NZ’s Evolve confirms wide ranging restructure
As part of its half year results released today, New Zealand-based early education and care provider Evolve Education Group has announced a dividend cut, provided a detailed update on a proposed turnaround plan, and the appointment of ex-G8 executives Chris Scott and Chris Sacre to the board.
In light of the reduction in current year earnings and the costs of the business turnaround plan, the board has concluded that no dividend will be paid at the half year. A dividend of 2.5 cents per ordinary share was paid last year amounting to approximately $4 million.
The board have taken these steps to address a sustained period of declining operating performance.
Chris Scott and Chris Sacre to join board
Chris Scott, the ex-founder and managing director of G8 Education Ltd, has been appointed to the Board as a non-independent non-executive director.
Mr Scott owns 18.9 per cent of Evolve, having purchased the stake from former Evolve CEO, Mark Finlay, in August 2018.
In addition, Chris Sacre has been appointed as an independent non-executive director.
Mr Sacre is also an ex-G8 Education executive having worked at the business from 2008 to 2016 in the Chief Operating officer and Chief Financial Officer roles.
As a result of these changes, Anthony Quirk and Lynda Reid will be retiring from the board.
Commenting on these appointments Alistair Ryan, Evolve Chairman noted “We are pleased to have Chris Scott and Chris Sacre join Evolve as non-executive directors. They both have considerable experience in the early childhood sector which will be invaluable as we reset the company and deliver on the turnaround plan.”
Two-phase turnaround plan created
The turnaround plan will have two distinct phases, the first of which will be a focus on halting the recent decline in occupancy and then seeking to rebuild occupancy back to a level of 81 per cent by 2021.
The company acknowledges that execution of the investment plan will require additional investment of approximately $2.9 million in FY19 and $4.2 million in FY20 and will be part funded by the elimination of the HY 2019 dividend payment.
The second phase of the turnaround plan will focus on capitalising on the newly developed operating platform to grow the business.
Additional key highlights of the turnaround plan include:
- The appointment of a number of new senior management positions including General Manager (GM) of Centre Operations, GM People and Talent, GM of Property, and GM of Marketing;
- The restructure of centre operations, marketing, property and human resources departments;;
- A new marketing strategy that focuses on centre-specific and digital campaigns;
- An action plan to address occupancy at the 50 lowest performing centres;
- Porse-in-home Childcare and Au Pair Link, two businesses considered to be non-core; and,
- Six centres being actively marketed with a view to being sold.
Funding, liquidity and capital structure all subjected to reviews
In light of the proposed restructuring, ASB Bank Limited (ASB) has agreed to a revision of the Group’s funding facilities with a specific focus on providing relaxed financial covenants for a period of four quarters commencing commencing 1 October 2018.
The amended facility is designed to accommodate the rebuild process by providing sufficient headroom to enable the turnaround to gather momentum and deliver strong improvements in operating performance.
In addition, the company has agreed to implement a revised capital management strategy which will seek to reduce the ratio of debt to EBITDA to below 3x. The current debt to EBITDA ratio is approximately 3.2x.
The strategy will seek to explore all options to reduce gearing including operational improvements, divestment of underperforming assets and alternative sources of debt and equity.
Half-year results impacted by impairment of goodwill relating to acquisitions
Evolve reported underlying net profit after tax but before non-recurring items of $4.6 million for the six months to September 2018. This compares to $7.0 million in the same period in 2017.
In addition the company reported that in light of declining enrollments in FY17 and FY18 materially impacting the current profitability of the overall portfolio of centres, an impairment charge will be taken to reflect this structural fall in financial performance.
The impairment charge will be for $32.1 million and will be used to reduce the carrying value of centres on the company balance sheet.
The board noted that the charge is a function of financial reporting standards and they remain confident that over the next three years profitability of the overall centre portfolio will improve.
Earnings outlook for FY19 cut
The company now expects to make between $12 million and $14 million of EBITDA in FY19. This compares to prior guidance of between $16.6 million and $18.6 million provided in July 2018.
Rosanne Graham, Evolve’s CEO, commented on the results, saying, “Consistent with what we signaled at the annual meeting, extra investment is required to turn the business around and this will be undertaken from this year. We are confident that with this investment we can return Evolve to much stronger levels of profitability and build a platform for future expansion.”
Evolve Education Group owns more than 120 centre-based ECE facilities around New Zealand, operating under brands that include Lollipops, Active Explorers, Learning Adventures, Little Earth Montessori, Little Lights, Little Wonders and Pascals.
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