Earnings Call Transcript - BFAM Q2 2021

Operator, Operator

Greetings. Welcome to the Bright Horizons Family Solutions Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I would now turn the call over to your host, Michael Flanagan. Please go ahead.

Michael Flanagan, Investor Relations / Host

Thanks, Stacy, and hello to everyone on the call. With me tonight are Stephen Kramer, our Chief Executive Officer; and Elizabeth Boland, our 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 Form 10-K 2020 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 will now take us through the review and update on the business.

Stephen Kramer, Chief Executive Officer

Thanks, Mike. Hello to everyone on the call and thank you for joining us this evening. I'll start tonight with a recap of our second quarter results and provide an update on our current operations and plan for the remainder of 2021. Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions. First, let me recap the headline numbers for the second quarter. Revenue increased 50% to $441 million and adjusted operating income of $34 million was up 25%. Adjusted net income of $30 million yielded adjusted EPS of $0.49, up 11% from last year. Overall, as we passed the midpoint of the year, I continue to be pleased with our performance and optimistic about the trajectory of our recovery, as well as the opportunity that lies ahead across all three of our business lines. Let me start with our full-service segment. Revenue grew 144% in Q2, reflecting the steady recovery of our early education operations since the widespread shutdown of 80% of our centers at the same time last year. We ended the quarter with 920 of our 1,006 centers open, having added four new centers and reopened a total of 18 temporarily closed centers in Q2. As I mentioned in our last, we've started to see several clients pull forward their reopening timelines, and more than half of our Q2 reopenings were originally slated to open in the second half of the year. The center that we opened for Ochsner Health in Q2 adds to our healthcare client portfolio. And in that vein, I'm also excited to have welcomed six previously self-operated centers for the Mass General Brigham Health system to the Bright Horizons family in early July. This opportunity was in large part based on our unique ability to deliver backup care to their employees at the height of the pandemic and the deep partnership we forged as a result. As they interact with clients and leaders from other organizations, I'm encouraged to hear their commitment to their return to office. Even as we all continue to respond to evolving conditions and impacts from COVID-19 variants, that sentiment is coming through loud and clear from our clients who are eager to reestablish in-person work and collaboration, and to reinvigorate their company cultures. We now anticipate that the majority of our remaining temporarily closed centers will reopen in the third quarter, as most clients plan for offices to be open by mid-September. We too will be officially opening our new home office to all employees September 13. And I am thrilled that our new state-of-the-art childcare center will be opening on our campus at the same time. I couldn't be more excited to have our teams back together under one roof to foster collaboration, creativity, and our culture, which has always been foundational to our organization. Within our open full-service centers, I remain encouraged with the continued steady improvement in enrollment levels. While many geographies have experienced periodic resurgence of COVID-19 over the last 12 months, our occupancy levels have demonstrated consistent quarter-to-quarter growth since reopening, and I remain confident in our ability to return to pre-COVID occupancy levels. With that said, we are navigating a business and working environment that remains fluid, underscored by the persistence of COVID-19 and its impact on employers' and employees' decision-making. In addition, as more families request tours and look to reserve full-time spaces in our centers, we are working hard to stay ahead of the staffing demands as the pandemic has certainly exacerbated the labor pressures, which have long affected the childcare industry due to a shrinking supply of early educators working in the field. Let me now turn to backup care. Revenue of $81 million in the second quarter was in line with our expectation, but does reflect a decrease of 40% due to the significant surge in demand we experienced a year ago in the early stages of the pandemic. The core underlying trends within our backup care business remain robust. We saw another strong quarter of new client additions with launches for Cargill, UMass Memorial Health, People Financial and Synopsys to name a few. More than three quarters of our new backup clients are new to the Bright Horizons family, reflecting the broadening interest among employers and the opportunity for long-term growth and service cross-sell. On the use front, traditional use continues to ramp and self-sourced reimbursed care, as expected, continues to taper with more parents transitioning to traditional in-center and in-home use settings. Although we have not fully returned to pre-pandemic use levels, traditional use grew sequentially through the quarter with unique users stepping up nicely. I'm also very encouraged by the client interest and uptake in virtual tutoring and Steve & Kate's Camps. More than 300 clients have added virtual tutoring to their backup offering in the last three months. And it was truly great to see children return to in-person camps and activities this summer after what has been a challenging year for all. I look forward to backup care returning to year-on-year growth next quarter, and remain very excited about the near- and longer-term opportunity within this segment. Turning to our education advisory business, which delivered solid revenue growth of 24%. We launched a number of new clients in the quarter, including Cincinnati Children's Hospital, International Paper and L3Harris. We continue to see strong activity levels, particularly within College Coach, as the pandemic amplified the complex decisions parents face with their children's education. I'm also excited to announce that we joined OneTen a few weeks ago. OneTen is a coalition of leading employers committed to upskilling, hiring and promoting 1 million Black individuals in America over the next 10 years into family-sustaining jobs with opportunities for advancement. Bright Horizons has the unique position of joining as both a participating employer and, through our EdEntry division, as a talent developer, focused on helping other OneTen employers build educational and employment pathways that support employees working toward further educational attainment. I continue to believe our workforce education and advising solutions are well-positioned to support the growing demand for training and upskilling of our client employees. So in closing, I am pleased with the rate of recovery in our business, following the unprecedented disruption caused by the pandemic. The team has done a tremendous job in delivering the highest quality care and education to our existing families, learners and employer clients, while at the same time identifying and capitalizing on unique opportunities for client and product growth. The combination of our early childhood education, backup and education advisory services create a powerful suite of solutions for our employer partners. I'm pleased with our solid first half of 2021 and how well we are positioned to continue to execute over the remainder of the year and beyond. Elizabeth?

