Q4 2019 Earnings Call
[music].
Good morning, ladies and gentlemen, welcome to the Extendicare Inc. fourth quarter Conference call. Please be advised that this call is being recorded.
I'd now like to turn the meeting over to Miss Jillian Santander. Please go ahead Mr. Johnson.
Thank you Kate.
Thank you good morning, everyone. Welcome to extend occurs fourth quarter and year end 2018 results conference call with me today is extended <unk>, President and CEO, Michael Grier, and senior VP and CFO David Baker.
Our 2019 fourth quarter results were disseminated yesterday and our available on our website along with a supplemental information package. The audio webcast of today's call is also available on our website along with an accompanying slide presentation, which viewers me that's itself.
A replay of the call would be available later this afternoon until March 13th.
A replay numbers and passcode have been provided in our press release.
As well and archive recording of this call will be available on our website.
Before we get started please be reminded that today's call may include forward looking statements regarding our future operations.
Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today.
We've identified those factors in our public filings on SEDAR, we could securities regulators and suggests that you refer to those filings.
As we discussed our performance. Please bear in mind that all figures are in Canadian dollars unless otherwise noted.
With that I'll turn the call over to Michael.
Thanks, Joanne and good morning, everyone.
In the fourth quarter 29 team, we continued to advance our strategy for sustainable long term growth.
With our long term care operations continuing to provide a stable base, we expanded our retirement living operations with the opening a new 124 suite community in very Ontario, which continues to experience very strong demand in that market.
We also continue to advance our plan to expand our Empire crossing retirement community and Port hope with the construction starting in the second quarter. This year.
The S.G.P. network continued to show strong growth during the quarter, bringing on a number of new customers increasing the number of seniors covered by our services to 64800 at the end of 29 team up 26% year over year.
Progress continues on our Paramesh transformation with 95% of our targeted volumes now on the new I T platform.
With the only our Alberta operation left to migrate to the new platform and 2020.
We continue to enhance our operations to provide excellent care to the growing number of Canadian seniors wherever they need it as they age and that's their care needs change.
Our growth efforts are supported by a strong market demand enabled by continuing investments in our people and technology.
Turning to slide four and our pyramid business, we successfully completed our transition out as a negative margin BC home health market in January 2020.
This transition and tailed the transfer of 1100 employees and over 1 million home care hours to the BC health authorities.
This transition now removes the adverse impact of the BC operations on pyramids profitability going forward.
In 29 team, we focused on delivering high quality services, while upgrading our systems to improve our ability to meet the increasing demand for home health care.
The new platform is automating work processes to improve scheduling reduce staff turnover and provide better support for our staff is they deliver services.
In the fourth quarter, we made good progress in our implementation ending the year with 89% of the targeted volumes converted to the new system.
This progress its continued in 2020. So today, we have migrated 95% of our volumes with only Alberta remaining.
We expect to complete the implementation within the original project budget of $12 million.
The new system, coupled with optimization of the operations will drive volume increases this year with margin improvements coming later in 2020.
As we implemented the software we added to our back office staff in preparation for the plan to increase in volumes.
This investment in our long term infrastructure sets us up for future success. However, the associated costs compressed into why margins over the course at 29 team.
As we build our volumes to deliver all the home care referrals coming our way, we expect our margins to return to historical levels in the medium term.
Moving to our long term care operations on slide five.
LTC continued to provide a strong foundation for our business.
The average occupancy at our homes remains stable at over 97% for the quarter ended the year.
Funding enhancements during 2019 helped drive an increase in revenue in the fourth quarter and are in a wide margins remained consistent.
Both the Ontario in Alberta governments are undertaking a review their long term care operating funding models with a view that potentially reduce costs and improve system performance.
Extendicare together with provincial industry associations continues to be actively engaged in those discussions in respect of the funding models.
As part of the funding changes the Ontario government indicated last year plans to eliminate the structural compliance premium funding for eligible beds effective April 120 20.
This represents funding of $1.3 million annually for Extendicare.
Discussions are ongoing with the government about this reduction.
In addition, we continue to work closely with the Ontario government to advance the long term care building program, including possible changes to the application of licensing process and the capital funding subsidy.
The critical state of long term care in the pressing need for additional beds to address the hallway medicine problem faced by hospitals keeps this issue at the forefront of the public policy agenda.
We are optimistic that the collaboration between the industry and government will enable the changes needed to get construction underway.
Extended care as projects are in various stages of planning and approvals, but none are currently under construction.
We continue to focus on planning until we have greater clarity on the financial and other aspects of the program.
Now turning to retirement on slide six.
This segment performed well in the fourth quarter, showing revenue and then Hawaii gross and stabilized occupancy averaging 94.9%.
And 2019, we grew our retirement living capacity by almost 30%, adding 236, new suites, including the very view retirement community, which opened in October.
Based on the strong presale activity and the initial occupancy levels at this property, we expect to achieve stabilized occupancy of 95% by the end of this year much earlier than originally anticipated.
Plans of advanced at our Empire crossing retirement community in Port Hope, Ontario for a 59 suite expansion.
We expect to break ground in the second quarter 2020.
On to slide seven or assist contract services and group purchasing services continue to show strong growth with 7% revenue growth in both the fourth quarter and for the full year.
At the end of 29 gene SGP together with our partners provided cost effective products and services to approximately 64800 senior residents across Canada.
In January we were delighted to welcome Anikas senior lifestyles, another outstanding senior care organization to join our client roster, bringing our coverage to approximately 71600 residents as we start the new year.
We continue to develop opportunities to expand as GP and assist through additional services in product offerings and by expanding the geographic reach of our sales team.
