Bright Horizons Family Solutions Inc

NYSE:BFAM

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, ladies and gentlemen, and welcome to Bright Horizons Family Solutions Second Quarter of 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Mr. Michael Flanagan, Senior Director of Investor Relations. Please go ahead, sir.

[Michael Flanagan, Senior Director of Investor Relations]

Thank you, Judie [ph], and hello to everyone on the call tonight. With me here are Stephen Kramer, our Chief Executive Officer; and Elizabeth Boland, our Chief Financial Officer. I’ll turn the call over to Stephen after covering a few administrative matters. Today’s call is being webcast and a recording will be available under the Investor Relations section of our website, brighthorizons.com.

As a reminder to participants, any forward-looking statements made on this call, including those regarding future business and financial performance, including the impact of acquisitions in COVID-19 on our operations are subject to 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 2021 Form 10-K and other SEC filings. Any forward-looking statements speaks only as of the date on which is made, and we undertake no obligation to update any forward-looking statements. We may also refer today to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available under the IR section of our website.

Stephen will now take us through the review and update of the business.

[Stephen Kramer, Chief Executive Officer]

Thanks, Mike. Hello, everyone on the call, and thank you for joining us this evening. I hope that you and your families are doing well. I’ll start tonight with a view of our second quarter results and provide an update on the business and plans for the remainder of 2022. Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions.

First, let me recap the headline numbers for the second quarter. As we passed the midpoint of the year, we remain focused on our growth strategy and delivery. In both areas, we continue to make good progress. Revenue increased 11% to $490 million and adjusted operating income of $50 million, was up 48%. Adjusted net income of $42 million yielded adjusted EPS of $0.71, up 45% from last year.

In our full service segment, revenue expanded 11% in the second quarter, just $371 million. We added 4 new centers, including a center for our new client [Shannon Medical] [ph], and reopened 5 more centers in Q2, ending the quarter with 98% of our 1,014 centers opened.

Across our centers, we saw broad-based enrollment growth with sequential improvement in occupancy in the second quarter and solid year-over-year growth. More specifically, in our lease/consortium centers, occupancy increased across both urban and suburban locations. And while the suburban locations still lead to more urban settings, we saw increased velocity of new enrollment in top major metro areas in the quarter, led in large part by DC, New York City and Seattle. We also saw solid growth in our client centers, which continue to be more highly occupied than our lease centers with higher Ed, industrial and healthcare verticals, continuing to deliver the highest occupancy levels.

On the staffing front, we also continue to make progress in our recruiting and retention efforts. Increased job seeker interest, combined with a streamlined candidate experience and enhanced compensation are driving positive net hiring. While we are still unable to accommodate all of the enrollment demand we have due to unfilled staff roles. We are encouraged by the hiring momentum and feel positive about the progress we have made over the last several months.

Outside of the U.S., the UK is also making strides in staffing and in rebuilding enrollment levels. However, in the Netherlands for the first time since the start of the pandemic, enrollment levels have been moderately constrained as a result of labor market challenges. In response, our Dutch team is replicating many of the recruiting and retention actions that the U.S. and UK teams have deployed.

With this as a backdrop, we started to experience some seasonal enrollment impact in June, which persisted into July. The historical summer and fall seasonal enrollment pattern created by older children aging up into elementary school and backfilled with new families has been muted during the pandemic recovery and re-ramping period. However, the persistence of our staffing shortages, particularly in the younger age cohorts, and our inability to backfill the open spaces with all of those families that had requested care has driven a more seasonal enrollment trend than we originally anticipated. This recent dynamic has led us to lower enrollment expectations for the second half of 2022, but we are confident that we will ultimately achieve full enrollment recovery.

Let me now turn to backup care. Revenue increased to $92 million or 13% over the prior year. We launched service in Q2 for new clients, Exelon, Infineon and Western Digital to name a few. Traditional center base and in-home use was solid, and in June, we hit an important milestone as you surpassed its comparable 2019 level for the first time since the pandemic began. And, encouragingly, that positive momentum has persisted into July, with more families engaging with our various intermittent care solutions.

Clients and their employees continue to value our expanding menu of use types within their backup care benefit. We recently expanded our virtual academic tutoring offering to teens and adults and this fall are piloting a new use type, pet care, enabling us to reach a new segment of our clients’ workforce, pet owners. Pet owners also require support when care is unavailable. These are a couple of examples that illustrate our flexibility in developing new use cases that can serve the evolving and diverse needs of our clients and their employee populations.

