G8 Education Limited (GEM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to G8 Education's 2024 Annual General Meeting. My name is Debra Singh, and I am the Chair of G8 Education Limited. A quorum is present, and I declare the meeting open. I would like to begin by acknowledging the Jagera people and the Turrbal people as the traditional custodians of Meanjin Brisbane, the lands on which we are conducting our meeting today. We respect their spiritual relationship with their country, and we pay respects to their elders, past and present. I extend that respect to any Aboriginal and Torres Strait Islander people joining us today. The company is delivering its 2024 Annual General Meeting as a hybrid meeting. The company is pleased to provide shareholders with the opportunity to attend and participate in the meeting, either in person or through an online meeting platform, where shareholders will be able to watch, listen, ask questions, submit written questions and vote online. I thank you for those that are in attendance today. Our shareholders are also able to dial in and ask questions over the phone lines. To utilize teleconference facility, shareholders must use their unique PIN provided to them by Link Market Services. If you don't have a phone PIN and would like to ask a question via the phone lines, please contact Link on 1(800)-990-363 now to get your PIN. [Operator Instructions] Full details on this facility are outlined in the online meeting guide available online. I would like now to introduce my fellow directors who are here with me today in Brisbane: Toni Thornton; Margaret Zabel; Peter Trimble; Prof. Julie Cogin; and our Managing Director and CEO, Pejman Okhovat. David Foster gives an apology for the meeting today. I also welcome Kelly McKenzie, our auditor from Ernst & Young who is available to take questions. Today, I'll be giving a Chair's address, followed by a presentation from our Managing Director and Chief Executive, Pejman. I will then move into the procedural matters of the meeting. I am now pleased to present my Chair's address. To begin, I will provide you with an overview of the group's 2023 performance from an operational and strategic perspective, and Pejman, our CEO, will provide an update on the market operating environment, the progress in relation to execution of the group's strategic focus, and the group's trading performance for the year-to-date. Following Pejman's presentation, we will move to the formal items of business. This is my first AGM as Chair. Firstly, I want to thank and acknowledge the former Chair, David Foster, who will be retiring from the Board following today's meeting. Let me express how delighted I am to be the new Chair of G8 Education. I've been on the Board as a Non-Executive Director since November 2021 and was appointed Chair in November last year. I'm extremely passionate about the sector and the advantages of providing early education to children and the positive impact this has on their start in life. It has been a privilege to be part of a team that is dedicated to making a positive impact by providing quality, early education and care to children and families attending our centers. I'm also a Non-Executive Director on the Kids' Cancer Project Board, which has been a passion project of mine for more than 8 years. Its purpose is to help more children survive cancer through science and research. I also serve on the ASX-listed Shaver Shop Group Board. I have over 40 years' experience in operations, human resources and change management, and I have extensive experience as a CEO and Group CEO. As your new Chair, I am committed to ensuring G8 Education continues to help shape the lives and minds of thousands of children attending our services every day while creating a fun and inspiring and safe place where all children thrive. Reflecting on 2023, I can report it was a transformational year led by our new CEO, Pejman. Since taking on the role in January 2023, he has established a clear direction for the future of G8 Education and is continuing to build on our strategic foundations. Whilst not from the sector, he has extensive experience that he has applied to transition with ease and has formed an excellent executive team around him. The Board has great confidence in his disciplined approach to executing the strategy and achieving positive outcomes that benefit all our stakeholders, which was clearly delivered in calendar year 2023 with solid earnings recovery underpinned by improved operational performance for the year. Inflation, interest rates and cost of living pressures for families dominated national discussion, while workforce shortages continued to challenge our sector. It's been a year of intensified regulator focus for the early childhood education and care sector, which has brought with it both challenges and opportunities. Early childhood education and care is central to the agenda at all levels of government, including changes to the childcare subsidy that benefit families, with many receiving more subsidy and others who were previously not eligible becoming eligible. This is great news for the sector, making early childhood education more accessible for families. We will continue to work with government to ensure we can provide the best care and the best start to life with the best resources to the 45,000 children in our centers every week. As a group, we are focused on delivering on our purpose to create the foundations for learning for life while improving our business capability to continuously find better ways to execute. During the year, we narrowed