Okay. Sounds good.
Now that's a little easier on people. Where do you live?
In the city.
Huh?
In the city. Sorry, yeah, San Francisco.
The following session is not open to the press.
All right. You guys are taking.
Okay, let's go ahead and get started. Thank you both for joining us. Really pleased to be joined by Paul Thompson, CEO of KinderCare Learning Companies, and Tony Amandi, CFO. 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 Learning Companies. KinderCare Learning Companies recently completed its IPO. For those who may be newer to the name, can you provide a brief overview of the business?
Absolutely. Number one, KinderCare is the largest in early childhood education. We are in 41 states across the U.S. and in Washington, D.C. The industry itself is very fragmented. The opportunity for us to be in more communities and grow through tuck-in acquisitions and opening 90 learning fields across the U.S. is a great opportunity for us. That's probably the number one thing I wanted 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. On the one end, 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. That gives us on one end.
On the other end, we have a premium brand, which is Crème School, and we've had that brand for three years. It's also another way for us to grow in communities with those centers. Across the U.S., with our KinderCare brand serving Middle America, each one of our centers reflects the community and demographics of that center. We've shown we can be profitable in all income levels across the U.S. and it gives us quite a bit of flexibility. Another place that differentiates us is our B2B platform. 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. In our Gen Z, the number one benefit they're asking for is affordability and accessibility of childcare.
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 onsite 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. If they want more flexibility, they can go to our community centers, 1,500 centers across the U.S. That gives us another differentiation. 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. There are five. Number one is same center enrollment growth. 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. 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. As their child ages up, many times their tuition actually goes down because of teacher-to-student ratio. We can embed tuition increases each year, and that's good for the top-line growth of our industry and our business. 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. On the KinderCare at Work 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.
As I mentioned, a very fragmented industry. We continue to see great growth there. The final growth lever for us is new center openings. We've been building that capability since COVID, where we took a step back, having a very good year this year. We'll continue to enhance our opportunity to grow new center openings as well.
Now you compete against another publicly traded childcare 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 Bright Horizons?
Absolutely. The number one strength of ours is having those 1,500 centers. As I mentioned, when we go to an employer and we survey all their employees, maybe building an onsite for them is a good outcome. 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. That's a great outcome where it provides greater accessibility and affordability to their own employees. Having that flexibility of offering, if 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.
That flexibility of offering is definitely a strong advantage for us when we're meeting with our employers.
Now the childcare 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? If there were to be a cyclical impact, where would you see it?
Yeah. When you speak of the defense, what we really enjoyed, if I can use that word, the last five years, is people recognizing how important the childcare industry is for parents to be able to go back to work. If you want a strong economy, your parents want to know that their child's in a safe environment. The childcare industry, that's the number one thing they know they owe to their parents. Just that recognition of not only parents who want to go back to work want to know that their child's 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 six weeks until their child goes into kindergarten, how much their child's learning and developing.
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. We have data that shows that the longer you're in a kindergarten environment, not only are you above your peer group, but you're advancing through those milestones at more meaningful time periods. 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. Those pieces are really the value proposition that we bring to parents. For them to understand, we are the largest accredited provider in the U.S., not just because of our numbers, but as percent of total. We're roughly 80% of our centers are accredited through NAEYC. The rest of the industry is less than 10% accredited.
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. We can prove through data. That's meaningful as a child's or parents making a decision on enrolling their child.
Makes sense. Historically, the federal government has been very supportive of childcare 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 childcare industry. 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. Whether it be fully funding the block grant, which is a great outcome for 2026, or the tax credits that were put in place effective January 1 of the new year, those are indications of Congress and the White House wanting to do more in the childcare space. That's a good indication for 2025. We also feel very good about what that means for further conversations that we can, I'm actually in Washington, D.C.
the next three days exactly to have further conversations with members of Congress and help them understand the impact that they're having for their constituents. That's exciting for us and exciting for how we see the federal support for it. There's also discretionary funds at the state level. 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.
