Kindercare Learning Companies Inc Stock

Thank you. Welcome to KinderCare's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the telephone keypad. If you would like to withdraw your question, press star 1 again. It is now my pleasure to introduce Jason Terry, KinderCare's Director of Investor Relations. Mr. Terry, you may begin the conference.

Thank you and good afternoon everyone. Welcome to KinderCare's second quarter 2026 earnings call. Joining me from the company are Chief Executive Officer Tom Wyatt and Chief Financial Officer Tony Amandi. Following Tom and Tony's comments today, we will have a question and answer session. During this call, we will be discussing non-GAAP financial measures, the most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and within the supplemental earnings presentation, both of which are posted on our investor relations website at investors.kimney.com. A reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and involve a number of uncertainties and risks which are explained in detail in the risk factor section of our most recent annual report on Form 10-K and other filings with the SEC.

Please refer to these filings for more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. The actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. All forward-looking statements are made as of today and, except as required by law, KinderCare undertakes no obligation to publicly update or revise any forward-looking statements, whether as of today or as of tomorrow. as a result of new information, future developments, or otherwise. I'll now turn the call over to our Chief Executive Officer, Tom Wyatt.

Thank you Jason and good afternoon everyone. I'm pleased to share updates on our second quarter performance with you today. We deliver results largely in line with expectations, along with a few bright spots that reinforce the progress we are making. During the quarter, we remained focused on the priorities we outlined earlier this year. strengthening execution across our centers, simplifying day-to-day responsibilities of our center leaders, and positioning the business for long-term growth. Revenue was down slightly compared to last year as we began optimizing our footprint during the quarter. This is partially offset by continued growth in champions and kinder care for employers. And our premium brand, the Crim School, continued building on the progress we've seen this year.

Same center occupancy for the quarter was just under 69% and benefited from our optimization work. We're encouraged by the progress we're continuing to make and we know there's more work ahead. I'll begin with our flagship brand, KINDERCARE. Improving our enrollment trend within our largest brand is going to be the result of more consistent performance over time. The actions we took to enhance our targeted marketing are helping us connect with more prospective families. At the same time, we are simplifying the responsibilities of our center directors. give them more time to leave their centers, support their teachers, and engage with families in meaningful ways. Those day-to-day interactions are the heart of great family experiences, and over time, they help convert interest into enrollment and retain families longer.

That's how operational improvements translate into better results. We put a renewed emphasis on our small group enrichment programs called Learning Adventures. These have expanded learning in our classrooms in areas like phonics, STEM, and Spanish. Family response continues to exceed our expectations as revenue from these programs has almost doubled from a year ago. We're expanding these offerings across more centers and into additional seasonal programming, giving families even more opportunities to extend their child's learning experience beyond our core curriculum, which we believe is a key differentiator. We're also investing thoughtfully to expand our geographic footprint where we see a attractive long-term potential and strong man for high quality early education During the quarter we entered our 42nd state with a new center in Bentonville, Arkansas. We also opened a center in Ridgefield, Washington, a thriving community often described as a childcare desert.

Both centers expand access to childcare where it's needed most. We're applying that same discipline approach to CRIMS schools, our premium brand, expanding into markets where we see growing demand. Just after the quarter ended, we opened the CRIM school at Great Park in Irvine, our first CRIM location in California. The school features modern learning environments, elevated amenities, and personalized educational experiences. This is an important milestone and expands CRIM into a large and very attractive market. We are pleased with enrollment in our summer camp programs at CRIM, where enrollment increased approximately 26% compared to last year. It's another encouraging sign that our repositioning efforts are gaining traction.

As we grow this brand, we're focused on delivering differentiated educational experiences that families value. Turning to champions, we delivered another strong quarter of double-digit revenue growth, extending our streak to four consecutive quarters. That growth reflects both the addition of 85 net new sites since Q2 of last year and improved productivity across our existing sites. Summer programming at Champions is going well and reinforces our relationships with families and our school district partners. We're expanding into additional schools within our existing districts while bringing our before and after school programs to new districts. Within KinderCare for Employers, we're continuing to see organizations look to partner with us to meet their employees' child care needs. During the quarter, we welcome several new partners across a range of industries, reflecting continued demand for our employer-sponsored childcare solutions.

That's an area of the business we're excited about, and we expect it to remain an important part of our growth strategy. We're also encouraged by the opportunity we see in tuition benefit. Our large national footprint gives us a clear advantage in offering childcare benefits to employers across 42 states. And we are able to connect more families with high quality care in the communities where they live and work. We believe that combination positions us well as employer demand for child care solutions continues to grow. Our breadth and flexible platform allow us to partner with employers in a variety of ways. For example, we have supported public safety employees in Dallas by providing 24-hour childcare during the World Cup this past quarter.

Just another example of how we can tailor our childcare solutions to meet the needs of employers. careers, and communities. Quickly touching on the policy environment, the overall direction has been encouraging. We continue to see steady bipartisan support at all levels as federal policy has remained supportive, and many states are expanding child care access. For instance, New York recently announced a massive investment of $1.7 billion into ECE programs. announced, it will add another $220 million toward 20,000 new mixed delivery childcare and New Hampshire is creating a childcare tax credit, incentivizing employers to be a part of childcare solutions. We applaud these leaders for listening to the needs of the working parents. As a national provider serving working families across the country, we're continually evaluating how we best serve them. THAT NAME IS EXPANDING INTO GROWING COMMUNITIES LIKE GROWING COMMUNITIES LIKE GROWING COMMUNITIES LIKE VINVILLE, RIDGEFIELD, AND VINVILLE, RIDGEFIELD, AND VINVILLE, RIDGEFIELD, AND IRVINE.

IRVINE. also means thoughtfully consolidating centers where demand has shifted. This is an important part of how we manage our presence across the country. As part of the ongoing evaluation of our center footprint, we've identified several consolidation opportunities that we believe will better align our centers with the communities we serve as families' needs and local demand for childcare have evolved over time. While the majority of our centers continue to perform well, some are no longer in the best locations to serve communities. As a result, we're consolidating those centers and as of today, we are approximately two-thirds of the way through this work, including 49 center closures completed during the second quarter. Those centers represented about 3% of our total center footprint and were primarily from our fourth and fifth quintile and on average were below 37% occupied. These decisions are never easy, and we evaluate every center individually.

Our priority is minimizing disruption for families, teachers, and the communities we serve. And wherever possible, we help families and employees transition to nearby locations. We're encouraged that both family and employee retention have exceeded our expectations through this process. We believe that the result will be a center footprint that's better aligned with where our families live and work today, And it will allow us to focus our people, our resources, and investments where they can have the greatest impact for families. As we complete the remaining consolidations this year, you should expect some quarter-to-quarter variability in our financial results. We believe that's a responsible tradeoff because these actions will strengthen KinderCare and better position us to serve families, continue investing in high-quality early education, and support long-term access to high-quality child care. Looking ahead, our priorities remain the same.

We'll continue improving execution across the business. We will continue to invest where we see the greatest opportunities, and we will continue supporting our center teams so they can deliver the best possible experiences for our families. We're encouraged by the progress we're making, confident in the actions we're taking, and excited about the opportunities ahead.

Tony will now provide more details on our financial results. Thank you, Tom. I'll start with our Q2 results and then discuss our outlook for the remainder of the year. Second quarter revenue was $698 million, down slightly from $700 million the prior year. Enrollment pressure was partially offset by strong performance in champions and contributions from KinderCare for Employers, Learning Adventures, and our newer centers. While current performance remains below prior year levels, the year over year gap has narrowed significantly and the underlying trend continues to improve. Overall, same center revenue decreased by $14 million or 2%. This was mainly driven by lower enrollment and an $11 million impact from closures, $5 million of which was our footprint optimization work.

Higher tuition rates and strong performance from centers newly included in the same center cohort helped offset a portion of the enrollment headwind. Total enrollment declined by 4% year over year, reflecting both ongoing pressure and impact from our center consolidation action. Pricing contributed approximately 2.6% to ECE revenue during the quarter. We see positive developments overall in subsidy reimbursement rates. We expect the benefits to remain modest through the current state budget cycle. The consolidations provided a 70 basis point benefit to same center occupancy for the quarter, which was 68.6% down 240 basis points from last year. Champion's revenue in the second quarter increased 13% year-over-year, driven by a mixture of new site openings and higher average revenue per site.

Along with KinderCare for Employers, these B2B businesses are broadening our revenue mix and supporting our overall growth strategy. We opened five new centers and acquired five new centers during the quarter. Cash consideration for the acquisitions in Q2 was about a half million dollars, funded completely out of the $45 million in free cash flow generated in the quarter. Unacquired Centers this year have contributed approximately $2.6 million in revenue year-to-date. As Tom mentioned, we closed 49 centers during the quarter and expect that number to reach 80 to 85 by the end of the year, with the majority of the remaining happening in the fourth quarter. On an estimated annualized basis, the optimization work would represent approximately a $57 million revenue headwind and an $8 million benefit to adjusted EBITDA. We estimate annual rent expense would decline by approximately $7 million, and occupancy would improve by roughly 150 basis points once the work is fully completed.

As we discussed earlier, you'll see some quarter-to-quarter variability in our financial results as we complete the remaining consolidations, and we've reflected those expected impacts in our updated outlook for the remainder of the year. To help investors better understand the optimization work, we've included a supplemental slide summarizing the impacts of consolidations completed to date and our expectations for the remaining work this year. Continuing down the income statement, reported a net loss of $8.8 million and reported a loss of $0.07 per share for the second quarter. Adjusted EBITDA was $63 million for the quarter, down from $82 million a year ago, reflecting the impact of lower occupancy on operating leverage. About $5 million of the decline was driven by adjustments to our insurance and legal reserves. Adjusted net income was $9.9 million and adjusted EPS was $0.08 compared to $26 million and $0.22 respectively in the prior year period. The quarter also included footprint optimization related impacts, primarily impairment expense and accelerated depreciation, along with other transition costs, including about a half million in severance expense.

While our optimization work has near-term financial impacts, we expect it to better align our center footprint and support stronger returns on capital over time. SG&A was 10.5% of revenue, down 76 basis points from last year. We remain focused on managing expenses while investing in the highest priorities. Interest expense was $18 million for the quarter, down from $20 million in the prior year, driven by a repricing last year. We expect to see favorable comparisons for the remainder of this year as well. Turning to the balance sheet, we ended this quarter with $174 million in cash and $188 million of available capacity under a revolving credit facility. Net debt to adjust the EBITDA is approximately three times.

We expect modest increase in that ratio over the balance of the year as we complete the remaining consolidations and fund costs associated with exiting leases. Our balance sheet provides the flexibility to complete the remaining optimization work. Today, we have line of sight to approximately 36 lease exits, representing approximately 20 to 25 million of expected lease exit payments. Those payments are reflected in our updated free cash flow outlook. The remaining leases are at varying states of negotiation, and their timing and ultimate resolution will vary by location. We'll continue to update investors as we gain additional visibility into the associated cash impacts, some of which may extend into 2027. Looking ahead, we are updating our full-year outlook to reflect the expected impact of our footprint optimization work.

For the full year, we now expect revenue between $2.66 and $2.7 billion, adjusted EBITDA between $200 and $220 million, and adjusted EPS between $0.05 and $0.15. Included in our updated outlook is approximately $8 million of incremental insurance related to our actuarial analysis on our workers' comp and general liability self-insurance. For our revenue growth assumptions, we are maintaining our occupancy to be down approximately 3% as reduced capacity from the optimization work partially offsets enrollment pressure. We now expect tuition contribution to revenue growth of approximately 2.5% for the year. Primarily reflecting the slower pace of state subsidy reimbursement rate increases than we previously expected. We expect the revenue growth contributions from champions and B to B to be 1%. With new centers and acquisitions to both remain consistent about 50 basis points each. consolidations are now expected to represent about 1.5 percent headwind to revenue growth this year we We expect CapEx this year to be between $120 and $130 million.

Free cash flow is expected to be less than $10 million, primarily reflecting elevated cash costs associated with the footprint optimization work. For modeling purposes, assume our effective tax rate to be 27% for the year. To provide better transparency as we move into the second half, we're providing an outlook for the third quarter. We expect revenue to be between $660 and $680 million and adjusted EBITDA to come in between $44 and $48 million. Human Saver Q3 is expected to be in the mid-60s. We'll continue to provide updates on the financial impact of the remaining consolidations throughout the balance of this year. By completing this work in 2026, we expect to enter 2027 with a better line center footprint, improved occupancy trends, and a cost structure that better supports sustainable long-term growth.

To wrap things up, our priorities for the second half are straightforward. We remain focused on discipline execution, completing our footprint optimization work, and investing in the opportunities that matter most. We believe those actions will position as well as we enter 2027. Now let's go ahead and open up the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of Josh Chan with UBS. Your line is open. Please go ahead. A reminder to mute and unmute yourself locally as needed. Josh, your line is open. Your next question comes from the line of Jeff Silver with BMO Capital Markets. Your line is open. Please go ahead.

Thanks so much. Can you hear me?.

TRUE. NEW SPEAKER P. AND IT SEEMS LIKE JEFF CAN'T HEAR.

Yes, I can hear me now. Both lines are open. Thank you. Okay. Can you hear me? Okay, I'm going to ask a question assuming that you can hear me. I'm just trying to get a little bit more color on the impact of the center closures. And forgive me, I came on the call late. If you hadn't, I guess, done all these center closures, what would have been the impact of guidance going forward, would it have been maintained, changed in any way, any color you could give would be great. Thank you. All right. Forgive me, we can't hear you at all.

I don't know if you're answering my question. Ladies and gentlemen. Can you hear me?.

We are currently experiencing technical difficulties. Please stand by as we resolve the issue.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Welcome to KinderCare's First Quarter Earnings Conference Call. [Operator Instructions].

It is now my pleasure to introduce Oliva Kirrer, Kinder care's VP of Investor Relations. Ms. Kirrer, you may now begin the conference.

Thank you, and good afternoon, everyone. Welcome to KinderCare's First Quarter 2026 Earnings Call. Joining me from the company are Chief Executive Officer, Tom Wyatt, and Chief Financial Officer, Tony Amandi. Following Tom and Tony's comments today, we will have a question-and-answer session.

During this call, we will be discussing non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and within the supplemental earnings presentation, both of which are posted on our Investor Relations website at investors.kindercare.com.

A reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and involve a number of uncertainties and risks, which are explained in detail in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC.

Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. The actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements.

All forward-looking statements are made as of today, and except as required by law, KinderCare undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future developments or otherwise.

Before we move on, we'd like to note that management will be holding meetings at Baird's 2026 Global Consumer Technology and Services Conference on June 2. We look forward to connecting with those of you who will be attending.

I'll now turn the call over to Chief Executive Officer, Tom Wyatt.

Thank you, Olivia, and good afternoon, everyone. I'm pleased to share with you updates on our first quarter performance. We finished the quarter slightly better than expected. That was supported in part by the efforts of our center in site directors and by our focus on execution. Over the past few months, we've made several changes across the business. and our results reflect the work that is already underway.

It is still early, but we are starting to see encouraging signs that those actions are making an impact. Revenue was up modestly, supported by continued strength in our Champions brand and B2B businesses. At the same time, enrollment in our ECE centers remain below prior year levels, down about 3%. as improvement from the fourth quarter when enrollment was down 3.6% year-over-year, but it continues to be a primary pressure point on the business and where we are concentrating our efforts.

Enrollment is not something that turns during a single quarter. It's a process of improving execution across a large portfolio of centers. Our focus right now is on putting the right pieces in place so that performance improves as we move throughout the year.

Our best opportunity for material progress will be in the back half of the year. Until then, we expect gradual improvements through the first half. Over the last few months, we have increased and refined our marketing investment, and we are seeing that show up in higher inquiry volume over last year. Since we began our investment, we have seen a 15% increase in inquiry in the targeted areas and a 3% increase for KinderCare overall.

So more families are engaging with us, and that's important for step. Just as importantly, we are starting to see early signs that conversion is beginning to improve in certain parts of the business. This is notable at cram and most pronounced in our opportunity region where enrollment during the quarter versus last year increased by 8%. That progress is not yet consistent across the system, but it reinforces something we believe strongly.

Demand is there. Our job is to convert it consistently across the system, and that is where our focus is right now. We are putting a dedicated focus on tightening the execution at the center level. This is about how quickly we respond to families, the quality of our tour experience and how effectively we follow up. It is also about making sure our center and site leaders spend their time on the things that matter most. We've taken steps to reduce administrative burden so they can focus more on the families and teachers because that is what ultimately drives performance.

In addition to work on enrollment, we are also taking steps to strengthen our real estate portfolio and better position our centers for sustainable long-term performance. Much like any multiunit operator, we evaluate our real estate portfolio on an ongoing basis. And that typically includes closing roughly 1% of our centers each year. We recently completed a more comprehensive network assessment with the goal of enabling long-term health and growth for all of our centers.

To achieve this goal in 2026, we expect to have a higher number of center closures than usual. We understand that any closures can be disrupted to families and staff. Whenever possible, we proactively help families and employees transferred to nearby locations to maintain continuity of care. This is disciplined portfolio management. It will result in stronger, more productive centers and higher overall occupancy over time, both of which support our mission to offer high-quality care to families.

To be clear, these are not easy decisions they will create some near-term variability as we execute across the year. However, we are confident that they are the right decisions to drive beneficial outcomes in the long term. We'll keep you updated in the coming quarters on our progress.

Before turning to more detailed business results, I want to spend a few minutes on the subsidy landscape. I have spent time this quarter meeting with state and federal lawmakers to advocate for families and the critical role child care plays in this country. from Colorado to Massachusetts to Washington, D.C. The feedback has been constructive and encouraging. We continue to see strong bipartisan support for child care at all levels of government.

Federally, an additional $85 million in CCDBG funding was approved in February. At the state level, while we are seeing different approaches, the overall direction remains constructive. For example, Indiana is deploying approximately $200 million to support the families of 14,000 additional children. We applaud the state's leaders for taking action to support the children and families of Indiana. More broadly, we are seeing constructive developments in several other states.

There are supportive actions in New Jersey and in Maryland to reach more subsidy families and reduce their program rate list. Overall, while conditions vary by market, we are encouraged by the recent directions many states are taking. Turning back to the business. We spent this quarter taking steps to drive week-to-week enrollment improvement in the first half of the year, so we can build momentum in the second half.

For our flagship brand, KinderCare Our work continues to enable center directors to spend more time engaging in person with teachers and families. We are also evolving how we manage inquiries, allowing our directors to stay focused on families, particularly in centers with high inquiry and lower occupancy. The data consistently tells us that when family and teacher engagement improves, outcomes improve across the board for children, teachers and enrollment, leading to stronger center performance.

We are also placing more emphasis this year on our in-center small group enrichment programs, which provide incremental revenue. These are programs we have had for quite some time, which offer families additional options for their children like comics, languages, music and STEM. We are creating amazing experiences for children in our centers and expanding this enrichment into our summer camps as well. Early results are encouraging, and we're pleased with the momentum we see in engagement, retention educational enrichment and the value these programs bring to our centers.

