Thank you for standing by, and welcome to the G8 Education Limited 2023 half year results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Pejman Okhovat, CEO and Managing Director. Please go ahead.
Good morning, welcome to the 2023 half year results call for G8 Education Limited. My name is Pejman Okhovat, and I'm the CEO and Managing Director of G8 Education. I'm joined today on the line by the Group's Chief Financial Officer, Sharyn Williams. Sharyn and I will take you through the investor presentation that was released to the ASX earlier this morning. I will concentrate my remarks on this call to the opening pages of the presentation, and then hand over to Sharyn, who will take you through the financials outcomes of the half one. Following the presentation, we will then open the lines and provide some time for Q&A. I will briefly guide us as we go through these slides as well, so you can navigate with us. We're on a slide three.
I would like to begin by acknowledging the Gadigal of Eora Nation people, who are the traditional custodians of the land on which we are conducting this presentation today. We respect their spiritual relationship with the country, and we pay respects to the elders, past, present, and emerging. I extend that respect to any Aboriginal and Torres Strait Islander people joining us today. I would also like to acknowledge the passion, capability, and expertise of the entire G8 Education team for their ongoing commitment to children's outcomes. This morning, we will cover a summary of half one and progress made to date, the operating and financial performances for the half, and conclude with a brief current trading update and an outlook for medium term.
Turning on to Slide six, which sets out the key messages, I'd like to talk through three key takeaways from the results and the progress we've made in the half from refocusing the group's activities. Firstly, the group's financial results reflect a solid earnings recovery compared to the previous comparable period, driven by higher revenues and margins. Pleasingly, the first and second quarters delivered growth versus PCP, which is reflective of a continuous focus on wage and other cost managements. Workforce remains a constraint in some areas of the network. Encouragingly, occupancy continues to be supported by the positive trend in frequency, which measures the average number of days per week that a child attends G8 centers. During the half, we narrowed our focus and doubled down our efforts on the highest impact areas of team and family.
We are committed to enhancing our team members' experience, so it was pleasing to see improvements in both team retention and team vacancies. These results are all the more credible when contrasted with the sector that's continuing to see growth in vacancy rates. As a consequence of these improved team outcomes, agency usage was lower, and the number of centers that experienced constraints due to workforce was reduced. Progress has also been made towards improving the experience of G8 families. The introduction of the Always On customer survey were implemented, providing G8 with a regular and highly valuable feedback loop with our families. The external contact call center was moved in-house and has been an instrumental part of G8 support our families as they navigate the recent CCS affordability improvements.
Post the CCS changes, we are seeing some encouraging early signs, and we will touch on this little bit more in detail later on. Strong cash flow was a feature of the result, and these results have been used to enhance shareholder value through a share buyback, dividend payments, and further optimization of the network. The approach to CapEx is also more targeted. We continue to invest in center resources, IT, and property, but have reduced the full-year CapEx forecast by AUD 10 million to a range of AUD 50 million-AUD 55 million. As a group, we have responded to the continued challenging environment with agility and resilience, while continuing to deliver on our purpose: to create the foundations for learning for life. Turning now to Slide seven, which clearly has out-outlined a stronger operating performance versus the COVID and flood-impacted PCP.
Occupancy for the first half of 67.4% was slightly higher than the prior year and is steadily narrowing the gap versus CY 19. Higher occupancy combined with higher fees delivered almost 10% revenue growth. Solid cost management, particularly in labor-related areas such as agency usage, demonstrating our focus on managing variable costs based on our performance. From a strategic perspective, net profit after tax increased 76.5% after including non-operating items, as outlined on Slide 17. This improved earnings profile, coupled with a buyback program, resulted in an 83% increase in earnings per share and facilitates the payment of an interim dividend of AUD 0.015 per share, representing 81% of the reported NPAT.
Moving to Slide eight, as touched on earlier, we have narrowed our focus on the highest impact areas to improve operational execution and drive occupancy. These areas relate to team, particularly with respect to retaining and vacancy rate improvement. Further enhancing the quality of the network and services that G8 provides. Also improving family experience. We are particularly encouraged by the improved team retention outcomes, up 0.7% to 70.2%, and a 24% reduction in vacancy roles across G8 network compared with CY 2022. Consequently, we are able to reduce the usage of high-cost agency fees and also removed many of the occupancy caps that results from centers being unable to fulfill the required rate to child ratio due to team shortages. Quality assessment ratings have remained flat since CY 2022 year-end. G8's results remain in line with the sector average.
