 80% of our centers will be open by the end of the third quarter. Throughout our reopening process, conversations with clients and surveys of parents and teachers have reinforced their confidence in Bright Horizons, specifically around our experience with health and safety practices. The expertise we have demonstrated in operating childcare in the COVID-19 environment has not only allowed us to open more safely and quickly but also to provide the critical reassurance that clients, returning teachers, and families deserve and require. Over time, we think this will be a key differentiator and an important reason for families and clients to choose Bright Horizons. We've also been really encouraged about the depth of conversations with employer clients, not only about their center reopening but also how our full suite of services fit within their short, medium, and longer-term business strategy. Employers clearly recognize that regardless of the work environment, on-site or remote, it is extremely difficult for employees to remain productive while caring for a child or elder. Existing center clients have remained very supportive, and we have seen interest from both new and existing clients around investing in our lease consortium centers to supplement their on-site centers or to provide more comprehensive national solutions. The unique challenges to our business created by COVID-19 have also provided opportunities for us to demonstrate to employers that not only do we have the scale and resources to support them in all environments but also possess the agility to develop and deploy creative solutions to meet their real-time needs. As an example, with fewer programs available for children this summer, we worked closely with some key clients to quickly stand up school-age programs within some of our temporarily closed lease consortium centers, so their employees could remain productive over the summer months. This is one example that showcased our ability to work collaboratively with clients to create an effective response to solve a critical pain point in their core operations. Let me now turn to back-up care, which delivered truly impressive results. As we discussed last quarter, our back-up business had been on track for solid growth coming into 2020, 12% to 13%, and was tracking well in the first quarter. With school and business closures starting mid-March, the demand for backup care surged as families struggled to balance their work responsibilities and the care needs of their children. With the majority of childcare centers closed during the second quarter, in-home back-up care and self-source reimburse care became increasingly valuable for clients and employees in need of a care solution. Self-source reimburse care has always been a value component of our comprehensive backup offering for clients to utilize in unexpected emergency-type situations, such as natural disasters. Given the national scope, severity, and rapid onset of COVID-19, the demand for self-source reimburse care offering was super-charged with more than half of our back-up clients deploying this alternative use solution. This surge in demand certainly came with some growing pains as we worked to accommodate the unprecedented volume of new registered users and care requests, but our ability to quickly deploy a solution for an unexpected need provided immense relief to hundreds of clients and introduced tens of thousands of stressed working parents to our services at a critical time. While self-sourced reimburse care proved to be the right solution for many employers and workers during the early months of the pandemic, we expect to see back-up care demand in Q3 and beyond return to more normalized in-home and in-center use. Since some of the demand we fulfilled in the second quarter represents use that may have typically been absorbed in the second half of the year, we have been working with our client partners to expand employee banks to ensure that parents, who will continue to struggle with evolving work and school practices, have continued access to the service. As we have spoken about on past calls, we continue to make advances in our technology and personalized marketing to improve the customer experience. As demand surged over the last few months, we deployed several enhancements to our backup system to create a more robust platform and a more seamless experience for end-users. In addition, we expanded Bright Horizons Central, so client liaisons could self-serve reporting, something that proved invaluable as clients were tracking use during this time of heightened demand. Furthering our digital strategy, I am thrilled to share that just yesterday, we completed the acquisition of the Sittercity business, a leading online marketplace for families and caregivers. This strategic acquisition expands our current portfolio of family-focused solutions and extends our capabilities to serve families and clients. We have enjoyed a strong partnership with Sittercity since 2013. We know the talented team well and appreciate the quality of their services and our shared mission of supporting working families with access to high-quality care. While the financial contribution in the near term is modest, Sittercity's digital capabilities and the long-term opportunity for cross-sell at the client and family level is significant. Turning now to our advisory business, which performed well given the environment with many new client launches this year and continued solid use of our clients' workforce education programs. While the pandemic has slowed new sales decisions, learning and development remains a key investment pillar for leading employers as the challenges of attracting and retaining key talent remain high. With College Coach offering important advice and insights around how COVID-19 is impacting the college admissions process and financial aid packages, we remain bullish about the continued long-term growth prospects of this segment. In closing, when I look back at the last quarter, one thing that stands out is the unique strength and resiliency of our diversified employer-centric model. In response to the unprecedented crisis, we did more than just hunker down and preserve resources. We took immediate action to support clients, parents, and families in need. We played a vital role in our communities providing care for the children of frontline workers during the early days of the outbreak. We worked diligently with local health authorities and medical experts to create safe, healthy, and nurturing environments for staff and children to return to. We deployed new solutions to employers and working parents to support their care needs as businesses and schools closed. We leaned in and made important investments, including a strategic acquisition. A silver lining from the last several months is the broader recognition of how important childcare is for our country's economic recovery and stability and the client recognition of what a responsive and innovative partner we can be. I believe high-quality childcare will be more important to the future than ever before and I remain confident that we will emerge from this crisis well-positioned to capture the opportunity that lies ahead.

