Earnings Call Transcript
BRIGHT HORIZONS FAMILY SOLUTIONS INC. (BFAM)
Earnings Call Transcript - BFAM Q3 2022
Operator, Operator
Greetings, and welcome to Bright Horizons Family Solutions Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief 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 Mr. Michael Flanagan, Senior Director of Investor Relations. Thank you, Michael. You may begin.
Michael Flanagan, Senior Director of Investor Relations
Thank you, Paul, and hello to everyone on the call. With me here 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 acquisitions and COVID-19 on our operations are subject to safe harbor statements 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 2021 Form 10-K and other SEC filings. Any forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements. We may also refer today to non-GAAP financial measures, which are detailed and reconciled to the 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 of the business.
Stephen Kramer, CEO
Thanks, Mike. Hello, everyone on the call, and thank you for joining us this evening. I hope that you and your families are doing well. I'll start tonight with a view of our third quarter results and provide an update on the business and outlook for the year. Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions. First, to recap the headline numbers for the third quarter. Revenue in the quarter increased 17% to $540 million with adjusted net income of $38 million and adjusted EPS of $0.66. In our full service childcare segment, revenue increased 14% in the third quarter to $381 million. We added four new centers including one for our new client QuikTrip, and we completed the acquisition of 75 centers in Australia. We also reopened four of our temporarily closed centers in Q3 and ended the quarter with 99% of our 1,081 centers open. Across our portfolio of light for life centers, we saw mid-single digit year-over-year enrollment growth in Q3. In the U.S., our centers located in the largest metro areas continue to progress in their enrollment recovery with New York City, San Francisco in the Bay Area, Los Angeles, and Atlanta showing notably strong year-over-year enrollment gains. Our higher education, healthcare, and industrial clients, which represent approximately 60% of our clients and portfolio, continue to show the highest occupancy levels, while our tech and consumer clients' centers experienced the fastest enrollment growth over the prior year. In terms of age mix, infant and toddler enrollment grew 8% over the prior year, more than double the rate of our preschool, despite the more acute staffing challenges in these younger age classrooms due to tighter teacher-to-child ratios. While staffing continues to constrain enrollments in most geographies, we saw incremental progress in retention and recruiting this past quarter. Our recent investments in teacher compensation have had an impact on retention, and we continue to see greater interest from job seekers. Taken together, this has resulted in continued improvement in net hiring. Importantly, the gains made in overall staffing levels are enabling center directors to spend less time covering classroom hours and more time on traditional leadership activities, including engaging with prospective families through tours. These marketing activities, which had been severely curtailed during the pandemic, are helping us rebuild the enrollment pipeline to drive all classrooms back towards pre-pandemic occupancy levels. Outside the U.S., enrollment trends remain muted, as labor market challenges continue to restrict our ability to serve all of the enrollment demand that we have in the UK and the Netherlands. We have several initiatives underway to drive recruitment amidst a very challenging market for qualified classroom staff. In addition to the stalling of our enrollment growth, the other short-term impact of this is higher labor costs given a greater reliance on agency staff to augment directly employed teachers, which comes at a cost premium. In Australia, where we closed on the Only About Children's acquisition on July 1, we are pleased with this initial quarter's performance. Specifically, enrollment was in line with our expectations, even while Australian operations continue to experience similar labor dynamics that we see across our global center operations. Let me now turn to backup care, which delivered exceptional results this quarter. Revenue increased 30% over the prior year to $129 million, outpacing expectations on strong usage in the third quarter. We also continue to see good new client success with Q3 launches for Hard Rock International, Leader Corporation, Lucid Group, and Premier Health Partners, to name a few. As we spoke about last quarter, we were encouraged to see record usage in June, with that momentum continuing throughout the third quarter. We saw usage across all of our care types, resulting in our highest revenue quarter in our backup segment's history. A particular note was the contribution of Steven and his team in the acquisition that we made in 2021. Under our ownership, we expanded their footprint, enabling us to increase our available backup capacity and serve a growing number of families with school-aged children. Additionally, as part of our broader strategy to expand the utility of backup care to a broader