Evolve Education : Chair Address AGM

Evolve Education Group Limited Chair's Address Annual Meeting, 17 August 2017

It is now 33 months, almost three years, since Evolve listed in December 2014.

Our first two years have been full of the start-up and get running type challenges that all businesses face and require a certain set of skills and capabilities.

Evolve is now established and in this current phase the focus is on establishing and embedding our ongoing business and operational model. Key personnel changes that reflect this emerging maturity of the business include Fay Amaral COO and Stephen Davies CFO who joined the senior executive team this time last year and he appointment of three new directors, Grainne Troute, Anthony Quirk and Lynda Reid.

The board has a firmly positive view about the future.

The majority of our centres are purpose-built and the majority of those are in good condition, something teachers, parents, children and ourselves can be proud of. We will be undertaking a full portfolio review of our centres later in this calendar year to ensure we are where we want to be in terms of location and quality.

Although we are moving gradually into the new centre territory domain, acquisition of existing operations will remain an important component of our overall strategy.

Performance

On the performance front, profits in FY16 and FY17 have been steady, if unspectacular, at $15.6m and $15.9m respectively.

This year to date we have experienced some incremental slippage in average occupancy across our 126 centres and some creep up in wage to salary ratios as a consequence of this occupancy dip and lack of rostering responsiveness across our centre network. Dealing with incremental occupancy slippage creates difficulties for centre managers for their staff cost management.

We can and will fix these issues but our first half result will inevitably be impacted by this year to date trend.

The softer than anticipated start to the year is taking some time to correct and, as a consequence, our first half result will be significantly down on last year.

Although the occupancy decline is relatively incremental, at 2% points across the centre network and the salaries to revenue ratio has crept up 4% points, the cumulative impact is not insignificant.

We are predicting the first half result to come in lower than first half last year at circa $7.0m.

In a like with like comparison with last year's $8.8m, it is important to call out two costs which have impacted this year being the start-up phase of new centre openings (-$160k) and the accident of this year's calendar with Easter weekend in this half year period but not in the last half year. The adverse impact of these 2 statutory days is approximately $430k after tax.

So on a like with like comparison to last year, we calculate we are down approximately 14%.

This is disappointing and it is fair to say we have been slow to react, but also fair to say that we are now in full response mode and are confident we can turn this around in the second half. Despite departing the board, Mark Finlay's sector expertise and operational pragmatism will not be lost to the

business. Mark is providing very effective hands-on assistance to management in our current recovery.

Last year's full year result was $15.9m and it will now be difficult to match that, but with a strong management response between now and March, we would expect to end the year in the range $14.0-$15.0m, operating earnings after tax.

Alan will speak more about operations and performance and the recovery effort, shortly.

Despite the weaker year this year, the board is very confident about next year. For FY19 , we anticipate a significant uplift in earnings as our brand and digital strategies which are currently being implemented, deliver a full year impact.

We are very confident about our future but note that it lies just around the corner, a bit ahead of where we are now.

We will report current year first half on 17 November, at which time we expect to provide further detail on how this year has been progressing and a firmer insight on the potential outcome for the full year.

In terms of building and investing for the future, Fay Amaral will address the meeting today to provide some insights into the brand consolidation and clarity and CRM/digital initiatives that are being implemented to help deliver increasing revenues on a sustainable basis going forward.

Qualified Teachers

There has been widespread publicity about the national shortage of teachers in New Zealand and this is having an impact on the business. Apart from the increased recruitment effort required from centre managers when supply is tighter, with teacher to children ratios needing to be strictly adhered to, a shortage of qualified staff has a flow-through consequence for the business.

Acquisitions

We have identified that the acquisition of existing businesses takes significant attention during the post-acquisition period in order to protect the important cultural relationship with staff and parents that underpins the financial performance of that acquisition.

As a consequence, we are scaling back our annual target to a more manageable 8-12 per annum, rather than trying to run too fast at a target rate of 15-20 centres. Acquisition of the Little Wonders Group of six centres in June has set the company well on the way to its target for this year.

In the acquisitions space there is reasonable competition for good centres and vendor price expectations have continued to rise, in many cases, above our willingness to pay.

Development Centres

All of which points us in the direction of our development strategy - emerging clearly as the important play for the company as we look ahead. New developments are purpose- built, are new (attractive to parents and teachers alike), will be well-located, and there is no goodwill to pay to an existing owner.

New centre developments take longer to come on stream than acquisitions but once a regular pattern of developments has been able to be established, our overall company cash flows will settle into a more regular pattern.

The temporary drag on earnings and cashflow, as we build into the new development programme, is something we have to get through, but it will be worth the element of patience required.