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DATE

Thursday, Aug. 13, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• Director of Investor Relations - Jason Terry
• Chief Executive Officer - Tom Wyatt
• Chief Financial Officer - Tony Amandi

TAKEAWAYS

• Revenue -- $697.5 million, representing a 0.4% decrease compared to the prior year due to center consolidations and enrollment headwinds.
• Net Loss -- $8.8 million, compared to net income of $38.6 million in the second quarter of the previous year.
• Adjusted EBITDA -- $63.0 million, down from $82.4 million as lower occupancy impacted operating leverage.
• Adjusted EPS -- $0.08, down from $0.22 in the same period last year.
• Champions Revenue -- $59.4 million, an increase of 13.4% driven by higher rates and the addition of 85 net new sites over the past 12 months.
• Early Childhood Education Revenue -- $630.5 million, decreasing 1.5% as a 4.0% decline in enrollment was only partially offset by a 2.6% increase in tuition rates.
• Same-Center Occupancy -- 68.6%, representing a decline of 2.4 percentage points year over year.
• Same-Center Revenue -- decreased by $14 million or 2%, reflecting $11 million in impact from center closures.
• Center Footprint Optimization -- 49 center closures completed during the quarter, representing 3% of the total footprint.
• Consolidation Metrics -- the closed centers averaged occupancy below 37% and were primarily located in the fourth and fifth performance quintiles.
• Annualized Optimization Target -- management expects these actions to result in a $57 million revenue headwind and an $8 million benefit to adjusted EBITDA on an annualized basis.
• Full-Year Revenue Guidance -- projected between $2.66 billion to $2.70 billion.
• Full-Year Adjusted EBITDA Guidance -- projected between $200 million to $220 million.
• Full-Year Adjusted EPS Guidance -- projected between $0.05 to $0.15.
• Third Quarter Guidance -- revenue expected between $660 million to $680 million with adjusted EBITDA between $44 million to $48 million.
• Capital Expenditures -- $120 million to $130 million planned for the full year.
• Free Cash Flow -- anticipated to be less than $10 million for the year due to elevated cash costs from footprint optimization.
• Lease Exit Liability -- $20 million to $25 million in expected payments for 36 identified lease exits.
• Acquisition Activity -- $0.5 million in cash consideration spent on five center acquisitions during the quarter.
• Liquidity Position -- $173.7 million in cash and $187.7 million in available revolving credit capacity.
• Net Debt Leverage -- approximately 3 times adjusted EBITDA.
• Summer Program Growth -- summer camp enrollment at Creme School increased 26% compared to the previous year.

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RISKS

• Amandi warned that the company lowered its tuition contribution outlook to 2.5% for the year, stating, "We're just not seeing some of the rate impact we thought we would start seeing from subsidy come through."
• Amandi stated, "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," noting a specific impact to full-year earnings.
• Amandi warned that free cash flow for the year is expected to be less than $10 million, reflecting "elevated cash costs associated with the footprint optimization work."
• Amandi cautioned that the net debt to adjusted EBITDA ratio is expected to see a "modest increase" over the remainder of the year during the completion of center consolidations.

SUMMARY

Management at KinderCare Learning Companies, Inc. (KLC -4.47%) reported quarterly results that were impacted by a strategic initiative to optimize the company's center footprint through the consolidation of underperforming locations. The company reported a slight decline in total revenue as growth in the Champions segment and the KinderCare for Employers business only partially offset enrollment pressures in core early childhood education centers. Management lowered full-year financial guidance to account for the impact of 80 to 85 planned center closures and a slower-than-anticipated increase in state subsidy reimbursement rates. Chief Financial Officer Tony Amandi indicated that while the consolidations create near-term revenue headwinds and lease exit costs, the strategy is intended to improve long-term occupancy and operating leverage by 2027.

