G8 Education Limited Management Presentation Senior Unsecured Notes - - PowerPoint PPT Presentation

Investing in the future of childcare

G8 Education Limited

Management Presentation Senior Unsecured Notes Offering 22 July 2013

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Company Discussion Financial Discussion Credit Highlights Questions

Page 3 Page 9 Page 15 Page 17

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Company Discussion

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Company History

• G8 Education Limited (ASX:GEM) is Australia’s largest for profit provider of high quality,

developmental and educational child care services

• G8 Education Limited currently has a portfolio of 201 childcare centres, either owned or

contracted, in Australia and 18 childcare centres and 51 franchised centres in Singapore

• G8 Education Limited has approximately 3% of the total Australian market providing

scope for further expansion in what is a largely fragmented market

• G8 Education Limited operates a multi-brand strategy which allows centres to operate

largely autonomously from a care and education stand point, whilst overlaying the group with administrative, financial and reporting disciplines

• G8 Education Limited has historically funded growth primarily through the equity markets

and as a result maintains a very low level of gearing

• The proposed notes offering adds tenure to the existing debt maturity profile and

diversifies debt funding sources

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Business Model G8 Education Limited’s business model is as operator and consolidator of childcare centres and maintains a multi-brand strategy.

Operations

• G8 Education Limited is an experienced and focused operator of childcare centres and

closely manages the key operational metrics and performance indicators at the individual centre level on a weekly basis. These include:

• Centre operating profit
• Occupancy
• Revenue
• Labour
• Rostering
• Experienced layer of “operational”

management that provide the necessary level of accountability to cost control and procurement decisions

• Centre directors, operations managers

and senior management are all aligned to the same key operational metrics and performance indicators

Chris Sacre Chief Operating & Financial Officer/Company Secretary

16 operations managers 201 centre directors

More than 4,000 centre staff Over 13,400 Licenced places

Jae Fraser GM Operations Melanie Excell Senior Operations Manager Angela Karzon Marketing Manager Emily MacDonald Financial Controller Jessica Battersby HR Manager

Brian Bailison Non-Executive Director Andrew Kemp Non-Executive Director Chris Scott Managing Director Jenny Hutson Chairperson Susan Forrester Non-Executive Director

Kirsten Berry Senior Operations Manager Glenn Davies IT Manager

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Business Model (continued)

Acquisition Strategy

• Acquire centres which are in operation
• G8 Education Limited does not acquire greenfield sites, removing significant occupancy and construction risk
• Acquisitions immediately deliver cashflow and earnings to the growth
• Margin improvement is derived from integration of key operational metrics and performance indicators to lift individual centre

performance

• Disciplined approach in relation to price
• G8 Education Limited has acquired all centres on

4.0 x EBIT

• Senior management have a strong track

record of successfully implemented this style of acquisition strategy

88 131 167 189 18 18 18 50 100 150 200 250 FY10 FY11 FY12 YTD13

Australia Singapore

Centre portfolio

Source: Company releases; FIIG Securities

Acquistion and EBIT multiples

Date Name Number of centres EBIT ($m) Price ($m) EBIT Multiple 11-Jun-13 Various - Announced only, not settled at date of report 17 6.0 24.0 4.0 3-Jun-13 Dolphin Childcare and Education 3 0.8 3.3 4.0 06-May-13 Rose Garden and Leaping 2 1.4 5.5 4.0 30-Apr-13 First Grammar, Learning Sactuary and Star Kids 12 3.6 14.5 4.0 15-Apr-13 Treehouse & Bellnore Drive 2 1.2 4.8 4.0 17-Dec-12 Learning Sanctuary 1 0.6 2.4 4.0 12-Nov-12 Pacific Group 16 7.0 28.0 4.0 22-Oct-12 Little Einstein 7 2.3 9.2 4.0 02-Oct-12 Kinder Haven 3 1.6 6.4 4.0 2-Oct-12 Koala 2 0.6 2.4 4.0 20-Aug-12 Casa bambini 3 2.5 10.0 4.0 24-Feb-12 Glen Gala Childrens Center 1 0.4 1.6 4.0 16-Dec-11 Educare 6 2.1 8.2 4.0 19-Apr-11 Kids Corner 6 1.8 7.1 4.0 01-Dec-10 Kindy Patch 30 5.0 19.9 4.0

Source: Company releases; FIIG Securities

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Industry Overview

• Fundamentals of the childcare industry

remain strong with a demand/supply imbalance

• Strong demand for childcare services

underpinned by economic and population changes resulting in an increased attendance rate for long day care

• Demand factors driven by:
• increased female participation in

the workforce

• Australia’s long term economic

stability

• low levels of underlying

unemployment

• Government financial support
• increased recognition of

educational and social benefits of early learning

• childcare participation in

Australia is low by western country standards

• The provision of childcare funding and

assistance is a central tenet of Government policies well beyond childhood education

10 20 30 40 50 60 70 0 years 1 year 2 years 3 years 4 years 5 years

% of population attending child care

NSW Vic Qld WA SA Tas ACT NT

• 1,000

2,000 3,000 4,000 5,000 6,000 7,000 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Total government expenditure ($m)

Source: Report on Government Services 2013, Total government expenditure on early childhood education and care 2012 dollars; FIIG Securities