our focus on addressing the challenges in our sector, including our team retention, lower agency usage and reduced vacancies. Whilst sector challenges around the availability of staff remain, as a business, we are pleased to have continued to alleviate the impact within our network. I'm pleased to report progress continues to be made towards improving the experience for G8 families. Our Always on customer voice surveys implemented earlier in the year continues to provide us with a regular, center-specific feedback loop that our teams respond to, allowing improvements in our families' experience. Additionally, the decision to shift the external call center in-house has significantly improved our responsiveness to new family inquiries. This has also been an important element to increasing frequency as they support our families to navigate the very complex CCS affordability improvements. Importantly, we continue to recognize the sector benefits of collaboration. We are a member of the Early Learning and Care Council of Australia, and we took a front row seat at the 2023 Early Childhood Australia National Conference as a Gold Sponsor of the event. Our team can be proud to have delivered strong improvements across the G8 network in 2023, and they have done so with a firm focus on our purpose, creating the foundations for learning for life. Amongst our highlights for 2023 was a solid improvement in quality, with 90% of services meeting or exceeding the national quality standards. This is up from 89% a year earlier. And whilst it appears marginal, this is the result of a continued focus on embedding and improving quality practices in our operations. Our ESG commitment reflects our dedication to fostering positive change and contributing meaningfully to a sustainable and inclusive future. One of our goals this year was the development of our inaugural Reconciliation Action Plan, which was endorsed and published by Reconciliation Australia in December 2023. We are immensely proud of this achievement and eager to share and embed a reflective RAP with our wider community as we realize our vision for reconciliation: Walking together. Learning together. Growing together. Pleasingly, we have continued to strengthen our focus on our environmental sustainability with the launch of our solar power initiative and a nappy recycling program pilot. These initiatives highlight our commitment to taking proactive measures to reduce our environmental impact. Throughout 2023, we reviewed and updated our disclosures related to climate risk and opportunities. We continued our Task Force On Climate-related Financial Disclosures pathway in anticipation of mandatory climate-related financial disclosures in Australia, particularly having regard to the new climate disclosure standards issued by the International Sustainability Standards Board. The group's financial performance during 2023 reflects solid earnings growth compared to the prior year driven by higher revenues and margin. We continued to assess our capital expenditure throughout the year as we build better capability in delivering major capital works, resulting in lower-than-expected CapEx, assisting in continued positive cash flow and building a solid balance sheet. From a statutory perspective, net profit after-tax increased 53% to $56.1 million after including nonoperating items, as detailed in the annual report. Pleasingly, this disciplined approach resulted in both halves delivering growth year-on-year. The strength of our balance sheet is reflective of our operational discipline and focus and will ensure our long-term sustainability and strength in our operations which will benefit all of our stakeholders. G8 Education has a renewed and clear strategic focus that is centered around developing a fit core through our 6 focus areas of team, quality, education and inclusions, customer branding, operating model and financial stability. While our strategy has been refreshed, our purpose of creating the foundations for learning for life remains the same, along with our vision, values and strong ESG commitment. Under Pejman's leadership, we have seen early signs of our renewed strategy delivering successful results, with these being achieved in each of the 6 focus areas. The Board and I are focused on overseeing the delivery of a fit core for our business as our operational execution and rigor in cost and capital control remain firmly in our sites. I'd now like to provide a brief update on our employee wage remediation program. This has well progressed, with over 95% of team members having been fully remediated and an outreach and advertising process continuing to connect with the remaining former team members. We are continuing to engage with the Fair Work Ombudsman in connection with the matter. The shareholder class action proceedings, which were filed against the company in late 2020 have been settled, subject to court approval, with the decision to settle made by the Board and the best interest of our shareholders. There will be no P&L impact through the group's expected 2024 financial results. As Chair, I share that it's heartwarming to see the work that goes on each day, keeping children at the center of all we do. And we sincerely thank all our team members for their passion and dedication to the families and children in our care. I would also like to thank you, our shareholders, for your continued commitment and support of G8 Education. I will now hand over to our Managing Director and Chief Executive Officer, Pejman Okhovat, to deliver his address. Thank you for attending today.