• Chief Executive Officer Tom Wyatt stated, "revenue from these programs has almost doubled from a year ago," referring to the Learning Adventures small-group enrichment curriculum.
• Management reported that 90% of center closures to date have involved locations in the lowest-performing fifth quintile of the portfolio.
• The company entered its 42nd state with a new location in Bentonville, Arkansas, and opened its first Creme School in the California market.
• The company is implementing an AI program to evaluate the quality of parent tours and center director interactions in real time to improve enrollment conversion.
• Management indicated that labor availability is currently not a limiting factor for growth across the portfolio.
• The footprint optimization is expected to improve total occupancy by approximately 1.5 percentage points once all planned closures are finalized.

INDUSTRY GLOSSARY

• Champions: KinderCare's brand providing before- and after-school programs for school-age children within local school districts.
• Creme School: A premium early education brand featuring specialized enrichment classrooms and elevated amenities.
• ECE: Early Childhood Education.
• Footprint Optimization: A strategic program to consolidate or close centers that are underperforming or no longer aligned with local demographic demand.
• Learning Adventures: Supplemental small-group enrichment programs offered at KinderCare centers covering subjects like phonics, STEM, and Spanish.
• Magnet Center: A high-performing center designated to receive families and staff transitioning from nearby consolidated locations.
• Quintile: A performance ranking system that divides the center portfolio into five equal groups based on financial or operational metrics.

Full Conference Call Transcript

Operator: Thank you. Welcome to KinderCare's second quarter earnings conference call. [Operator Instructions] It is now my pleasure to introduce Jason Terry, KinderCare's Director of Investor Relations. Mr. Terry, you may begin the conference.

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

John Wyatt: Thank you, Jason, and good afternoon, everyone. I'm pleased to share updates on our second quarter performance with you today. We delivered 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 KinderCare for Employers. And our premium brand, the Creme 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 to give them more time to lead 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 incremental programs expand 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 attractive long-term potential and strong demand 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 disciplined approach to Creme Schools, our premium brand, expanding into markets where we see growing demand. Just after the quarter ended, we opened the Creme School at Great Park in Irvine, our first Creme location in California. The school features modern learning environments, elevated amenities, and personalized educational experiences.

This is an important milestone and expands Creme into a large and very attractive market. We are pleased with enrollment in our summer camp programs at Creme, 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 4 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' childcare needs. During the quarter, we welcomed 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 childcare 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 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 childcare access. For instance, New York recently announced a massive investment of $1.7 billion into ECE programs. California announced it will add another $220 million toward 20,000 new mixed-delivery childcare spaces, 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 means expanding into growing communities like Bentonville, Ridgefield, and Irvine. It 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 2/3 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 childcare. 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.

Anthony Amandi: 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. While 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. Champions 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 5 new centers and acquired 5 new centers during the quarter. Cash consideration for the acquisitions in Q2 was about $0.5 million, funded completely out of the $45 million in free cash flow generated in the quarter. New and acquired 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, we 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 $0.5 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 our revolving credit facility. Net debt to adjusted EBITDA is approximately 3x.

We expect a 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 million 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 billion and $2.7 billion, adjusted EBITDA between $200 million 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 B2B to be 1%, with new centers and acquisitions to both remain consistent at about 50 basis points each. Consolidations are now expected to represent about a 1.5% headwind to revenue growth this year. We expect CapEx this year to be between $120 million 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 million and $680 million and adjusted EBITDA to come in between $44 million and $48 million. Occupancy for 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-aligned 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 disciplined execution, completing our footprint optimization work and investing in the opportunities that matter most. We believe those actions will position us well as we enter 2027. Now let's go ahead and open up the line for questions.

Operator: [Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets.

Jeffrey Silber: 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 in terms of guidance going forward? Would it have been maintained, changed in any way? Any color you could give would be great.

Anthony Amandi: So we shared some information in the -- online in the presentation. So hopefully, that will be helpful for you all, but I can go over a few things. So in the quarter, it was about 70 basis points of impact to revenue. We anticipate because you're asking more about guidance, 150 basis points of impact to occupancy. And so obviously, that's having a positive impact of departing those centers. And we anticipate about $30 million of revenue decrease because of those closure of centers. So that's definitely weighing into our guidance, and that's the amount that kind of made the changes.

