G8 Education Limited (GEM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the G8 Education investor call. [Operator Instructions] I would now like to hand the conference over to Mr. Gary Carroll, CEO. Please go ahead.

Thank you, and thanks everyone for joining us this morning. I'm joined on the call -- virtually joined on the call by Sharyn Williams, the group CFO for G8 Education. And for the purposes of this call, we'll be using the investor presentation that was posted on the ASX a bit earlier this morning and the slide numbers correspond to that presentation. So if we start on Slide 8, which really frames the flow of the presentation for today, what we'll be outlining for you is: Firstly, the impact of COVID-19 on the trading performance of G8 Education as well as details in relation to the government funding and relief packages that apply to the sector and to G8. We'll also be going through the various cost saving and cash preservation initiatives, both from an operating and capital perspective, that we've undertaken to mitigate the impact of COVID-19. In terms of an outlook, it is incredibly difficult, as you can imagine, to forecast the exact tenure and time and impact of COVID-19, and what we'll talk through is the various scenarios that we've modeled and how that plays into the equity raising today. From a guiding principles perspective, we are clear on our intention to retain our highly qualified center teams. And when we combine those with the initiatives that have been underway for some time, we feel that, that has us -- the retention of our team has us well-placed to rebound from COVID-19 in future months. And then the final thing that we'll be going through is -- are the various capital structure initiatives we've undertaken both -- from a dividend, a debt and an equity point of view. If I start with the impact on G8 of the COVID-19, and turning to Slide 9. The major impact across the sector of COVID-19 has been a material reduction in occupancy both in a physical attendance point of view, and also from a booking point of view. And this has resulted from the escalating containment measures that the government have implemented, which have limited the people movements, and I don't feel I need to go that -- into any great detail. Also, the shutting down of various industries has clearly resulted in employment losses across many sectors. The net impact of that has been that, across the sector, in the last 2 to 3 weeks of March, we saw nonattendance rates, which are historically around 8% on any given day as children are sick or on holidays, et cetera, increasing to approximately 50% towards the end of March. And that was really felt across the sector, including ourselves as people kept children at home through health or economic reasons. We also saw a significant increase in cessation of care requests of parents. To wrap some quantum around that, and there will always be a delay between physical attendance and paid occupancy, either by virtue of the allowable absences regime by which parents withhold the child from attending but continue to pay the fee to preserve their spots or via notice periods relating to cessation of care. Our paid occupancy as at the end of the first week of April was circa 9.7% below our prior corresponding period, and that was at a level of around 60%. And given the nonattendance that I talked to of around 50%, we actually had a physical attendance during that week in the low 30%. And our understanding is that's very consistent with what our other operators are experiencing. In response to that, and as outlined on Slide 9, the government came up with a sector-specific relief package as well as confirming that the sector could take advantage of the broader JobKeeper wage subsidy package. And the first point worth noting here is that for us, it was very comforting that the government chose to have a specific relief package for our sector. For us, that highlights the essential part that we play in the economy and highlights the importance that we provide in terms of providing care and education and enabling people to go to work, which in these trying times, I think, is even more important. It is very comforting to see. In terms of the details around the relief package, it operates by taking the average fee revenue for all operators in the last 2 weeks of February and halving that average fee. The government will pay that weekly amount to all operators in the week beginning the 6th of April for the period of the package. I'll note that the official expiry date of the package at the moment is the end of June. However, in a number of discussions between sector peak bodies and the minister, he has confirmed that the intention of the government is to match the period of the relief package with the period of the JobKeeper package. And the June expiry is more around reviewing how the package is going, and I'll go into that in a little bit more detail rather than having a hard expiry. So for our planning purposes, we have assumed that the period of the relief package will match the period of the JobKeeper package. The net effect of that relief package is that our revenues will be approximately $33 million per month for the duration. Turning to the wage subsidy, which legislation got passed yesterday, the results of that subsidy is that all eligible -- all employers will be eligible to receive a wage subsidy equivalent to $1,500 per fortnight for all eligible employees and that subsidy runs for 6 months. And later in the presentation, I'll talk about what that means from a dollar quantum point of view for G8 on a monthly basis. We turn to Slide 10, which outlines our -- the operational initiatives that we're undertaking to mitigate the impact of COVID-19. I think it's very important to point out the first and most important operational initiative for us is to ensure the safety and well-being of our children and team. As a result of that, we have set up a dedicated COVID-19 support team, and we've implemented a number of additional infection control measures, hygiene practices. We've rolled out a new sanitizing product, Zoono, which has been tested to be highly effective against the sorts of viruses we're encountering. We are working closely with relevant health authorities and monitoring and responding to their advices to ensure that we keep our children and team as safe as possible. That does include social -- relevant social distancing practices, which in our sector the sorts of changed processes we've got are around separating our age cohorts. Historically, at the start and end of each day, we may have combined those cohorts into family groupings. We are not doing that at the moment. We are staggering meal times, and we're increasing time outside, where obviously there is a little bit more space and allows for better social distancing. In terms of cost reduction activities, there are a few focuses here. One of our primary focuses is on how we maintain agile rostering so that our matching of team member numbers closely matches our physical attendance levels. And we have got a full-time team dedicated to ensuring that we're working with our centers to achieve optimal results, not only from a financial perspective but also from the team member perspectives. As part of our operational initiatives, we'll also be encouraging our team to utilize annual leave. That is primarily from a health and well-being perspective. It does have benefits from a EBITDA perspective, but clearly no impact from a cash perspective. We have undertaken a number of cost saving initiatives in both operating expenditure and capital expenditure, and it'd be safe to say that we've really honed in and ensured that we're focusing on critical items, both from an operating and capital perspective. A call out that we currently undertake on a regular basis are review of our asset base and our portfolio. We will continue to do so. It may be that in the coming months, that review may highlight opportunities to exit underperforming assets, and certainly, the ability to use capital raised -- from this equity raising may assist in a timely exit of those underperforming assets. I will note, however, that we haven't undertaken detailed modeling in relation to those assets at this point, neither have we started any negotiations. So there's probably no more detail I can share on that particular line item at this point in time. Our final key cost area that we were looking at is our property costs. And at the start of this week, we commenced the process to have formal discussions with our landlords in relation to getting rental relief, and I'll expand on that process in the quantum in a little bit later. And finally, as a show of leadership and support for what we're doing, our directors have undertaken to reduce their director's fees by 20% for the next 6 months. Turning to our capital initiatives, which are set out on Slide 9. I'm actually going to reverse the order of what's contained on the slide because that was really the order in which they are undertaken. The first thing that G8 did was to temporarily suspend our dividends with the exception of our deferred 2019 final year -- final dividend, which will get paid in October. We think our suspension of dividends is a prudent thing to do to preserve cash in this kind of environment, and we are not expecting to declare or pay any dividend in relation to 2020. A dividend may, subject