Thank you, Stephen, and I will take you through now a recap of the headlines for the quarter again and provide some thoughts on the rest of the year. For the second quarter, overall revenue contracted 44% to $294 million. Adjusted operating income declined to $27 million and adjusted EBITDA was $60 million or 20.4% of our overall revenue. As Stephen outlined, the majority of our centers remained closed during the second quarter and centers that were opened were primarily serving healthcare and other essential workers. As a result, full service center revenue contracted $300 million or nearly 70%. This is modestly better than our expectations as 160 temporarily closed centers were reopened for a portion of the quarter. Our adjusted operating income contracted $107 million over 2019 in the full service segment to a loss of $55 million. This is in line with our expectations of a 35% to 40% flow-through on the contracted revenue. As Stephen went through, demand for our back-up services drove very strong performance in the second quarter with top-line growth of 94% to $136 million and $77 million of operating income. As center-based backup care became less accessible with center closures starting in mid-March, we worked closely with clients to expand the availability of self-sourced reimbursed care to meet the sudden and intense needs of their employees. We were also able to limit the decline in operating income in Q2, in part due to our highly variable cost structure and through strong cost management as well as the actions that we discussed last quarter to mitigate the impact of our closed centers. We reduced labor and program expenses associated with centers that were closed. We contracted SG&A through reductions in discretionary spending and personnel costs including employee furloughs, cuts in executive compensation, and the elimination of other non-essential spending. We have also been able to benefit from certain provisions of the Cares Act including payroll tax deferrals, tax credits for retained employees, and accelerated tax depreciation. Interest expense of $9 million in Q2 of 2020 was down nearly $3 million over 2019 on lower interest rates and average borrowings. The structural tax rate on adjusted net income of 15% is down from 23% in 2019 primarily on reduced taxable income. Turning to the balance sheet and cash flow, we consumed a modest $13 million in cash from operations in the quarter and made limited capital investments of $15 million compared to $30 million in the prior year. We ended the quarter with $270 million of cash, which includes the $250 million of equity capital that we raised in early April and we have no borrowings outstanding on our $400 million revolver. Now briefly looking ahead to the remainder of 2020, we're not providing revenue or earnings guidance at this time as the duration and the scope of the ongoing business disruption remain difficult to predict. However, as we did last quarter, I can share some qualitative color on how we see the next several months evolving. As discussed, we anticipate that more than 85% of our centers will be reopened by the end of the third quarter. As we reopen centers, we're phasing in enrollment operating with some capacity reductions to accommodate COVID-19 safety protocols. Therefore, we initially welcome a finite number of families and a core group of staff before expanding the enrollment to additional classrooms. The early enrollment trends from reopened centers are encouraging and we anticipate sequential improvement over the balance of the year. We believe that the full recovery in our enrollment will happen, but it will likely take several quarters. The near-term outcome of this reopening and re-ramping cadence is that we expect full-service revenue to trail 2019 levels in the third quarter by approximately 45% to 50%, with a related flow-through to operating income of between 50% and 60%. In terms of center operations, we ended the second quarter with 1076 childcare centers in the portfolio of which 409 centers, to be exact, were operating. We continue to progress centers in the development and construction phase and currently expect to add approximately 25 new centers in the full year 2020. As part of our post-COVID portfolio assessment, we also made the decision to permanently close 18 of our centers in the US and the UK and are evaluating another 50 to 60 additional centers to potentially not reopen or to divest over the next 6 to 12 months. Turning now to back-up care which has clearly been a bright spot in the first half of the year, providing great client service opportunities while also contributing to the stability of our overall operating performance. We continue to expect back-up care to deliver strong top-line growth in the mid-teens for the full year 2020, though use was heavily concentrated in Q2 as many employees used a significant portion of their annual back-up allowance. Therefore, we currently expect lower overall use and revenue in the second half of the year though we continue to engage with client partners to potentially extend their back-up care program with additional use allowances and so to conclude, although the operating environment continues to be very fluid and our results in the second quarter are a testament to the durability and strength of our diverse service offerings and employee-centric model, the deliberate and swift actions we've taken to combat the pandemic also underscore the financial and operating agility that we've demonstrated over our 30-plus year history. I have great confidence that we have the right team partnerships and assets to not only weather the current crisis but to capitalize on the opportunities that our financial position, our scale, and our brand afford us in the future. And so with that, we are ready to go to Q&A.