Moving on to our education advisory business, which delivered revenue growth of 7% to $27 million. Activity levels were solid at college coaches this business continues to see high interest levels from parents needing help in navigating the college admissions and financing processes.

In EdAssist, while new client interest is steady, we did see fewer participants than expected in part due to the continued strength of the labor market. Given the strong underlying need, and employer demand for upskilling and reskilling to support career development and growth, I am optimistic about our opportunity and workforce education.

Before wrapping up, I want to formally welcome the team from Only About Children, along with the children and families that folks serves to the Bright Horizons Family. We are thrilled to have completed this beachhead acquisition and to now be operational in the attractive Australian childcare market. Elizabeth and I had the opportunity to visit with OAC in early July. And over the last month, our teams have been working closely and collaboratively on the integration. I couldn’t be more impressed with the caliber of the organization. And I’m excited about the potential for OAC to further grow and broaden our impact on families.

Furthermore, we have heard from a number of our multinational clients expressing interest in exploring employer-sponsored opportunities to support their Australian employees with new care supports. We expect OAC 77 centers to contribute approximately $70 million of revenue over the remainder of 2022. As we spoke about on our last call, given the near-term effects of the integration, OAC’s EPS contribution will be limited in 2022 with its full potential realized in 2023 and beyond.

Let me now turn to our consolidated outlook for the rest of 2022. We continue to operate in an environment that has more limited visibility of enrollments, particularly over the important summer and fall transition period. And given some of the constraints we have seen year-to-date on staffing, we are leaning more heavily into wage investments this fall. Given these factors, we’re revising our 2022 revenue outlook to approximately $2 billion and adjusted EPS of $2.60 to $2.75 per share, or growth of 30% to 38%.

In closing, we are proud of the critical role we feel for our clients and their employees, and the significant impact we have on the development and lives of so many children, families and learners. We are focused on the critical work to be done over the near-term that will most certainly fortify our foundation now and for the future.

With that, I’ll turn the call over to Elizabeth, who will review the numbers in more detail, and I will be back with you during Q&A.

[Elizabeth Boland, Chief Financial Officer]

Thank you, Stephen. As you said, I’ll recap the quarter results and then provide some additional updated thoughts on our outlook for the remainder of 2022. The second quarter overall revenue increased 11% to $490 million. Adjusted operating income increased $16 million [ph] to $50 million or 10% of revenue, and adjusted EBITDA increased 22% to $83 million, or 17% of revenue.

In the second quarter, we added 4 new centers, reopened 5 centers that had been temporarily closed and permanently closed 9 centers, ending the quarter with 1,014 centers operating. Full service revenue increased $37 million to $371 million in Q2, or 11% over the prior year, a 15% increase on a constant currency basis.

As Stephen mentioned, our enrollment levels improved in Q2, and the range of occupancy continues to average between 35% and 65% of capacity across the portfolio with a couple of points uptick this past quarter. Countering this enrollment expansion were 2 discrete headwinds to the revenue growth in the second quarter. The strength of the U.S. dollar against the British pound and euro resulted in approximately $13 million in revenue headwind compared to Q2 of 2021, which was slightly higher than we had anticipated for the quarter.

In addition, the ARPA government support for childcare services that we received on behalf of certain client centers was higher than we anticipated, and reduced the subsidy revenue that was needed from those clients by approximately $6 million in Q2.

Adjusted operating income for the full service segment was $22 million, or 6% of revenue, an increase of $18 million over Q2 of 2021. The 50% operating income flow through was driven by the gains and enrollment that I mentioned, as well as an increase of $12 million in our books government funding that we received at our P&L centers. This funding helps to offset operating costs during this rebranding period, including the investments that we continue to make in teacher compensation.

Backup revenue growth increased to 13% in the second quarter, with total revenue of $92 million. As Stephen mentioned, we’re pleased with the overall use trends in the quarter as we achieved our targeted center base and in-home use levels. Because the mix of use between capitated and pay-per-use clients differs slightly from our expectations. It had a modest impact on our projections for revenue in the quarter.