to performance, be paid in respect of the first half year for CY21. The second thing we resolved to do was, we were keen not to disadvantage shareholders who had elected to take up the dividend reinvestment plan, and so what we've determined to do is adjust the issue price of the shares under the DRP to match the offer price under the current equity raising. There's no action required by G8 shareholders who've already elected to participate in the DRP, but we feel that's a fair result. The second key step that we undertook was to work with our banks, who have been very supportive this whole time to agree amendments to our banking facilities to provide covenant relief and -- for our next 2 testing periods being June 20 and December 20. So the banks will not be testing our fixed-charge cover ratio and leverage ratios during the following 2 periods. And I just want to call out that we continue to be very pleased with the support we've been receiving from our banking syndicate during this time. It's been very much appreciated. The final step that we've undertaken in relation to capital structure is the raising that we're talking about today, where we're looking to raise $301 million to provide us with an additional liquidity buffer, so that we can continue to operate through not only the next few months but the next quite extended period. And we feel this allows us an appropriate liquidity buffer to cope with any sort of downside scenario testing that may come in the coming months and really enables us to strengthen our balance sheet by significantly reducing our leverage. And Sharyn will go into that in a bit of detail. And depending on the overall macro environment and what happens over the next 12 to 18 months, it may afford opportunities for growth. However, I'm at pains to point out that the primary purpose of this raising is to provide a liquidity buffer to support our current operations as we all navigate COVID-19 and the subsequent recovery. In terms of the structure of the raising, it's a combination of a placement and an entitlement offer. Institutional placement totaled $134 million, while the entitlement offer with the one for 2.2 accelerated non-renounceable entitlement offer split between $89 million dollars for institutional portion and a retail component of $79 million, with the full issue being underwritten. The impact of the raising is -- primary impact is it reduces our leverage from 2.3x to 0.4x on an adjusted CY19 basis. I can then take people to Slide 15 -- I'm sorry to Slide 16. This really provides a quantification of the financial impact of COVID-19 and the government funding packages on G8. And I'll take a little bit of time to go through this slide. The intent of the slide is to provide you with a snapshot of the cash flow impact, pre and post COVID-19, both from a revenue and a cost point of view. So I'll start with the revenue which is on the left-hand part of the slide. You'll see that our -- prior to COVID-19, our average monthly revenue for the first half of 2019 was $72 million. As a result of the government relief package, that has been reduced to $33 million a month. You'll note that the $33 million government contribution is lower than the relevant CCS portion of $42 million in the prior corresponding period. The primary driver for that is that we -- in the $33 million number, there is not the benefit of seasonal growth that typically occurs in the sector and for G8 between the March and June period. It has really cut off a seasonal low. The last 2 weeks of February are a seasonal low in childcare sector, and it was -- that period was used because it was the period just prior to where COVID-19 started having a material occupancy impact. But it clearly does have a financial impact on an ongoing basis. Turning to expenses. The initiatives that we're undertaking when combined with the wage subsidy package results in a $32 million reduction in average expenses for average cash costs for G8 on a monthly basis. And turning through each of these in order, clearly the major cost reduction activities in the wages line, where wages are forecast to reduce from $43 million a month to $16 million a month, and that $27 million reduction is primarily made up of the $23 million subsidy -- JobKeeper subsidy that G8 is -- will be receiving. We have built up that subsidy on an employee-by-employee basis to consume eligibility in quantum. So our confidence level around that number is fine. The remaining $4 million of wage savings are through rostering activities, where we're matching team member numbers to physical attendance numbers. And as outlined previously, we have a dedicated team looking at how we ensure that we deliver those results. We have certainly increased the cadence of those activities from being a typically a weekly or fortnightly process to being very much a daily process, and that is progressing very well. As a result, our confidence around realizing that number is very high. There are $5 million in remaining cash savings on a monthly basis, leading to 3 areas. The first is around rental, where we're assuming a $2 million or a 20% reduction in rental costs. We commenced our formal engagement with landlords at the beginning of this week. We deliberately held off engaging landlords until we could ascertain the details of the relief package because, for us, that provides a very public and quantifiable impact of the revenue impact of COVID-19 on our operations, noting that a 50% fee struck off a seasonal low is actually more than a 50% revenue reduction on an annualized basis. We also were aware that the government was contemplating a PRInCiPleS Framework around negotiations between landlords and tenants when that has just been released. And while it doesn't strictly apply to G8 because we had sent over more than $50 million, we are certainly looking to incorporate the concepts and principles from that framework into our negotiations with landlords. We do have a significant number of landlords. We have 377 landlords with our top rate-based landlords only accounting for 47 of our census, so just below 10%. So there are a lot of discussions that need to be had. Our ask of them is in line with the PRInCiPleS framework that I've just articulated, which is clearly north of the 20% reduction that we've assumed. We wanted to adopt a conservative position given the number of landlords and the results in leakage that may occur. But given that buffer, we're very confident around achieving at least that result. We are forecasting to achieve $2 million in operating cost savings in a number of areas. We've already started this activity, and our run rate is very much indicative of the run rate you see there. These are centrally-controlled noncritical items such as marketing, training, et cetera. And as said, there, actions have already been undertaken. Levers pulled there. So confidence around that number is very high. And finally, we're -- we have reduced our annual CapEx from $40 million a year to $25 million a year. And in so doing, we are focusing only on critical CapEx items only. So the asset refurbishment program that we had called out in previous presentations has been deferred. We are focusing on critical items only and that equates to broadly $1 million a month. What you'll see a result of that is, G8's cash flow is essentially breakeven during the period of the subsidies, which interestingly was what the government was actually hoping for in its design of the relief package that we're trying to achieve viability, but that we're very clear that it wasn't about underwriting people's profit margins. And you would say that we -- if that was their intention, they'd certainly achieved it in our case. A breakeven cash flow scenario is certainly much better than a significant number of other sectors that are suffering significant cash leakage on a weekly and monthly basis. So as a result of -- sorry, once we determined that we were breakeven on a monthly cash flow basis after implementation of those activities, we turned our mind to how do we then provide an appropriate liquidity buffer to cope with the period post the subsidy under various downside scenarios. For example, if we -- as the subsidy expires, if occupancy across the sector including G8 starts off at very low levels and continues at those levels due to a very challenging employment environment, we wanted to position ourselves to be able to withstand that sort of harsh operating environment, which led to our decision to undertake the capital raising and the details of which are set out on Slide 18. The call outs from this slide are that the issue price of the raising is at $0.80 per share, which is a 25.9% discount to our last traded price of $1, a 16.1% discount to our theoretical ex-rights price. And that's broadly in line with recent issues that have happened in the market. I'd like to take the opportunity to thank our joint underwriters, UBS and RBC, who've done a fantastic job in a very short time period to get this issue away and for their underwriting of this issue. So that's very much appreciated. We'll be using the proceeds from the offer to strengthen our balance sheet flexibility and provide a strong liquidity buffer to manage through what may be a prolonged period of recovery. And to expand on what that means from a financials and balance sheet perspective, I'll hand over to Sharyn to walk you through the capital structure.