Jeffrey Silber: Were there any -- I know there were other changes in guidance. Was there any other impact beyond the center closures in terms of your guidance change, whether it's tuition or subsidy impact?

Anthony Amandi: Yes. So right, in our guide, we did reduce, Jeff. The one thing that we did change was going down to 2.5% on pricing. So we're just not seeing some of the rate impact we thought we would start seeing from subsidy come through. And so that's why we brought that down from 3% to 2.5% for the back half of this year.

Jeffrey Silber: And is that something that you think will be delayed into next year? Or is that kind of, I guess, a recurring item?

Anthony Amandi: No. At this point, it's something that we're monitoring, and we do think it could impact the first half of next year. And so it's definitely something we're monitoring on the potential impact into the first half.

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

Jeffrey Meuler: Just a similar question to Jeff. But on the slide, I guess, 10 in the deck, it says there's an adjusted EBITDA impact, negative $2 million in Q2 and negative $3 million in 2026. I thought that you said there was like $8 million of benefit from these closures. So can you just help square that? And then on the EBITDA guidance, just any adjustments beyond kind of the closures, the $8 million of insurance headwinds? And then I don't know if there's any sort of like flow-through impact to EBITDA, presumably there is on the lower price yield.

Anthony Amandi: Yes, that's right, Jeff. So on the $3 million that's on that slide, right, that is the direct impact we saw from closing those centers. So that is some severance that will come, right, on centers where we weren't able to move a center director or a teacher. We obviously would provide severance in that situation. And then as we turn keys back over outside of the kind of the leases, there's occasionally some maintenance type fix up things we need to do. And obviously, they're relatively minimal, but that's factored into that $3 million as well.

Jeffrey Meuler: Was there an $8 million benefit that was referenced?

Anthony Amandi: So that will be the annualized benefit. So that's something we see into the future of kind of seeing those centers depart our fleet and the EBITDA that they were pulling us down by going forward.

Jeffrey Meuler: So there's only a partial benefit from that this year?

Anthony Amandi: That's right, Jeff. Yes, that's right.

Jeffrey Meuler: Okay. Got it. Got it. And then can you just comment on just the marketing initiatives and the enrollment growth in the opportunity region and just to what extent that progress is continuing?

John Wyatt: Yes, Jeff, it is continuing. The opportunity region is still performing well. I would tell you that the marketing that we began in the first quarter and it continues through the third quarter now, we actually added a few more million dollars to it, so going into back-to-school because all of the marketing, the target marketing we've done on paid search has put us in a position to increase year-over-year inquiry every single week. So we're really pleased with that. It's all about execution now, Jeff.

We're waiting to see and are starting to see, as we've mentioned in the last call, we're starting to see some traction in partial centers where the clarity of their job, the lack of distractions, all the work that we did to simplify the role of center director is starting to pay off a bit.

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

Faiza Alwy: So just a follow up on the closures. I think you said that there's maybe more costs in 2027, and that might be related to some of the cash costs. So can you just help us appreciate some of the impacts into 2027? Should we expect that $8 million benefit to come through in 2027? Or would there be some lingering costs that's going to flow through the P&L?

Anthony Amandi: Yes. No, good question, Faiza. So as far as direct impact to adjusted EBITDA, we would expect the benefits to start flowing through in '27 and as it relates to Jeff's question earlier, even start to see that partially in the back half of this year. So we'll start to see those benefits. We did -- I did call out a $20 million to $25 million number for continued cost for closures, that's right now our best estimate on cash costs as we look to buy out of the right leases that we can buy out that are a great ROI for us to buy out of. So those would be onetime cash costs.

And based on the general accounting principles on that, we would see those not hit EBITDA, but they would potentially a portion of that hit net income as we go through. So we're working on those as we speak today. We'd like to get those finished up as soon as possible, but I did allude to the fact that we just know with negotiations that some of that might flow into '27, but we're hoping to get it done as soon as we possibly can.

