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Edited Transcript of GEM.AX earnings conference call or presentation 22-Feb-21 10:00pm GMT

·38 min read

Full Year 2020 G8 Education Ltd Earnings Call Bundall, Queensland Feb 23, 2021 (Thomson StreetEvents) -- Edited Transcript of G8 Education Ltd earnings conference call or presentation Monday, February 22, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Gary G. Carroll G8 Education Limited - CEO, MD & Executive Director * Sharyn Williams G8 Education Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Aaron Muller Canaccord Genuity Corp., Research Division - Head of Research of Australia * Gareth James Morningstar Inc., Research Division - Strategist * John Hynd Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst * Marni Lysaght Macquarie Research - Analyst * Peter Drew * Tim Plumbe UBS Investment Bank, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the G8 Education Limited Full Year Results Briefing Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Gary Carroll, CEO. Please go ahead. -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [2] -------------------------------------------------------------------------------- Thanks, Rachel, and good morning, everyone, and welcome to the 2020 full year results presentation for G8 Education Limited. My name is Gary Carroll, and I'm the CEO and Managing Director of G8 Education. I'm joined today by the group's CFO, Sharyn Williams. As Rachel outlined, we'll walk through the investor presentation that was posted on the ASX earlier this morning and then provide time for any questions. I'd like to begin by acknowledging both the Jagera people and Turrbal people who are the traditional custodians of the land on which we're conducting the meeting today. We respect their spiritual relationship with their country, and we pay our respects to Elders, past, present and emerging. And I'd like to extend that respect to any Aboriginal and Torres Strait Islander people that are joining us today. I'd also like to recognize the entire G8 Education team for their outstanding efforts during what was an incredibly challenging period during 2020. The commitment and resilience demonstrated by our team members this year has been extraordinary. They have and continue to provide the best learning foundations for our children and support for our families. Moving now on to the formal part of the presentation. Slide 5 sets out the highlights for the group in 2020, both from an operational and strategic execution perspective. Our key barometer of performance, occupancy, recovered strongly from the COVID-related lows in April and performed better than expected in the second half of the year. This has allowed us to deliver an underlying EBIT of $105.2 million for the year on a pre-AASB 16 basis, slightly above consensus, while also reinvesting the quarter 4 government subsidy into center quality as well as delivering on the employment guarantee. For us, this was the right thing to do and serves the best interest of the group and its shareholders as it achieves the right balance between short-term results and medium-term sustainable quality. The group's cash conversion performance continued to be strong during the second half of 2020, and we ended the year with a strong balance sheet and a net cash position of $21.8 million. In terms of strategic execution in a challenging environment, the group has not lost sight of its strategic priorities. We adapted well to deliver results in line with or better than target in all 4 strategic areas of focus despite the capital and other constraints that were present in 2020. Center quality continues to improve with 85% of centers meeting or exceeding National Quality standards at the end of 2020, above our target and ahead of national averages. And we're committed to building on this further in 2021 and beyond. The group's improvement program is on track with 94 centers being completed in terms of learning environment, training and work routines. COVID has resulted in delays in receiving in-center resources for about 40% of those centers. However, the centers that have had resources implemented have delivered encouraging early signs of occupancy growth. We expect to receive resources for the remaining centers in the next 4 to 6 weeks. As reported at the half year results, wage performance for G8 has been good with roster efficiency benefits being captured during 2020 in line with expectations. Finally, our portfolio optimization program is on track, with agreements reached to divest 10 centers, and active process is underway covering another 15 centers. We are expecting to open around 10 greenfield centers in 2021 using our new capital-light acquisition model. Turning to the financial summary for 2020, which is set out on Slide 6. Underlying EBIT for the full year was $105.2 million. That includes a $12 million CY '20 expense relating to the employee payment remediation program, which I'll talk about a bit later. This result is 10.4% behind the prior corresponding period with both revenue and costs for the group being significantly impacted by government support and COVID. The headline statutory loss after tax of $187 million was driven by the $237 million noncash impairment expense that was booked in the first half following a review of forecast cash flows as a result of COVID. The group's capital base is strong with a net cash position following the $301 million equity capital raising in April. And the bank debt refinance was completed in February, delivering lower interest rate costs, increased flexibility and longer tenor. Dividend payments remain suspended with the group to consider dividend payments following the first half results in 2021. Turning to a review of operations for the year. Slide 7 shows the occupancy performance during 2020. The recovery that had been described at our half year results continued for the balance of the year with the gaps to the prior year narrowing significantly over the second half. December occupancy was 