G8 Education Limited (GEM) Earnings Call Transcript & Summary

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

Thanks, Ashley. So good morning, everyone, and thank you for joining the trading update call for G8 Education. As Ashley said, my name is Gary Carroll, and I'm the CEO and Managing Director of G8 Education Limited. I'm joined on the call today by the Group CFO Sharyn Williams. I'd like to begin by acknowledging the traditional owners of the land from where we're conducting today's presentation, the Jagera and the Turrbal people as the traditional custodians of Brisbane. We pay our respects to Jagera and Turrbal elders past, present and emerging. And I'd like to extend those respects to any aboriginal or Torres Strait Islander people joining us on this call today. So Sharyn and I will now walk through the investor presentation that was posted on the ASX earlier this morning and then provide time for any questions. We start on Slide 5. The group recorded unaudited statutory EBIT after lease interest of $71 million and NPAT of $41 million at the end of November, with the result being driven by good occupancy recovery after the COVID impact -- impacted Q1 period and costs being well controlled. Our current core occupancy as at the December 4, was 77.3%, 1 percentage point higher than 2021 and 1.3 percentage points behind 2019 levels. Effective wage management mitigated the impact of elevated agency usage that persisted during the second half of the year to the sector workforce shortages and recent COVID-related impacts, while our overall cost base has been managed well with the cost-out program being on track to ensure inflationary impacts have not adversely impacted operating margins. Our net debt of $87 million means that the group maintains a conservative net debt-to-EBITDA ratio of 0.9x. Turning to Slide 6, which shows the group's 2022 occupancy performance in detail. Occupancy of 77.3% continued to narrow the gap on CY '19, driven by our strategic change programs and the reestablishment of the seasonal uplift trend as well as increases in days in care due to changes in government subsidy in relation to siblings in care and the removal of the annual subsidy cap. Sector workforce shortages continue to impact occupancy with a portion of the network constrained by team member availability. From a state-by-state perspective, the same trends that were evident in our August market update have continued with Queensland, Western Australia and New South Wales being the best-performing states with occupancy in line with or ahead of pre-COVID levels. Victoria is growing, albeit at a slower rate than South Australia and ACT being relatively more impacted by workforce turnover and availability, noting of course, the very small number of centers in the ACT. Inquiry levels are above the PCP. However, due to constraints in occupancy as a result of workforce shortages, the conversion rate has remained flat. The group's wage performance is set out on Slide 7. Implementation of our HRIS and roster system was completed during the year. And when combined with enhanced processes and training, this has resulted in solid wage efficiency performance as measured by wage hours per booking. Wage rate growth, excluding agency, was 4.7% on a year-to-date basis for 30 November, while the rate increase was 8% after including the impact of agency usage. Slide 8 provides details in relation to the group's operational priorities during 2022 being the workforce and our quality improvement program. Starting with workforce, through a series of activities, we have held team retention reasonably steady, outperforming the sector with sector vacancies up by more than 30% between February and November 2022. During the year, we've implemented increased day-to-day support for our center managers and provide dedicated teacher registration resources, the early childhood teachers, while ensuring we are market competitive in both of these key roles in terms of remuneration. From an educator perspective, our focus has been on leveraging our systems to provide enhanced flexibility while also providing increased development opportunities. Given our scale, we have the opportunity to mitigate workforce shortages by growing our own talent. In this respect, it's pleasing to see circa 1,000 team members enrolled in