Faiza Alwy: Got it. Got it. Understood. And then, Tom, I just wanted to ask more about all of your efforts around strengthening the execution in the business. where would you say -- I know it's early days, but where would you say you are? And what are some of the focus areas been for you right now? And what -- is there sort of -- are you at Stage 1? And is there a second stage that's to follow? And how should we think about the impact of all of your efforts and when that sort of starts helping enrollment in a more meaningful way?

John Wyatt: Good question, Faiza. Obviously, to turn 1,600 centers is going to take some time, although I can tell you that we have seen good progress in some of our centers that have eliminated a lot of that extra curricular distraction, if you will, more quickly than others. And so we see that in some of our centers. I would tell you that we're hoping to see some of that during back-to-school. We don't know how much yet, obviously, because we're literally 2 or 3 weeks into back-to-school.

But our hope is between back-to-school and the rest of the year, which, as you know, we continue to grow enrollment all the way through the fourth quarter and into the first half of next year. So our hope is it continues to crescendo, continues to improve over that period of time. And at the same time, we will continue to invest where it makes sense in additional paid search, if you will, targeted marketing to continue that year-over-year increase in inquiry.

Operator: Your next call comes from the line of Manav Patnaik with Barclays.

John Ronan Kennedy: This is Ronan Kennedy on for Manav. Previously discussed the quintiles, the opportunity regions, remediation efforts and now obviously, an acceleration of center consolidations. Can you just walk through again the specific criteria used to evaluate a center and determine whether it receives investment is remediated, consolidated closed? I know I think you talked about 37% occupancy level. Is there anything else from an enrollment trends, local supply-demand dynamics, labor availability, pricing, anything else? If you could just walk us through that thought process.

Anthony Amandi: Yes, of course. Makes sense where you're going. I mean look, as we looked at the fleet, we went through -- and we talked about this back in March. So we went through one by one and looked at every single one for, frankly, most of the things you're talking about there, right? The biggest one that we're really looking at is we have a pretty good feel on when we're building a new center, when we're acquiring a center, what we expect to have success with as far as demographics go. And there's a number of demographics that go into there. And so we took a peek at that and qualified our portfolio against those same ones.

That got a much smaller subset of the centers that are like we need to take a deeper dive on those. And at that point, we weren't looking at anything else. We weren't looking at financial results. We weren't looking at engagement or anything there. From there, then we took it and looked at each one of those things. So to your point, we're looking at what our inquiry levels have been and what are the demographics looking at? What's the engagement level of the center where it's historically been, where it has financially been trending? Frankly, you brought up labor, labor is really not an issue almost anywhere.

It's a day-to-day battle, but it's not something that's preventing us from growing ever. But really looked at all those individually and made some decisions center by center on what we needed to do. And then we're always looking at the kind of that drive time map of, it's usually 10 to 15 minutes. And so we are all -- we were looking at, is there any sister centers within that 10 to 15 minutes for any of those centers that we flagged that might make sense to do what we call a magnet center and be able to serve those families at a magnet center. And so that was definitely a consideration as well.

John Ronan Kennedy: Got it. And then you had indicated roughly 2/3 of the optimization effort is done. Is there a possibility for more to be done post FY '26 because, say, there are centers with similar characteristics, but you think they could potentially improve, et cetera. Is there any risk of still further remediation consolidation next year or consolidation closure?

Anthony Amandi: Yes. No, look, here's what I'd say. We historically, I'd say since 2014, at least, have always looked to close centers. We're running this business like a multi-location business while also making sure we're taking great care of our families and our teachers. But every year, we're constantly looking at that. So I would anticipate we're still going to close more centers next year. And so we will still keep our pulse on that, and we're going to continue to see closures much like we have in the past as well.

John Ronan Kennedy: And if I may, I'll ask another one. Can I just please reconfirm if there's a, so to speak, clean enrollment trend? If you can comment to that and the inquiry conversion, anything of note from an enrollment standpoint for the retained portfolio?