From a family perspective, we have reassessed the approach to attracting new families. Firstly, the use of aggregators has been reduced because of these poor quality leads produce unacceptably low conversion rates. This purposeful change is reflected in the drop in inquiries and is not reflected in the underlying demand for G8 services. The marketing investment was reallocated to better conversion opportunities. Consequently, conversion increased 2 % points in the half. To further enhance the ownership of our family experience, we made a strategic decision to bring our call center in-house. The external call center was transitioned to an in-house team in July and August. In doing so, this change has provided G8 with more control over family experience at a lower cost. This change was executed with minimal disruption and will be completed by end of August.
As a part of improving the family in-center experience, we have implemented an Always On NPS and feedback survey. These surveys provide us with regular feedback, center by center, thereby providing real-time visibility on the performance of our centers. Moving to slide nine. We continue to progress our ESG journey. G8's H1 target for Scope 1 and 2 emissions was achieved, and the first phase of solar installation in our network has commenced, covering 10% of our centers. In the early childhood sector, G8 has the opportunity to make a meaningful difference in the lives of our team and families, particularly in the areas of child protection, allied health, well-being, and reconciliation. In these areas, G8's key milestones were achieved.
Our Reflect Reconciliation Action Plan draft was submitted for review, G8's Education Advisory Committee commenced, and extensive ongoing training on child protection and mandatory reporting obligation is currently being embedded across the network. In terms of improving flexibility for the G8 team, 14% of agreements now have flexibility, supporting our team's well-being and life balance, as well as an improved retention. Slide 10 now. Group occupancy for the first half was slightly above PCP, and we made steady progress against CY nineteen, lowering the gap to 2.1% compared to 2.5% at quarter one. Occupancy remains variable across the network, and in some centers, mainly due to key factors such as workforce shortages, location dynamics, and operational execution. As explained earlier, we have done a lot of work to improve our retention and vacancy.
Workforce challenges remain a big issue, with over 100 of our centers on priority recruitment. Capped centers have had a large impact on occupancy. A real positive is a reduction of capped centers over the last six months, now to seven centers only. Across the states, we are seeing markedly different levels of occupancy, pleasingly, the larger states are showing improving momentum. Queensland and New South Wales are our best overall performing states. A big part of Victoria are exhibiting positive momentum, performance is not uniform, and absolute occupancy levels remain subdued. WA pleasingly is performing above CY 2019. The environment does remain challenging. ACT and SA continue to operate in a tough environment. Vacation care year-over-year is different, which is based on a decision we made last year to significantly reduce this offer.
We continue to see a further increase in days in care following the recent government improvement to CCS, aimed at improving affordability for our families. Turning to slide 11, which further demonstrates the impact of capped centers have had on our CY '23 occupancy. The chart on the left shows a spike in centers that were subject to occupancy caps due to workforce shortages. These numbers spiked during a crucial enrollment transition period in late CY '22. We estimate that the impact of those 50 centers being capped between October and December reduced our CY '23 half 1 average occupancy by circa 1.3 % points. This reinforces the continued focus on team retention and vacancy, and pleasingly, this focus has been rewarded by a meaningful reduction in the number of capped centers in recent months, from 35, roughly in January, to about seven now.
Turning now to slide 12. A welcome initiative from the government was higher funding for the sector, aimed at improving affordability for families. These changes to the Child Care Subsidy, as part of Cheaper Child Care Bill, came into effect from 10th of July, 2023. The G8 team has worked hard in preparing for these changes so that we can, we can assist families in benefiting from these upcoming reforms. A family-friendly calculator was developed, information workshops were held in every center across the country, and individual conversations with our families were held where possible. Our data shows that over 80% of G8's total families are better off, and 17% reduction in gap fees were observed.
From a frequency of booking perspective, as evidenced in the 1st half, the average number of days children are in care continues to increase, and we have seen some encouraging early signs of further increase in frequency after CCS changes by circa 2%. The G8 team remains focused on providing ongoing support to families to maximize their CCS benefits. Turning to slide 13. Like many parts of the economy, the early childhood sector has been impacted by increased workforce vacancy rates. Navigating these shortages remain G8's key focus for CY 2023 and beyond. It is our expectation that these challenges will remain as a headwind within the sector.
G8's effort to attract and retain great talent is a multi-year strategy, which includes advocating and participating in sector-level conversations with government, offering above award remuneration for key roles, competitive team recognition, flexibility benefits, professional development and incentive programs, and incremental recruitment resources initiatives. G8's talent strategy is yielding encouraging results. We are particularly pleased that an environment where sector vacancies continues to increase, G8's vacancies have reduced during the half by over 20%, helping to reduce agency usage and reduce the number of capped centers during the half. From a broader educator perspective, we are now leveraging the system we have in place to improve workforce planning. This not only optimizes our rosters, but also allows for greater flexibility and mobility of our team. In addition, increased development opportunities have been provided to the team, particularly in terms of leadership.