set of eligible client employees, we recently rolled out pet care as an additional use case. This follows the successful pilot with a third-party service provider over the last several months. Along with virtual tutoring and expanded school-aged camp programs, this is the latest example of our product innovation designed to drive greater adoption and frequency of use. Moving on to our education advisory business, which delivered revenue growth of 14% to $31 million. We added several new clients in the quarter, including launches with AmerisourceBergen, Johns Hopkins, and VMware. We continue to see solid use levels, with particularly notable participant growth assists in the quarter. I continue to be excited about our opportunity in workforce education, as this remains an area of focus for employers looking to differentiate their employee value proposition and upskill employees into various roles. Let me now briefly touch on our consolidated outlook for the rest of 2022. We remain on track to achieve $2 billion in revenue, and we are narrowing our adjusted EPS to a range of $2.60 to $2.65 per share, or growth of 30% to 33% for the full year. Before wrapping up, I want to take this opportunity to reflect on the signature employee recognition events that have been occurring across Bright Horizons over the last couple of months. This year, we had nearly 25,000 award nominations from clients, families, and colleagues. And after two years of booming virtual celebrations, it was great to celebrate with colleagues here two weeks ago. My heartfelt appreciation goes out to all of our employees who work tirelessly each day to make a difference in the lives of children, families, learners, and workplaces. In closing, we are encouraged by the continued progress we are seeing across our business. We have met the challenges of the last two-plus years head-on by making investments in teacher compensation and benefits, expanding recruiting workstreams, further investing in technology to enable seamless client and user experiences, and developing and launching new care types to reach a broader range of clients and employees whose need for childcare and family support has never been greater. I continue to believe that the strength of our client relationships and unique employer-sponsored business model, coupled with the acute need for our quality services, position us well to execute against our short- and long-term objectives, all while remaining steadfast in our focus on delivering the highest quality care and education for children, families, and clients. With that, I'll turn the call over to Elizabeth, who will review the numbers in more detail, and I will get back to you during Q&A.
Elizabeth Boland, CFO
Thanks, Steven. Hello, everybody, and thanks for joining us tonight. I'll recap the quarter results and then provide some updated thoughts on the remainder of the year as well. For the third quarter, overall revenue increased 17% to $540 million. Adjusted operating income held steady at $46 million, or 8% of revenue, while adjusted EBITDA of $81 million, or 15% of revenue, increased 2% over the prior year. In the third quarter, we added 79 new centers, reopened four centers that had been temporarily closed, and permanently closed 12 centers, thereby ending the quarter with 1,081 centers. Our full service revenue increased $47 million to $381 million in Q3, or 14% over the prior year. Revenue gains were driven by increased enrollment in pricing, which contributed approximately 10% to revenue expansion, as well as by the addition of Only About Children, which we acquired effectively on July 1, and which contributed $37 million in the quarter. Enrollment in our centers that have been open for more than one year increased mid-single digits, with 5% enrollment growth in the U.S. and our European operations were narrowly positive, less than 1%, reflecting the effects of having to limit enrollment due to constrained availability of staff. Our occupancy levels averaged 55% to 60% in Q3, as the typical preschool enrollment seasonality over the summer months resulted in lower occupancy sequentially from Q2 to Q3. Two notable factors presented 7% headwinds to this growth. First, the strengthening dollar resulted in a $19 million year-over-year headwind in Q3. Second, support for childcare services we've received on clients' behalf reduced client subsidy revenue by $10 million, which was an incremental $6 million compared to the prior year. Adjusted operating income for the full service segment contracted $13 million to a loss of $3 million in Q3. The third quarter is historically our weakest quarter from an operating income standpoint, mainly driven by the preschool enrollment seasonality over the summer months. As we've seen throughout the year, ARPA government funding directly to the childcare sector continues to provide support to the inefficient cost structure during this ramping period. We received $14 million of this support in Q3, up slightly from the $12 million we received last year. Looking at the components of operating income, in its most recent quarter, it was impacted by higher labor costs, including investments in teacher compensation, which were effective mid-quarter, and outside spend on agency staffing internationally. In addition, as center directors recover from fewer staff