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Industry Outlook

• All major indicators point to a continued

positive outlook for the sector

• Government expenditures growing

year-on-year

• Portion of children attending

childcare trending up

• Growth in supply of long care

places outpaced by demand

• Industry will remain largely fragmented

providing growth opportunities for

• perators with the means to expand
• Barriers to entry for major corporate

players around access to capital remain

• Social trends supporting long day care

25% 27% 29% 31% 33% 35% 37% 39% 1,200 1,250 1,300 1,350 1,400 1,450 1,500 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Proportion of children attending childcare

0-5 yr olds ('000) Proportion attending (RHS)

Source: FIIG Securities; Report on Government Services; Petra Capital

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

• 5,000

10,000 15,000 20,000 25,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Change in Long Day Care places

Additional LDC places Change pcp (RHS)

Source: FIIG Securities; Report on Government Services; Petra Capital

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Financial Discussion

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Financial Performance - Historical

Financial Year 2012 Results Consolidated

2012 2011 % Year End December 31 ($000's) ($000's) Change Revenue 179,991 142,899 26% Expenses 148,054 116,114 28% EBITDA 31,937 26,785 19% less: D&A 2,530 1,903 EBIT 29,407 24,882 18% less: Interest Expense 2,539 2,188 Net Profit before Tax 26,868 22,694 18% Net Profit after Tax 19,209 17,250 11% less: Abnormal/Non-recurring Items 521 (3,343) Underlying Net Profit after Tax 19,730 13,907 42% Underlying EBIT 30,012 21,539 39% Key Credit Statistics Debt/EBITDA 1.5 1.4 Net Debt/EBITDA 0.9 0.8 Net Debt/Operating Cashflow 1.4 1.9 Interest Cover 12.6 12.2 Gearing ratio 24% 32%

• Cashflows from operations of $20.0m represented 101% of NPAT ($19.7m)

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Financial Performance – Historical (continued)

• Underlying Revenues have increased 29% over the last financial

year from $138m in 2011 to $179m in 2012

• Like for like revenue (across 118 centres) increased 10%

in 2012

• Underlying EBIT increased 39% over the last financial year from

$21.9m in 2011 to $30m in 2012

• Like for like EBIT (across 118 centres) increased 11% in

2012

• Group EBIT margin is affected by seasonal fluctuations in
• ccupancy from January to June due to the transition of children

from Kindergarten to primary school

• Peak occupancy is in November each year
• Underlying EBIT margins have improved through a combination
• f organic improvements and high quality acquisitions.
• Underlying EBIT margin increased by 8% in 2012
• Average portfolio occupancy increased year-on-year by 2% in

2011 and a further 3% year-on-year in 2012

• Like for like occupancy (across 118 centres) increased

2.2% in 1H11 vs 1H12 and 0.5% in 2H11 vs 2H12

20 40 60 80 100 120 1H10 2H10 1H11 2H11 1H12 2H12

Total Revenue

Source: Company releases; FIIG Securities

$m

• 2

4 6 8 10 12 14 16 18 20 1H10 2H10 1H11 2H11 1H12 2H12

Group EBIT

Underlying EBIT Deferred consideration

Source: Company releases; FIIG Securities $m

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G8 Education Limited – 1HCY13 Guidance

Broker $M EBIT HY13 CY13 CY14 Broker A 17.4 52.8 64.9 Broker B 17.1 48.1 66.4 Broker C 16.8 48.7 58.2 Broker D 16.9 46.8 58.9 Average 17.1 49.1 62.1

• G8 Education Limited operates on a calendar financial year. In relation to the half year

ended 30 June 2013, G8 Education anticipates that its underlying audit reviewed financial result will exceed the average guidance anticipated by four brokers currently publishing analysis on G8 Education, being EBIT of $17.1 million.

• A summary of the forecast position of the four brokers for the half year ended 30 June

2013 and the full year ending 31 December 2013 is set out below:

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Cashflow

16.93 17.91 44.24

• 11.71
• 36.15
• 57.71
• 1.28
• 6.42
• 8.08

7.35 11.76 19.95

• 2.73

20.85 13.23

• 0.91
• 2.26
• 4.77
• 0.90
• 1.43

3.69

• 80
• 60
• 40
• 20

20 40 60 80 100 FY10 FY11 FY12 $m

Sources and Uses of Cashflows

Other investing activities CAPEX Net proceeds from borrowings Operating cash flow Dividends Acquisition of businesses Net proceeds from equity issues $24.3m $(17.5)m $50.5m

$81.1m

$(46.3)m $(70.5)m

Source: Company releases; FIIG Securities

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Debt facilities

• G8 Education Limited has an existing $70m senior secured credit facility (currently

drawn to $48.5m) with BankWest. The facility will remain in place after the notes have been issued.

• Future drawings under the senior secured facility will be governed by financial

restrictions and covenants

• The major covenants governing the senior secured facility include:
• Secured Debt/EBITDA < 2.2 times
• Interest Cover Ratio > 5.5 times
• Bank facility pricing BBSW + 230bps

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Credit Highlights

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Credit Highlights

• The largest for profit operator of childcare centres in a highly fragmented sector
• Experienced and profitable operator
• Disciplined consolidator
• Resilient business model with demonstrated history of organic margin improvement
• Strong and stable cashflow generator, with excellent cash conversion metrics
• Robust credit statistics, with low level of leverage and strong coverage ratios
• Engaged shareholder base with a demonstrated capacity to efficiently access equity markets
• Experienced management team with a strong track record of successfully implementing a similar

acquisition strategy

• Fundamental demand drivers of the childcare industry remain very strong
• Childcare and early childhood education is central to a number of key government policies (from

both sides of politics) both in relation to childhood services and broader economic goals

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Questions

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