KLC

Welcome to KinderCare's first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. If you would like to ask a question during his time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press star one again. It is now my pleasure to introduce Olivia Kirrer, KinderCare's VP of Investor Relations. Ms. Kirrer, you may now begin the conference.

Thank you and good afternoon, everyone. Welcome to KinderCare's first quarter 2026 earnings call. Joining me from the company are Chief Executive Officer, Tom Wyatt, and Chief Financial Officer, Tony Amandi. Following Tom and Tony's comments today, we will have a question-and-answer session. During this call, we will be discussing non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and within the supplemental earnings presentation, both of which are posted on our investor relations website at investors.kindercare.com. A reminder that certain statements made today may be forward-looking statements.

These statements are made based upon management's current expectations and beliefs concerning future events impacting the company, and involve a number of uncertainties and risks, which are explained in detail in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. The actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. All forward-looking statements are made as of today, and except as required by law, KinderCare undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

Before we move on, we'd like to note that management will be holding meetings at Baird's 2026 Global Consumer Technology and Services Conference on June 2nd. We look forward to connecting with those of you who will be attending. I'll now turn the call over to Chief Executive Officer, Tom Wyatt.

Thank you, Olivia, and good afternoon, everyone. I'm pleased to share with you updates on our first quarter performance. We finished the quarter slightly better than expected. That was supported in part by the efforts of our center and site directors and by our focus on execution. Over the past few months, we've made several changes across the business, and our results reflect the work that is already underway. It is still early, but we are starting to see encouraging signs that those actions are making an impact. Revenue was up modestly, supported by continued strength in our Champions brand and B2B businesses. At the same time, enrollment in our ECE centers remained below prior year levels, down about 3%.

That is an improvement from the fourth quarter when enrollment was down 3.6% year-over-year, but it continues to be a primary pressure point on the business and where we are concentrating our efforts. Enrollment is not something that turns during a single quarter. It's a process of improving execution across a large portfolio of centers. Our focus right now is on putting the right pieces in place so that performance improves as we move throughout the year. Our best opportunity for material progress will be in the back half of the year. Until then, we expect gradual improvements through the first half. Over the past few months, we have increased and refined our marketing investment, and we are seeing that show up in higher inquiry volume over last year.

Since we began our investment, we have seen a 15% increase in inquiry in the targeted areas and a 3% increase for KinderCare overall. More families are engaging with us, and that is an important first step. Just as importantly, we are starting to see early signs that conversion is beginning to improve in certain parts of the business. This is notable at Crème de la Crème and most pronounced in our Opportunity Region, where enrollment during the quarter versus last year increased by 8%. That progress is not yet consistent across the system, it reinforces something we believe strongly. Demand is there. Our job is to convert it consistently across the system, that is where our focus is right now. We are putting a dedicated focus on tightening execution at the center level.

This is about how quickly we respond to families, the quality of our tour experience, and how effectively we follow up. It is also about making sure our center and site leaders spend their time on the things that matter most. We've taken steps to reduce administrative burden so they can focus more on the families and teachers, because that is what ultimately drives performance. In addition to work on enrollment, we are also taking steps to strengthen our real estate portfolio and better position our centers for sustainable long-term performance. Much like any multi-unit operator, we evaluate our real estate portfolio on an ongoing basis, and that typically includes closing roughly 1% of our centers each year. We recently completed a more comprehensive network assessment with the goal of enabling long-term health and growth for all of our centers.

To achieve this goal in 2026, we expect to have a higher number of center closures than usual. We understand that any closures can be disruptive to families and staff. Whenever possible, we proactively help families and employees transfer to nearby locations to maintain continuity of care. This is disciplined portfolio management. It will result in stronger, more productive centers and higher overall occupancy over time, both of which support our mission to offer high-quality care to families. To be clear, these are not easy decisions. They will create some near-term variability as we execute across the year. We are confident that they are the right decisions to drive beneficial outcomes in the long term. We'll keep you updated in the coming quarters on our progress. Before turning to more detailed business results, I want to spend a few minutes on the subsidy landscape.

