G8 Education Limited (GEM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the G8 Education Limited CY '21 Full Year Investor Call. [Operator Instructions] I would now like to hand the conference over to Gary Carroll, CEO and Managing Director. Please go ahead.

Thanks, Travis, and good morning, everyone, and welcome to the 2021 full year results presentation for G8 Education Limited. As Travis said, my name is Gary Carroll, and I'm the CEO and Managing Director of G8 Education, and I'm joined on today's call by the group's CFO, Sharyn Williams. We'll walk through the investor presentation that was posted on the ASX earlier this morning and then provide time for any questions. I'd like to begin by acknowledging both the Jagera and the Turrbal people who are the traditional custodians of the land on which we are conducting this meeting today. We respect their spiritual relationship with their country, and we pay our respects to elders past, present and emerging. And I'd also like to extend that respect to any Aboriginal and Torres Strait Islander people joining us today. I'd also like to acknowledge the entire G8 Education team for their outstanding efforts during the year, the dedication, skill and commitment of all our team members to respond to what was a highly challenging and rapidly changing operating environment while continuing to deliver high-quality learning and care to our children and families has been extraordinary. They deliver on our purpose every day, which is creating the foundations for learning for life. Moving now to the formal presentation. In today's presentation, we'll be covering the following: firstly, a summary of financial performance for the 2021 year, followed by an overview of how our strategy is flowing through to operating results and building momentum for sustained future growth; secondly, we'll provide a detailed review of operating and financial performance for the 2021 year; finally, we'll focus on 2022 and beyond, including our view of the medium-term outlook as well as our outlook for the current year based on trading to date. Turning to the summary of financial performance for 2021, which is set out on Slide 6. The numbers tell the story of the year that, like 2020, was significantly disrupted by COVID-19. After growing occupancy strongly in the first half of the year, the onset of the Delta variant in the middle of 2021 and the Omicron variant in late 2021, the resulting movement restrictions and isolation requirements had a significant impact on occupancy and revenues in the second half of the year. Government support and effective cost management helped mitigate the impact on profitability with statutory NPAT of $45.7 million being ahead of market consensus. The group continued to demonstrate strong cash flow generation. We maintained a strong balance sheet with net debt of $25.9 million at the end of the year. Slide 7 sets out the key drivers of financial performance, both for the 2021 year and future years. I'm very pleased to say that the execution of our strategic program, particularly the improvement program, delivered excellent results during the year and provide strong momentum for such results to translate into occupancy and earnings growth once more normal market conditions resume. Secondly, our strong balance sheet provides resilience to weather-volatile operating environments. We are also conscious of maintaining an appropriate balance between navigating uncertain operating conditions and providing returns for our shareholders. As flagged in our half year results release in August, we will be resuming the payment of dividends with a final dividend of $0.03 per share being declared, representing a 56% payout ratio of CY '21 EPS. We will also be implementing an on-market share buyback as part of the group's capital management strategy, and we'll share more details on that later in the presentation. Our network optimization program is progressing with the primary activities to date being the divestment of our impaired centers. When combined with network growth via our refreshed greenfield growth strategy, this measured strategy will drive improved portfolio quality and increased returns in future years. Finally, while short-term COVID headwinds remain, strong long-term fundamentals will underpin sector growth over the medium term. Slide 8 contains a summary of the group's operating scorecard which shows the CY '21 performance of our key leading indicators that drive occupancy compared to both prior years as well as our medium-term targets. The simple rule of thumb is that stable engaged teams providing high-quality learning and care drive high levels of family engagement that, in turn, leads to sustainably high levels of occupancy. If we approach the scorecard in that order, the group has continued to improve its quality performance in 2021. 