Bright Horizons Family Solutions - Earnings Call - Q1 2020
May 6, 2020
Transcript
Speaker 0
Greetings, and welcome to the First Quarter twenty twenty Earnings Release Conference Call. At this time, all participants are in a 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, Michael Flanagan, Senior Director of Investor Relations.
Thank you, Mr. Flanagan. You may begin.
Speaker 1
Thanks, Victor, and hello to everyone on the call. With me on the call today are Stephen Kramer, Chief Executive Officer and Elizabeth Bolan, 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 IR section of our website, brighthorizons.com. As a reminder to participants, any forward looking statements made on this call, including those regarding future business and financial performance, including the impact of COVID-nineteen on our operations are subject to the Safe Harbor statement included in our earnings release.
Forward looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2019 Form 10 ks and other SEC filings. Any forward looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward looking statements. We also refer today to non GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the IR section of our website. Stephen will now take us through the review and update on the business.
Speaker 2
Thanks, Mike. Hello to everyone on the call and thank you for joining us this evening. I hope that all of you are staying safe and healthy during these unprecedented times. I would like to take this opportunity to thank the first responders, medical personnel and others on the frontline who are working tirelessly to ensure that our communities' needs and critical care are being provided. And I want to thank our teachers and all early childhood educators who in the face of the storm have provided calm, nurturing and loving environments for young children.
I'm pleased that the field of early childhood education now more than ever is seen as an essential support within our society and the teachers in the classroom are recognized as heroes. They have forever made a difference and I am truly inspired by their individual and collective dedication. I'm going to begin today's call by briefly recapping our first quarter results. I will then discuss our response to the COVID-nineteen pandemic and the strategic actions we are taking to navigate the near term challenges and to maintain positive momentum for the longer term. Elizabeth will provide a more detailed review of the numbers and some further context around the potential impacts from the pandemic before we open it up for your questions.
To recap, the first quarter we delivered revenue of $5.00 $6,000,000 an increase of 1% and adjusted EPS of $0.74 a decrease of 9%. These results reflect the COVID-nineteen related impact to our business that began in March. Leading up to the crisis, our business was trending in line with our expectations for the quarter. In our Full Service segment, we added 11 new centers, nine of which were organic, including client centers for Fifth Third Bank and Verily Life, a subsidiary of Alphabet and a second center for Pioneer Natural Resources. Our backup peer business also started off exceptionally well, running high teens growth in the first part of the quarter with over 50 client launches, including Anheuser Busch, E*TRADE, Micron and Fifth Third, who launched Backup Care in connection with its new center opening.
And we also added to our Educational Advisory client base during the quarter, launching services for DaVita, TIA Craft and Gilead. But the strong momentum from fourth quarter twenty nineteen and the early part of Q1 twenty twenty was interrupted by the outbreak of COVID-nineteen in each of the key geographies in which we operate, The U. S, The U. K. And The Netherlands.
While governments and health authorities across these three geographies ordered the closure of all non essential businesses, our child care services have been deemed critical to support essential frontline employees such as first responders, researchers, health care and medical professionals who are leading the fight against COVID-nineteen. So in mid March, in order to best support our clients, families and staff, we began to temporarily close a significant portion of our centers and to concentrate our resources on health care and other essential client centers as well as critical hub centers to support the children of medical and other essential workers. Before I get into the current state of our operations, let me frame my comments by observing that we have weathered many economic cycles over Bright Horizons' thirty plus year history, driven by our value proposition in high quality services, underpinned by a culture of caring and service. We also have a number of structural advantages driven by our employer sponsored model in The U. S, significant government support outside The U.
S, as well as the diversity of our service offerings. Our employer sponsored cost plus centers operate with no financial risk. Our employer sponsored bottom line centers bear no occupancy costs. And our lease consortium centers benefit from the support of various employers through backup use and other subsidies. The Backup and Ed Advisory segments have continued the growth that they've seen in recent quarters.
And with their strong operating margins and cash generation provide additional support and stability to the overall business. So getting to the specifics. Today, approximately two fifty of our nearly 1,100 centers globally remain open. The safety and well-being of our staff and the children in our care have always been and continue to be our first priority. We closely monitor guidance from the CDC and local health authorities and take direction from medical experts, including a direct relationship with a leading physician at Boston Children's Hospital.
We have enhanced many of our existing practices and implemented new protocols including social distancing procedures for pickup and drop off, daily health checks for staff and children, the use of face masks by all Bright Horizons staff, limited group sizes for older children and enhanced hygiene and cleaning practices. In The U. S, approximately 150 of our seven eighteen centers remain open to essential workforces. Our early childhood professionals are enabling medical staff to treat patients at leading hospital systems, including New York Presbyterian, Johns Hopkins Medical and Mayo Clinic. They are also supporting essential employees at leading organizations such as SC Johnson, Union Pacific and Cummins Engine.