1.5 percentage points below the prior year. This was a result of children being kept in care longer than the prior year. Pleasingly, strong occupancy growth occurred during the second half despite the cessation of free childcare in July. On this slide, we've segmented the year to demonstrate the impact of key events that occurred during the year. It's also worth pointing out that the usual relationship between occupancy and revenue was not present during 2020 due to the impact of various subsidy packages. A state-by-state breakdown of occupancy is provided on Slide 8 with occupancy trends being broadly consistent with the exception of: firstly, Victoria, which was impacted by more extensive lockdown restrictions; and the ACT, where occupancy was impacted by higher-than-average center manager and team turnover. Overall, like-for-like occupancy for 2020 was 69.2%. The group's wage performance is depicted on Slide 9. The utilization of the forecasting component of the group's new rostering system assisted in achieving the targeted rostering benefits during the year with lower wage hours per booking in 2020 relative to the same occupancy levels in 2019. These improvements are not impacted by the employee payment remediation program. There was certainly a significant level of COVID-related volatility that impacted on roster levels during the year, from large swings in attendance levels through employment guarantees tied to government subsidies. Overall, I was very pleased with how the team adapted to the challenges presented by this volatility during the year. The final point worth noting on wages is the impact of occupancy on wage efficiency with the group recording higher wage hours per booking from October driven by lower occupancy compared to the prior year. Turning to Slide 10. The employee payments remediation program announced on the 8th of December 2020 remains on track, covering training, reporting and system enhancements to achieve the targeted controls. Payments to impacted team members are expected to be substantially completed by 31st of July 2021. As announced in December 2020, total program costs were estimated at between $50 million to $80 million before tax or $35 million to $56 million after tax. Analysis and validation work is ongoing, and the group has recognized a provision of $80 million in its CY '20 financial statements. G8 continues to engage with the Fair Work Ombudsman regarding the matter after we voluntarily self-reported to FWO last year. I'll now hand over to Sharyn to provide a detailed overview of the group's financial performance. -------------------------------------------------------------------------------- Sharyn Williams, G8 Education Limited - CFO [3] -------------------------------------------------------------------------------- Thank you, Gary. I will now walk through the financial drivers of the group's results, including the statutory and pre-AASB 16 results and the underlying performance of the business over the past year. Turning to Slide 12. The key drivers of the full year results are outlined, and the full year snapshot on Slide 13 sets out the statutory and underlying results of the group. Revenue of $787 million is 14% lower than the prior year and reflects the impact of COVID-19 and the various government support packages for the sector. The decrease in revenues was predominantly experienced in quarter 2, where the government funding model effectively capped revenue based on a reference period, coinciding with the seasonal low point of the year and irrespective of occupancy levels. This release package protected the group's revenue from parents withdrawing children from care in the early stages of COVID-19 restrictions. However, it also removes parent copayments, otherwise known as gap fees. As a result, cost management was a key focus during this period. During quarter 3, parent copayments were reinstated as relief from the government subsidy package was halved. And then in quarter 4, the government subsidy was further reduced to focus mainly on the state of Victoria. From a statutory result perspective, the group experienced a net loss after tax of $187 million. The key driver was the previously announced $237 million after tax impairment, which was noncash in nature and reflected the reduction in carrying value of assets on the balance sheet. This impairment was announced to the market in June 2020 and was comprised broadly of 2 items: firstly, a $150 million impairment of goodwill driven by the COVID-19 impact on the group's future cash flows, particularly the near-term expectations; the second material driver was the strategic review of the portfolio, which resulted in 52 centers being identified as underperforming and subsequently impaired. This resulted in circa $90 million after tax of AASB 16 right-of-use assets and plant and equipment assets being impaired. You will recall that this right-of-use asset was brought on to the balance sheet following the implementation of the AASB 16 leases standard in January '19 and now forms an additional asset companies must test for impairment. From a pre-AASB 16 perspective, the pro forma columns on Slide 13 reflect key changes to the P&L from the changed leasing standard, which can be seen in the reduced occupancy cost lines, offset by increases to the depreciation and finance cost lines. In terms of the profit and loss, cash flow and balance sheet impacts of the standard, we have now provided 2 years of pre- and post-AASB 16 financials to show the impacts of this accounting standard. These financial statements have been outlined in detail in the appendix. The net impact of the leasing standard on the 2020 results was circa $2.7 million on the NPAT line. This is down from $8.7 million in 2019 due to the reduction in depreciation of the right-of-use asset, reflecting the impairment of the carrying value. Going forward, the group will report on a statutory post-AASB 16 basis only, and the impact of the standard is expected to be broadly neutral at the NPAT level in 