At Crème, our new brand positioning is starting to resonate. We are preparing for upcoming specialty summer camps and we see families enjoying our updated curriculum, which launched in the first quarter. We are seeing better conversion of stronger inquiries, especially in younger students and are encouraged by the progress we are making.

Champions continues to be a strong performer for us. Our 70% growth reflects both new site additions and the strength of our existing sites, and we see continued opportunity in both. In our B2B offering, we continue to see strong employer interest in supporting their employees. We signed 12 new tuition benefit clients in the quarter, including a large public university in Florida and multiple professional organizations.

All told, we are seeing increasing demand for more integrated solutions across our services. These relationships are becoming a more meaningful and complementary part of our business and a strong growth driver going forward. We continue to make positive progress in our real estate growth during the quarter.

By opening 3 new centers and acquiring another 2. So when you step back, the picture to us is clear. We feel good about the progress we're seeing. We are proud of the growth from B2B and champions, and we're seeing solid improvement at Crane. We're also seeing traction from our marketing investment and from the changes we've made within our KinderCare centers. We still have work to do. So we have a clear path forward and are focused on continuing our progress into the second half of the year.

With that, I will turn it over to Tony.

Thanks, Tom. I'll walk through the quarter and then go over how we are thinking about the year. Starting with income. Revenue was $673 million in the first quarter, up modestly compared to last year. Same center revenue decreased by $7 million from last year, driven primarily by lower enrollment, while contributions from newer centers and higher tuition rates helped offset some of that pressure. Pricing contributed about 2% to ECE revenue growth despite continued lower subsea reimbursement rates, which we expect to process at least through the current state budget cycles.

This 2% increase from tuition contribution was offset by lower overall enrollment, down 3% year-over-year. While that represents an improvement from the 3.6% decline in the fourth quarter, enrollment continues to weigh on results. As a reminder, enrollment typically builds through the first half of the year and will decline with the transition to summer before we build back up during back-to-school.

Same-center occupancy for the quarter was 66%, up 150 basis points from the fourth quarter and down 310 basis points from the first quarter of last year. Our champions before and after-school business continued to perform well as revenue increased 17%, driven primarily by new site openings and incremental pricing. Beyond near-term performance, we see champions and by extension, our B2B business, as an increasingly important and diversifying part of our mix.

We opened 3 new centers and acquired 2 new centers during the quarter. Cash consideration for the acquisitions in Q1 was about $0.5 million funded completely ahead of the $1.1 million in free cash flow generated in the quarter. New and acquired centers contributed approximately $12 million in revenue since the start of the year, an increase of 35% from the same period a year ago. Similar to the fourth quarter, we recorded a noncash impairment related to the decline in our stock price in Q1. This drove a reported net loss of $290 million and reported EPS loss of $2.45 and does not impact our liquidity or outlook.

Adjusted EBITDA was $52 million for the quarter compared to $83 million in the first quarter last year. Adjusted net income was $4.2 million, and adjusted EPS was $0.04 compared to $27 million and $0.23, respectively, in the prior year period. The drivers here are relatively straightforward. Lower occupancy continues to be the largest factor. Since we must maintain minimum teacher-to-student ratios, our labor inputs are not as flexible in our current position in the margin set function, improvements in occupancy will allow us to drive better overall operating leverage.

As Tom outlined, the path to improvement is through enrollment. The early signs we are seeing in inquiries and conversion are important, and we're now looking for consistency as we move through the year. SG&A was 10.6% of revenue, down slightly from last year. As we look ahead, we expect to see additional improvement coming from a continued focus on efficiency and cost discipline. Interest expense was $18 million for the quarter, down from $20 million in the prior year, driven by our repricing last summer.

Moving on to the balance sheet. We ended the quarter with $133 million in cash and $190 million of available capacity under our revolving credit facility. Net debt to adjusted EBITDA was just under 3x and within our targeted range. We expect leverage to be around this level as we work through the enrollment pressure and EBITDA recovery consistent with our current operating profile. We have been taking a closer look to identify centers that should exit our real estate portfolio.

We've examined center level trends for local market demographics, occupancy, engagement, lease terms and other factors. To that end, we've identified a set of potential centers for action and are working through timing and approach. Ideally, we want to avoid as much disruption to families and employees as possible while also consolidating effective families and teachers into nearby centers where it makes sense.

This work is in process, and we do not have more specific details to share right now. Other than to say, we will close more than the usual 15 to 20 centers we normally see each year. When we speak with you to discuss Q2 results, we'll be at a point to provide more detail.

We expect some adjustment in 2026 as we work through this process, but it will result in a stronger, more resilient portfolio and improved focus going forward. We'll keep you updated on our progress with our Q2 update and in the quarters ahead. Moving on to our outlook. We are raising our full year adjusted EBITDA and adjusted EPS guidance to reflect our first quarter performance. We continue to expect revenue to be between $2.7 billion and $2.75 billion, we now expect adjusted EBITDA to be in the range of $215 million to $235 million and adjusted EPS to be between $0.15 and $0.25.

This outlook reflects the early signs of progress we are seeing in the business while continuing to assume gradual momentum building into the second half of the year. We are maintaining our revenue building block assumptions for the full year, tuition and occupancy are expected to have offsetting contributions at plus 3% and minus 3%, respectively.

Champions and B2B are expected to contribute about 1% with new center openings and acquisitions contributing about 50 basis points each. Since the work on optimizing our portfolio is not yet finalized, we are not including any related closure assumptions in our full year outlook beyond the typical 1% offset we expect a given year.

Consistent with our first quarter remarks, CapEx this year will be approximately 5% of revenue and free cash flow will be between $35 million and $40 million. For modeling purposes, consumer effective tax rate to be 27% for the year. Given the impact of current occupancy levels on our margin profile and profitability, we will provide additional direction for the second quarter.

For Q2, we expect revenue to be between $690 million and $700 million, and adjusted EBITDA to between $63 million and $67 million. We are doing the work today to drive improvement throughout the year. The progression we are focused on is tied to execution, particularly around enrollment and conversion, and we expect those efforts to build momentum in the back half of the year.

Our targeted marketing investments have been effective at generating additional inquiry. How effectively we convert the new and existing demand into enrollment will be an important indicator of how the business is tracking to stronger performance.

To wrap things up, our focus is on execution, improving the performance of the core business and positioning the company for stronger results as we move into the back half of the year. Now let's go ahead and open up the call for questions.

[Operator Instructions]. Your first question comes from Jeff Silber of BMO Capital Markets. Please go ahead.

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

Yes, I'd be happy to, and I know Tony will speak to this too. It starts with the work that we did in sooner, the fact that our -- the administrative detail and stuff that was distracting our center of directors is, in essence, going away, primarily starting with the second quarter, but also the work that we've done in paid search have paid off. The numbers that we quoted earlier, 3% all KinderCare in the quarter, plus 15% in other areas is -- and that's year-over-year increases.

So we are getting more inquiry than we got last year, and we're starting to see that enroll. So very positive, sometimes in page search candidly, is not as affected, but it has been very effective for us, which goes back to a comment I made, there is not a lack of demand for children that need child care. And we're going to get them. This is what top plan is.

Okay. That's great to hear. And 1 follow-up I want to focus on same-center occupancy. I -- down on a year-over-year basis. But what is embedded in your guidance to get to the revenue and adjusted EBITDA level? Where should we be seeing occupancy by the end of the year?

Yes. Jeff, as we stated in our remarks, we're still holding our guide at that 3%. So it was 310 basis points here in the quarter, and so right on that mark. And that [ $0.03 ] was an improvement from the 360 in the fourth quarter. So we are seeing a little bit of movement trajectory, but our guide still consider a 3% balance for the year.

Your next question comes from the line of Faiza Alwy of Deutsche Bank.

John, you talked about the improvement at Crème and the opportunity region where [ Ingela ] increased by 8%. Just remind us and give us some context around the variability that you've seen historically and maybe discuss a little bit more on why these particular centers are doing better than others in your view?

Well, let me start with the the opportunity region. That is, as you know, carved out centers that have been challenged with occupancy for a number of years, candidly. And we moved to a different region. We put one of our most effective leaders over that region and she literally put together her own strategy around what do we do, how do we do it, how are we going to increase the momentum of inquiry and take advantage of that to enrollment and candidly work on retention as well. So she's just done a phenomenal job. She's kept the nose, very low in those centers. They've been very, very focused on growth. They've been very, very focused on creating the best possible experience toward the families that come in and visit with us and it's paid off. I mean, the 8% sort of speaks for itself. So we feel really, really good about that.

In the case of Crème, and I'm happy to answer another question you had on that. But in the case of Crème. Crème is quite a success story. We had a very rough year last year going through a rebranding of that business, changing out some leadership and candidly, just making it much more center focused than it had been in the past. And it's really worked exceptionally well. And I also need to share and we said it in the prepared remarks, but the launch of the new curriculum, the impact that we've had from our teachers and their positive experience with it.

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

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

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

Yes. No, Faiza, no really changes to consider. I think as we talked about last year, Champions is slightly underperforming where we would have liked to see them. But we are seeing them feedback to where they are. And frankly, their Q1 was right where we expected it to be and they continue to be on that path that we expect for the year.

They were up -- so they ended the quarter at 1,159 sites last year, they ended the quarter at 1,038. So they're up about 10% just in tight -- alone. And obviously, that was a lot from the additions we made this fall, but also just the net impact of closures over those 2 years. So a lot of that growth is coming from the new sites as well, but we are seeing some nice traction, single -- low single digits, but TWB growth Champion as well. So we're also doing a nice job of growing that as well, which continues to be important given the high accounts of 1,000. So champion is a base growth engine and if you come back where they belong in double-digit growth.

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

Your next question comes from the line of Jeff Meuler of Baird.

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

Yes. So let me start, and then Tom can add some kind of strategic operational things. Look -- has literally just hit its 1-year anniversary last year. So I think there is something about clearly, pulling that group out, having a really strong leader but -- leader that we knew would get into that level of detail with those kind of directors of NPLs to really focus on enrollment and growth.

We talked about -- we put a few tools in that we're now spreading through the organization that I think are helpful as well. I think it's a combination of things, right? We weren't investing marketing -- correctly in them. So it wasn't that they aren't getting some of the additional spend now. So that's positive. But we think it is a lot of that focus, and that's something you've heard Tom talk about, I'm sure we'll add more here.

But letting the center records focus on what's important for their center, which promotes growth in the moment, allows them to really put aside other things that are being asked and focused on that. And that's just something that leader, I think, has done a really rich job of doing over the last 12 months, and we're really seeing the results from that. So Tom, do you want to add anything else to that.

Well, only one thing I'll add, Tony, because you answered the question well. What I would say to you that I am the most impressed with and what I'm most encouraged buy in the rest of the fleet is that Christine, the young lady that is running is the RVP over the opportunity region. Literally cleared the decks for the center of Directors over a year ago, which we didn't even begin to do until mid-first quarter and the rest of the fleet.

So they see literally created no noise around what was important to her, which was the tour experience, the family experience, the quality of the teachers, the quality of the classroom and ultimately, driving growth through enrollment and inquiries. So I'd say to you that, that part is the part that I'm the most encouraged by because we have now done that in the total of 1,600 centers, not in 100 centers. So the second quarter and certainly, as we've mentioned in the call, our prepared remarks, the second half of this year, we feel much stronger about than we did 90 days ago.

Got it. And then when you're talking about the 15% inquiry increase among the targeted centers, 3% overall, just what percentage of the centers are you doing like paid or elevated paid search for? And just given that you're seeing the returns on it and he thought on expanding that to more of your geography [indiscernible].

Jeff, I think you were asking, given the return we're seeing on those would be spent in the more geographies?

Yes.

Okay. Correct. Yes. So single-digit percent of our centers. So we really wanted to target with marketing if we utilize different marketing tools at more of a localized level or a state level, what happens. And as you see those numbers overall, it's been positive. We've learned a couple of things from a couple of other states too that has a detractor, that hasn't been quite as rich. And so that allows us to turn a little bit more where we can pull strains. Will we -- anything that information to do better and think about more definitely. It's definitely something that's an ongoing conversation about where should we be utilizing our marketing spend and what should we do to make it robust.

So no direct plan to share with you today on that, but definitely going to make sure that as the data continues to play out, that is something that we utilize in making good decisions.

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

Your next question comes from the line of Toni Kaplan of Morgan Family.

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

Good question, Tony. So I'll call it try to call it out in my prepared remarks there, but let's me get super quick. At this point, our guidance is still just at closing the 1% of centers. And so we are just including that work now on which centers we do believe need the portfolio. A couple of next steps need to happen. One is determining the right timing for the community and for us. And a lot of that comes lease discussions. And so we are undertaking that right now. And so we will see closures happen kind of throughout the rest of the year. And so at this point, that's why -- we need to see how that goes before we're able to really give a good clear guide on much of those centers, we do think and when they'll be exiting the portfolio. And so that's why today, we're holding to that just [ 1% ] and then when we come talk to Q2, we'll have a much clearer picture and be able to firm up the impacts of those closures, both on revenue, but also on the bottom line for the year.

And then I wanted to ask about pricing. I think in the quarter, it was a little bit over 2%. I know the whole year guide is for 3. I was wondering if you are seeing any positives from either discounting or things like that? Has that been a factor in some of the increased conversion or things like that? And I guess, also, given that you're expecting 3 for the year, do you expect to sort of incrementally raise prices more as you go through the rest of the year?

Yes. Good question, Toni. So let's parse it a little bit. So on the private pay side, Our new prices and be on January 1, for -- and new students. And we're seeing those prices take hold just as strong as we have in the past and at a very strong rate. So that's a positive. And those private pay rates are above the 3% this year as we expected them to be. And we have not been doing additional discounting or anything like that outside of what we normally do, Toni. We continually find in this industry that there's places to do that. But again, the biggest thing about price is the value you provide. And if you provide great value, you're keeping your features, you have high engagement, price holds really well.

If you're not living up to those things for their families. A small discount or some discounts don't necessarily matter. So just to share that we haven't seen that. One thing we have seen, Tom mentioned it was our enrichment programs and small -- takeaway systems for -- and STEM and some other things are gaining some momentum, which is great. It's great for the family -- obviously the children and kindergarten preparedness. It's great for retention. The same is usually stay longer. And it's great for us as well. They're paying a little bit more into what they're doing, and that's helping a little bit too on the private-based [indiscernible] subsidy too. We're seeing more part in subsidy families than we've seen in the past, utilized that as well.

On the subsidy side, I mentioned it, but we are still seeing the impacts of India and some of the other states still impact us today. So a couple of things there. One, we'll anniversary those come in the back half of the year once we get out of this budget cycle. And based on everything we know there allows us to give us that guidance that we're giving you the 3% for the year.

I think we're starting to see some positive things. Tom mentioned Indiana has come out with some positive news after they thought through it a little bit, and that's definitely something that's going to be helpful for us as well. As we kind of recover from some of those things that impact us from the back half of the year on price and subsidy.

Your next question comes from the line of Manav Patni of Barclays. Please go ahead.

This is Roman Canady out for Manav. Can I please confirm how you're thinking about the role of closures versus turnaround efforts with all the initiatives underway. And if there is a threshold for exiting those underperforming centers versus endeavor to improve them with those initiatives and how that has evolved?

Yes. So look, we truly look center by center, every single one of our centers, right? I mean that was something we always do, right, when we get Tom, look me in the eyes, like we have to do that again. So a lot of that analytical -- we were able to get through quickly and then we went through every single one.

Why am I pointing that out? I'm calling that out because, yes, we know all these things that we put into place, right, as we've changed the tractor of what we're doing, and Tom's provided some, I think, clarity and simplicity for our field and what we can do. We thought about that we made each decision and made this list that now we're going to go analyze and take care of.

So if there's a center that checked all the boxes as far as demographics leadership engagement, et cetera. Those are some centers you might see us hold on to for another back-to-school session maybe or another year to see if this is going to work like we've got growth opportunity. These things don't flip on a dime and happen in the next one. So definitely some centers we're considering doing that. Other centers, we had a long conversation about -- we decided we still think it's the right thing entities for various reasons. And every center is a little different. Some of them could be, you know what, we can push these kids into another center closer and teachers into another one and the one that was a lease life or something else.

So truly a one for one. So I say all that, and then Tom, I now want to touch on it a little bit, too, but we are going to exit the centers that we don't believe should be with us in the next 3, 5 years and tomorrow, and we're going to make it so we have the strongest portfolio. So as we do have all of that focus that we keep talking about, we know our focus throughout the organization, from KinderCare center Director, logistic leader to our entity support is on all the right centers for the long run health of the company.

That was well said, Tony, I'll add only one thing. Just to put in perspective because you're asking what are we doing through the process. The process starts with the opportunity region. We send centers to the opportunity region that we know should have potential to improve. So we start there. And the good news is Christine is showing us they can, in fact, react and grow. And that's pleasing to us because we don't want to close any center we don't want to impact any child or, quite frankly, any employee. So the opportunity for us to start there and try to do everything we possibly can with leadership, with the plenty of the teachers, the inquiry, the enrollment work that we do, we do that first. And if in fact, we can't see a path forward that when we make the decision to close it. That's very helpful.

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

Yes. Of course, good question. Yes. Look, obviously, 2% of tuition, that's still continuing to outweigh our wage rate by a little under 100 basis points, so kind of in the 70 to 80 basis point range. So we're still creating some insurance wins, which we do every year. The majority of the rest to your point is the impact of that occupancy happening, right? And obviously, we're up against that I believe in the last [indiscernible] and normal other rent increases were up against normal other costs impacting that. They are putting pressure on the system. But those are things that at the level we're at, we're just not able to manage that, especially with labor.

So what's the next level, 70% a really key number that we always talk about. 70% is where we do really have on average, 2 teachers in the classroom, which means the staff of additional hours is really minimal. And so that's -- a term for the year. Getting back just a 3% we have off from last year. will be critical for us to kind of start building that margin. And everyone counts, but we're a couple of percent off from really a sizable one, where the margin really starts to [indiscernible] the right direction.

Your next question comes from the line of George Tong of Goldman Sachs.

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

George, I'd say how I feel. It's just allowing all the changes we put in place the clearing the decks for the center directors, getting the right formula and quite frankly, the amount of money invested in to paid search to have the right center directors and all the centers to getting people focused on growth in a much more purposeful way than they were even in the second half of last year.

That takes time when you have, in our case, it includes champions. We have almost 3,000 locations, 43,000 employees. It just doesn't happen overnight. The increase that we saw in the first quarter was -- it felt good to us. We felt like we were making impact where we weren't sure we were even going to see that.

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

Got it. That's helpful. You mentioned you're raising the EBITDA guide for the full year primarily to reflect outperformance in 1Q. Is there any reason why the margin outperformance in 1Q shouldn't repeat in future quarters, which would allow you to raise the guide even more?