I have spent time this quarter meeting with state and federal lawmakers to advocate for families and the critical role childcare plays in this country. From Colorado to Massachusetts to Washington, D.C., the feedback has been constructive and encouraging. We continue to see strong bipartisan support for childcare at all levels of government. Federally, an additional $85 million in CCDBG funding was approved in February. At the state level, while we are seeing different approaches, the overall direction remains constructive. For example, Indiana is deploying approximately $200 million to support the families of 14,000 additional children. We applaud the state's leaders for taking action to support the children and families of Indiana. More broadly, we are seeing constructive developments in several other states. There are supportive actions in New Jersey and in Maryland to reach more subsidy families and reduce their program wait lists.

Overall, while conditions vary by market, we're encouraged by the recent directions many states are taking. Turning back to the business, we spent this quarter taking steps to drive week-to-week enrollment improvement in the first half of the year, so we can build momentum in the second half. For our flagship brand, KinderCare, our work continues to enable center directors to spend more time engaging in person with teachers and families. We are also evolving how we manage inquiries, allowing our directors to stay focused on families, particularly in centers with high inquiry and lower occupancy. The data consistently tells us that when family and teacher engagement improves, outcomes improve across the board for children, teachers, and enrollment, leading to stronger center performance. We are also placing more emphasis this year on our in-center small group enrichment programs, which provide incremental revenue.

These are programs we have had for quite some time, which offer families additional options for their children, like phonics, languages, music, and STEM. We are creating amazing experiences for children in our centers and expanding this enrichment into our summer camps as well. Early results are encouraging, and we're pleased with the momentum we see in engagement, retention, educational enrichment, and the value these programs bring to our centers. At Crème de la Crème, our new brand positioning is starting to resonate. We are preparing for upcoming specialty summer camps, and we see families enjoying our updated curriculum, which launched in the first quarter. We are seeing better conversion on stronger inquiries, especially in younger students, and are encouraged by the progress we are making. Champions continues to be a strong performer for us.

Our 70% growth reflects both new site additions and the strength of our existing sites. We see continued opportunity in both. In our B2B offering, we continue to see strong employer interest in supporting their employees. We signed 12 new tuition benefit clients in the quarter, including a large public university in Florida and multiple professional organizations. All told, we are seeing increasing demand for more integrated solutions across our services. These relationships are becoming a more meaningful and complementary part of our business and a strong growth driver going forward. We continue to make positive progress in our real estate growth during the quarter by opening three new centers and acquiring another two. When you step back, the picture to us is clear. We feel good about the progress we are seeing.

We are proud of the growth from B2B and Champions, and we're seeing solid improvement at Crème de la Crème. We're also seeing traction from our marketing investment and from the changes we've made within our KinderCare centers. We still have work to do, but we have a clear path forward and are focused on continuing our progress into the second half of the year. With that, I will turn it over to Tony.

Thanks, Tom. I'll walk through the quarter and then go over how we are thinking about the year. Starting with income, revenue was $673 million in the first quarter, up modestly compared to last year. Same-center revenue decreased by $7 million from last year, driven primarily by lower enrollment, while contributions from newer centers and higher tuition rates helped offset some of that pressure. Pricing contributed about 2% to ECE revenue growth, despite continued lower subsidy reimbursement rates, which we expect to persist at least through the current state budget cycles. This 2% increase from tuition contribution was offset by lower overall enrollment, down 3% year-over-year. While that represents an improvement from the 3.6% decline in the fourth quarter, enrollment continues to weigh on results.

As a reminder, enrollment typically builds through the first half of the year and will decline with the transition to summer before we build back up during back to school. Same center occupancy for the quarter was 66%, up 150 basis points from the fourth quarter and down 310 basis points from the first quarter of last year. Our Champions before and after school business continued to perform well as revenue increased 17%, driven primarily by new site openings and incremental pricing. Beyond near-term performance, we see Champions, and by extension our B2B business, as an increasingly important and diversifying part of our mix. We opened three new centers and acquired two new centers during the quarter.

Cash consideration for the acquisitions in Q1 was about a half million dollars, funded completely out of the $1.1 million in free cash flow generated in the quarter. New and acquired centers contributed approximately $12 million in revenue since the start of the year, an increase of 35% from the same period a year ago. Similar to the fourth quarter, we recorded a non-cash impairment related to the decline in our stock price in Q1. This drove a reported net loss of $290 million and reported EPS loss of $2.45, and does not impact our liquidity or outlook. Adjusted EBITDA was $52 million for the quarter compared to $83 million in the first quarter last year.