92% of the 65 centers that were assessed during the year achieved a meeting or exceeding rating enabling the overall network quality to increase to 86%. As further centers are assessed in a post-COVID-19 environment, we are confident of achieving our 2024 portfolio target of 95%. Turning to team metrics. Against an environment in 2021 that saw vacancies across the sector at double pre-pandemic levels, G8's performance was very pleasing. Team engagement at 77% was broadly in line with prior years and remains ahead of national and global benchmarks. Importantly, the center and operational leadership cohorts that have been the primary focus of our strategy to date have shown strong increases in engagement highlighted by 90% engagement of our center managers, 5 percentage points higher than 2019. Team retention across the sector has been significantly impacted by 2 years of COVID-19 during which all providers, including G8, were on the front line every day. Improving team retention is a key focus for the group with a number of initiatives that were rolled out in half 2 of 2021 such as ECT remuneration and benefits showing promising early signs. Turning to Net Promoter Score or NPS, which is a key measure of family engagement. We've seen strong improvement over the last 2 years, and our 2021 score of 52 highlights we are on track to achieve our 2024 goal of 65. We've seen strong growth in inquiries as we've continued to evolve and improve our website, our marketing and lead pipeline activities as well as benefiting from the word of mouth that flows from improved quality and family engagement. Conversion of inquiries to enrollments has been impacted by extended COVID lockdowns during the year particularly in our largest market of New South Wales. This disruption is also evident in the center closures that occurred during the year. Closure activity ramped up significantly during the latter part of 2021, increasing from around 20 closures in September to nearly 50 in October driven by the Delta variant. The impact of the Omicron variant was even more significant. The group closed more than 190 centers, nearly 40% of our network in a 5-week period between December and January, placing enormous strain on our team and our families. The closures certainly had a direct impact on occupancy, meaning that the positive momentum from lead indicator performance did not fully flow through to occupancy in the 2021 year. As Sharyn will highlight later in the presentation, occupancy growth stayed not as heavily impacted by COVID-19 and was very promising in 2021. This result plus the momentum obtained from improvements in quality and engagement across the broader network provide confidence around the achievement of the group's medium-term occupancy goal. Slides 9 and 10 outline the impact of the improvement program on the group's results as well as the other key drivers of momentum. We have completed 224 centers as part of the improvement program with 137 centers targeted for completion in the first half of 2022. The group's investment in the program in 2021 was $3.5 million in OpEx, primarily driven by center field support roles and $4.7 million in CapEx driven by in-center resources. As a reminder, the program scope covers 3 areas: the training of pedagogy and practice and resetting of learning environments; center-managed leadership development; and lastly, the embedment of standard work routines to centers. The results of the program have been very pleasing. Starting with quality, 100% of the CY '19 and CY '20 improvement program centers achieved a meeting or exceeding rating. Team engagement and family engagement results were also ahead of the rest of the group, with team engagement increasing by 6 percentage points and family engagement growing by 8 percentage points. This enabled the improvement program centers to achieve occupancy results that were in line with our target despite the significant impact of COVID-19 in the second half of the year. EBIT performance was very strong in the first half, with EBIT growth compared to 2019 levels being 8 percentage points above the rest of the group, although EBIT growth was significantly impacted by COVID in half 2 as movement restrictions in particular hit New South Wales and Victorian centers hard. The first half EBIT run rate was consistent with the run rate required to achieve our medium-term earnings target. And together with the results in the lead indicator categories of quality, team and family engagement, provide solid momentum for occupancy and earnings growth as operating conditions return to normal. In addition to the improvement program during 2021, the group undertook activities aligned with our strategic imperatives of improving quality, team engagement and NPS. These are in relation to property investment and continued execution of our training and professional development programs. Both of these initiatives delivered good results for the year. Our property investments ensure that we achieve meeting ratings for our physical environments for all centers that were assessed in 2021 while also driving significant uplift in NPS. The group's CM First Steps program, which provides induction and onboarding for new center managers, has delivered material improvements in retention performance with the run rate in the first 6 months of this program being circa 5 percentage points better than prior periods. Finally, we've seen encouraging improvement in ECT retention in quarter 4 following the rollout of increased wages and other benefits for ECTs. At G8, we have the responsibility and the opportunity to instill the foundations for learning for life in the children we care for and to recognize the longer-term social and sustainable impacts that we can help deliver to the broader community. We have a plan in place to deliver against this opportunity as summarized in Slide 11. The plan covers areas of governance, our people, service quality and our environmental impact. From a performance perspective, we are on track with our medium-term targets with good progress being made across all areas and special call-outs in relation to our educational programs concerning environmental sustainability; our sustainability-linked loan, which is the first of its kind from Australian ECEC provider; and the linking of executive remuneration to key sustainability focus areas. I'll now hand over to Sharyn to provide a detailed overview of the group's operating and financial performance for 2021.