Yes. Great question, George. Look, I mean there's a $5 million right that we're raising coming from Q1 is pretty much isolated to a couple of things that outperformed from when we talked to you guys in early March. One, we saw a few more brands come in than we were expecting, right? Grant has been something we talked about were last year. We expected this should to be lower than last year, and we're expecting still to be relatively close to kind of prepandemic levels.

Q1 came in a little bit stronger. And so at this point, we don't believe we have the visibility or transparency that believe that, that's going to reoccur for the rest of the year. So kind of help that amount and then expect the rest of the quarters to go still as we are expecting to start the year.

And then the rest was a little bit of labor favorability. So despite -- question earlier that -- it is harder to do labor here in this moment. We did see some favorable actions there with our labor a little bit around some timing, we believe, with spring rates and things in the quarter. So we do think at this point our onetime. And so that's why we're not going to assume that we can continue those be more quarters.

[Operator Instructions]. Your next question comes from the line of Josh Chan of UBS. Please go ahead.

I was wondering how you would contextualize the 3% enrollment decline versus the 3.6% in Q4. Would that be mostly the opportunity region. And then maybe relatedly, how is the enrollment trends in the non-opportunity regional centers kind of trending?

Yes, Josh, the opportunity, the opportunity region had a little bit better trajectory. And so a decent portion of that is coming from there. And then there's a little probably 10 basis points or so just related to some capacity changes as well as we look at that. And that's something we always talk about that we're trying to meet each community where they're at. everything else is staying relatively consistent, maybe 10 basis points or so amongst everybody else of improvement, but everybody else has remained relatively consistent so far.

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

Josh, I just would love to for you all. We are just in the throes of it right now, and it really comes down to looking at communities, looking at leases, negotiating with landlords to get out of them or not get out of them and decide how we will continue it as much as we would have loved to give you that color. We're not quite there on our own either. So I'm confident that come August we will be able to fill you in exactly where we're at and be able to talk about the impact definitely for '26. And I think we'll be at a point we'll be able to share some thoughts about the ongoing.

The impact of that would be both on revenue and EBITDA because that you'd expect we're going to exit the performing centers, and that's going to have a positive trajectory for '27. It's not at the place right give you precision right now, but will be in August.

I appreciate that. Thanks so much for your time.

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

Thanks, Miriam, and thanks to all of you all. I appreciate the questions. Very high-quality questions coming from you today. We appreciate it. Look, as we've outlined lately, since I joined the company back in December and certainly after the first quarter call, what we set out to do was to execute better and to reduce the complexity in our centers, invest in paid search to really help drive the overall growth inquiry that we need. And we're doing that. And we've seen good signs of it in every single one of our businesses. So we feel good about that.

Tony said it, and I'll say it again. At this point, it's all about execution. The demand is there. We have the opportunity. We have the largest brand in the entire marketplace and certainly have the trust of the families and respective families in our centers. So although there's a lot more to do, we're very encouraged by what we've seen and we're looking forward to updating you on the progress in the next quarter and quarters -- so thank you so much, and have a great evening. Thank you.

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

Good afternoon, ladies and gentlemen, and welcome to the KinderCare Fourth Quarter 2025 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, March 12, 2026. I would now like to turn the conference over to Ms. Olivia Kirrer, Vice President of Investor Relations. Please go ahead.

Thank you, and good evening, everyone. Welcome to KinderCare's Fourth Quarter and Full Fiscal Year 2025 Earnings Call. Joining me from the company are Chief Executive Officer, Tom Wyatt; and Chief Financial Officer, Tony Amandi. Following Tom and Tony's comments today, we will have a question-and-answer session.

During this call, we will be discussing non GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non GAAP financial measures are available in our earnings release, which is posted on our Investor Relations website at investors.kindercare.com under the Financials tab.

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

And with that, I'd like to turn the call over to Chief Executive Officer, Tom Wyatt.

Thanks, Olivia. Hi, everyone. I'm pleased to be joining you today in my first earnings call since returning as CEO in December. It is wonderful being back at the helm of KinderCare and leading this talented team. This company's purpose has been a significant part of my life for a long time, and these first few months back have been productive. The work we have begun to redirect our company back towards the type of growth I oversaw for 12 years is gratifying, and I'm looking forward to sharing more with you today.

Let me start with this. Our recent performance has not been where we expected it to be, and that responsibility is ours. In some areas, we fell short of the consistency and execution that families expect when they choose KinderCare. That perspective, along with the time I've been spending in our centers with our field teams, with clients and many of you has reinforced where we're executing well and where we need to improve. We must move with greater urgency, act more decisively, evolve how we operate and strengthen accountability across the organization.

Beyond our immediate business activities, I've spent time with lawmakers at both the federal and state levels, and I'm encouraged by the strong bipartisan support we're seeing for the childcare sector overall. We also continue to receive feedback from public policy officials about KinderCare's industry leadership. I'm proud that we continue to support working families in our centers while advocating for policies that strengthen access to quality, affordable child care.

That commitment is reflected in our culture as KinderCare was once again recognized as one of Gallup's exceptional workplaces for the 10th consecutive year. It is our educators and teams who bring our culture to life every day. Their unwavering dedication has been the cornerstone of our success as they build confidence in children and families across the United States even in years that test our resilience.

Last year was one of those years, as KinderCare delivered a mixed performance in the fourth quarter and overall throughout 2025. Concerns about inflation in the broader economy and declining consumer confidence magnified affordability concerns for some of our customers, creating a challenging environment. Confusion around federal and state grants further tested the childcare sector, although continued bipartisan support for childcare underscores the long-term importance of access to quality child care. The economic and policy landscape will continue to evolve as it has over our nearly 60 years in business, but our commitment to serving working families remains at the core of who we are.

With that context, let me turn to our results. Overall, we finished 2025 slightly better than anticipated at the end of Q3. Including an extra week in the fourth quarter this year, revenue was $688 million, up 6% from last year. Adjusted EBITDA in Q4 was $68 million. Adjusted earnings per share was $0.12, and same center occupancy was 64.5%, down 340 basis points from last year. Tony will walk you through the extra week impacts during his remarks.

While 2025 presented some areas of pressure, we made progress across our brands during the year. KinderCare, which accounted for 88% of our total revenue, continues to be the core driver of our overall performance. Our top quintile centers felt some of the headwinds during the year, while performance in our lowest quintile showed encouraging improvement. Much of that progress reflects the work underway in our opportunity region, which is a focused group of centers in our fourth and fifth quintiles receiving individualized leadership support to help unlock their growth potential.

At the same time, we continue to expand the portfolio through new center openings and acquisitions, including expanding into Idaho and extending our high-quality classrooms to more families and communities. In a market that remains highly fragmented and where the 3 largest providers make up less than 5% of the total market, our national network gives us a unique ability to responsibly expand access to high quality child care over time.

Our Champions before- and after-school brand continued to drive purposeful growth through an aggressive pace of new site openings and contributed 8% to the total revenue in 2025. Our newest brand, Creme Schools, contributed 4% to total revenue during the year. In 2025, we executed a focused reset of the brand, refined its positioning and strengthened operational and program consistency while opening 2 new schools. Early indicators this year are encouraging, and we are intent on building on that progress.

We expanded our B2B partnership in 2025, providing flexible childcare solutions to more working families while opening 6 new on-sites, the most in a single year for our company and bringing our total to 77 total employer-sponsored centers. During the year, we opened new sites for government clients in Maricopa and Montgomery counties for energy sector employees at Halliburton and most recently for health care professionals at UNC Health Johnston. As we deepen relations with more than 1,000 employers, we see continued opportunity for steady organic growth in our B2B business.

Overall, we continue to build on the capabilities in our brands that have long defined KinderCare when we operate at our best. But this isn't about looking backward. It's about moving forward with urgency and reaffirming the important role we play in supporting working families across the country.

How we ended 2025 is how we began this year. We're approaching this year with a clear understanding of what needs to be improved. This year is about raising the standard of execution across the business. That means improving how our centers operate, aligning spending with our highest priorities and taking deliberate portfolio actions among underperforming centers when needed, while continuing to grow responsibly through new center openings and acquisitions.

To reinforce that focus, we've changed our short-term incentive plan, so the incentive compensation is more directly tied to the financial and operational outcomes we expect to deliver. Going forward, all employees eligible for performance bonus will share responsibility for achieving our growth targets.

For the KinderCare brand, we are increasing marketing investments and expanding proven operational practices from our opportunity region. The path ahead for this brand reflects what we know and what we've learned, which will drive the next phase of our growth in our centers. What will be different begins with clarity about who we are and the experience families expect when they choose KinderCare. From there, it's about reaching new families, deepening engagement with those already enrolled and ensuring that we continue to earn their confidence every day from their first inquiry to the day their child graduates into Kindergarten. To help navigate this path, we have simplified some of our management priorities as Michael Canavin, the President of KinderCare, who previously led the brand through a period of sustained growth, has shifted from overseeing multiple areas of the business to a single focus on driving only KinderCare.

Creme Schools underperformed our expectations last year as we implemented significant brand repositioning. With that work behind us, Creme is now focused on translating those efforts into sustained enrollment growth through the refreshed curriculum we recently announced and targeted enrollment initiatives.

Champions is set for another year of strong new site openings alongside an increased emphasis on growing site-level enrollment. Across our B2B business, tuition benefit is as strong as ever, supported by our national network of centers that allows employees to access care at locations convenient to them. We're going to continue building on this momentum by expanding employer relationships, deepening client advocacy and improving utilization to drive stronger partnerships and long-term growth.

At our best, KinderCare is defined by strong leadership in our centers and sites, high standards in our classrooms, a differentiated educational experience, deep engagement with families and the strength of our national network. Our expectations for this year reflect enrollment trends coming into the new year and the actions underway to strengthen execution and center-level performance.

We expect this year to come with its own challenges. We will meet those challenges by building greater consistency across the business, addressing areas that have underperformed and working hard to reinvigorate our enrollment trajectory. Tony will go over our 2026 outlook in detail.

I'm encouraged by the progress we are making, the opportunities ahead and the dedication of our people. Our enduring commitment to families is what differentiates KinderCare within our industry, and I look forward to the impact we will continue to make together.

If there's one message I want to leave you with today, it's this. We understand where KinderCare needs to improve, and we're taking action. That work starts with growing enrollment, improving how our centers and sites perform each day and making decisive portfolio adjustments when needed. Results are going to take some time, but we're excited to do what it takes. And the work has already begun.

I'll turn the call over to Tony now to walk through the financial results and guidance in more detail.

Thank you, Tom. Starting with the review of the fourth quarter. Revenue was $688 million, up 6% year over year, primarily reflecting the incremental $45 million contribution from the 53rd week. On a comparable basis, revenue was essentially flat year over year. Tuition contributed 2% growth in our centers, and Champions delivered double-digit expansion, while lower center enrollment offset those gains. Enrollment trends in the quarter were consistent with our expectation exiting the third quarter.

At the center level, we saw the same dynamics. Same center revenue increased 6% to $618 million, driven by the extra week, tuition increases and the incremental contribution of new centers entering the same center pool, partially offset by lower overall enrollment. Same center occupancy for the quarter was 64.5%, approximately 340 basis points below the prior year, in line with our revised guidance.

Champions generated $60 million of revenue in Q4, up 12% year-over-year, approximately $800,000 of which was from the extra week. The performance was supported by incremental site additions during the year and continued client growth. In total, we added 128 net new sites compared to last year and finished with over 1,150 sites.

Champions and our broader B2B initiatives continue to diversify our portfolio and complement our community-based centers. We see them as important long-term growth drivers. And during the quarter, we expanded our B2B footprint with a new KinderCare for employers on-site openings, completing a record year of employer-sponsored site growth.

We also made progress across our other growth drivers. In addition to the on-site center, we opened additional 6 new community centers and added 6 centers through acquisition during the quarter. Alongside these growth priorities, we also closed 7 centers in Q4 as part of our regular portfolio management activities.

Primarily due to a noncash goodwill impairment charge recorded during the quarter, we reported a net loss of $177 million in Q4. The impairment was precipitated by market-based valuation inputs rather than changes in operating cash flows. It had no impact to our liquidity, debt covenants or ability to generate cash.

Adjusted EBITDA totaled $68 million for the quarter, which includes an approximate $12 million from the additional week and was helped by some incremental labor savings during the holiday period. Adjusted EPS was $0.12, up $0.03 from the prior year. SG&A to revenue was 10.7%, down compared to the prior year, which included some elevated IPO-related costs. We are now starting to lap the additional ongoing public company costs, and we'll begin to have more normalized comps in our coming quarters as we remain focused on disciplined cost management and operational efficiency.

Interest expense declined significantly year-over-year, reflecting debt repayment and repricing actions completed following the IPO. These actions have lowered our structural financing costs and positioned us with a stronger and more resilient capital structure as we entered 2026.

Looking at the full year, including the 53rd week, revenue increased 2.6% to $2.73 billion and adjusted EBITDA increased just under 1% to $300 million. Adjusted EPS was $0.70, up from $0.40 in 2024. Same center revenue increased 2.5% to $2.49 billion, reflecting tuition increases, centers entering the same center base and the extra week in the year, partially offset by lower enrollment.

For our long-term growth levers, tuition growth for the year was 2.2%. This reflected lower-than-usual increases in subsidy reimbursement rates, along with the underwhelming performance at Creme. Same center occupancy declined 200 basis points for the year to 67.8%, as the early softness we experienced last year persisted through the back-to-school season and into year-end. We ended the fourth quarter at 64.5%, which forms the starting point for 2026.

As many of you are aware, we group our centers into quintiles ranked by EBITDA in order to better evaluate the performance during the year. Centers in our top 3 quintiles continue to hold a high average occupancy of almost 79%. Additionally, in 2025, as in 2024, about 60% of our centers were over 70% occupied. Champions and B2B initiatives contributed about 1% to revenue growth.

We opened 14 new centers during the year, which contributed about 20 basis points to revenue growth. We also acquired 26 tuck-ins during the year, which contributed about 60 basis points. The revenue contribution from new and acquired centers, including new on-sites for the year, was $23.5 million. Cash consideration for the 26 acquisitions was $23 million and was funded completely out of the $110 million in free cash flow generated over the year. Partially offsetting our center growth were 19 closures, which came out to about 1% impact to overall revenue growth.

The primary drivers of the income statement were consistent with what we saw in the fourth quarter. SG&A was more in line with our ongoing run rate compared to 2024, and interest expense declined substantially over the year following the balance sheet actions taken post IPO. For the full year, we reported a net loss of $113 million, largely attributable to noncash impairment recorded in the fourth quarter.

Adjusted EBITDA margin for the year was 11%. While enrollment softness created top line pressure throughout the year, disciplined expense management helped preserve overall margin performance and better aligned our cost structure with our current enrollment trend. Adjusted net income increased to $83 million from $39 million in 2024.

We ended the year with net debt to adjusted EBITDA of 2.6x, at the lower end of our targeted range of 2.5 to 3x, which we believe provides a stable and resilient financial foundation. While enrollment remains below prior year levels, the operational discipline implemented through 2025, particularly in our opportunity region, positions us to operate with greater consistency and control.

Looking forward to 2026, our outlook is informed by the enrollment patterns exiting last year and our initial read on the first quarter performance. We expect revenue of $2.7 billion to $2.75 billion for the full year as compared to $2.69 billion on a 52-week basis in 2025. As the Q4 trends have carried over into the new year, lower enrollment in our largest brand is weighing on our top line, offsetting benefits from tuition increases, which began taking effect in early January.

The enrollment outlook is driven by year-over-year challenges overall in both private pay and subsidy enrollments. We expect enrollment to improve gradually as we move towards our summer out period, although we do not expect that growth rate to surpass the rate we saw in the first half last year given our current trends. Therefore, our full year expectations reflect regular seasonality from a lower starting base as the actions we have taken to stabilize occupancy and improve performance have an opportunity to drive comparable enrollment and occupancy improvements in the second half. We will continue to maintain a healthy spread between tuition and wages.

Adjusted EBITDA is expected to be $210 million to $230 million this year, down from $288 million for the comparable 52-week period, driven mostly by lower occupancy, a reduction in grants versus 2025 and increased marketing investment aimed at driving our top funnel activity for targeted centers. Consequently, we're projecting adjusted EPS to be $0.10 to $0.20, down from $0.62 for the comparable 52 weeks in 2025.

Our full year guide assumes tuition to drive approximately 3% of revenue growth and be fully offset by a 3% decline in same center occupancy. Our other growth lever assumptions are expected to continue with their growth trajectories with Champions and B2B contributing about 1%, and the new center openings and acquisitions contributing approximately 0.5% to revenue growth each.

Additionally, we expect revenue growth to be impacted by about 1% for the 15 to 20 closures, which normally act as an offset each year. Our guide does not assume any closures beyond that, although we will likely take additional targeted actions where appropriate. We expect free cash flow to be between $35 million and $40 million and CapEx to run about 5% of revenue for the year, with most of that CapEx directed towards growth. For modeling, you can assume our effective tax rate to be around 27%.

We do not plan on regularly providing quarterly guidance. However, since we are so close to quarter end, additional color will be helpful. For the first quarter, we expect revenue to be in the range of $664 million to $674 million, adjusted EBITDA to be between $45 million to $48 million and adjusted EPS to be about breakeven. These expectations are underpinned by the drivers we've outlined for you already as the lower base and enrollment trend carries over from the second half of last year and creates an unfavorable comp versus the first quarter last year.

Enrollment remains below prior year levels, and our outlook reflects the starting point. The actions taken last year and those underway now are intended to position the business to exit the year on a better trajectory. Our priorities for 2026 are clear: stabilize occupancy, improve performance in lower performing centers and take decisive portfolio actions where needed while maintaining financial discipline.

Operator, let's go ahead and open up the line for questions.

[Operator Instructions] Our first question comes from the line of George Tong from Goldman Sachs.

So you're guiding to 8% EBITDA margins in 2026 at the midpoint. That's a pretty significant drop from 11% in 2025. Can you elaborate on some of the key factors causing this sharp drop in margins?

Yes, of course. George, look, the first thing I'd start with from your 11% is the extra $12 million we had in the 53rd week, right? So that's not going to duplicate, and that 53rd week is always a lot more profitable given the time of the year.

From there, the big call out is really all about those FTEs, George. Obviously, on the top line, that's impacting us. But as we have that lower occupancy expectation, that's the biggest thing that we're deleveraging, obviously, with that, and that's impacting all the way down to margins.

We -- the other call out kind of made there was grants. We knew in Q1 of 2025 that, that was kind of going to be the peak of the year, and it turned out that way as the states were kind of reacting to their funds rolling off. And we're seeing that in the back half of last year and expecting it to kind of stabilize back to normal pre-COVID levels this year as well. So we're seeing that. But it's all about FTEs at KinderCare, George, really, and that's the biggest impact on margin.