These initiatives have been linked to improved retention outcomes. Achieving a 7% uplift in ECT retention and a stable center manager result versus CY 2022 was particularly pleasing against the sector, where ECT and center manager vacancies are up 26% and 33% respectively over the last 12 months. Given our scale, G8 has the opportunity to mitigate some of the sector workforce shortages by growing our own talent. We are proud to support circa 1,400 team members to further their education via enrollments in Certificate III, diploma courses, as well as bachelor study programs. In the case of ECTs, the workforce challenge has been exasperated by increased demand due to higher regulated ratio requirements in New South Wales and Victoria, as well as the pausing of immigration over the last 2+ years.
These factors have resulted in ECT vacancies increasing materially over the last three years. Governments, both federal and state, have responded by introducing funding and scholarship programs to reduce the cost of both vocational and tertiary educations. We also provide accelerated degrees to fast-track ECT qualifications. While by no means the silver bullet, G8 remains committed to building a talent pipeline from a grassroots to address future projected needs. Significant progress has been made by attracting quality team, reflecting step change in the vacancies, as mentioned, 24% down year-over-year. The centralized recruitment team and additional HR business partners support the center network, leading to a more efficient recruitment process, evidenced in time to fill, improving 16% on the previous comparable period. Increased focus on internal referral programs is also yielding benefit and lowering recruitment costs.
Turning to slide 14, there are multiple inquiries and reviews underway in the sector. G8, along with the sector, remains focused on engaging constructively with government and regulators to ensure the sector operates within improved settings for families, educators, and sector participants. It is worth to know that these inquiries require significant attention and consume resources. The ACCC inquiry is focused on drivers of cost and variability of these costs by providers, and how this relates to fees in the sector. An interim report was released in July, and the final report is due in December 2023. The Productivity Commission reviews are underway, with a draft report expected in November. Multi-employer bargaining is a broader regulatory changes across Australia, with one of the stated aims of this reform being to address undervalued work in the care sector and address the gender gap.
Progress has been made with the application hearing occurring in August, and G8 was a party to this application. These reforms remain a significant focus for the group and will require careful navigation. G8 welcomes these changes and the growing recognition that investing in the sector is an investment in our future generations and our economy. The group was also pleased to see recent measures that provided accessibility, affordability, and inclusion for all families. We look forward to working collaboratively with unions, peak bodies, and governments during the process in relation to multi-employer bargaining and advocating for government funding in relation to wage increases. Now moving to slide 15, which reflects our more proactive management of our portfolio....Optimizing the center network remains an important element of group strategy and is a fundamental basis for creating a profitable portfolio for G8.
The principle of optimization will be anchored in investing and growing G8's great centers, improving underperforming centers, and divesting poor performing centers in poor locations. A range of options will be explored to deliver the most prudent, sorry, financial outcomes for the group, which is a common practice across all distributed networks. We are very focused on ensuring we have a continual eye on our portfolio performance, and we optimize this as we go. As the external environment evolves, it is critical we stay responsive to any changes that we assess. To this end, five centers were exited in half 1, one center was opened in half 1, and since 30th of June, a further three centers have been exited.
25 of the 52 CY 20 impaired centers to date have been exited. The remaining, as an overall cohort, have improved performance and will now be a full part of a BAU network optimization. We deployed a small but focused team on our existing 10 Greenfield centers. I'm pleased to see that over the last six months have performed in line with our expectation, with occupancy of 65% and AUD 1.4 million in the first half. Now these centers have robust occupancy. The focus turns to realizing sustainable earnings growth for this cohort. The approach to the Greenfield pipeline will be measured, and we'll continue to assess the reduced pipeline of seven centers to be delivered over the next two years.
This pipeline continues to progress slowly due to developer challenges with supply chain and inflation, and we continue to take a very commercial lens on this pipeline, particularly in current environment. I will now hand over to Sharyn to provide a detailed overview of group's operating and financial performance.
Thanks, Pejman. Our group performance saw growth in revenue, EBIT and NPAT, as outlined on slide 17. The group's 1st quarter profit performance was substantially stronger compared to the PCP, as we cycle the impact of Omicron and flooding. Pleasingly, the 2nd quarter also showed growth in earnings over the PCP. Support costs were lower than the prior period, even after inflationary impacts, reflecting the benefit of the cost out program from 2022. It also reflected procurement benefits and cost discipline. We do note included in this period was circa AUD 1 million in costs relating to the resources to support the multiple regulatory reviews facing the sector. As flagged in February, the temporary government funding stream relating to apprentice wages reduced during the period by just over AUD 1 million.