Anthony Amandi: Yes. So right, we talked about that the quarter was down 240 basis points and the closures had about a 70 basis point impact, right? So we're still right around that down 3% kind of as clean as you can get it, if you will.

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

Toni Kaplan: I wanted to ask about the tuition reduction in the guide. I think you talked about it being related to state subsidies. Is that a timing issue? Or could you just maybe explain what's going on there?

Anthony Amandi: Yes. Is it timing, Toni? I don't think I would necessarily classify it as timing, right? So as we go into the year and then go -- when we talk to you back in May, we have certain expectations where state budgets are going to land and what they're going to do about them. It's still not 100% clear to us what all the states are going to do as far as tuition increases related to subsidy. But at this point, based on what we know, we believe it's not going to come in quite as high as we were expecting it to in the first half of the year.

Now to your timing question, there is a potential that states make some different decisions, and we do -- we get some more monies related to that later in the year, and we'll update it as we go. But based on what we know today with our connections and knowing what the governments are thinking, that's why we chose to reduce that related to subsidy revenues.

John Wyatt: And Toni, the only thing I would say is, as we've sort of reversed the trend in Indiana, which penalized us last year, and we're seeing solid growth in Indiana at this point in time. And also, you heard us talk on the prepared remarks, both New York's $1.7 billion infusion and the $200 million in California on mixed delivery as well as tax incentives in New Hampshire, all of the wind at our back. So we may gain it in one place and lose it in the other. But all in all, this year has been a lot more stable than it was last year.

Toni Kaplan: Understood. And I wanted to ask about when you think about the back-to-school environment right now and the strategies that you're deploying, we've talked in the past about the opportunity regions and marketing changes. Anything else we should be thinking about that you're doing differently in the back-to-school market push this year?

John Wyatt: No. I would tell you that it's the focus on the marketing, and that is a 2-pronged approach. We have an amount of marketing that's going throughout our 42 states now, not 41, but 42 states. Along with that, we have a target marketed program in a number of states. We've actually increased that from the first half of the year. So all that should give us wind at our back.

The other thing that we are just testing and it's new for us, Toni, we work on a -- and have since adopted and executed an AI program that's helping us with the quality of the tour, quality of the interaction with the center director and new parents as they inquire for enrollment, which is showing us, quite frankly, in real time, the quality of the call, the quality of the follow-up all the way through to enrollment. And we are very encouraged as is the field management team about what that can do for us. And that's literally started just weeks ago.

So more to come on that in the next call, but something that we are increasing exposure to right now.

Toni Kaplan: Terrific. Really, really quickly, Tony, you mentioned the third quarter revenue range. I think we didn't catch it and it differs in the transcript. So just wondering if you could just repeat that range for 3Q.

Anthony Amandi: Yes. So we're at $660 million to $680 million for revenue, $44 million to $48 million for adjusted EBITDA and occupancy in the mid-60s.

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

Keen Fai Tong: You discussed the qualitative criteria that you use to select centers for consolidation. Can you quantify or estimate how many centers in your current retained portfolio have occupancy or profitability that's comparable to the centers that are being closed?

Anthony Amandi: I don't have an exact figure for you there, George. I mean like we shared, out of the closures we've done so far, about 9 out of 10 of them, right, are out of quintile 5. A strong portion of the remaining ones that we'll do this year are also coming out of quintile 5. So we're definitely exiting -- not a majority, not quite a majority yet, but a strong portion of those. And so we're definitely exiting some of our lowest performers.

And any ones that we have left, if they were at a level of occupancy similar, we are still keeping them because of demographic reasons or potentially, and most often, it is a center director change or something like that, that we still see there is the ability to grow that. But again, to some of the questions we had earlier, those are going to be some of the centers that are in the top of our watch list that we're seeing some of these actions that Tom is talking about will allow them to turn around.