Got it. That's helpful. And I noted the part where you mentioned the goals at the beginning to move with more urgency, to act with decisiveness to strengthen accountability. Can you talk at a high level about what your top priorities are to achieve those initiatives for the upcoming year?

Yes, George, this is Tom. It's good to talk to you. I -- we have done a number of things. One of the specific things that we did -- well, let me start with we feel really good about the business we have in the at-work space. That business is growing for us. It's solid. It met last year, and it's on plan this year as well.

We feel the same way about Champions. Champions had a great year last year. They're on track to have a great year this year, double-digit increase as well. So this is all focused on KinderCare, and it's all focused, as Tony just mentioned, on enrollment.

What I'd tell you we've done is we've taken Michael Canavin, who is the President of KinderCare, who was also managing other businesses for us in 2024 and 2025, and we moved Michael back to just KinderCare. And when Michael joined me, quite frankly, back in 2012, 2013, he was totally responsible for KinderCare. And he enjoyed and led, quite frankly, the growth that we had during those years. So that's number one. We want to put Michael back in charge. We want Michael to not have any distractions from KinderCare and work on enrollment.

The second thing we did is we cleared the distractions of the center directors, which were many. When I got back to the company, there were a number of activities going on in the centers that were distracting candidly, and we've taken those out, and we've actually seen already some improvement from that in activities, including enrollment. So we feel better about the role of the center director, making them the center director they want to be, and that is introducing KinderCare to more families, more children and going from that standpoint.

The third is that we added significant investment in paid search for the first half of this year, and we're contemplating doing the same thing in the second half. We are seeing trajectories there we haven't seen in a while. We actually have an increase in number of inquiries year-over-year, which is positive and feels good to us. And that's something that we're going to continue to build upon.

The last thing I'd tell you is that we changed our incentive compensation program. It's always had growth as a part of it, but we this year made it literally 100% focused on growth, on profitable and FTE growth for all aspects of anyone that's in the incentive program.

So those are the key components that we've done. The big ones being Michael to me. Obviously, paid search is already showing signs of life. And clearing the distractions, we're allowing our center directors to be center directors, candidly, and they haven't been for about 1.5 years.

Our next question is from Andrew Steinerman from JPMorgan.

Tony, you moved a little quick for me on the prepared remarks. Could you just give us, for the quarter just reported, the M&A revenue contribution? And then within the context of the full year guide on occupancy being down, and obviously, you can't really do anything at the immediate front, of course, that's kind of where we are going into the year. My question is sort of the pacing throughout the year. Like, for example, by the time we get to September enrollments, is there an expectation that occupancy could be flat by then or maybe by the end of the year? Just kind of a sense of the pacing of the year.

You bet, Andrew. So revenue from acquired centers was $6.2 million in the fourth quarter, totaling $14.9 million for the full year from our acquired centers this year. Of course.

Let me give you a little commentary on just kind of how the year trends and then, Tom, if you want to add anything just on where we could go. Our guide at this point, Andrew, at our 3% down on FTEs assumes a curve that is, for the most part, similar to last year and what we've seen historically, really primarily last year and a little bit of the back half of '24 and so utilizing that guide. So what do I mean by that?

We will continue to grow incrementally, and we have been even this year, and we did from week 2 all the way until about week 20. It's kind of towards the end of May. And we'll grow incrementally every week up into that point, where the end of May is usually our high point. At that point, we call it kind of summer's out, and that's an inflection point for us.

So we'll lose a handful of families to some different summer decisions. We'll also get a lot of more incoming families from some of their summer decisions. That's a big inflection point that we're building into now with our marketing and reach out with our families as early as right now. And that's an inflection point to start to hopefully add some more students at that point. We'll hold those students over the summer. And then back to school is obviously the big one, another big inflection point. I think you guys are all aware of that.

The current guide assumes pretty consistent performance to last year, but both those inflection points give us the ability to break those curves. And so Tom, if you want to touch on...

Yes, I'd like to. And sorry? I'm sorry, I thought someone said something. Anyway, I'd like to add this. Number one, I don't accept that curve, just to be honest with you, because -- and call me optimistic. But look, when I came to this company in 2012, the company had experienced 13 quarters in a row of negative top and bottom line. I joined in February of 2012. And in July of that year, we went positive, and we stayed positive all through, to include, to COVID.

So this opportunity for us to change the trajectory of this business is significant. And by offering the opportunity for our center directors to be more focused on enrollment; to add paid search, which we didn't do back in 2012, we just did it organically; and to bring Michael back into the fold as being the head of the driver, the leader he was back then are significant. So we're being conservative or we're being thoughtful with using the curve from 2025, but I'll be very disappointed if we stay with that.

Our next question is from Jeffrey Meuler from Baird.

Yes. I guess it's going to be a similar question to what I asked last quarter, but maybe, Tom, in the context of just comparing how you view the industry structurally today to when you joined in 2012. KinderCare is not the only player in the market that's had tougher enrollment trends over the last year, and we're always trying to sort through to what extent that's cyclical and to what extent that's structural and to what extent execution plays a role. So I would just love your views on maybe the structural health of the industry or what's kind of evolved over either since you last joined or since you last stepped out of the CEO seat.

Yes, happy to. When I joined in 2012, the business was as it had been for, quite frankly, decades, growing at a moderate rate of 1% to 3% a year in occupancy and quite frankly, in just FTEs naturally. It was only after the pandemic that we saw this, if you will, pressure on growth.

As far as the industry is concerned, what I see happening is the strong, if you will, the scaled larger providers are staying strong, although they are obviously challenged by enrollment and occupancy. But the issue I see now that the monies from the pandemic, if you will, ARPA monies, that kind of thing are gone, we're starting to see a contraction of the mom and pops or smaller providers; and quite frankly, we're seeing that even in the centers that are offered up to us to purchase.

So I believe you're going to see this year and quite frankly, I've been -- I've asked Parthenon to do some work for us because I believe that you're going to see a contraction of smaller players in 2026, and you're going to see us as the providers, us being the larger providers, continue to scale and continue to find ways to potentially gain share.

I gave you an example of that. I said this to my team yesterday. If you look at the top 3 players in this business, it's obviously us in #1 slot. It's Learning Care Group who's #2 and then Bright Horizons. If you look at all 3 of those, they barely come to 5% of the entire share of market of early childhood education. And we're at like 1.8%, 1.9%. It baffles me that without -- with aggressive approaches to marketing, aggressive approaches to the quality that we do, aggressive approaches to allowing our center directors to be high-quality providers of the relationship that they have, the effort they're making, the tours that they're taking, the time they're giving families, I feel like we will continue to grow. And I think there will be a few of us that emerge in 2026 doing just that.

I don't think the entire market is going to grow in 2026. I think we're going to see more of what we saw in 2025 because of the economy, because of the -- if you would, just the instability of things that are going on in our environment. But I do believe the opportunity for some of us to get into another lane, make an effort at what we're doing, put more emphasis on growth, we'll get there. It's my opinion.

Okay. And then I think you said twice in your prepared remarks that you fell short of the consistency that families expect. My prior understanding was the challenges were more on demand or inquiry conversion, but existing family retention was good. So maybe if you can go into more detail on what you meant by fell short of the consistency families expect. And was that directed at existing families and retention? Or was that more on inquiry conversion?

No, our retention, I'm pretty happy with. It's been stable and actually grown a tiny bit. So we're fine there. We have not seen any slippage to say. Where I was speaking to specifically there is, and I go back to my comments earlier, is that we didn't allow our center directors to be center directors. They were bombarded with a number of things that really distracted them from the core effort of what they do, and that is taking care of families, being in the classroom, recruiting great teachers and creating the environment they have.

They weren't able to do the tours and do them in the quality way that they've done in the past because they were busy. They were distracted. And the opportunity for us to give them back the time to do a high-quality tour, to be in the classroom, to empower their teachers, do all that is what we do well. And quite frankly, we're getting back to that.

Our next question is from Manav Patnaik from Barclays.

This is Ronan Kennedy on for Manav. You spoke of bipartisan support but I think also acknowledged confusion around the federal and state grants further testing the childcare sector. Can you talk about -- there have been a fair amount of headlines, I think, early in the first quarter and throughout, whether it's the HHS Defend the Spend or even some headlines on a state-level budget cut standpoint, whether it's administrative throttling or reimbursement rates. Can you talk about those dynamics and the impacts for first quarter and what is anticipated or contemplated in the guide?

Happy to. And I'll tell you, in the first 90 days -- I've only been here 90 days. But in those first 90 days, I have been to Washington and visited with senators and congressmen and women, basically combating, if you will, and defending our approach to CCDBG and our integrity around that.

Minnesota was a curveball, and it happened right at the end of December into January. And we flew, I think it's the second, maybe third week, so 6 CEOs and I flew to D.C. to ensure the government officials that we were not the problem. We were the solution. And candidly, they agreed with us.

And we have worked with them to be sure that they are looking at things, that they're setting up the right corrective actions to feed out and flesh out any possible fraud that they -- may occur or might occur in that part of our business. And what I came out of that meeting with -- we met with the head of that, Alex, and forgive me, I don't remember his last name, but a great guy who works for RFK and literally is the top player in that arena. He feels very good about where the major providers are and has no intentions of freezing any funds or slowing any funds down. the first quarter, we will see no impact to that. And quite frankly, we don't see an impact to it this year.

I'd also tell you that a week after we were in Washington, they actually raised the block grant $85 million more, so about 1%, not a lot. But it's a lot better than freezing the funds, candidly, and it was a lot better to see a bipartisan support function increasing, although increasing the CCDBG, the block grant.

I also spent time in February in Colorado, and I'll be spending time in the next week in Massachusetts. I'll visit with the governors there and the lieutenant governors there and also the Head of Education in those states. And it's all to -- I've done this all my career in this world. I've always wanted to get out, and I wanted to meet with them and be sure they realize the emphasis and impact that we have on hard-working families and quite frankly, the development that we have on children.

So we are taking a very strong offensive stance to that. I've got a meeting in May with 8 of the CEOs, the top CEOs in the country, just those folks to have a strategic session with them as well. And all of that to say, I feel good about the -- if you will, the block grant. I feel good about subsidy in total. We don't see any interruptions to it. And quite frankly, we feel good.

Now I will tell you, we've had some manipulations in state funding. And so some states are allocated more. Some states are allocated less. But for us, being in 41 states around the country, we may see an interruption of a couple of funds or dollars in one state, but we pick them up in the following state.

So all in all, something we have to be all over. And quite frankly, we have a staff of a few hundred that administer the subsidy disbursements in our company. And quite frankly, that's a -- quite frankly, a competitive advantage we have in that space.

Appreciate the insights there. If I may, please, I'll shift gears. You had referenced being willing to take deliberate portfolio actions among the underperforming centers. I don't think the guidance contemplates that. It was referred to, if I'm not mistaken, as a possibility. But can you help us understand that decision framework, there's a level of occupancy margin or even trajectory that would trigger, say, a center-specific targeted initiative for improvement or a potential exit and then what the total impacts of those could be for '26, please?

Yes. So Ronan, look, here's what -- in the guide, we just have -- we've been doing 15 to 20 per year in the last few years, and you all know that. And so as we build out our guide and where we're going for this year, we did that.

One of the things that Tom has asked myself and others, as he's been here and taking things in, is to do another hard look at all of our centers and revalidate that all of our centers are the ones that are going to take us through '26 and into 2027 as we get all the FTEs back across this fleet. So we are, frankly, in the middle of taking a hard look at all of our centers.

And the things you're talking about are the ones that are important, demographics, occupancy, engagement and all of their trends. And we're taking a hard look at that now so that we can come back and look ourselves in the mirror that we have the right centers going forward. And that's likely going to be a higher number than 15 to 20. We're just not at the point now where we can give you that number because I don't even have it, but we're working through it.

And I'll just add one comment. I'm an [ ex retailer ], and you know that when you have a multisite business, you're always evaluating all your centers. You're building some. You're closing some, and you're decorating some others. So all of that is what we do.

And I just came back with a heightened awareness of that and wanted to be sure that we were as current as we can be. And Tony has done a phenomenal job with that. But I did want to take a little bit more aggressive approach, candidly, from looking at it given the enrollment trends of the last year, 1.5 years and just be sure that we were where we needed to be.

Our next question is from Toni Kaplan from Morgan Stanley.

I was hoping that you could just delve a little bit more into the enrollment issues. It's been asked in a couple of different ways. But I guess, how much of it do you think is market-driven versus self-inflicted? What could drive the enrollment better or worse than the down 3% in the guide? And I guess, the specific things that you're doing to try to sort of stem the decline here, I know you talked about personnel and paid search and incentive comp changes, but just any very specific like things that you're doing to try to drive enrollment and what you see as the real core issues on the enrollment side?

Happy to, Toni. And I'll start with something we haven't discussed yet, and that is, as you know, we've had some very good success in our -- solid success in our opportunity region in 2025. And I can tell you that the first quarter of 2026 is still performing above where it was before, and we're very excited about that. As a matter of fact, we've taken many of the best practices out of the opportunity region, if you will, and we've actually implemented those in all of our centers for 2026.

Other than that, I'd say that there are macro situations that we're in. I go back to inflation, just the economy in general, the instability of our country right now, all -- even the work environment, I mean, people are still figuring that out. All of those have played or have been noise in, if you will, the aspects of enrollment. But I'd tell you, to me, enrollment for us has been self-inflicted for the most part, and not totally but for the most part. I actually believe, when I look at the amount of activities that are going on in the center that do not pertain to enrollment, it's been significant. And I really believe that we get our centers back to and our center directors back to focusing on introducing KinderCare to more families, being a part of the community in a bigger way, doing the things that they need to do to create that kind of interest and enthusiasm, we'll do much better.

On top of that, please don't take anything away from the paid search that we've spent. We've spent millions of dollars there that we haven't spent in the past. And it is showing increases in the number of inquiry we got, not only the number but also the quality of inquiry. They're coming to us. They're literally, if you will, in real-time being spoken to. I mentioned earlier about the distractions we had.

If someone inquires to KinderCare, they're obviously looking at other centers or inquiring at other centers. If we don't get back to them quickly, they may make a decision by somebody else's proactivity. Our centers today now have the time and the effort and the focus and priority to go after those inquiries as quickly as they possibly can.

So it's -- and I mentioned Michael earlier, getting Michael back into it. He's an operations guru and opportunity for him to be out in the centers, be sure that they're focused on these things, reliving all the things that he accomplished in the years past, I believe, is going to make it all come together. And the fact that we started the year literally communicating that growth is priority one, including the change in our compensation program for the whole company, I think those are the right signals to send, and I hope they're going to bring forth the fruit we've got.

Great. And then thank you for the update on the quintiles chart. I noticed, obviously, that the top 4 quintiles had deteriorated a little bit year-over-year; and obviously, the fifth got better. I guess when you think about those top 4, like are you concerned that those are going down? Like what's the right level there? And then maybe the other question is, I guess, when you think about these -- the quintiles, what -- are there different problems in the first quintile versus the third quintile? Or would you just generally put quintiles 1 to 4 in the same bucket of suffering from the same trends?

No, I would say to you, quite frankly, the top quintile is our highest quality center. It's the center that has the most stability in it. It's the center that, quite frankly, has the highest family engagement, the highest employee engagement, and it goes down from there.

And what I'd say to you is each one of them has individual challenges. But for the most part, I would say to you, the reason those higher quintile centers were down, it goes back to the distraction of the center director, in my opinion. They didn't have the opportunity to do what they needed to do, and they were highly occupied to begin with.

So the opportunity to take the opportunity regions best practices to those other quintiles, if you will, is going to help them. That along with paid search, that along with clearing the decks for the center directors to be center directors, all of that is going to help those grow. And I'm not at all concerned about those quintiles going forward. Quite frankly, they're the ones that we, quite frankly, poured the marketing towards, and that's where we're going to go.

Our next question is from Jeff Silber from BMO Capital Markets.

This is [ Ryan ] on for Jeff. Just on the pricing algorithm, I understand the age of methodology, but it looks like you were around 2% for '25. Just from the conversations with parents, what is the appetite for the 3% price increase you're layering in this year?

Yes, of course. Yes. So I think as a reminder, the tuition that we talk about as a company is the mix of approximately 2/3 private pay, 1/3 subsidy families. So our rate was actually higher than 3% last year as well on the private pay side. And really what pulled us down this year was some of those states, Indiana being the big one, but a few others, too, in really that back half of the year, where we saw additional displacement from those private pay rates with what we are getting from subsidy.

So, so far, we're, what, 9 weeks into the year, and it's been really quiet as far as our new rates and so feeling good about that. And again, as a reminder for everyone, when we put those new rates in on January, they are for new students and age ups. And so it's not really as much of a price increase conversation. Virtually all of those families that age up are still actually going to be paying less than they did the prior week even with that at embedded price.

So the way we do that really helps with those conversations and helps the families feel solid about it. And we're making sure we're living up to the value we need to give those families. Even with those price increases they're not feeling, we need to be able to speak to the value they're getting from them.

I appreciate it. And then you talked about some early wins on the selective marketing front. Just wondering how you're measuring that and when you expect to see some of those results come to fruition and we'll see it in the P&L.

The great thing about paid search, and I'm sure you know this, but -- is that you can track it all the way from inquiry to tour to actually enrollment. And we're doing every bit of that. And quite frankly, with AI, the amount of data we're getting and just capturing is phenomenal. And what I was speaking to earlier, quite frankly, was just year-over-year growth in inquiry.

If we have more people inquiring for KinderCare and we're giving our center directors more time to generate a tour and generate the opportunity and conversation around enrollment, we'll win. And that's the approach we're taking to it. So it starts with just getting if -- traction in the number of inquiries that we have year over year. And that has shown up.

It has shown up significantly for our smaller brands, and it has shown up in an increase in KinderCare as well. So all in all, that's encouraging to me. And I go back to my comment earlier about we're less than 2% of the share of market in this business. If we're going to be aggressive and we're going to increase inquiry, and we're going to give center directors the opportunity to do their job, the opportunity for us to grow enrollment is there. And so the opportunity now is all about execution, and that's the approach that we're taking.

Our next question is from Josh Chan from UBS.

Tom, if somebody suggests or asks you whether growing enrollment is tougher now than it was 10 years ago, kind of like how would you agree or disagree with that?

No, I actually believe -- let me explain to you why I'm going to say what I'm going to say. Enrollment after a family decides, one, that they are proud of the brand, this is a brand they want to be associated with, inquires about potential openings in their child's age group and then shows up for a tour, the actual opportunity to enroll them has not changed. They've -- we are one of the very few companies that actually show them how much KinderCare costs for their child in the classroom, in their community. So they come to our center knowing that.

Quite frankly, this industry doesn't do that as a practice, and we felt like we should be transparent, so we don't waste someone's time. If they can afford KinderCare and they want to see the actual experiences a child has in the center, please come. And I can tell you that, by doing that, we have seen better enrollment as a percent of the total inquiries and tours than we saw prior to that. So it's not a problem.

