KLC

Core Operational Priorities & Execution Improvements

• Maintained focus on 2026 stated priorities: strengthening center-level execution, simplifying center leaders' day-to-day responsibilities to free up time for teacher support, family engagement, and enrollment conversion, and positioning the business for long-term growth.
• Enhanced targeted marketing for the flagship KinderCare brand to improve enrollment trends, and expanded the high-margin Learning Adventures incremental enrichment program (covering phonics, STEM, and Spanish) across more centers and into seasonal programming, after family response and revenue nearly doubled year-over-year.

Geographic & Brand Expansion

• Entered its 42nd U.S. state with a new center in Bentonville, Arkansas, and opened an additional new center in Ridgefield, Washington, an underserved childcare desert.
• Opened the first CRIMS School premium location in California (Irvine) immediately after quarter-end, marking a key milestone expanding the premium brand into a large high-potential market.
• Gained new employer partners across multiple industries for KinderCare for Employers, leveraging the company's national 42-state footprint to meet growing employer demand for childcare tuition benefits and customized solutions.

Footprint Optimization

• Undertook disciplined footprint consolidation to align the center network with shifting family demand; completed 49 center closures in Q2 2026, representing ~3% of total centers, all primarily from the lowest-performing quintiles with average occupancy below 37%.
• As of the call, the company is two-thirds of the way through 2026 consolidation, with a total of 80-85 full-year closures expected, mostly completed in Q4 2026.
• The company prioritized minimizing disruption for families and employees, assisting with transitions to nearby locations; family and employee retention through the process have exceeded management expectations.
• On an annualized basis, full optimization will create a $57 million revenue headwind, deliver an $8 million benefit to adjusted EBITDA, reduce annual rent expense by ~$7 million, and improve overall system occupancy by ~150 basis points.

Policy Environment

• Management noted steady bipartisan support for childcare expansion at the federal and state level, highlighting major recent investments in New York ($1.7 billion for ECE programs), California ($220 million for 20,000 new childcare spaces), and New Hampshire (a new childcare tax credit for employers), all of which create positive tailwinds for the business.

Financial Performance Highlights

• Generated $45 million in free cash flow in Q2 2026; ended the quarter with $174 million in cash and $188 million in available revolving credit capacity, with a net debt-to-adjusted EBITDA ratio of approximately 3x, providing sufficient flexibility for ongoing optimization work.

• Full-year 2026 guidance has been updated to reflect the impact of footprint optimization, additional insurance reserve costs, and slower-than-expected state subsidy reimbursement growth: revenue is now guided 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.
• Full-year occupancy is expected to be down approximately 3% year-over-year, as reduced capacity from consolidation partially offsets underlying enrollment pressure.
• Annual tuition contribution to revenue growth is now expected to be ~2.5%, down from prior expectations due to slower state subsidy reimbursement rate increases.
• Consolidation is expected to create a 1.5% headwind to full-year 2026 revenue growth; B2B segments (Champions and KinderCare for Employers) are expected to contribute 1% to revenue growth, with new centers and acquisitions each contributing 50 basis points.
• Full-year 2026 CapEx is guided between $120 million and $130 million; full-year free cash flow is expected to be less than $10 million due to elevated cash costs associated with footprint optimization; the expected full-year effective tax rate is 27%.
• Third quarter 2026 guidance is provided for additional transparency: revenue is expected between $660 million and $680 million, adjusted EBITDA between $44 million and $48 million, and Q3 occupancy is expected to land in the mid-60% range.
• Management expects quarter-to-quarter financial variability through the end of 2026 as remaining consolidations are completed, and expects entering 2027 with an improved aligned footprint, better occupancy trends, and a cost structure that supports sustainable long-term growth.

Total consolidated revenue for Q2 2026 was $698 million, a slight decrease from $700 million in Q2 2025. Overall same-center revenue decreased 2% ($14 million year-over-year), driven by lower enrollment and center closure impacts, partially offset by higher tuition rates and strong performance from newer centers. Total enrollment declined 4% year-over-year, reflecting both enrollment pressure and footprint consolidation. Same-center occupancy was 68.6%, down 240 basis points from last year, with a 70 basis point benefit from completed consolidations.

1. KinderCare (flagship brand): The company’s largest segment saw ongoing enrollment pressure, partially offset by growth in incremental small-group enrichment programs (Learning Adventures), whose revenue nearly doubled year-over-year. New centers were opened in high-demand underserved markets during the quarter.

2. CRIMS School (premium early education brand): The segment continued growth momentum, with summer camp enrollment increasing 26% year-over-year. The first California location opened just after quarter-end, expanding the premium brand into a large attractive market.

3. Champions: Delivered a 13% year-over-year revenue increase in Q2 2026, marking the fourth consecutive quarter of double-digit revenue growth. Growth was driven by 85 net new sites added since Q2 2025 and improved productivity at existing sites. Summer programming performed strongly, supporting expanded relationships with school districts and families. This B2B segment contributed positively to overall group results, offsetting weakness in core center enrollment.

4. KinderCare for Employers: The B2B employer-sponsored childcare segment saw continued strong demand, with multiple new partners added across industries during the quarter. It contributed to offsetting core enrollment weakness as part of the company’s diversified growth strategy. Combined with Champions, these B2B businesses contributed 1% to full-year expected revenue growth.

Pricing contributed 2.6% to overall early childhood education (ECE) revenue in Q2. Adjusted EBITDA for the quarter was $63 million, down from $82 million in Q2 2025, primarily due to lower occupancy reducing operating leverage and $5 million in reserve adjustments for insurance and legal costs. SG&A as a percentage of revenue was 10.5%, down 76 basis points year-over-year.

• Forward-looking statements are inherently subject to uncertainties and risks that could cause actual results to differ materially from stated expectations, as detailed in the company's latest Form 10-K and SEC filings.
• Footprint optimization involves variable lease exit costs; 36 lease exits are currently visible with $20-25 million in expected exit payments, but remaining leases are still under negotiation, with cost and timing varying by location, and some cash impacts may extend into 2027.
• Underlying enrollment pressure in the core KinderCare segment remains, with overall occupancy still below pre-consolidation and prior year levels.
• Subsidy reimbursement rate benefits from state policy are expected to remain modest through the current state budget cycle, coming in lower than prior expectations.
• Net debt-to-adjusted EBITDA is expected to increase modestly through the end of 2026 to fund consolidation and lease exit costs.

Technical difficulties disrupted the first scheduled question, so no full substantive exchanges were completed during the Q&A portion of the call. The only initiated question from Jeff Silber of BMO Capital Markets was cut off by audio issues before management could respond. The question requested additional color on how full-year guidance would have changed if the center footprint optimization program had not been implemented. No further questions were processed before the call transcript ended.