Our first question comes from Hamzah Mazari with Jefferies. Please proceed with your question.

Good afternoon, and thank you very much. I was hoping you could address some of the negative perceptions surrounding daycare. First, there's the impact of remote work on employer-sponsored daycare centers; if employees are working from home, they may not utilize those services. Secondly, consider the trend of suburban migration, as most of your centers are located in urban areas. Additionally, what are your thoughts on the possibility of universal pre-kindergarten if Biden is elected? Finally, have you encountered any COVID cases in the centers that are currently open?

Okay. Well, that was a long list. We're trying to take notes here, so do you want to kick it off, Steve.

Thank you, Hamzah. I'm glad to address your question regarding the various factors that could impact our business. It's important to recognize that during this pandemic, it has become evident to both working parents and their employers that expecting an employee to be productive at work while also serving as a primary caregiver or teacher at home is quite challenging. There's been a significant increase in awareness regarding the importance of childcare and the benefits of employers investing in it. In our discussions with clients and potential clients about on-site and near-site childcare centers, we see a strong commitment to both reopening and maintaining this model long-term. Interestingly, one of the most vocal advocates for remote work has also decided to establish a childcare center on their corporate campus. While there may be shifts among some companies regarding work locations, most progressive employers recognize the importance of employer-sponsored childcare. Regarding the migration from urban to suburban areas, when we evaluate the few centers we don’t plan to reopen, they aren't primarily located in urban settings. In fact, families still show a tendency to reside in urban areas, which continue to experience the largest disparity between supply and demand for childcare. Our focus remains on the employer model, particularly in urban areas and their surrounding regions. On the topic of universal pre-K and any potential plans from the Biden administration, I want to highlight our successful operations in the UK, where universal pre-K is implemented nationally. This support strengthens our model, and we are always open to third-party assistance to make childcare more affordable for families in the U.S. Historically, this support has come from employers, while in counties like the UK and the Netherlands, it has come from government initiatives. We welcome any opportunities for government support to enhance childcare affordability for working families. Lastly, regarding COVID cases, our centers operate within communities affected by the virus, and throughout the early months of the pandemic, we successfully maintained operations at 250 centers, thanks to our dedicated teachers and the robust COVID protocols we've established. Overall, I feel optimistic about our momentum despite the challenging operating conditions.