And I think you have to understand that if a family is, one, in need and secondly, have chosen the #1 brand in the country, KinderCare, and then have come in to literally take a tour and be with our center director and spend some time in the classroom, we're pretty darn confident we can win that tour.

Okay. That makes a lot of sense. And then kind of a financial question. I guess if you take out the 53rd week in 2025, then your guidance assumes kind of slight revenue growth in '26 but then a $60 million plus EBITDA drop. I guess, does that contrast surprise you? I know that there's enrollment and deleverage and things like that, but that just seems like a very large contrast between the top and the bottom line there. Is there a way to kind of conceptualize that?

Yes. No. I mean a little bit to what, I think, George asked, too, as well, right? The biggest driver there, truly, Josh, is the deleveraging and what you see as those enrollments go down. Your -- just the basic fixed costs, rent, center directors and some of the other fixed costs, obviously, you're getting no leverage off of that at all. And it is harder as you drop down, especially kind of into the 60s where we're at on average across the fleet there to make up the teacher hours. You're not making up many teacher hours by dropping enrollment, and so that's really falling off. And that's the biggest impact that's really happening.

We're high single-digit millions of grant loss, probably around $7 million to $9 million -- actually probably closer to $10 million, I guess, year-over-year, with most of that being in the first half of the year of our expectations of what states are going to do to grants, which really normalizes in '26 back to where it was pre-COVID, is our expectation.

And then the other one is some of this increased marketing as well is in our expectation there. Now that should pay off for us over time and even in 2026, but at this point, kind of factoring that in, more weighted towards cost than the upside we'll see from it.

There are no questions at this time.

Chloe, thank you. And everyone, thank you for your time today, and we look forward to talking to you again very, very soon. Thank you so much.

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

Awesome. Well, thank you guys for joining us. This is the business services track at the Ultimate Services Investor Conference. I'm joined now by Tony Amandi, the CFO of KinderCare Learning Companies. My name is Judson Lindley. I'm an analyst on Andrew Steinerman's business and Information Services team at JPMorgan. And the format of this fireside chat will be 20, 25 minutes of Q&A for me, and then I will open up the floor to see if anyone has any questions. But thank you for being here, Tony.

Thanks, Judson.

Yes. So we've just kind of passed the first year anniversary of KinderCare as a public company. So I thought maybe just to start, I'd give you a chance to assess what has been -- I think you would probably admit a little bit of a bumpy first year. So maybe take us through the plans you laid out at the IPO and what's transpired since then?

Sure. So I'm guessing everybody knows, but let me take a quick step back. So KinderCare, our biggest focus is early childhood education. So we do that through 1,600 centers, the majority of which are community-based. We have about 75 centers that are on or near site. And we also utilize all those community ones for employers business as well to get them involved in our community centers. And then we also have our [ Creme ] brand, which is a premium brand that's in there. It's about 45 centers that are for those that want to spend a little bit more, I have a little bit different services. And then Champions is our before and after school brand. It's about 1,000 sites at -- predominantly private schools, but some charter schools as well.

So -- yes, we're about at the IPO mark about a year ago. So the biggest transpired is we've got 2 things going on really. One, the macroeconomic environment, probably a little tougher than we thought it was going to be a year ago, right? Administration change, some noise about Department of Education, neither one is really applicable to us, but there's definitely some noise around that. And then the macroeconomic environment definitely is hanging over us a little bit in decision-making that's happening for our centers.

That said, we know like at our local level, there's things we can do to impact that. And so that's really been the focus in the last 2 quarters of what are we doing at a local level despite those macroeconomic conditions to get those families that are inquiring, and we're still seeing adequate level of inquiries at our centers to get through and really get those enrollments we need to kind of get back on the [indiscernible].

So maybe just to dig a little bit deeper there. I mean, I'm not asking you to split it out evenly because you probably couldn't. But how much of that, let's say, the declines in enrollment do you think are down to idiosyncratic issues at underperforming centers versus the unfortunate scenario that we find ourselves in with the economy?

Yes. Well, it's really hard for us to parse it. So like on one hand, we know that the macroeconomic is clearly impacting us, right? Consumer sentiment is down. Every family of really any means is making decisions about how they spend that next dollar. But what I'd start with is that we're still getting plenty of inquiries at all of our centers in order to get to the occupancy levels we want to. And so despite the overhang over the whole all of our 1,600 centers, when we really look at center by center, we really work with that local one of what's going on there and what could they do better because I've been saying it this week, but like in the end, that one center take away the city because most of our centers aren't in the city here, you got to get 80 to 100 kids within a 5-mile radius to enroll with you.

And so you can overcome a macroeconomic environment like this if you're doing the inquiry to enrollment process right and you're doing retention right. And we're doing a nice job with retention. The families that are with us are staying actually slightly better than they did a year ago. So the families that are with us are seeing the value and sticking with us. It's been a new student enrollment issue for us. And we're just really trying to lean in on that to help them diagnose where in the funnel part of it, they could do better and really trying to help them do that.

So maybe assuming the macro environment does get better, which at some we hope it will. Maybe talk a little bit more about the things KinderCare is doing at the center level, specifically in your -- maybe your bottom 2 cohorts to improve performance and take occupancy higher.

Yes, perfect. So we start -- let's start with what we call the opportunity region, which our opportunity region is about 150 centers. So it's about half the size of the quintile. It's predominantly Quintile 5, which is our lowest performing group of centers, a few from Quintile 4. And we carved that group out at the start of our Q2, so back in April to really focus on them. The 2 things going on there. We're predominantly new center directors. So we need to kind of speed up their training and their focus and then really working that inquiry enrollment funnel. We gave them and kind of testing out a couple of new diagnostic tools to help them with that inquiry enrollment funnel to really help them, and we're seeing some nice lift there. So opportunity region, despite the company being down occupancy, opportunity region is actually up in occupancy and is kind of through Q3 here, our fifth quintile is actually up about 200 basis points year-over-year despite the whole one down.

So definitely have some optimism in what we're seeing there. Quintile 5 is the one of our kind of 5 quintiles that isn't back to pre-pandemic levels either. So coming into the year, it was about 10% behind. Quintiles 1, 2 and 3 were all surpassing pre-COVID and Quintile 4 is about right at. So there's a lot of opportunity there. Obviously, the acronym again, but to get that up to better levels. That said, we think we can spread that to all the rest of the centers, too. So we've had a big inquiry to enrollment focus throughout the mall.

Coming into about a year ago, we really started rolling out a lot of new tools for both our center directors and families. We have an occupancy whiteboard that's digital that really helps the center director and district managers know where their future spots are going to be opening, so they know where they can really focus more. We've made a lot of improvements to Family Builder, which is our sales force tool we use to -- use the inquiry to enrollment funnel to give the center directors a lot of help with that. We've done things like online scheduling, which sounds super simple. But if you rewind a year ago for us, you had to call a center director and be by their calendar and your calendar to schedule one. Now you can just do that online, something like that, that takes time to get through the process because center directors were using it, but they'd use it and they'd open up their schedule from 10 to 11 and let families choose 10 to 11, and that's not really the point of having that system.

So it's kind of getting them to buy into the process of like open up your whole schedule, it will be okay, and they'll let families choose when they come to that. So we're going through a lot of that adoption and kind of fighting some of the past things when everybody used to walk in our call and it's 2025 going to 2026, that's not what families do anymore. So trying to give them a lot more tools and then leaning in with more to get them -- get those enrollments higher.

Definitely understand how that could lead to higher conversion. Maybe to take a step back again to something that's maybe a little bit more out of your control. The other dynamic with the third quarter earnings was the subsidy business. So maybe just start and sort of talk to us about what actually happened in the third quarter?

Sure. So I'll take a step back even from the third quarter. So our subsidy business is about 1/3 of our revenue. And so that comes at the individual state or local levels. The majority of that money starts at the federal level. So the federal block grant gets pushed down to the states, the states decide what they want to do it. They sometimes give the state level, often push it down to lower levels. And at that point, the states are making determinations on what they're going to reimburse for reimbursement rates, how many spots are going to open and what the income level they're going to have that needs to be below to cut into that.

So year-over-year, the beautiful bill kept the federal levels flat which is good for us. Of course, we'd love higher, but it kept them flat. We've got a couple of years, 2012 through '16, that whole run, the block grant was pretty much flat, and we are consistently growing subsidy over that time period. '18 and '19, it was flat, and we actually grew 6% in subsidy in '19. So it being flat is fine. We can take market share there, and we feel good about that. So flat is a great start for us. From there, the states determine do they want to add some more money in or not from their local -- their own coffers. So Nevada is one state, I know off the top of my head that doesn't add anything, which is fine. They have a nice program there, and they use the federal dollars and don't add anything in.

Indiana was one that over the last couple of years was actually kind of the highest contributing one out of their own state dollars. So what happened with Indiana was they went to reconcile their budget this year with all the things going on in their state and made the determination to cut back both on rate and spots, which doing both is unprecedented and for either one that they did were both unprecedented things we hadn't seen. So on rates, they cut back rates depending on age between 10% to 30%. We've never seen a rate cut like that by a state. And then they cut about 13,000 spots. And those 13,000 spots, just due to the turn you have at back-to-school with kindergarten going out and people moving out during the summer happens really quickly. So that's pretty much all played through all the way by September. So that impacted us about 1,000 subsidy students by the end of September and all came pretty fast and quick test.

The follow-up question you want to ask, so I'll just answer it for you is we don't see -- there's not very many other states that are that far over their skis like Indiana was. New Mexico is one that is kind of leaning into it a little bit more. We don't have almost any centers in New Mexico, but New Mexico is actually going to universal child care. So they're actually having a program where chunk is virtually free for everyone at certain centers. So we actually just applied with our few centers and got accepted. So starting Jan 1, we'll be part of that program, which will be great. We only have a couple of centers there. So New Mexico is one leaning out over it.

The other thing that happened in Q3 was there's a couple of other bigger states for us, Arizona and Texas. They both put freezes in place. And so as they're reconciling and figuring out what they're going to do with their budget, they put a freeze in place basically saying like we're not going to give any more vouchers out for a time period until we figure this out in a good way. We're past that now. They've unfrozen, so they're giving out new vouchers. And both states have actually said they're going to put a little bit more of their dollars in going forward in the next 2 years, too, which is a great result.

And the reconciliation process for states outside of the 3 you mentioned, and I should know this. But we're sort of past that point?

Yes, exactly. Yes. So yes, we're all past that. And so we have pretty good visibility into where they're going to be as far as rates and number of seats going forward.

Maybe to pick up on what you mentioned with New Mexico. Obviously, there's a lot of different ways to do a universal pre-K or universal ECE program. So my first question is, what do the reimbursement rates look like? How many seats are there in New Mexico? And then I guess, maybe just add a little context around maybe another state that isn't as favorable or what makes a program more or less favorable for a [indiscernible] provider?

So New Mexico will be interesting, right? It's really the first universal childcare we've seen in the states outside of a few minor local levels. It's really the first one we've seen, so it will be interesting to see how they go through it. So they are, like most ones do in universal pre-K, doing mixed delivery, also kind of referred to as parent choice. So they might do some at public schools, but also opening it up for private providers. Virtually every time they do that, they have an application process. So they don't just let you go wherever you want. You got to apply as a center and get accepted into the program so that way the state or local municipality can hold up their level of quality. So for example, we've done that in New Mexico, and we'll see how many spots we get in that program starting next year for that one.

As far as universal pre-K, I'd say that it's kind of the same thing. Majority of the time, states right away or quickly get to the place where it's mixed delivery and open it up for private or they use public for their kind of pre-K or [ TK ] depending on what you want to call it and get to that point. Reimbursement rates for both those programs are interesting because for both those programs, whether they're doing it public -- the public ones or with us, it's only a few hours in the middle of the day. And so -- which is great. And we can do that, and we love doing that in the states that make sense. We love those programs because what usually ends up happening is, call it, 4 hours in the middle of the day, really great for it being free, actually more of a pain for most parents than anything else, if that's all you're getting.

So we'll do that, Georgia is a great example for us. We've been doing it for years in Georgia. We'll do universal pre-K under their program for 4 hours in the middle of the day, and then we'll do what we call wrap care in the morning and afternoon around that. And by the time we do all those things, we're completely getting back to a normal private pay rate and serving those families for a full day, which is what they need to be at work.

And do you all participate in New York City?

We do at one of our centers just a little bit. So we only have a couple of centers here in the city.

So I might as well ask just because it's a topic amongst investors and obviously, in the news, our new mayor or incoming mayor has ideas about universal childcare. I guess, do you know anything about those proposals yet, what that could look like for the city?

I have -- sorry, unfortunately, I'm not up to date on that one, just given our low mix here. It's not one I'm up to speed on that.

I think the answer might actually be that there isn't much out there...

Okay, very...

I didn't know if something I don't. I guess pulling this all together in aggregate, the question on people's mind is when do you get back to positive enrollment growth, recognizing we talked about a lot of factors that are out of your control. Is that 2026? Or should we be thinking more in 2027?

I guess I'd frame it in this way. Coming out of back-to-school, that gives us kind of a band of likely outcomes through May of next year, right, within a few hundred basis points. So obviously, that means there's a little bit of climb from negative out to May for us to get out of that. The holidays is a big gating period for us. So holidays is a time when families usually have a little bit of time off and they can think through their decisions. So we definitely see some change that happens there, hopefully, in a positive way where they're coming to us. January is also the highest infant enrollment period as well.

And so once we get through that, we'll have a lot better feel for how we'll look at least through May, and that will really tighten that up. And then summer is a new period and then back-to-school again in about a year is another big period for us as well. So every week from here all the way to May, we're going to grow incrementally. We're going to go add on a few net students all the way until May. May is always our highest enrollment period. So we have opportunity to break our curve and snap through. It's going to take some time. Like there's not a big period really until back-to-school next year for us to make a dramatic one. But every week, we think we can make a little bit of traction towards it and get there.

And maybe just to touch quickly on the fourth quarter. I know that you guide to an occupancy rate year-over-year, and that's down 2% now for the full year. Could you just talk about what that actually implies for enrollment growth relative to what you did on full-time enrollments in the third quarter?

Yes. So usually, they go -- like as I think of our guide to start the year, they're usually pretty tight. As the year goes, they tend to drift apart a little bit. The reason is, is because we're trying to meet the community needs at a center and adapt our classrooms. So we change classrooms as we change classrooms, that changes our capacity. And so we're trying to change those a little bit. So I'd expect it to be off a couple of 20, 30 basis points from enrollment to occupancy, but it's pretty tight.

Okay. All right. That makes sense. The other thing that you talked about on the third quarter call as it relates to 2026 is pricing and that you expect to benefit from higher tuition rate increases in 2026 relative to what you did in 2025. Could you just maybe help investors think about that or get comfortable with taking a higher tuition rate increase in the backdrop of where we are with enrollments?

Yes, of course. So I'd start with just our process for what we do. So we do price increases at a center level and even at a classroom level, but really at a center level predominantly. So we are looking within our 4 walls at lots of things. The kind of 2 biggest ones is our own occupancy. So where are we at as far as volume, but then also engagement. So we work with Gallup and do engagement surveys for both our employees and our families, gives you a really good feel about how that center is doing. If the families and employees are more engaged, there's a lot more stickiness to everybody involved, less engagement, less stickiness.

We've seen that -- it's a good thing to factor into price. Outside our walls, our competition levels, competition pricing are kind of the 2 big ones. General demographics, too, like if we're seeing at that local level, something shift, we'll think about that in our pricing. So we build that pricing from there and then obviously, it comes together collectively. So we feel good about each one of our individual pricing. We're putting in those factors despite the macroeconomic environment, we know at each individual level where we should be. And we've been pretty good at that private day one and able to pass that along.

The next thing I'd say is -- so we're going through that right now, and that's why we kind of didn't give you anything specific for next year yet. We'll put those rates in on January 1 for new students and age-ups. What that does, and not that many in the industry are doing that yet, but what that does is when a student starts, they're almost always going to pay the most they ever pay that week for the rest of their time with us because as they age up, their prices drop because of student teacher ratios, and we can embed a 3% to 7% price increase, and they still pay less than they did the week before when they move up in the classroom. And so come September, we'll have some price conversations, but we're in the teens as a percentage of our families actually having a real -- your price is going up next week conversation in September. And so it lets us really embed those prices a lot easier going forward.

And I guess just to make the delineation between private pay and subsidy, is your pricing strategy any different from what you just talked about for subsidy? And do you have more certainty about subsidy since the funding is pretty much set at the state and federal level for next year?

Yes, exactly. So we have a good feel of how subsidy rates are going to be for that. On private pay, we'll know here pretty soon. So coming into the year, we'll have a good feel on private pay -- on overall rate as well as private pay, of course, but overall rate, we'll be able to guide to that. And the one thing that did impact us this year, right, was mix. So we'll obviously go into the year with expectations of knowing where the private pay rate is, know where the subsidy rate is, our expectations with how each one of those student counts are going to go.

This year, our subsidy rate was lower than our private pay one. We knew that coming year coming into the year, we actually grew subsidy students more than private pay. And so that mix pulled us down. We've had a number of years where subsidy rate overall is higher than private pay. So that's not -- that was just a happenstance this year.

Another regulatory question or related to the regulatory environment. You've talked about the Employer-Provided Childcare Credit that was enhanced with the One Big Beautiful Bill Act. I ask about it every time I talk to you guys because I think it's interesting. But I guess my question is, have you integrated that into client conversations? And have you seen any traction?

Yes. So it's in every one of our client conversations. So we are attacking it with our current clients that are doing Tuition Benefit+. So let me step back really quick for everybody. So we refer to tuition benefits. So tuition benefit is our program where we're offering a discount to families at a provider, a client that's across the nation to go to any of our KinderCare centers. It's a great option for us to provide a discount because we've got a captive audience that they partner with us with marketing on, and we know those families are stickier than other families. So the discount is a good ROI for us.

What we pushed the last few years is what we call Tuition Benefit+, and that's where providers are also chipping in. So we've got a couple of big providers across the United States. They're chipping in an extra 20%. So the family is paying just 70% of market rates. We're getting reimbursed that extra 20% every month by that provider. And so we're just only chipping in our 10% discount in that example. So I say that to -- we're utilizing in all our tuition conversations, tuition benefit conversations. We're going to our current providers and being like they're Tuition Benefit+, and we have one that was doing a 10% kick in and like, hey, the numbers basically play out. You can go to 20% for your families and you're seeing out of cash next year for -- because of this new 45F and they're going to do that, which is great.

So now nothing directly to us, we're hopefully going to get more families from that because now they're paying 70% instead of 80%, and we know they're super sticky. We're utilizing that in conversations to build centers, too, because they can use that to build centers. We're utilizing it for new sales also to try to get them to jump to Tuition Benefit+ right away rather than tuition benefit. So we've got a little bit of an uptick. I think they've got to get through a Chief HR Officer, usually procurement and a CFO, and they're the worst part to get all the way through that. So we know it's going to take a little while and it doesn't go in place till January 1 yet.