Adjusted net income was $4.2 million, and adjusted EPS was $0.04 compared to $27 million and $0.23 respectively in the prior year period. The drivers here are relatively straightforward. Lower occupancy continues to be the largest factor. Since we must maintain minimum teacher-to-student ratios, our labor inputs are not as flexible at our current position in the margin step function. Improvements in occupancy will allow us to drive better overall operating leverage. As Tom outlined, the path to improvement is through enrollment. The early signs we are seeing in inquiries and conversion are important, and we're now looking for consistency as we move through the year. SG&A was 10.6% of revenue, down slightly from last year. As we look ahead, we expect to see additional improvement coming from a continued focus on efficiency and cost discipline.

Interest expense was $18 million for the quarter, down from $20 million in the prior year, driven by our repricing last summer. Moving on to the balance sheet, we ended the quarter with $133 million in cash and $190 million of available capacity under our revolving credit facility. Net debt to adjusted EBITDA was just under 3x and within our targeted range. We expect leverage to be around this level as we work through the enrollment pressure and EBITDA recovery consistent with our current operating profile. We have been taking a closer look to identify centers that should exit our real estate portfolio. We've examined center-level trends for local market demographics, occupancy, engagement, lease terms, and other factors. To that end, we've identified a set of potential centers for action and are working through timing and approach.

Ideally, we want to avoid as much disruption to families and employees as possible, while also consolidating affected families and teachers into nearby centers where it makes sense. This work is in process, and we do not have more specific details to share right now, other than to say we will close more than the usual 15-20 centers we normally see each year. When we speak with you to discuss Q2 results, we'll be at a point to provide more detail. We expect some adjustment in 2026 as we work through this process, but it will result in a stronger, more resilient portfolio and improved focus going forward. We'll keep you updated on our progress with our Q2 update and in the quarters ahead. Moving on to our outlook, we are raising our full year adjusted EBITDA and adjusted EPS guidance to reflect our first quarter performance.

We continue to expect revenue to be between $2.7 billion and $2.75 billion. We now expect adjusted EBITDA to be in the range of $215 million-$235 million and adjusted EPS to be between $0.15 and $0.25. This outlook reflects the early signs of progress we are seeing in the business, while continuing to assume gradual momentum building into the second half of the year. We are maintaining our revenue building block assumptions for the full year. Tuition and occupancy are expected to have offsetting contributions at +3% and -3% respectively. Champions and B2B are expected to contribute about 1%, with new center openings and acquisitions contributing about 50 basis points each.

Since the work on optimizing our portfolio is not yet finalized, we are not including any related closure assumptions in our full year outlook beyond the typical 1% offset we expect in a given year. Consistent with our first quarter remarks, CapEx this year will be approximately 5% of revenue, and free cash flow will be between $35 million and $40 million. For modeling purposes, assume our effective tax rate to be 27% for the year. Given the impact of current occupancy levels on our margin profile and profitability, we will provide additional direction for the second quarter. For Q2, we expect revenue to be between $690 million and $700 million and adjusted EBITDA to be between $63 million and $67 million. We are doing the work today to drive improvement throughout the year.

The progression we are focused on is tied to execution, particularly around enrollment and conversion, and we expect those efforts to build momentum in the back half of the year. Our targeted marketing investments have been effective at generating additional inquiry. How effectively we convert the new and existing demand into enrollment will be an important indicator of how the business is tracking towards stronger performance. To wrap things up, our focus is on execution, improving the performance of the core business, and positioning the company for stronger results as we move into the back half of the year. Now let's go ahead and open up the call for questions.

We will now begin the Q&A session, please limit yourself to one question and one follow-up. If you would like to ask a question please press star one to raise your hand. To withdraw your question press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally please remember to unmute your device. Please standby while we compile the Q&A roster. Your first question comes from Jeff Silber of BMO Capital Markets. Your line is open. Please go ahead.

Thanks so much. In your prepared remarks, you talked about the higher inquiry, sorry about that, re-rate that you're seeing in marketing from a marketing perspective. Can you give us a little bit more color what you think is driving that, if this is something that can continue?