Thank you, Gary. I will now walk through the key elements of the group's operating and financial performance for the year as outlined on Slide 13. The financial summary for the 2021 calendar year is set out on Slide 14. In terms of overall earnings quantum and margin, second half earnings were slightly ahead of and EBIT after lease interest margin was in line with the first half. This disruption to the usually stronger seasonal second half reflects the operating environment at the time with the resurgence of COVID-19 in our largest states impacting the second half results from both an occupancy and an average fee perspective. For the purposes of this summary, I will focus on the comparison of the 2021 year with the corresponding pre-COVID-19 period of 2019. Firstly, the core performance. Revenues from the core portfolio reduced by circa 7% and was $62 million lower. There were 2 key drivers of the reduction, occupancy being 2.1 percentage points lower than 2019 equating to $50 million and the absence of $48 million in revenues from the centers divested since 2019. Offsetting these reductions were higher average net fees of $16 million and $20 million of temporary government support relating to COVID-19. Despite this significant reduction in revenues, core center margins were flat on the 2019 year, driven by costs being effectively managed in response to attendance levels, roster and compliance activities that mitigated the potential impact of wage remediation compliance items, a lower rent proxy due to the impaired centers and removing negative or low-margin centers through lease surrender or divestment. This result is a solid outcome considering the cost base compared to 2019 has 2 years of inflation within it funded by only one fee increase over that time. Taking each cost area one at a time, firstly, the largest component of the cost base being wages. I flagged the half year results. For those areas not as impacted by lockdowns, wages as a percentage of revenue was expected to be flat as the wage leverage created by seasonally higher occupancy was absorbed by the one July wage rate increase. This was achieved not only in centers not impacted by October 19, but more broadly across the group through the rostering and wage optimization program as well as divestment of loss-making centers. This rostering and wage program delivered wage outcomes that enabled the group to absorb any potential ongoing costs from the group's wage remediation and compliance program. The rent proxy is a combination of lease depreciation and interest and outgoings. The absolute quantum is reduced versus calendar year '19 due to a reduction in center numbers and the lower depreciation resulting from the impairment of 52 centers in the prior year. Rents for calendar year '21 as a percentage of revenue was 13.2%. However, when adjusted for the impact of the impairment expense, increases to 14.2%. This is 0.4 percentage points below CY '19, a good result considering 2 years of rental rate increases during that time. This also reflects the divestment of centers that were not economically contributing to the group. The increase in other costs was driven by customer engagement team where we had a higher volume of inquiries, insurance cost escalation due to a hardening of the insurance market and increased IT investment. The savings from lower attendances during the second half were reinvested into property, repairs and maintenance, to deliver improved results across quality, NPS and team engagement. The greenfield portfolio earnings continued to mature in line with occupancy. Overall, investments made in network support have contributed to the improved scorecard metrics outlined by Gary and supported core center margins and growth in the greenfield centers. The resulting outcome is operating EBIT after lease interest of $80.1 million and a margin of 9.2%, in line with the first half. The group's occupancy performance during the year is contained in Slide 15. Occupancy in the first half narrowed the gap on CY '19 to be 1 percentage point closer. However, due to the resurgence of COVID-19 in the second half, the seasonal growth from families joining through the year and existing families increasing days in care did not occur in the affected states. The drivers of these occupancy impacts changed through the second half. The initial widespread movement restrictions turned to center closures as isolation requirements for families and teams caused centers to close or bookings to be lower. This resulted in those states most affected by COVID-19 not having the same seasonal occupancy build as centers in Western Australia, South Australia and Queensland. What was highlighted during this time was the geographic diversification of the network, provided some insulation against the impacts of lockdowns and isolation requirements, with the less impacted states reinstating a seasonal trend over and above what was achieved in 2019. This occupancy growth was also supported by our strategic change programs focused on improved quality, NPS and team engagement. Critical to this overall occupancy result was maintaining family enrollments by waiving parent gap fees where children could not attend due to COVID-19. Consequently, this reduced the average fee. For the second year in a row, the G8 team has done