Okay. And I know it's early days, so you may not have enough of a sample size to say, but is it smaller clients that are more receptive to this, just given the size of the credit? Or has it become bigger?

So the one switch is actually a decent sized client, and -- but it should impact everybody. I mean we've got -- we definitely have tuition benefit. We have one Tuition Benefit+, for example, they pay 90%. So they pay it all, right? So it's free for their -- it's a little small medical center and they pay completely for their childcare one. So for them, great, probably maybe not much of a win for us, but for them, great. And so we can utilize that one to talk to others about like, hey, think about getting up to 40 and 50 on a smaller one where their costs don't spend quite as much. But on the bigger ones, it's a great option, too.

So bringing the discussion together in full service, and I guess this is for the whole business, but the majority of your algorithm pertains to full service. You laid out a medium-term algorithm at the IPO. I think on the conference call, you said you're still confident in getting back to that. So maybe just talk to us about each of the individual components.

That would be great. So yes, we laid out kind of 5 parts of our revenue algorithm. So I'll start with the ones that are basically on and think they'll continue to. So one is our B2B business. So we think of our B2B business about our on-site centers as well as our Champions brand. So we're really on the Champions before and after brand, selling to presents -- not presidents, to superintendents and principals to get into that business. And so we really consider that B2B, and it's that same leader running both of those. We put a 1% to 2% algorithm on that as far as revenue growth, and we're hitting the lower end of the range. We're right at 1% now, and we're adding about 200 new sites there and confident we'll be able to continue that going forward.

On our greenfields, also a 1% to 2% algorithm there. Next year, we'll be in the mid-20s for a number of greenfields. This year, we're in the teens. That was kind of constrained by some capital decisions we made during COVID. It takes a little over 2 years once we say go on a center to get it up and going. So we knew we'd be in this place, but feel good where we're going to be next year and even have really good purview into 2027 on where that's going to go. So we feel great about that.

Tuck-in acquisitions is another 1% to 2% lever, and that's one where we are kind of low 20s for acquisitions last year. We'll beat that this year and don't see any reason why we don't beat that going forward. The market is really robust, incredible EBITDA multiples, often 0 to 1x EBITDA because we're partnering with a REIT to buy their center, and we can capitalize that and buy at a really low one. So we're at about 1x revenue there, too. So feel good about that ongoing. The 2 biggest ones are price and volume, right, occupancy and tuition rate.

So tuition rate at 3% to 5%. This year, we'll be outside of that based on everything we've talked about today. This is really the first year in a long time we've been outside of that with kind of some of the subsidy pulldowns as far as mix and what subsidy rates done. We feel good about getting to that in the next couple of years at the latest, but we'll talk about that a little bit more as we give guidance for '26, but we're just not far off from that. one feel good about getting back -- so occupancy is really the one that's hanging out there a little bit.

And you kind of asked when we think we'll get back. '26 is probably a stretch to get back in the 1% to 2% next year. Paul said '27. And I think with all we've done, there are focus on inquiry enrollment and some of the other changes we've made. We announced we promoted Lindsay Sorhondo to Chief Operating Officer, which is wonderful. I think she's going to do some great things both in the background of the business, but taking some stuff off Paul's plate, letting Paul get a little closer to the business. And then at the same time, we actually took out kind of a layer in our field team, too. So we kind of have East and West in the KinderCare one and have put those 2 still really high-performing individuals in better places at the company, but that's going to let our brand leader get a lot closer and really focus on inquiry enrollment. So we definitely have optimism we can get back there pretty soon.

That's great. You talked about costs. So I'll shift to margins. Obviously, teacher wages are a big component of your cost structure. So maybe talk to us about the other components investors should be aware of and kind of in the context of you've seen margin compression in the last couple of quarters. So what does it take to get back to expanding margins, which I know was a goal at the beginning of the year?

Yes, absolutely. Yes. Look, I mean, labor collectively is about $0.50 on the dollar of revenue as far as costs. And so that's obviously the biggest one. Rent is about 15% of it. And then all the rest of them kind of add up slowly for food, insurance, landscaping and things like that, none of those add up too fast. The one call out on food, I would make is at centers that get over 25% subsidy, we get reimbursed by a federal food program for all food cost of that center for that program. So that's one that often at a center that has some subsidy students, it actually kind of isn't even a cost for us, which is great.

I mean you alluded to it, occupancy is a big driver on operating leverage. So our current calculation was 2% increase in occupancy is worth about 1% in EBITDA margin. Where we're sitting the downward is probably about right, 2% as well. And so it puts pressure on teacher hours, right? You lose a student. You don't get to necessarily lose exactly the number of teacher hours per day that you did because you got teacher-to-student ratio requirements, you got to keep, and we will and want to keep those. So definitely puts pressure on that. And then it puts pressure on rent and some things there, too.

So we are next year going to roll out a new labor tool, which we're really excited about. We made an announcement a few months ago that we're partnering with Legion, who partners with a lot of multi-location businesses to build labor tools, and we're going through that sometime probably later in '26, we'll roll out our tool and really utilize a lot better data and insight to forecast better. Legion would probably tell you we're going to use AI. I'm not sold if that's good or if it's just really good insightful data that we're going to use to do that. But a lot more predictive analysis to get to where we need to be with labor. We're going to save some dollars, which makes the CFO of me really happy. Just as importantly, though, we're going to make it so schedules and things are a lot better for our teachers. So I think we're going to really improve our engagement with our teachers too, which hopefully will help with occupancy as well.

The other cost that just being thoughtful to is G&A, right? So we invested a lot in this business in '23 and '24 to get to where we wanted to be on the sales and the growth things and some of our digital tools I talked about earlier. We know that we're at the high point there. And so we'll continue to see some G&A leverage. You all go look at our financials and say, you're not leveraging G&A, Tony. We're leveraging outside of our public company costs this year, right? So we had to take on all those as the first year public company with third-party costs and insurance and audit and things like that. Behind that, though, we are doing a little bit of leveraging. I still think we'll keep doing that into the future.

And then the last one, which we talked about a little bit, though, is we are confident that we'll continue to create margin enhancement through the difference between tuition and wage. And so we'll be able to drive tuition above our wage rate and that will be able to keep funding the bottom line as well.

Great. I guess maybe pause to see if anyone wants to ask you a quick question. Otherwise, I've got a couple more. Cool. Maybe talk about Champions. You mentioned it in your algorithm. I guess just how big the business is today, what you see as the runway for opportunity? And I guess I'll take a stab. You've never really -- you don't break out profitability between full service and Champions, but just directionally, how it compares to the full-service business.

Yes. So let's start there. always shocks people a little bit, but pretty much all our Creme, Champions or for employers, they're all about the same margin business. So Champions has a much lower tuition price point. They're at schools. We don't pay much rent. The teacher student ratios are a lot higher. So it kind of offsets a much lower tuition and gets a similar gross margin. Champions as we sit here coming out of back-to-school is about 1,100 locations. We just added about 200 new ones, net this year, we're going to add about 120 plus or minus net to the count, which is great.

There's -- depending on which one you look at, 60,000 to 90,000 elementary schools, we're currently the biggest private provider out there. The YMCA also does it. And so they're bigger than us. There's a lot of runway out there. There's a lot of -- there's shockingly a lot of elementary schools that don't even have before and after school care. So those are easy opportunities. There's a lot out there that do their self-op. And so easy for us to come in and just take that over for them and the principal doesn't even have to think about it anymore and they love that.

And then there are some of the other ones like the YMCA where we come in and guarantee homework is done and add some more curriculum to it, and it's not just play. And we think that can be lift too, and it's definitely selling point and so there's a lot of runway for Champions, and we're confident it will grow double digits well into the future.

Great. Maybe last question for me. Capital allocation. I know you guys talked about your priority being investing in the business organically. But I will ask about have you discussed any more share repurchases as a potential use of capital?

Yes. So a Board meeting last week, and it's a constant conversation, right? Is that the right next step? I can tell you coming out of the Board meeting, we came out with the determination that buying tuck-in acquisitions at multiples that make sense is still a great thing that we should be doing for both the near term, but definitely the long term, continuing with our greenfield strategy and funding this Champions growth is the right thing to do. So nothing imminent right now, but as you would expect, it's an ongoing conversation with the Board.

Awesome. I think that's all we have time for, but always good to see you, Tony, and thank you for being here.

Well, Thanks, Judson. Thanks for having us.

Yes, of course. Thank you.

Good afternoon, ladies and gentlemen, and welcome to the KinderCare Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 12, 2025. I would now like to turn the call over to Ms. Olivia Kirrer. Please go ahead.

Thank you, and good evening, everyone. Welcome to KinderCare's third quarter earnings call. Joining me from the company are Chief Executive Officer, Paul Thompson; and Chief Financial Officer, Tony Amandi. Following Paul and Tony's comments today, we will have a question-and-answer session. During this call, we will be discussing non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release which is posted on our Investor Relations website at investors.kindercare.com under the Financials tab.

And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company, and involve a number of uncertainties and risks, which are explained in detail in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC.

Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. The actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements.

All forward-looking statements are made as of today, and except as required by law, KinderCare undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. I would also like to mention for interested parties, our executives will be participating in upcoming fireside chats over the next few weeks, which will be publicly accessible on our Investor Relations website under the News and Events tab.

And with that, I'd like to turn the call over to Chief Executive Officer, Paul Thompson.

Thank you, Olivia, and welcome to everyone on the call with us today. In the third quarter, we saw success across our B2B and portfolio growth levers. Revenue was $677 million, up nearly 1% from last year with same center revenue of $617 million. The softness we anticipated in organic growth continued, resulting in same-center occupancy of 67% at the lower end of our expected range. Remember, Q3 is typically our lowest quarter due to summer seasonality.

When thinking about our current occupancy, it's important to note that our top 3 quintiles, which are roughly 960 early childhood education centers continue to operate around 80% occupancy on average, and our employer on-site centers averaged over 70% occupancy, while the balance of our network provides clear growth opportunities. I'll share in a moment some of the operational initiatives we focused on during the third quarter, which we believe, over time, will help ease the recent moderation in occupancy and position us to drive future growth.

The back-to-school season unfolded amidst a more cautious consumer backdrop, which we believe influenced family decision-making. While demand at the center level was adequate to support our enrollment objectives, our average weekly enrollment fell short of last year's mark. Additionally, we saw headwinds in our subsidy business in a handful of states with near-term softening of tuition reimbursement rates and fewer new student authorizations.

We believe the enrollment challenges reflect the current economic environment are not permanent and we expect to see a return to the historical performance we have experienced in subsidy enrollments in the future. It's worth noting here that our belief is rooted in the historical bipartisan support for childcare funding, we have seen both at the federal and state level, and we remain confident in the long-term outlook for childcare subsidy funding.

Turning to our other growth levers. We continue to make great progress in the quarter. Specifically, we signed a number of new clients at our Champions' school-age program and expanded our employer relationships, as employers look to offer dedicated on-site or access to our network of community centers for their employees.

We also grew our center count through new center openings and tuck-in acquisitions, with the latter continuing to outperform on the year. Stepping back from the quarter's results, I'll spend a moment on what we're seeing in the broader economic landscape. Inflation remains elevated and families are showing more caution in their decision-making as reflected in recent economic data showing an overall decline in consumer confidence. We recognize how these influences are causing hesitation for some as they make their child care decisions.

We believe these dynamics are likely to persist into 2026. In this environment, we're managing with a focus on disciplined execution, operational efficiency, effective cash management and a continued commitment to meet families in their local market where they need us the most. We believe KinderCare's national scale, strong subsidy partnerships and ability to serve families across diverse circumstances, position us to navigate these conditions with resilience.

Our commitment to high-quality early education and the distinctive experiences offered through our centers, strengthen our brand and reinforce the trust families place in us. These advantages give us confidence in KinderCare's ability to perform through varying and uncertain economic conditions. A number of families seeking subsidy assistance remains elevated across the country, and our government funding team continually seeks to engage state and local agencies in productive ways to expand care to as many of those families as possible.

However, to maintain balanced budgets, some states have implemented measures such as wait lists and reducing reimbursement rates. In certain cases, these actions have had a significant impact. For example, in Indiana, roughly 13,000 fewer children are receiving subsidy assistance since the start of the year, and our full-time subsidy enrollments have declined proportionately in the state by nearly 1,000 children over that same period. At the same time, many providers in this state have been further pressured from reduced reimbursement rates.

Other states are taking steps in the opposite direction by expanding support for child care with measures like reducing cost for families by lowering co-pays, increasing reimbursement rates or in the case of New Mexico, pursuing a public-private solution to make childcare universally accessible. Regardless of each state's approach to appropriating their budget we remain committed to partnering with state and federal leaders to expand access to affordable high-quality child care for families across the country.

As these efforts unfold across the broader child care landscape, we remain focused on strengthening our own operational foundation. As I mentioned, occupancy was at the lower end of our expected range due to a complex of near-term dynamics. Over time, we are confident that our ability to convert the demand we see in our centers, together with ongoing positive and constructive engagement with state and federal leaders on childcare funding will be important drivers towards achieving our occupancy goals.

Progress here may take some time. However, we believe we are taking the right strategic steps to build sustained improvement upon solid fundamentals. In order to accelerate our pace of results, we intensified our focus on the operational levers within our control, evolving our leadership talent, applying lessons learned from our opportunity region more broadly and expanding the use of our digital and diagnostic tools.

We concentrated on center level improvements, particularly enhancing both the speed and personalization of family interactions. Our digital tools continue to make it easier for families to move through the enrollment process and for center directors to more effectively match available spots with family needs. The digital tools are also helping to drive overall improvement within our opportunity region and in some cases, creating significant impact at the center level.

As a reminder, our opportunity region is a collection of around 150 centers that we've determined to have high performance potential, which can be unlocked with focused attention and resources. One of our opportunity region centers located in Michigan and led by a veteran Center Director used our center diagnostic tool to pinpoint opportunities for improving enrollment and worked with our district leader to develop a remediation plan.

Within 8 months, she lifted occupancy from 48% to 95%, that kind of turnaround shows what's possible when we pair well-trained leaders with our tools to execute. I shared this example to illustrate that despite the challenging environment, we are finding ways to make progress.

Overall, we continue to see encouraging progress within the opportunity region, and we're applying the lessons learned from our successes there more broadly across our network. To be clear, we don't expect to achieve results of the same magnitude in all of our almost 1,600 ECE centers, we believe, however, that the easiest path for broad-based improvement in overall enrollment is generally going to be among centers that currently have lower occupancy, most of which are grouped in quintiles 4 or 5.

Beyond attracting new families, we're equally focused on the engagement of our current families. In fact, we recently completed our annual engagement survey and received over 130,000 responses from our families which is near last year's record response total. This represents our 13th year of partnering with Gallup. And as a reminder, we measure both employee and family engagement.

Consistently, we hear from families that they celebrate the positive impact that safe, high-quality child care can have on their child's development and that the families are deeply connected to our center staff. In addition to receiving feedback, high levels of engagement help us maintain strong family retention.

Our ability to create consistent nurturing environments is a hallmark of the KinderCare experience and underscores the reasons so many families stay with us year after year. Our focus on operational excellence extends into the management ranks as well. In order to better align our strategic operational goals with our growth initiatives, we recently announced the promotion of Lindsay Sorhondo to Chief Operating Officer. Lindsay has been an incredible executive leader for us during her 12 years with the company, most recently as our Chief Innovation Officer. She has been a decisive business partner with a strong track record of execution and driving results. We're excited for Lindsay to acquire a tremendous skill set to accelerating operational excellence throughout the organization. This structural alignment represents an important step forward in our broader strategy to sharpen brand level focus and connect our strongest operators directly to driving same-center occupancy growth across our centers.

Closer to the center level, we also took purposeful actions within our field leadership to strengthen performance. During the quarter, we refined our district leader structure to sharpen operational focus, increase accountability and improve agility while ensuring we have retained our most effective leaders. These critical members of our organization are responsible for oversight and development of our center directors and are expected to step in and personally support them where help is needed.

Turning to tuition, growth came in at 2% for the third quarter, which Tony will discuss in more detail shortly. With back-to-school finished, we are now finalizing our plans for 2026 tuition rates. As a reminder, we maintained a 50 to 100 basis point spread overall between wages and tuition. And we will continue with that strategy while setting tuition to reflect local market dynamics and needs. This financial discipline gives us the flexibility to continue investing in our other growth levers. B2B, NCOs and tuck-in acquisitions, all of which performed to expectations this quarter.

Our Champions before- and after-school business continued to perform well with double-digit revenue growth year-over-year, including meaningful growth in average enrollments in established sites. Year-to-date, we expanded the program with over 200 new site wins. The solid performance from the Champions team this past quarter and frankly, all year, provides momentum for Q4 and the rest of the school year.

KinderCare for Employers, which consists of our on-site employer-focused centers also continued to perform well for us. During the quarter, we opened 3 new centers and employer locations and continue to develop our pipeline of opportunities. It's also important to note that occupancy at our on-site averages over 70%. And which speaks to the great partnerships we have fostered with employers to let their employees know about this benefit available for their children.

Employers are also expanding childcare benefits for their employees through our tuition benefit offerings. During Q3, we signed 20 contracts with employers, including Parkview Health System, Discovery Life Sciences, The Aspen Group and MassMutual Life Insurance. Our new contracts are spread across 17 states, covering 317,000 employees who will now have access to KinderCare's nationwide network of centers at a discounted tuition rate. We continued executing on our other growth levers during the quarter by welcoming families to 2 new early child education centers in Illinois and Colorado. This brings our year-to-date total to 8 new center openings within communities.

We are also very active with tuck-in acquisitions in the past quarter by acquiring 6 centers across 6 different states. Taken together, we have clear visibility into these 2 levers and expect 2026 to be another active year. Looking at the remainder of this year, we'll continue to focus on improving same-center occupancy and tuition by driving engagement and consistency through our leaders in center-level teams.

We expect our other levers will perform to our 2025 expectations, reinforcing the diversification of our model. With that, I'll hand it over to Tony to walk through the financial results and outlook.

Thanks, Paul. Our third quarter results were mixed as revenue came in slightly below our expectations, largely reflecting a slower pace of enrollment through the back-to-school season. While this pressured margins for the quarter, cost discipline and positive cash generation remained consistent as Champions and KinderCare for Employers, NCOs and tuck-in acquisitions all continue to perform well.

Let me walk through the quarter in more detail. Total revenue was $677 million, up 80 basis points from last year, with growth driven by Champions, despite positive effects from tuition increases, early childhood education revenue softened due to slower enrollment activity during the quarter, which also resulted in lower occupancy for the quarter.

Same center revenue was flat to last year at $617 million, supported by generally robust retention levels during the third quarter and continued contribution of prior new center openings and acquisitions being included in the same center pool. Total average weekly full-time enrollments decreased by 190 basis points to just over 140,000 students in the quarter, reflecting lower overall enrollment compared to last year and a softer starting point at the beginning of Q3.