The combination of stronger center performance and lower network support costs resulted in a 56% increase in operating EBIT and some recovery of margins. Net finance costs were circa AUD 5 million, a reduction on the PCP due to the absence of costs relating to the subordinated facility and a smaller facility size. Our total facilities, partially drawn, remain at AUD 306 million in total. Finance costs, which are comprised of commitment fees on undrawn facilities, interest costs on drawn facilities, expense borrowing costs offset by interest received, are expected to be circa AUD 11 million-AUD 12 million in CY 2023. This estimate is based on the current BBSW, but we're conscious interest rates may continue to increase. Software development costs during the half reflected costs for cloud-based software as a service program. These are now expensed, not capitalized, following a recent accounting interpretation clarification.
These costs predominantly relate to the implementation of our procurement system, which is already providing benefits in terms of visibility and unit cost optimization. These software development costs will reduce in the second half. The other non-trading items relate to non-cash gains and losses on leases relating to AASB 16 modifications. Turning to slide 18, we'll be focused on center performance. You will note this is now reported on a total center basis, including Greenfields, reflecting the smaller number of Greenfield centers we have. The prior period has been restated to allow for a like-for-like comparison, and core performance, for those looking for it, has been included in the footnote. The center network delivered higher revenue and earnings than the PCP and experienced some recovery in margin.
While occupancy was up modestly, revenue increased circa 9%, largely reflecting the January and July fee reviews, a necessary response to considerable inflation within our cost base. The impact of this inflation is most evident in our employment expense, where we saw an increase on PCP of circa 9%. This uplift reflects the annual award increase of 4.6%, effective in July 2022, increases in pay rates as our team work their way through improved qualifications, and additional on costs, such as the superannuation rate increase of 0.5% and state-based payroll tax increases, such as the Queensland Wellbeing Levy. We also continue to invest in professional development for our team. A highlight of the period was the reduction of agency usage to 2.1%, a 1.6 % point decrease, offsetting some of the internal wage rate increases....
This result also reflects a range of factors, including those Pejman touched on earlier, relating to improved team retention and lower team vacancies. Other factors driving the lower agency outcome were the central roster management support team and the new HRIS system. We also pooled our team resources to create local efficiencies and implemented for our team flexible working arrangements. Rent is another material cost for our business. Rent expenses increased 6.7% on PCP, reflecting the composition of our network, where two-thirds of our portfolio currently have annual increases linked to CPI. Depreciation increased as expected, reflecting CapEx investment in the prior year, where the spend was above depreciation. Other costs, such as direct costs of servicing our bookings, were managed well and in line with occupancy levels, while lower expenditure in property, utilities, and maintenance reflected procurement initiatives and volume reductions.
With overall center expenses increasing 7.5%, center network margin recovered to 14.3%. Overall, the result demonstrated the benefits of reduced external labor usage, effective cost disciplines, and an active response to inflation. The group will maintain our cost focus and disciplines, particularly given that inflationary pressures are expected to continue, not only for G8's cost base, but also for our families who are feeling these pressures. Turning now to slide 19. Cash flow generation was strong for the half, with cash conversion of 102% and AUD 43 million in operating cash flows generated. The lower cash conversion number in the prior comparative period was largely driven by a timing impact relating to the carryover of additional creditors into early CY 2022 due to the cutover to our new financial system.
The cash generated in the period was utilized for CapEx, the final tranche of the share buyback, lease surrenders, and dividends. The first half is our seasonally lower earnings period, and consequently, we drew down debt to fund the CY 2022 final dividend. During the half, CapEx and software as a service cost were AUD 17.7 million, circa AUD 3 million lower than the prior comparative period. The targeted total CapEx and SaaS for CY 2023 has been reduced by AUD 10 million and is expected to be between AUD 50 million and AUD 55 million. This spend will be predominantly focused on property improvements, IT resources, and educational resources to improve team engagement, family retention, and child outcomes. All else being equal, positive net cash flow is expected in the second half, as well as a reduction in net debt compared to the level at the half year.
Turning to funding and capital management on slide 20. The group declared a 50% increase in the dividend to AUD 0.015. The group has a strong balance sheet with a conservative leverage level of less than 1x and ample liquidity. We maintain a strong balance sheet with net debt of circa AUD 100 million at June 2023, and access to a further AUD 123 million of committed bank debt facilities. Our capital and cost management discipline will continue to be a focus as the group builds capabilities towards a more consistent and efficient operating model. Pejman will now talk through the current trading and outlook.
Thanks, Sharyn. We will now turn to trading outlook and current trading and outlook. On the slide 22, briefly looking at the macro dynamics. You know, our belief is that the long-term fundamentals of the sector continues to be encouraging from a demand perspective, with a positive trend in female workforce participation rates and continued positive momentum in net migration. At the same time, we remain cautious given the significant challenge relating to team shortages, inflationary pressures on the economy overall, and the significant amount of regulatory activity relating to the sector over the next 12 to 24 months. On the supply side of the equation, the supply growth has gained some momentum in the recent quarter, with a net supply 3.5% in the most recent quarter. Turning to current trading, update and outlook on slide 23.