That said, we are pleased with the acceleration of use in June, surpassing 2019 levels, and the continuation of that trend into July. Operating income in backup care of $25 million or 27% of revenue was broadly in line with our expectations for the quarter.

Our educational advising segment delivers growth of 7% on contributions from new client launches, expanded use in college admissions and financing advising and our SitterCity services. The lower than expected participant used in ads that Stephen mentioned, resulted in slightly lower overall revenue growth for this segment. Interest expense of $8 million in Q2 was down $2 million over 2021 and comparatively lower borrowing costs in the quarter. However, in the current environment, we are expecting interest to approximate $11 million per quarter in the second half of the year on higher rates, and because we will be temporarily drawn on the revolver following the closing of the acquisition of Only About Children.

The structural tax rate on adjusted net income is increased to 26% for 2022, compared to 21% in Q2 of 2021 on increasing taxable income, and lower tax benefits from equity activity under ASU 2016-09.

So now turning to the balance sheet and cash flow. For Q2, we generated $67 million in cash from operations and made capital investments of $8 million and executed share repurchases totaling 45 million. Well, we ended June 30 at 2.4 times net debt-to-EBITDA. This will increase due to the completion of our acquisition of Only About Children on July 1. We paid approximately $210 million at closing and the remaining payment of approximately $110 million is deferred until the end of 2023.

So now moving on to our revised 2022 outlook. Our updated guidance reflects the current operating trends and performance as well as other market and business factors, including FX movements, rising interest rates, timing and quantum of government funding supports, and general inflation, particularly on labor, energy and food costs.

In terms of the top-line, we now expect 2022 revenue of approximately $2 billion. At a segment level, we expect full service to grow roughly 15% backup to grow in the range of 12% to 18%, and ed advisory to increase 5% to 10%. In terms of earnings, this will translate into adjusted EPS in the range is $2.60 to $2.75 for the full year 2022. We expect OAC to contribute roughly $70 million to revenue for the second half of 2022 with limited earnings contribution this year, as we integrate the business and operations.

In the more immediate timeframe, our outlook for Q3 is for overall total revenue growth in range of 12% to 16%, with full service revenue growth of roughly 12% to 15%, backup growth in the 15% to 20% range, and Ed advisory, again, growing approximately 5% to 10%. In terms of earnings, we expect Q3 adjusted EPS to be in the range of $0.60 to $0.65 per share.

In closing, various conditions have disrupted the timeframe to return to pre-COVID enrollment levels and operating performance in our full service child care segment. We believe that the actions that we’re taking and the investments we have made and continue to make on the way trends are critically important and will further strengthen our leadership position in our field.

Our employer-sponsored business model is unique, and the strength of these relationships and the diversity of our service offerings, from full service child care, to backup care, to educational advising positions us well to capitalize on an expanding market opportunity for all of our services.

And with that, Judie, we are ready to go to Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Andrew Steinerman of JPMorgan.

[Andrew Steinerman, JPMorgan Chase & Co.]

Hi, there. I was wondering if I heard you correctly, Stephen, like it feels like you’re constrained to growth or the timing of growth recovery, really is supply, staffing, recruiting, and you definitely were clear saying we’re not meeting all the demand we have. But is that true in most major markets? Or is it is it mostly a supply constraint? And then in some major markets, it’s still demand recovery?

[Stephen Kramer, Chief Executive Officer]

Yeah. So, first of all, I’ll start by saying at half of our centers, right, we have had the ability to get back to pre-COVID levels. And so, obviously, in those markets, we have a nice balance between our ability to attract and retain staff, and the demand that exists in those markets. The flip side of that is there are certainly some of the urban markets that have been and continue to persist to be more challenging, both from a staffing perspective, as well as meeting that demand against that staff. So I would highlight, again, places like New York City, DC, Seattle, where we are seeing progress. On the other hand, they definitely lag the overall portfolio in terms of both the constraints on supply, but also in certain age groups on the demand side.

What I would say finally is, we do see really nice progress in our client centers, as well as in our suburban centers, and then in select urban areas like a Boston, LA, San Francisco. So, overall, Andrew, to answer your question, the answer is we have areas where we’ve been able to garner staff and to meet that demand. And then there are other places in the country where we continue to struggle on the supply side, and then ultimately are not able to fulfill the demand on that side.

[Andrew Steinerman, JPMorgan Chase & Co.]