The new student enrollment dynamics during back-to-school compressed our same-center occupancy to the low end of the range we expected for the quarter, finishing at an average of 67%, down 160 basis points from a year ago.

As we look forward, remember that back-to-school is our highest new student enrollment period and sets the start of the client for the next 7 to 8 months in which we historically have sequential growth each week until summer.

Tuition was a 2% contributor to revenue growth versus last year, which was lower than we anticipated entering Q3, reflecting the higher subsidy mix and smaller subsidy rate increases than expected for 2025, further affected by subsidy rate reductions in a few states. Most importantly, we continue to maintain a healthy spread between tuition and wages, which ensures our ability to consistently drive margin within our centers. as we deliver the high quality of care KinderCare is known for and ensure our teachers can receive a competitive pay and benefits package.

Champions and KinderCare for Employers continue to demonstrate solid growth. Champions' revenue grew 11% in the third quarter versus last year to $50 million with 120 net new sites added to the portfolio over the past 12 months. Employer on-site centers continued to perform well during the quarter with average occupancy over 70% and consistent revenue growth. As employees continue to navigate flexible work arrangements, our team is deepening partnerships with employers to expand on-site childcare options, including the opening of 3 new centers this quarter while also growing participation in our tuition benefit programs that support families using our community-based care.

As Paul mentioned, we opened 2 NCOs during the third quarter and acquired 6 tuck-ins, bringing us to 20 tuck-ins so far this year. On a year-to-date basis, cash consideration for the tuck-ins is just under $18 million and was funded completely out of the $138 million in free cash flow generated this year. Our ability to fund new centers and tuck-ins while maintaining our leverage is a testament to the strength of our operating and growth models.

The revenue contribution from new and acquired centers year-to-date was $21 million as of the third quarter, relatively consistent with the first 3 quarters of last year. Our development time line for new centers provides excellent visibility into the timing of future openings and we are firmly on track to accelerate our pace of NCOs into the mid-20s per year in 2026 and beyond, consistent with our long-term growth objectives.

While we aren't seeing a flood of independently owned center closures this year, after expiration of COVID funding, we are certainly seeing many more opportunities for tuck-ins. We expect to sustain this momentum beyond the current year as part of our broader long-term growth strategy.

Net income for the quarter was $4.6 million, bringing the year-to-date total to $64 million, a 58% increase over the same year-to-date time period last year. benefiting from operational improvements and lower interest expense following our deleveraging actions.

Adjusted EBITDA for Q3 came in at $66 million, down 7% from last year as lower occupancy led to leverage pressure in the quarter. Our adjusted EBITDA margin for the quarter came in just under 10%, reflecting fewer enrollments in Q3 seasonality.

Quarterly SG&A expense to revenue was up 109 basis points year-over-year. Embedded in there are onetime fees incurred from favorable credit facility repricing we completed in July and increased public company costs versus Q3 last year. We'll begin to lap the incremental public company costs incurred since the IPO in Q4 this year. As we move forward, we will remain focused on disciplined cost management and operational efficiency.

Income from operations was $26 million for the third quarter compared to $54 million from the prior year. Interest expense was $24 million, sharply down from the $39 million last year, reflecting the positive impact of our post-IPO debt repayment and repricing actions since, including the repricing we completed on July 1.

Adjusted net income for Q3 was $15 million, up from $4 million last year, and adjusted EPS was $0.13, increasing from $0.05 a year ago. Our ratio of net debt to adjusted EBITDA at the end of Q3 was 2.5x and remains comfortably at the bottom of our targeted range.

Moving on to our outlook for the rest of the year. As we analyze trends coming out of back-to-school, it's clear that recovery in enrollment occupancy is going to take longer than we expected. In addition, while we haven't experienced a direct material impact from the government shutdown, the tangential and downstream unknowns due to its severity have added another layer of complexity into our expectations for the year.

As a result of these factors, we are updating our forecast for 2025. For the full year 2025, we are expecting revenue to finish the year between $2.72 billion and $2.74 billion. Adjusted EBITDA expected to land between $290 million to $295 million and adjusted EPS to be between $0.64 and $0.67. Looking at our growth lever assumptions for the year, we expect revenue growth from tuition to increase by approximately 2% from 2024, a reduction from our prior guide due to the combination of higher subsidy revenue proportion and a small amount of states reducing the reimbursement rates.

We are currently finalizing our 2026 tuition planning. And as always, we align our pricing approach with community-level dynamics, ensuring we balance profitability with the different pressures families are managing for access to care.

Turning to same-center occupancy. We expect to continue seeing week-to-week growth in full-time enrollment for the remainder of this year. Given where we ended Q3 and the subsequent data so far in Q4, we now see a full year occupancy coming in about 200 basis points lower than 2024. We expect Champions to continue performing well in Q4 and carry that momentum into 2026, at the same time, we continue to see solid progress in KinderCare for Employers and its contractual reoccurring revenue streams.

Putting these 2 together, our B2B business is expected to contribute about 1% to growth this year. New center openings are expected to be shy of 1% growth contribution this year as previously expected. We will continue our thoughtful and measured strategy with opening new centers and given our clear visibility into new centers coming online, which should improve this contribution percentage in 2026 and beyond.

Tuck-in acquisitions have been robust all year and continue to be favorable for us. We have been able to advance our growth priorities in this space with a discerning eye in quality and capital efficiency. We believe the number of opportunities we evaluate will continue at a high level for the foreseeable future.

This key lever for portfolio expansion and diversification is expected to contribute about 1% to growth this year and at least the same in 2026. The pipeline visibility for acquisitions remains strong.

We expect free cash flow to be between $88 million to $94 million for the year, CapEx will likely land in the range of $131 million to $133 million for the year, with most of that aimed towards growth initiatives. For modeling purposes, our effective tax rate should be around 27% for 2025. While we are not providing official guidance for 2026, we're giving some directional insights in the growth levers as we see them today.

We expect tuition increases will be a larger contributor to growth than in 2025, we also believe the momentum we have in B2B and our pipeline visibility for NCOs and tuck-in acquisitions should keep each of these 3 levers on a solid trajectory with each around 1% for 2026.

With that, operator, let's open up the line for some questions.

[Operator Instructions] And your first question comes from Toni Kaplan from Morgan Stanley.

This is Yehuda Silverman on for Toni Kaplan. Just had a quick question about enrollment. So as we know, it's been a bit weaker all year, weaker in this quarter. Just wondering, heading into 2026, what your expectations were surrounding it, at least directionally, I know you mentioned that there has been some hesitation, do you expect it to be in 2026 at current levels, worse or better? Just want some color on that.

I appreciate the question. And as Tony said in his comments, that's what we're watching for in the remainder of 2025 so that we can clearly see any continuation of impact from the government shutdown. What I would tell you is we still very -- feel very good about the level of inquiries were seen at the local level of each one of our centers.

We continue to see improved performance from our center directors and district leaders on how they work those inquiries into enrollment. And then as we continue to see confidence return for our consumer who are in that space, we believe over the long term, we will return to the growth algorithm we've talked about historically for growth for KinderCare and our scale and diversification allows us to do that.

Great. And just a quick follow-up. So you mentioned in the guide that there was no direct impact from the government shutdown but the uncertainty added more issues heading into the end of the year. Is there anything factored into the guide itself? And if so, to which growth algorithm assumptions? Is this tied to?

Yes. So we do not see it, right -- very, very, very few families that were impacted by it. We extended a couple of courtesies to families here and there that were impacted to help them make it through and that would be great for them and for us in the end. Just some of the uncertainty continues to come from some of the things we talked about that we think it's putting pressure on the state as they think about what they're doing in the future as far as their spend. We are in constant talks with all those states, and know that there's a lot of thought process going on and what the impacts to their budgets might be by something like this in the future, too. And so that's just kind of where some of the uncertainty currently sits.

Your next question comes from Andrew Steinerman from JPMorgan.

I was wondering what timing do you think you could get back to the long-term algo. And I think you said for '26, you expect pricing increases to be higher than '25. Could you just comment on that?

Yes. No, that's right, Andrew. We believe they'll be higher, right, as we're ending this year on 2%. So we're still finalizing what our private pay rates will be for next year that will go in place January 1. So we're not quite there on the private pay side. And then a little bit, like I just mentioned, still some of that uncertainty, we want to see what happens here with the states as we conclude our fiscal year and head into next year and have some better expectations for what's going to happen on the subsidy side.

We still have direct confirmation with some states what they're doing. There's a number, they're still -- we're not sure yet. So that's why we're not going out with the guide, but at this point, we feel good that it will be above next year -- I mean this year, sorry, next year will be above this year.

Right. And my first question was when do you think you'll get back to algo?

As far as pricing, Andrew?

No, no. Overall, your medium-term algorithm, when do you think -- what do you think you'll get back to? What type of timing do you think you'll get back to the medium-term algorithm overall?

Overall, we will get back to the algorithm in 2027. And then what we're watching for is clearly on B2B and NCOs and acquisitions. We continue to be in 2026, as Tony articulated on track for that. Feel good about tuition and then for us to continue to make progress on occupancy specifically.

And your next question comes from Manav Patnaik from Barclays.

This is Ronan Kennedy on for Manav. Tony may I ask, if you could please expand or just remind us on the softer starting point you referenced for the back-to-school enrollment period. And then could you confirm the extent to which the lower enrollment was driven by macro factors, the softening of reimbursement rates for your student authorizations or internal opportunities for improvement of conversion?

Yes. So look, the reference to the softer start was already that we were bringing in a lower number coming into back-to-school, right, than we would have liked to really start the year. So it's part of my talking points there was that, Q2 as we headed out of the summer was at a lower point than we would have liked to be heading in. So that kind of gives us a softer starting point for back-to-school in general to do it.

As far as kind of -- I don't think -- we don't have a quantitative number for you in each 1 of those, Ronan, they're obviously all impacting it. And we're well aware that the consumer confidence environment and people thinking about their next dollar spent is clearly impacting our whole economy, once you get down to a local level, though, then that's on us to show the value you get out of spending those dollars to come to KinderCare and having your child ready -- to be ready for kindergarten as they get through with us.

And so that gets down to the local level where it's on us to utilize those tools and tell those stories and show that value. And so that -- those kind of gains start to overlap quite quickly. And then the subsidy one, Paul alluded to Indiana. Indiana is the biggest state for us that's definitely impacting us with being down 1,000 students from the start of the year based on some of the decisions they've made to balance their budget and what they've done to wait list and some freezes, we have a couple of other states that aren't up to that level but have also been a really drag to us here at back-to-school as well. So hopefully, that helps.

And then can you provide any insights on your occupancy trends by quintile through the quarter and exiting into 4Q?

It's consistent with what we talked last time about that slight decline in the top 3 quintiles and then an improvement in that fifth quintile that continues to give us the confidence, what we're talking about returning to our long-term growth algorithm is the improvement we're seeing in our opportunity to region, we've talked about the larger opportunity that exists in our lower occupied centers. So the diagnostic tools and the digital tools are working well to enable that growth, and we believe that will continue.

And your next question comes from Jeff Meuler from Baird.

Just on your optimism for getting back to algo in 2027 and characterizing this as short-term factors. Could you just address, I guess, the structural concern that industry supply has been built over time, and you're now combining that with a lower birth rate and the industry had taken a lot of above-CPI pricing that's compounded over time, that's pricing families out of the market. Just what gives you confidence that it is just short-term factors. And not a greater supply/demand imbalance that's built in the industry over time.

Yes. No. Great question. And there are many factors that we're watching. Beyond birth rates, you're also looking at women in the workforce. You're looking at children age of 0 to 5. And all those things accumulate to what we track is inquiries per center so that we know that we're getting the sufficient flow of inquiries at the top of the pipeline to fill our centers. And that is the most important thing to us, which continues to be very good for us.

In addition to that, the bipartisan support for child care so that we can have a thriving economy across the U.S. So working parents can go back to work and know that their children are in a safe environment where they're being ready for a successful kindergarten transition as they go into that.

So those things about seeing bipartisan support for our lower-income families, the continuation of good inquiries even through the last number of months as we came into this back-to-school and then knowing there's a lot of controllable factors for us, 1 of which we just mentioned is our center directors slowing down with those parents who are looking at making an investment in their child for early child education is us helping them recognize their child, the longer they are in our care, the more successful they're going to be in kindergarten and beyond.

And that's a really compelling argument as we talk to -- or justification is probably a better word as we talk to parents. So all those things, as we continue to improve the talent across our organization at that district leader level as I talked, is what gives us confidence as we move into 2026.

And then beyond, I guess, disciplined cost management and operational efficiency initiatives. At what point do you more proactively take cost out of the business? I asked because we're now in a position of revenue declines on a per week basis. And it looks like the EBITDA deleveraging on the revenue adjustment and guidance is pretty significant. So at what point would you be more proactive about taking expense out of the business?

It's something we're looking at all the time on evaluating the efficiencies of different investments we're making to become stronger on the digital side or other investments across our teams. And so there's things that we're already doing to ensure we're delivering the best flow-through of profit from the revenue that we do have.

Labor continues to be a big part of our P&L, as you well know. So continuing to think about how we up-level our sophistication around labor is another piece that we'll continue to lean into. So there's a number of ways that we can ensure that whether it's G&A or labor or other things that we have from a cost control, we are watching that all the time and talking about any more aggressive measures that we should be doing, all at the same time that we're delivering long-term revenue growth is very important.

Your next question comes from Jeff Silber from BMO Capital Markets.

I just wanted to continue on Jeff's question. Are you thinking at all about more aggressively closing some centers? You didn't really mention that when you talked about some of your cost control.

Yes. I wouldn't necessarily say more aggressively, Jeff. We are constantly looking at the right centers for us to maintain and go forward with them, right? So that starts with the demographic look in a little bit, that's what Paul was talking to, like where are our current inquiry levels, where our competition levels on outside of our walls, one.

And then basing that then against inside our walls where our engagement levels, are we performing to those right levels? And then where is our profitability based on rent and labor and things like that. So we're constantly looking at those. We are up for closing centers. And I think that's been clear in the past. We don't have a cap for how many centers we need to do, if it's the right time to close centers, we'll do that.

Obviously, you're looking at lease timing on those and making sure that the ROI on a closure does make sense. But you won't see us hesitate to close centers that should be closed, but we'll continue to keep the ones open that we think can and should be profitable not only in the long term, but in the short or medium term, too, that we believe we can get there through the right method.

All right. Fair enough. And let me just continue this questioning. You continue to make acquisitions. I know it's a small piece of the capital allocation but would that be something that you might consider putting on hold and maybe shifting more towards a little bit more aggressive deleveraging.

Yes. So as we sit today, our Board is pushing us to continue to make sure we do have that medium- to longer-term look on the use of our capital. And so as we sit today, we are going to continue to fund NCO engine, which is a couple of years out from when we say yes on the center and also continue on the tuck-in ones. We're still getting nice value on those in the very low single-digit EBITDA multiples and think that, that's both helpful for short term and long term.

And your next question comes from George Tong from Goldman Sachs.

I wanted to go back to enrollment trends. Can you estimate how much of the enrollment headwinds you're seeing are due purely to economic factors like consumer confidence versus more idiosyncratic factors at the local level?

It's difficult, George, to drill a line of direct correlation to those factors to the enrollment. What we would tell you is -- but for those handful of centers or -- excuse me, states where we saw a slowdown of subsidy we would be in a much stronger position closer to the flattish enrollment. And so that in and of itself is something that we know is more short term in nature.

But then there are other things where we see as we've talked to you before, the decisions from parents in the longer cycle around that, that they are considering consumer and thinking about kind of the overall macro conditions. But nothing that we can provide to you on a direct correlation, just recognizing that it does -- these factors have an impact.

Got it. That's helpful. And along the same lines, as you look at the center diagnostic tools and the various findings at the various centers, especially in the opportunity regions, what have been the latest local factors that have come up most frequently as preventing enrollment growth? And have those factors changed from the prior quarter?

So from -- the way I would answer it with what we're seeing with our opportunity region and them using and the change management and adoption that goes with those diagnostic tools and digital tools. We actually are seeing stronger enrollment in those centers. So it is working.

And again, they are at lower occupancy. So the range of age groups and parents that you can activate across that pipeline are more significant. And so what I would answer to your question is continuing to take those learnings from opportunity to region, continuing to be more proactive with our parents and our higher occupied centers. Those things will continue to minimize the reasons why a parent isn't enrolling as quickly as they might have been over the last few months in our higher quintile centers.

And your next question comes from Josh Chan from UBS.

I guess, the question on the Q4 enrollment that is baked into the guidance, like how low this [indiscernible] guidance is? Is it around the 4% decline mark I guess that's important because it sort of sets the stage, like you said, for the remainder of the school year, I guess.

Josh, will you ask it 1 more time? So I heard you referenced at 2%. And then we lost you for about 6 or 7 seconds, then you said 4%. Can you restate it 1 more time for me?

Yes. Yes, I apologize. I'm wondering what type of enrollment decline is baked into the Q4 because that forms the run rate into next year?

Yes. So we were -- we obviously gave you kind of a guide for the full year, right? We're seeing so far be slightly below where we were in Q3. So it's not nearly as dramatic as your numbers are suggesting but we are seeing a slight flip that, like you said, would take us into the holidays. Holidays being an important inflection point, it's kind of the #3 behind summer and back-to-school and how we come out of that. And then that really sets the range of outcomes through May.

Okay. That's helpful. And then on the margins that's embedded into the Q4 guide, could you just talk through what is happening to cause the relatively steep change in terms of the EBITDA expectations relative to the revenue expectations change?

Yes, of course. Yes. So look, the revenue is being caused by 2 different things, right, that we talked about. And so I'll take those 2 and talk about the impact. Occupancy dropping a little bit more than we thought is having some impact. Occupancy declines obviously don't have as big of an impact on EBITDA as do pricing.

But it does less students, obviously, is bringing less revenue, it's bringing less EBITDA. And then obviously, an occupancy decline impacts our ability to leverage, especially our gross margin and even our G&A a little bit. So we're seeing definitely some impacts from that.

And then the other 1 is the pricing, right? So as we're seeing a few of these states, Indiana, again, being 1 of the big ones, dropped some of the reimbursement rates those dollars flow pretty much straight through to the bottom line. And so that dropping to 2% is really the probably more powerful thing here in the fourth quarter that dropped our EBITDA guidance.

And your last question comes from Faiza Alwy from Deutsche Bank.

Yes. I want to just make sure that I'm understanding the mechanics around the subsidies, especially after listening to the last answer from you, Tony. So just maybe could you take a step back and just explain to us maybe how much of an impact that had on the quarter or you're expecting to have on the year?

And kind of what the -- when do you expect resolution? And like what should we be following to get a better sense of where we land here, whether things are getting better or worse in the specific states, and any sort of time line or decisions when other states might make certain decisions around these reimbursements.