vacancies, as has been the case over the last two years, they've been able to pivot back to leading center operations and enrollment initiatives. This is a key driver to rebuilding the enrollment pipeline and converting new enrollments for the future. Backup care revenue growth increased 30% in the third quarter, with total revenue of $129 million. As Steven mentioned, we're particularly pleased with the strength of usage growth throughout the quarter and resulting operating performance, which delivered $40 million of operating income, or 31% of revenue, in the quarter. Our educational advising segment delivered growth of 14% on contributions from new client launches, expanded usage, and advising services in college admissions and financing. As we've spoken about in the past, education advisory is at an earlier growth stage, and the associated innovation requires investments to execute against a growing and evolving market opportunity. This can result in variability in the operating performance for each quarter as businesses invest to grow and scale. Illustrating this, while additional investments in technology and customer acquisition within these businesses dampened operating profits earlier this year, our most recent quarter reflects solid operating profit growth and margins of 27%. Turning now to a few other earnings factors. Reported interest expense was $12 million in Q3, including $1.5 million related to the accreting interest on the $106 million deferred payments for Only About Children, which is payable at the end of 2023. Excluding this amount, which is added back in the non-GAAP adjustments, we expect interest rates to tick up to around $12 million-plus in Q4 given the current rate environment. The structural tax rate on adjusted net income has also increased to 27% for 2022, compared to 22% in Q3 of 2021, on increasing taxable income, and lower tax benefits from equity activity under ASU 2016-09. Turning to the balance sheet and cash flow. Through September, we generated $131 million in cash from operations, made capital investments of $251 million, including the $206 million for the acquisition of OAC, and executed share repurchases totaling $183 million. We ended the quarter at 3.5 times net debt to EBITDA, with $32 million in cash and debt of $1.1 billion. Moving on to our outlook for the rest of 2022. Our updated guidance reflects the current operating trends and performance and includes more significant foreign exchange headwinds, higher interest expenses, and higher tax rate expectations than previously estimated, as well as the continued inflationary pressures that we've been seeing with labor, energy, and food costs. In terms of top line, we expect 2022 revenue of $2 billion, which includes approximately $16 million year-over-year headwind for foreign exchange. This is approximately $15 million higher than we had previously estimated. At a segment level, we are expecting full service to grow roughly 15%, backup care to grow in the range of 15% to 18%, and education advisory to increase between 7% and 12%. In terms of earnings, this will translate into adjusted EPS in the range of $2.60 to $2.65 for the full year 2022. This narrower range includes our updated estimate of the higher tax rate that I mentioned, 27%. So with that, Paul, 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 George Tong with Goldman Sachs. Please proceed with your questions.
George Tong, Analyst
All right, thanks. Good afternoon. Based on your unity, revenue performance, and your outlook for $2 billion in revenues in 2022, it would appear that your guidance for Q4 revenue being slightly down from Q3, down around 5% to 6%. And usually, Q4 revenue is up from Q3. So, can you confirm if that's the case? And if so, besides FX headwinds, are there any other factors that may cause Q4 revenues to be lower than Q3?
Elizabeth Boland, CFO
So, the foreign exchange is the main change. I think that you're seeing, George, in Q4. Sequentially, we do have backups at its high watermark in Q3. So there's a little bit of a pullback that we would see in backup during the 15% to 18% range that we've provided there. But those are really the only factors. I don't know that it's a downgrade in our view, it's really in the same range that we have provided with the updated FX.
George Tong, Analyst
Okay. Got it. That's helpful. And then secondly, could you tell us how much in government subsidies you recognized both on the revenue side, and then the cost side, and what the outlook is from P&L?
Elizabeth Boland, CFO
Yes. I previously mentioned that we had $14 million recognized in the P&L centers, which represented a cost offset. In our cost-plus client centers, this resulted in about $10 million, reducing the costs that a client needs to cover with us. This amount does not benefit us directly but rather helps the client by decreasing their subsidy obligation. For the P&L impact, it's $14 million, and we expect this to remain similar for the rest of the year. We anticipate selling an additional $5 to $10 million throughout the year. From the clients' perspective, the offset in client revenue is likely around $4 million to $5 million, consistent with what we observed in the third quarter.
George Tong, Analyst
Got it. Very helpful. Thank you.
Elizabeth Boland, CFO
Thank you.
Stephen Kramer, CEO
Thanks, George.