a great job in supporting families during lockdown disruptions and positioning centers to rebuild attendances post lockdown. Turning to Slide 16, which provides a further breakdown of occupancy by the regions of metro, regional and CBD as well as state-by-state occupancy. The group's full year occupancy grew by 3.1 percentage points relative to calendar year '20, however, ended 2.1 percentage points behind 2019, losing some of the ground made in the first half. The benefit of the group's geographic diversification is evidenced here with limited CBD exposure of 7 centers providing some insulation. G8 regional centers continued to be the standout performance in the second half, materially outperforming metro and CBD centers, with average occupancy 2.5 percentage points higher than 2019 and over 10 percentage points higher than metro centers. This reflects the strong net migration trend to the regions during the pandemic. The state-by-state view highlights the cumulative effect of movement restrictions in Victoria with occupancy growth in the absolute occupancy number, being lower than other states and almost 10 percentage points lower than Queensland, which was largely unaffected by COVID-19 in 2021. While occupancy in New South Wales was impacted by the pandemic, the impacts may have been muted by lower supply growth and also having a large number of centers in the improvement program. The improvement plan implemented for our 9 centers in the ACT is yielding positive results in NPS scores with occupancy expected to recover over time. Finally, the divestment program has delivered good occupancy benefits, supporting positive improvements compared to 2019 in Western Australia, Queensland and New South Wales in particular. Wage performance for 2021 is illustrated on Slide 17. Historically, in the second half of the year as seasonal occupancy increases, wage efficiency improves due to regulated ratios, thereby creating operating leverage. This can be seen in the downward trend of 2019 and the first half of 2021. However, the second half 2021 was materially impacted by COVID-19 and associated reduced attendances. The impacts of COVID-19 lockdowns and isolations are clearly evident in fortnights 14 through 22 on the graph. Fortnights 23 to 26 returned to similar efficiency levels to the same period on 2020 but were higher than 2019, driven by lower occupancy levels. It should also be noted these fortnights were impacted by a number of center closures in November and December. The continued investment in wage systems, training and processes enabled the group to effectively respond to attendance levels as well as to effectively mitigate the impact of any potential wage remediation and compliance costs in the year. From a wage rate perspective, the award increase of 2.5% was implemented across the G8 workforce in July. A remuneration increase was also implemented for center managers in March 2021 and early childhood teachers in November 2021. Slide 18 sets out what's been a positive performance for the group's greenfield portfolio. The portfolio covering 16 centers had an average occupancy of 74%, 3 percentage points higher than half 1 despite the challenging external environment. The continued occupancy growth enabled the portfolio to grow net profit before tax by $5.4 million from a $3.9 million loss in CY '20 to a $1.5 million profit in CY '21. These results were achieved after funding employment and setup costs of centers yet to open, which absorbed some of the growth in earnings. You may recall from the greenfield presentation in August 2019 that as a greenfield reaches maturity, they are moved into the core and provide an additional element of major growth for the group. Upon reaching targeted occupancy level, they are expected to generate strong profitability under the refreshed capital-light approach. The assessment of maturity is undertaken on centers that have reached an occupancy range of at least 80% or at the end of year 3. Under this approach, 6 of the current greenfield centers will be matured into the core portfolio from the beginning of 2022. The focus will remain on those centers that are still in the maturation phase, including the new center added during the second half. In terms of the portfolio earnings, the greenfield portfolio approach is intended to realize, on average, a broadly neutral earnings outcome as a portfolio with the growing earnings stream from maturing centers fund start-up losses of newly opened centers. COVID-19 disrupted this funding approach with only 1 new center opened during 2021 and a number of new centers being deferred. As a result, 9 new centers are expected to be handed over during 2022 in what is effectively the first full year of the revised greenfield program. Due to the 6 greenfield centers earnings of $1.7 million moving to the core, the portfolio is expected to create negative '22 EBIT of $3 million. Impaired center divestment program continues to progress as set out on Slide 19. 