G8 Education Limited (GEM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the G8 Education Limited Trading Update Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Gary Carroll, CEO and Managing Director. Please go ahead.

Thanks, Lexie, and thanks, everyone, for joining us. As we flagged in our year-end results presentation, the sector has certainly been significantly impacted through Omicron and flood impacts. And we thought it would be worthwhile to provide our shareholders with an update and translate that into impacts on financial results year-to-date as well as the actions being taken to respond. If I start with an overview of what's been happening. As we flagged in our CY '21 results, we had a very high volume of Omicron cases in all markets, and they materially impacted our revenue, our occupancy performance and employment costs in both January and February as a result of both center closures and isolation requirements. These impacts actually continued to flow into the early weeks of March and coincided with what were really devastating flooding in parts of Queensland and New South Wales. The net result of that in terms of occupancy was that occupancy was -- fell to 2.1 percentage points behind 2021 levels in early March, before pleasingly recovering over the following weeks to be 0.8 of a percentage point behind the prior corresponding period as at the 3rd of April. And this recovery in occupancy provides confidence that as flagged in our CY '21 results presentation, the impact on occupancy is expected to be temporary. While we continue to see some level of delayed enrollments, there has been an increase in conversion in the last 3 weeks, and there remains an encouraging pipeline of inquiries to drive the occupancy recovery. And for those of you who've got access to the announcement, we've included a couple of graphs in terms of occupancy movements, so you can see visually what's been happening across our centers. It's also worth noting that another effect of the isolations and flood impacts actually relates to employment costs, with team member shortages and sick leave increasing the usage of agency team members. Converting all of those into our financial results, the group recorded a quarter 1 operating EBIT after lease interest profit of $1 million versus $17 million in the prior corresponding period, driven broadly by 4 things: firstly, $6 million in incremental discounting versus PCP, which are predominantly gap fee waivers to support families during COVID or where flooding either closed or impacted access to a center. The gap fee waivers have reduced in recent weeks from an average of $500,000 per week to $125,000 per week. We've also had the absence of $5 million in COVID-19 government subsidy that was received in the PCP. Thirdly, an incremental $2 million in employment costs driven by additional agency costs and sick leave as a result of COVID-19 and flood-related team member shortages; and fourthly, delays in the lead pipeline, as we've called out in the full year results, as well as Omicron case numbers and weather events impacting enrollments. While we're on the subject of financials, I also wanted to note that our interest expense, excluding lease interest for the 2022 year is expected to be circa $13.5 million, and we'll be undertaking a review of lending facilities in the second half. Pleasingly, from an operating perspective, the group continued its momentum in relation to its improvement program, with the current cohort of approximately 140 centers due to be completed by mid-2022. That leaves us with about 15% of centers remaining to be completed, and that, therefore, provides the opportunity to embed the practices and capabilities using a more business-as-usual structure for the program, which in turn provides the opportunity to improve effectiveness, efficiency and also reduce cost. We do believe that the Q1 impacts are largely expected to be temporary. However, we remain cautious about the COVID operating environment. It still remains uncertain. Potential effects may include the continuation of the impacts that we have seen in quarter 1, particularly in the absence of additional government support. So to respond to that challenging environment, the savings that we will achieve through transitioning the improvement program project structure into a more business-as-usual model have been augmented by an additional cost reduction program, including reprioritizing discretionary spending and programs, and also reducing our support office team member numbers. Total cost reductions are targeted at between $13 million and $15 million for the remainder of CY '22, with costs being predominantly realized in half 2. These actions will reduce our cost base, particularly in the support office, and we'll be channeling resources through our center network. All of these changes will improve and enhance the resilience and performance of the business, both in the short and longer term. Our key focus is around supporting our center network to ensure it's well supported to deliver the best quality service to children and families. It's worth noting we will be continuing to spend at our current levels on the provision of in-center resources, pedagogy and practice support and the previously announced property spend, which are all aimed at further improving the quality of the center network. So that provides a kind of summary of performance for the first quarter and the actions being undertaken. I'm now happy to open it up for questions.

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

Guys, can you hear me?

Yes.

Just 3 questions from me, if possible, please. Just Gary, if we think about overall occupancy being 0.8% behind. If we were to split up your portfolio from the improvement program -- once that have had the improvement program changes, those that have not, is there a noticeable difference in terms of the occupancy lag?