Thank you, Gary. Slides 19 and 20 outline the capital structure and balance sheet of the group at December 2019 adjusted for the equity raise, less transaction costs. The balance sheet is materially strengthened as a result with the net debt of $354 million reducing by $289 million to $65 million using December 2019 balances as the basis. This strengthening can be seen in the reduction of the net debt to underlying EBITDA leverage ratio, which was 2.3x at December '19. This number adjusts down to 0.4x. I do note net debt is expected to be circa $100 million at the half June to reflect first half movement of $10 million of committed acquisitions, which are the final centers in our development pipeline, interest of $10 million with the remaining increase due to the $23 million JobKeeper monthly payments being paid monthly in arrears. To reinforce Gary's comments, our immediate focus with these funds is to stabilize the business and cash flows and ensure liquidity buffer both during this period and in preparation for coming out of this COVID-19 period with a strong balance sheet. I'll now hand back to Gary to conclude.

Thanks, Sharyn. So in conclusion and which is summed up on Slide 23, for us, very big positive commitment from the government, really confirming our status as an essential service as far as the relief package, and I will commend the government in their design of that package because in our case, it's certainly achieved their overall intention. I did forget to mention that the other key component of their package was to make childcare free for parents during the period of the package. The intent behind that was to encourage parents to keep bringing their children into care and inside during if that sets up the sector to emerge in a stronger position from an occupancy perspective after the health crisis has been -- is finished, and I think that's a really good outcome. We are clearly taking a number of actions to improve our operating and ongoing cash position both in terms of rostering, in terms of deferral of all noncritical OpEx and CapEx. We will be undertaking a review of underperforming assets, and we had suspended the payment of our dividends. They are subject to payment all of the 2019 final dividend in October considering, once again, the great support we're getting from our banking syndicate and allowing us to not undertake covenant testing during the remainder of 2020, which really buys us a lot of space given the earnings profile we've just walked through. And we are undertaking a process and it's fully expecting to get a significant level of support from our landlords in relation to rental costs during this period. And wrapping up, we think the capital raising certainly achieved our objective of providing us with significantly strengthened balance sheet and an appropriate liquidity buffer to handle any typical downside scenario and prolonged recovery from COVID-19. That finishes the formal part of the presentation, noting that there is a fairly extensive list of key risks contained in the balance of the presentation, which form part of our overall off-the-documents and encourage people to work their way through that and happy to take questions on those at any time. What I might do now is open up the floor for questions.