Could you discuss how your back-up care business stands out from others in the market, such as care.com? Additionally, can you provide some insight into the potential growth of this business over time? Feel free to share any market size estimates or other relevant information based on its past performance. I'm interested in understanding how your offering is uniquely positioned compared to competitors. Thank you.

We hold a significant share of the backup care market, largely due to our long-standing experience in providing this service. Our extensive resources dedicated to this business line give us a clear advantage. There is a strong connection between our backup care placements and the interest shown by our clients and their employees in utilizing our centers. This position allows us to serve our clients effectively, especially through our own centers. Additionally, the market potential within the backup care segment is substantial, and we believe we are in the early stages of this business. Unlike our center-based services that typically require a workforce of around 1,500 employees at a single site, we can cater to employers of all sizes nationwide. Overall, we are just beginning to tap into this market, hold a competitive edge, and offer what clients and their employees truly want—the high-quality Bright Horizons centers in our network.

Great, thank you so much.

Thank you. Our next question comes from Jeff Meuler with Baird. Please proceed with your question.

Thank you and good evening. Backup care has obviously performed exceptionally well this quarter, and it seems you anticipate it will return to normal levels relatively soon. I'm curious about the key factors influencing this normalization, especially after such a strong quarter. For example, regarding self-source care, I’m unclear on its significance in Q2. Is it more related to the emotional support needed in collaboration with corporate sponsors, or is it influenced by the overall demand from schools potentially reopening and full-service daycare centers resuming operations? Could you help clarify which factors are the most crucial and their relative importance in this normalization process?

I believe that self-source reimburse care is a new category that clients could access, serving as a substitute for other types of care. Its usage was notably concentrated in the second quarter, as many employees took advantage of their full annual allowances. This illustrates how we are trying to interpret the typically annual cycles of usage allowances clients provide for their employees. We also welcomed several new clients to the back-up care segment or those using this care category for the first time, contributing significantly in the second quarter. We were aiming for a growth cadence of 12% to 13%, and this contributed to that, particularly from clients utilizing more services due to being per-use clients, as well as those who used their allowances early in the year. In terms of main drivers, full-service centers faced major closures, which dampened access to in-center care this quarter. However, we anticipate a restart and reopening in the latter half of the year. In-home care began the year strong with notable growth compared to last year, and while it is a different category from in-center care, we anticipate its continuation. The alternative between reimbursed care and in-center care is a key driver for us, along with the reopening trends. We are optimistic, given the influx of new registered users and clients who have never utilized back-up care before. As more parents need support, companies are becoming more aware of the benefits this service offers their employees, particularly for those with school-age children. While we are initiating talks with clients regarding these opportunities, it is still early to provide quantifiable insights.

Okay. And then it looks like the latest round of fiscal stimulus proposals have some child care financial support language in them differ between I think Republicans and the Democrats, but as far as I can read it, you and your family users should be eligible for that proposal. But we're just love your perspective or confirmation of that is the case. Thank you.

We have reviewed the proposals and generally agree that there are positive aspects for the families we serve, which could ultimately benefit us as well. However, we are not relying on any of these proposals to be implemented, as financial concerns have historically been the biggest obstacle. Therefore, we are not incorporating any positive expectations into our plans, although we acknowledge that there are elements that could be beneficial.

And some of them are similar to ones we've talked about in the past of increasing the de-cap Flexible Spending Account limits that make childcare more affordable to parents, that's a fundamental opportunity that certainly would benefit us, but I think those incremental elements have more chance of passage than the completely broad brushed UPA kinds of suggestions.

Got it. Thank you.

Thank you.

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Thank you. My first question is just on Sittercity. I think they have been an important partner with you guys for a long time. I was just a little bit surprised that you said the acquisition, I guess, was in the period, like how much of the in-home back-up care was sourced from Sittercity. I was just hoping that you could give us a little bit more details and maybe what you would change by acquiring them versus partnering with them.

