KinderCare Learning Companies, Inc. (KLC) Earnings Call Transcript & Summary

Okay. Let's go ahead and get started. So thank you both for joining us. Really pleased to be joined by Paul Thompson, CEO of KinderCare; and Tony Amandi, CFO.

So really, again, thank you for joining us for the conference. I want to spend a little bit of time talking about the high-level strategic vision of KinderCare. KinderCare recently completed its IPO. So for those who may be newer to the name, can you provide a brief overview of the business?

Absolutely. So number one, KinderCare is the largest in early childhood education. We are in 41 states across the U.S. and in D.C. The industry itself is very fragmented. So for the opportunity for us to be in more communities and grow through tuck-in acquisitions and opening up greenfields across the U.S. is a great opportunity for us. So that's probably the #1 thing I want to share. Number two, we have a very differentiated platform in the industry, which gives us a lot of versatility to address all total addressable market in this space. So on the one hand, we have subsidy children who receive vouchers through the federal government, which allows them to parent choice go into the quality care that they want to receive. So that gives us on one end. On the other end, we have a premium brand, which is Creme, and we've had that brand for 3 years. So it's also another way for us to grow in communities with those centers. And then across the U.S. with our KinderCare brand, serving Middle America and each one of our centers reflects the community and demographics of that center. So we've shown we can be profitable in all income levels across the U.S. and gives us quite a bit of flexibility. Another place that differentiates us is our B2B platform. So both with Champions, which is the largest for-profit before and after school program, we're over 1,000 sites, and we're growing a significant number of sites each year in champions. And then in a Gen Z, the #1 benefit they're asking for is affordability and accessibility of child care. So for us to have 1,500 centers that we can go to employer and give them an equitable benefit for their employees, so they can attract and retain the very best talent. We can do an on-site for them, which is a wonderful way for us to build that benefit for families that are parents that are going to their corporate office Monday through Friday or if they want more flexibility, they can go to our community centers, 1,500 centers across the U.S. So that gives us another differentiation. So those are kind of the key factors about KinderCare. You talked about the IPO story, and I think it's helpful for everyone to understand our growth levers that we have, and there are 5. Number one is same-center enrollment growth. And so that's really focused on occupancy of our existing centers and growing that for where that is today. Tuition is the second growth lever for us. And that's important in this industry because when our consumer, the parent enters our center, the highest tuition they will likely pay is that first week because as their child ages up, many times the tuition actually goes down because of the teacher-to-student ratio. So we can embed tuition increases each year, and that's good for the top line growth of our industry and our business. But for a parent and that consumer, it's a good outcome for them. Our third growth lever is what I talked about with B2B. We're continuing to see new clients added each year in the before and after school program that can be superintendents, principals, district leaders making that decision. And then on the KinderCare for employer side, that can be a CFO, CHRO or procurement and for us to sell to them. The fourth growth lever for us is tuck-in acquisitions. And as I mentioned, a very fragmented industry, we continue to see great growth there. And then the final growth lever for us is new center openings. And we've been building that capability since COVID, where we took a step back, having a very good year this year, but we'll continue to enhance our opportunity to grow new center openings as well.

Now you compete against another publicly traded child care company called Bright Horizons. When you look at the two companies, what would you say is your main competitive advantage or source of differentiation compared to BFAM?

Absolutely. The #1 strength of ours is having those 1,500 centers. So as I mentioned, when we go to an employer and we ask all their -- survey all their employees, maybe building an on-site for them is a good outcome. But in addition to that, many employers also want to add on what we refer to as tuition benefit, where we're subsidizing the tuition 10% for their employees. What we're seeing is more and more employers are wanting to also subsidize for their employees. And so that's a great outcome where it provides greater accessibility and affordability to their own employees. And so having that flexibility of offering, so you, as a parent, you might want to have that support closer to where you live as opposed to where you work because maybe a family member or a neighbor might have flexibility to pick up your child if you're not able to do that. So that flexibility of offering is definitely a strong advantage for us when we're meeting with our employers.