Operator, Operator
Thank you. Our next question is from Andrew Steinerman with JPMorgan. Please go ahead.
Andrew Steinerman, Analyst
Hi, it's Andrew. Could you go over in the third quarter what the organic constant currency revenue growth post closings were? And also on a year-over-year basis could you let us know what's implied in the fourth quarter, again, on an organic constant currency post-close basis?
Elizabeth Boland, CFO
So, organic, well, let me go back, I mentioned that how much revenue contribution there was from Only About Children. Andrew, that was around $37 million, and we had another $3 million or so from other smaller tuck-in acquisitions. So a total of $40 million of the growth was inorganic. So the remainder, constant currency, I think we'd have to might be able to do the calculation here quickly, but I don't know.
Stephen Kramer, CEO
Yes. The FX was $90 million in full service around 6%. The client ARPA that we received was another kind of 300 basis points or so. So, no more organic constant currency within full service was around 10% growth year-on-year.
Andrew Steinerman, Analyst
Did you say 10? I didn't hear you?
Stephen Kramer, CEO
- Yes. Full service grew about 10% constant currency organic.
Andrew Steinerman, Analyst
Okay. And what's implied in the fourth quarter in terms of organic constant currency, again, on a post-closing basis?
Stephen Kramer, CEO
Well, we have another 20 or so plus million of FX headwinds year-on-year, Only About Children similar performance in the fourth quarter. And then another beside $4 million to $5 million of ARPA.
Elizabeth Boland, CFO
We would fill that out, Andrew, but it's probably close to that 8% to 10%.
Andrew Steinerman, Analyst
Okay, I appreciate it. Thank you very much.
Operator, Operator
Thank you. Our next question comes from Manav Patnaik with Barclays. Please proceed with your question.
Manav Patnaik, Analyst
Thank you, Stephen, you mentioned you gave a lot of statistics around infant and toddler growing 8%, twice preschool, etc. I was hoping you could just maybe, on a high level, just maybe help appreciate what the kind of quarterly improvements you're seeing in? And how that ties in with what you're hearing from your clients, in terms of what the return to office cadence looks like and how it helps you guys or not?
Stephen Kramer, CEO
So, if you don't mind, just repeat the question, you were a little bit muffled?
Manav Patnaik, Analyst
Yes, sir.
Elizabeth Boland, CFO
Was it about client distribution?
Manav Patnaik, Analyst
Yes. Just what the client, you did a bunch of different carve-outs and infant goals and preschool goals. And without having a base to it, I was just hoping to pull through it out for us in terms of what you're really hearing from your clients in terms of the quarterly cadence of occupancy?
Stephen Kramer, CEO
Well, maybe just, I'll start here. Manav, just on the infant and preschool, we started seeing different performance within those two segments in the third quarter, the infant and toddlers growing up high single-digit range year-on-year enrollment there, where preschool was in the low single-digit range. So we saw better growth in that cohort, which has been more staff constrained, more recently in the last year or so, given the tighter teacher-to-child ratios within those classrooms. I think we were encouraged by that. And that should bode well as we think about building that pipeline of enrollment, particularly that will feed into these older classrooms over the next 6, 12, 18, and 24 months. So that's some of the difference performance we observed within those two age groups. And then the question was about clients, and clients' sentiment, Manav, which I believe was the second part of your question. We continue to have really positive sentiment from our existing client base around the centers and the importance of those centers to their employees and specifically to some of their return-to-office clients. In addition to that, certainly we have seen a very strong pipeline concerning prospective clients being interested in investing in childcare very specifically, looking at new centers, as well as clients or prospective clients who may self-operate their own centers in the form of healthcare or higher ed, who have historically self-operated many of them being interested in the potential of transitioning those centers to our management. In all of those cases, we are very well-positioned to continue to partner with clients on this essential topic to them and to their employees.
Manav Patnaik, Analyst
Got it. And, Elizabeth, can you just help us with how we should think about the margins in the fourth quarter, especially for full service and the other ones seem perhaps easier?