Elizabeth Boland, Chief Financial Officer

Thank you so much, Stephen, and hi to everybody on the call tonight. Thanks for joining us. I'll recap the quarter's results and then provide some thoughts on the rest of 2021. For the second quarter, overall revenue increased 50% to $441 million and adjusted operating income increased 25% to $34 million or 8% of revenue with adjusted EBITDA of $68 million or 15% of revenue. We ended June with 920 out of our 1,006 centers open. In the second quarter, we added four new centers and reopened 18 centers that had been temporarily closed. We also permanently closed 13 centers. The 86 centers that remained temporarily closed at June 30 are slated to reopen in the coming months. Full-service revenue increased $197 million in Q2 or 144% comparing favorably with our expected increase of 135% to 140% year-on-year. As Stephen mentioned, enrollments are tracking well and our occupancy levels now average between 50% to 60%. As noted, we are particularly encouraged by the sequential improvement of enrollment across all geographies. Adjusted operating income for the full-service segment also improved $59 million over 2020, to a positive $4 million. This represents a 30% flow-through on the revenue growth. Again, this is ahead of our expectations of approximately 20% flow-through on the progressing enrollment and solid cost management, as well as continued support from our client partners and the government programs that are targeted for the childcare industry. The underlying demand for backup care services continued to remain strong in the quarter with a growing list of clients, an expanding user base and a broadening of care types. As we've discussed on prior calls, backup care experienced outsize growth in 2Q of 2020 due to the significant use of self-sourced reimbursed care during the initial phase of the lockdowns. While reimbursed care continues to be one of the care type options for some clients, it is significantly reduced compared to the prior year. As a result, our total backup revenue decreased 40% in Q2 against that outside comparison. Overall, for the first half of the year, backup revenue was down 25% compared to 2020 broadly in line with our expectations. Traditional in-center and in-home backup use continues to progress toward pre-COVID levels. Both users and uses are growing solidly over 2020 as a result of the expanding network of available centers and parents' increased need for additional care support. Adjusted operating income for the segment was $25 million for the quarter or 30% of revenue broadly consistent with our longer-term targeted performance. This compares to $77 million in the prior year, which reflected the outsize margin contribution from the recognition of self-sourced reimbursed care, which was recognized on a net revenue basis. Our Educational Advising segment also reported solid growth in the quarter with revenue up $5 million or 24% on contributions from new client launches, as well as expanded use of our workforce education, college admissions advising, and Sittercity services. Since the onset of the pandemic, we've also been able to limit the adverse impact of the revenue contraction on our operating income. We've been measured about aligning our reopening schedule with demand for care. We've been disciplined about cost management and investment spending, and we've creatively responded to client needs with expanded service offerings. Our variable cost structure and the support we received from our client partners, as well as various provisions of the CARES Act and the Consolidated Appropriations Act in the U.S. and other government programs directed toward the childcare industry in the U.K. and the Netherlands have also helped to limit the deleveraging. Interest expense of $9.6 million in Q2 of 2021 was roughly equivalent to the prior year. And our structural tax rate on adjusted net income was 21% compared to 15% in 2020, primarily due to the proportionately lower tax benefit from equity activity under ASU 2016-09. In terms of our capital deployment strategies, our first priority is investments in the growth of the business, both organic and inorganic, followed by share repurchases under our existing authorization. We generated $67 million in cash from operations in the quarter and made investments in fixed assets and acquisitions of around $15 million in line with the prior year. We also resumed our share repurchase program and acquired $70 million of our shares in Q2 after pausing over the prior year. We ended the quarter at 3.1 times net debt to EBITDA with $419 million of cash and no borrowings outstanding on our $400 million revolver. As has been the case since the onset of the pandemic last year, we are not providing full earnings guidance as the cadence of recovery remains difficult to predict. However, I will share some qualitative color on how we see the next quarter unfolding. With most clients targeting their offices to be open by mid-September, we anticipate over 95% of our centers will be opened by the end of Q3 absent any unexpected client delays. With that said, our focus remains on enrolling families and ramping centers back to pre-COVID levels. As discussed, we're pleased with the enrollment trends and continue to see growing interest from prospective families. Therefore in the near-term, we expect full-service revenue to increase by approximately 50% to 60% over Q3 of 2020 with incremental operating income flow-through of around 45%. In addition to the typical Q3 seasonality that we experience in this segment, the stepped up pace of reopening and the associated inefficiency during the ramp stage, along with the continuation of COVID protocols, including enhanced staffing levels, will have some temporary weigh on our operating income as we finish off 2021. As a reminder, our third quarter typically experiences some seasonal cycling of enrollment as older preschoolers move to elementary school. This impacts Q3 margins as we backfill that enrollment in the younger age groups into the fall and the enrollment mix shifts toward younger cohorts. Shifting to backup, we remain very optimistic about backup care's growth runway. Having now lapsed a significant surge in reimbursed care that we delivered at the outset of the pandemic in 2020, we expect backup care to return to year-over-year growth in the second half of the year. In the near-term, we expect traditional use to continue to build and grow significantly year-over-year driving total backup care revenue growth of approximately 15% to 20% in Q3 with operating margins ranging around 30% to 35%. With regard to our Ed Advisory business, we expect to continue to deliver mid-teens revenue growth and consistent operating income in the range of 20% to 25% for Q3. And with that, we are ready to go to Q&A.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Manav Patnaik with Barclays. Please go ahead.