Firstly, our current trading, group's spot occupancy is at 73%, with gap to CY 2019 remaining around 1.6%. As we continue to improve our operational execution, we are seeing steady improvements across our network, with over 46% of our centers now operating above CY 2019 levels, and with over 80% of our centers, operating at an average occupancy above 80%. We've implemented a small media fee increase in response to a record Child Service Award rate increase of 5.75% in July and other inflationary challenges. We are very mindful of the impact of the cost of living on our families; hence, we exercise diligence in ensuring any fee increase was kept to a minimum. Our cash flow remains strong through our more prudent approach to capital investment and better cost management.
Since June, we have exited another three underperforming centers and our buyback strategy is now complete, resulting in a strong balance sheet. Turning our attention to outlook, we remain cautiously optimistic with the strong fundamentals in place that supports long-term demand growth. We have also seen early signs of affordability measures supporting families with a number of Our G8 families are using childcare, increasing slightly in the past few weeks, reflecting the positive impact of the CCS changes since July. The net center supply growth in the sector increased in H1, with Q2 growth at 3.5%, the largest since CY 2021 H1. Workforce shortages remain a sector challenge and there are many government initiatives being considered at both federal and state level with potential future impact. Meanwhile, our staff retention attraction places G8 in an improved position.
Inflation will continue to play a role in both our families' affordability and cost challenges of operating businesses. For our families, their affordability is partially offset by the CCS changes, and we will continue to focus on cost-based management. Regulatory focus on the sector will continue through CY 2023 and CY 2024. G8 will continue to play a role by advocating for the sector and our team. Our near-term focus remains on critical areas that have higher impact, starting with team. Attracting and retaining team to support seasonal occupancy growth and a better start to CY 2024. For our families, assisting families in benefiting from CCS changes and improving their experiences across the journey that they take with us. From a quality point of view, we remain committed in delivering high quality education, and our ambitions remains to improving our NQS ratings. Operational execution.
Consistent operational execution is a critical focus area to deliver quality every day, which in turn will support occupancy growth. As we move into this critical period of enrollment and transition between 23 and 24. Cost management continues to be prudent and manage variable costs well, and also deliver procurement savings. On property, embedding network optimization capability and disciplines in our organization will be our focus, and from capability point of view, we will continue to grow our capability across the organization. Of note, we are also delighted to be onboarding two new executive team members to our organization. Our new COO, Shane Dann, starts in September. Shane joins us with years of experience in the sector with Affinity Group and Evolve. Our new CIO, Calvin Goulding, started in July with experience in customer-facing organizations such as Flight Centre.
We have also hired experienced senior property leaders and established our own call center capability, reflecting our focus on ensuring we set G8 up for future success. We also look forward to providing an strategy update at an investor day, sometime in Q3, probably more towards late October. I'm now gonna hand back to the moderator for Q&As.
Thank you. If you wish to ask a question, you will need to press the star key followed by the one on your telephone keypad. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Marni Lysaght with Macquarie. Please go ahead.
Hi, Pejman and Sharyn. Thanks for taking my questions. Just, just the first one with me, I just wanna kind of go into the weeds a bit more with just some of those capped centers. Look, I understand you've improved retention and, and staff incentives across the network. Can you talk to how much are those, those centers being capped is more of a sector thing versus, say, a central location thing or potentially a reputational thing?
Good morning, Marni. Yes, we'll, we'll kind of try to break that down a bit for you. The capped centers is, is not just for G8, it happens across the sector-wide, and particularly with the staff shortages that the sector has been facing over the last two or three years. It is a phenomenon that we're well now. Majority of those capped centers that we have highlighted, in the pack, a big lot of them are actually due to the capped centers, that we had in Q4 of CY 2022. When you have a capped center in place, as you know, what it means is, we're not able to onboard new families as a result, lower occupancy, because we cannot meet the regulatory ratio requirements.
Mm. Mm.
When you're in that situation, the families unfortunately have to take the children somewhere else. It is, in reality, a permanent loss of those families until we find new ones to replace when we have more staff back in those centers to have what we call a formal cap. If we kind of look back at those, what we've highlighted, since quarter four of last year, there were 72 centers that overall have been impacted by what we call formal caps, which means limitation on the ability to onboard families. 50 of those 72 centers, they were the ones that had really tough staffing issues in Q4, and those centers in CY 2023 have got an occupancy 6% or 8% lower than the rest of the organization.
It just shows that, you know, when you are faced with that real challenge of not having people in the center, you can't onboard people, and unfortunately, people go away. The positive side of this is, as we've reduced our vacancy rate by 24%, we have been able to reduce our capped centers significantly, coming out of those highs of 45s and 46s in Q4 of CY 2023 to about 35 in January, and we've now got about seven.