Yeah, I'd be happy to, and I know Tony won't speak to this too. It starts with the work that we did in center. The fact that our administrative detail and stuff that was distracting our center directors is in essence going away, primarily starting with the second quarter. Also, the work that we've done in paid search has paid off. The numbers that we quoted earlier, 3% all KinderCare in the quarter +15% in other areas is true, and that's year-over-year increases. We are getting more inquiry than we got last year, and we're starting to see that enroll. Very positive. Sometimes in paid search, candidly, is not as effective, but it has been very effective for us, which goes back to a comment I made.

There is not a lack of demand for children that need childcare, and we're gonna get them. That's what our plan is.

Okay, that's great to hear. My follow-up, I want to focus on same center occupancy. I know it's down on a year-over-year basis, what is embedded in your guidance to get to the revenue and adjusted EBITDA level? Where should we be seeing occupancy by the end of the year?

Yeah, Jeff, as we stated in our remarks, we're still holding our guide at that 3%. It was 310 basis points here in the quarter, right at that mark. That 310 was an improvement from the 360 in the fourth quarter. We are seeing a little bit of movement and trajectory, but our guide's still considered at 3% down for the year.

Okay. Thanks for clarifying that. I'll jump back in the queue. Thanks so much.

Thanks, Jeff.

Your next question comes from the line of Faiza Alwy of Deutsche Bank. Your line is open. Please go ahead.

Yes. Hi. Thank you so much. Tom, you talked about, you know, the improvement at Crème de la Crème and the Opportunity Region where enrollment increased by 8%. Just remind us and give us some context around, you know, the variability that you've seen historically and, you know, maybe discuss a little bit more around what, you know, why these particular, you know, centers are doing better than others in your view.

Well, let me start with the Opportunity Region. That is, as you know, carved out centers that have been challenged with occupancy for a number of years, candidly. We moved to a different region. We put one of our most effective leaders over that region, she literally put together her own strategy around what do we do, how do we do it, how are we going to increase the momentum of inquiry and take advantage of that to enrollment, and candidly work on retention as well. She's just done a phenomenal job. She's kept the no-shows very low in those centers. They've been very focused on growth. They've been very focused on creating the best possible experience for the families that come in and visit with us, it's paid off.

I mean, you know, the 8% sort of speaks for itself, so we feel really, really good about that. In the case of Crème de la Crème, and I'm happy to answer another question you have it on that. In the case of Crème de la Crème is quite a success story. We had a very rough year last year, going through a rebranding of that business, changing out some leadership, and candidly just making it much more center-focused than it had been in the past. It's really worked exceptionally well. I also need to share, and we said it in the prepared remarks, but the launch of the new curriculum, the impact that we've had from our teachers and their positive experience with it, but even more importantly, the families.

We have never in the history, the 14 years I've been here, we've never gotten the kind of impact and response from the family units, the mothers and fathers, the parents of our kids, that we've gotten in this launch, which is very exciting to us. Because in Crème de la Crème, they are paying a premium for a premium experience. And it's great to see that the new curriculum that we gave them, which is a far more advanced proprietary curriculum than the, if you will, store-bought curriculum that was being used when we acquired the company, when we acquired Crème. It is significantly different, and quite frankly, people are noticing that. We feel very good about that.

The other part of it is the paid search increases that we're seeing in Crème have been significantly higher than the average that we suggested earlier that we mentioned earlier. It's a combination of a much better experience for the families, a much better tour experience for the parents. Ultimately, a better experience for our teachers with the new curriculum, and it's playing through the resilience of the families, and ultimately paid search.

Great. Thank you for that. Then just as a follow-up on the Champions and the before and after school sites, you had really nice acceleration in 1Q. I know I think you talked about higher number of center openings. Maybe just give us some context around that, sort of how much of that contribution came from new centers. I know you didn't change your guide or the contribution that you're expecting for the year, so, you know, just let us know if there's, you know, a timing factor there or if there's anything else to consider.