21 of the 52 impaired centers have been divested, representing $3 million of the impaired portfolios' pre-AASB 16, 2019 EBIT losses. The group incurred cash outflows of $7 million related to divestments and surrenders during the year, and we will continue to employ a commercial approach, guided by return on capital when assessing our exit alternatives, taking into account lease tail and trading performance. Turning now to Slide 20, which outlines network support costs. These costs capture compliance costs and the designated support team and programs designed to support centers across pedagogy, operations, compliance and safety, and quality. These team members include practice partners, operations and people coaches in the improvement program, quality assurance partners, wage optimization and compliance teams, centralized recruitment and HR business partners, all of whom work directly with our centers. The headline increase includes a number of items from the 2020 year that related to COVID-19 such as JobKeeper, cash conservation activities including reduced wages for support office roles, incentive programs and COVID-19 subsidies in Singapore, which increased earnings. If these items are taken into account, the increase on the prior year is $14.1 million, 70% of which is related to programs such as the study pathways and team service recognition programs, the center manager induction program, a centralized recruitment team and the specific support roles referenced earlier. Pleasingly, the benefits of these programs and teams are flowing through in center margin performance in addition to a range of positive outcomes including cost management, improved wage compliance and efficiency levels despite lower occupancy, a growing trainee base to grow our own and maximize training subsidies, a 92% exceeding and meeting ratings for centers assessed in the year and improved turnover outcomes for our CM roles, an uplift in family NPS. The remaining 30% of increased costs related to corporate costs such as the hardening insurance market, investment in IT systems and cyber-defense and a centralized COVID-19 support team. As outlined on Slide 21, the group's cash conversion was 107% despite a decrease in overall operating cash flows driven by lower EBITDA, the unwind of rent relief from 2020, the timing of government support payments and prepayments of insurances. The benefits of the refinance and lower net debt levels are evident in the reduced interest outflows, reducing from $24 million in 2019 to $11 million in 2021. Overall, cash flow for the calendar year '21 was neutral before wage remediation program payments. This remediation program progressed with $38 million of payments made relating to current and former employees. There remains 7,400 former employees to be located and paid. During the year and outlined on Slide 22, CapEx was $47 million, excluding software-as-a-service cost of $7 million, which following a recent accounting interpretation, are now treated as OpEx. If the CapEx is pro forma to include software-as-a-service, the overall spend was $54 million. This is lower than expected due to the COVID-19-driven delays, particularly in the property improvement area. Equipment resources includes the investment in educational resources and the improvement program, and technology includes the elements of the HRIS and finance systems that can be capitalized along with IT equipment in centers and support office. The increase in property CapEx year-on-year has driven positive momentum in our occupancy lead indicators of quality with 100% of centers achieving meeting for Quality Area 3 property and increased NPS and higher team engagement scores in those centers where material property works were undertaken. Due to COVID-19-driven delays, property investment of $10 million will be carried into 2022, contributing to a total CapEx, including software-as-a-service of circa $65 million. This CapEx will focus on continued investment in center quality in both the physical environment and resources to centers, both contributing to team engagement and family retention. Turning to Slide 23. The group is well positioned from a balance sheet perspective with the debt refinanced during the year providing the group with stronger liquidity, greater flexibility and lower funding costs. Net debt at the end of 2021 was $26 million, an increase since the trading update due to 3 payroll payments in December, offset by creditor payments carried into January following the implementation of the new finance management system over the new year period. Current net debt is circa $45 million, reflecting the wash-up of a number of timing differences that existed at year-end. And with 2021 being a neutral cash flow result, this $45 million predominantly reflects the wage remediation program of $38 million and divestment outflows of $7 million. Fully franked dividend of $0.03 per share has been declared and is payable in April 2022. This is a 56% payout ratio based on the proportional target payout ratio range of between 50% and 70% of net profit after tax. The dividend reinvestment plan has been suspended, and an on-market share buyback will be implemented as part of a balanced capital management strategy with the volume of buyback to be determined by appropriately balancing between shareholder returns and leverage levels, the uncertain earnings recovery outlook driven by COVID-19, the funding of strategic priorities, including the improvement program and the property investment program and other funding needs included for wage remediation and network optimization. I'll now hand back to Gary for the strategy update.