Manav Patnaik, Analyst (Barclays)

Thank you. Good evening.

Elizabeth Boland, Chief Financial Officer

Hi, Manav.

Manav Patnaik, Analyst (Barclays)

Glad to hear all the reopenings and all that positive commentary. The one question I was curious about is you guys acquired Sittercity, you got the Steve & Kate’s Camps. And even at Barclays, I think we just got an email saying you could exchange a day of backup for like four hours a virtual visit or something of which the tutoring. I was just curious how did the economics of all that work, does it change what we've seen historically, or are they just substitutes; just trying to understand if those can be offsets to what's continued uncertainty of reopening here.

Stephen Kramer, Chief Executive Officer

That's a great question, Manav, and thanks to Barclays for continuing to lean in on the backup service. So essentially as we've always described, the underlying economics of our backup care service is based on the use that we're able to achieve, and that ultimately accrues to what employers are investing. And so as we continue to increase the use types, and obviously as you just described, Barclays is investing in virtual tutoring. You have the ability to use in-home care. You have the ability to use any center care. We are just broadening the kinds of services that are used within the rubric of backup care. And our goal obviously is to extend the benefit to a larger swath of the employee population and at the same time make the services more relevant to that larger population. So ultimately, the goal is to continue to increase the investments that our employer partners are making as a result of the fact that we're having more and more impact on their employees.

Manav Patnaik, Analyst (Barclays)

Got it. And just curious Elizabeth, just on the Ed Advisory, I think I heard you give us the margin expectation, just curious how we should think about the growth in the second half of last year, there was a step up there, but just curious if there's anything to call out.

Elizabeth Boland, Chief Financial Officer

So the growth, do you mean the revenue growth?

Manav Patnaik, Analyst (Barclays)

Yes, correct.

