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Tough new rules on staffing levels have hit the bottom line of Australia's largest listed childcare centre operator G8 Education (ASX:GEM) which posted interim earnings of $23.7 million for calendar 2018.
The net result is down 22 per cent from a year earlier, despite an 8 per cent lift in revenue to $396.4 million.
The revenue increase included contributions from acquisitions and new centres as well as fee increases.
However, underlying EBIT of $48 million was 21 per cent down on the previous corresponding period due to lower occupancy and higher wages.
The share market reacted strongly to the profit result, marking G8 shares down more than 15 per cent.
G8's managing director Gary Carroll describes the implementation of the government's Jobs for Families Child Care Package as the 'biggest change to the industry in recent times'.
He says while underlying EBIT was hit hardest in the first quarter through the increase in staff ratios, G8 had focused on improving operational efficiencies over the first six months of this year.
"Management of wages and rostering improved materially in Q2 and the changes are not expected to have any material impact in (the second half)," he says.
Oversupply concerns in the sector were reflected in G8's average childcare centre occupancy dropping 2.5 percentage points, on a like-for-like basis, during the half year.
Carroll says there are signs of improvement in the current period with July occupancy up 2.2 per centage points to 74.5 per cent.
"August has continued this trend, with occupancy growth ahead of last year's levels" he says.
Carroll is confident G8 will benefit from the new childcare subsidy introduced on July 2.
"While occupancy growth in July and August is encouraging, and demand is forecast to improve as a result of the new childcare subsidy, the combination of supply conditions and regulatory change is unprecedented," he says.
"Notwithstanding continued improvement in quality and capability, we are not forecasting a material improvement in market conditions until mid to late 2019."
As a result, G8 says it is taking a conservative view to forecasts of occupancy growth over the current half year.
"Our base assumptions are for similar year-on-year trends in occupancy growth to continue for the balance of the year," says Carroll.
G8 lifted childcare fees by 5.5 per cent on July 1, which coincided with wage increases of 3.5 per cent.
G8 also completed construction of seven new childcare centres during the half year and is targeting a total of 12 new centres in calendar 2018 and a further 16 in 2019.
In view of the regulatory changes to the industry, G8 plans to update shareholders on its trading performance in late October or early November.
The company is paying an interim dividend of 4.5c per share fully franked.
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