31 July 2008
ASX ANNOUNCEMENT
A.B.C. LEARNING CENTRES LIMITED (ASX:ABS)
ABC Adjusts 2008FY Guidance and Carrying Values of Assets
During the preparation of the 2008FY accounts A.B.C. Learning Centres Limited (“ABC” or the “Company”)
has identified a number of areas where a reassessment of accounting treatments and carrying values is
required and further provisions, adjustments and write-downs of $(213) million need to be taken. The audited
accounts are expected to include the following changes:
Expected 2008FY EBITDA per 22 April 2008 announcement (post deduction of $280 million expected book loss in relation to deconsolidation of ABC’s US operations) $105m – $114m
Profit on sale of UK Vouchers business included in 22 April 2008 guidance (delayed into 2009FY per ASX announcement of 27 June 2008) $ (110)m
Adjustments to items included in previous EBITDA guidance as at 22 April 2008 $ 7m
Changes in underlying operating performance $ (20)m
Additional non‐recurring adjustments to EBITDA guidance $ (68)m
Expected 2008FY EBITDA as at 31 July 2008 $ (86)m
Prior expected depreciation, amortisation and finance charges as at 22 April 2008 $ (219)m
Additional impairments, depreciation, amortisation and finance charges $ (132)m
Expected Profit Before Tax as at 31 July 2008 $ (437)m
Note:
Please see Appendix 1 for a detailed breakdown of the individual adjustments and refer to ASX announcement on 22 April 2008
The NPAT figure has not been included as the tax effect accounting has not been completed.
Asset Value Review
The review of asset values (see Appendix 1 reference to impairment) as well as the final calculation of the
precise book loss in relation to the deconsolidation of ABC’s US operations ($280 million was included in the
22 April 2008 guidance update) is ongoing.
2007FY Re-statement
At this stage based on the work completed to date, ABC expects that a re-statement of 2007FY pre-tax
earnings by $(19) million will be made at the 2008 full year results announcement based on accounting
advice received. In addition, a one-off, pre-tax adjustment to prior year earnings before 2007FY of $(34)
million will be reflected in retained earnings at the same time. These restatements relate to:
(i)
the treatment of the restructuring charges associated with the unwinding of the Regional
Management Companies ("RMC") structure together with associated costs, some of which has
to be allocated to 2006FY and 2007FY due to the age of the debtors that have been written off;
(ii)
the partial reversal of income recorded following the receipt of cash from the sale of rights to
provide labour to ABC’s childcare centres in Aust/NZ to 123 Careers in 2006, which will be
recorded over the 10 year term of the agreement rather than during 2006FY, 2007FY and
2008FY; and
(iii)
a change in ABC’s accounting principles regarding the recognition and depreciation of toys and
equipment.
Adjustments to 2008FY Guidance
Of the adjustments outlined in the table above, a total amount of $20 million relates to ABC’s underlying
operating performance – $13 million of which is attributable to the Company’s operations in Australia and
New Zealand. The reduction in profitability is mainly attributable to lower than expected improvements in the
Company’s management of waiting lists and occupancy levels as well as salary and rent expenses which
were higher than planned during 2H 2008FY.
Dividends
In the current circumstances, the Board of ABC has determined not to declare a dividend for the second half
of the 2008 financial year. Payment of future dividends will depend upon profitability, capital commitments
and available cash and franking credits at that time. A fully franked interim dividend of 8 cents per share was
paid for the six months to 31 December 2007.
Capital Expenditure
Consistent with ABC’s stated commitment to focus on organic business improvement and a slower pace of
acquisitions, the Company’s capital expenditure programme for centre acquisitions and refurbishments in
Australia and New Zealand has been reviewed and is now expected to be as follows:
2009
110 new centres
$165m*
plus $45m of refurbishments
2010
70 new centres
$ 80m*
plus $17m of refurbishments
(*net of deposits paid)
The above capital expenditure for Aust/NZ centre acquisitions and refurbishments represents a significant
reduction from 2008FY which was approximately $400 million.
2009FY Performance
The first three weeks of the 2009 fiscal year have been encouraging and ABC confirms that its centres in
Aust/NZ have met their revenue and wages targets. An increase in fees in Australia and New Zealand has
been implemented following a comprehensive fee review and the introduction of a standardised fee
structure.
Banking Covenants
ABC confirms that post all of these adjustments, write-downs and impairment charges it remains compliant
with all banking covenants.