Elizabeth Boland, Chief Financial Officer

Yes. So still looking at mid-teens revenue growth. As you mentioned before, Sittercity has joined the family and it is contributing in that group. That's where it is reported in terms of the segment reporting. So it will be lapping that inclusion last year as we get to the end of 2021. Because we are ramping that business and getting it to its own maturity, it has contributed to some of that headwind on the margin being closer to 20% than what we would see as more of a long-term margin in that segment between 20% and 30%. So near-term, that's why we guided to 20% to 25% and think that mid-teens on the top line is appropriate.

Manav Patnaik, Analyst (Barclays)

All right. Thank you very much.

Operator, Operator

Your next question comes from George Tong with Goldman Sachs.

George Tong, Analyst (Goldman Sachs)

Hi, thanks. Good afternoon. You mentioned that occupancy rates for full service are at 50% to 60% now, can you talk about how you expect that to progress and step up in Q3? What's embedded into your outlook? And then exiting the year, are you still on track to get back to pre-COVID occupancy rates and what are those rates in your view, structurally. Has it changed post COVID versus pre-COVID?

Elizabeth Boland, Chief Financial Officer

Yes. I mean, I think the headline answer or the initial answer to that is that we're broadly similar to what we have talked about in prior quarters. We are on track that we're pleased with in terms of the sequential progression. The Q3 results we'll have some turnover of that enrollment as the older preschoolers do go to elementary school and we're backfilling with new family. So even though we would seasonally typically see enrollment declining in Q3, we're expecting some continued modest improvement and continuing that into the fourth quarter, so that we are getting to near pre-COVID levels by the end of this year. That is certainly what we see given the demand profile that we're hearing from parents, what they're requesting and the conversations we're having with clients. So I think we're on the same page similar to what we have talked about in the past.

George Tong, Analyst (Goldman Sachs)

Got it. That's helpful. You mentioned that you're going to see some weighing on operating income as you finish off 2021 with full service due to ramping costs. But you also talked about the flow-through for operating income is going to be 45% in Q3. So does that suggest that margins will come under particular pressure in Q4 as some of those costs come back online?

Elizabeth Boland, Chief Financial Officer

I think what the messaging there is that we are in some respects in Q3 at the apex of the inflection on comparison to last year. So we were reopening centers in Q3 of last year. We had sort of the highest inefficiency of enrollment and cost structure. So the flow-through as we continue to ramp will be at the top now, and as we compare to Q4, we're not giving detailed guidance on Q4 at this point. But certainly, it will pull back from that level, because we had already seen quite a bit of improvement last year from Q3 to Q4. So I think just trying to make sure that everyone understands that we still have some COVID protocols, we're not going to be back to our margins in pre-COVID even as we are approaching our enrollment levels by the end of the year. We need to get all of the stability and the consistency of the cost structure to align with the enrollment and have the opportunity to have the tuitions cycle through as well. So there's a few moving parts like that that are contributing to our needing a few more quarters to be getting back toward the pre-COVID gross margin or operating margin that is aligned with having enrollment levels close to where we were.

George Tong, Analyst (Goldman Sachs)

Got it. Very helpful. Thank you.

Operator, Operator

Next question comes from Hamzah Mazari with Jefferies.

Hamzah Mazari, Analyst (Jefferies)

Hey, good afternoon. My question was on backup. Your Q3 guide seems very positive. Your 2020 revenue base was like, I think $388 million. I guess the question is, how big could this business be over time? Do you have a sense of how we should look at the addressable market given you've added more clients during this COVID timeframe than you've ever done before. And is there any competition here or not really?

Stephen Kramer, Chief Executive Officer

Yes, a lot in there, Hamzah, and I'll take each one in turn. In terms of the addressable market and sort of what we see as the opportunity, we think the opportunity within backup care is great. Different from our onsite childcare center business, which requires a minimum of roughly 1,000 or 1,500 employees in a single site location, our backup care services can address the needs of employers of any size greater than about 500 employees. So the addressable market there is quite a bit larger in terms of the number of employers. You're right to point out that we have added a large number of additional employers into this segment and as they season, we'll continue to see greater amounts of use coming from those employers. And at the same time, we continue to extend the number of use cases that are attributable to our backup care service. So again, I think there are a number of very positive tributaries that we are heading down as it relates to the backup care service. In terms of competition, we obviously do have competition in this marketplace. That said, we are by far and away the leader; we pioneered this space and certainly have continued a fairly dominant position within the marketplace. We take innovation within the service line incredibly seriously, because we ultimately always want to be providing best-in-class service to our employer clients and their employees, and feel incredibly positive about both the opportunity, as well as our competitive position.