2021. The group experienced a statutory loss after tax of $187 million. However, after adjusting for the impairment and noncash items outlined in the notes to the financial statements, the group achieved an underlying EBIT of $105 million and NPAT of $60 million. This underlying EBIT result is 12% lower than the 2019 year, reflecting the impact of COVID and the various revenue models relating to government support packages for the sector. In response, the group remained agile and managed wages and costs effectively in response to periods where revenue was capped, attendances varied and employment guarantees were a requirement of the government support. The second half of the year was stronger than the first half as the revenue model returned to parent copayments. Movement restrictions began to ease and government support continued, albeit at lower levels than in quarter 2. The underlying EBIT result includes an allocation of wages for both 2020 and 2019 years, reflecting an estimate of the wage remediation relating to those years. The underlying NPAT result of $60 million was 11% lower than the prior year. From a net profit perspective, reduced finance costs relating to borrowings of $9 million are reflective of the benefits of the refinance of the Singapore notes and repayment of the revolving facility using equity raised funds. Turning to a more detailed overview of operating performance on Slide 14, the various government support packages and reductions in the cost base are evident with an organic EBIT margin result of 22% despite significantly lower revenues and the planned March 2020 fee increase not being implemented as a condition of the government support. In addition to managing wages to attendance levels, the JobKeeper subsidy and employment guarantees required to access the government release subsidy introduced further variables and complexity to our wage management. The combination of effective roster management, optimizing the JobKeeper subsidy and utilization of annual leave resulted in organic wages before the benefit of JobKeeper subsidies reducing by 2%. Rental costs for the year reduced by 1.6% year-on-year with annual rent increases offset by COVID rental abatement negotiations. It's worth noting that the underlying rental rates continue to increase in line with the lease arrangements for rental reviews, and the rental abatements are only a temporary decrease. Other costs increased by 12% compared to the prior year, driven by an additional $10 million investment in quarter 4. A stronger-than-expected Q3 result gave us confidence to reinvest the majority of the quarter 4 government support into the areas of physical center repairs and maintenance, increased educational resources and increased support for the enrollment and transition process. The 2017 to 2020 acquisition cohorts, along with visibility of the 52 impaired centers, are also outlined in the table. All cohorts reflect improved performance, although it is difficult to infer the underlying earnings improvement of these recently acquired centers given the COVID and government subsidy impacts during the 2020 year. Gary will touch on the performance of the greenfield centers as part of the strategy update later in the call. From a support office cost point of view, net costs were flat on the prior year. However, this did include a $2.7 million JobKeeper subsidy offset, which will not repeat in 2021. As mentioned earlier, the planned March 2020 fee increase was not implemented due to the government subsidy arrangements. However, a fee increase has now been implemented in 2021 to partially cover the cost base inflationary increases experienced over both 2020 and 2021. Outlined on Slide 15 are the fee cash flow and capital drivers of the group. The balance sheet is strong and in a net cash position following the equity raise earlier this year. The recent debt refinance provides the group more flexibility in tenor in its debt profile as well as lowering funding costs. Slide 16 outlines the cash flow statement of the group. As a reminder, the AASB 16 leases implementation has no impact on the net cash flows generated by G8. To assist investors, we have provided pre-AASB 16 numbers for the second year to allow comparability. The presentation impact of the standard is to increase operating cash flows with an offsetting outflow in financing activities. The rental payments are comprised of an interest and principal payment. The principal portion during the year of $58.5 million can be seen in the table moving from operating to financing cash flows with net cash flows remaining unchanged. The interest portion is included in the interest paid line. During the year, pro forma operating cash flows of $131 million funded maintenance CapEx and intangibles of $27 million and the 2019 deferred dividend payment of $19 million. The $11 million of acquisitions during the year comprised 4 greenfield centers, the final centers in the historical development pipeline. Interest payments for borrowings were $19 million. In terms of cash flows relating to financing costs, during the year, the equity raise contributed a net $290 million and was partially used to repay the $95 million revolving bank facility with the remainder being left as cash on hand at year-end. Subsequent to December, $200 million of these funds have been used to repay the term senior facility, lowering interest costs and leaving $100 million term debt now drawn. Turning now to Slide 17, which outlines the balance sheet of the group. The material call-outs on the balance sheet include the group being in a net cash position following the equity raise and the strong cash flows during the year. There's been a reduction in intangibles and the right-of-use assets following the impairment earlier this year. The provision relating to the wage remediation has been recognized at $80 million or $57 million net of tax benefit. The balance sheet is in a strong position to withstand COVID impacts moving forward and to take advantage of sensible growth