Thank you, Debra, and good morning, everyone. I would also like to acknowledge the traditional custodians of the land we are on today, the Jagera people and the Turrbal people as the traditional custodians of Meanjin. Since joining G8 Education 15 months ago, I have had an enriching and a positive experience as I have learned about the early childhood sector, and importantly, about G8 and our dedicated team, by visiting over 1/4 of our network and seeing firsthand the amazing work our teams do every day to support our families in our 430 centers across the country. I have worked hard and at pace to understand, plan and implement a set of strategies and initiatives that will grow our organization over multiple horizons. As Debra outlined, I'm going to provide you with an update on the operating environment, the progress in relation to execution of our group's strategic focus areas, and group's trading performance for the year-to-date. Turning our attention to the current environment. The long-term outlook of the sector in our view remains positive, with continued bipartisan government support towards universal access to early childhood, economic benefits of increased female work participation and net growth in migration. At the same time in 2023, the sector's operating environment remained dynamic, with heightened inflation impacting our economy and putting pressure on operating costs, cost of living and a tough labor market. Group's activities saw G8 navigate this environment well through a focus on occupancy, cost management, improved retention of our team and delivery of high-quality programs, leading to improved results for our families, team and shareholders. G8 Education, along with the sector, remains focused on engaging constructively with government and regulators to ensure the right settings are in place for families and sector participants. Multiple inquiries and potential reforms, including multi-employer bargaining reforms, remain a focus this year and will require careful navigation. The group welcomes these changes and the growing recognition that investing in the sector is an investment in our future generation and our economy. The group remains supportive of measures that improve accessibility, affordability and inclusion for all families. We have invested significant time and resources in being a leading voice in our sector discussions, including the recently released findings from the ACCC Child Care Inquiry, the draft from the Productivity Commission's ECEC Inquiry, New South Wales IPART ECEC Review and report on South Australian Royal Commission, ensuring we continue to advocate for better, for our center team members as well as the children and families in our care. The findings and recommendations from these inquiries continue to be further developed, and we look forward to working alongside all the government and sector stakeholders for a better future. Now our strategic focus areas. At G8 Education, we are purpose led, guided by our values and proud to help shape the lives and mindset of thousands of children attending our services every day while creating a fun and inspiring place where all children thrive. Aligned with this is our renewed strategy and path forward. To deliver on our strategy and achieve our strategic objectives, the group has developed a phased approach focused on creating a fit core over the near term before enhancing the core and then pursuing attractive growth opportunities. We have 6 focus areas of team, family experience, quality education, inclusion, operating model and financial stability that will translate into consistent operational execution, improving efficiency of our process and systems, management of cost and assets and building capabilities for future. I'm pleased to report we are already delivering results that will achieve a stable and capable team, delivering high-quality services every day, better. Educational programs for children and improved experience for families and children in our care. For example, we were able to increase our team's retention by 4% on the prior year to 74%, with teacher retention increasing 12% and reducing our team vacancies by 25%. This was achieved by focusing on ongoing employee education and other workforce factors, including the health and well-being of our people. As a result, there are no capped centers due to team shortages within the G8 network, and our usage of agency has significantly reduced. Occupancy continues to be supported by positive trends in increasing frequency, which measures the average number of days per [ week ] that a child attends a G8 center. Our first horizon, which is the focus for CY '24, provides a near-term emphasis that is dedicated towards delivering improvements in family experience, team stability and engagement, operating model efficiency and optimization of our centers to deliver a fit core, early learning and care business. This is underpinned by our purpose of creating the foundations for learning for life while placing the child at the heart of everything we do. These positive results have been achieved through targeted strategic initiatives, including a family experience program, targeted learning and development and our people-enhanced disciplines for our business-as-usual activities. Aligned with our values, we will continue to innovate and bring our passion for early education to our centers for our families and future generations. Looking beyond CY '24 out to CY '26 and onwards, our focus will graduate to horizon 2, enhancing our core and horizon 3 that will focus on growth. Now trading update. With respect to our year-to-date performance to April 2024, we have continued the solid start to the year. From a group occupancy perspective, the occupancy improvements year-on-year has been maintained at April year-to-date occupancy of 1.1 points above pcp and from a spot perspective 1.3 points above the same week last year. We continue to see strong performance in cost management, particularly in wage rostering and usage of agency, with current usage levels well below prior year. These positive outcomes are driven by our strong performance in filling vacancies and improving team retention, which have continued through quarter 1. Portfolio optimization has progressed albeit slower than initially expected due to regulatory and landlord approvals. To date, 17 centers have been exited, reflecting statuary EBIT after lease interest losses of $1.1 million. The divestments have occurred on a commercial multiple of 1.5x of the CY '23 pre-AASB 16 losses of $3.7 million for a cash outflow of circa $5 million. There remains 8 centers to be divested in the Genius deal and a further 6 will be progressed outside of the Genius deal. Looking ahead, the group will continue to be purpose led and pursue its strategic objectives by focusing initially on a fit core where G8 demonstrates improved operational execution, including disciplined capital allocation framework, focus on optimization of the existing network and [ disciplined cost ] management principles. This will pave the way for our next strategic horizon where we aim to enhance and grow. In closing, I would like to acknowledge and thank our G8 team for their dedication and compassion they provide to our children as they partner with families to support children's early education and outcomes. It is a privilege to create the foundations for learning for life for the next generation of Australian children. And finally, I would also like to thank our shareholders for your ongoing support and attending today. I'd like to now pass to the Chair.