Elizabeth Boland, CFO
Yes, I mean, the performance with the full service this quarter was, as I talked about, constrained by a number of the labor impacts. And so we would expect those to be continuing in the fourth quarter to some degree. So the full service segment performance should be close to breakeven around that range, and perhaps, plus minus, but close to that similar, hopefully a bit improved. But that's around where we are this quarter. So we would expect that to be similar, with a little bit of uptick in enrollment through the rest of the year, but modest. And back-up performance, as you might know, from the history of the way that back-up performs sequentially, or just overall for the year. We have a high watermark in terms of revenue and had solid margins this quarter. Our long-term view on back-up would be 25% to 30% operating margins, but in Q4, it often is a bit higher. So given the way that utilization gets consumed, people have banks of use that they can use it or lose it, and so there tends to be some opportunity there with our clients. We would look for margins to be closer to 35%, maybe as high as 40% in Q4, and then the educational advising business is fairly steady. As we've said, 25% to 30% is where we delivered this quarter. So, we could be on the higher end of that in Q4 as well.
Manav Patnaik, Analyst
Thank you.
Operator, Operator
Thank you. Our next question is from Jeff Silber with BMO Capital Markets. Please proceed with your question.
Jeff Silber, Analyst
Thanks so much. I just want to confirm something. Did you say that third quarter, full service center utilization was 55% to 60%? And then also, what would be implied for that specific metric and the guidance report?
Elizabeth Boland, CFO
So yes, I did. The overall average is 55% to 60%. As we sort of came through the seasonality we would expect it to be lifting up a couple of percentage points on average for the rest of the year. And so that's a little bit of an uptick. Now that we're through the fall cycling, and we're enrolling, but the bigger lifts would be early in 2023, as we get into that, with more of a high watermark in Q1, Q2.
Jeff Silber, Analyst
Okay. That's helpful. And I know you go through your center footprint, and you continuously call the number of centers. I think you said it was 12 this past quarter. But are there certain geographies where maybe some centers, the utilization is so low that it might pay to be a little bit more aggressive in either closing or consolidating? Is that something you might be considering?
Elizabeth Boland, CFO
Well, I mean, it's an important question, Jeff, because we have obviously over the last couple of years, we've had to take a very hard look at the portfolio and where we were seeing demand come back as the centers reopened. We do have in terms of trying to stratify, if you will, how the portfolio is operating. We have some very, very high performers. In fact, 25% of the portfolio is operating at around 80%. So we have good, really strong performers. Sightlines on a quarter of the portfolio is very well performing, not all the way back in terms of margin deliveries, but the margin as a percentage of revenue, even though the usage is back, the enrollment is strong. And we have one more cycle, probably a price to cost ratio to get back to our pre-COVID margin there, but very close on that piece. But the underperformers, which is your question, about 20%, are actually very underperforming, so operating at less than 40% occupancy, and those are the ones that would certainly be on a strong watch list to be sure that we are persisting with. We see some positive signs of enrollment or some staffing success, driving enrollment, but those would be some that may be candidates for consolidation or closure potentially in the future. But we are still working to enroll in those centers because we believe in the location broadly for that group of roughly 150 centers that are in that more significantly underperforming group. With those, we see great opportunity, but as you say, we need to be disciplined, as we always have been to potentially consolidate or foreclose if necessary in the future.
Stephen Kramer, CEO
Sorry, the only other fine point I put on that is we have centers in that third grouping that are underperforming that are in the same geographies as the ones that are in the middle group and in the top group. That gives us the confidence that again, over time, as we continue to grow our staffing levels and continue to enroll, that there is a sightline. So to answer your question very directly, we don't have a specific geography that we believe ultimately we're going to sort of on mass close out. Instead, we look, as we always do, center by center. The nice thing is that we have good sightlines in each of our major geographies to see performance, as Elizabeth said that is in that top performing category.
Jeff Silber, Analyst
Okay, appreciate the color. Thank you.
Elizabeth Boland, CFO
Thanks.
Operator, Operator
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley. Please proceed with your question.
Toni Kaplan, Analyst
Thanks so much. I wanted to ask another question about the government subsidies. I believe the number of the large programs is decreasing in 2023. So just wanted to help understand the expectations of what this means for 2023 year-over-year? And maybe what a normal year for government subsidies is like maybe pre-COVID? Thanks.