Hamzah Mazari, Analyst (Jefferies)

That's very helpful and I forgot to mention Jefferies is a backup client too, just in case. But also just a follow-up question and I'll turn it over, the 100 employer centers that you had called out a few quarters ago that were shut, I think they were shut in Q4, they were shut in Q1. I think the new disclosure is that you expect 95% of your centers to open by Q3. I'm just curious about the 100 employer centers, maybe that's old definition, but are any of them open now? And are you expecting all of them to reopen by the end of Q3? I just wanted to get a sense of, if any of those centers you expect to remain shut forever or are impaired, is the question. Thank you.

Elizabeth Boland, Chief Financial Officer

Yes. So just to clarify, we have a total of 86 centers that are still temporarily closed and it's not to say never say never; there may be a handful of those that ultimately don't reopen, but in general, we think they all are going to reopen. They all have a schedule and a plan. There are a handful that are into early 2022, but the vast majority are this year and the vast majority are expected for Q3. So of those, there are a number of client centers in that group. We do have a few that are our lease models that are under our discretion that we have been managing the opening. But for the large portion of these, they are client decisions. And that's why we framed it as the majority being Q3.

Hamzah Mazari, Analyst (Jefferies)

Great, thank you so much.

Stephen Kramer, Chief Executive Officer

Thanks, Hamzah.

Operator, Operator

Next question comes from Andrew Steinerman with J.P. Morgan.

Andrew Steinerman, Analyst (J.P. Morgan)

Hi. I actually have two questions. I hope that's okay. The first one is, it's good to see the occupancy rates for full service centers heading back to pre-COVID levels by year end this year. My question is past that, into next year, what needs to happen to get full service revenues back to pre-COVID levels? And then my second question, which is really a different question, is are you seeing full service demand from Bright Horizons families closer to where they live or work, and how is Bright Horizons addressing that dynamic?

Elizabeth Boland, Chief Financial Officer

Sure. So I think the answer to the first question is into 2022, of course, as we target to be at or near pre-COVID levels by the end of the year, we would be into early next year before we are seeing revenue comparable to pre-COVID levels. We have the advantage of some— it depends on where the enrollment is concentrated in terms of the relative tuition levels and some of those things. But in large measure, we would expect to be lapping comparably at the revenue level sometime in the first half of 2022. And as it relates to continuing to grow enrollment from there, I think the opportunity for us as we've talked about on prior calls is that we're talking about pre-COVID levels and that certainly is threshold one. But from there as we continue to work in an environment where supply is constrained and the awareness of the need for childcare is increasing and employers are continuing to be supportive, we will also be working hard to continue to grow past what was the pre-COVID levels and now will also have the opportunity to drive revenue a bit higher than that. I'll let Stephen answer the second part of your question.

Stephen Kramer, Chief Executive Officer

Great. Thank you, Elizabeth. So Andrew, in terms of is our enrollment tending towards closer to home or to work? I think the answer is yes. The reality for us is that our enrollment tends to be either at the workplace or in a community-facing center. But in both cases, the individual who's enrolling typically lives within about 10 miles. We are finding that a lot of our families that enroll are living within 10 miles of their work site and therefore enrolling in their work site. And ultimately for those who are enrolling in our community-facing centers, again, they are living relatively close to the center. To get underneath the question, what we're finding is that our centers are located very proximate to where our enrollment lives and ultimately those centers are very well located for them. So overall feeling really good about where the portfolio is. We continue to look for additional employer clients that are looking to subsidize and finding good success, and at the same time continuing to look for new developments that allow us to continue to infill and finally looking for acquisition targets to do the same. So overall feel really good about where we're located and the enrollment trends related to those who are choosing a Bright Horizons experience.

Andrew Steinerman, Analyst (J.P. Morgan)

Perfect. Thank you.

Operator, Operator

Next question comes from Gary Bisbee with Bank of America Securities.

Gary Bisbee, Analyst (Bank of America Securities)

Good afternoon. I guess two sort of risks that appear to be out there I wondered if you could comment on. The first is just, are you hearing any change in plans as it relates to the Delta variant? I think there've been a number of large companies that have publicly sort of pushed off when they're bringing back a lot of employees. And so is that conversation happening? Do you see that as a timing risk as we think about the next several months and quarters? And secondly, just labor inflation and tight labor markets, maybe Elizabeth, that was part of your comment on costs will be higher. Margins will take longer to come back than revenue. But how are you working through that? Is that an issue or are you able to price and cover that as you've done in the past? Or is that somewhat of a headache at the moment? Thank you.