That makes sense. Elizabeth, just one really quick question on the D&A side, depreciation and amortization that the number in the quarter just came in a little bit below my model. What should we be thinking about for D&A for the year? And if you could just highlight, which piece of that comes from Only About Children?

[Elizabeth Boland, Chief Financial Officer]

Yeah. So we would estimate the overall to be around $80 million for the year for D&A with Only About Children of contribution probably $2 million or so, about $1.5 million, so $3 million, just quickly doing the translation.

[Andrew Steinerman, JPMorgan Chase & Co.]

Okay. Thank you very much. Much appreciate it.

[Elizabeth Boland, Chief Financial Officer]

Yeah.

[Operator]

The next question comes from Manav Patnaik of Barclays.

[Manav Patnaik, Barclays]

Thank you. Stephen, I was hoping, these half of the sentence that you said have already reached pre-COVID occupancy. Please give us a little bit more color on the percentages? And is that off the same denominator in terms of number of basins and cases? Because you’ve obviously had to push back your full occupancy guidance for a while now. And I’m just wondering like is that – can you get to that if people just return to the office 3 days a week?

[Stephen Kramer, Chief Executive Officer]

Yes, well, why don’t I start with the last question that you asked me of which is around enrollment patterns of families. We are still seeing the vast majority of families who are registering and enrolling at our centers coming in for full time. And so that is at our onsite client centers, and that is in our lease consortium centers. So from a pattern perspective and a schedule perspective, that is identical to what pre-COVID look like. And so, ultimately, as we think about the progress that we’re making, obviously, it’s really focused on continuing to be able to take full time enrollment in our centers, because that is certainly what families are seeking in terms of care.

In terms of thinking about the enrollment at the centers that have not achieved pre-COVID. I think we’ve been upfront to say that our client centers and our suburban centers, by and large, are performing better than the urban counterparts. But, again, what we saw in this quarter is that in the urban markets that we had seen some significant lag, we started to see the velocity of that enrollment coming in increase. And so, overall, I hope that’s a fair characterization for you in terms of giving you a bit of context around where we’re seeing enrollment, and how we ultimately see it coming in across the portfolio.

[Manav Patnaik, Barclays]

Okay. Got it. And then just on the labor shortages, I mean, it’s been going on for about 3 to 4 quarters now. Do you anticipate – I know, you said you’ll obviously get it done, or the supply will come back, et cetera? But do you think it takes another like 4 to 6 quarters before you can settle that out? Just curious on, how you think you can tackle the situation?

[Stephen Kramer, Chief Executive Officer]

Yeah. So, we – first of all, as both Elizabeth and I highlighted in the prepared remarks, we have made some labor investments and wage investments over the past, call it, 6 to 9 months. We are also in the process of doing another wage adjustment for our staff teams. And so we are hopeful that with this continued focus and increasing wages that we are going to continue to unlock opportunities on the staffing side. Certainly, we’ve been seeing that. So the number of applications us to rise our ability to continue to increase the number of net new staff continues to rise. And so as we look out, we are hopeful that these actions will have an impact and continue to have an impact as it relates to our ability to staff and then ultimately enroll against that increasing staff.

[Manav Patnaik, Barclays]

Okay, thank you.

[Operator]

The next question comes from George Tong of Goldman Sachs.

[George Tong, Goldman Sachs]

Hi, thanks. Good afternoon. You mentioned seasonal factors weighing on enrollment performance in June and July in a sort of a departure versus COVID performance. Can you talk a little bit more about that? And then talk about how you distinguish between what may be seasonal versus what may be changes in client behaviors, because of an increase in work from home?

[Elizabeth Boland, Chief Financial Officer]

Yeah, let me start and see what else Stephen wants to add. So from a seasonal standpoint, George, what we’re trying to convey in our description of this is the seasonal pattern that we’ve always had in our business where preschoolers are old aging out and they’re going to elementary school, and probably on average 50% or so of our enrollment in the center is going to be preschool enrollment. The capacity may be a little bit more, but the attendance is going to be around 50%. So those children are the older ones are aging out, and then we need to backfill them either with new families from outside of the center or with children who are aging out from the 2-year old into the preschool age group were 3 year old and 4 year old. So that’s the normal pattern.