Elizabeth Boland, CFO
Sure. Thanks, Toni. So just to recap where we are this year, we are expecting essentially positive income statement effects, if you will, around $50 million to $60 million from government funding. It's primarily ARPA funding that we are now in the midst of receiving, and that ARPA funding, as you suggest, is sunsetting in September of 2023, based on the current status of the regulation. So states still have money to distribute, quite considerable funds to distribute, but based on our sight lines, on what we have, where our footprint is, and where we have applied for support there, we expect that 2023 could be half of that. And to be on whether that is better, but it's up to the states to decide. We're looking ahead to a reduction in the amount of support that we've been able to receive this year looking ahead to 2023. Prior to COVID, we had a very small footprint of families who were receiving support through various government programs. So while it may be 0.5% or 1% of our revenue in a pre-COVID environment, that we have such support in the U.S. Of course, in our international operations, it is based on international programs. Families access the support for the three to five-year-olds in the UK and for all families in the Netherlands and Australia. So those support systems are just eligible for working adults and working parents. Those are built into the intuition structure.
Toni Kaplan, Analyst
Terrific. And just as a follow-up. I know you mentioned the utilization at 55% to 60%. I think previously, it was 55% to 65%. Is it the backfill issue that is really driving this down? Is it the staffing issues that have been consistently leading to an inability to open more classrooms? I guess, what's sort of the main drivers of the sort of decrease?
Elizabeth Boland, CFO
Yes, it's actually a seasonal change. The sequential decline is quite consistent with where we've seen. There is growth year-over-year. So a year-over-year increase. The sequential change from Q2 to Q3 is based on preschoolers cycling out into elementary school. That's why we cited the again in enrollment is higher in our infant and toddler groups and a little bit lower in the preschool group because that's a net gain in preschoolers is about half 3%, 4%, whereas infants and toddler growth is more like 7%, 8%, averaging out to around that mid-single digit. The change from 55% to 65% on average is simply that sequential seasonality, and it's not weakness, per se, from staffing. I think our staffing challenges are constrained to growth from being more than that. That's where we have been talking about our investments in the wage structure, benefits structure in order to attract staff and take advantage of the demand that we have to move that group of centers that wasn't in the strongest performing group that I mentioned, that is at 80% enrollment, or the weaker performing group that's under 40% enrolled. We want to get that 40% to 70% group up to its target. We see a real opportunity.
Toni Kaplan, Analyst
Super. Very helpful. Thanks.
Elizabeth Boland, CFO
Thanks.
Operator, Operator
Our next question comes from Faiza Alwy with Deutsche Bank. Please proceed with your question.
Faiza Alwy, Analyst
Yes. Hi. Good evening. So I was wondering if you could indulge us a little bit in terms of how we should be thinking about 2023? Obviously, it's early, and I'm sure you haven't, you're probably in the middle of your planning process. But how are you approaching 2023? What are some of the things that we should keep in mind as it relates to enrollment, pricing, wages, staffing, sort of anything you'd like to address would be very helpful?
Elizabeth Boland, CFO
Sure, I'm happy to start, and Steven can weigh in as well. As we look ahead to 2023, we are in the throes of our planning process for that. We will, of course, have more specific information to provide when we talk to you all next. But as we look at the events closing out 2022, we have been making progress. As we said, on the enrollment front, we've invested in our recruiting efforts, our teacher attraction, retention, marketing, we're investing in wages, etc. We would expect pricing increases in our full service business, certainly to see pricing increases above our historical average. We would be looking at ranges in the mid to higher single digits, so 5% to 7%, knowing that we need to remain competitive, and we're in a marketplace that we are certainly aiming to get enrollment back as well as maintain the pricing that we believe are appropriate for the service we are delivering. So pricing is around that. We would expect wage inflation to be returning to a more typical range of around 3% to 4%. Although wages will be higher than that because we did make a substantial investment in compensation this summer and fall. The knock-on effect of that would be that the labor costs will likely be in the more high single digits to 8% to 10% likely overall because of that knock-on effect, coupled with a more modest wage inflation. Other inflationary costs are coming through things like energy and some consumer goods that we have, although those are smaller portions of our overall cost structure. From our backup business standpoint, this year we are looking at growth in the mid to higher double digits, 15% to 18%. It has been a very strong year. We are coming off of a COVID-lapping year tax. We have good strong client accounts that we can continue to build on. We expect that to grow in the double digits, probably more like the low to mid-single digits. We'll be refining that as the year goes on. But that's what we're looking at probably from the backup business standpoint. That's the array of Bright Horizons metrics of how we're looking at next year.