Thank you, Pej. Before moving to the specific business of the meeting, I will summarize the shareholder question and voting procedures, which apply to this meeting. As set out in the Notice of Meeting, there are 5 resolutions to be considered today. The resolutions have been outlined and explained in the explanatory statement that accompanied the Notice of Meeting. If there is no objection, I propose that the Notice of Meeting be taken as read. Thank you. For each of the 5 resolutions, I will put each resolution to the meeting and ask for questions. In terms of shareholder questions, only shareholders or corporate representatives of shareholders, or those holding a valid proxy from a shareholder, are entitled to submit questions. I will ask for questions in the following order. Firstly, if you are in the room, you can ask questions by raising your yellow or blue attendance card and a microphone will be brought over to you. Secondly, if you are dialing in, I will ask you for questions via the phone. Thirdly, if you have joined us online, you can submit questions at any time. Your questions will be read out by our Company Secretary and addressed at the relevant resolution. Questions that are similar in nature or of a common theme may be summarized and aggregated together. For those of you who have joined us online, instructions for how to lodge a question online are set out in the presentation today. There is also an online guide available via a link at the bottom of your screen. If you have joined us online, I encourage you to submit your questions as soon as possible. The procedure for voting will be as follows. The proxy votes are contained in our presentation today, which will be displayed on the screen at the appropriate time. All resolutions being put to the meeting today will be determined via a poll. All undirected proxies will be voted by myself in favor of the resolution, to the extent I'm permitted to do so. For those of you who are attending in person, I will ask all in attendance that have been issued with a yellow shareholder or proxy holder card to complete the voting form on the reverse of the card. At the completion of voting for the final resolution, you will be asked to place the voting cards in the boxes carried by Link share registry staff. For those of you who have joined us online, you may place your votes at any time using the voting card on your screen. For assistance with voting, there are instructions in our presentation today. There is also an online guide available via a link at the bottom of your screen. Again, that guide is also available on our corporate website under the 2024 AGM tab. Each resolution set out in the Notice of Meeting is to be considered as an ordinary resolution and, as such, must be approved by a simple majority of the votes cast by the shareholders entitled to vote and voting on the resolution. Shareholders can submit their votes online until 5 minutes after the meeting closes. Once the voting is closed, our share registry provider, Link Market Services, will tabulate the results, which will be released as soon as possible today on the Australian Securities Exchange. Those results will also be displayed on our corporate website once available. Before proceeding to the first item of business, let me introduce our auditor for the 2023 financial statements, Ms. Kelly McKenzie from Ernst & Young, who has joined us in person today and is available to take questions on the conduct of the audit and the preparation and content of the independent external auditor's report. All questions should be directed to myself as Chair of the meeting, and I will then invite any other Director or relevant person to respond as appropriate. Item 1. Ladies and gentlemen, I now turn to the financial statements for G8 Education Limited. You have received the annual financial report, directors' report and auditors' report for the year ended 31 December 2023. I now invite discussion on the financial statements and annual report, including questions on the business or operations of G8 Education Limited or on the management of the company generally. Questions that have been submitted regarding other items of business will be held until we come to that item. I would like to remind you that only shareholders or corporate representatives of shareholders, or those holding a valid proxy form from a shareholder, are entitled to speak. Could you please address all your questions through me as Chair? Are there any comments or questions for those in the room? Operator, do we have any questions on the phone line for this item or any other items of business?

