KinderCare (KLC) Q1 2026 Earnings Transcript

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DATE

Thursday, May 14, 2026 at 5:00 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — John Wyatt
• Chief Financial Officer — Anthony Amandi
• Vice President of Investor Relations — Olivia Kirrer

TAKEAWAYS

• Revenue -- $673 million, up modestly, reflecting growth from Champions and B2B segments while offset by continued enrollment declines.
• Same-center Revenue -- Decreased by $7 million due to lower enrollment, partially offset by contributions from newer centers and higher tuition rates.
• Enrollment -- Down 3%, a sequential improvement from a 3.6% decline in the previous quarter, but still a principal pressure point.
• Same-center Occupancy -- 66%, an increase of 150 basis points sequentially, yet 310 basis points below the prior-year period.
• Champions Revenue -- Increased by 17%, driven by new site openings and incremental pricing.
• New and Acquired Center Revenue -- Contributed $12 million year-to-date, a 35% increase, not entirely due to acquisitions.
• Adjusted EBITDA -- $52 million, down from $83 million in the prior-year quarter due to lower occupancy and margin compression.
• Adjusted Net Income -- $4.2 million, with adjusted EPS of $0.04; both significantly lower than $27 million and $0.23 reported last year.
• Net Loss and EPS -- Reported net loss of $290 million and EPS loss of $2.45, driven by a noncash impairment related to stock price decline, with management clarifying no impact on liquidity or outlook.
• Cash Balance -- $133 million in cash and $190 million available on the revolving credit facility at quarter end.
• Net Debt to Adjusted EBITDA -- Just under 3x, which is within the targeted range outlined by management.
• SG&A Expense -- 10.6% of revenue, slightly down compared to the prior year due to ongoing efficiency and cost discipline.
• Interest Expense -- $18 million, a reduction from $20 million last year following a repricing.
• Full-year Guidance Raised -- Adjusted EBITDA now projected between $215 million and $235 million, and adjusted EPS forecast increased to the $0.15-$0.25 range.
• Revenue Guidance -- Maintained at $2.7 billion to $2.75 billion, with tuition and occupancy expected to balance at +3% and -3%, respectively, alongside 1% from Champions and B2B, and 50 basis points each from new centers and acquisitions.
• Q2 Guidance -- Revenue expected between $690 million and $700 million and adjusted EBITDA between $63 million and $67 million.
• CapEx Guidance -- Capital expenditures remain projected at approximately 5% of annual revenue.
• Free Cash Flow Forecast -- Management projects free cash flow between $35 million and $40 million for the year.
• Marketing Investment Impact -- A 15% increase in inquiries in targeted centers with a 3% increase company-wide; conversion rates showing initial improvement in focus areas.
• Enrollment Progress -- The opportunity region achieved an 8% enrollment increase, attributed to targeted execution and leadership changes.
• Network Optimization -- More center closures expected than the usual 15-20 per year as a result of disciplined portfolio management; specific closure figures pending further review.
• Acquisitions -- $0.5 million in Q1 acquisition spend, fully funded ahead of $1.1 million in free cash flow generated for the period.

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RISKS

• Enrollment remains persistently below prior-year levels, with management stating, "it continues to be a primary pressure point on the business."
• Occupancy shortfall is constraining operating leverage and margins, as described: "our labor inputs are not as flexible in our current position in the margin set function."
• Noncash impairment booked due to stock price decline resulted in reported net loss of $290 million and EPS loss of $2.45, potentially creating near-term volatility.
• Higher-than-usual center closures planned for 2026 are expected to cause "some near-term variability as we execute across the year."

SUMMARY

KinderCare Learning Companies (NYSE:KLC) reported modest revenue growth, with significant contribution from the Champions segment and B2B business even as core enrollment and same-center metrics continued to lag. First quarter performance benefited from increased marketing investment, which drove higher inquiry volume and some early conversion improvements, particularly in targeted regions. Management emphasized that a larger number of center closures are in process for 2026 as part of portfolio optimization, which will result in near-term operational disruption but is expected to improve long-term center-level performance. Subsidy funding at both state and federal levels was described as constructive, with management noting new $85 million federal CCDBG funding and expanded state initiatives. The company's updated guidance reflects raised full-year adjusted EBITDA and EPS targets, as one-time factors supported Q1 margins, but no incremental closure impacts are yet incorporated.

• CEO Wyatt said, "Our best opportunity for material progress will be in the back half of the year," signaling anticipated timing of operational recovery.
• Champions site count grew to 1,159 from 1,038, indicating about 10% expansion primarily via new openings and existing client site additions.
• Private pay tuition increases for new students are running above 3%, supporting pricing-driven mix improvement in 2026, with enrichment programs adding incremental revenue across core brands.
• Only single-digit percent of KinderCare centers currently receive targeted paid search marketing, with ongoing evaluation to scale as localized data supports expansion.

INDUSTRY GLOSSARY

• CCDBG: Child Care and Development Block Grant — major federal funding source for childcare subsidies.
• Opportunity region: Designated subset of centers identified by management as underperforming but targeted for intensive operational improvement.
• Champions: KinderCare's before- and after-school program business line serving elementary schools.
• B2B: Business-to-business segment involving employer-sponsored childcare offerings and tuition benefit contracts.
• Enrichment programs: Supplemental educational offerings (e.g., comics, languages, music, STEM) that provide additional child engagement and incremental revenue for centers.

Full Conference Call Transcript

Operator: 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.

Olivia Kirrer: 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.

John 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.

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

Jeffrey Silber: 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?

John Wyatt: 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.

Jeffrey Silber: 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?

Anthony Amandi: 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.

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

Jeffrey Silber: 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?

John Wyatt: Well, let me start with 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.

Faiza Alwy: 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?

Anthony Amandi: 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.

John Wyatt: 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.

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

Jeffrey Meuler: 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?

John Wyatt: 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.

Anthony Amandi: 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.

Jeffrey Meuler: 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].

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

Jeffrey Meuler: Yes.

Anthony Amandi: 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.

John Wyatt: 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.

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

Toni Kaplan: 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.

Anthony Amandi: 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.

Toni Kaplan: 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?

Anthony Amandi: 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.

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

Unknown Analyst: 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?

Anthony Amandi: 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.

John Wyatt: 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.

Unknown Analyst: 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.

Anthony Amandi: 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.

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

Unknown Analyst: 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?

John Wyatt: 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.

Unknown Analyst: 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?

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

Joshua Chan: 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?

Anthony Amandi: 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.

Joshua Chan: Okay. And then on the incremental closures, I know 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.

Anthony Amandi: 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.

Joshua Chan: I appreciate that. Thanks so much for your time.

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

John Wyatt: 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.

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

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