opportunities. Turning now to Slide 18, which outlines the capital management areas of the group. The net proceeds of the equity raise earlier in the year are reflected in net debt as the operational cash flows have supported the business requirements, and therefore, there has been no requirement to draw upon these funds. Cash conversion of the business measured on a lease-adjusted basis was strong during the year, driven by cost control, the timing of quarter 4 expenses and cash preservation. During the period, CapEx was $30 million with $10 million of planned CapEx deferred until the 2021 year. As mentioned earlier, 4 greenfield centers were settled, and this now completes the historical pipeline. Greenfield centers, moving forward, will be at significantly lower capital outlays and reflective of commercial lease arrangements. The capital raise significantly reduced leverage with the group in a net cash position at December 2020 of circa $21 million. This provides the group with significant liquidity and cash reserves to buffer a sustained period of COVID impacts. The dividend policy remains temporarily suspended, as outlined earlier this year, and the Board will reconsider the dividend policy in August 2021, subject to financial performance. No dividend was declared in relation to the 2020 year. However, the 2019 dividend was paid to shareholders in October. The forecast 2020 CapEx is estimated to be in the range of $50 million to $65 million and focused on continued investment in center quality. Cash on hand at December of $317 million resulted in a net cash position of circa $22 million as a result of better-than-expected second half results. The debt facilities of the group were drawn to $300 million at December, however, has since been restructured in February 2021 to allow the repayment of the $200 million drawn senior debt facility in full. This leaves only the subordinated facility of $100 million in undrawn. The restructure also extended the average debt expiry to 3 years with a staggered profile of expiries out to October 2025. The additional benefits of the recent refinance is the ability to lower interest costs by converting the $200 million of term debt to a revolving facility; reducing the debt capacity from $500 million to $400 million given the improved liquidity of the group; and including sustainability-linked performance elements, reinforcing the importance of quality and safety to the group. Turning now to our capital metrics slide on Slide 19. The group's key financial ratios are lease-adjusted net debt to EBITDA, fixed charge cover and gearing. Net debt levels ended the period in a net cash position, and therefore, leverage was neutral. Fixed charge cover ratio remained at 1.6x due to interest and rentals reducing during the year in line with EBIT. The group currently has no gearing. The capital position is strong based on the recent equity raise and the refinance. From a return perspective, return on capital employed has reduced during the period, reflecting the decrease in earnings and the increase in capital from the equity raise, offset by the reduction from the impairment. The level of gross debt will reduce in the coming period given the repayment of $200 million of debt facilities. I'll now hand back to Gary for the strategy update. -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Sharyn. I'll now turn to an update on the implementation of the group's strategic plan. In Slides 21 and 22, we provided an overview of the group's strategic direction and key strategic goals as well as outlining the key strategic objectives and programs of work. As outlined in previous Investor Day presentations, the strategic focus to date has been on building a scalable foundation for the business, including implementing scalable systems such as our childcare management system Xplor, a new rostering and human resource information system; driving rollout of a curriculum framework and quality standards in centers; implementing proper support structures for centers covering HR, education and quality; and conducting foundation research on both the customer and team member experience. Now that the foundations are largely in place, we will build on those foundations to further lift quality, continue to build a market-leading team and deliver a differentiated education and care offering to our G8 families. We've taken the opportunity in the last few months to review the group's strategy and reaffirm our key strategic objectives, goals and programs of work. We've also worked with the broader G8 team to refresh our purpose, vision and values. These elements are critical building blocks as we build the culture that will differentiate G8 in the market and make us the employer of choice in the sector. Slide 22 sets out the group's strategic objectives and programs of work. Starting with our objective in relation to fulfilling children's learning potential, our team in child safety programs and education program are well underway and are on track. Team safety, in particular, has seen excellent results with our LTIFR performance improving by around 47% in the last 12 months. Our People Pathways Program covers our roster and HRIS system rollout, which is on track to be completed by mid-2021, including implementing the enhanced controls in relation to award compliance. Our people program covers professional development training and study pathways for our educators as well as organizational capability development in areas such as leadership. The key program to drive operational excellence is our improvement program with around 200 centers to be covered by this program in 2021. As stated previously, results from our 2020 cohort have been in line with expectations, delivering occupancy, quality and work routine improvements. Our fourth strategic objective is to drive profitable growth with the focus being on optimization of our network, including divesting impaired centers and sensibly growing our network under a more efficient capital model. We will also be implementing an