The child care services industry is known for being defensive in nature. Given the current macro uncertainty, can you talk about how that defensiveness has helped you in the business? And if there were to be a cyclical impact, where would you see it?

Yes. The -- when you speak to the defense, what we really enjoyed, if I can use that word, the last 5 years is people recognizing how important the child care industry is for parents to be able to go back to work. So if you want a strong economy, your parents want to know that their child is in a safe environment. And so the childcare industry, that's the #1 thing they know they owe to their parents. And so just that recognition of not only parents who want to go back to work, want to know that their child in a safe environment. What also has elevated the last number of years is understanding and recognizing how important that development time period is from 6 weeks until their child goes into kindergarten, how much their child is learning and developing. So parents are asking better questions about which program is giving my child the best advantage on hitting milestones and then thriving once they go into kindergarten and beyond. So we have data that shows that the longer you're in a KinderCare environment, not only are you above your peer group, but you're advancing through those milestones at more meaningful time periods. So not just are you as a child better from October to the following spring, but you are progressing well against your peer group and hitting those milestones at an earlier age. So those pieces are really the value proposition that we bring to parents. And for them to understand, we are the largest accredited provider in the U.S., not just because of our numbers, but as a percent of total. So we're roughly 80% of our centers are accredited through NAEYC the rest of the industry is less than 10% accredited. And that matters because they're testing for the capabilities of our teachers and their credentials. They're looking at the investments we make in facilities. They're looking at the effectiveness of our curriculum. And so we can prove through data. And so that's meaningful as a child -- or parents making a decision on enrolling their child.

Makes sense. Historically, the federal government has been very supportive of child care services. What's your assessment of the latest federal budget in terms of its impact on the industry and how it's overall subsidizing the industry?

Absolutely. The biggest takeaway we took from 2025 is this continued bipartisan support of the child care industry. And again, it goes back to Congress wants a strong economy, and they know that the strength of the childcare industry allows parents to go back to work and show up and not have absenteeism or have concerns about where their child is at. So whether it be fully funding the block grant, which is a great outcome for 2026, but also the tax credits that were put in place for effective of January 1 of the new year, those are indications of Congress and the White House wanting to do more in the child care space. So that's a good indication for 2025. But I also -- we also feel very good about what that means for further conversations that we can -- I'm actually in D.C. the next 3 days exactly to have further on conversations with members of Congress and help them understand the impact that they're having for their constituents. And so that's exciting for us and exciting for how we see the federal support for it, but there's also discretionary funds at the state level. And so us working with the states so that they can see the impact of their parent choice decisions on pre-K and universal pre-K and other things and having a parent choice, which is allowing us to participate is the best outcome for those communities.

So occupancy rates are an important driver for the business. And this year, you're expecting occupancy rates to decline around 100 to 150 bps because of various local market dynamics. Can you talk a little bit more about what these dynamics are and what you're doing with these transactions?

Do you want to take that?

You want to take a break?

Yes.

Okay. Yes. So look, we see -- at each one of our centers, we're able to diagnose what's happening there and what we can do about it. And so you've heard us say, George, obviously, you referenced it, it's at a local level rather than macro across the board. And as we look at some of the items that might be macro as far as job rates or pricing or anything like that, we're not seeing anything that's impacting all our centers. And we do have the tools to look at it at a center level and diagnose what's going on. The most often things are something related to teacher turnover. So we're still able to get all the teachers we need, but we got to make sure we keep especially the lead teachers in place. And so if teacher turnover spikes, that usually has some impacts on the amount of children we can serve because families want to see that stability. So that's something we can lean in with the center directors and make sure we lean into our engagement, and we're doing what we need to keep those teachers around. The other most common one is something in the inquiry to enrollment funnel. And so -- and there's a bunch of different steps there, right, starting with inquiry and then the tours and then the final enrollment. And we're able to use our tools to lean in there as well to work with the center director, to work with the district leader on what's happening and diagnose it and get some training or lean in with them to do it at that level. And so we do see various things at different ones, but there's no overriding thing we're seeing across the fleet.