Certificate III and Diploma courses and 450 enrollments in Bachelor study programs. Turning to our improvement program. I'm pleased to say this program has been completed with the centralized driven program rolled out across the network and refreshed educational resources in each center. Our focus has now turned towards sustaining and continuously improving center quality as part of our business as usual, supported by the efforts of our center field support teams. On a year-to-date basis, 89% of our networks are currently rated is either meeting or exceeding national quality standards. Slide 9 provides an update in relation to the group's capital management activities. Starting with our share buyback. Circa 31 million shares totaling $32 million have been repurchased via an on-market share buyback as at 9th of December. G8 has determined it will spend up to $40 million on the buyback, which is expected to be concluded during Q1 CY '23. This quantum supports a conservative leverage level and enhances shareholder returns while preserving an appropriate level of funding reserves. From a debt and leverage perspective, the group's current net debt position of $87 million means that we have a leverage position of 0.9x net debt to EBITDA. Net debt increased during the first half of 2022, funding the full year CY '21 dividend, buyback and CapEx during the seasonally lower earnings period. Operating cash flows between July to November funded CapEx, dividends and buyback requirements with debt levels remaining flat since half 1. Our debt refinance process is on track to extend the existing October 2023 expiry and to increase tenure with a staggered debt profile with our debt facilities, including sustainability-linked performance targets. Turning to the macro outlook for 2023, which is set out on Slides 10 and 11, and starting with Slide 10, the Cheaper Child Care Bill passed both Houses of Parliament in November and the changes to the child care subsidy is scheduled to come into effect on July 1, 2023. The slide contains a visual representation of the increased subsidy at various income levels with improved affordability expected to drive increased demand as was the case for the prior CCS increase that occurred in 2018. It is worth noting that other demand drivers such as workforce participation, birth rate and international migration are also expected to be positive in the coming years. On the supply side of the equation, Slide 11 highlights that supply growth remains subdued compared to prior years, driven by increased construction and funding costs and longer construction times due to labor shortages with these drivers behind the subdued supply growth expected to persist for the majority of 2023. There are 2 material events to occur in the next 12 months from a regulatory perspective. First, the passage of the new industrial relations legislation through Parliament has paved the way for multiemployer bargaining processes to commence across a number of sectors, including child care. G8 has been working collaboratively with unions, peak bodies and employees to commence the planning process in relation to multiemployer bargaining with the sector and unions being aligned that a precondition of entering such a process is that the government will fund any relevant wage increase as this ensures that wage cost increases do not flow through to higher fees for families. Secondly, the ACCC inquiry into the sector will commence in early 2023, focusing on the drivers of costs and fees in the sector. The terms of reference to the ACCC inquiry were consistent with G8 discussions with sector participants and government, and we've been working in conjunction with peak bodies to commence the data gathering process to demonstrate the significant variability in cost drivers that are present in the sector. And this presence of significant variability in cost drivers mitigates the potential risk of pricing regulation in the sector. This variability was acknowledged in the previous productivity commission into the sector with no action being taken in relation to pricing regulation at that time. The ACCC is expected to provide an interim report by 30 June 2023 with the final report due by 31 December 2023. That concludes the formal part of the presentation. Ashley, I'll now open the floor to any questions.