And what we have been seeing through the pandemic is because we’ve essentially been revamping and rebuilding enrollment across the entire portfolio, that’s been a much more steady and linear rather than that decline of the older shorter, we’ve just been continuing to grow enrollment. We have seen this June and July, as we mentioned, we’ve seen as those preschoolers are aging out, and parents are getting them prepared for elementary school, that the number of children that are – we are able to backfill in from either from our tutorial category or from outside and coming back into the child care system, if you will, in a post-pandemic period, that that just has not been – we have not been able to fill those spaces. And so we’re seeing a little bit of the seasonality as a result of the preschoolers growing up and needing younger children to come into the ranks.

And so to the extent that your question is, how do we distinguish seasonality that usual aging up from behavior, and coming back to the office or other work patterns. It is certainly been a disrupter, as we said about what decisions parents are making about care choices. And so we still don’t have all parents off the sidelines. We don’t have all children who had been in care, before the same levels of children in care. And so there still is some of that disruption in the system. But it is, I think, at this point, because of the cadence of what we’re seeing in a good majority of our centers, we see it more of a seasonal pattern than any other work from home, work from office kind of condition.

[George Tong, Goldman Sachs]

Got it. That’s helpful. And then could you tell us how much in government subsidies and benefits you received in the second quarter?

[Elizabeth Boland, Chief Financial Officer]

Sure. So we received a total of about $16 million that was attributable to our P&L centers. So that was able to defray costs in those centers in the quarter. Our cost plus clients where we essentially return that back to the client was another $6 million. So a total of about $22 million in the quarter, again, which $16 million was offsetting other costs. I cited in the prepared remarks, $12 million that was the increase over last year. So in the second quarter of 2021, we got about $4 million.

[George Tong, Goldman Sachs]

Got it. Very helpful. Thank you.

[Stephen Kramer, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Jeff Silber of BMO Capital Markets.

[Jeffrey Silber, BMO Capital Markets]

Thank you so much. I wanted to go back to some of the remarks, Stephen, you had at the beginning. I think when you were talking about full service centers, I think the quote was, you’re confident that the company is going to ultimately achieve a full enrollment recovery? Can we get a little bit more color? What you mean by that? Are you talking about revenues? Are you talking about utilization? And roughly when do you think that’ll happen?

[Stephen Kramer, Chief Executive Officer]

Yeah, so that was really reflective of utilization, and getting back to pre-COVID levels of utilization in our centers. And, obviously, we’re not providing any guidance as it relates to 2023. But our expectation is that within the year that is when we would be looking to have utilization at pre-COVID enrollment levels.

[Jeffrey Silber, BMO Capital Markets]

Okay. That’s very helpful. I appreciate that. And then shifting gears and talk a lot about what’s going on the cost side. I’m just wondering from a price perspective, if you can remind us what price increases you took this year and what should we expect for next year?

[Elizabeth Boland, Chief Financial Officer]

Yeah. So I’ll take that, Jeff. So this year on average, and it does vary by location, but we took price increases of around 5% to 6% on average. And, there’s some selective markets where we looked at some minor other mid-year increases, but that was not systemic, so average of 5% to 6% this year. As we look ahead, Stephen just said, we’re not giving guidance yet for 2023. I think directionally given the wage investments that we have made in 2021. And we have continued to make in 2022 and are making even as we speak.

We would be looking at a higher than our historical average. Our historical average would have been around 4%. So obviously 2022 was higher, we would expect it to be, again, higher than average and looking to recover as much of the sort of underlying costs, inflation and cost increases that we’re seeing. But we continue to balance that against our focus on rebuilding the enrollment levels first, and looking at price as a follow-on active action to get back to the pre-COVID center economics.

So, broadly speaking, I think you’d see something north of 5%, but we have not landed on what that would be. It would just be threading the needle there between the enrollment levels and the overall cost structure that we see unfolding.

[Jeffrey Silber, BMO Capital Markets]

Great. Appreciate the color. Thanks so much.

[Operator]

The next question comes from Hamza Missouri of Jefferies.

[Hamzah Mazari, Jefferies Group LLC]

Good morning. Thank you. My first question is just around visibility that you have in your financial guidance today. Maybe just frame for us kind of, I guess, your conviction level given – we got expectations a couple of times for, obviously, some issues were non-controllable like on the we have labor today. Just curious how much buffer you have in your new guide and kind of the visibility today versus – I don’t know if you want to compare a couple of quarters ago or however you want to frame that for investors?