Right. Have you seen prior instances of these local market dynamics play out in the past? And if so, what were the fixes?

Yes. What I'd go back to would be we really put in our quintile strategy. So that's where we're looking at our centers from top to bottom, kind of divide them up in 5 different groups and really thinking about the different playbooks at different those levels kind of towards the end of 2016 to 2017 and really utilizing that to really grow to where we were pre-COVID, which is our highest at that point and are back past that again. But we use that to diagnose. If you're a lower quintile, what did you need? And what was the playbook to move up to the quintile 3 and quintile 4 metrics to move up those charts? And so not directly answering your question of seeing problems, but the same sort of thing, like using diagnostic tool, using a playbook, and that's something we really started putting back in about a year ago now. So until about a year ago now, we were just making sure we got past pre-COVID levels, which we were kind of the first in the industry to do so. Once we got there as a fleet, it was time to turn back to that and really have done so. And we've kind of doubled down on that even more with the percent of our lowest performers and what we did with the Opportunity Region here at the start of Q2 to even do that even more.

Right. So we talked about there not being a single factor causing the occupancy headwinds. From an operational perspective, would you rather there be a single factor? Or would you rather it be a number of various different local market factors, which is easier to handle?

Yes. It's an interesting question. COVID was one factor, and that was not a great experience for the industry and to get back to that from a recovery perspective. So when you have multiple factors as we currently do, I think that allows you more creativity and flexibility about how you go after the solution and how you go back to focusing on what you can control. We, in '22, '23 and '24 really had strong enrollment gains each of those years. And so here we are in 2025. And what we're encouraged by, as Tony was saying, we know how to run great centers. We know how to improve the enrollment of individual centers. And so understanding that this is about good operational practices and getting to reignite or reintroduce some things perhaps we were doing exceptionally well in 2018, '19, reintroducing that now here in 2025. So that feels like something we can control, and it's about ensuring that our teams, or our center directors have the capabilities and understand what's expected of them and then looking at our leading and lagging indicators to ensure that they're doing the right activities for prospective parents and existing parents. We know we're on the right path to have a healthy outcome on overall enrollment. And that feels like where we should be right now as opposed to there isn't -- in any business, there's not usually a silver bullet to correcting things. So for us to return to what we know we can control and using the data, you've mentioned it before, how data-driven we are, that is a good experience of our team to look at the data by different communities, segment, different groups of centers and then understanding, as Tony was just saying, there's a good playbook for centers that are over 85% occupied, and then there's a good playbook for centers that are less than 60% occupied. So that's exactly the practices that we're focused on.

Right. If you look at enrollment cycle for private pay families, I think recently, the sales cycles have been a little bit elongated. Can you talk a little bit more about that and what you would need to see externally for those sales cycles to normalize?

I think with the conditions that exist outside of KinderCare across the economy through the U.S. is understanding, and we always have known, but the tuition for a parent as a part of their budget is very much the size of their mortgage or their rent. And so for us to get to even historical levels on that time horizon really is us being very impactful with parents about understanding the value proposition of what we do for their child. And so that goes back to the earlier statements I was just making for a parent to understand how much development occurs for a child under the age of 5 years old, understanding that a dollar spent on a child's development under the age of 5, any economic study would tell you it has a stronger ROI than at any other time in the life of a child. And then for us to articulate for those parents the compelling difference of our curriculum and the impact we have on children achieving those milestones. Those are the things that help a private pay parent understand how important it is for their child to be in that type of an experience and then for them to make the decisions they need to on their own personal budget is really the expectation that we have for our team.