Yep. Occupancy rates are an important driver for the business. 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 to address them? You want to take a break?
Yeah.
Fair.
Yeah. 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. You've heard us say, George, obviously you referenced it. It's at a local level rather than macro across the board. 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. 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. 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.
If teacher turnover spikes, that usually has some impacts on the amount of children we can serve because families want to see that stability. 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. There's a bunch of different steps there, right? Starting with inquiry and then to tours and then to final enrollment. We're able to use our tool 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. 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? If so, what were the fixes?
Yeah. What I'd go back to would be we really put in our quintile strategy. That's where we're looking at our centers from top to bottom, kind of dividing them up in five different groups and really thinking about the different playbooks at different levels, kind of towards the end of 2016 to 2017, and really utilizing that to really grow to where we were pre-COVID, which was at our highs at that point and are back past that again. 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 three, quintile four metrics to move up those charts.
Not directly answering your question of seeing problems, but the same sort of thing of like using a diagnostic tool, using a playbook. That's something we really started putting back in about a year ago now. Until about a year ago, we were just making sure we got past pre-COVID levels, which we were kind of the first in the industry to do. Once we got there as a fleet, it was time to turn back to that and really have done so. We've kind of doubled down on that even more with a % of our lowest performers and what we did with the opportunity region here at the start of Q2 to do that even more.
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?
Yeah. 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. 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 2022, 2023, and 2024 really had strong enrollment gains each of those years. Here we are in 2025. 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. Understanding that this is about good operational practices and getting to reignite or reintroduce some things perhaps we were doing exceptionally well in 2018, 2019, reintroducing that now here in 2025. That feels like something we can control.
It's about ensuring that our teams or our Center Directors have the capabilities and understand what's expected of them. 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. 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. 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.
There's a good playbook for centers that are less than 60% occupied. That's exactly the practices that we're focused on.
Right. If you look at enrollment cycle for private paid 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. 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. That goes back to the earlier statements I was just making of for a parent to understand how much development occurs for a child under the age of five years old, understanding that a dollar spent on a child's development under the age of five, any economic study would tell you it has a stronger ROI than at any other time in the life of a child.
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. For them to make the decisions they need to on their own personal budget is really the expectation that we have for our team.
I think, George, I should add, we're tweaking that as we go, right? 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? Our current families are definitely understanding the value they're getting from us. One of the focuses is how are we making sure we're telling that story, hopefully quicker, to get it down to those families so that the new ones can understand what our current families already do.
Your occupancy rate this year is 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?
Yeah. Just for everyone, when we brought Crème School in, that actually had a dampening effect on our occupancy. If you look at our KinderCare versus 2019 centers, we're actually above. It's just the Crème School centers are so large and they have an undue impact. For us, for an expectation about occupancy, we have so many centers in our quintile one through three that are above 80% occupied. 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. We know that we have examples throughout very different communities where we are over 80% occupied. We have an expectation of ourselves that each year we should be expanding our occupancy one to two percentage points.
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. You've heard from us throughout this year how we've been adding, rolling out enhancements to our digital experience. 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. As I mentioned, for us to expand into mid-70% and higher occupancy is definitely our expectation over the medium to long term.
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.
Let's talk a little bit about tuition rates. 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 when you hope that range to be?
You bet. Yeah. We started the year and guided that we thought our overall would be around 3%. 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. We roll out new prices on January 1 for our private pay side for our new students and age-ups. They get those as they go. Paul talked about the pricing impact. That really helps in that area. On the subsidy side, 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, every student's right where we thought they would be at this point, which is great, right? There's no surprises there. 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. Our downturn has been in the private pay, which is the conversation we've had most of this discussion. 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. 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. We really kick that off at the start of Q4 to put in our pricing for next year for private pay. 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. Just the last reminder I'd 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. That's why we are starting at the low 3. We knew it was going to be a little bit lower this year, and we're just slightly down from where we thought we'd be at the start.
Makes sense. 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?