I'm also pleased with our partnership with First Responders First, a collaboration between Ariana Huffington's Thrive Global, the Harvard School of Public Health and the Creative Artists Association to provide vital childcare in communities that have been hit particularly hard by the virus such as Chicago, Detroit, Seattle and DC. We also continue to do important work with our families enrolled at centers that are currently closed. Our educators have created an online platform where children are able to stay connected to the other children in their class and access a variety of teacher videos made to continue the science, art and reading curriculum while at home. In addition to facilitating virtual activities, we offer weekly webinars on key topics and center director newsletters to keep families informed and up to date. Each of these are valuable ways for everyone in our community to stay connected and these engagement activities will certainly aid in our reopening process.
As we plan for the reopening of our centers across The U. S, we are following federal, state and local guidelines related to shelter at home mandates. As such, we are not setting a single reopening date. Instead, we are engaging our client partners in discussions about their plans and the supports they are seeking for their employees. Likewise, we will make decisions about reopening our leaked consortium centers in collaboration with client partners as well as insights gained through pulse surveys of enrolled and prospective families.
We have been encouraged by the discussions with clients and early indications from parents about their interest in our reopening of their centers. We believe that the expertise that we have demonstrated in operating child care under COVID-nineteen protocols will not only allow us to open more safely and quickly, but also to provide the critical reassurance that clients and returning families desire. Turning now to The UK, approximately 35 of our three thirteen centers remain open to serve those children of workers critical to the coronavirus response. Similar
Speaker 3
to
Speaker 2
The U. S, we are continuously monitoring guidance from The UK health authorities and currently anticipate a rolling reopening which will track the lifting of shelter in place mandates. In The Netherlands where we continue to operate approximately 60 centers, we have seen the most government support and therefore limited disruption. Since the outbreak, our centers have been serving only parents working in critical professions. But starting next week, we expect they will reopen to all children and families.
This is in line with the Dutch government's updated guidance to begin reopening the economy, starting with schools and childcare centers. Let me now move to Back Up Care, which has been a particular bright spot during this crisis. As you might recall, we finished 2019 with strong momentum in the use of our Back Up Care services and we saw those trends continue into 2020. As the pandemic spread during March and the need for child care supports became even more acute for both essential workers and for families affected by school closures, we experienced significant increases in demand from both current and new clients. In particular, we've seen increased demand for in home care and reimbursements for self sourced care.
Our sales, operations and technology teams have worked tirelessly to meet the surgeon care requests and we continue to marshal resources including additional investments in automation. As we approach the summer months, we expect to see continued need for in home care, increasing demand at our own centers as they reopen and for summer enrichment care that we will operate along with partners. Looking further out, the increase in registered users that we have served during this crisis represent a new and larger population to whom we will market and ultimately hope to serve through traditional backup care. Our Ed Advisory business has also continued to deliver solid results. Employers remain committed to education programs and participation by their employees continues to track expectations.
For those clients that have furloughed employees, we have introduced a special program Education Boost, which is a cost effective self paced option for impacted employees to start or continue their educational pursuits. We have also seen increased interest in discussing our student loan repayment program given the tax incentive created by the CARES Act. As we play a critical role in supporting working families during this pandemic, we at the same time have been forced to take difficult measures to ensure the financial health of the organization today and over the long term. We are making these hard decisions consistent with our employee centric culture and our commitment to keeping the well-being of our employees and staff members at the forefront. Although we temporarily furloughed more than 22,000 of our teachers and support staff in connection with center closures, we've ensured that these team members had transition pay, continued healthcare coverage and access to ongoing education benefits such as Education Boost, the Ed advisory program which I just mentioned.
We have taken a number of additional steps to strengthen our financial position and to preserve cash and liquidity. We've reduced discretionary spending and support costs and have focused our investments to prioritize the most critical operating areas and have suspended our share repurchase program. I have elected to forego my salary and our executive team and Board of Directors have also agreed to reductions in compensation until the majority of our centers reopen. Following the quarter's close, we amended and expanded our revolving credit facility to $385,000,000 and raised $250,000,000 through an equity investment from a long term well respected institutional investor. This set of actions ensure that we are on solid footing as the economy begins to restart and recover and that we are well positioned to proactively take steps to reaccelerate our own growth and performance.
Before I turn the call over to Elizabeth, I want to say that I'm honored that Bright Horizons continues to make a difference in the fight against COVID-nineteen. And I want to extend a special thanks to those Bright Horizons employees across the world who are working tirelessly as well as to our loyal team members who are currently on furlough. Bright Horizons has been and will always be about our people. And it is the passion and expertise of each and every employee that allows us to collectively impact the lives of children, families and adult learners that we have the privilege to serve through our employer clients. So in summary, I remain very optimistic despite the difficulties presented by COVID-nineteen.