And I think, George, I'd just add like we're tweaking that as we go, right? I mean I know we've talked to you about the first half of this year, even with our enrollment down, we saw our retention of our current families actually be higher than they were in the prior year, right? So our current families are definitely understanding the value they're getting from us. And so that's one of the focuses is how are we making sure we're telling that story hopefully quicker to get -- to cut it down to those families so that the new ones can understand what our current families already do.

Right. Your occupancy rate this year tracking towards 68.5% to 69%, which is roughly in line with pre-COVID levels. What would you say your longer-term target is for occupancy rates and what can get you there?

Yes. And just for everyone, when we brought Creme in, that actually had a dampening effect on our occupancy. So if you look at our KinderCare versus 2019, centers were actually above. And it's just the Creme centers are so large and they have an undue impact. But for us, for an expectation about occupancy, we have so many centers in our quintile 1 through 3 that are above 80% occupied. So we know when we do things well and when we have strong engagement, which we measure with Gallup for both our staff and our parents that they have the best business outcomes on student retention, as Tony was just saying, teacher retention and profitability. So we know that we have examples throughout very different communities where we are over 80% occupied. So we have an expectation of ourselves that each year, we should be expanding our occupancy 1 to 2 percentage points, and it just requires us to focus on those things that we can control and is exactly what we're talking about here. One of the elements to that is improving the digital experience of both our parents and our center directors. So you've heard from us throughout this year how we've been adding -- rolling out enhancements to our digital experience, and that can be on the enrollment process. It can be on the billing and payment process. It can also be on how we more effectively communicate with parents through our mobile app. All those things help our parents have a better experience, better loyalty to us and wanting their child to stay with us longer. So as I mentioned, for us to expand into mid-70% and higher occupancy is definitely our expectation over the medium to long term. And it just requires us to do those things which we've been talking about here of empowering our center directors to have more time in their week to develop better relationships with prospective and existing parents.

Talk a little bit about tuition rates. So you're looking for tuition rates to be up 2.5% to 3%. It's a little bit updated from your prior expectations of 3%. Can you talk a little bit about what drove the update and longer term, what you hope that range to be?

You bet. Yes. So we started the year and guided that we thought our overall would be around 3%. And so we recently updated that to be between 2.5% and 3%. I'm going to take a quick step back, George, on pricing and how we do that. So we roll out new prices on January 1 on our private pay side for our new students and age-ups. And so they get those as they go. And Paul talked about the pricing impact. So that really helps in that area. And then on the subsidy side, we -- those prices go into impact when the states put them in place. What I'd tell you is, if I look at student by student, we're -- every student is right where we thought they would be at this point, which is great, right? There's no surprises there. And so we haven't changed any of our pricing. We haven't updated pricing up or down or done anything there. What's happened this year, which has caused us to update that pricing is we have grown subsidy this year. Our subsidy students are actually up slightly. And so our downturn has been in the private pay, which is the conversation we've had, most of this discussion. And this year, in 2025, our net revenue per FTE is higher for our private pay than it is for subsidy. That's not something that happens every year, but this year, it is. And so really, that mix is what's causing our overall pricing to drop a little bit this year. We will really get into it here in Q4. So we really kicked that off the start of Q4 to put in our pricing for next year for private pay. And obviously, we're having conversations with all the states and all the agencies to get a feel for what they might be doing next year. We fully expect to be back within the 3% to 5% pricing for next year and ongoing. And then just the last reminder, I'd just say is this year coming off a little short of 3% is coming off of several years in a row where we were in the 4% to 6% range as well. So that's why we are starting at the low 3%. We knew it was going to be a little bit lower this year, and then we're just slightly down from where we thought we'd be at the start.

Makes sense. So you're seeing some really nice positive momentum with your B2B business. Can you talk about how performance with the B2B compares with your community centers in terms of occupancy rates and enrollments?