Yeah. No, Faiza. No, no really changes to consider. I think as we talked about last year, Champions was slightly underperforming where we would have liked to see them. We are seeing them be back to where they are. Frankly, their Q1 was right where we expected it to be, and they continue to be on that path that we expect for the year. They were up. They ended the quarter at 1,159 sites. Last year, they ended the quarter at 1,038. They're up about 10% just in site count alone. Obviously, that was a lot from the additions we made this fall, also just the net impact of closures over those two years.

A lot of that growth is coming from the new sites as well, but we are seeing some nice traction. Single, low single digits, but AWE growth at Champions as well. They're also doing a nice job of growing that as well, which continues to be important given the high count of sites at 1,000. Champions is a nice growth engine, and we're excited to see them back where they belong in double-digit growth.

Just on that subject, we are also seeing the quality of the additional sites that they're looking at to be improved year-over-year. We not only see the momentum that we've seen so far this year picking up, but also the quality of the size of the school and the locations of the schools. Quite frankly, many of them are additional schools at already existing clients of ours. It feels really good for us long term.

Great. Thank you so much.

Your next question comes from the line of Jeff Meuler of Baird. Your line is open. Please go ahead.

Yeah, thank you. Good afternoon. The Opportunity Region enrollment growth is really impressive. To what extent do you think the growth you're seeing there now relative to the rest of the portfolio is because you took action there sooner, and therefore you're seeing the payback in a bigger way now, versus it's just like a richer opportunity for improvement from the baseline, or it's more intensive in terms of the initiatives being applied or something like that?

Yeah, Jeff, let me start, and then Tom can add some kind of strategic and operational things. Look, Opportunity Region has literally just hit its one-year anniversary last year. I think there is something about clearly pulling that group out, having a really strong leader, but also a known leader that we knew would get into that level of detail with those center directors and DLs to really focus on enrollment and growth. We've talked about we put a few tools in that we're now spreading through the organization that I think are helpful as well. I think it's a combination of things, right? We weren't investing marketing dollars directly in them, it wasn't that. They are getting some of the additional spend now, that's positive.

We think it is a lot of that focus, and that's something you've heard Tom talk about. I'm sure he'll add more here. Letting the center directors focus on what's important for their center, which for most is growth, in the moment, allows them to really put aside other things that are being asked and focus on that. That's just something that leader I think has done a really rich job of doing over the last 12 months, and we're really seeing the results from that. Tom, go ahead and you can add anything else to that.

Well, only one thing I'll add, Tony, 'cause you answered the question well. What I would say to you that I am the most impressed with and what I'm most encouraged by in the rest of the fleet is that Christine, the young lady that is the RVP over the Opportunity Region, literally cleared the decks for the center directors over a year ago, which we didn't even begin to do until mid-first quarter, in the rest of the fleet. She literally created no noise around what was important to her, which was the tour experience, the family experience, the quality of the teachers, quality of the classroom, and ultimately driving growth through enrollment and inquiry.

I'd say to you that that part is the part that I'm the most encouraged by, because we have now done that in a total of 1,600 centers, not in, you know, 100 centers. The second quarter, and certainly as we've mentioned in the call, our prepared marks, the second half of this year, we feel much stronger about than we did 90 days ago.

Got it. When you're talking about the 15% inquiry increase among the targeted centers, 3% overall, just what percentage of the centers are you doing like paid or elevated paid search for, and just given that you're seeing the returns on it, any thought on expanding that to more of your geographies?

Hey, Jeff, I think you were asking, given the return we're seeing on those, would we spend them to more geographies?

Yes.

Okay. Perfect. Single-digit percent of our center. We really wanted to target with marketing, "Hey, if we utilize different marketing tools at more of a localized level or a state level, what happens?" As you can see those numbers overall have been positive. We learned a couple things from a couple other states too, that hasn't been a detractor, but it hasn't been quite as rich, that allows us to learn a little bit more where we can pull strings. Will we be utilizing that information to do better and think about more? Definitely. It's definitely something that's ongoing conversation about where should we be utilizing our marketing spend and what should we do to make it robust.

No direct plans to share with you today on that, but I'm definitely gonna make sure that as this data continues to play out, that it's something we utilize in making good decisions.

Thank you.

