Nido Education Limited (NDO) Earnings Call Transcript & Summary

Thank you for joining us for the Nido Education Limited 2023 Annual Results Call. I'm joined today by Renee Bowman, Nido's CEO; and Tom Herring, Nido's CFO. If we move to Page 5, you will note we as Nido are very focused on our people, which reflects in our purpose. We define our purpose as to create an environment that supports teachers to rise and make a positive impact on the lives of children. If we move to Page 6, you'll see the financial highlights. We traded in line with our prospectus forecast of 350,000. Tom will discuss this later in the presentation through the finance pages. And if we'd like to go through to Page 7, I'll hand across to Renee.

Thank you, Mathew. Nido currently owns and manages 97 services, 52 are owned by Nido, and we have 11 services in incubation as the market is no doubt aware, the sector experiences seasonality, which with its lowest point typically in February and its highest point in November. This coincides with children transitioning to primary school and, of course, a heightened number of new enrollments. Nido has moved through its lowest point and as of last week, recorded a spot occupancy of 73%. It's important to note the portfolio is made up of a number of services still in trade up. Finally, on this slide, following a fee increase in January, Nido's average daily fee now sits at $153. The next slide, please. Nido has an established leadership team with experience developing and growing quality services. Of particular note on this slide, Mathew has been in the sector for over 20 years and our new Services Director and Operations Director have worked with Mathew for over 12 years. The rest of the leadership team brings a wealth of experience, both in the sector and in their respective specialty areas. Next slide. Nido is a people-centric business, and our performance is only ever as good as our people, which is why we're so focused on creating an environment in which our people can rise. With our continued growth, Nido is welcoming more and more people into the Nest every day. If we look at the graph shown on the screen, you'll see the number of open roles is reducing. The gap between open roles and new hires is also closing. We can attribute this to a number of factors, both a strong talent acquisition team, adoption of a decentralized model to improve time to hire, and improvement in staff retention and the gradual maturing of our services. There is typically a lot of interest in recruitment from the market. So I'm happy to share that Nido received over 2,000 applications in January, and this trend continues into February. Next slide. Nido's aspiration is for all of our services to achieve a meeting or exceeding national quality rating for all of its services. We are very close to this, as you can see, with 95% of services now achieving meeting or exceeding, which is better than the national average. I'll now hand it back over to Tom.

Thanks, Renee. Good afternoon, everyone. I'll now walk through the financials if we can move to Page 12, please. This table shows the statutory performance for 2023 against '22. Revenue and other income of $95.6 million was approximately $62 million higher than last year. This reflects continued revenue growth of the 28 services owned from the start of the year and incremental revenue from the 24 services acquired in October. Occupancy grew throughout the year as per prospectus, reaching a weekly peak of 82.5% in late November. The expenses reported here are inclusive of AASB 16 and significant nonrecurring costs mainly connected to listing and acquisitions. These costs make it difficult to compare '23 against prior year in the prospectus. So we've included a couple of slides to help explain the underlying trends. If we move to the next slide, please. This table breaks out '23 by line item against last year. Underlying EBITDA has improved from a loss of $4.1 million to $351,000 profit in '23. This was mainly due to existing services opened in previous years continuing to trade up and due to the incremental EBITDA contribution from the services acquired in October. I'll briefly touch on the EBITDA impact of the significant one-off items. AASB 16 adjustments had a $12 million positive impact on EBITDA with rental payments, which used to be recognized within EBITDA being added back and substituted for depreciation expense of $6 million and an interest expense of $11 million. Share-based payment expenses totaled $10.1 million, comprising bonuses and options issued to our employees as part of our incentive and retention strategy. Transaction costs totaled $10.9 million with $3.25 million being expensed in the P&L as shown here and $7.8 million capitalized in equity as per accounting requirements. Other items included stamp duty of $1.8 million and $650,000 of other nonrecurring costs. Next slide, please. Here, we show the key elements of '23 performance versus the prospectus. Underlying EBITDA of $351,000 was in line with prospectus and the loss after tax of $18.1 million was $1.3 million favorable. Please note, the prospectus numbers here are from the statutory forecast shown in the prospectus, which assumed an October acquisition and IPO date rather than the pro forma forecast, which reflected -- no owning the services from the start of the year. Service EBITDA of $10.3 million was $700,000 favorable to forecast with days of learning being slightly higher. This was offset by $700,000 additional support office costs incurred in the second half. The $15.8 million of significant one-off costs were $1.4 million higher than the prospectus forecast. Transaction costs and final share-based payment calculations were slightly above estimates. Other line items worth calling out include finance and tax. Finance costs were $700,000 unfavorable to forecast, mainly as a result of early repayment of the $17.5 million loan drawn in October to comply with listing requirements. We repaid this in full on 2nd of January 2024, once we were satisfied that the loan was no longer required and to avoid paying additional interest. As a result of this early repayment, the establishment fee of $600,000 forecast to be amortized over the life of the loan was fully expensed in 2023. The tax benefit of $3.6 million relates to deferred tax on leases and employee benefits. There's no current tax payable in '23 because a loss was reported for the year. We expect to commence paying tax in 2024 once we have utilized the full impact of tax losses. Next page, please. You'll see that Nido's balance sheet has changed significantly following the acquisitions in the IPO. Cash excluding the impact of the $17.5 million loan was $8 million. The acquisitions have generated $111 million of goodwill and also increased right-of-use assets and lease liabilities. The balance sheet includes $9 million of cash-backed rent bonds. These rent bonds will be moved to a new guaranteed facility with NAB in the coming weeks with the cash being repaid to Nido and used to settle the $8 million deferred consideration recorded in current liabilities. Next slide, please. Finally, with cash flow. As you'd expect, given the underlying EBITDA, cash from operations is around breakeven at $293,000. We raised $99.5 million through the IPO and utilized $73 million for acquisitions and $6 million to fund the first tranche of the NAED loan in line with prospectus. The balance of the equity raise was used to cover transaction costs and working capital. As of 31st December, all IPO and acquisition costs have been paid for, except for the deferred consideration and stamp duty, which we are waiting for the ATO to authorize. That completes the walk-through of the financials, and I'll now hand back to Matt to provide an update on Nido's growth strategy.