[Operator Instructions] The first phone question comes from Tim Plumbe with UBS.

Just a couple of questions from me, if that's all right. The first one, Gary, is just a clarification. When you mentioned the government setting the limit at the 2 -- last 2 weeks of Feb, that's the feeling point right? I mean, you need to get your occupancy back up to that level to get paid that amount?

No. It's actually a fixed -- it's a fixed amount, Tim. So once it's set, and in our case, it's $33 million a month, we get paid that amount for the balance of the subsidy period regardless of occupancy.

Okay. And so if occupancy remains materially lower than it was at the end of February, do you adjust your staffing accordingly? And does that mean that the cash burn is actually lower than what you've got in the slides?

Yes. So to expand on that, we called out that rostering is one of our cost saving opportunities, and we have assumed a 50% physical attendance level during the period of the subsidy. And that is a bit higher than the physical attendance level that we entered the subsidy period with. And what we're saying is we will adjust our rosters so that our team member levels match the physical attendance levels as well as any related regulatory or staff-to-child ratio requirements. So we'll clearly continue to be in compliance with all of our operating requirements. But yes, there is an opportunity around rightsizing the same on a daily basis to ensure that it matches physical attendance. I will also point out that we -- I'll come back to our guiding principles to start that we want to retain our center-based teams during this period, and we think there are a number of other productive opportunities that we have -- can have the team doing in a lower occupancy period. And by optimizing those activities relative to the JobKeeper subsidy, we achieve both our desired financial outcomes as well as an -- our desired employment outcomes for our team.

Got it. And you guys had previously spoken about cost initiatives that had already been put in place, so for example, the electronic rostering system. Can you talk about how much of these cost saves that you've identified here can be retained once we get out of this corona environment? How much of those can remain?

That's a good call out on the roster system because we mentioned that we've reduced our capital expenditure to be only focused on critical items. Our roster and HRIS system is a critical item for us. So we are pushing forward to complete that project. Clearly with everything that is going on right now, we haven't rolled out that project. We haven't rolled out the new roster system, and we will finally roll out of it to coincide with the sensible time given COVID-19. What it means for us in terms of capability, Tim, is that the processes that we set up now can feed nicely into and be augmented by that roster system, so that these sorts of agility that we're exhibiting now can be maintained in the future or a combination of the new system and the enhanced processes we're rolling out.

Great. So those cost reductions don't incorporate any benefit from that. And then just lastly, in terms of supply, it's been an issue in the sector for a number of years. How are you guys thinking about supply within the industry post COVID-19? And how should we think about that in an environment where unemployment potentially picks up a little bit?

Yes. So I think predicting exactly what will happen to come out of COVID-19 will be -- is very challenging at the moment. We do -- our base case though is that we think that supply growth will certainly reduce significantly over the next 6 to 18 months, primarily through reduced access to capital and also, I think, people having a much more circumspect view on occupancy will lead to a reduction in new centers being developed.

The next question comes from Garry Sherriff with RBC.

Gary and Sharyn, plenty of detail provided. Just a handful of questions here. Firstly, I just wanted to clarify that government package time frame and your internal assumptions. So on the revenue side, that relief package goes to the end of June and the JobKeeper cost support package goes up until the end of September. I just wanted to clarify, are you assuming both are going to go through to the end of September?

Yes, we are. And that's off the back of discussions with -- between the peak bodies and the relevant government departments, Garry, because they've been quite consistent in their communication to say that they appreciate that the package has actually worked together and they coincide. So they would -- it's certainly their intention to build into the legislation a rollover mechanism such that at the end of June, it will be rolled over to match the period of the wage subsidy. And on that basis, we've made our operating assumption that they'll continue to coincide.

Okay. Yes, that's clear. And I guess the next question goes to occupancy post-September. Have you got a base case occupancy rage -- range for Q4? I mean I know Q4 is typically your highest occupancy period. Just trying to get a rough sense from a base case, what you think that might look like?

I mean really tough. We're trying to predict what the recovery out of COVID-19 is. We've run a number of scenarios. As I'd say, our scenario for the next few months is that our physical attendance and occupancy will be around 50% mark for this period. And it'll be safe to say that, that would be our base case assumption moving out of the subsidy period.

Fees. I just want to review your thinking here. I mean I know in February, you'd flagged the 4% to 4.5% fee increase. Clearly, life has changed since then. I just wanted to clarify thoughts on fees.

Yes. So it's somewhat of a moot point in our revenue's fix for the next number of months based on our fee revenues for all operators in the last 2 weeks of February. And we hadn't implemented a fee increase during that period between 1 January and end of February. So really, the -- our fixed revenue is based off a nonfee increase number, and we certainly have no intention or plans whatsoever to be implementing fee increases for the balance of 2020. The government has been quite clear in their dealings with the sector that they would not be expecting any operators to be doing fee increases during 2020 given the prevailing economic environment.

That's clear. Occupancy. Another big cost for you guys. Can you provide some color on the strategy here? I know you've got an illustrative 20% reduction in cash rent costs. I understand you've got about 50 centers between the 2 big listed operators, Charter Hall and Arena. But outside of those 2 big players, how many landlords in total do you need to negotiate with? And do you have a rough sense on quantum cost reduction occupancy for calendar year '20?