These challenging times highlight the best of Bright Horizons, our vital role in the business continuity plans of our client partners, the value that our unique service offering provides to families and clients we serve and our ability to effectively operate during a crisis. While we are not providing 2020 revenue or earnings guidance at this time, given uncertainty around the duration and scope of the ongoing disruption, we draw great strength and stability from the financial contributions of our backup and ed advisory services as well as employer support of our centers. It is devastating to consider that a vast number of child care centers may never reopen as a result of the financial hardship created by this pandemic. But for all the reasons I have described, we are confident in our ability to not only reopen, but to find future growth opportunities in a post pandemic environment. We have a strong balance sheet and even more importantly, the agility and ingenuity that has been demonstrated over the last eight weeks and throughout our history to emerge from this current disruption stronger and more resilient than ever before.
Speaker 3
Thank you, Stephen. I will now again recap the headlines for the quarter and provide some more detail on what actions we've taken to respond to the challenge of COVID-nineteen. For the first quarter, overall revenue increased $5,000,000 to $5.00 $6,000,000 Adjusted operating income decreased $13,000,000 to $49,000,000 or 9.7% of revenue and adjusted EBITDA of 81,500,000 declined $12,000,000 As Stephen outlined, the COVID-nineteen impacts have been relatively confined to our full service segment. Revenue in this segment contracted 1.7% or $7,000,000 as high single digit growth in the first two months was erased by a sharp decline in the final two weeks of the quarter as we began the temporary closure of centers beginning mid March. Adjusted operating income compressed to $22,500,000 or 5.4% compared to $41,500,000 in 2019.
When we closed centers, we determined that we would one, allow parents to roll forward the partial month tuition as a credit for when centers reopen and two, support our affected teachers and staff with two weeks of transition pay subsequent to their center close dates as well as continued healthcare and education benefits. We believe that both of these actions will support a quicker recovery as centers begin to reopen and as we recall our teachers from furlough and invite families back to the centers. Our backup operations performed well in the quarter, growing the top line 15% to $74,000,000 and generating $22,000,000 of operating income in the quarter, up $5,000,000 from 2019. We continue to have strong utilization levels from both existing and new clients, particularly for in home care and reimbursements for self source care, both of which have proven to be important alternatives to center based care and school age programs at this time. Our Ed advisory business, which is delivered virtually and therefore not directly impacted by social distancing orders grew revenue by 11% to $21,000,000 in the quarter and generated operating income of $4,000,000 on new client launches and expanded use by the existing base.
Interest expense of $10,000,000 in 2020 was down slightly over 2019 on both lower interest rates and lower average borrowings. The Q1 twenty twenty structural tax rate on adjusted net income of 15% is down from 24% in 2019 on reduced taxable income and proportionately higher tax benefits under ASC '20 sixteen-nine. Turning to the balance sheet and cash flow, We generated $64,000,000 in cash from operations in the quarter and made modest investments in fixed assets and acquisitions of $13,000,000 compared to $61,000,000 in 2019. We ended the quarter with $49,000,000 in cash and no borrowings outstanding on our revolver. Annual principal payments, which approximate $11,000,000 are on our term loans, which mature in 2023.
I'd like to now provide some additional context around the potential ongoing impacts from the COVID-nineteen pandemic and the mitigating actions that we're taking. As Stephen mentioned, we have a number of structural strengths in our business model and we've also acted swiftly to right size structure. Let me provide a few examples. First, as mentioned, our Backup Care and Ed Advisory businesses remain fully operational and growing. Both have been building on our extensive client partnerships and expanding our service offerings to meet new needs arising from the pandemic.
Both segments generate strong operating margins and in the 2020 combined to generate $26,500,000 in operating income and more than $30,000,000 of adjusted EBITDA. We continue to expect these segments to contribute strong earnings and cash flow in Q2 and for the balance of the year. Second, it's important to remember that our full service centers are largely employer sponsored. In these centers, the client sponsor maintains responsibility for the facility costs, contributes to the operating costs of the center, and we earn a management fee. So of our roughly 1,100 centers, nearly half are client centers where we generate no where we generally have no ongoing fixed expenses.
In lease consortium centers, we do have the responsibility for occupancy costs, which amount to roughly $15,000,000 a month prior to any potential COVID related rent deferrals or abatements, which we are pursuing. In our European operations, both The UK and Dutch governments provide substantial support for childcare as well. Third, with clients bearing a significant portion of our fixed center costs, our full service cost structure is highly variable, and we have the ability to flex that as needed. Personnel costs are the primary component of the variable center expenses, and they comprise roughly 70% of total costs. Concurrent with our center closures in mid March, we made the decision to furlough the majority of our center employees.