Go to Page 18, please. Our incubator growth strategy, which Renee will discuss further, allows Nido to focus on owning and operating high occupancy proven childcare services with the incubator taking on the trade-up risk. Go to Slide 20, please.

So Nido has a clear growth model for the future with the incubator expected to open 80 to 100 services over the next 4 to 5 years. All of Nido's services are purpose-built for Nido. Nido controls all aspects of service development and operations from day 0, thereby eliminating all integration risk. From day 1, Nido receives a guaranteed $370,000 income within 12 months of opening, which consists of $250,000 for opening and $120,000 per annum to manage each service. Whilst in trade-up, the incubator bears the setup costs, trade-up risk and operating losses. We move to the next slide. So as mentioned earlier, Nido has 11 services currently in incubation. We can see here the current occupancy of each service and also a 6-month average. We've shared this last column in relation to acquisition criteria, which stipulates that services must achieve an 80% average occupancy for 6 months and 5,500 EBIT per license placed. Nido then has a guaranteed acquisition price of 4.5x AEBIT, and there is a possibility for a 10% earn-out and clawback of the acquisition price based on the first 12 months post Nido's ownership. On the next slide, of course, there was an announcement a couple of weeks ago around our $67 million acquisition facility. So as and when the services in incubation reach their acquisition criteria, Nido is well positioned to acquire these services, having finalized this acquisition facility earlier in the month, and this sets us up well for the next 3 to 5 years. So in summary, on the next page, we have started the year very well. Our CY '24 has started in line with prospectus forecast. Our February seasonal occupancy low was 73% and growth has commenced. When the need arises, we are well positioned in terms of acquisitions with a $67 million debt facility reached. Of course, we have the 11 services in incubation, and we have a strong supply of educators coming into the Nest. So all in all, Nido is well positioned for a great CY '24. We now invite questions.

[Operator Instructions] Your first question comes from Ben Wilson with Wilsons Advisory.

Well done on the sort of clean result. Just a few questions from me. Firstly, in terms of the incubator occupancy, there's obviously a range of performance there across the 11 services. Can you just comment on how you -- I guess, how you're satisfied with these overall -- in the context of previous centers as they trade up? I understand the sort of typical time frame is 18 months to get to 80% utilization, but where they sit currently as a portfolio, are you satisfied with their trajectory to date?

Yes. So on average, the portfolio is trading in line with expectations, which is an average of 18 months to achieve that 80% plus occupancy. We have a number of services that are clearly trading below that average and a number of services are trading above the average, obviously creating the average. So that provides us opportunity possibly to buy some services ahead of forecast or ahead of that average. But all in all, we're generally sort of happy with how the portfolio is trading in the incubators.

Just turning to the wait list. I understand at the time of prospectus, it was around about 6,500 across the network. Can you just state roughly where that waitlist sits now and how it's spread across your portfolio of services?

It's spread fairly evenly across the country. We have some services with 600 on the waitlist. We've got some with 30 on the waitlist. And I probably should add that a waitlist is a measure of how many people you haven't been able to satisfy. So it's not necessarily a great measure of performance. So we'd much rather be at 100% occupancy with 10 people on the waitlist. But we're certainly seeing that waitlist remain static. We've seen a number of new hires come through, allowing us to satisfy more people on the waitlist. So we're certainly seeing an improvement, but we have seen obviously that increase coming into the new year of new people sort of joining the waitlist, but we're hopefully able to satisfy them quicker than we have in previous periods.

And just final one for me. Speaking with you guys yesterday, I understand you're seeing, I guess, a constraint in supply just with construction costs having risen so markedly over the last few years, and that could be both a benefit for you in terms of lesser competition potentially in your areas. Just playing that forward, if you do see a slight delay in new center openings within incubator this year, I guess that would likely lead to lower management and establishment fees. Are you confident you could make up any shortfall from those revenue streams via your core childcare revenue?

At this point in time, we are, yes. And we'll know sort of over the next couple of months what will happen in terms of any delays of sites coming out the ground. But all that does is probably push that revenue back into 2025. So it's not lost to us. But we remain sort of confident on our CY '24 prospectus forecast numbers. We'll give a fuller update sort of probably April, May.

[Operator Instructions] there are no further questions at this time. I'll now hand back to Mr. Edwards for closing remarks.

Thank you all for your time today and your ongoing interest in Nido Education, and we look forward to chatting in the near future.