Yes. So we've got 377 landlords, and we've got a team of people that are working to get in contact with all of those. We are targeting to have all of those negotiations completed in -- by end of April. So from May, we'll start harvesting the benefits from a cash flow point of view as I'd outlined in -- when talking about rent. We are falling back on the PRInCiPleS framework that is in place right now for SMEs, which said that the level of rental relief should be proportionate with the level of revenue reduction. On that basis, we'd be asking for relief that's in line with the sort of fee reduction we're seeing right now. Our assumption in terms of cash savings is clearly benchmarked at a lower level and that provides some buffer in terms of the sheer number of landlords, et cetera, et cetera. So we're very comfortable with the conservatism built into those numbers.

Last 2 questions. First one, you noted in that pack about the review and possible exit of underperforming assets. Could you give us a sense on what assets you currently see as underperforming and any sense on what that might look like from an asset impairment point of view, given you've got a sizable intangible asset on your balance sheet?

No. So as I'd outlined, we haven't undertaken detailed modeling at this point on those assets or on our portfolio. It is also tricky to try and estimate impact of occupancy during this period. So I can't really give you any more details on that at this point, Garry. As they emerge, we'll continue to keep the market updated.

No problem. Last one on payroll tax relief. Any sense on what that could look like given, I believe, there is some form of payroll tax relief that you guys are targeting?

I might hand over to Sharyn because she's been leading the charge on all of the tax-related cash saving measures.

Sure. So there's a number of national and state initiatives that are providing either permanent reductions to payroll tax and the like or deferral of cash payments. So we're working through those as they're announced. But there's certainly the relief being given there.

The next question comes from James Bales of Morgan Stanley.

I wanted to understand some of the wage costs assumptions. Could you just run through your flexibility in terms of the mix of permanent and casual staff? And are there any impacts from adjusting those wage costs in terms of impacting the JobKeeper payments from the government?

Yes. So our mix of casuals, James, is about 11% of our total team. That provides us with a certain degree of flexibility in terms of managing the hours of those teams to meet relevant occupancy level. The remainder of our workforce is broadly evenly split between full-time and part-time. We'd certainly be looking to work with our part-time team, in particular, to agree on the relevant hours and productive activities that can be undertaken, and as part of that, matching it to the subsidy levels that we're going to be receiving from JobKeeper. And intent -- the intent of that is, how we can limit our incremental spend on top of JobKeeper and by balancing hours and activities to really harvest the full benefit of the JobKeeper wage subsidy. So it really does boil down to a center-by-center, physical attendance, team member attendance kind of framework. And we've got a really good process in place now to work with the teams on balancing those needs, because the other factor that comes into play, James, is our center-based teams are also potentially required to be at home to take care of school-aged children for health concerns, et cetera, et cetera. So actually quite a complex puzzle that we need to be implementing on a daily basis, where we're getting forecast views of child attendance, team attendance, putting together the roster to optimize hours, and then overlaying JobKeeper subsidy to ensure that we're being as efficient as we can from a financial perspective. We've done a number of modeling scenarios and are confident around the number that we've got there in terms of the opportunity available for us, noting that casual usage also delivers a reasonable portion of that overall sum.

Great. And then just to follow up, you mentioned that when running some of these scenarios, you'd run some cash burn scenarios post the expiry of any government support. Could you give us a flavor of what that cash burn rate might look like?

No. No. We're not really talking in terms of guidance or forecast numbers at this point in time. What -- we've run and we've got a good sense of what may occur, but what we want to do, James, is as we get closer to emerging out of the subsidy period and we have a much better understanding of how long the health crisis will last and then we move into economic recovery, we'll then be able to fine-tune those models and look to re-engage with the market and what that means at that point in time.

The next question comes from Peter Drew with Carter Bar Securities.

Just a few questions, if I can please. I guess, firstly, just that $23 million assumption in terms of JobKeeper benefit. It looks like when I've back-calculated, it's about 7,000 employees. I thought that headcount was a fair bit higher than that. Just wondering what the assumption is there, please?

Yes. So do you want to take that, Shaz?

Sure. Peter, we've worked on, as Gary said, eligibility requirements. There's a number of nuances there in terms of people with under 12 months' service for casuals, nonresident status. So we've worked on that basis through the eligibility.

Right. Okay. And so -- and then just, I guess, to get a bit of a feel, what sort of level of, I guess, inquiry have you had, I guess, this week after -- post the government's announcement that it's making childcare free for this period. What have you seen across the portfolio in terms of inquiries for, I guess, from existing families for more days and from new families?

Yes. We've had a pretty fair number of inquiries, Peter, both in terms of, well, 3 real buckets. People that had recently ceased care looking to re-engage; secondly, existing families wanting to take additional days; and then thirdly, new families entering the sector. So it had all 3. We've been very careful about managing those inquiries. As I'd alluded to in the presentation, across the sector, including ourselves, we've needed to amend our capacity to take account of social distancing and other health and safety requirements. What that has meant is the practical occupancy capacity is lower than our licensed occupancy capacity. That does vary by center, but it's a fair bit lower. And the government was also clear to say, in terms of priorities, it's people that have ceased and existing families well ahead of new families into the sector. Part of the intent of the government doing a 1-month and 3-month review is, they can assess all of these sorts of activities and go, do we need to tweak the subsidy to take account of growing occupancy? Because, at the moment, in our fee revenue, we don't get rewarded for any additional occupancy over and above our starting occupancy level, so to speak. So at the moment, we're utilizing waitlist to try and enable us to take the time to plan those additional children coming into our centers so they can be accommodated safely and that we can appropriately resource the teams to handle those. And then in about 3 weeks' time, we'll be sitting down sharing that sort of data with the government and going, how do we work this? Because we need to then manage the balance from a financial and a safety perspective, if we are -- if across the sector, we're starting to see increases in occupancy demand. It's a nice problem to have. I mean, prior to this -- the relief package, I don't think any of us would be thinking that we'd be getting inbound inquiries for increased occupancy any time soon. So it's a nice problem. We need to be really careful about how we manage it primarily from a safety point of view.