Thanks, Sharyn. And now that we've reviewed the 2021 year in detail, we'll turn our focus to 2022 and beyond, starting with a review of long-term sector fundamentals, as set out on Slide 25. Demand growth for the sector is projected to be positive over the medium to long term driven by an increasing awareness of the benefits of early learning, boosting female workforce participation, increasing birth rates, net migration and strong overall employment levels. The sector continues to enjoy solid bipartisan support while government support during the pandemic reinforced the essential role the sector plays in the overall economy. Recent changes to the childcare subsidy to improve affordability are also expected to be positive from an enrollment perspective. Short-term challenges still exist, particularly in relation to supply growth and workforce shortages, although forecast increases in net migration are expected to improve the workforce picture in the coming months. It's also pleasing to see increasing student intake numbers for Certificate 3, diploma and degree qualifications in late 2021 and early 2022. G8's strategy continues to evolve to take account of the changes in the market and operating environment. As depicted in Slide 26, while creating great teams and providing high-quality early learning and care remains a key strategic priority, changes to the workforce and childcare patterns, which were accelerated during COVID-19, are influencing the delivery of early learning services. In particular, providing more mobile and flexible early learning and care options for children and families is a key opportunity for the group that we are well positioned for. In late 2021, G8 made small targeted investments in 2 separate businesses that are intended to drive the group's capabilities in relation to mobilization of early learning and broadening of care. Leor is a leading provider of in-home learning and care and a registered NDIS service provider, covering those families who cannot access center-based learning including ship workers, those with specific health challenges and children with complex needs. The second business, Kiddo, is an on-demand booking app connecting parents with carers instantly. G8 is a strategic investor in Kiddo with a 20% shareholding. Kiddo enables parents to access care outside the hours that are provided by center-based services. Importantly, while Leor and Kiddo enable us to provide more diverse learning and care options for children and families, they also support a differentiated offer for G8 educators as they can build further skills and income from various models within the G8 Group. Slide 27 outlines the group's key strategic focus areas for 2022. Apart from the support to drive growth at Leor, the focus areas are unchanged from 2021. These programs provide a good balance between driving quality, optimizing network performance and implementing scalable systems to enable sustained strong performance. Finally, our focus turns to the current 2022 operating environment and outlook for the year. Slide 29 outlines a chronology of how COVID has impacted the group since July 2021. Our doors have remained open during the entire period with the priority of maintaining a safe and trusted environment for our children and team being paramount. I'm proud to say that we have provided employment surety and well-being support to our team throughout 2021, while also supporting parents with gap fee waivers or discounted fees totaling $28 million in the year. Finally, we've implemented additional cleaners for centers at an incremental cost of $1.3 million compared to 2021. Turning to the current trading and outlook, which is set out on Slide 30. Strong sector fundamentals remain with ongoing government support, increasing female workforce participation and a growing awareness of the benefits of early learning and education on life outcomes for children. Across the sector, however, there are near-term COVID headwinds, including unprecedented increases in closures during January 2022 without corresponding business continuity payment support; isolation requirements causing lower attendances or center closures, both resulting in gap fee waivers as G8 continues to support its families; delayed enrollments resulting in softer occupancy levels; and lastly, team member shortages resulting in attraction and retention challenges. The resulting impact on current core occupancy for the group is 3.6 percentage points lower than 2019 and 1.9 percentage points lower than CY '21. This subdued occupancy level is expected to be temporary, however, as the impacts of COVID moderate and businesses normalize. The inquiry pipeline is strong, in line with January 2021, positioning the group well to translate this into occupancy as demonstrated in half 1 CY '21. Strong underlying momentum in the portfolio, particularly in occupancy lead indicators despite the challenging environment, positions the group well for a COVID-19 normal environment. Our focus in the near term is on driving occupancy by converting inquiries and deferrals and continued investment in attracting and retaining talent. The group's balance sheet is strong, providing support for short-term challenges. An on-market buyback is to be implemented as part of the group's capital management strategy. As we conclude the formal part of the presentation, let me express once again our gratitude for the whole G8 team and all G8 families for their work and support during the challenging 2021 year. I'll now hand back to our host, Travis, to start the Q&A session.