Stephen Kramer, CEO
Yes, absolutely. Thank you. As we are heading into the final parts of this year, moving into next, we continue to feel really good about our pipeline from a client perspective. That's both for new centers, as well as for backup and education advisory. I think that the core services that we are offering are very much in the interest of employers as they continue to see stressors relating to their own workforce, and their own return to office plans. From the reception from our existing client base, we continue to hear about the importance of health and safety, as well as continuing to focus on socialization and education given the disruption that has occurred through the pandemic. Overall, we feel really good going into 2023 as it relates to those we serve.
Faiza Alwy, Analyst
Thank you. That's very helpful. I guess just a follow-up question as it relates to full service. Is it fair to say that from here, the incremental enrollment is going to more come from filling the staffing gap as opposed to different sort of more return to work and less of a hybrid arrangement and things like that? Is that a fair way to think about it?
Stephen Kramer, CEO
I think that it is safe to say that, at this point in the cycle, staffing is a real constraint in our ability to serve increasing numbers of families. So, it's fair to say that in more than half of our centers, we have demands that outstrip our ability to actually service those interested families. I would say, in addition to that, we continue to, as Elizabeth alluded to earlier, we continue to work really hard to improve our retention rates and our staffing retention rates to do things like our wage increases and other benefits enhancements, and at the same time, get really specific about improving our top-of-funnel for new recruits, and then ultimately streamlining the process to hire. So I would say that, yes, staffing is the larger part of the impediment in our ability to grow enrollment. It is a major area of focus for us where we believe we continue to make strides.
Faiza Alwy, Analyst
Great. Thank you. If I may just ask one more quickly on just the margins on educational advisory. I know you'd made some tech investments earlier in the year. Are you past those investments? I see a pretty big increase in margins this quarter. Are we sort of past the investments? Is this sort of the new run rate?
Elizabeth Boland, CFO
That's in a range of what our long-term expectation of that segment would be. We recited 20% to 30% as I know that's a wide range, but we recited 20% to 30% as a range for a technology backbone, less labor-intensive, technology-delivered service. It's fair to say that in a more emergent type of segment like the education advising businesses, there are periodic and episodic investments that need to be made. I would say that the investments are in the rearview mirror, just that the earlier part of the year between some technology, some enhanced build-out of some of the elements of the Sittercity marketplace, and the ongoing investment in our EdAssist business, which focuses on advising for adult learners and administrative processing of the college work. It is an ongoing investment that will require keeping up with the developments and innovations in that sector, resulting in some variability. A couple of quarters may have some investments, and then you may see either the short-term payoff or a longer-term payoff strategy.
Faiza Alwy, Analyst
Got it. Thank you so much. Really appreciate it.
Elizabeth Boland, CFO
You're welcome.
Operator, Operator
Thank you. Our next question is from Jeff Miller with Baird. Please proceed with your question.
Jeff Miller, Analyst
Yes. Thank you for taking the question. Question on full service margin. I hear you on seasonality and temp staffing costs on the other side of the ARPA benefit. Is there anything else that's worth calling out in the one that would potentially come to mind for me is anything on the Australia acquisition? I understand you're excluding the transaction costs. But are there any upfront costs, severance onboard that lower margins? There was acquired deferred revenue write-off of a month push and just anything else that would be unusual that's going into the back half margins?
Elizabeth Boland, CFO
Yes, it's a good question. We don't want to give a litany of things that could be headwinds, but there are some integration costs with the Australian acquisition, which are not the transaction costs themselves, but just as you say, some costs of onboarding the team and whether it's one-time system conversions and things like that. So there's about a million dollars, just under a million dollars in the second half that would be affecting the margins, a little bit of that continuing next year, but it would begin to abate as we complete the integration early in 2023. And the other thing I would call out, Jeff, is that in the U.S., we have been experiencing, of course, some inflation, but the energy costs in the UK and the Netherlands have been particularly high. These are smaller portions of our business, but they certainly are adding several million dollars to the second half of the year in terms of overall cost inflation that has the opportunity of persisting and/or abating if things settle down a bit more in Europe. So that's another headwind against that I would call out.