The result is that our labor expenses have been reduced roughly in proportion to the center closures. These actions were made to preserve the financial health of the organization during the pandemic and to foster a quick return to work for those furloughed employees. Lastly, the contributions from centers that remain operational coupled with management fees and client coverage of transition labor costs will also offset a portion of the ongoing costs in our closed locations. Looking ahead to the remainder of 2020, as Stephen mentioned, we're not providing revenue or earnings guidance at this time as the duration and the scope of the ongoing business disruption, including the pace of reopening and ramping temporarily closed centers cannot be predicted. However, I can share some qualitative color and a few details on areas where we have more control and therefore visibility.
Our current view is that we expect the majority of our centers to remain closed at least through the end of the second quarter. Given the late onset of the pandemic and only a partial quarter impact in Q1 of twenty twenty, we therefore expect the negative financial impact to be more pronounced in the second quarter than it was in Q1 with full service revenue contracting in line with center closures and a related flow through to operating income of around 35% to 40%. As Stephen mentioned, we're continuously monitoring guidance and taking direction from medical experts and government authorities as it relates to reopening. With some stay at home orders beginning to be lifted and states and communities starting to reopen for certain businesses, we will look to methodically reopen and re ramp through the remainder of the year in early twenty twenty one. We have prudently planned for a variety of outcomes and we believe that we have ample liquidity to fund the operations of the business in a number of reopening scenarios, including a more protracted phasing in of our centers and enrollment, although that is not what we anticipate happening.
Regarding liquidity, cash at the quarter end was $49,000,000 as I mentioned. As we've highlighted, we've taken a number of steps to reduce discretionary spending and overhead costs, including the furloughing of support staff in addition to centers employees, reducing executive and board comp and cutting nonessential spending. We've also had early success pursuing rent abatements and rent holidays and are taking advantage of various provisions of the CARES Act, including payroll tax deferrals, tax credits for retained employees and accelerated tax depreciation. We've also reduced our capital expenditures, redirecting our investments to highest priority areas that support growth and performance and would expect to spend approximately half of our previously guided 110,000,000 to $115,000,000 plan. And finally, as previously disclosed subsequent to the end of the quarter, we upsized and amended our revolving credit facility to $385,000,000 and added $250,000,000 in equity capital.
These actions increase our liquidity as we weather the immediate effects of COVID-nineteen while also supporting our longer term plan. The commitment from our employees around the globe, the economic resiliency of our durable employer sponsored model as demonstrated in prior cycles, our experienced management team that has successfully navigated prior downturns, our financial discipline and our thoughtful approach to capital allocation, all give me great confidence and conviction we can not only navigate through the current disruption, but also take all the necessary steps so that we emerge from this crisis well positioned to take advantage of both near and long term growth opportunities. And so with that, Victor, we are ready to go to Q and A.
Speaker 0
Thank you. We will now be conducting a question and answer session. Our first question comes from Andrew Steinerman with JPMorgan. Please proceed with your question.
Speaker 4
Hi, everybody. Hi, Andrew. Thanks for hosting us today. Appreciate it. So my question is, are you willing to share with us April trends, meaning revenue trends for full service, educational advisory, and backup, on a year over year basis?
Any comment on full service if the year over year trends were different at the April than at the April?
Speaker 3
So Andrew, with respect to maybe adding some meat to the information that we had in the prepared remarks to get at your question. Obviously, for since we began to temporarily close centers in mid March, the month of April reflects essentially the full contraction down to around two fifty centers operating. And because of the that a relatively proportionate amount of revenue would contract in addition to there being somewhat lower utilization because of the guidelines around how many children can be in a center and social distancing rules. So there's a substantial contraction in full service in April because of those moves. And there's I think that that's the context that we can provide at this point.
Speaker 4
And could you say how much Ed advisory and backup are up in April?
Speaker 3
Again, would point to the guideline that they are continuing to track with the plans that we had for the year, continued the shift away from in center use of backup care would be it would be more on the in home side than in the in center side because of what's available center basis wise. But I think the continued trend we're pleased with the stability in both of those as we exited Q1 and got into Q2.
Speaker 5
Okay. Thank you. You're welcome.
Speaker 2
Thanks, Andrew.
Speaker 0
Thank you. Our next question comes from Hamzah Mazari with Jefferies. Please proceed with your question.
Speaker 6
Good afternoon. I hope everybody is healthy and safe. My first question is just as you come out of this, do you see any structural changes post COVID that essentially change the growth profile of your business, whether it's work from home population doubling or maybe the margin profile as you implement social distancing, etcetera. I know you touched on some of that in the prepared remarks, but any thoughts would be very helpful.