Stephen Kramer, Chief Executive Officer

Great. So Gary, on the question around timing of return to office, I think we've been on the front end of this information flow from our clients because obviously they see our support as a critical element of their return to office strategy. We were very early to recognize that employers were anxious to get their employees back, even though some of the rhetoric in the news was different; we heard very early that direction of travel. We continue to hear that it is very much a focus for employers to by and large get their employees back to the office. Irrespective of that, I think there is certainly a tone change as it relates to a few employers that may delay their date past Labor Day or just after Labor Day. There is real intent to make sure that employees have full supporting coverage and the flexibility that employers are moving forward with is certainly narrowing. But that said, you may have heard in the news about Apple moving it off by a month; that's still within the window of the Labor Day schedule. I think there's a lot of focus around that just after Labor Day return to the office.

Elizabeth Boland, Chief Financial Officer

And as it relates to labor inflation, Gary, I would say that we are certainly seeing wage inflation in our industry, like many other industries. We're not a minimum wage payer; we average well above that. And even though our wages do vary by geography, we're well above that across the geographies that we operate. But it is still—last year, 2020, was quite a disruptive labor year. So there is both some market constraint with people differing timing of coming back to work with either health concerns or unemployment benefits continuing. We are seeing that labor inflation is on the higher end of where we would have framed it in the past. We've been in more of a 2% to 3% range historically, and I'd say we're more in our 3% to 4% range on average with some areas higher than that. From a pricing standpoint, we have to date been able to continue to price ahead of that and to consider that even in markets where it's higher than the 3% to 4% average, we've been able to do so and expect that we would continue to. Where we've talked about a potential longer cycle of recouping all of the costs is in the typical full-service center going forward, as we get through this pandemic period and the extra costs that are in the model now with protocols that are kept up, not just from a health and hygiene standpoint, but also from some of the incremental staffing that is required. That will need to work its way out as we get more to a return to normal. And so that is where we may see a little bit of time in the headwind on margins as well. But overall structurally, labor inflation we think is on the higher end. We do have some support for that in the near-term from government programs that are geared toward directing some of the Consolidated Appropriations Act or ARPA funding to labor. So we're able to defray some of the costs with that. But it is still something that is part of the calculus that we're working through for our plan for the rest of this year and next.

Gary Bisbee, Analyst (Bank of America Securities)

Okay. So is it reasonable to think that some of those costs like the COVID protocols bleed into next year? That comment maybe wasn't just thinking about the next four months.

Elizabeth Boland, Chief Financial Officer

I think that yes, there may be some ongoing protocol costs, but not a lot of it. We expect to be tapering that down at the year end, but there may be some ongoing elements. We're looking to government support for some of those costs to offset the majority of it if there's a bleed into next year.

Gary Bisbee, Analyst (Bank of America Securities)

And then if I could just sneak in one more: your balance sheet is obviously quite strong. Profits are coming back. So leverage is going down. I've heard from a lot of people thinking that you'd likely be active in the M&A markets, looking at businesses that are in weaker position in the full-service center business to take share there. Maybe even transition your mix a bit more to the community-based market. We haven't seen any meaningful activity yet. Is that a real opportunity and what's the gating factor to moving on those kinds of opportunities? Thank you.

Stephen Kramer, Chief Executive Officer

Sure. We absolutely are very actively seeking acquisition opportunities as it's been our history. We are looking both in the geographies in which we operate—the U.S., U.K. and the Netherlands—as well as more broadly. As we've shared before, we look at markets where there is some form of third-party support, whether that be government, employer, or some combination thereof. You can count on us for continuing to focus and look and make sure that we are evaluating good opportunities that are a strategic fit, a quality fit and a financial fit. I would say that part of the delay, if there has been a delay, has been the amount of disruption that providers in our sector have experienced. As providers have built enrollment, many are trying to do the same thing so that they can bring back some of the value they had in a pre-pandemic level and ultimately achieve valuations more in line with their expectation. That's an important piece to consider in timing. But absolutely we are focused on continuing to look at both acquisition as well as organic growth opportunities, both in the markets that we're in today as well as more broadly.