Yeah. Our onsite business, what we refer to as KinderCare at Work, has as well exceeded their 2019 levels. The overall occupancy of our onsites exceeds that of our community centers, which isn't surprising because you have more of a captive audience of consumers, the parents who are working at that employer. 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-to-high 70%. Feeling really good about the clients we have, the onsites we have. We've also seen a growth in the number of employees of our clients who are in our community centers. 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 Amandi'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. 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. They're opening on time and with a great initial push of enrollments. Even on our existing sites before and after, we're seeing an increase to the number of students at individual sites. That continues to be a growth opportunity. Both businesses performing well. What's been exciting for us is how many of our clients speak as advocates for us.
We have many instances where we're introduced to a new potential client because they refer us to their peer CEO or CHRO or CFO at a peer organization. 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. 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.
Yeah. There's a few different ways of driving that growth. Number one is continuing to offer the flexibility with clients, understanding what's important to them and their employee. When we show up with whatever solution, we're addressing what's important to their culture, addressing what's important to their strategy. That's been a powerful way for us to grow. Thinking about even do they want a management fee or do they want a P&L center, 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 the employees. 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. 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 PCE and B2B growth now and over the longer term?
Right now, Champions 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. Even with the stronger revenue growth, we expect that to continue. There are roughly, you know, 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. It shows you that opportunity to add sites is a long horizon for us. For us to continue to ramp our site growth, I feel will give us a runway for a number of years. 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?
Yeah, I mean, as we look, 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. Knowing where our wage is going to be is one of the starting points for that. About three years ago, we changed when we do wage and how we do wage. Now we do it at anniversaries for our teachers, and we know kind of what that ladder is. Once a 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. With that, both myself and the CHRO know when those are going to happen throughout the year and can really plan into that. We're sitting exactly where we thought we would be right now, which is great.
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. Then we'll build tuition a little bit from that, making sure that we can create some differential that allows us to fund the business and do all the other great things we're doing for families and teachers. I've been here 17 years, pretty much every year other than that kind of COVID timing, we've been able to outpace it. It's something that I think we do when we're running our KinderCare, but it's truly an industry thing as well too, right?
Yep. Makes sense. Now, if you look at EBITDA margins, which factors in the positive spread between wages and tuitions, but also factors in occupancy rates, EBITDA margins are coming down a bit year over year because of the occupancy decline. Are there internal efficiencies that you guys are pursuing to help mitigate that temporary negative operating leverage?
Absolutely. When you are a multi-unit operator, thinking about those efficiencies and strengthening the gross margin has to be a core outcome. 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 number one cost in an organization like us. Continuously thinking, as Tony's talked before about the seasonality, managing labor in a responsible way while still having a great experience in a classroom is a key piece for us to continue to enhance and one thing we're always working on.
If you had to think about the timeframe for when you can get back to EBITDA margin expansion, what's a rough idea of when that might happen?
Yeah, I don't think it'll be that long till we turn the corner again, George, right? I think we're doing a nice job with G&A. Just one other item there. We had talked about a year ago that felt like 2023 and 2024 were going to have 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. 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.
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'll 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.
The topic of AI and GenAI have been pretty big in business services in recent quarters. Can you talk about where you see the opportunity for GenAI within the business, and if there could be any sort of potential threat from GenAI?
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. Those first steps of help are an opportunity. We're doing our own digital initiative as we talked about, and from the acceleration of the momentum of delivery of new iterations of our systems, we're using it there as well. There is future opportunity. Another place that we're using it, we submit for RFPs when required on certain employer client requests. 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 putting the construct of that in a much more efficient way than it has been historically. Future opportunities are what we're talking about.
How do we continue to enhance the experience the parents are having? Are there other capabilities that we can do in our future? 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. Lastly, you're expecting free cash flow generation this year of $85 to $95 million. What are your top capital allocation priorities?
Yeah. It's still growth in the business. The tuck-in acquisitions, new greenfields, 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. 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. We'll keep, there's some digital growth things we want to invest in as well. 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. After that, we'll see if some of the other things in the structure make sense. Right now, it's growth.
Makes sense.