Yeah, one more thing on that subject. We've even changed during this first quarter, we've changed the emphasis in some areas. We've also stopped doing, we do a national, if you will, breadth of paid search every quarter. The specific targets, we maneuvered that in the first quarter and it has paid off. We're getting smarter and even the vehicles that we're using are changing. We're getting smarter as we go forward and we feel we're making progress.

Got it. Thank you.

Thanks, Jeff.

Thank you.

Your next question comes from the line of Toni Kaplan of Morgan Stanley. Your line is open. Please go ahead.

Thank you so much. You talked a lot in the prepared remarks about analyzing the portfolio, and it sounds like you might be planning to close a bunch of centers this year. Is it more than you were expecting? I ask that because, you know, you kept the revenue guidance the same. I was wondering if there were sort of offsetting factors that led you to keep that same revenue level even though, you know, closing these centers is sort of on the table and maybe incremental. Thanks.

Yeah, good question, Toni. I'll call it out again. I tried to call it out in my prepared remarks there, let's make it super clear. At this point, our guidance is still just at closing the 1% of centers. We are just concluding that work now on which centers we do believe need to exit the portfolio. A couple of next steps need to happen. One is determining the right timing for the communities and for us, along with that comes lease discussions. We are undertaking that right now. We will see closures happen kind of throughout the rest of the year.

At this point, that's why we need to see how that goes before we're able to really give a good, clear guide on which of those centers we do think and when they'll be exiting the portfolio. That's why today we're holding to that, just 1%. When we come talk to you in Q2, we'll have a much clearer picture and be able to firm up the impacts of those closures, both on revenue, but also on the bottom line for the year.

Terrific. I wanted to ask about pricing. I think in the quarter it was a little bit over 2%. I know the full year guide is for three. I was wondering if you are seeing any positives from either discounting or things like that. Has that been a factor in, you know, some of the increased conversion or, you know, things like that? I guess also, you know, given that you're expecting three for the year, do you expect to sort of incrementally raise prices more as you go through the rest of the year? Thanks.

Yep. Good question, Toni. Let's parse it a little bit. On the private pay side, our new prices went into effect on January 1st, for age ups and new students, and we're seeing those prices take hold just as strong as we have in the past and at a very strong rate. That's a positive. Those private payer rates are above the 3% this year, as we expected them to be. We have not been doing additional discounting or anything like that outside of what we normally do, Toni. We continually find in this industry that there's places to do that. Again, the biggest thing about price is the value you provide.

If you provide great value, you're keeping your teachers, you have high engagement, price holds really well. If you're not living up to those things for the families, a small discount or some discounts don't necessarily matter. Just to share that with you, we haven't been seeing that. One thing we have seen, and Tom mentioned it, was our enrichment programs and small takeaway sessions for phonics and STEM and some other things are gaining some momentum, which is great. That's great for the families obviously, and the children and their kindergarten preparedness. It's great for retention. Those families usually stay longer, and it's great for rate for us as well. They're paying a little bit more in to what they're doing, and that's helping a little bit too on the private pay side.

Frankly, some subsidy too. We're seeing more and more subsidy families than we've seen in the past, utilize that as well. On the subsidy side, I mentioned it, we are still seeing the impacts of in Indiana and some of the other states still impact us today. A couple things there. One, we'll anniversary those, come the back half of the year once we get out of this budget cycle. Based on everything we know there, allows us to give us that guide that we're giving you of the 3% for the year. I think we're starting to see some positive things. Tom mentioned, Indiana has come out with some positive news after they thought through it a little bit.

That's definitely something that's gonna be helpful for us as well, as we kind of recover from some of those things that impact us in the back half of the year on price and subsidy.

Super. Thank you.

Of course. Thanks, Toni.

Your next question comes from the line of Manav Patnaik of Barclays. Your line is open. Please go ahead.

Hi, this is Ronan Kennedy out from Manav. Thank you for taking our questions.

Could I please confirm how you're thinking about the role of closures versus turnaround efforts with all the initiatives underway? If there is a threshold for exiting those underperforming centers, versus endeavoring to improve them with those initiatives, and if and how that has evolved?

Look, Ronan, we truly looked center by center, every single one of our centers. I mean, that was something we always do. What we did, Tom really looked me in the eyes and was like, "We gotta do that again." A lot of that analytically, we were able to get through quickly, and then we went through every single one. Why am I calling that out? I'm calling that out because, yes, we know all these things that we put into place as we've changed the trajectory of what we're doing. Tom Wyatt's provided some, I think, clarity and simplicity for our field and what we can do.