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

Just 2 questions from me, if that's all right. Gary, the first one just around the pipeline. I know that you mentioned labor shortages having a bit of an impact. Can you talk about that pipeline relative to calendar year '19 levels? And whether you've seen any kind of softening off in that pipeline that's not seasonally related of late, please?

You're talking the inquiry pipeline team, Tim?

Yes, that's right.

Yes. I mean our inquiry pipeline compares well -- current one compares well to 2019 levels or leading into 2019 levels. So we're pretty happy that we're getting the levels of inquiry we need to have a decent enrollment and transition result into the early part of the year. The key data point that we're all tracking in the sector is availability of team to meet that demand. You are somewhat assisted by occupancy levels in February being at their seasonal low. So we should be able to accommodate that demand at that time of year. And clearly, we need to then ensure that we're consistently getting -- recruiting to fill that gap as the year goes on, but we remain pretty comfortable with inquiries and how they're flowing through into bookings for the early part of the year.

Got it. Got it. And just the second one around that labor shortage. What are your thoughts in terms of potential pricing increases that might need to go through the industry. I know that you said the government bargaining would be reliant on government helping to offset some of that incremental cost, but what was the industry thinking in terms of pricing increases for the next -- or sorry, labor increase -- potential labor increases for the next 12 months?

Yes. So there's a bit in that question, Tim. I mean, first point for us is we've actually been really happy with our retention of our team relative to the sector in the -- during the year. So that's helped mitigate the challenge somewhat, although it is very much a tough market out there to retract educators to the sector. We did bank on agency usage coming down over the last couple of months. But like many workforces, we've had a little bit of COVID go through our network, and that's kept agency a little bit more elevated than what we were planning, although we -- that is very much a temporary outcome. In terms of attracting people to the sector generally, the pipeline of Certificate III and Diploma educators is okay. Actually, the numbers in those courses and completing those courses would indicate that we'll be -- as a sector, we will be improving our labor profile during the course of 2023. The key role that's a challenge for all of us is the Early Childhood Teacher role where there's a big gap between supply and demand. And that's something that won't be fixed overnight. As you and I have talked about before, we're very much pursuing and grow your own talent strategy to mitigate that. And if we get a decent proportion of the 450 diploma educators in the G8 network that are studying towards the bachelor scholarship, we will be very well placed in relation to filling that teacher shortage over the next couple of years.

Your next question comes from Marni Lysaght with Macquarie Capital.

I just have a quick question for you just around drivers of recent occupancy. I know that there's obviously a recovery post COVID locked down earlier this calendar year. Also cognizant of the fact that you've given us some operating cash flow data. But is some of it potentially driven by movement away or kind of getting out decreasing your exposure to some of those impaired centers? Or is it largely just the recovery in the -- all the macro [ base ].

Yes. I think it's too -- it's not about our impaired centers because we actually haven't really sold many, if any, over the last number of months. So I think there's a combination of the market improving and certainly, the market benchmark data we see feels like occupancy across the sectors recovered reasonably well and the regulatory changes have certainly added to that. We do think we've also contributed a piece of that with our improvement program because we noticed the outlet when we do roll that out in our centers. So I think it's both, but it is very much about the core business, not about portfolio management, driving the occupancy performance.

All right. And just a follow-up on that, like can you maybe give us some color or what do you view being your observations with respect to the part -- ongoing process of exiting those centers? Has appetite changed given the change in the macro climate? Or are you finding appetite fairly stable?

Yes, it's a good question, Marni. So we've got about 26 or 27 centers left. They're really in 2 cohorts: One, we've turned around the performance of about half of them so that they're actually not a cash drain. And as a result there ...

So they improved there or something last result.

Yes, they have. Yes. So that certainly meant that we're a lot more selective in our activities in marketing those centers. A number of them are still on the market, but our price expectations are probably elevated. We do still see demand out there. It's just everything is still a bit slower. And I think sector conditions are not overly easy. And the excluding scale players that are looking to grow their networks aggressively, the ones and twos type acquisitions aren't happening in big volumes. The other half of our impaired centers are the bigger, longer leases, they are draining cash, but the very hard to sell because they're in challenged locations with long-term leases. And so they're going to be hard to get rid of.

Okay. That's all understood. And my other question is just around, I guess, the transition with new management kind of how has your experience been with that handover and what are kind of -- what's your focus now, Gary, as you look to wrap up?

Yes. Pejman Okhovat starts on the 3rd of January. He is officially still at BIG W until the 31st of December. They kept into his notice period. So we have been -- Sharyn, myself and most of the members of the management team have been catching Pejman to do transition fitting around his current role, and he's done a really good job of that. He'll certainly, I think, hit the ground running with a good level of knowledge of the market and the sector and the group as much as you can when you're not able to do it full time for a big period of time. But I think he'll -- and the response and reception from both himself and the team, I've been really pleased with. So that's good. As a result, my focus is hitting the numbers for the end of the year. So something that occupies Sharyn in my time, a fair bit, as you can imagine, and I'm pretty keen to make sure that we deliver the results that we want to come 31 December, and it's not 31 December yet.

Your next question comes from Aaron Muller with Canaccord Genuity.

Gary, Sharyn. Just a few questions for me. Firstly, just on the cost-out program, I think I recall you sort of -- you're having to take out $13 million to $15 million this calendar year. Are you guys on track for that? And secondly, could you give us a feel for how many centers in the portfolio have a wait list currently. I think at the half year, you said it was about 15%. And then thirdly, just a comment on reenrollments, how they're tracking versus PCP?

Yes. So cost out program, yes, on track, 13% to 15%, that was a gross number, Aaron, and it is realized in '22. It's not a kind of annualized run rate, so that's going okay. Re-enrollment is on track. The progress updates we get were in line with where we'd like to be. So that's going okay. And your third question?

It's just about how many centers in the portfolio currently have wait list. So I think it was about 15% at the half year.