Thanks, Manav. Yes, we're excited about the acquisition of Sittercity. I think what we were really characterizing was that their economics at this point are still relatively small compared to our back-up business and then certainly the broader business, that's not to diminish the importance and the strategic intent in making that acquisition. In terms of what they have done in terms of our partnership historically, it's really been around our ability to offer our employer clients and their employees bulk access to Sittercity services, so traditional Sittercity services and a large number of our clients currently undertake that opportunity. Into the future, obviously we see good synergy in terms of beginning to serve up for example our centers as options on the Sittercity platform so that we can continue to provide options to Sittercity users in that regard and at the same time fundamentally as we continue to build out our digital strategy and our digital capabilities, we see Sittercity as a nice way forward in terms of the capabilities that they bring to the company.

Got it. And just a follow-up on the suburban versus urban debate. Can you elaborate on the centers you've closed? You mentioned you closed the UPA and are evaluating another 60 for closure. Where are those centers located, and what is the reasoning behind the permanent closure if you believe, as you stated earlier, that utilization will eventually rebound?

Yes, the way you've framed the question is an important consideration. Only a small portion, likely around 10%, of these locations are in major urban areas, while the majority are in more rural and suburban settings. As we look ahead to late 2021, we must consider the prospects for recovery in some of these areas, which may lead us to make quicker decisions. We can consolidate our operations into other locations, and we are carefully evaluating our portfolio to be prudent. The current conditions appear more promising than they were a few months ago, but there is still a long path ahead, and we want to be strategic about our investments.

Got it. Thank you. That is enough.

Thank you. The next question comes from the lines of Andrew Steinerman with JP Morgan. Please proceed with your question.

Hi, it's Andrew. I have two questions, one is about visibility into September. And the other is about utilization of the factors that will be open in September and so basically, I'm thinking September is always an important time for families to often go back to work and when you say phased in your capacity do you already have commitments from families for September or do you have to still kind of do the logistics on who is going to come in September and then assuming you have that visibility, what type of utilization should we expect in September.

Yes, it's an important question, and it highlights the uniqueness of this year. September typically sees many families entering a re-enrollment period, but this year is different due to ongoing uncertainties surrounding school reopenings and the decisions being made by businesses. This situation has created a level of disruption that diminishes the visibility we would usually have for September. We're examining the general reopening process, and our plans for reopening centers are driven by surveying parents to gauge their interest in returning. We are initially limiting enrollment and gradually adding classrooms as we welcome families back. Currently, our centers have enrollments ranging from 20% to 60%, depending on whether they stayed open or reopened under various conditions. As we move into September, we expect to be around the average for centers that are currently open and in a gradual re-enrollment phase, which is quite different from the usual September re-enrollment cycle.

Okay. Is there a waitlist reopening due to more demand than you have capacity?

In some cases, because we are opening an infant room, a toddler room, and a preschool room, a family may need to join the waitlist to be considered for enrollment in the new classroom. We are pleased with the demand levels and the ongoing interest from parents. We are surveying them to gauge their interest and making offers that are converting well. However, some parents prefer to wait a few months while others want to enroll immediately, so we are trying to balance both preferences along with our opening and safety protocols.

Understood. Thanks, Elizabeth.

You're welcome.

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed with your question.

Hey, this is Jeff standing in for Toni. I want to ask the work from home question in a different way. Given the increase in employees working from home, where do you stand on allowing employee children to attend centers outside of their usual employer-based center? If work from home becomes more permanent, do you see the overall model adapting to this change?

There are several factors to consider regarding this question. First, parents generally have a strong interest in maintaining continuity of care. If they expect to return to their office in the upcoming months and their child will be at a center for several years, they will likely choose a center that offers long-term stability, which is often the one associated with their employer. Second, when comparing the cost for families between our lease/consortium centers and their employer-sponsored center, there is usually a tuition difference of about 10% to 20%. This provides a financial incentive for them to utilize the workplace center. Lastly, practically speaking, families will have priority access at their employer's center, which they may not have at a local lease/consortium center unless their employer has a partnership with that center. Therefore, there are several reasons why employees will prefer to continue using their on-site center.