Chair, there are no phone questions.

Thank you. Tracey, do we have any questions?

Yes. We've got 4 questions under general business, Chair. The first question is from [ Boyd Martin ]. The question is, reading between the lines, it sounds like landlords have refused to assign to Genius? How many of the 31 to be sold to Genius have been assigned to them? How much has been paid to Genius? And how many have refused to assign to Genius?

Look, I think I'll answer first, and then, Pejman, I'll throw to you, having been doing all of that work. I think it's fair to say that we anticipated that we would be able to divest the centers a little quicker than we have. It's taken a little bit longer than anticipated, Pejman, I think it's fair to say. But in your address, you talked about the progress that we're making, so over to you.

So as per the announcement today, we originally have 31 centers as part of the deal with Genius. 17 have been transferred already, and we've dealt with those. There are 8 further centers remaining within the Genius deal that we're working with landlords and Genius to see how we complete those over the next few months, again, they are subject to all of those outcomes. And there have only been 6 that we have removed from the deal with Genius. There are several reasons why the 6 have been pulled out of the deal with Genius, and some are relating to the fact that some landlords did not want G8 to come off as a guarantor of the deal, and we weren't prepared to stay as a guarantor. So there's an element of us not being prepared to do that. But all the relevant information and financial impact is as per what we've stated today.

Thank you. The next question is from Stephen Mayne. The Chair succession announcement in September last year contemplated our former Chair, David Foster, staying on the Board until the end of today's AGM at the latest. Why have we stuck with the latest possible retirement date given the revelations of the Bell inquiry, and Mr. Foster's heavy commitment as Executive Chair of Star for a brief period earlier this year and his current ongoing role as acting CEO in the middle of a regulatory firestorm? Shouldn't he have retired earlier?

Well, I think we've been clear that David Foster has resigned and his resignation from the Board is effective after this meeting. It was appropriate at the time when I took over as Chair from David that, in fact, I requested that he actually help me through that transition, which he did a really wonderful job of, and I think to be completely respectful to David who'd been on the Board for 8 years and did a wonderful job as Chair and a wonderful job as a director. In fact, I don't think we need to talk to Star at all today.

Thank you. The next question is from Stephen Mayne. Could Margaret please comment on whether the G8 directors who are not currently serving on the Star Entertainment Board have met yet to discuss whether the headline-grabbing revelations coming out of the Bell inquiry are serious enough to potentially impact Board composition at the company?

Would you like comment Margaret on it?

We've been monitoring, but we fully support the directors that are on our Board and the work that they've been doing and have had no reason to change that. So we're completely supportive of all the directors on our Board and their participation.

And I think it's also fair to say that Toni has been a Director on the Board now over 2 years, I think, 2.5 years, and brings incredible industry experience and has been an amazing Director over the last 2.5 years. Through her speech this morning, she also talked in detail about all the other areas of strength that she brings to the Board.