Speaker 2
Sure. So thank you. That's a it's a great question. What I would say simply is that we don't expect there to be structural changes coming out of this. Certainly, from a health and safety perspective, we are and will continue to have very significant protocols around making sure that we do pick up and drop off in ways that are socially distanced.
We'll do health checks certainly for children and staff. We will make sure that we are managing group sizes for some of the older age groups. But in terms of structural changes, we don't see actually that being the case. In terms of the demand side, which you allude to in terms of more work from home, I think what people have come to realize through this pandemic and working at home with young children is it is incredibly challenging to work from home and also have your children at home with you. And so I think what we're hearing from our early solicitation of input and feedback from our parent base is they are very much looking forward to having their children come back to the center to continue their milestones and progression and at the same time allow parents to get back to work in a more productive way.
So I would say that certainly from the perspective of the demand structure side, as I said, I think we will certainly implement protocols over time that have small marginal cost differentials, but nothing that will be significant. And at the same time, we see employers willing to step into that additional expense, certainly to protect their employees and their families.
Speaker 6
That's very helpful. And just my follow-up question, I'll turn it over. I know you're much bigger than your largest competitors out there. But do you expect to see M and A picking up coming out of COVID just given not many have the liquidity that you do today with the equity raise and some of the other stuff that you've gotten ahead of. So just any thoughts on M and A coming out of this and what you're hearing competition wise?
Thank you.
Speaker 2
Sure. So look, I think that there will certainly be unfortunately situations where many other providers do not have the financial wherewithal to make it through this crisis and ultimately reopen. With that, obviously, we expect to see opportunities for operators who have turned the keys back to landlords for us to step into their positions in strategic locations where we believe there's a good opportunity to operate. In addition to that, as you alluded to, we do believe that there will be M and A opportunities in ways that fit our criteria, which obviously are fitting strategically, fitting geographically and then ultimately fitting financially in the longer term. So we do believe that coming out of this as we saw in the last recession, there will be M and A opportunities that present themselves as a result of this really unfortunate crisis.
Speaker 6
Great. Thank you very much.
Speaker 3
Thank you.
Speaker 0
Thank you. Our next question comes from Jeff Meuler with Baird. Please proceed with your question.
Speaker 7
Yes. Thank you. Have you had any temporarily Or do you have reopening dates for any centers? Like I think you have some centers in Georgia or just any of the states that are starting to reopen.
And if you do, I'd love detail on this. Otherwise, I'd just love the perspective on it. But I guess what are you doing you talked about digital learning solutions but to stay engaged with families so that when the centers reopen it's more like flipping a switch to get the families back in the centers?
Speaker 2
Yes. So let me start with that and then we can double back, Jeff. In terms of parent and child engagement, that has been a high priority item for us. We believe it's critically important for the well-being of the children and we also think it's an important engagement tool for the parents. So we have a cadence on a weekly basis of activities where we are continuing to keep engaged with both children and families to ensure that we are supporting them during this difficult time as they try to work from home and also be directly responsible for parenting during the day.
What I would say is expect that that will absolutely be an underpinning for our ability to reenroll these families. And as Elizabeth shared in the prepared remarks, as we came into this crisis, we took the approach of pausing enrollment and moving the unused part of their tuition to a credit for when they return. So again, all actions that are helpful as we think about standing these centers back up. In terms of reopening, we are still in the very early planning stages on reopening. We have had a handful of centers that have reopened.
But again, our goal is not only to look at the lifting of the shelter in place in certain states, but also to work collaboratively with our clients, get a real sense from parents about their readiness to come back to work in a more traditional way and have their children at the center. So we are approaching it in a very, very methodical way. And early indications Jeff are that the families are very excited to come back and ultimately employers are looking forward to supporting us to get our centers opened.
Speaker 5
Okay. Just Elizabeth I think
Speaker 7
you said a 30% to 40% decremental EBIT margin and full service revenue down proportional to closed center count. I just want to make sure that I have the mathematical implications correct that. On a run rate basis, you're currently at a modest negative EBIT position consolidated. Is that the correct implication from the segment level disclosure you gave us?
Speaker 3
I think what I said was 35 to 40%, just to clarify on that. But with respect to I'm sorry, I'm just trying to find a note here that you had said that was is the EBIT the combined EBIT in Q2, what was your question?
Speaker 7
Is consolidated, yes, EBIT trending currently modestly negative just based on all the color you gave us at the segment level and running the math through it?
Speaker 3
Yes. I mean with that portion with the large portion of the business in full service as beneficial as backup and advising are and their margins of course are substantially higher than what full service margins are in a regular quarter. So they do contribute disproportionately to their revenue. But with 80% or 75% to 80% of the full service centers closed, then there is decremental, yes.
Speaker 8
Thank you.