We thought about that as we made each decision and made this list that now we're gonna go analyze and take care of. If there's centers that checked all the boxes as far as demographics, leadership, engagement, et cetera, those are some centers you might see us hold on to for another back to school session maybe or another year to see if this is gonna work. Because like we talked about with Opportunity Region, these things don't flip on a dime and happen the next month. Definitely, there's some centers we're considering doing that. Other centers we had a long conversation about and decided we still think it's the right thing to exit these for various reasons, and every center is a little different. Some of them could be, you know what?

We can push these kids into another center closer, teachers into another one, and the ones with the least life or something else. Truly a 1 for 1. I say all that, then Tom I know wants to touch on it a little bit too. We are gonna exit the centers that we don't believe should be with us in the next three to five years and tomorrow. We're gonna make it so we have the strongest portfolio. As we do have all of that focus that we keep talking about, we know our focus throughout the organization, from teacher to center director to district leader to our NSC support, is on all the right centers for the long-term health of the company.

That was well said, Tony. I'll add only one thing. Just to put in perspective, because you're asking what are we doing through the process. The process starts with the Opportunity Region. We send centers to the Opportunity Region that we know should have potential to improve. We start there. The good news is, Christina is showing us that they can in fact react and grow, and that's pleasing to us. Because we don't wanna close any center, we don't wanna impact any child, or quite frankly, any employee. The opportunity for us to start there and try to do the everything we possibly can with leadership, with the quality of the teachers, the inquiry, the enrollment work that we do, we do that first.

If in fact we can't see, a path forward, that's when we make the decision, to close it.

That's very helpful. Thank you. For a follow-up, if I may please. The adjusted EBITDA margin drivers I think were understandably described as relatively straightforward. Obviously, occupancy is a primary factor. Are you able to quantify or help us think about the relative contribution of that dynamic of the 3% enrollment decline versus pricing and then wage inflation and other costs? I think you noted labor is not flexible due to the required ratios and the margins for that step function lower. Can you help us how to think about those dynamics and perhaps the next inflection point in occupancy that might restore that margin leverage? You know, how much upside is tied to hitting that threshold?

Yep. Of course. Good question. Obviously 2% of tuition, and that's still continuing to outweigh our wage rate by a little under 100 basis points, so kind of in the 70-80 basis point range. We're still creating some different swings at, which we do every year. The majority of the rest, to your point, is the impact of that occupancy happening, right? Obviously, we're up against that rent that we discussed last time from PropCo and normal other rent increases. We're up against normal other costs impacting that that are putting pressure on the system. Those are things that at the level we're at, we're just not able to manage that, especially with labor. What's the next level? 70%'s a really key number that we always talk about.

70 percent's where we do really have, on average, two teachers in a classroom, which means the step function of additional hours is really minimal. That's again, 70% for the year. Getting back just the 3% we have off from last year will be critical for us to kind of start building that margin. Everyone counts, but we're a couple percent off from really a sizable one where the margin really starts to ratchet back up the right direction.

Got it. Thank you very much. Appreciate it.

Of course.

Your next question comes from the line of George Tong of Goldman Sachs. Your line is open. Please go ahead.

Hi. Thanks. Good afternoon. You're expecting a gradual enrollment improvement in the first half and a more meaningful recovery in the second half. Can you elaborate on why enrollment performance should more materially improve in the second half, and specifically, what gives you the confidence that the second half will be the turning point and not, say, some point in 2027?

I, George, I tell you how I feel. It's just allowing all the changes we put in place, the clearing the decks for the center directors, getting the right formula, and quite frankly, the amount of money invested in to paid search, to have the right center directors in all the centers, to getting people focused on growth in a much more purposeful way than they were even in the second half of last year. That takes time when you have, in our case, it includes Champions. We have almost 3,000 locations, 43,000 employees. It just doesn't happen overnight. The increase that we saw in the first quarter was It felt good to us. We felt like we were making impact where we weren't sure we were even gonna see that.