Mm. Okay. Okay. Just to kind of maybe like bridge some of that into maybe current trading, you're saying core occupancy as at the 20th of August is down 80 basis points versus last year, so the 20th of August, 2022. Then you're saying it's down about 200 basis points versus the first half of calendar year 2019. Is that a typo in the presentation, or why are you comparing August occupancy to the first half of calendar year 2019?
Sorry, just to confirm our numbers.
Mm-hmm. Mm.
We're talking about the group occupancy-
Yeah.
of 73% as a spot rate on the 20th of August.
Mm-hmm.
This 73% group occupancy-
Mm
It is a spot, as I said.
Yeah.
It is versus spot at CY 2022.
Mm-hmm.
That's 0.3 points lower than that spot is.
At the group? Yep.
At the group level, yes.
Yep.
What's pleasing for us is, the gap to CY 2019 has continued to reduce. If you remember in Quarter One, when we, at AGM, our gap was 2.5.
Mm-hmm.
End of half was 2.1-
Mm.
now the spot rate is 1.6.
Okay. Okay, 'cause it just, in the when I've gone to the slide deck, it's comparing it to the first half of calendar year 2019, so that was, that was the confusion. Perhaps we take this one offline?
Maybe, maybe we can take that offline with you.
Yeah.
'Cause we don't see that one.
Yeah.
Let's, let's pick that up with you separately.
Yeah
these are not what we've got in the deck.
All right. Then just, just to kind of maybe kind of tie in.
Yeah.
I know that you're calling out like, the staffing shortage as being an issue, but, like, is it the cap centers that's driving that, that disparity versus last calendar year?
Predominantly, you know, as we've, as I said, we've entered, the cap centers have played a major role in.
Mm
occupancy overall. As we said, in half one, the, the You know, the approximate impact of it was about 1.3% of occupancy.
Mm
for us.
Mm.
The good thing is we are working incredibly hard to reduce that, and we're very pleased with our progress in terms of our own reduction of vacancy rates and retention being more improved than the sector has been. We do have other challenges, Marnie. It's not, not everything in our world is purely down to workforce shortages, as it is one of the critical issues. As I highlighted earlier, you know, our centers, the ones that are not where they need to be from an occupancy point of view, there are two other factors at play. One of them being location dynamics, particularly around what the supply-demand ratios have or currently, compared to what they have been before, so the level of competition in our environments.
The third bucket is, you know, being a large provider with a 434 large number of services across the country, there'll always be centers that require better execution and operational performance, which is down to us to improve to.
Okay. Okay, Just another question from me. You, you've highlighted some of the regulatory focus being a regulatory.
Marnie, I've got to be... I need to be fair to the other callers. We can come back to the queue.
Okay.
We'll answer this one-
Just one more question. Yeah.
We'll answer this last one, but we need to go to the others.
Totally. Just regulatory, regulatory environment being in focus, can you kind of detail more about multi-employer bargaining and what that, how are you thinking that, that might impact you further out? Like, what? You know, I know that it's sort of like preliminary discussions, but trying to understand the quantum of potential government funding and what you think you guys will land on, you know, as you, you, you negotiate this outcome?
Marni, I wish I had a, I had answer to any of those, questions. This is a very new legislation, as you know. The legislation came into, into effect, only in, in May this year, and we are the first sector to go through this.
Mm.
there's been no other sector-
Mm
... that's gone through this. We are very much currently in the procedural state. The negotiations have not even started yet.
Mm.
What that means is the interested parties, which we are a voluntary, party to, to this multi-employer bargaining, alongside three unions and a number of other providers, is we have. An application has been submitted to Fair Work Commission.
Mm
... to grant authorization for the negotiations to begin. There was a hearing last week in, at Fair Work Commission to ensure that the interested parties have what's termed "commonality of purpose," and that's being currently considered by Fair Work Commission. Again, we, we're, we're hoping, and I think we're, we're positive that the Fair Work Commission hopefully will grant that authorization, and sometime, perhaps in September, the negotiation will begin. There are basically three groups of parties to the negotiation, if I'm trying to make it as simple as possible. One group will be the providers, one group are the unions, and the third party to the table will ultimately be the government, who will be the, will be the fundamental funder. The unions have publicly asked for a 25% pay rise for the government to fund.
Mm.
Where that ends up, Marni, I've got as big a crystal ball as you have. Rest assured, we will be advocating very hard for government funding.
That's all clear. I'll jump back in the queue. Thanks for answering my questions.
Thank you. Talk to you soon.
Your next question comes from Tim Plumbe with UBS. Please go ahead.
Hi, guys. Can you hear me?
Yes, we can.
Yes.