Contacts:
Investors and Analysts
Andrew Barber, General Manager Corporate Affairs
07 3908 2594
Media enquiries
Lisa Keenan
nightingale
0409 150 771
03 9614 6930
Kate Inverarity
nightingale
0413 163 020
03 9614 6930
Scott Emerson
Crook Publicity
0401 998 181
07 3221 7155
Appendix 1
Adjustments to items included in previous EBITDA guidance as at 22 April 2008 22‐Apr 30‐Jul
Consulting fees 10 Liquidated damages (developers) 26 36 Gain/(loss) on sale of property 10 (9)
FUN.ASX mark to market (44) (40)
RMC restructuring charges (30) (19)
(6) 0 Project cost write‐off (re‐classified) Changes in underlying operating performance Aust/NZ operating variance Additional income (123 Rights) US operating variance UK operating variance Delta Comments 5 (5) $10m consulting fee income reported for 1H 08FY was subsequently disputed in part and a credit note over $5m was issued by ABC 10 Additional liquidated damages of $10m were recorded during 2H 08FY (19) Given current market environment a book loss of $9m was recorded in relation to the sale of property in Aust/NZ 4 FUN mark‐to‐market reduced given sale of shares during 2H 08FY 11 See note 1 6 Project cost write‐offs have been re‐classified as impairment and are included below 7 (15) Impacted by not achieving expected gains in half year ending June 2008 for wages and occupancy levels 2 See note 2 (8) Impacted by higher operating costs, slightly lower occupancy levels than expected and slow‐down in acquisitions given sale process 1 Better than expected operating performance due to tighter cost management (20) Additional non‐recurring adjustments to EBITDA guidance Non‐recurring impact on Aust/NZ EBITDA (27) Unrealised late delivery fees, back pay of salary increases granted before 2H 08FY, increased professional fees Payroll tax settlement payments and provisions (33) See note 3 Other debtor write‐offs Additional adjustments to Profit Before Tax (8) Sundry debtors (68)
Expected impairment of intangibles (80) Expected impairment of childcare licences, management agreements and software Impairment of investments, loans, receivables and buildings held for resale (34) Impairments of various investments, loans granted and assets held for sale as well as project cost write‐offs Depreciation and amortisation (14) Revision of asset register following implementation of improved accounting practices (also see note 4) Net interest expense Prior year adjustments (pre‐tax) 07FY earnings adjustment (19) 07FY expected to be adjusted for revised treatment of the cash received from the sale of 123 Rights (minus $11m, see note 2), unwinding of RMC structure (minus $5m, see note 1) and depreciation revision (minus $3m, see note 4) 06FY and prior earnings adjustments (34) Earnings in 06FY and prior years are expected to be adjusted for revised treatment of the cash received from the sale of 123 Rights (minus $30m, see note 2), unwinding of RMC structure (minus $2m, see note 1) and depreciation revision (minus $2m, see note 4) (4) Higher than expected net interest expense given higher draw down and consent fee on US sale (132) Note 1:
The total restructuring charges and associated costs relevant to the unwinding of the Regional Management
Companies ("RMC") structure are expected to amount to $27m (compared to previous estimate of $30m).
Based on accounting advice these charges should be allocated over 06FY ($2m), 07FY ($5m) and 08FY
($20m). The pre-tax earnings for 06FY and 07FY have to be adjusted downward accordingly.
Note 2:
In 2006, the RMC’s operated by ABC sold the rights to provide labour to its Aust/NZ centres for a period of
10 years to 123 Careers for $46m. This amount was recognised as income of $30m, $14m, $2m in 06FY,
07FY, 08FY respectively being the years in which the cash was received. Accounting advice requires the
income to be amortised over the 10 year term of the contract which implies a downward adjustment to
historical pre-tax earnings of $30m in 06FY and $11m in 07FY. In turn, the pre-tax income in 08FY will be
$2m higher than expected because of the inclusion of the deferred revenue amortisation.
Note 3:
The Commissioners for State Taxation (except ACT) have taken a view that ABC controlled the directors of
each of the RMC’s. The consequence of this grouping would be that only one pay-roll tax deduction may be
claimed in each State to reduce the level of taxable wages for the group. ABC has agreed to pay a total of
$4m in relation to a settlement in NSW in June 2008 of which ABC is disputing $775k of penalties. While
ABC is disputing the additional claims, the company has decided to provision $29m reflecting the total
amount claimed including disputed tax ($18m), interest and penalties ($11m) in all States.
Note 4:
Based on accounting advice, ABC changed its accounting principles for the recognition and depreciation of
toys and equipment which implies a downward adjustment of historical pre-tax earnings by $3m in 07FY and
$2m in 06FY.