Gary Bisbee, Analyst (Bank of America Securities)

Thank you. That's helpful.

Operator, Operator

Next question comes from Jeff Silber with BMO Capital Markets.

Jeff Silber, Analyst (BMO Capital Markets)

Thank you so much. Stephen, I just wanted to clarify something you had said earlier. I think you had mentioned that the majority of your full-service center clients' employees live, I think it was, within 10 miles of the center. And then also even the ones that may go to the least consortium models also live a similar proximity. If I'm taking my child to a work site childcare center, and then I'm working from home two days a week, if I wanted—if I contracted you for a whole month or for a week, I can still choose which center to take my child based on proximity. Is that correct?

Stephen Kramer, Chief Executive Officer

Yes. So there's sort of two ways to think about that. First, we have many examples of families who have their children five days a week within a worksite center and may be working two, three or four days at the work site. The real advantages for a family to think that way: first, they recognize from a continuity of care perspective that is likely the best for their child to have continuity of teacher and classmates within a center. In addition, they are often receiving a quality of care at a lower cost because there is an inherent subsidy being provided by the employer. So there is a real draw for employees to utilize their work site center both from continuity of care and from a financial and quality perspective irrespective of how many days they're working in the office versus at home and having their child at the work site. But yes, we do have other families that make the decision to mirror their schedule and also have a child a couple of days in one of our community-facing centers that may be closer to home. We offer both options, but we are certainly seeing much more of a draw to utilize the onsite center for their employer center, as opposed to splitting the week between two centers.

Jeff Silber, Analyst (BMO Capital Markets)

That makes a lot of sense. I appreciate you clarifying. If I could switch over to your Ed Advisory business, we're seeing a lot of companies really focused on offering education-oriented benefits to their employees. Are you seeing a lot more interest in that kind of business? And if I combine all your other educational advisory services as a whole, should we expect that to be a bigger percentage of your business going forward?

Stephen Kramer, Chief Executive Officer

So first, that area of our business is certainly growing more quickly than our full-service area in particular and likely faster than our backup area as well. Increasingly, that growth rate will cause it to become an increasing percentage of the overall, granted it's still relatively nascent today compared to the other two businesses, but we do expect to continue to see a healthy growth rate for Ed Advisory. On the workplace education side, most major employers have had tuition assistance programs for some time, but given the need for upskilling and reskilling, there is real focus on doing this work strategically. That's where our services come into play: our ability to take something that has historically been managed internally and do it in a more progressive and employee-centric way. As employers look to fill hard-to-fill jobs and prepare for future jobs, they are absolutely looking more specifically at how they develop their workforce through education. We believe we're well positioned in this market across our client base to continue to grow this business.

Jeff Silber, Analyst (BMO Capital Markets)

Okay. That's really helpful. Thank you so much.

Operator, Operator

Next question comes from Toni Kaplan with Morgan Stanley.

Toni Kaplan, Analyst (Morgan Stanley)

Thanks so much. I wanted to ask about the center count; it went down in the quarter by nine. I was just hoping you could go into what the primary drivers were of the 13 that closed. Was this a more permanent shift from employers towards more flexibility in the work schedule or are there other reasons that we should be thinking about on why the employers would want to close those centers?

Elizabeth Boland, Chief Financial Officer

Thanks, Toni. We had a number of centers that were temporarily closed and we were still assessing whether they were viable for the long-term, whether we could accommodate families at other centers. So a good portion of those are leased models that we also had control over. Not all of those centers were client decisions. There are a handful of client centers where the population had a lighter imprint and so they were not as viable as an ongoing support location for that client and they made the decision to close. I don't think this should be seen as any kind of a fundamental or indicative shift; it's really been a location-by-location decision that in some cases may have been reflected in any normal year, not just COVID, but COVID gave the impetus for that client to make a decision.

Toni Kaplan, Analyst (Morgan Stanley)

That's great. And as a follow-up, how should we be thinking about new center growth as we go through the rest of the year and into 2022 versus history? I imagine during COVID you were seeing a longer timeframe for someone to really pull the trigger on a new center. Has that shortened now that case counts started going down and uncertainty has lifted a little bit? I just want to understand the timeline.