Great. I'll, I'll ask two and then jump back into the queue as well. Just the, the first one is a little bit of a further question from, from Marni's initial question around those seven capped centers. As the second half progresses, typically your occupancy increases, right? Do you need to hire incremental ECTs in the second half to remain at that seven capped rate? Or do you expect that to be sufficient to, to be kind of, you know, at that level or, or better during the rest of the, the second half if you don't make materially incremental hires?
Yeah, Tim. If we look at our cohorts, our ECTs are a relatively fixed number because they're our bachelor qualified, and each center needs a certain number. It does change a smidge in New South Wales as occupancy goes up. Your point around the broader educator group is correct, that as seasonality grows up, goes, you do need more, FTE, basically, to satisfy that. That's where we're very focused on this quarter, in making sure that we continue our work on vacancies, et cetera, to make sure that we don't have that same seasonality that you saw in the prior year.
Gotcha. The, the second one's a follow on from, like, the ACCC review that, that is going on in the industry at the moment. The initial report that was put out, just so that I understand correctly, is the current phase that the ACCC is looking or dealing with the large players to look at their cost base over the course of the, the period that they've reviewed the pricing increases?
Yeah. Tim, I think if I understand you correct, the initial review that ACCC conducted was across the whole of the sector, so large, medium, and small providers. The interim report was based on all of them. They have now asked for further information in, let's call it phase 2, which they want to complete that sometime in September. They've asked... Our understanding also is predominantly the large providers. I think they're going to ask some medium providers, too, for information, particularly relating to cost and fee increases and decisions in this year. January to July.
Sure. Okay, great. I'll jump back into the queue. Thanks, guys.
Thanks, Tim.
Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Wei-Weng Chen with RBC Capital Markets. Please go ahead.
Hi, guys. I'm sorry, I joined, halfway through, and I'm sorry if I missed it, but just the CapEx reduction, just wondering if you could speak to, the, the rationale for the reduction. Is it, like, a permanent reduction, or is it, kind of we're shifting into maybe next calendar year from understand?
I'll give you a kind of a high-level view, and then if Sharyn can jump in and probably break it down for you. We, we've been very purposeful about this choice. This hasn't just happened. We, we are going to exercise what I call a bit more rigor around what we spend. The good thing also is we've also spent quite a lot of capital, if you recall, over the last few years, in, in upgrades, our center resources, which we don't believe we need to be at the same rate, hopefully going forward. In terms of major capital works in our centers, I have been particularly kind of focused in making sure where we invest our money, there are good returns that come back.
As a result, as I said, we have purposely, slowed down that capital investment in our centers until we have a model by which we are more comfortable about the returns on those improvements or upgrades. Sharyn, do you want to add anything else? Capital investment in our centers is only, you know, it's a big part of it, but there are other things that we consider.
Yeah, certainly. Just to build, as Pejman said, the prior improvement program did refresh equipment resources in all centers, so we are seeing a dramatic increase from prior year, particularly in that space. Then, we have replaced a number of our systems with enterprise systems, so that SaaS cost will also come off.
To your last question?
Yeah.
I'm sure we answered it. You did also ask, will this continue? You know, we're hoping to, to reduce the indicated CapEx of AUD 60 million-AUD 65 million at the beginning of the year by AUD 10 million to AUD 50 million-AUD 55 million range by end of this year. Look, Sharyn and I are pretty focused on this, and we, we're hoping that we can retain a reduced rate going forward. What number that's gonna be, we can probably talk to you guys more about it either in Q3 or Q4.
Yeah. Just a follow-up question, I guess, on that CapEx spending. I guess you've spent a bit last year, in terms of your center quality, that was flat at 89%. Are you expecting this reduced spend to have any impact on that number and that quality rating? Do you stay confident that you can keep that 89% flat or even grow it from here?
Yeah, in terms of the quality rating, Wei- Weng, it's a number of quality areas, so QA 1 through to QA 7, and property is a subpart of one of those areas. We have been very mindful to be keeping an eye on that, to make sure that we're not seeing any negative implications in that, and we haven't to date. Those quality ratings are very much around educational practices, relationships with children, engagement with the community, health and safety. Pretty happy with the work we did to date to get our centers up to that QA 3 rating. But it is something we're mindful of, yeah, and comfortable that it won't have that impact.
Okay, cool. Just the last one for me was just on inquiries. I think I know that you guys were saying you in-house some of the, the, the call, sort of center, sort of stuff. Just wondering, One, what does that mean, I guess, for, you know, headcount and, and costs? Two, I see the actual inquiry volumes have come down, conversion is up, but I guess maybe how are you thinking about, or, or, yeah, how are you thinking about that going forward? And, how's that tracking at the moment?