[Elizabeth Boland, Chief Financial Officer]

I think, Hamzah, visibility is challenging in a few ways. One is both the time of year. So we are in the sort of the summer turnover period that I tried to articulate earlier about seasonality. And so we are always in a sort of a building mode from an enrollment and filling standpoint anyway. So we have good visibility on a high percentage of where we are now. But we do have additional enrollment that we are looking to gain over the rest of the year. And as children aged out of the centers that’s the backfilling that we will need to do.

But we do think that we’ve been measured about what we’re expecting in terms of that enrollment. You can see from the revision to the guide that we’ve looked at the patterns of where we are now, what we are – the steps we’re taking now and how quickly that can convert from – we sort of restarting if you will, more of the marketing engines to follow behind the staffing actions that we’re taking and having all of that bear fruit. And so we think we’ve been measured for the rest of the year, and even though 100% of it isn’t already, if you will in the books. We do have some room to go, we think we’ve set a reasonable target.

[Hamzah Mazari, Jefferies Group LLC]

That’s very helpful. And maybe I missed this, but just your pro forma leverage on the balance sheet post the Australia deal. And maybe as part of that, how much floating rate debt exposure do you have? And just thoughts on where you want leverage to end up eventually?

[Elizabeth Boland, Chief Financial Officer]

Yeah, so roughly speaking, you didn’t miss it, because I didn’t explicitly said, but roughly speaking, we’d be taking up closer to 3 times than where we are at the end of the quarter of 2.4 times. In terms of overall value that we have floating, we all of our debt is variable interest rate, but we do have caps on about $800 million of that $1 billion in debt that we are carrying, so not very much a bit exploding at this point. But we do have a step up to the bottom on that. And it’s just compared to a really favorable year last year as well.

I think from a leverage standpoint, we’ve historically carried a higher level than this, certainly 3.5 plus, we’ve just done a substantial acquisition. And we’ve always said that that’s growth reason to be looking even temporarily at something a little bit north of 3.5. So I think our general comfort range, and we’re in that comfortable range, and it could take up above 3.5 temporarily just because of the cash generation in the business.

[Hamzah Mazari, Jefferies Group LLC]

Got it. Thank you so much.

[Stephen Kramer, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Jeff Miller of Baird.

[Jeff Miller, Robert W. Baird & Co.]

Yeah, thank you. So just on the summer backfill dynamic is it that the children that have been born in the last 2.5 years roughly during the pandemic? They found other care arrangements? Many are persisting in those other care arrangements? Or am I oversimplifying it or missing some more important driver?

[Stephen Kramer, Chief Executive Officer]

Well, I think that the summer piece that we’re talking about, are currently enrolled families, who the oldest age group ends up matriculating on to elementary school, right, and so really the dynamic there is a very well own path that we’ve seen historically, and are certainly seeing in this summer period. I think the piece that is the dynamic that we’re focused on is our ability to backfill against those levers, right, so as expected levers, and when we think about the enrollment requests that we have, certainly our goal is to match those against staff capacity. And some of the impacts becomes when the demand obviously is most significant at the youngest age groups, where ultimately, we need to continue to hire incremental teachers to take that demand versus in the age groups where we have had the levers where we either going to garner enrollment from the outside, or to a large extent grow our own into those older age groups.

[Jeff Miller, Robert W. Baird & Co.]

But, I guess, what’s the hypothesis on why the demand from those older children to backfill is lower than expected?

[Elizabeth Boland, Chief Financial Officer]

Well, I think there certainly is some – as you framed, there are some conditions where we have not been able, with a younger – so a younger age group child, someone who is 2 years old, how they’re two, and we have been short staffed, have not been able to take the enrollment 6 or 9 months ago. So they are not in the system to be aging up for families, as you said, have not yet come back in they were born in the last couple of years, and they have not entered the child care system, or they were on a waitlist work for us, and we couldn’t take them, and so they are they have found other care. There are certainly some of that dynamic too, but it’s difficult to quantify where each of those channels, parents have gone down. But, as you say, there is some of that dynamic that’s happened.

[Jeff Miller, Robert W. Baird & Co.]