We're really anxious to see what happens in the second quarter and into the third quarter. As you know, back to school is the bell ringer for us. We can get through, if we can retain the children that we expect to retain and the camps that we're setting up, and all that is aggressively postured at this point to do so, we go into a back to school season with a firm muscle built around all those processes, we feel good about where we're going.

Got it. That's helpful. You mentioned you're raising the EBITDA guide for the full year, primarily to reflect outperformance in Q1. Is there any reason why the margin outperformance in Q1 shouldn't repeat in future quarters, which would allow you to raise the guide even more?

Yep. Great question, George. Yeah, look, I mean, there's really the $5 million, right, that we're raising, coming from Q1. It's pretty much isolated to a couple of things that outperformed from when we talked to you guys in early March. One was we saw a few more grants come in than we were expecting, right? Grants has been something we talked about where last year, we expected this year to be lower than last year, and we're expecting still to be relatively close to kind of pre-pandemic levels. Q1 came in a little bit stronger. At this point, we don't believe we have the visibility or transparency to believe that that's going to reoccur for the rest of the year.

Kind of held that amount, expect the rest of the quarters to go still as we are expecting to start the year. The rest was a little bit of labor favorability. You know, despite Ronan's question earlier and how it is harder to do labor here, in this moment, we did see some favorable actions there with our labor. A little bit around some timing, we believe with spring breaks and things in the quarter, that we do think at this point are one-time, that's why we're not going to assume that we can continue those for 4 more quarters, George.

Got it. Very helpful. Thank you.

Of course.

Your next question comes from the line of Josh Chan of UBS. Your line is open. Please go ahead.

Hi, gentlemen. Thanks for taking my questions. I was wondering how you would contextualize the 3% enrollment decline versus the 3.6% in Q4. You know, would that be mostly the Opportunity Region? Maybe relatedly, how's the enrollment trend in the non-Opportunity Region centers kind of trending? Thank you.

Yeah, Josh. The Opportunity Region had a little bit better trajectory. A decent portion of that is coming from there. There's a little, probably 10 basis points or so, just related to some capacity changes as well as we look at that. That's something we always talk about, that we're trying to meet each community where they're at. Everything else has stayed relatively consistent. You know, maybe 10 basis points or so above everybody else of improvement, but everybody else has remained relatively consistent so far.

Awesome. Okay. Thank you. On the, on the incremental closures, I know that that's not in the guide, but is there a way that you can frame out what the impact would be? Because I, you know, obviously it will have an impact on 2027 base as you complete the program, just to kind of box that in a little maybe if there's a way to do that.

Josh, trust me, I would love to for you all. We are just in the throes of it right now. It really comes down to looking at communities, looking at leases, negotiating with landlords to get out of them or not get out of them and decide how we will continue it. As much as we would have loved to give you that color, we're not quite there on our own either. I'm confident that come August, we will be able to fill you in exactly where we're at and be able to talk about the impacts definitely for 2026.

I think we'll be at a point we'll be able to share some thoughts about the ongoing impacts that will be both on revenue and EBITDA because as you'd expect, we're gonna exit the lower performing centers, and that's gonna have a positive trajectory, for 2027. It's just not at the place where I can give you precision right now, but will be in August.

Sure. Okay, appreciate that. thanks so much for your time.

Thanks, Josh.

There are no further questions at this time. I will now turn the call back to Tom Wyatt, Chief Executive Officer, for closing remarks.

Thanks, Miriam, and thanks to all of y'all. Appreciate the questions. Very high quality questions coming from you today. We appreciate it. Look, as we've outlined literally since I joined the company back in December, and certainly after the first quarter call, what we set out to do was to execute better, and to reduce the complexity in our centers, invest in paid search to really help drive the overall growth inquiry that we need, and we're doing that. We see good signs of it in every single one of our businesses. We feel good about that. Tony said it, and I'll say it again, at this point, it's all about execution. The demand is there. We have the opportunity.

We have the largest brand in the entire marketplace, and certainly have the trust of the families and respect of the families in our centers. Although there's a lot more to do, we're very encouraged by what we've seen, and we're looking forward to updating you on the progress in the next quarter and in quarters to come. Thank you so much and have a great evening. Take care.

This concludes today's call. Thank you for attending. You may now disconnect.