Again, we'll play a bit of a tag here. The, the key reason why we have decided on bringing, bringing the call center to an in-house team, is predominantly based on our families' experience. My observation was that, the customer journey that our families were going through was not the most ideal, especially where we as I said, we were working with an external party. Our system integration, to be honest, was not that good. We were basically handing the customer or the families over many times during their journey, and it wasn't something optimal. We couldn't really, assess the real impact of that journey for our customers. This should be a capability that G8, you know, really owns. You know, our family experience is the most important one.
If the families feel really engaged with us, you know, they stay with us for, for five years. The reason or the decision to bring it in-house was to improve the family experience. We have cost savings, yes, and Sharyn can probably talk about where we are now in terms of the phasing, because we've still got a little bit more work to do in terms of potential cost savings that it may come with it.
Sure. We've brought 75% of the centers across at the moment, and the last tranche will come across at the end of August. In that transition, we do have a little bit of duplication of costs, while we're phasing in and out of the current arrangement. What we're pleased to see is that we will be able to realize some cost savings next year. We want to get our arms around it first, Wei Wing, before we can assess that. Certainly being closer to the processes, closer to the journey, it gives us a better opportunity to realize both a better experience and also any efficiencies we can get.
Sorry. Okay, I was on mute. Sorry. Thanks. That's all from me.
Thanks, Wei Wing.
Thanks, Wei Wing.
Your next question comes from Tim Plumbe with UBS. Please go ahead.
Hi, guys. Just two more from me, if that's all right. They're both.
Sorry, Tim, you're, you're very faint.
Sorry, sorry. Is that better?
That's much better. Thank you.
Okay. Sorry about that, guys. The first question, just some of your peers or, or competitors have put through wage increases, circa 8%, across the industry. Just wondering, and apologies if you touched on this, I came in a little bit late, but just wondering if you could touch on what sort of wage pressure you're seeing across the industry. I, I recognize there was a 5.75% government increase, but, but is, is the actual labor cost increasing more than that?
You are correct in a couple of those dot points, Tim. The award increase in July was a record 5.75% for our sector. That's obviously gonna cost the educators. We are in a very competitive market, though, Tim. There are providers out there who pay above award, some of them pay above award more than us already. The sector does remain competitive. Does the sector just pay 5.75%? The answer is, some do and some don't. We put through a mid-year increase again of 3.8%, which brought our total for the year... If you remember, we had a 6% in January to a 9.8%.
Our observation was that this sector, predominantly, you know, the medium and large players, they were between 8% and 11% and 12%, but there were quite a large number of them that were above 10%. We were kind of in the middle of the pack. Not only we had to reflect those cost increases just on wage increase that we observed, but there were many other things that, the cost throughout the half one going into half two, were far more than what we anticipated. Like, lots of consumables, including food, you know, nappies, which is a very big cost for us, you know, double-digit growth. Cost of maintenance, repairs, anything to do with, property, management, has significantly increased. That's what, what we put through.
Gotcha. Just the last question. Around the ECTs, how is the industry dealing with the shortages? Are you managing to find ECTs from other countries and bring them over? Or h-how do you see the shortage being addressed?
The shortage, I think in a systemic, Tim , is probably going to be a little bit more medium to long term. Governments, you know, they are, as I said, state governments and federal government, they've got what they've termed, workforce task forces, looking at, particularly around shortages of educators and ECTs. Has anything fundamentally come out of those? Not yet. We have been advocating for improvement, I wouldn't like to call it relaxation, of the visa programs for, for the early childhood sector. Again, nothing has come out, the governments are genuinely, they are listening, and they're trying to see what, what impacts they can make. The biggest thing that we can do is two things.
Obviously, we can recruit from the market, which I do believe, you know, we've done a relatively good job in the six months, you know. In my word, when I'm talking to team, we have been fighting a pretty good fight in, in, in our recruitment. The other one is growing our own. You know, that's one of the big impacts that we can have, 'cause once we grow our own and we put our own team through our own study pathways and support them financially with their professional developments, their tenureship with us does increase quite a lot, and they stay with us, you know, two-three years. On average, you know, the tenureship of our team increases by about 20%. Both recruiting and developing our own, and working with the, the governments to, to try and improve the situation, too.
Great. Thanks, guys. Appreciate the questions.
There are no further questions at this time. I'll now hand back to Mr. Okhovat for closing remarks.
Thanks very much. In closing, I would like to once again thank the G8 Education team for their continued professionalism and dedication, and for making G8 a truly purpose-led organization. I'd like to thank our team for the support they provide to our children and our families each and every day. It's a privilege to work with you and create the foundations for learning for life for the next generation of Australian children. I'd like to also thank our shareholders for their ongoing commitment and support, and also thank all of you guys today for, for listening and also your questions. This concludes our presentation of our G8 half 1 2023 results.
Thanks, everyone.
Bye.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.