Yes. Most of the states have already worked through that and what is the origination from it is everything not related to childcare specifically. So all of that was fully funded but these are the discretionary dollars this year as other impacts flowed into states, they needed to think about how they budgeted for the new fiscal year. And so it is the expectation that every state has already gone through the awareness for what their funds need to be or what their balanced budget needs to be going into 2026.

Where we saw the most significant change, as I mentioned, was in a handful of states. Even in 2 of those states, Texas and Arizona, they after that time, have come out that they're adding both of them are kind of in the $50 million to $100 million over the next 2 years.

Some of that will come in a rate improvement, some of that will come in additional chairs for children. So I believe that we're through it with most states. We've already seen those 2 states take a different weighing back in. And then for the remaining states, there's continuation of that going into 2026.

Okay. Understood. And then just on the pricing comment, that pricing is going to be higher in 2026. I'm curious what you're seeing from a wage inflation perspective? And I know the question has been asked before around whether or not the end consumer is sort of ready for that pricing, given the level of inflation that we have seen generally. So just give us a bit more color around why you think pricing will be higher. And what's driving the decision behind higher pricing in '26?

Yes. So I'll take your wage one first, which I think you're leading me to the second one, Faiza, because you remember how we really do that as kind of a starting point. So we're working on wage right now and where we believe that will end and are pretty much there on that one. We utilize that one to test ourselves but we're always trying to make sure we can get 50 to 100 basis points differential. And at this point, we believe we can again next year. From there kind of in parallel, we're working at a center level to look at a number of factors. The ones internal to us our engagement levels and our occupancy are the 2 biggest ones, how those families feel with us and how many we have, obviously, are 2 big factors there.

And then externally, we're looking at number of competitors. We're looking at competitor pricing, and we're looking at general other demographic factors for that local center. So as we're seeing the early roll-ups of where we think we're going to land and believe what we can do at that center by center level are the things that give me the confidence to make that statement.

Sorry, if I can just clarify. So do you think that 50 to 100 basis points differential can actually be higher in '26? Or is it really the higher wage growth that's leading to higher pricing?

Yes. So I wouldn't say they tie directly, but we will still be at 50 to 100 basis points next year as well. So I don't want you to walk away thinking wage growth leading to higher pricing. We believe we know where we'll land wage. And with the tools we have, we can be pretty precise for that for the year. And we are also confident we can create 50 to 100 basis points of price based on our individual center dynamics.

Thank you. And there are no further questions at this time. I will now turn the call over to Mr. Paul Thompson. Please continue.

Thank you, Kelsey. Just last month, we passed the 1-year anniversary of becoming a publicly traded company. As we move forward from this milestone, we are focused on executing with discipline in driving continuous improvement in all facets of our organization. Our long-term strategy remains sound, and we are confident in our ability to deliver against it as broader economic conditions improve.

Thank you all for joining us today, and we look forward to speaking with you again soon.

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.

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

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

Absolutely. So number one, KinderCare is the largest in early childhood education. We are in 41 states across the U.S. and in D.C. The industry itself is very fragmented. So for the opportunity for us to be in more communities and grow through tuck-in acquisitions and opening up greenfields across the U.S. is a great opportunity for us. So that's probably the #1 thing I want to share. Number two, we have a very differentiated platform in the industry, which gives us a lot of versatility to address all total addressable market in this space.

So on the one hand, we have subsidy children who receive vouchers through the federal government, which allows them to parent choice go into the quality care that they want to receive. So that gives us on one end. On the other end, we have a premium brand, which is Creme, and we've had that brand for 3 years. So it's also another way for us to grow in communities with those centers. And then across the U.S. with our KinderCare brand, serving Middle America and each one of our centers reflects the community and demographics of that center. So we've shown we can be profitable in all income levels across the U.S. and gives us quite a bit of flexibility.

Another place that differentiates us is our B2B platform. So both with Champions, which is the largest for-profit before and after school program, we're over 1,000 sites, and we're growing a significant number of sites each year in champions. And then in a Gen Z, the #1 benefit they're asking for is affordability and accessibility of child care. So for us to have 1,500 centers that we can go to employer and give them an equitable benefit for their employees, so they can attract and retain the very best talent. We can do an on-site for them, which is a wonderful way for us to build that benefit for families that are parents that are going to their corporate office Monday through Friday or if they want more flexibility, they can go to our community centers, 1,500 centers across the U.S. So that gives us another differentiation.

So those are kind of the key factors about KinderCare. You talked about the IPO story, and I think it's helpful for everyone to understand our growth levers that we have, and there are 5. Number one is same-center enrollment growth. And so that's really focused on occupancy of our existing centers and growing that for where that is today. Tuition is the second growth lever for us. And that's important in this industry because when our consumer, the parent enters our center, the highest tuition they will likely pay is that first week because as their child ages up, many times the tuition actually goes down because of the teacher-to-student ratio. So we can embed tuition increases each year, and that's good for the top line growth of our industry and our business. But for a parent and that consumer, it's a good outcome for them.

Our third growth lever is what I talked about with B2B. We're continuing to see new clients added each year in the before and after school program that can be superintendents, principals, district leaders making that decision. And then on the KinderCare for employer side, that can be a CFO, CHRO or procurement and for us to sell to them. The fourth growth lever for us is tuck-in acquisitions. And as I mentioned, a very fragmented industry, we continue to see great growth there. And then the final growth lever for us is new center openings. And we've been building that capability since COVID, where we took a step back, having a very good year this year, but we'll continue to enhance our opportunity to grow new center openings as well.

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

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

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

Yes. The -- when you speak to the defense, what we really enjoyed, if I can use that word, the last 5 years is people recognizing how important the child care industry is for parents to be able to go back to work. So if you want a strong economy, your parents want to know that their child is in a safe environment. And so the childcare industry, that's the #1 thing they know they owe to their parents. And so just that recognition of not only parents who want to go back to work, want to know that their child in a safe environment. What also has elevated the last number of years is understanding and recognizing how important that development time period is from 6 weeks until their child goes into kindergarten, how much their child is learning and developing.

So parents are asking better questions about which program is giving my child the best advantage on hitting milestones and then thriving once they go into kindergarten and beyond. So we have data that shows that the longer you're in a KinderCare environment, not only are you above your peer group, but you're advancing through those milestones at more meaningful time periods. So not just are you as a child better from October to the following spring, but you are progressing well against your peer group and hitting those milestones at an earlier age. So those pieces are really the value proposition that we bring to parents. And for them to understand, we are the largest accredited provider in the U.S., not just because of our numbers, but as a percent of total.

So we're roughly 80% of our centers are accredited through NAEYC the rest of the industry is less than 10% accredited. And that matters because they're testing for the capabilities of our teachers and their credentials. They're looking at the investments we make in facilities. They're looking at the effectiveness of our curriculum. And so we can prove through data. And so that's meaningful as a child -- or parents making a decision on enrolling their child.

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

Absolutely. The biggest takeaway we took from 2025 is this continued bipartisan support of the child care industry. And again, it goes back to Congress wants a strong economy, and they know that the strength of the childcare industry allows parents to go back to work and show up and not have absenteeism or have concerns about where their child is at. So whether it be fully funding the block grant, which is a great outcome for 2026, but also the tax credits that were put in place for effective of January 1 of the new year, those are indications of Congress and the White House wanting to do more in the child care space. So that's a good indication for 2025.

But I also -- we also feel very good about what that means for further conversations that we can -- I'm actually in D.C. the next 3 days exactly to have further on conversations with members of Congress and help them understand the impact that they're having for their constituents. And so that's exciting for us and exciting for how we see the federal support for it, but there's also discretionary funds at the state level. And so us working with the states so that they can see the impact of their parent choice decisions on pre-K and universal pre-K and other things and having a parent choice, which is allowing us to participate is the best outcome for those communities.

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

Do you want to take that?

You want to take a break?

Yes.

Okay. Yes. So look, we see -- at each one of our centers, we're able to diagnose what's happening there and what we can do about it. And so you've heard us say, George, obviously, you referenced it, it's at a local level rather than macro across the board. And as we look at some of the items that might be macro as far as job rates or pricing or anything like that, we're not seeing anything that's impacting all our centers. And we do have the tools to look at it at a center level and diagnose what's going on. The most often things are something related to teacher turnover.

So we're still able to get all the teachers we need, but we got to make sure we keep especially the lead teachers in place. And so if teacher turnover spikes, that usually has some impacts on the amount of children we can serve because families want to see that stability. So that's something we can lean in with the center directors and make sure we lean into our engagement, and we're doing what we need to keep those teachers around.

The other most common one is something in the inquiry to enrollment funnel. And so -- and there's a bunch of different steps there, right, starting with inquiry and then the tours and then the final enrollment. And we're able to use our tools to lean in there as well to work with the center director, to work with the district leader on what's happening and diagnose it and get some training or lean in with them to do it at that level. And so we do see various things at different ones, but there's no overriding thing we're seeing across the fleet.

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

Yes. What I'd go back to would be we really put in our quintile strategy. So that's where we're looking at our centers from top to bottom, kind of divide them up in 5 different groups and really thinking about the different playbooks at different those levels kind of towards the end of 2016 to 2017 and really utilizing that to really grow to where we were pre-COVID, which is our highest at that point and are back past that again. But we use that to diagnose. If you're a lower quintile, what did you need? And what was the playbook to move up to the quintile 3 and quintile 4 metrics to move up those charts? And so not directly answering your question of seeing problems, but the same sort of thing, like using diagnostic tool, using a playbook, and that's something we really started putting back in about a year ago now.

So until about a year ago now, we were just making sure we got past pre-COVID levels, which we were kind of the first in the industry to do so. Once we got there as a fleet, it was time to turn back to that and really have done so. And we've kind of doubled down on that even more with the percent of our lowest performers and what we did with the Opportunity Region here at the start of Q2 to even do that even more.

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

Yes. It's an interesting question. COVID was one factor, and that was not a great experience for the industry and to get back to that from a recovery perspective. So when you have multiple factors as we currently do, I think that allows you more creativity and flexibility about how you go after the solution and how you go back to focusing on what you can control. We, in '22, '23 and '24 really had strong enrollment gains each of those years.

And so here we are in 2025. And what we're encouraged by, as Tony was saying, we know how to run great centers. We know how to improve the enrollment of individual centers. And so understanding that this is about good operational practices and getting to reignite or reintroduce some things perhaps we were doing exceptionally well in 2018, '19, reintroducing that now here in 2025.

So that feels like something we can control, and it's about ensuring that our teams, or our center directors have the capabilities and understand what's expected of them and then looking at our leading and lagging indicators to ensure that they're doing the right activities for prospective parents and existing parents. We know we're on the right path to have a healthy outcome on overall enrollment. And that feels like where we should be right now as opposed to there isn't -- in any business, there's not usually a silver bullet to correcting things.

So for us to return to what we know we can control and using the data, you've mentioned it before, how data-driven we are, that is a good experience of our team to look at the data by different communities, segment, different groups of centers and then understanding, as Tony was just saying, there's a good playbook for centers that are over 85% occupied, and then there's a good playbook for centers that are less than 60% occupied. So that's exactly the practices that we're focused on.

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

I think with the conditions that exist outside of KinderCare across the economy through the U.S. is understanding, and we always have known, but the tuition for a parent as a part of their budget is very much the size of their mortgage or their rent. And so for us to get to even historical levels on that time horizon really is us being very impactful with parents about understanding the value proposition of what we do for their child. And so that goes back to the earlier statements I was just making for a parent to understand how much development occurs for a child under the age of 5 years old, understanding that a dollar spent on a child's development under the age of 5, any economic study would tell you it has a stronger ROI than at any other time in the life of a child.

And then for us to articulate for those parents the compelling difference of our curriculum and the impact we have on children achieving those milestones. Those are the things that help a private pay parent understand how important it is for their child to be in that type of an experience and then for them to make the decisions they need to on their own personal budget is really the expectation that we have for our team.

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

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

Yes. And just for everyone, when we brought Creme in, that actually had a dampening effect on our occupancy. So if you look at our KinderCare versus 2019, centers were actually above. And it's just the Creme centers are so large and they have an undue impact. But for us, for an expectation about occupancy, we have so many centers in our quintile 1 through 3 that are above 80% occupied. So we know when we do things well and when we have strong engagement, which we measure with Gallup for both our staff and our parents that they have the best business outcomes on student retention, as Tony was just saying, teacher retention and profitability.

So we know that we have examples throughout very different communities where we are over 80% occupied. So we have an expectation of ourselves that each year, we should be expanding our occupancy 1 to 2 percentage points, and it just requires us to focus on those things that we can control and is exactly what we're talking about here. One of the elements to that is improving the digital experience of both our parents and our center directors. So you've heard from us throughout this year how we've been adding -- rolling out enhancements to our digital experience, and that can be on the enrollment process. It can be on the billing and payment process. It can also be on how we more effectively communicate with parents through our mobile app.

All those things help our parents have a better experience, better loyalty to us and wanting their child to stay with us longer. So as I mentioned, for us to expand into mid-70% and higher occupancy is definitely our expectation over the medium to long term. And it just requires us to do those things which we've been talking about here of empowering our center directors to have more time in their week to develop better relationships with prospective and existing parents.

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

You bet. Yes. So we started the year and guided that we thought our overall would be around 3%. And so we recently updated that to be between 2.5% and 3%. I'm going to take a quick step back, George, on pricing and how we do that. So we roll out new prices on January 1 on our private pay side for our new students and age-ups. And so they get those as they go. And Paul talked about the pricing impact. So that really helps in that area. And then on the subsidy side, we -- those prices go into impact when the states put them in place.

What I'd tell you is, if I look at student by student, we're -- every student is right where we thought they would be at this point, which is great, right? There's no surprises there. And so we haven't changed any of our pricing. We haven't updated pricing up or down or done anything there. What's happened this year, which has caused us to update that pricing is we have grown subsidy this year. Our subsidy students are actually up slightly. And so our downturn has been in the private pay, which is the conversation we've had, most of this discussion. And this year, in 2025, our net revenue per FTE is higher for our private pay than it is for subsidy. That's not something that happens every year, but this year, it is. And so really, that mix is what's causing our overall pricing to drop a little bit this year.

We will really get into it here in Q4. So we really kicked that off the start of Q4 to put in our pricing for next year for private pay. And obviously, we're having conversations with all the states and all the agencies to get a feel for what they might be doing next year. We fully expect to be back within the 3% to 5% pricing for next year and ongoing. And then just the last reminder, I'd just say is this year coming off a little short of 3% is coming off of several years in a row where we were in the 4% to 6% range as well. So that's why we are starting at the low 3%. We knew it was going to be a little bit lower this year, and then we're just slightly down from where we thought we'd be at the start.

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

Yes. So our on-site business, what we refer to as KinderCare for employers has as well exceeded their 2019 levels. The overall occupancy of our on-sites exceeds that of our community centers, which isn't surprising because you have more of a captive audience of consumers, so the parents who are working at that employer. And so similar, just understanding that we have great operational practices at those centers and looking to drive them to have even stronger occupancy and where they are from in their mid-70s -- mid- to high 70s. So feeling really good about the clients we have, the on-sites we have.

We've also seen a growth in the number of employees of our clients who are in our community centers. So that's attractive to us because those parents who are loyal to their job and enjoying that benefit, stay with us longer back to Tony's comments on our retention being longer comes as having even in our 1,500 centers, more employer-related client revenue flowing through our centers has been powerful.

And then on the Champions business, similarly, we've seen growth of that. I talked about we're adding new sites all the time. Right now, we're in the midst of back-to-school where many of those new sites open. So they're opening on time and with a great initial push of enrollments. And then even on our existing sites before and after, we're seeing an increase to the number of students at individual sites, and that continues to be a growth opportunity.

So both businesses performing well. What's been exciting for us is how many of our clients speak as advocates for us. So we have many instances where we're introduced to a new potential client because they referred to us to their peer CEO or CHRO or CFO at a peer organization. And that's great for us because in many cases, they're not looking to do a process or an RFP. They've heard great outcomes for the way of the flexibility of our offering, how we show up with a very turnkey, high-quality program for those clients. And so that accelerates our ability to add those additional clients to our portfolio.

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

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

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

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

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

Yes. I mean as we look -- so we -- like I mentioned earlier, we'll look at what we want to do as far as tuition at our centers here in the fourth quarter to roll that out and knowing where our wage is going to be is one of the starting points for that. So we, about 3 years ago, changed when we do wage and how we do wage. So now we do it at anniversaries for our teachers, and we know kind of what that ladder is. Once the teacher stays with us after a year, they get a pretty sizable increase because they're able to run a classroom by themselves and be a lead teacher. And so with that, both myself, CHRO know when those are going to happen throughout the year and can really plan into that. And we're sitting exactly where we thought we would be right now, which is great.

So as we look to next year, we'll start with wage and see where we believe that's going to be based on lots of different metrics and expectations. And then we'll build tuition a little bit from that and making sure that we can create some differential that allows us to fund the business, do all the other great things we're doing for families and teachers. And so I've been here 17 years, pretty much every year other than that kind of COVID timing, we've been able to outpace it. And it's something that I think we do what we runway to care, but it's truly an industry thing as well, too. Right?

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

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

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

Yes. I don't think it will be that long until we turn the corner again, George, right? So I think we're doing a nice job with G&A. So just one other item there. We had talked about a year ago that felt like '23 and '24 were at a high point of G&A spending, and we're seeing that play out this year. If you look at our SEC financial statements, you won't quite see that with our public company costs coming in this year, but really feeling good that we'll anniversary that here coming up in the fourth quarter, and we'll start seeing that G&A leverage really start to pay off.

So we'll see a little bit there. We'll continue to see the tuition outpace the wage. And then as occupancy creeps back to flat and then beyond, we'll really start seeing that go as well. But then to Paul's point, we've got some other things in the works that we think can also help chip away with that. We did kind of a public announcement that we're working with Legion now in that labor area, and we're excited with what some of the tools Legion can bring to us, and we're not quite ready to roll that out. It will be sometime next year. But using some tools with them, I think, is going to be exciting and let us both save on labor, but also set up schedules even better for our teachers as well.

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

So from the opportunities are those that so many are already activating on when you think about call center and for assistance to parents or to families or even our own center directors, kind of those first steps of help is an opportunity. We're doing our own digital initiative, as we talked about. And so from the acceleration of the momentum of delivery of new iterations of our systems, we're using it there as well. There's future opportunity. Well, another place that we're using, we submit for RFPs when required on certain employer -- yes, employer client requests.

So using all the RFPs we've written over the last number of years helps us to still tweak them to be very personal for each individual RFP, but kind of putting the construct of that in a much more efficient way than it has been historically. And then future opportunities are what we're talking about, how do we continue to enhance the experience of the parents having. And so are there other capabilities that we can do in our future. And as other industries do this ahead of the curve, that gives us an opportunity to learn from them and look for places for us to do that as well.

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

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

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

Thanks, George.

Thanks, George.