upgraded finance management system in 2021. Finally, we'll be conducting a targeted pilot of a differentiated end-to-end experience in a small number of centers in 2021, covering elements of physical design, technology, products and services, education and process reengineering. We are in the process of enhancing our reporting in relation to the performance of our greenfield portfolio, to provide improved transparency of greenfield performance and to better distinguish between the greenfield and core portfolios. A sample of the amended reporting format is set out on Slide 23. We will be scheduling a separate session to walk our investors through the greenfield reporting suite to allow adequate time for review and questioning. Turning to the current trading and outlook, which is set out on Slide 25. The group expects 2021 to be a recovery year given the absence of additional government subsidies and the continued impact of COVID-19, particularly on occupancy, either directly through movement restrictions or indirectly through economic impacts such as higher unemployment. COVID-related movement restrictions continue to impact revenue and EBIT with $800,000 of fees waived year-to-date in 2021 to support families. The current position is that the provider funds these fee waivers. Victorian government COVID support measures ceased on the 31st of January 2021. Sector-level discussions continue with the federal government relating to subsidies being paid to providers where such movement restrictions are in place. The occupancy gap relative to 2019 levels has continued to narrow with the circa 4.5 percentage point gap that was present in November 2020, reducing to circa 4 percentage points in February 2021, in line with our expectations. Year-to-date wage performance is tracking to expectations. Strategic earnings growth priorities in CY '21 remain our improvement program, network growth and exiting impaired centers. The improvement program is expected to gain momentum in CY '21 based on positive results to date and the medium-term earnings potential in this program. The cost of this increased activity will be managed to ensure they are funded by the benefits of the strategic programs. Approximately 10 new greenfield centers are expected to open in CY '21 for a capital outlay of circa $4 million. Start-up trading losses in CY '21 are expected to be circa $4 million based on current center opening dates with strong returns expected over the medium term as the centers mature. CapEx deferred from CY '20 of $10 million will be released in CY '21, taking the expected total to $50 million to $65 million. As we conclude the formal part of the presentation, let me express once again our gratitude to the G8 team and all of our G8 families for their work and support during a challenging year. I'll now hand back to our host to start the Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Tim Plumbe from UBS. -------------------------------------------------------------------------------- Tim Plumbe, UBS Investment Bank, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just 2 questions for me, and I'll jump back in the queue and ask some others afterwards. But Gary, just in terms of that refresh strategy, can you remind us how far through you are in terms of that strategy? And maybe also, how are you guys thinking about the occupancy benefits that can flow through once they've all been implemented, please? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [3] -------------------------------------------------------------------------------- Yes, yes. Thanks, Tim. So I'll take you back to our November 2019 Investor Day. We talked about 3 phases: building the foundations, then accelerating and then harvesting the benefits or maturation. We're in that harvesting the benefits phase. So the foundation phase is largely done. We'll be delivering our HRIS system mid this year, finance system later this year. But we are -- a number of our activities are more around how do we now accelerate growth, the key being -- and the key 3, which we've been calling out for a while, being our improvement program. And to somewhat answer your second question, we've talked about, Tim, as key objective of that program is to improve center quality. Working towards center becoming a meeting center is worth mid-single digits in terms of occupancy growth, and going from meeting to exceeding is probably 2 or 3 percentage points. So we included those sorts of targets into our improvement program, and progress to date has certainly been in line with that kind of target. I will call that it's very early days because it's very hard to measure in a COVID world what occupancy growth was. And most of the 94 centers we did in 2020 were in Victoria. But they have certainly, as a cohort, started the year in a pleasing fashion. The other 2 components of our acceleration program were around exiting our divested centers. And then lastly, it's about sensibly growing our network, Tim, using a capital-light model. -------------------------------------------------------------------------------- Tim Plumbe, UBS Investment Bank, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Got it. And just the second question. In terms of the center divestments, I think you mentioned 10 centers that you're divesting, negotiations around another 15. How should we think about the EBIT losses that are attached to both of those groups? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [5] -------------------------------------------------------------------------------- Yes. So the 10 that we've done to date, you would say, would be more of the low-hanging fruit. Of the $12 million, they would be slightly lower as a proportion of the overall portfolio. Still decent. We're happy with the results we've received. The next 15 may be a bit more material, but we're thinking they may also take a little bit longer. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Okay. Your next question comes from Marni Lysaght from Macquarie. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [7] -------------------------------------------------------------------------------- I just wanted to double check just on -- when you've spoken about occupancy for this early calendar year, Gary and Sharyn, just a bit more color in terms of the gap. And perhaps if you could elaborate, just those comments about fees, and it'd be good to have an update on pricing. -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [8] -------------------------------------------------------------------------------- Yes. Thanks, Marni. So we've continued to chip away at the gap, and where we are today, we're right in line with where we thought we would be and what we've been positioning to in the market. As a reminder, we had forecasted to the market that the half back to 2019 will take quite a period of time. We will chip away at that during 2021. We won't be back at 2019 levels by the end of this year. So we started the year in line with where we thought we'd be, around 4% down on 2019 levels, which is an improvement on the back end of 2020. So we're very comfortable with the trajectory that we're building in our occupancy improvement profile. In terms of pricing, we did implement a fee increase that took effect at the beginning of February, in the mid-4% range. That takes our average figure around $118. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [9] -------------------------------------------------------------------------------- Clear. Another -- I just have one further question, and I'll jump back in the queue. But just in terms of -- on occupancy, are there any cohorts or centers where occupancy would be at pre-pandemic levels? Or are you just -- you can't give that granularity? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [10] -------------------------------------------------------------------------------- Yes. We don't share that kind of granular level. It's probably hard to give you any more color on that. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Your next question comes from Aaron Muller from CGF. -------------------------------------------------------------------------------- Aaron Muller, Canaccord Genuity Corp., Research Division - Head of Research of Australia [12] -------------------------------------------------------------------------------- Just a couple of things. At the moment, given where occupancy is, could you just give us a sense of the sensitivity on EBIT from a 1% increase or decrease in occupancy? Is it difficult sometimes or at any point in time? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [13] -------------------------------------------------------------------------------- Yes. I mean we've flagged over the years, Aaron, 1% would be somewhere $10 million or $11 million of revenue. That would be about consistent. And we flagged somewhere in that $3-ish million from an EBIT perspective. But obviously, we need to work our way through it. Some of the levers that have been in place previous years have been impacted with subsidy, et cetera. But as a general rule, it's at $10 million or $11 million worth of revenue from a 1% movement in occupancy. -------------------------------------------------------------------------------- Aaron Muller, Canaccord Genuity Corp., Research Division - Head of Research of Australia [14] -------------------------------------------------------------------------------- Perfect. And then just in terms of the new greenfields that are being opened, what's the timing of that first half, second half fleet? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [15] -------------------------------------------------------------------------------- I think nearly all of them are in the second half of the year. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Gareth James from Morningstar. -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Strategist [17] -------------------------------------------------------------------------------- Yes. First question is just on -- you mentioned high employee turnover in the ACT. Are you able to elaborate on that at all? And also center manager turnover for the group, how that's progressing? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [18] -------------------------------------------------------------------------------- Yes, yes. So thanks, Gareth. I can't really give you the specifics, but we did have higher-than-average turnover in both center managers and ACT -- and our team in the ACT. There's a very competitive labor market there. And I think we aren't the only player to be challenged a bit with the war for talent in the ACT. In terms of overall turnover, team turnover was quite positive for the year, finished at around 21%. We did actually have an uptick in center manager turnover in November and December. We were tracking for results around 16% -- mid-16% for the year. We had an uptick in November and December and finished the year at 18.8%, which is actually -- disappointed with that result and with certainly work underway on how we can recover that. And January, we have recorded a better result, but we need to get that trend back more on a favorable basis over the coming months. -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Strategist [19] -------------------------------------------------------------------------------- Sure. And just on that uptick towards the end of the year, I guess that kind of comes into another question that I have with regards to the supply outlook. What are you seeing with regards to supply? Is it very strong at the moment? And is that an impact on your center manager turnover, do you think? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [20] -------------------------------------------------------------------------------- It's a good question, Gareth. So from a G8 perspective, we're not seeing a relative increase in supply impacting our centers. That said, supply for the second half of 2020 was certainly at a level higher than what we were forecasting. And it looks like that elevated supply has continued into '21 on a market basis. We've been a little bit less impacted from a specific G8 point of view, but still presents a challenge. Does it play into challenges around retaining team members? Yes it does. We think the -- across the sector, the -- our understanding is vacancy rates are a bit elevated, and the war for talent is a little bit hotter due to that supply. -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Strategist [21] -------------------------------------------------------------------------------- Okay. Just a couple more for me. So just on the impairment, just with regards to what's happened with the economic outlook, would that impairment have been materially different, knowing what you know now, if you have had those kind of expectations when you made the impairment? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [22] -------------------------------------------------------------------------------- Yes. So when we do our impairment, Gareth, we look at our forecast cash flows under a number of scenarios. We partnered with Deloitte Access Economics in trying to form a view as to what our likely occupancy and financial performance was going to be. On that basis, I don't think we would have changed any of what we've done in relation to impairment, knowing what we do now, acknowledging that it's a point-in-time assessment, right? -------------------------------------------------------------------------------- Gareth James, Morningstar Inc., Research Division - Strategist [23] -------------------------------------------------------------------------------- Sure. And just final one on strategy. I think you talked a couple of years ago about potential brand consolidation. Is that still on the agenda? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [24] -------------------------------------------------------------------------------- It is. Our first priority, apart from the initiatives that I've talked about in terms of improvement program, et cetera, we are doing a small pilot on building a differentiated offer, end-to-end. Depending on the results of that pilot, that may play into a more broad-based action, which may include some movement in terms of brands. But very early days on that. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Your next question comes from William Cunning from Carter Bar Securities. -------------------------------------------------------------------------------- Peter Drew, [26] -------------------------------------------------------------------------------- Gary, Sharon, it's not Will. It's Pete here. Just -- just a question on just wage, the wage bill inflation. Can you just -- just trying to sort of understand, I guess, the moving parts that you're going to have in '21 versus '19. And I think one of the big pieces is just the wages bill given that I think there was a fair bit of wage inflation last year. You couldn't offset that with fee increases. Can you just sort of talk through, I guess, that sort of feature, how you're going to -- what influence that will have this year? -------------------------------------------------------------------------------- Sharyn Williams, G8 Education Limited - CFO [27] -------------------------------------------------------------------------------- Sure. So in terms of the key driver, you're right, Peter, it is the absence of the fee increase in 2020. So when you compare the 2 years of wage inflation versus the 1 year of fee increase, you do get a couple of percentage points uplift in wages as a percentage of revenue. We have realized efficiencies in 2020 year in terms of that rostering. So it's really that, as you suggested, the inflationary aspects that causes that temporary increase in wages as a percentage of revenue. There is some inefficiency from lower occupancy, as you can see in the pack, although we're trying to address this through rostering as the year unfolds. -------------------------------------------------------------------------------- Peter Drew, [28] -------------------------------------------------------------------------------- Okay. And then how do we think about that additional $12 million in wages costs that -- from the underpayment in 2020? Obviously, that $12 million wasn't in '19. Has that been more or less kind of offset by the wage efficiency from the new system? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [29] -------------------------------------------------------------------------------- Yes. So 2 parts to the answer, Peter. So we did restate our 2019 results to take account of estimated impact of the remediation program. So you would see that flow through in terms of restated 2019 numbers, $12 million, $13 million or thereabouts. Moving forward, with our rollout of our new roster system, et cetera, we're saying we absorb those costs, so they don't have any material impact moving forward. -------------------------------------------------------------------------------- Peter Drew, [30] -------------------------------------------------------------------------------- Okay. And then just 2 more features. Just firstly, obviously, depreciation expense was small -- lower in '20 versus '19. Could you give us a bit of a steer of what that might look like this year given that CapEx is going to be a lot higher? And then the other factor is just -- is there going to be some sort of savings in '21 versus '19 from divested centers? And what sort of order of magnitude in terms of EBIT would that be? -------------------------------------------------------------------------------- Sharyn Williams, G8 Education Limited - CFO [31] -------------------------------------------------------------------------------- So in terms of the depreciation, you are right. With the increased CapEx spend, it's probably looking at depreciation around the 24, 25 level. Now in terms of a statutory point of view, you will have depreciation on leases, which over the last 2 years has reduced given the impairment. Probably the easiest way to look at that would be making sure that the net profit after tax and before tax is neutral from any adjustments from AASB 16. -------------------------------------------------------------------------------- Peter Drew, [32] -------------------------------------------------------------------------------- Okay. And then on the divested centers? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [33] -------------------------------------------------------------------------------- Quantum of depreciation. That really depends on the progress. That's a bit of a thumb suck at this point, Pete, in terms of the progress on our sales activity. We had called out, when we announced it, that we do expect that to be quite a prolonged process. So not seeing anything material just in the 2021 year. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Your next question comes from John Hynd from Wilsons. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [35] -------------------------------------------------------------------------------- if I could just touch on some of the cost lines. Just to confirm, the support office costs, would they have been sort of closer to $43 million this year without JobKeeper? And I mean if that's the case, it's a pretty big step-up in terms of percentages. How should we think about that going forward? And then just one more question in a similar line. Other expenses at the center line increased materially. I'm sorry if you've touched on this earlier, but what's in that? I think it's about close to $10 million. What drove that as well, please? And how should we think about it going forward? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [36] -------------------------------------------------------------------------------- So you're right, without the JobKeeper, it was around the $43 million. The increase was driven by our investment in our strategic programs, predominantly our improvement program. That involves some increased resourcing into our centers to drive improvements. How should you think about that moving forward? Well, we are doubling the activity level in 2021. And we called out we'd be -- the benefits from the strategic programs will fund that increased expenditure. So it doesn't drag on the bottom line. But we do expect an increase in that in '21 because we're getting good results. In terms of the increase in other center costs, that was the reinvestment of the quarter 4 subsidy in areas like R&M, in-center resources, et cetera. So that is more of a one-off increase. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [37] -------------------------------------------------------------------------------- By reinvestment of subsidy into resources, so what does that actually entail? Like is it more educational programs for the children? Or is it wider ranging than that? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [38] -------------------------------------------------------------------------------- So in-center resources, they're expensed equipment: books, toys, other educational resources. Then there was R&M, so improving the physical quality of the centers. They were the 2 main drivers. We obviously needed to keep our obligation around employment guarantees. So that's soaked up a bit of the subsidy, that would have flowed through more in your wages line, not your other cost line. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [39] -------------------------------------------------------------------------------- Okay. And sorry, one more for me. And again, apologies if it's been touched on. But Slide 8 on occupancy, the supply is up 3 and a bit, up 3.7 and occupancy for G8 is down closer to 6. What -- how are you talking to the gap there given like the investment you have been making in turning the centers -- trying to turn these centers around? How are you talking about spread? -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [40] -------------------------------------------------------------------------------- For us, john, 2020 is not a great year to do a correlation line between supply and occupancy given the lockdown restrictions and COVID impacts on occupancy. I think it's a very valid observation in a more normalized year like 2021. But if you have a look at Victoria as an example, that reduction in occupancy was very much driven by lockdown restrictions, not around supply. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [41] -------------------------------------------------------------------------------- Okay. And I mean the ACT is meant to be quite a popular region for childcare at the moment. It's meant to be, I understand, quite a lot of demand. Is there a new entrant that's taking occupancy here or has added capacity? I'm just wondering about the 16% change there. And look, granted you've only got 9 centers. -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [42] -------------------------------------------------------------------------------- Yes. I mean it is a small part of it. It's popular both in terms of demand and supply. So -- and it's a very small market. So there was a lot of capacity added to that market in preceding years. And I think we're starting to see the flow-on impact. That said, we can do a better job in the ACT, and we're not shying away from the fact that we think we can turn around that performance and we're focused on doing so. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Carroll for closing remarks. -------------------------------------------------------------------------------- Gary G. Carroll, G8 Education Limited - CEO, MD & Executive Director [44] -------------------------------------------------------------------------------- Thanks, Rachel, and thanks, everyone, for joining us. No doubt, we'll catch up with a large number of you over the next 3 days, and we thank you for your time today. Thank you. -------------------------------------------------------------------------------- Sharyn Williams, G8 Education Limited - CFO [45] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.