Okay. And then for only about children, just what type of margin profile are they onboarding at? And are you going to be including the restructuring and integration chart, or I guess integration charges? Are you including those in your adjusted EPS? Or are you going to be backing the integration charges out?

[Elizabeth Boland, Chief Financial Officer]

So, generally, we are – integration costs are not something that unless you’re significantly outside, we typically have not added those back, we would add that transaction costs. But the overlapping costs of either incremental investment for those that we may make, because of this beachhead acquisition and new resources that we need to bring to bear or, temporary resources that are helping with the transitional filings and statutory reporting and everything else. There’s some of those costs that would just be absorbed. So we would be reporting those and that’s part of why we’ve said the results, we are not expecting a meaningful contribution for this initial period, they are coming over to us as we talked about, initially, when we announced the transaction, this is similar to our full service.

The rest of our full service business operated at both from a fee level gross margin level and an overhead support level similar to our other operations outside the United States, where they are primarily full service business prior to COVID, that business was operating in the high-single-digits, 9%, 10% are getting to that level. So, OAC is not coming to over to us quite at that level, because of the, as I said, they are still in a slight recovery mode 2 from the pandemic. So, they are not fully functional at their optimized run rate, if you will, but they are on track to get there and that coupled with some of the interest that we mentioned that we would be attributing to this given the overall mix of cash flow in the business and incremental – just these incremental costs as what goes into it.

[Jeff Miller, Robert W. Baird & Co.]

Okay. And then just last we can come up with an estimate. But if you have a clean guidance bridge, so we get the plus 70 from OAC. What is the incremental FX headwind in terms of dollars of headwind in this guidance relative to the prior guidance? Just we can do the organic constant currency bridge?

[Stephen Kramer, Chief Executive Officer]

That’s about $8 million to $10 million full year.

[Jeff Miller, Robert W. Baird & Co.]

Okay. Thank you.

[Operator]

Thank you. [Operator Instructions] The next question comes from Toni Kaplan of Morgan Stanley.

[Toni Kaplan, Morgan Stanley]

Thank you so much. I’m hoping we could go back to labor. Are you able to clarify, I guess, what is driving the labor shortage? I think during COVID, we were thinking that it seemed to be about unemployment benefits being really strong, and it’s an industry that is somewhat lower paying. I imagine that that’s largely through, but correct me if that’s wrong. But, I guess, have caregivers just found different jobs that are higher paying or what do you think is really driving the labor shortage?

[Stephen Kramer, Chief Executive Officer]

Yes, I think we are certainly past the unemployment benefits that we had faced in terms of a headwind previously on the labor side. But, look, I think that certainly across many industries, there is a recognition that especially frontline roles, and certainly are teaching roles or frontline roles, there is a real dearth of individuals that are seeking these opportunities out. And at the same time, we have had some of our retention, put under pressure throughout this period. These are difficult jobs, right? They’re really important, and they’re highly valued.

On the other hand, they are difficult. And so we are certainly seeing within our industry categorically and then certainly within our employees, that there are teachers who are making different decisions who are deciding to leave the industry. And, therefore, we’re very focused on as we always have, hiring for attitude and training for skill. One of the most important programs that we have on offer is our Horizon future degree program. And that is certainly an attraction for new entrants into our field.

But, certainly, I think across the child care field, and the childcare industry, it is well recognized that there continues to be a shortage of individuals that are interested in doing the work that is so important to us.

[Toni Kaplan, Morgan Stanley]

Got it. I wanted to also ask, Stephen, you mentioned the pet care that you’re getting into, I guess, what’s the advantage? Is it that you already have the relationship with the employer, so you’re offering a new service to them? And, I guess, are the pet caregivers for lack of a better term, ones that are interchangeable, and so you just have if you don’t have the in-home demand, you can shift to pet demand, I guess, how does that just work? And what’s your advantage in pet care?

[Stephen Kramer, Chief Executive Officer]

Yeah, so I think, first and foremost, you rightly point out the fact that we have over 1,000 client relationships, specifically within our backup line of service. And as we have continued to have conversations with our clients, about the possibility of expanding the use cases, one of the ones that has certainly come up time and time again, is this area of pet care. And the reality is that as we all know many employees of our client organizations think of their pets in the same way that they think about their children.