And Gary, how do you manage it from a, I guess, existing families that were on 2 days that now want 5 and then are probably going to switch straight back to 2 after this -- after -- when they go back to having to pay. How do you manage that, because that's kind of unproductive occupancy?

So that's the intent of having a 1-month review with the government to go, "Here's some of the scenarios we want to model out with you." Not only for now in terms of potential to tweak the subsidy amounts to accommodate, we've also started the discussion with them at a sector peak body level around, what's the transition out of the subsidy look like? Is it a light switch that we'd just go from free to being paying full fees, because we think that it might have an outcome or do we do it on a managed basis? And they're taking all of that feedback and starting to work on their models. They don't have the answers right now. The pleasing thing is, they're engaging with the sector to try and jointly develop what those look like. So I can't answer that for you right now, Peter, but I -- what I do know is that we're working on it jointly to see what the potential models could be.

Okay, and then just on the sort of ramp-up centers that you've got. Are they going to be closed given that, I'm guessing that there's a portion of the portfolio that was at very low levels of occupancy and that obviously 50% of not much is not going to be viable. Are they -- do they get put on ice? What's the strategy there? And then a broader question is, what do you see more broadly across the sector in terms of other centers that are pretty new that are ramping up? Do they sort of close and the occupancy flows to your portfolio?

So there's a couple of things in there, Peter, in that. If you're shut, then you don't get the benefit of the subsidy. The sector had already provided feedback to the government that the ramp-up centers or the recently opened were going to be particularly challenged based off their fee revenue, and the government -- there is a mechanism in the funding package around exceptional circumstances. And the departments confirmed that those recently opened centers fit that criteria, in which case we'll be sitting down on a center-by-center basis with the department and agreeing an appropriate level of fee revenue, which is likely to be struck on a mature at center level, which will greatly assist those kind of ramp-up centers. The second point around centers that are about to open. Yes, we won't -- we just clearly won't be rushing out the doors to open them in this kind of environment. We would be looking to delay. We've got a couple. We've only got a couple left, but we're not in any rush to open them.

Okay. And then just the head office support costs. What are you doing there specifically? I mean, last year, it was about $38 million. What can you get that sort of reduce that to on an annualized basis?

So part of those $2 million in operating costs per month that I've called out incorporate savings in our support areas. So we've applied the same methodology to support offices we've done throughout the entire business, which is reducing back to critical spends. So a fair chunk of that saving actually comes out of the support office. I will say it's largely deferral though. It's not a permanent reduction. As things pick up, you would, for example, expect to start increasing your marketing spend, as an example. From a support office team member perspective, same methodology as the centers actually, which is, how do we manage the hours worked and annual leave, et cetera, for teams. So that we optimize the benefit of JobKeeper, we're being fair to people, we enable them to take time off to refresh, and we take account of, in some areas, we've got reduced activity because of COVID-19. So we're applying the same methodology throughout our group, whether it's centers or support office.

Okay, and just the last one, maybe for Sharyn. Just, how should we think about interest costs for this year? It looks like you're still going to have the drawn debt and the cash sitting in the bank. Is that right? So will interest costs be sort of $20 million, $25 million?

It should be reduced down to $20 million. We'll look to reduce our revolving facility with some of those funds, Pete, as they roll off.

Yes. And what's the DRP participation rate for the final?

I believe it's around 30%. So the cash outflow will be around $19 million.

The next question comes from Scott Hudson with MST.

Maybe just a follow-up to that last question, Sharyn. So longer term, do you think you'll be utilizing that cash to pay down debts? And is the near term just a, I guess, a liquidity requirement to keep that cash in the bank?

Near term, certainly, liquidity requirement. We will manage our interest expense though at the same time. Our next expiry on our facility is 18 months away in October 2021. So our intention is to engage with bankers in the third quarter on that one.

Okay. Just in terms of the -- sort of the covenant relief. So you achieved that covenant relief prior to deciding on the characterizing, is that correct?

So what we actually did there, Scott, was we wanted to undertake a capital raising. So we then engaged with our banks and said to really assist in the saleability of the equity raise. We'd like to -- for you guys to waive your covenants for the June and December period. So in effect, they were kind of concurrent processes while we were working up the structure of the equity raise. We were working with the banks on the covenants.

Okay. So the covenant relief was subject to a capital raise?

No. The covenant relief assisted in the capital raise.

Yes. But I guess they weren't going to give you the covenant relief in the absence of the capital raise?

I think it certainly assisted in getting the covenant relief, yes, I'd agree with that.

Okay. Just in relation to the -- sorry, the cash components of the greenfield cohort in this half. What sort of cash spend have you had through the half?

Sharyn, did you want to take that?