Yes. So our on-site business, what we refer to as KinderCare for employers has as well exceeded their 2019 levels. The overall occupancy of our on-sites exceeds that of our community centers, which isn't surprising because you have more of a captive audience of consumers, so the parents who are working at that employer. And so similar, just understanding that we have great operational practices at those centers and looking to drive them to have even stronger occupancy and where they are from in their mid-70s -- mid- to high 70s. So feeling really good about the clients we have, the on-sites we have. We've also seen a growth in the number of employees of our clients who are in our community centers. So that's attractive to us because those parents who are loyal to their job and enjoying that benefit, stay with us longer back to Tony's comments on our retention being longer comes as having even in our 1,500 centers, more employer-related client revenue flowing through our centers has been powerful. And then on the Champions business, similarly, we've seen growth of that. I talked about we're adding new sites all the time. Right now, we're in the midst of back-to-school where many of those new sites open. So they're opening on time and with a great initial push of enrollments. And then even on our existing sites before and after, we're seeing an increase to the number of students at individual sites, and that continues to be a growth opportunity. So both businesses performing well. What's been exciting for us is how many of our clients speak as advocates for us. So we have many instances where we're introduced to a new potential client because they referred to us to their peer CEO or CHRO or CFO at a peer organization. And that's great for us because in many cases, they're not looking to do a process or an RFP. They've heard great outcomes for the way of the flexibility of our offering, how we show up with a very turnkey, high-quality program for those clients. And so that accelerates our ability to add those additional clients to our portfolio.

Right. What are some of the top initiatives you have to sustain the growth trajectory of B2B? It sounds like it's an important growth driver for the business.

There's a few different ways of driving that growth. Number one is continuing to offer the flexibility with clients. So understanding what's important to them and their employee and so that when we show up with whatever solution that we're addressing what's important to their culture, addressing what's important to their strategy. So that's been a powerful way for us to grow. And then thinking about even do they want a management fee or do they want a P&L center. So being upfront with what model works well as they're selling that benefit into their organization. We talked about the tax credits for -- so there's 45F and then the tax credit going to their employees. So educating the employer and the business and those decision-makers about what's available to them and their employees is another way that we've been helping them formulate their own value creation opportunity. And so then we meet the moment for them.

Let's talk a little bit more about Champions. You talked about site growth that you're seeing in recent quarters. How do you expect Champions growth to compare with BCE and B2B growth now and over the longer term?

Right now, Champions is -- grows at a stronger top line revenue growth. It's a smaller part of our business. It's roughly 7% of our top line revenue. So there's -- even with the stronger revenue growth, we expect that to continue. Just there are roughly -- there's many elementary schools throughout the U.S., but let's say the addressable market is 60,000 schools. We're in 1,000 today. So it shows you that opportunity to add sites is a long horizon for us. And so for us to continue to ramp our site growth, I feel, will give us a runway for a number of years. And that's both charter schools and public school systems that we're able to add those sites.

Makes sense. Tuition growth is outpacing wage growth by 50 to 100 bps per year, which has, of course, positive implications for margins. How rigorously can you maintain that positive spread between tuition and wage growth?

Yes. I mean as we look -- so we -- like I mentioned earlier, we'll look at what we want to do as far as tuition at our centers here in the fourth quarter to roll that out and knowing where our wage is going to be is one of the starting points for that. So we, about 3 years ago, changed when we do wage and how we do wage. So now we do it at anniversaries for our teachers, and we know kind of what that ladder is. Once the teacher stays with us after a year, they get a pretty sizable increase because they're able to run a classroom by themselves and be a lead teacher. And so with that, both myself, CHRO know when those are going to happen throughout the year and can really plan into that. And we're sitting exactly where we thought we would be right now, which is great. So as we look to next year, we'll start with wage and see where we believe that's going to be based on lots of different metrics and expectations. And then we'll build tuition a little bit from that and making sure that we can create some differential that allows us to fund the business, do all the other great things we're doing for families and teachers. And so I've been here 17 years, pretty much every year other than that kind of COVID timing, we've been able to outpace it. And it's something that I think we do what we runway to care, but it's truly an industry thing as well, too. Right?