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

A couple of questions from me and then I'll jump back into the queue. But firstly, Gary, just wanted to talk about the improvement program, 224 centers that you've rolled out, another 137 centers in the first half '22. How do we think about the program thereafter? Are we largely done in terms of the centers needing that specific improvement focus? That's the first part of the question. And then just the second part of the question around the improvement program, team engagement and NPS tracking well ahead of the rest of the portfolio. Can you maybe talk about the occupancy levels that you're seeing relative to the rest of the portfolio? And I don't know if it's easier to break it down if we just look at metro improvement within the portfolio versus metro improvement outside of that improvement portfolio or something like that.

Yes. Thanks, Tim. So our improvement program, we intend to get through our entire center portfolio. Our targeted timing is by the end of first quarter 2023 because we -- the reinvestment and resetting of learning environments even in a high-quality center still adds value, we think, from a team engagement. And there's certainly -- we are keen to keep investing in our center manager capability across all of our cohorts. So we will be through -- we're targeting to be through the program by first quarter 2023. In terms of your question on occupancy, the occupancy performance for the year was in line with our target. Our targets took account of the fact that nearly all of our improvement program centers were in New South Wales and Victoria in 2021, Tim. And as you can imagine, the swings and roundabouts, given COVID, make it very hard to do a benchmarking exercise between those centers and other states where there was no COVID impact. So for us, our focus is more on look forward into a COVID-normal environment, setting up those centers well based off quality, team and family engagement, so they can start accelerating once all the COVID restrictions are removed.

Got it. And then just a second question around labor cost inflation. Lots of industries talking about pressures that they're seeing there, and it's a bit over 2/3 of your OpEx. Last year, you guys were impacted with cost inflation without being able to lift prices as a condition of the government funding. Can you talk to those labor headwinds that you face at the moment? And to what extent those should be able to be offset by pricing increases across the industry, please?

Yes. So we actually made changes to remunerations for center managers in March last year and [indiscernible] in November and pulled that out in [ hers ] at our award wage increase. So for this year, the only current committed increase relates to our award increase for our educators, which will occur in the middle of the year. That said, we'll continue to monitor the market, and we do want to remain competitive in terms of wages. So it's something we track very closely. There are no planned activities apart from award increase at this point in time that would occur across the entire network. We have already implemented our fee increase at the start of the year. I think it's already made the media in certain centers, and the number was 6%. That would enable us to absorb the impact of those recent changes to wages and the forecast award increase and have a slight margin accretion, subject to the operating environment that we face ourselves with -- from a cost profile around COVID, impact on occupancy moving forward, et cetera.

The next question comes from Aaron Muller from Canaccord Genuity.

Just coming on from Tim Plumbe's questions, just on price increases. So you said that the increase has gone through. And it's -- the average is 6%, is it?

That's it.

Okay. And then just interested, Gary, you've got an 81% target for occupancy. I presume that's 2024. I'm just interested if you could comment on how we should think about the sensitivity to an increase in the occupancy to EBIT?

Well, as you know, Aaron, as you start getting into the high 70s and low 80s, it leads to quite an acceleration from an EBIT growth perspective because all incremental occupancy above that level does not automatically translate into an increase in roster requirements in our centers. So we said those numbers are consistent with what we outlined to the market in our 2019 strategic investor update and the EBIT that flow from that.

Okay. Maybe then you could -- could you maybe comment on how long-term margins look for the business in sort of -- if you get up to that occupancies in the 80s?

Yes. We haven't released a target EBIT percentage at this point, Aaron, as you know, particularly given the last 2 years and a bit of an uncertain outlook at this point. We are -- as we complete our improvement program, that will enable us to finalize our ongoing operating structure moving forward. We'll then provide greater clarity on what an ongoing cost base will be. At that point in time, that's really when we'd start updating the market on what our medium-term margin profile is going to look like.