Not a material difference, given what's happened in the first couple of months of the year, Tim. And it's also worth noting that the focus of our improvement program for this year-to-date has been in Western Australia and South Australia, a fair chunk of those. And WA has had its own recent challenges around Omicron cases. So it's too early to tell in terms of meaningful impact of improvement program from a CY '22 perspective.

Got it. Second question is just about the inquiry pipeline. Are you able to talk about at all, please?

Yes. So we're actually continuing to see really strong levels of inquiry pushing through to elevated levels of tours. We have seen an improvement in the conversion from tours to enrollments. Although they are still not at prior year levels, they are certainly improving. So Tim, it's the combination of elevated inquiries and tours and an improvement in that conversion gives us some confidence around occupancy continuing to improve. Like clearly, we're wary of the operating environment, and we're closely monitoring that.

Great. And then just the last one in terms of that cost out target, and apologies if I heard this incorrectly, but $13 million to $15 million targeted calendar year '22. How do we think about the annualized benefits, and how do you think about sustainable long-term cost out as a result from this initiative, please?

Yes. So of the $13 million to $15 million, Tim, around $6 million to $7 million relate to reduction in employment costs, so the annualized effect of those will be closer to sort of $10 million. The rest are more -- not indexable from an annualization point of view, so you're probably looking at an ongoing cost out somewhere in that $15 million to $18 million.

[Operator Instructions] Your next question comes from Aaron Muller from Canaccord Genuity.

Gary, just -- could you just comment on the use of agency staff? Has that sort of started to subside?

It still remains at elevated levels compared to prior year, Aaron. We've mitigated the impact of agency well through continuing improvement in wage hours per booking. While we've had a bit of an improvement in team turnover year-to-date, you wouldn't say that we cracked the back of agency at this point in time.

Your next question comes from Peter Drew from Carter Bar Securities.

Gary, just a question. I guess, of those factors that you listed that impacted the first quarter in terms of the costs. I guess, just if we look into the second quarter, is it really only that reduction in gap waivers -- gap fee waivers that's kind of materially different and obviously, the improvement in occupancy?

Yes. So thanks, Peter. So discounting, we do expect to continue, albeit at lower levels, because closures and isolations are reducing, which is pleasing. Building on Aaron's question, the key watch-out area for us is around agency, and that will be dependent on labor markets, which have slowly started to improve, continuing to open up and enable us to attract permanent or part-time team members to replace agency, but it's still a pretty tough employment market out there. Yes.

Yes. Okay. And just one other question. Could you just unpack, I guess, that $15 million to $18 million worth of cost savings? Just I know it's probably a bit sensitive. But as much as you kind of can in terms of maybe not really the labor component but maybe the other piece, just where those -- what they actually relate to?

Yes. So there's 3 buckets that make that up, Peter. There is the labor piece, which I've called out in terms of quantum. The remaining 2 buckets are in we have paused at some of our discretionary change programs, and a number of those costs were flowing through the P&L. We've also looked a bit harder at our discretionary spend items, and they're your usual suspects, whether that's consulting fees, marketing costs, et cetera.

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

Thanks, Lexie. Thanks, everyone, for joining us at reasonably short notice. As flagged in the release, we'll look forward to giving everyone an update at the AGM on the 27th of April.

That does conclude our conference for today...

Sorry, I think we've actually got 1 more question, Lexie.

Yes, it looks like Tim Plumbe has a follow-up question from UBS.

Sorry, just one other question for me, Gary, and following on from Aaron's question. Just in terms of labor cost headwinds, could you -- are we seeing any increase in terms of the underlying cost of labor is part 1. And then part 2, if we think about agency cost versus permanent staffing costs, how do we think about percentage higher per head? And then what sort of percentage of your workforce is agency now compared to a business-as-usual situation?

Okay. So there's -- so I got 3 questions out of that, Tim. So I think in terms of normal award rate increases, we're not seeing any movement. They get reset on annual basis. The impact of agency costs, probably between 1 and 2 percentage points in terms of wage cost at the moment. And in a normal steady state point of view, they're probably at about half the level of what they currently are now.

Got it. And so just you're not having to offer above -- I mean, historically, you paid above wages.

Yes. So for -- no. ECTs and center managers, pleased to say we've had some small wins in terms of reduction in turnover in both of those cohorts. And at this stage, we haven't had to do that by elevating beyond what we currently do in terms of paying above award. Okay. So thanks, everyone, for joining us. As I said, look forward to giving you an update -- a further update on trading as part of our Annual General Meeting, which takes place on the 27th of April. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.