Speaker 2
Yes. Thank you.
Speaker 0
Thank you. Our next question comes from Manav Patnaik with Barclays. Please proceed with your question.
Speaker 5
Thank you. Good evening, guys. Just kind of like a medium term looking question, I guess. Firstly, the 150 centers that you currently have open serving the essential employees, what does utilization at those centers look like? And is that kind of a glimpse of what we might see in the near future with all these social distancing rules and guidelines?
Just curious on your thoughts there.
Speaker 2
Yes. So first Manav, just to put a fine point, we have two fifty centers that are open globally.
Speaker 3
And 150 is just the way?
Speaker 1
150 is here in
Speaker 2
The U. S. Just to clarify. In terms of how those are operating, I think it's important to focus on the fact that the population that we are serving across those two fifty centers is strictly healthcare and other essential workers. And so when we have limited who we are serving through this, obviously the utilization rates in these centers is quite a bit lower than what we would see at steady state coming out of this pandemic.
So again, if we think about the addressable group of families that we are looking to serve, given how much smaller that is than from our total addressable, we are certainly running at utilization levels that are a decrement from what we will expect to see coming out.
Speaker 5
Got it. And then kind of tied to that the lease consortium strategy, if there's a view that everyone from the city is going to run away to suburbia now for space and etcetera, like any early thoughts on whether that continues or you slow that down or too early to tell?
Speaker 2
Yes, it's a great question Manav. It is not a trend obviously that we can opine on because certainly it's too early days. What I would say is that we have had this lease consortium strategy over the last number of years. We have about 100 that are really focused on the urban area. But our expectation is that young families will continue to persist in the urban area.
And certainly, we don't expect to see employers change course and move out of urban areas. And so taken together, given our employer centric model, we have great confidence in how that strategy will continue to perform over time. All right. Thank you, guys. Thank you, Manav.
Speaker 0
Thank you. Our next question comes from Gary Bisbee with Bank of America Securities. Please proceed with your question.
Speaker 9
Yes. Hi, good afternoon. I guess I'd like to follow-up on that question of utilization. Given the number of job losses in The U. S.
And how historically center utilization has tracked with unemployment, How should we think about how a step down in utilization could impact the profitability of your business on the other side of this? It's I think you saw a ten, eleven point decline in utilization during the financial crisis for, I think, fair to say fixed costs, at least on the real estate front with the lease distortion strategy are higher today. And so should we think that it could take a while to get profitability back to pre COVID levels than when you broadly opened all the centers? Or are there ways to work through that leverage you can pull to get the business operating closer to how it was historically back to sort of fully open? Sure.
Speaker 2
So thanks, Gary. So why don't I start on sort of how we're thinking about it strategically and then Elizabeth can follow-up with a little bit more quantification. As we think about the unemployment that is likely to be an outcome of this economic challenge, we are seeing those employers with a lot of frontline employees being the first to furlough and likely separate. So when you think about some of the harder hit industries like retail, energy, those are not the industries that we have ever had particular focus. And so as we see this crisis unfold, whether it be retail or hospitality or other industries that have a lot of frontline that ultimately will be displaced, Those are not either our employer clients or are they typically the families and the families that we serve.
So different from the financial crisis, back a number of years now, we expect that the unemployment challenge is going to be really focused in an area where we don't currently serve and therefore we don't expect the same implications, in that way.
Speaker 3
Yeah, and sort of echoing back to the last major recession that we weathered the February timeframe, Gary, as you mentioned, we had substantial reduction in enrollment over that period of time. It was, as you say, about 10 points to most of utilization. And because of the variable nature of most of our costs, we were able to essentially retain most of our full service margin profile. We contracted margins by about one percentage point during that time. We were continuing to grow through new center openings and acquisitions as well where all of the components of our growth strategy were contributing to that performance, but we were able to cost manage through a lot of the enrollment contraction.
As you say, a different portion of our business now, it's a slightly higher portion that is coming from the lease consortium centers where we have the occupancy costs as our responsibility. So there is somewhat of a different cost profile. But I think that I'd answer the question in the frame that you asked, which is it will take a bit of time to re ramp back to pre COVID levels. That enrollment will come back for all the societal reasons I think that we're aware of. But also, the more time that passes, the more we will need to be essentially re enrolling children in an age group that they've outgrown.
And so we will be again at a growing our own re enrollment over time. So there will be a re ramp period that does have to happen. So it take some time to get back to those margin levels. But I think the underlying components of why we have the sort of steady rudder of cost plus the contributions from our bottom line client centers and then the upside opportunity in the lease consortium centers will all help to contribute to that the pace of that growth over time and each can contribute in their own way.