And, therefore, when they have a breakdown in arrangements with their pet, they do need some support. And so similar to the work that we do on the child and elder care side. We are going to be providing a service that allows for employees to utilize their set of use that is available through their employer directed towards their path. And so we’re going to be contracting with third parties to actually deliver that care, and obviously using the backup care mechanism and benefit to fulfill that demand.

[Toni Kaplan, Morgan Stanley]

Thank you.

[Operator]

The next question comes from Faiza Alwy of Deutsche Bank.

[Faiza Alwy, Deutsche Bank]

Yes. Hi, thank you. So I’m still a bit unclear around the demand versus supply dynamics. And I was thinking maybe one way we could think about it is sort of urban, sort of isolate out some of the urban areas. And I wonder if you can help us think through like maybe what the enrollment was in these urban centers, pre-pandemic, and kind of where you’re trending right now. And how much of that gap is supply driven? I guess, relatedly, I’m curious if you’re seeing these supply issues across the board? Or are they more – are you seeing them more on the urban side?

[Elizabeth Boland, Chief Financial Officer]

Well, broadly speaking, the disparity, if you will, between enrollment in our urban versus suburban is about 5 percentage points. So there is a distinction, but it’s not a wholesale gap, if you will, I think it’s these more intense areas that we’ve called out around New York City, DC, et cetera, that has a bigger, a much wider gaps in that compared to sort of a more generic urban, suburban comparison. And so from the standpoint of demand supply, obviously, the center is 30% or 35% enrolled, there’s more – in that center, there’s more of a demand problem, that there is in a center that is 60% enrolled, and just can’t add them at, we can’t open the next final toddler room, because we don’t have the 2 teachers to open that room, or we similar with a preschool room.

So the supply demand dynamic has changed, depending on how much a centre has enrolled. But I think that our view is that there are supply constraints that are pretty hyper localized. Some areas did not shutdown as much. And they were – so therefore, they reopened more quickly. And then there is less disrupted teacher supply there. But I don’t know having looked at the patterns for us, I don’t know that there’s anything particular that we would call out there.

[Stephen Kramer, Chief Executive Officer]

Yeah. And I think the only thing I would add is, Elizabeth, rightly pointed out to the cities that have been more challenging than New York City’s, the DC’s, the Seattle’s. But on the flip side of that, we also have within the portfolio plays like Boston, LA, San Francisco, that have strongly affirmed. And, therefore, we really are – yeah, we are really not thinking about this as an urban challenge. It is very specifically in certain cities, where they are held back for a garden variety of reasons. But nonetheless, I think that we took a great heartening in this last quarter to see even places like New York, DC and Seattle, continuing to progress. So those are not cities that we expect won’t come back. They just have not come back as quickly as places like Boston, LA and San Francisco for us.

[Faiza Alwy, Deutsche Bank]

Okay. Okay. Thank you for that. And then just follow-up on the prior question really around, I guess, the psyche of new parents, particularly, children who were born during COVID like what is your research shown in terms of, what they’re looking for? Is that – are you seeing that it’s more maybe one parent hasn’t gone back to work yet? And is doing more of the caregiving at home? Is it more of a hybrid environment? I’m curious sort of what your research has shown around that.

[Stephen Kramer, Chief Executive Officer]

Yeah, what our research and certainly what our enrollment patterns bear out, are that individuals who are coming back to childcare, or coming into childcare for the first time are coming back on a full time basis. So they’re coming back five days a week, and are choosing to have that 5 days a week to really support the continuity and consistency of care for their children and to support the needs they have, as full time working employees. The folks who have not come back into child care are really generally doing a few different things, some of them are continuing to play together their patchwork of support, some of which includes working from home and trying to hobble together between spouses, and or grandparents, and/or just off the side of their desk, caring for their children.

And then others are really planning for what could be a fall or January enrollment in more professionalized group care settings like Bright Horizons. And in the meantime, are spending the summer and/or into the fall, trying to figure out exactly what their work arrangements are going to be, and then making a decision as it relates to where they’re going to find a combination.

[Faiza Alwy, Deutsche Bank]

Okay. Thank you. Really appreciate it.

[Stephen Kramer, Chief Executive Officer]

Thank you. Excellent. Well, we appreciate everyone joining us this evening and wishing you a great night.

[Elizabeth Boland, Chief Financial Officer]

Thanks. Have a good rest of your summer.

[Operator]

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation.