Nido Education Limited (NDO.XA) Earnings Call Transcript & Summary

[Audio Gap] Half year results call. I'd like to start by acknowledging the traditional custodians on the land in which we are all meeting today and pay my respects to their elders past, present and emerging. On behalf of the Board and leadership team, I want to begin by recognizing the passion and the commitment of our Nido educators and team. Every day, they dedicate themselves to supporting children's learning, care and safety, and there is no more noble purpose. At the heart of Nido are the children we serve. It's both a privilege and a responsibility to play such an important role in their lives, and we're grateful to the families for the trust they place in us. And importantly, I want to acknowledge you, all of you on the call today, our shareholders and investors. Your investment in this sector matters. It creates opportunities for children to thrive, enables families to achieve their goals and help secure a stronger future for the next generation of Australians. With your capital, confidence and partnership, we're delivering on this aspiration together. Our purpose is clear: to create environments that support educators to rise and make a positive impact on children's lives. The first 5 years of life are not just important, they're decisive. They lay the foundation for every child's learning, well-being and opportunity that follows. And at Nido, we believe that when educators can leverage their talents and passions and skills with the right environment, tools and support, their impact on children is profound. Whilst pursuing this purpose, we remain very focused on disciplined growth and committed to delivering sustainable long-term value for investors. Thank you for the opportunity to present to you all today. I really appreciate you dialing in. My name is Adam Lai. I'm the CEO and now Executive Director at Nido Education Limited, and I'm joined by 3 of our team: Nadia, our Head of Education and Professional Development; Tom Herring, our Chief Financial Officer; and Matthew Edwards, our Founder and Managing Director. As many of you know, in February, I had the privilege of joining the Nido family, a team that's worked together for many years with passion and dedication. I want to acknowledge and thank them for all they've achieved in this half. Now today, we're going to talk you through our service performance, the backdrop of the current and forward market, the evolution of our offering and investment in supporting capabilities, our pipeline for growth through incubation and a summary of the year ahead. To summarize our half year result, we've delivered an acceptable result in a challenging market. We've demonstrated resilience and agility and made disciplined investments that position us well for growth. At Nido, everything begins with our educators and their passion and commitment make it possible for us to serve children and families every day. Our educators are really the heart of our organization. And in the first half of this year alone, they've delivered more than 450,000 days of learning. And each one of those days represents not just care and education, but an investment in a child's future, trust from a family and a contribution to the strength of our communities. That's really the foundation upon which all of these results and everything else really rests. In the first half, Nido has demonstrated resilience and agility. Nido service EBITDA increased by 8% to $12.8 million, and we've maintained our EBITDA per service run rate of $229,000 on the prior comparable period. This is for the backdrop of market headwinds. It's been a challenging period for the sector. Occupancy levels across the industry remain subdued, reflecting a combination of cost of living pressures on families, cyclical birth rate trends, shifts in working patterns, including remote and hybrid work, of course, and also increased supply in some locations. While occupancy was approximately 3% down on the prior comparable period on a like-for-like basis, we have preserved our fee and realized sustainable productivity and efficiency improvements. Importantly, given the strength of our balance sheet, today, we have announced we are paying a fully franked interim dividend of $0.015 per share without compromising our growth agenda. In this half, we've taken the opportunity and have continued to evolve our service offering, ensuring it remains responsive to the needs of children, families and educators. At the same time, we've strengthened our corporate and service support, investing in executive leadership, safety and compliance, marketing, brand and our people, building upon the capability required to underpin sustainable growth going forward. And looking ahead, we're well positioned to expand our impact. We've built upon a strong foundation through the first half. We're actively progressing a pipeline of more than 100 services. This gives us confidence in our ability to deliver sustained growth for Nido and more importantly, to increase that positive impact that we had that I discussed earlier. In summary, we are navigating a challenging environment with discipline. We're investing with purpose, and we're building for the long term. With the continued support of our shareholders, the extraordinary commitment of our people, Nido is very well placed, both in its impact and also its value. The 56 Nido-owned services have performed well through the first half. In summary, as mentioned, we've delivered a modest increase in revenue in the first half of 8%, with a service EBITDA pre-AASB 16 of $12.8 million over the prior comparable period. We've held both EBITDA per service at $229,000 and our margin at 16%. Despite the challenged occupancy across the sector, we have been able to deliver days of learning for the half of 453,000 against 460,000 last year. Now we maintain an average fee of $172 per day against an average of $157 this time last year, reflecting the investment and positioning of our service. In January 2025, we made the decision to hold and not increase average fees across all services given the prevailing pressures on cost of living on Nido families. This decision was taken purposely and with consideration of the impact. As a result of this decision, we did not realize approximately $3 million of revenue that would have had an impact on the bottom line. In July, we did increase fees within the allowable range of 4.4%, in line with the commitments for operators that have opted into the worker retention grant. And we've been able to improve our wage to revenue ratio from 59% to 57% through delivering improvements in the efficiencies in our practices. Notably, this has been realized through very careful management and also natural attrition. This result was delivered against the backdrop of a challenging sector in the first half. Anecdotal evidence suggests a softness in occupancy across the sector during the first half of this year. And our analysis indicates that this is a result of flat population growth, only modest increases in service usage and an increase in new supply in some areas. Today, around 22% to 23% of children aged 0 to 5 receive the childcare subsidy for center-based care. And Nido responded to this challenge with a focus on brand and marketing initiatives, including the delivery of campaigns and building new capability. Secondly, as many Australians know, there's a significant focus on child safety and child protection in the community sector and government right now, particularly in the wake of the abhorrent crimes committed by a number of alleged perpetrators in long day care settings. In the industry that we're in and the sector that we're in, we've seen firsthand the concerns of families right across the country as we engage with them to understand their perspectives and concerns. And we provide clarity on the safeguards we have at Nido to protect and keep their children safe. We commend the recent work of Victoria Police and the government in identifying and arresting a perpetrator of serious crimes in Victoria. It's a matter on public record that the individual worked at Nido service for an 18-day period before being terminated during his probation period. His termination related specifically to unsatisfactory retention to an incident report concerning a child's behavior towards another child. The action didn't relate to any behavior by the individual towards a child. Police have since uncovered, however, that the individual went on to commit a pool in crimes post his employment at Nido. Child protection is always at the forefront of our work. While we should never need a reminder, this case really reinforces the need for constant vigilance. And to this backdrop, we continue to focus on child safety and child protection in all we do as a major priority. We are seeing encouraging signs of greater workforce stability across the sector, and this is reflected in our own experience at Nido. This stabilization is likely supported by the normalization of workforce movement following COVID as well as meaningful increases in educator incomes, of course. Over the past few years, wages in the sector have risen by around 13% through award increases with an additional 10% provided through the worker retention plan for compliant operators such as Nido and a further 5% increase still to come. This is a really positive trend. Retention greatly supports the maturing of practice, teaming and forming relationships with children and families. In 2026, Australian's childcare landscape is poised for substantial transformation. Government policy will likely increase demand for days of learning. The Australian government currently provides childcare subsidy to families. The amount a family may receive is based on 2 tests: Firstly, a means test based on their income; and secondly, on an activity test based on the hours they undertake approved work or study activity. From January 2026, the government will commence the 3-day guarantee, mandating that all families can now receive at least 3 days of subsidized early childhood education per child regardless of their parents work or study. These changes will increase demand with over 100,000 families now being eligible for additional subsidy support from the government. We're expecting improvements in cost of living through interest rate cuts, lower inflation and better employment statistics, which provide more favorable conditions going into FY '26. Concurrently, child protection and safety reforms are gaining momentum across jurisdictions as many of you would have read. The recent high-profile abuse cases have spurred inquiries and recommendations, including establishing independent regulators, strengthening working with children's checks, introducing national registers of early childhood workers, mandating safety training, deploying CCTV trials and increasing unannounced inspections. At the federal level, authorities are considering reforms to bolster regulatory oversight and tighten provider accountability. To be clear, Nido welcomes these reforms. Efforts to improve safety of children and operator compliance and quality across the sector is welcomed. We encourage governments to follow through with the coordinated reform across the regulatory landscape, including getting behind the national working with children's checks, the national educator registers and a national reportable conduct scheme. We'll continue to focus and advocate for children's safety and protection as a priority. And it's this backdrop that during the first half of the year, we've continued to evolve our service offering and also invest in our supporting capabilities. I'd like to hand to Nadia now, our Head of Education and Professional Development, to take us through some of the evolution of our offerings.