Speaker 9
Great. And then just one follow-up if I could on backup. That's encouraging to hear that continues to do quite well. Even with a lot of the in house capacity obviously being closed, I guess as we think about the mix shifting to in home and then also this concept of reimbursed self chosen care, however you framed it, which I know is Bank of America's third offering, by the way. But should we think that there's major profitability differences?
Or is it pretty similar? And as part of that, is this concept of reimbursing self chosen care, is that new? Did you do that sort of because of this? And is that a new opportunity? Or is that something you've done in the past that I've just never heard about?
Two part of it. Thank you very much.
Speaker 3
Yes.
Speaker 2
And so if we start with the reimbursed self source care which we call Crisis Care Assist, that is something that we have had, but it typically has been both episodic and very focused. So if you think back to Hurricane Katrina or the wildfires in California, we have supported employers and their employees with reimbursements for self sourced care. In our history clearly we have When never care is disrupted, isn't Yes, care is disrupted. But we have never seen obviously, the need, like we have seen in the current pandemic and we've never seen it as pervasive across the country clearly as we are seeing it today. So self sourced care that is reimbursed through us is something that we've done.
It's been a modest contributor historically. We have seen certainly unprecedented demand for that in the current climate. What I would say is that combined with our in home care provision has really supported employees and their employers quite well. And Bank of America, thank you for being a great client. We have had a number of our clients lean into that in the way Bank of America has with the understanding that in the current circumstance, where centers are closed and other schools are closed, it is a very good option for employers and employees.
In terms of the margin profile, I would say that on the in home care side, clearly the economics the margin economics are not as strong as what we'd see in center given the increased cost. On the other hand, in many of our client contracts, we also see a differential in the rate that is being reimbursed. And then secondarily on the Crisis Care Assist side, you'll see us reporting the revenue associated with that on a net basis, because again the reimbursement that goes to the employee is truly a pass through. And so because it's on a net basis, the revenue per care instance is lower, but the margin associated with it is more emblematic of what we'd see traditionally in that business line.
Speaker 3
All right. So you see those the effects of those would counter each other. So there'd be not a dramatic difference.
Speaker 9
Great. Thank you.
Speaker 2
Thank you. Thank
Speaker 0
you. Our next question comes from Jeff Silber with BMO Capital Markets. Please proceed with your question.
Speaker 8
Thank you so much. You had mentioned that you opened up some new centers in the quarter. Can we talk about the new center pipeline for the rest of the year? I'm assuming right now that's on hold, but if you could confirm that, that'll be great. And just wondering how discussions are going for future center build outs?
Speaker 2
Yes. So on the existing center pipeline, what we are finding is our employer clients who are in process, who have made the commitment and are in the process of construction, they continue to persist with their projects. And so we will continue to see centers open up on that basis, because obviously as we always talk about there's a longer sales cycle, but there is also a development process of opening up a new center. And so you'll continue to see us open new centers that were in flight and started pre COVID. The second thing that I would observe is that as we look out into our sort of newer pipeline, we are as we saw in the last economic downturn, we saw a pivot of our opportunities away a bit from new capital and new centers that would be being sold to those that were going to be transitioned.
So we see both healthcare and university opportunities in particular where they self operate centers have found it incredibly challenging to operate those centers in the current environment and have instigated conversations with us about taking over the management of those programs post COVID.
Speaker 8
Okay. That's helpful. I appreciate that. And you mentioned in your prepared remarks how the company has been through a number of economic cycles. And obviously, we're in unchartered waters here.
But I'm just curious how do you think your business is different going into and coming out of this crisis when we compare it to the Great Recession? I know you were private, but just in terms of the business overall. Thanks.
Speaker 3
Well, I think that, you know, one of the things that we and I think Steven touched on this that this kind of a crisis different than the Great Recession where we were part of a very broad based, I mean, part of a broad based economic impact now too, but we are able to really demonstrate to our client partners what we can do at a time that may actually pivot them to embracing more services with us in the future more quickly. I think that the recession of two thousand and nine, 'ten was a slower ramp down and then a slower ramp up. And we were certainly building and growing the backup business substantially through that time and Ed advising and we entered European a new European country in The Netherlands shortly thereafter. So there are a number of stakes in the ground that we that did propel us to a very strong growth coming out of that recession as well. But now we have even I think better foundational underpinnings that we can both amplify, capitalize on and continue to while we are running the business that we have now continue to look ahead to what may be down the pike.
And I think that the may be the question of what is the cadence and the duration of the shutdown and then the reopening cadence, all of that is to be determined. But there still may be some quicker decisions that are coming out of it because of the quickness of the contraction. So I think that's one of the differences that I'd say now versus then. We have obviously a more substantial business in Europe than we had before. So some more diversification there, diversification of our service line offerings.
And so I think all of those are strong underpinnings as well.