I believe another important aspect for on-site centers is that they have priority. Additionally, they are usually located where a client has a significant number of employees, even when attendance is lower, which exceeds the center's full capacity. Therefore, there will be demand in this evolving work environment.

Okay. That all makes sense to me. And then you did 35% conversion margin, it looks like in the quarter with a full service, which I think was the bottom of your prior range. And I think in the 3Q guide you said 50% to 60%. So I just wanted to understand exactly what's driving that figure higher. And is there any kind of variables there that can make that number come in better than expected. Thanks.

Certainly. The main factor is that in the second quarter, 80% of our centers were closed until we began reopening in late May and early June, resulting in a 70% revenue decline, and many employees were furloughed. As we reopened, with 160 centers back in business by June 30 and several hundred more in July, we reached a total of 725 by the end of July. We've been bringing back staff faster than the revenue and enrollment typically associated with fully optimized staffing. We mentioned last quarter that the revenue contraction would decrease; it has shifted from 70% to between 45% and 50%. However, our labor structure is currently less efficient. As occupancy costs in our lease and consortium centers become more manageable, we might face some challenges with labor as we continue to ramp up. This is the main factor, and as we progress, our recovery will follow the trends seen in Q2 as we continue to stabilize through the remainder of the year.

Thanks a lot.

Thank you.

Thank you. The next question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.

Hi, thanks, good afternoon. You're targeting to have more than 80% of your centers opened by the end of 3Q with utilization rates ranging somewhere between 20% to 60%. As you look beyond 3Q, how quickly do you expect utilization rates to recover to the more traditional 70% to 80%.

I believe we won't reach those levels until well into 2021. While some centers might return to that level sooner, on average, we expect that recovery to take place later in 2021. It's still early to make definitive predictions. However, we anticipate gaining better visibility in the next few quarters. Our immediate goal is to reopen the centers and encourage parents to return, which will help restore regular activities and confidence in our protocols. Although we see this as achievable in the long run, it will take some time to get back to where we were.

Got it. And you mentioned that the detrimental margins for 3Q will be 50% to 60%. Can you perhaps frame what the relationship might be between detrimental margins and capacity utilization rates, in other words, where would rates have to go for decrementals to improve.

Well, they'd be improving over that range of 20% to 60%. So I think on average what we plan for a good steady increase in enrollment, but to the extent that is faster than those metrics, I don't know that we have anything more specific that we would lay out right now.

Okay, got it.

Thank you.

Thank you. Our next question comes from Gary Bisbee with Bank of America. Please proceed with your question.

Good afternoon. I would like to follow up on the question regarding the full service center. I recognize the challenges of bringing staff back, which may exert some pressure. As you consider operating in the post-COVID environment, aside from the timing of restaffing the center, how are you assessing your operating costs compared to before? Do you anticipate needing a higher number of staff to maintain smaller class sizes? I expect that while cleaning and supplies will incur some costs, they are not significant. However, do the processes and changes you have implemented lead to a higher cost structure as we look ahead over the next few quarters or even a year or two?

Yes, I think you've highlighted the two main points. There are additional cleaning and sanitation costs that we consider important, but they are manageable. Regarding labor costs, one factor is the need for extra staff to handle remote pickup and drop-off since parents are not bringing their children to classrooms. There’s a bit of that, and in terms of classroom staffing, we are focusing on staying more contained in one room rather than combining group sizes. As we navigate this phase of ramping up, we foresee some adjustments to costs in the long term. The increased labor and cleaning costs we are experiencing will be manageable, either through slight price adjustments or modest increases in enrollment. We believe these costs are not so significant that we cannot return to the operating levels we had before.