Stephen Kramer, Chief Executive Officer

The full-service center and onsite center business has always had a long sales cycle. We had a number of clients who were further along in the sales cycle when COVID hit and many of them put that on pause. That said, we've also had some clients through COVID, especially those who currently self-operate their centers, make decisions more quickly. I mentioned Mass General Brigham earlier; they are a great example where that sales cycle was relatively short, given the fact that we impressed them with the work we did with backup care in the midst of the pandemic. They self-operated six centers and made the decision that we were the right partner to transition those centers, given how difficult they were finding operating through the pandemic. So it's a combination: we definitely saw some clients accelerate their decisions due to COVID, and there are opportunities, particularly self-op transitions, that we hope to see through 2022 as a result of the pandemic.

Toni Kaplan, Analyst (Morgan Stanley)

Super. Thank you.

Operator, Operator

Next question comes from Jeff Meuler with Robert W. Baird.

Jeff Meuler, Analyst (Baird)

Yes. Thank you. Good afternoon. Just so I'm interpreting your commentary or setting expectations appropriately: when you're talking about getting back toward pre-COVID enrollment in full-service centers, should we be thinking about that more on a per-center basis since center counts are still down from pre-COVID by the end of this year? And do we also need to buffer for the centers that are reopening in the second half of this year that would take some typical ramp time?

Elizabeth Boland, Chief Financial Officer

Great clarifying question, Jeff. We've been trying to be descriptive of a comparable set. So that occupancy level, if we're at 50% to 60% now and we're looking to be back at or near pre-COVID levels by the end of the year, that's for those centers that are operating—not as an absolute number of total enrollments compared to total. The centers that are opening in Q3 or Q4 would not be part of that cohort. They would be starting out at lower occupancy—10%, 20%, 30%—unless they have a different wait list, and they'd be ramping up as we get the other centers reopened. So that is intended as a same-center comparison.

Jeff Meuler, Analyst (Baird)

Okay. And then to broaden Gary's wage inflation question out a little, could you comment on how your teacher and caregiver employee retention has been trending over the last year or into this year, following a really challenging set of circumstances for those individuals? And then related to that is the ability to hire qualified labor: is that a meaningful constraint in pockets and if so, is that a constraint for you at all?

Elizabeth Boland, Chief Financial Officer

I'll start. The short answer is that the labor pool has long been constrained. The numbers of folks entering the early childhood space has been shrinking for years and we've for many years been working hard to be an employer of choice where committed teachers and caregivers want to work. We invest in pay, benefits, environments and career opportunity. The labor pool is in a challenging state right now. We're seeing people with health concerns, differing timing of coming back to work, unemployment benefits continuing in some cases; so the hiring environment is challenging. We're in a re-ramp mode and some folks have left the industry because it became more challenging. We're pleased that turnover status is not markedly different than prior years, but hiring is challenging. Wage rates are rising and are part of the equation. We think we can manage through that with our business model; parents and clients understand it and are supportive, but the labor supply is another part of the equation and that's a long-term game.

Stephen Kramer, Chief Executive Officer

I'll add that we were especially proud after a very difficult set of circumstances when we temporarily closed centers and were forced to furlough a large number of employees. The vast majority came back when we were reopening and asked them to come back. That was a strong signal of the kind of retention, culture and employer-of-choice status we enjoy and the relationship we have with our employees. That helped us get to where we are and many other employers did not enjoy that same return. So we were pleased with our ability to attract back previously employed folks from pre-COVID and have them be the basis of our workforce again.

Jeff Meuler, Analyst (Baird)

Okay. And then last one for me: the backup care margin this quarter was in the range that you've been talking about; however, it's lower than in other quarters that had contribution from self-sourced reimbursed care. Is self-sourced reimbursed care now too small to matter and help your margin, or is there another factor that goes into that?

Elizabeth Boland, Chief Financial Officer

The self-sourced reimbursed care is a care type but it is diminished significantly. There still is some component there; it's higher than prior years but it's a much more modest portion of the use. As traditional use comes back and we have that supply chain of caregivers providing care, that's where the costs come back into the system in a slightly different way. That would be both our Bright Horizons centers where we're providing care and that's a benefit to full service but a cost to the backup group, or our third-party network of in-home or other center providers would drive that.

Jeff Meuler, Analyst (Baird)

Okay. Thank you.

Stephen Kramer, Chief Executive Officer

Great. So thanks again for everyone joining the call and wishing you all a great rest of the summer and a good night.

Elizabeth Boland, Chief Financial Officer

Good to talk to all. Thank you.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.