Speaker 2
Yes. I think the only thing that I would add to that is there is a tremendous appreciation from working parents about how difficult it is to both work and care for their children. And so certainly we are in a position where we are hearing from our families and from our employer clients about their keen interest to get back to a situation where they are able to get back to work and at the same time their children are able to have the kinds of experiences that they can only have at a Bright Horizons center.
Speaker 8
Okay. That's helpful. Thank you so much.
Speaker 3
Thanks, Jeff.
Speaker 0
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley. Please proceed with your question.
Speaker 10
Thank you. Hi Toni. Hi. You mentioned signing 50 new clients for backup care. Could you talk about what the contribution from that would be and the length of the arrangements?
Are these sort of temporary until the employers start to sort of resume their original in terms of original care arrangements? Or would you be able to sort of expand on the relationship for a longer term?
Speaker 3
Well, speaking more broadly, actually these clients are sort of conventional new backup clients that we've launched. And so an average backup client may range from $100,000 to $250,000 annual contract value. So that's sort of the general magnitude of without speaking to any one of these individual clients, that's generally what we would be seeing launched. So they are not temporary. These arrangements aren't temporary.
These are sort of conventional new adds to the backup portfolio.
Speaker 10
Okay. That's great. And then just my second question is around pricing. I guess as we're sort of in this challenging environment, does pricing become more challenging post COVID? I guess how are you thinking about you usually get about 3% to 4% pricing a year?
Just wondering how you're thinking about that going forward this year?
Speaker 2
Sure. So absolutely, we are spending a lot of time thinking about pricing. And as you'll know, we are very disciplined about ensuring that there is a differential typically 1% between our price increases and our wage increases. And so we continue to be focused on that metric that we have over the last thirty years continue to perpetuate. It is not completely clear at this point where on the scale our price increases will be and where the wage increases will be.
On the other hand, we continue to be confident that we'll be able to have a differential between those two.
Speaker 10
That's great. Thank you. Glad you guys are doing well.
Speaker 2
Thank you. Thank you. You too.
Speaker 0
Thank you. Our next question comes from George Tong with Goldman Sachs. Please proceed with your question.
Speaker 11
Hi, thanks. Good afternoon. Appreciate the helpful update on the business. Can you maybe elaborate on what kind of guidance you're currently receiving from your medical experts and the CDC and when it would be appropriate to begin reopening your centers?
Speaker 2
Yes. So we are, in very close contact. So first and foremost, we're following the guidance from the CDC. We have a medical expert that we have retained, who has been incredibly helpful in our COVID protocols and is also helping us to think about our reopening. What I would say is that the protocols that we're focused on look a lot like what we have been operationalizing to date through the last eight weeks.
So again, not huge differences between how we're operating in the current environment into sort of this next phase. So overall, again, the guidance is really around making sure that we're doing social distancing at pickup and drop off that we're doing health checks to make sure those who are entering the centers both staff and children are well. We're making sure that our staff are wearing masks. We're making sure that we are appropriately limiting group sizes, which really only has impacted the older age groups because in the younger age groups the typical group size is smaller than the sizes that are being recommended by the CDC and our medical expert. So I think all in, we feel really good about the experience that we've had through this and truly believe that we'll be able to operate in a safe and healthy way going forward.
Speaker 11
Got it. If the centers in The Netherlands reopen as planned and centers in The U. S. And The U. K.
Stay closed through the end of the second quarter, what would the potential revenue impact be in the second quarter? In other words, what would be a good downside case scenario for revenues?
Speaker 3
Sorry, you said if The Netherlands center is open and the remaining the centers in The U. S. That are closed now remain closed through the end
Speaker 11
of the
Speaker 3
second quarter? Yes.
Speaker 11
That's right. The U. S. And The U. K.
Centers that are closed today remain closed through the entire second quarter. What would the potential downside case for revenues be?
Speaker 3
Think the thumbnail I'd use is that that's about 80% of our centers. So the proportionate revenue would be contracting in that way.
Speaker 11
And that's even taking into account the different business models between cost plus, P and L, lease consortium and other mix factors that could differentiate the number of centers versus the revenue flow through?
Speaker 3
Yeah. I mean, there's certainly a lot of puts and takes in the numbers of children that are being served, which centers are open, where they're located in terms of the relative tuition levels and the client support. But I think that's a relatively representative for what you're asking in terms of a broad brush since we're not that's as much guidance as we're giving at this stage. There's too many variables.
Speaker 11
Got it. Very helpful. Thank you.
Speaker 3
You're welcome.
Speaker 2
Thank you. Wonderful. All right. Well, thank you all very much, for participating this evening. We hope you and your family stay safe and healthy, and, look forward to, being in touch soon.
Have a good night.
Speaker 3
Thanks very much. Take care.
Speaker 0
Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.