Thank you, Adam. So through the first half of FY '25, we've invested in evolving our service offering. This year marked an exciting milestone for us with the launch of Nido's kindergarten curriculum. Shaped by the voices of almost 1,000 children, families, educators and community members over a 3-year period, it represents a shared vision of meaningful learning and growth aligned to the earlier years learning framework and the Reggio Emilia philosophy. We know kindergarten is more than just the 2 years before school. It is a crucial milestone in early childhood that sets the foundation for future learning and well-being. Quality kindergarten has been shown to improve children's social, emotional and cognitive development and creates a strong platform for lifelong learning. By investing in this important stage, we are giving children the best possible start to their educational journey and paving the way not only for a successful transition into school, but greater opportunities in education and life beyond. Strong family partnerships are central to our philosophy at Nido. As part of our kindergarten offering, families are invited to parent teacher interviews and receive a comprehensive summary of learning and development report twice a year. This really helps us to build stronger links between home and kindergarten whilst individualizing each child's learning journey. To support educators in the implementation of the curriculum, we have developed a suite of practice guides with accompanying online learning modules and delivered a series of webinars and communities of practice to strengthen teacher capacity. The development of our Birth to 3 offering is currently underway, and we're working with a group of leaders to align it with the kindergarten curriculum to create a seamless continuum of learning. In terms of our menu, we've also invested in developing an outstanding one created in partnership with the nutritionist after extensive feedback from our chefs, educators and families. It has been assessed by a qualified dietitian to ensure every dish exceeds daily national targets for nutrition whilst adhering to national food safety standards. This new menu is all about nutritious meals that children actually enjoy, supporting their growth, energy and well-being. From very proteins and flavors to allergy-friendly options, the menu has been designed to be balanced, inclusive and full of goodness. During the first half of FY '25, we've continued to invest in strengthening our risk and compliance capabilities. This includes a review and continuous improvement of our policies and procedures in areas of child safeguarding, safety, people and operational practice. Nido has a unique leadership model at each center. An executive service manager leads daily operations with vision and purpose, a curriculum leader guides curriculum implementation, coaches and mentors educators and fosters collaboration between families and team and a family advocate who advocates for children and families and supports in the engagement and administration of families. These 3 roles work closely with our lead educators, cooks, educators and broader support team. At Nido, we've developed a new design specification with one goal in mind to create spaces that keep children safe, calm and ready to learn. The Reggio Emilia philosophy considers the environment as the third teacher. And that means that every detail of the space, the colors, layout, furniture and flow isn't just background. It actively shapes how children feel and how they learn. Our new environments are designed to protect, inspire and support children every day. In the second half of this year, we'll continue to build on this momentum and strengthen our practice. I'll hand back over to Adam Lai to provide an overview on support office costs.

Thanks very much, Nadia. Over the past year, we've made well considered and disciplined investments into our corporate and support capabilities. We've made this investment conscious of it hitting our earnings during the period. The increase of $1.8 million in our support office costs during the reporting period represents an investment into being fit for growth. This investment includes executive leadership, education quality, importantly, child safety and compliance. As Nadia mentioned, throughout the beginning of the year, we invested in the education curriculum and meaningful improvements in safety, compliance and quality. People leadership and support, inquiry generation and brand. We are very comfortable with the investment in capability, and it sets us up very well for forward growth. I'll now hand back to Nadia to talk through some of the regulatory changes that we're seeing on the horizon.

Thank you. So the government will introduce regulation to protect children and their safety. Reform will require both changes to operator practices and changes to the regulatory regime itself. Nido has a dedicated risk and compliance function that supports services to maintain compliance with emerging regulatory changes. The team scan and engage continuously monitoring the regulatory landscape and engaging with relevant authorities to stay informed of emerging changes. Identify and assess change impact on service operations, implement changes to ensure compliance with regulations and best practice, monitor the effectiveness of initiatives by conducting audits on an ongoing basis and continuously improve by using insights from monitoring and feedback to refine, strengthen and enhance overall compliance culture. A number of the proposed changes to operator practices are already embedded at Nido. These include CCTV present in all Nido-owned services yards, the use of personal electronic devices in classrooms already being banned, vaping already being banned within our services and the voluntary adoption of the national model code for taking images and images and videos of children within our safeguarding children policies and procedures. The sector continues to evolve with ongoing regulatory changes, and we proactively monitor and implement strategies to ensure our services remain fully compliant. I'll now hand over to Tom Herring to take us through a summary of our group results.

Thanks, Nadia. Please note that the figures I refer to are all on a pre-AASB 16 basis and exclude noncash costs. A reconciliation to the statutory results is in the appendix. Group revenue was $82.8 million. Group EBITDA was $6.6 million and NPAT was $4.6 million. As Adam mentioned, we're really pleased to announce a fully franked interim dividend of $0.015 per share to be paid in September. We have a strong balance sheet with low leverage and debt capacity to acquire services from the incubator as they meet the acquisition metrics. As Adam touched on, service performance was solid in light of current conditions, being $0.8 million up on last year as a result of 4 acquisitions made in September '24 and sustained performance of our existing services. The additional investment in our processes, people and systems have increased net support office costs by $1.8 million to $6.2 million. These factors result in an overall group EBITDA of $6.6 million. Depreciation of $0.4 million was similar to last year and reflects the low capital expenditure requirements in our business. Net finance costs of $0.2 million and tax expense of $1.4 million were broadly in line with the previous half, resulting in overall net profit after tax of $4.6 million. Turning to capital management. High cash generation and low leverage leaves us in a strong position as we look to continue to invest in growth. Highlights include cash conversion of 97%, inclusive of workers' retention grants, which were received in July. $0.4 million worth of shares acquired as part of the share buyback scheme launched earlier in the year. Net debt of $10.9 million at a net leverage ratio of 0.5x. And we have $34 million of debt available, inclusive of the Accordion facility that will be established when required.

Okay. So we might now turn to incubation. Thanks, Tom. At Nido, we grow differently. We have the privilege of opening quality purpose-built greenfield services that are designed to deliver safety, child protection, educational and social outcomes and staff experience. Instead of taking on all the upfront risk of building new centers, we use what we call our incubation growth model. And here's how it works for those of you who haven't heard of it before. Private funds provide the capital and build the new service, while Nido designs them, manages them and sets them up for success. We receive establishment and management fees during this period, but importantly, we don't carry the financial burden of development or early stage losses. Once the center proves itself reaching strong occupancy and earnings targets, Nido has the option and the right to buy at a set multiple. By then, the center is already operating well with a culture and standard shaped by us from day 1. As we've outlined to investors previously, growing through our incubator model provides us with a number of benefits. We support the design and development of new Nido-branded services owned by the incubator, providing development off balance sheet and limiting our exposure to trade-up risk whilst maintaining the option and the right to acquire once certain conditions are met. When we open the services, we get a management fee. When we trade up and hit certain performance hurdles, we acquire the service. When we acquire the service, we get the benefit of acquiring at a reasonable multiple and having the full benefit of the profit from the service. The benefits are clear. It's capital efficient, so we grow without stretching our balance sheet. It's lower risk. We only acquire once performance is proven. It ensures quality because we've been in the driver's seat from design all the way through to operation, and it gives us a predictable pipeline of new services ready to come into the group at a predictable acquisition multiple. So this model means that Nido can scale sustainably and with confidence, delivering value for our families, our people and our shareholders. So far this year, we've opened 5 services. In Clyde North, Mandogalup, Mandurah, Swan View and Hilbert, with more to open this calendar year. And these sites are wonderful and safe learning and development environments for children. They've been designed and developed to our specifications. I'll hand over to Nadia to talk through some of the features of those new services.

So our updated learning environments have been designed with one clear priority, keeping children safe while supporting their learning and well-being. First, safety is built into the design. We've removed sharp edges, introduced curve joinery and set a clear sightline so educators can always see and hear children. Rooms are equipped so staff don't have to leave to access resources, ensuring children remain supervised at all times. Second, the spaces are calm and inclusive. We've taken inspiration from the natural world using soft colors, simple layouts and natural textures. This reduces overstimulation, helps children feel settled and supports those with sensory sensitivities to engage confidently. Third, the environment itself supports learning while protecting children. Multipurpose furniture is safe as well as functional. Lighting can be adjusted for comfort and focus and open-ended materials allow exploration in a secure setting. The result is straightforward, environments that are safe, calm and effective. They make it easier for educators to supervise and support children, and they give children the freedom to learn and grow with confidence. I'll hand back to Adam now to talk through our platform for growth.