Yes. Makes sense. Now if you look at EBITDA margins, which factors in the positive spread between wages and tuition, but also factors in occupancy rates, EBITDA margins are coming down a bit year-over-year because of the occupancy declines. Are there internal efficiencies that you guys are pursuing to help mitigate that temporary negative operating leverage?

Absolutely. Again, when you have -- when you are a multiunit operator, thinking about those efficiencies and strengthening the gross margin has to be a core outcome. And so there -- that is part of this reigniting and reintroduction of best practices across the system that we're looking at beyond the wage and tuition capability. Labor is the #1 cost in our -- in an organization like us. So continuously thinking as you transition, as Tony has talked before about the seasonality, managing labor in a responsible way while still having a great experience in the classroom is a key piece for us to continue to enhance and one thing we're always working on.

And I guess if we just think about the time frame for when you can get back to EBITDA margin expansion, what's the rough idea of when that might happen?

Yes. I don't think it will be that long until we turn the corner again, George, right? So I think we're doing a nice job with G&A. So just one other item there. We had talked about a year ago that felt like '23 and '24 were at a high point of G&A spending, and we're seeing that play out this year. If you look at our SEC financial statements, you won't quite see that with our public company costs coming in this year, but really feeling good that we'll anniversary that here coming up in the fourth quarter, and we'll start seeing that G&A leverage really start to pay off. So we'll see a little bit there. We'll continue to see the tuition outpace the wage. And then as occupancy creeps back to flat and then beyond, we'll really start seeing that go as well. But then to Paul's point, we've got some other things in the works that we think can also help chip away with that. We did kind of a public announcement that we're working with Legion now in that labor area, and we're excited with what some of the tools Legion can bring to us, and we're not quite ready to roll that out. It will be sometime next year. But using some tools with them, I think, is going to be exciting and let us both save on labor, but also set up schedules even better for our teachers as well.

So the topic of AI and Gen AI have been pretty big in business services in recent quarters. Can you talk about where you see the opportunity for Gen AI within the business and if there could be any sort of potential threat from Gen AI?

So from the opportunities are those that so many are already activating on when you think about call center and for assistance to parents or to families or even our own center directors, kind of those first steps of help is an opportunity. We're doing our own digital initiative, as we talked about. And so from the acceleration of the momentum of delivery of new iterations of our systems, we're using it there as well. There's future opportunity. Well, another place that we're using, we submit for RFPs when required on certain employer -- yes, employer client requests. So using all the RFPs we've written over the last number of years helps us to still tweak them to be very personal for each individual RFP, but kind of putting the construct of that in a much more efficient way than it has been historically. And then future opportunities are what we're talking about, how do we continue to enhance the experience of the parents having. And so are there other capabilities that we can do in our future. And as other industries do this ahead of the curve, that gives us an opportunity to learn from them and look for places for us to do that as well.

Right. And then lastly, you're expecting free cash flow generation this year of $85 million to $95 million. What are your top capital allocation priorities?

Yes. It's still growth in the business. So the tuck-in acquisitions, new greenfields, so we're going to continue to ramp that up now. We've got some COVID decisions behind us that slowed that down. We'll get into the mid-20s for a number of new greenfields this year. And I think we'll see that trajectory keep going. We added 23 tuck-ins last year. I think we'll see that trajectory keep going as well. And then we'll keep -- there's some digital growth things we want to invest in as well. So really, we plan to kind of keep investing in ourselves and in growth. We think that's the right return for the business right now. And then after that, we'll see if some of the other things in the structure makes sense. But right now, it's growth.

Makes sense. Well, thank you, Paul and Tony, for the great discussion. Please join me in thanking them both.

Thanks, George.

Thanks, George.