Yes, it's still around -- it's somewhere between 12 to 15. So the overall number is stuck at that kind of level.

The next question in Wei-Weng Chen with RBC Capital Markets.

Gary, just a quick question on December trading. So just I guess how to think about earnings for this December. Last year, you guys see about $5 million of EBIT, $3 million of NPAT in December, appreciated sort of a seasonally quieter period. Is there anything we should think about when comparing this December to last December? Are there reasons why we can't say that trading should be around plus $5 million EBIT and plus $3 million NPAT for this year.

Well, without giving a forecast, Wei-Weng, I'll talk to the drivers that -- so what's different year-on-year is our occupancy is higher, our fees are higher when our wage costs are high. So we're certainly hopeful that the pluses will slightly outnumber the minuses.

Yes. Great, all things being equal, I guess, you're saying year you should be slightly better than last year.

Yes. Now it is an interesting time of year for all of us in the sector because predicting holiday behavior during December has been a very taxing exercise over the last couple of years, 2 years ago when COVID was there, no one took holidays. It was a great time for occupancy. So we're watching daily and weekly to see how that goes. It looks like the trend is very similar to 2019, which will be good.

[Operator Instructions] the next question comes from Tim Plumbe with UBS.

Just a follow-up one for me. Gary, just in terms of those assessed centers, I think at the half year, you guys were at 85% of the portfolio assessed and still at 85%. So is that an ongoing thing? Or is that kind of stalled in the second half and largely can play.

Well, it really depends on the number of centers that get assessed in the results, Tim. So if we get a meeting tend to go back to working towards that kind of knocks around that number, the number we focus on more particularly as the growth in the network number, which has increased from 86% to 89% across the entire network over the years. So we're pretty happy with that result. That's in line with where we want to be over the next to get to 95% in the next couple of years.

Got it. Got it. And just second question. In terms of the staffing that you've got at the moment, would you have capacity to be able to get back towards calendar year '19 occupancy levels in calendar year '23 or there just isn't the -- or there just isn't enough ECT labor supply in the market?

I think if we continue our progress from a retention perspective, and we get a good flow-through of graduates internal programs. We had actually improved our recruitment. We've done a record level of recruitment in the year, continue that. Certainly, our operational planning is to get back to 2019 levels during 2023. And all of the people activities are focused on ensuring we have the resourcing to do that.

And potential to import from offshore, how discussion is currently going.

Still incredibly frustrating. I think we called out in the presentation that there's still a lot of huffing and puffing, not seeing too many numbers come through.

Your next question comes from Marni Lysaght with Macquarie Capital.

Apologies if it's been asked, I just got dragged away. But just kind of remind us, you've got 1 month remaining in the rest of the financial year and kind of a normal year, kind of the profitability of -- or contribution of that December month, I know that occupancy obviously does tail off close to Christmas.

Yes. So I think if we take you back to December last year, we did our trading update last year and December earnings last year were 4 to 5 EBIT. We're hopeful of given occupancy and fees are higher. They will be a touch better than the wage increases that are higher than last year. So net-net, hoping for at least that number.

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

Yes. Gary, Firstly, I'd like to say thanks for your help and your guidance over the last 5 years and wish you all the best for the future. And my question is where do you think CapEx will land for the full year? And sort of what will it look like next year? And what's left with the center enhancement program, please?

Thank you, Peter. That gives me the opportunity to hand over to Sharyn. Thank you. That's very much appreciated.

So CapEx year-to-date, it's around $54 million, and that includes $6 million for Software as a Service. So for this year, we're still expecting to land in that low $60 million to $65 million. Now that will depend obviously on availability of trading, et cetera, which does tend to come back a bit heading towards Christmas. And in terms of next year, we had flagged that we'll still do an elevated level of capital spend next year, which we can update on in February in terms of what that looks like in the components.

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

Well, thanks, Ashley, and thanks, everyone, for attending. Very much appreciated. We will, no doubt, catch up with a number of you one-on-one over the next couple of days. But if we don't, I wish -- I'd like to take the opportunity to wish everyone a safe and happy festive season, and thanks for joining us today. Thank you.

Thanks, everyone.

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