Jeff Miller, Analyst
Thanks for that. And then on backup care. I get that the care type expansion is broader than summer camps, and the other areas are growthful. I hear that the momentum and record usage for traditional folks' services continue, but just given the seasonality, can you quantify, Steven, a bit for us in the quarter and the year ago, from a revenue perspective? And is there any tail of that into Q4? And is there any outsize margin benefit from that business during Q3?
Elizabeth Boland, CFO
We don't really tend to pull out and quantify these smaller groups. But I'd say that once you've hit on an important element, which indicates that camps have very high utilization over the summer and the revenue actually falls away. They have intermittent camps for different events during school vacation times, but there are opportunities there, and it's not the same intensity as we experienced during the summer. So we certainly contributed several million in revenue growth in the quarter, but that would be much more de minimis in Q4.
Jeff Miller, Analyst
Okay. And then just last for me, can you just talk through balance sheet management plans, just how you're thinking about steady-state leverage currently, managing fixed versus floating exposure, etc., given rising rates?
Elizabeth Boland, CFO
Sure. We had obviously some significant investments in the third quarter with the acquisition of OAC and substantial share repurchases. We're around 3.5 times net debt to EBITDA right now. That's certainly a comfortable level for us given our EBITDA profile, etc. But we would be looking to continue to grow into that at this point. We've always said that we go to the 2.5 to 3.5 times general leverage target and doing a significant acquisition like what we're speaking of is certainly something that is right in our strategy. Our debt is escalating the interest costs, but we do have caps on our debt, 80% of it, that is protecting us from the variability of interest rates. A portion of those caps roll off next fall, and then we got sequential for restarting caps tail on after that. Our debt is essentially 80% to 90% covered and converted fixed with those caps in place.
Jeff Miller, Analyst
Very helpful. Thank you.
Elizabeth Boland, CFO
Thank you.
Stephen Kramer, CEO
Thank you.
Operator, Operator
Thank you. Our next question is from Stephanie Moore with Jeffries. Please proceed with your question.
Unidentified Analyst, Analyst
Hi. I'm in for Stephanie Moore. I was just wondering, outside of financial services and healthcare, are you guys seeing any verticals where employer-sponsored daycares are ramping up a bit more than you thought? And what's the sales cycle look like there?
Stephen Kramer, CEO
Yes. When we think about industry verticals, we've shown really good success across verticals over the years. Currently, there's particularly strength in healthcare and higher ed. We're seeing it in manufacturing and distribution as well, two industry verticals that historically were not as much a focus of our efforts. Given the challenges they see in their workforce, they are looking to attract and retain childcare centers, which have become a more attractive element. Overall, in terms of the pipeline, we feel good about it. As I mentioned earlier, we feel good about ground-up opportunities, as well as the transition of management from some self-operated programs. Overall, going out of the year into next year, we feel good about the interest.
Unidentified Analyst, Analyst
Got it. That's helpful. Could you just provide us with an update on how you're thinking about capital allocation priorities?
Elizabeth Boland, CFO
Yes. As I just said, we did some significant capital investment in Q3 with our acquisition of Only About Children, and about $180 million in share repurchases. We are in absorption digestion mode, continuing to look at smaller tuck-in acquisition opportunities and being judicious about those. At this point, we are focused on growing enrollment and recovering in the primary-based business. We have a number of lease models that are in development, which are new standard growth fits in the next 12 months, with $35 million to $50 million of spend. That is the primary focus of our capital allocation at the moment, as well as paying down the revolver that we have outstanding, which is about $100 million or so.
Unidentified Analyst, Analyst
Got it. Thank you.
Elizabeth Boland, CFO
You're welcome.
Stephen Kramer, CEO
Thank you all very much for joining us on the call this evening, and wishing you a good evening.
Elizabeth Boland, CFO
Thanks, everyone. Take care.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.