Sure. So that final $10 million, Scott, of the development pipeline, around $7.5 million has gone out with another $2.5 million to go out prior to June.

And that's excluded, that's not in the $25 million CapEx cost or included in the $25 million?

Correct, that's in addition.

In addition, yes. Okay. And then Gary, in terms of the EBIT acceleration program that you are undertaking, what -- I guess what impact on that's through this current period?

Yes. So -- yes, just before I answer that, I'm conscious that the -- from a covenant relief perspective, I've just went and checked out the final waiver letter. It was a condition of covenant relief that we completed the equity raise. So I just wanted to confirm that with you, Scott. And in terms of the EBIT acceleration program, the asset refurbishment piece is on hold. So we're not doing the asset refurb. We have retained the core project team and it is a critical project for us. So the 2 critical projects in additional to COVID-19 for the group are our roster and HRIS and our EBIT acceleration team. They've -- what we've asked the team to do is focus on the operating elements of that turnaround, which is improving learning environments, improving foyers, websites. There's a number of activities that we can undertake in a cost effective, capital light way, to still improve the quality of our centers, so that as we emerge out of the -- and into the recovery, we'll present our centers in the best possible light, and hopefully, that translates into good occupancy growth in the recovery period.

And just the last one from me. So I understand you're running at sort of 50% attendance levels. What sort of, I guess, enrollment occupancy do you have? I'd understand there's probably a number of parents that are enrolled but not taking advantage of the care. Do you have any sense of what that number is?

So we're paid for our bookings. So people on the books are in the low 60s. Our physical attendance at the moment is in the low 30s. We've made an assumption that, that will slowly increase over the coming months as we learn to handle the increase in people with the safety requirements and people being free kind of there's a little bit more demand from our existing families to re-engage back in. But exactly, how it will go is really anyone's guess at this point in time. I do come back to one of the benefits of the subsidy is that our revenue is fixed regardless of occupancy, and then it's down to how well and how efficiently we manage rosters with the benefits of JobKeeper subsidy to ensure we optimize benefits there.

The next question comes from Glen Hoffman with Renaissance.

Just want to clarify the covenant testing. So you've got relief for June '20 and this December '20. So your next covenant test being June '21. Just clarifying, in terms of, is that a historic trailing sort of covenant test, and therefore, you're still potentially coming out of a difficult period? And just how you see that playing out in terms of your tests that you have to be applied at June '21?

Sharyn, do you want to take that one? You've been leading the charge with the banks.

You're correct. They are rolling covenants, so on the last 12 months' basis. So obviously, depends on the duration and severity of the COVID-19 impact. Our banks are conscious of this because that applies to most businesses. So we will be engaging with them in the third quarter, both on our October '21 expiry but also on what that June '21 testing looks like.

And by then, Glen, we think we'd have a good handle on what the starting occupancy is out of the subsidy package. We'll then recut our scenarios and go forward, engage in those discussions with a bit more accuracy around what that's going to look like.

Yes. It's fair to say that might be an issue at that point. Yes, I mean, in terms of -- if you've got your ramp up out of the post-COVID sort of setting still playing out in that historic trailing number.

So I think in many respects that my answer will come back to why we're doing what we're doing today. What we're doing is buying ourselves a significant buffer in terms of balance sheet liquidity and covenants, and in a relative sense, I'd say that positions us pretty well to have those discussions compared to many others in the market in which we operate as in if we're coming out of it low and slow, it is likely the sector will be coming out of it low and slow, and people's ability to then compensate for that in their operating environment, I think, we feel that we're in a much better position off the back of this equity raise.

The next question comes from Gareth James with Morningstar.

Could I just firstly clarify what you're assuming in terms of occupancy and physical attendance in the next few months?

So we're -- our base case at the moment, Gareth, is an occupancy of around 50% for a number of months.

Okay. Because I'm just thinking that if you're currently at, what, 60%, are you?

Our physical attendance is in the low 30s. Our bookings are in the 60s, yes.

Yes. So you're assuming that occupancy is going to continue to fall. I'm just thinking that with the childcare being free now, wouldn't that be going in the other direction?

So what we've assumed, Gareth, is and it builds on a bit of Peter Drew's point from before is, at the moment, it's free. So it's very easy for people to continue. When it stops being free at the post-subsidy period, then some -- we may get some leakage as people go, "Okay, I might have to rethink what I'm doing." And it really is dependent on the overall macroeconomic and employment market. So we have in our base case assumed some softening of occupancy coming out of the subsidy period.

Okay. But what kind of rebound have you seen so far in the occupancy rate since it was converted to the new system?

So we've certainly seen some good levels of inbound inquiries. We actually haven't materially increased our physical attendance just right now as we're working our ways through ensuring that we can do that on a safe basis. So we have seen a little pickup, but it is really too early for us to call that -- what that trend will look like, Gareth.

Okay. And have you seen much or do you expect much of a benefit from the impacts on the council-run centers?

No. I mean I was actually pleased to see the New South Wales government come in and support the council centers so that they'll continue to be funded and remain open. We think that's a good thing for the sector. So as a result, we -- they're really in the same situation as other operators like ourselves. They get the benefit of the job keep the subsidy.

Okay. Are you able to provide some guidance with regards to likely one-off costs relating to the current period? So things such as, like, one-off capital rate, fees and any other kind of one-off costs.

So we've got the costs for the raising there in Slide 20. I'm not aware, and Sharyn, correct me if I'm wrong, of any other significant other one-off costs at this point?