Thank you. The last general business question is also from Stephen Mayne. I'm a counselor at the City of Manningham in Melbourne's eastern suburbs which owns 25 seasonal kinder sites that are leased on a peppercorn rent to not-for-profits or parent committees. Most of our buildings are more than 40 years old and subscale with just 1 room. Meanwhile, large private childcare competitors with kindergarten programs have been popping up all over Manningham. How should council landlords work with private operators like G8? And across Australia, are councils getting out of early learning infrastructure?

Thank you for the question. I'll pass to Pej to comment on that.

Firstly, thank you for the question. We work with all council and state-based regulators. All our licenses actually have to be approved by the Department of Education in each state. So all the states and councils are fully aware how many providers they are actually providing licenses to, to build. So they already know. I can't comment on what the councils and the local authorities should do with regards to any state-based kindergarten programs and the reason why they're not investing in them or they're not opening anymore. I just couldn't comment on that. I can only comment on the fact that we work very, very closely with every state department.

There are no further questions on general business.

Thank you. As there are no further questions, we will now move on to the formal resolutions. As a reminder, if you are joining online, you can place your vote at any time using the virtual voting card. Resolution 1. The first resolution in the Notice of Meeting is a nonbinding resolution to adopt the rem report. Please note that the vote on this resolution is advisory only and does not bind the directors or the company. Voting exclusions apply to this resolution as set out in the Notice of Meeting. The resolution is that the rem report for the year ended 31 December 2023 be adopted. I now welcome questions with respect to the rem report from those in the room. Are there any questions from those joining online?

No Chair, there's no questions on this item.

Proxy votes have been received in respect of this resolution. The results of the proxy votes appear on the presentation. This resolution will be determined by a poll. Can I ask all in attendance that have been issued with a yellow shareholder or proxy holder card to complete their voting on the reverse of the card? We will now move to Resolution 2, the reelection of Ms. Margaret Zabel. The company seeks members' consideration and, if thought fit, to pass the following resolution as an ordinary resolution, that Ms. Margaret Zabel who, having been elected on 19 May 2021 as a Director in accordance with the company's constitution, retires as a director of the company and being eligible offers herself for reelection as a director of the company, be elected as a director of the company. As stated in the notice of meeting, Ms. Margaret Zabel is seeking reelection as a director of the company. Ms. Zabel has the full support of the Board for her reelection. I can confirm that the Board considers her to be an Independent Non-Executive Director. Ms. Zabel's background, qualifications and experience appear in the explanatory note to the Notice of Annual General Meeting. I now invite Ms. Zabel to give comment in relation to her reelection. Margaret?

Good morning, fellow shareholders and guests. It is both an honor and a privilege to stand before you today as I seek reelection to the Board of G8 Education. Over the past 6 years, I've had the distinct pleasure of serving alongside dedicated colleagues and passionate educators. And together, we've made significant strides in advancing the purpose and vision of G8 Education. As we reflect on our achievements, I'm proud to have played a role in guiding G8 Education through the periods of challenge, resilience, growth and transformation. From expanding our educational offers, embracing digital innovation, investing in the education and retention of our team and optimizing our property portfolio, we've remained committed to providing the highest quality early childhood education and care to families across Australia. Looking ahead, I'm energized by the opportunities that lie before us and also Pejman's leadership. As we navigate an ever-changing landscape, my focus remains steadfast on several key priorities. Firstly, commitment to excellence. G8 Education will continue to prioritize excellence in all aspects of our operations, from curriculum development to staff training, to parent engagement. By maintaining the highest standards, we ensure that every child entrusted to our care receives the best possible start in life. Secondly, innovation and adaptability. In today's rapidly evolving world, innovation is essential for staying ahead of the curve. G8 Education will embrace technology, creativity and forward-thinking strategies to remain agile and responsive to the needs of our families and communities. And thirdly, collaboration and partnership. Collaboration is at the heart of our success. G8 Education will continue to forge strong partnerships with parents, educators, community organizations and government agencies to create a supportive ecosystem that nurtures the holistic development of every child. And as I seek your support for reelection, I'm deeply grateful for the opportunity to continue serving G8 Education and its stakeholders. Thank you for your trust and confidence and sharing the vision for excellence in early child education and care.