Sure. Okay. And then just finally, on the support office costs, is it -- the calendar year '22, should we be thinking about the second half of '21 being the run rate, so looking at about $65 million for the full year?

Yes.

[Operator Instructions] The next question comes from Chami Ratnapala from RBC.

One question on the occupancy, probably looking at it more on a regional basis. Can see a slight improvement, I guess, in the CBD portfolio or rather around that level that we had. But just keen to understand why metro seems to be lagging. If you could just talk to or expand on this in terms of the usual seasonality that we've seen through the end of the last year as well.

Yes. Thanks, Chami. So I think the main driver around metro is because of the predominancy of New South Wales and Victoria in that cohort, both of which were hammered by lockdowns and isolations and closures in the second half of the year.

And if you were to think about -- because given that your -- the largest exposure east through metro and CBD, just keeping [ our eyes ] CBD, just focusing on metro, I suppose, can see from the supply report as well that many of the closures have been in that segment. Just keen to understand any thoughts heading into the first half or even to the second half, where we'll see the occupancy acceleration, just how you're thinking about that metro portfolio.

Yes. So I think if we come back to first half 2021 where the market was as normal as it's been for the last couple of years, we saw good growth in -- or good improvement in metro and regional in that half. So as conditions -- these closures reduce, we're certainly anticipating good occupancy growth performance for both metro and regional cohorts. We still think that the change in working patterns will be a dampener on CBD centers moving forward. So where it's not an asset class, we're looking to grow our portfolio in. And we're somewhat thankful we've got a reasonably small exposure at this time.

[Operator Instructions] The next question is a follow-up from Tim Plumbe from UBS.

Just 2 further questions for me. Just in terms of the centers for sale, can you talk about buyer appetite that you're seeing out there? And how you're progressing around some of those larger greenfield centers that sit within that portfolio for sale, please?

Yes. Thanks, Tim. So we expected it would be a bit slower for the second half of the portfolio. I think it's adding the COVID impact in -- particularly in quarter 3 and quarter 4. It's probably slowed that down a bit more. You can just imagine people are trying to draw a line on what go-forward occupancy is going to be, and that was very difficult in quarter 4. That said, we've started to see some recent pickup in activity and interest from purchases in that portfolio. And we've been progressing on a number of fronts there, including the larger greenfields that you're calling out. So we still think that we will hit our target of getting through that portfolio by the end of the first half 2022.

Great. And then just the second question. Obviously, first 5 weeks of the year have been extremely challenging and probably not reflective of the rest of the year going forward. Is there a way for us to think about the EBIT that was generated in those first 5 weeks relative to the comparable EBIT in the first 5 weeks of '19, just so that we can split that out from the rest of the operations for the year?

Yes. I mean I won't give you the exact number. But clearly, our EBIT is down on prior year, consistent with occupancy being down and a absence of BCP payments, yes. But as you can appreciate, pretty reluctant to give you an exact number. But that said, the cost performance has mitigated, to the extent possible, the reduction in occupancy. So still happy with how we performed during that period. We're just going to be starting off a lower base at the start of the year.

Okay. Great. And maybe just the last one, in terms of those network support costs, obviously, multiple buckets within there. From memory, there was a time when you were talking about the strategic improvement program and the incremental costs associated with that. But at some point, when that was completed, those costs were to come out of the network support costs. Should we still be thinking once -- I think you said the first quarter '23, once that program is completed, we'd see a decent drop down in the network support costs or just maintained at that current level?

So to give you a road map on getting clarity on that, we will get through a fair chunk of our improvement program, as you can see in the first half of the year. That provides us with greater clarity on what the go-forward around center support structure needs to be to maintain performance. This phase is all about improving. We then need to work out our investment on maintaining. We expect to have that work completed so that by the August update, we can provide a more fulsome update to the market on what that go-forward operating structure and cost envelope is going to look like.

At this time, we're showing no further questions. I'll hand the conference back to Mr. Carroll.

Thanks, Travis, and thanks, everyone, for their time today. No doubt we'll be catching up with a large number of you over the coming days. Thanks for attending, and I hope everyone has a great week. Thank you.

Thanks, everyone.