No, correct.

Okay. And just -- when you return to a more -- kind of a more normal environment, what kind of target leverage ratio are you thinking that you'll be aiming for?

Well, our medium-term leverage target is 1.5 to 1.7.

Okay. And I mean I'm just thinking that this could kind of potentially result in a situation where you have significant surplus liquidity, and you could be in a very strong, strong position. Do you have any thoughts with regards to that, with regards to would you prefer kind of organic developments or acquisitions? Or it's kind of everything on the table?

Yes. So our immediate and strong focus is on ensuring the stability and efficient operation of our current business, and more importantly, the health and safety of our children and teams, and I don't mean to belittle that. I mean that is our #1 priority right now is, how do we keep our team safe? We'd like to think that the capital raising helps from a job security point of view of our existing teams, and that's really, really important to us. Our focus remains on our existing centers and coming out of this recovery with good growing levels of occupancy and harnessing the organic growth opportunities that are ahead of us. That is by far and away, our biggest priority. And that's all we're really focused on right now. If it so emerges that the combination of the macro environment and what we do generates opportunities to look further, then we'll do that. But not before, we're very comfortable that we're on the right trajectory and that we're out of this thing. And I'd love to see a situation where we have that capital to invest, but right now, we're not even thinking about it.

Just one final one quickly. Just with regards to the rental costs, I'm assuming that will be a deferral of those costs rather than a waiver.

Yes. We're adopting a position, Gareth, that we expect based on the PRInCiPleS framework that our landlords will assist us in reducing our rental costs during what is a very difficult revenue period.

[Operator Instructions] The next question comes from Tim Plumbe, UBS.

Sorry, just one follow-up question from me, if that's all right. If in a couple of months you get a whole bunch of parents that decide that they do want to send their kids back and you go from that 50% physical attendance to 60% physical attendance, so back up to the max of where your funding takes you to, what would the cash costs look like in that situation?

So we haven't -- I wouldn't be able to estimate that right now, Tim. And the thing I like about the government model around their 1-month review is we'll be sitting down with the government ahead of that kind of scenario and then talking to them about what it means from a revenue versus cost point of view. And -- but yes, it's very hard for us to predict right now how that's going to play out. All I can say is we'd be working actively with the government to point out the clear mismatch in us being able to do that in an efficient way. And the government have shown that they're very open to accommodating people so that they remain viable because incurring a significant level of cost increase because it will because of ratios, et cetera, without getting consequent revenue would be a challenge. I do note there's the existing mechanism around exceptional circumstances so we could do today go, and if there's a center where we've got that kind of arrangement, Tim, and then talk to the government about compensating subsidy changes to alleviate that, my preference is they do it on a sector-wide level, but we -- it's always an option available to us. It is a bit moot right now because really our occupancy cap is guided more by health and safety and social distancing rather than parents' desires.

Yes. Yes. But just so that I'm clear, if there was demand, you would have to take it up to the 60% level?

We will raise -- we will operate our centers to be safe and to be viable. So we would be looking at all of our options from a safety and viability perspective before we pull the trigger on that increased amount.

The next question comes from John Hynd with Wilsons.

Noting the potential scenario where you're essentially breakeven for the rest of the year, I'm wondering if you can put some color on what the first quarter looked like in terms of profitability. And then the second part of that question is can we for $33 million of revenue that you're talking to per month, can we maybe work back from that number to sort of see how we get there as well with the -- I guess, with the actuals you're assuming in that number, please?

Your first question, John. Can you repeat that?

Sure. Yes. I think it's -- given that it looks like it could be breakeven for the remainder of the year?

Yes. No, sorry, I remember that. We're not giving guidance on what the start of '21 is going to look like. So as we emerge out of the subsidy period, and we know what our starting point occupancy will be, we'll then be able to form a more accurate view of what 2021 will look like, and we'll reengage then, but who knows what this thing is going to look like over the coming months. So we're not releasing any guidance figures around that at the moment.

Sorry. I can appreciate that, Gary. I was just wondering more about the first quarter this year. How does that -- how do we look there from a profitability perspective?

Okay. Yes. Sorry, apologies. Quarter 1, we -- as we'd flagged in our February investor preso, occupancy was down slightly up to the end of February. And we think we're actually -- there's a little bit of early COVID impact on that. From a profitability point of view, we were able to mitigate the impacts of the occupancy using cost efficiencies. So our -- we're satisfied with our profit results for the first quarter. In terms of your second question around $33 million, the high-level inputs to that were our actual occupancy, which is around 65% for those 2 weeks of February multiplied by our average fees over that period divided by 2.

So does that -- forgive me, does that include -- so that's gross or net of the gap? I'm just wondering how the gap...

Yes. It's your gross fees. So it's combination of CCS and parent GAP fees except centers that -- where the gross fee is above the maximum hourly CCS rate cap of $11.98 an hour, about $140 a day, for those centers, it's kept at 50% of the maximum hourly rate cap.

Right. So you mean your -- so this is -- of your apparent revenue, this is more than 50% less of what your apparent revenue was in February?

It would be slightly low. We have about 20% of our centers that are over the cap. So yes, it is slightly lower than 50% of our gross revenues.

There are no further telephone questions at this time. I'll now hand back to Mr. Carroll.

Thank you, and thanks everyone for your time today. We look forward to providing you an update in the coming months. Thanks everyone. Bye.