John Wyatt: George, you should also know that we had a number of centers that graduated from the opportunity region this year, and we're really proud of that. We also added a couple back in. So I mean, we really are seeing movement in the opportunity region. And candidly, through this part of the year, it's been positive from a standpoint of successful turnaround. So we're encouraged by that. Not that we always won't have, we'll always have a quintile 5 that we're going to focus on. But hopefully, it's improving as the mix improves itself.

Keen Fai Tong: Got it. That's helpful. And going back to a point that you just mentioned for centers that you're looking to retain even if it's in the lower quintiles, what improvement do you need to see and over what time frame before you decide whether or not to continue remediation or pursue a closure?

Anthony Amandi: Yes. I mean, as you'd imagine, George, it's really a center-by-center determination, right? How long we've had that center, what lease life is left, about how much leases on, are all some of the quantitative just financial reasons we're looking at. Center director and DL time with that center. whether an opportunity region might give them a little bit more time. And then it's just trajectory we see, right? We've kind of always talked about getting to about 45% to 50% is generally breakeven for a center. And so as centers show trajectory to that and then hopefully pulling out of that, that gives them more ability to kind of buy themselves a little bit more time.

So there's not a perfect equation for it, but we're obviously looking at those quantitative factors. And then the last one I'd just say because we continue to say and it's very true is where engagement levels look at because those generally tend to be a leading indicator. So if we're seeing engagement levels increase, and we'll do pulses midyear, sometimes you get a check on those. If we're seeing them go in the right direction, usually, that's a leading indicator that things are to come.

John Wyatt: And one more thing just on that subject. We look a lot at density. I mean these centers are centers that are sometimes 30, 40, even 50 years old and families have moved out of or migrated out of that area. So just density. If we have a high density and we're a low performer, then it's on us. But if we have a low-density center, occupancy is low, inquiry is low, future enrollment doesn't seem to be there, then it's on us to say, look, families have left this community. It's more mature, and we need to find those families and move to where they are.

Operator: Your next question comes from the line of Josh Chan with UBS.

Joshua Chan: I guess on the centers that you decided to close in terms of how they got to the occupancy levels that they were, would that primarily be COVID? Like is that the main reason you would think?

Anthony Amandi: I don't think it's necessarily COVID, Josh, right? I mean I guess we can all have a different interpretation of COVID and what that means. I would say these were centers that pre -- whatever time period you want to say, were successful for us, and they are doing well by us. And some of them have been in the fifth quintile, potentially, but still performing well and demographics have changed. So would some of those -- would somebody say it's because of COVID, the demographics change? Potentially. But it's more just demographics generally to Tom's point, have changed and the families just aren't there for us to serve anymore and it's time to let them go.

Joshua Chan: Okay. That makes a lot of sense. And then maybe on guidance, I know that it's been asked a little bit earlier, but could you just bridge for us why as you close these unprofitable centers that instead of EBITDA going up by a portion of that $8 million that it goes down by $15 million? Like I know there's some insurance in there and some costs, but just can you just bridge us that difference, please?

Anthony Amandi: Yes, of course. So yes, look, I mean, we called out the insurance things that are impacting it. We did call out the kind of $3 million and kind of onetime costs related to those closures that's definitely impacting it. The reduction of tuition from 3% to 2.5% is definitely impacting the downward trend of EBITDA as well. So we're definitely factoring in a portion of that $8 million run rate we talked about in the back half. As a reminder, Q1 and Q2 are generally our highest EBITDA quarters. So we're not getting quite as much here in the back half out of that. So that number is definitely in there.

It's just a couple of other factors that are working against us.

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

John Wyatt: Ben, thank you very much. And to all of you, thank you for your questions. Thank you for your support, and we wish you a very good night. We are really, really proud of the progress we've made. I hope you see it. I hope you see the traction we have. I hope you look hard at the businesses like Creme and At Work business, which are both performing very nicely and the trends, if you will, the new shoots, if you will, the green shoots within KinderCare. So have a great night. We appreciate your interest, and we look forward to talking to you next quarter.

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