Last quarter, I asked about my employer, and I apologize for the many emails they sent regarding your performance, which they are very pleased with. I want to revisit the topic because they have increased the back-up usage available to employees multiple times this year. I understand your perspective on the current user base and how many are nearing their maximum usage levels. However, do you have insights on how frequently and what factors might influence whether employers could expand these limits further? For example, does it relate to the reopening of offices and the subsequent reduction in need? I'm trying to understand if there's a chance for further expansion, so that business in the second half may not just mirror the second quarter but instead show a stronger persistence than anticipated.

Yes. First, I want to thank Gary and Bank of America for being a fantastic client and, more importantly, a great employer that supports its employees during these challenging times. Bank of America stands out in how they have approached expanding available services, offering more opportunities for their employees to utilize this important resource. More generally, employers are reconsidering the work-from-home versus office debate. The focus has shifted away from where employees are working to ensuring productivity while addressing the needs of caregivers, particularly for young children who require care. As we approach the fall, employers are thoughtfully considering what support will be necessary, not only for young children but also for school-age programs. We're having positive discussions with various employers about how they can better support their employees. Some, like Bank of America, are choosing to enhance their services, while others are planning to reopen their facilities before their offices. Each employer is making unique decisions, but a common thread is that they are being considerate of their employees' needs. The rapid onset of the pandemic revealed the difficulty of balancing work and home responsibilities, and there is a universal acknowledgment that such a situation is unsustainable as we move into the fall. Employers like Bank of America are striving to be thoughtful, and we are committed to being a supportive partner to organizations like yours.

That's helpful. I have one last question about back-up before I turn it over to you. You mentioned the profitability of full-service and how you're observing its progression. I didn't catch your thoughts on back-up in the situation where revenue declines in the second half, but the full year aligns with your revenue expectations. In that case, would the profit at that level be a good indicator, and how should we consider the margin in that scenario? Thank you.

It's a good question. I would say that since the self-sourced reimbursement care is recorded as a net revenue item, it somewhat skews the margin profile for the second quarter. Looking at the second half of the year, I believe our operating margins can continue to remain within our targeted range of around 30%. So we expect to maintain margins in the high 20s to 30%, consistent with what you have seen in the past. This is how we view margin performance in relation to that revenue.

That's for the back half or the full year.

That's just the back half.

Okay, all right, great, that's helpful, thanks.

Thank you. The next question comes from Jeff Silber with BMO Capital Markets. Please proceed with your question.

Thanks so much for squeezing me in. On utilization, did you disclose roughly what the utilization was in 2Q 2020 and I'm curious how that compared to 1Q 2020?

We didn't disclose it because with 80% of the centers closed for most of the quarter, those that were open had very limited enrollment for first responders. Therefore, the attendance was probably in the 30% to 50% range of utilization, compared to the 70% to 80% utilization we saw in Q1.

That's helpful. I want to shift to the topic of portfolio rationalization. Are there potential areas you're considering that currently lack centers? If people continue to work from home and remain in their suburbs, could some of the smaller centers facing financial challenges be viewed as acquisition or takeover opportunities for you?

Yes. We definitely anticipate that that will be the case and our expansion strategy is certainly to continue to look for good opportunities on the lease/consortium side as well as on the acquisition side, as we stated previously, here in the US. We think that those will come in the profile of single sites or small groups of well-located centers that are in strategic locations for us, but absolutely we intend to continue to grow our portfolio overall even within the context of continuing to rationalize as well.

Okay, great. Thanks so much.

Thank you. And thanks to all of you for joining the call this evening and appreciate your support.

Thank you, everyone. I appreciate your patience. We were a little bit late, but we value all the questions and will connect with you virtually. I don't believe we'll be meeting anyone in person for some time, but we'll see each other online. Take care.

Take care.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation. And you may disconnect your lines at this time.