With that I'll now turn to David Bacon, our Chief financial officer to provide insight into our financial results for the fourth quarter David.
Thanks, Michael.
First provide an overview of our overall corporate financial performance for the fourth quarter in the year and provide some highlights of the individual business segments.
I'm sure any floors to slide nine at our results revenues grew 0.7% in Q4 and 1.1% for the year largely driven by long term care funding enhancements growth and the retirement segment as well as retroactive Bill 148 home health care funding received in the second quarter, partially offset by the decline.
In home health care volumes.
Net operating income in Q4 was unchanged compared to Q4, 2018, reflecting higher revenues and the impact of labor accrual adjustments offset by lower home health care volumes increased back office operating costs.
Net operating income for the year was down 0.4%.
As a result, our NOI margins were lower by 10 basis points in Q4 at 11.3% and by 20 basis points for 11.8% for the year.
Adjusted EBITDA increased modestly in Q4 due to lower administrative costs adjusted EBITDA for the full year was down 3.1 million or 3.3%, reflecting the year over year decline in Hawaii and increased administrative costs in part due to the Paramount transformation.
Adjusted EBITDA margins for the full year were 8% down from 8.4% in 2018.
Hey, AFFO in Q4 decreased by 1.2 million to 11.4 million compared to Q4, 2018, driven by higher maintenance Capex and interest costs, partially offset by lower current taxes for the full year, our AFFO declined by 5.2 million or 8.9% driven.
By the earnings decline and increased interest costs.
Our dividend remains an important way to return value to our shareholders and in 2019, we declared dividends of 42.7 million, representing a payout ratio of 81% compared to 73% in 2018.
Turning now to slide 10, and as with prior quarters, we have summarize some key factors that impact the comparability of Q4 and 29 team to their respective comparative periods.
Our Q4 in 2019 results were impacted by Bill 148, retroactive home health care funding received in Q2.
Severance costs in Q3, the pyramid transformation and the impact of I FRS 16.
In Q4, our results were impacted by favorable label accrual another year and adjustments of 0.9 million in Q4 zero point Sixmillion for the full year, 2019, which primarily impacted our LTC results.
The net impact of these factors led to an increase of 0.9 million in Hawaii and 1.2 million in adjusted EBITDA, when comparing Q4 2019 to Q4 2018.
Turning now to slide 11 briefly adjusting for the factors that I've just outlined our consolidated at Hawaii is down by 2.7% in Q4 and 2.4% for the full year and margins are lower by 40 basis points in both Q4 and for the full year 2019, which reflected the client.
Paramount volumes and NOI margins offsetting the growth in long term care and retire.
Similarly, adjusted EBITDA was down by 3.1% in Q4, and 6.9% for the full year over 2018, reflecting the drop in Hawaii and higher administrative costs.
Adjusted FFO for the full year would be 55.3 million down 11.2% from 2018, and our payout ratio for 2019 would be 77% as compared to the 81% as reported.
Turning now to our individual business segments, and first were home health care operations on slide 12.
When we exclude the impact of the previously noted factors in Hawaii from our home Health care operations was 6.9 million for Q4.
18.1%, largely driven by lower volumes and higher back office operating costs. The NOI margin was 6.5% for the quarter compared to 7.7% in the fourth quarter of 2018 as lower volumes and increased support staff decrease their profitability.
Volumes from our home health care operations declined by 3.2% in Q4 and 3% for the full year.
While volumes were down year over year, we did see a modest sequential increase of 0.3% in Q4 as compared to Q3 of 29 team.
As Michael noted we completed the successful exit from BC in January.
All right NOI margins in 2019, excluding DC would have been a 110 basis points higher or 8.7% for the year.
In addition, our total volumes for 2019, excluding DC would be approximately $9.3 million.
Turning now to our long term care operations on slide 13.
After adjusting for the factors impacting comparability. Our Q4 2019 revenue grew by 2 million or 1.2% that our NOI increase by zero point, threemillion or 1.7% compared to Q4 2018, and then why margins were 11.5% up slightly from 11.4% in Q4 two.
18.
And why growth was driven primarily by Ontario flow through funding level of increases offset by increased cost of residents care at higher operating in labor costs.
Why margins for the full year after adjusting for the factors impacting comparability were 11.9% from 11.5% in 2018.
Turning now to our retirement segment on slide 14.
Net operating income from the retirement living operations increased 0.7 million worth 31.4% to $3 million in Q4 compared to Q4 2018.
This improvement was primarily driven by growth in our average occupancy from same store operations to 95.8% in Q4 compared with 88.3% in Q4 2018.
Partly offset by early lease up and Preopening losses from our non same store retirement communities.
Our strong lease up activity continued in the fourth quarter and to retirement communities Douglas crossing in New York and crossing were classified as stabilized having achieved targeted occupancy levels.
Stabilized occupancy at year end of 95.1% up sequentially by 100 basis points from Q3 2019.
Turning to our final segments, our assistant SGP business revenue increased more than 7% for the full year with gross growth in resident served by SGP growing more than 26% year over year.
I know why from the contract service consulting group purchasing operations declined slightly in line with expectations, resulting in the NII margin of 55.7% for Q4 and 55.5% for the full year as back office costs were increased in 2019 to support the growth experienced in the past two years.
As well as the increased volumes coming online with new customers added.
Yeah anyway, which included Amica, which brings our total residence now serve to over 71000.
Finally, turning to our financial position on slide 16.
The company's consolidated cash and short term investments at year end were 94.5 million and the company has approximately $65 million available to draw under its credit facilities.
In Q4, 2019, we repatriated U.S. 10 million of cash from the captive and subsequent to year end of initiated a further repatriation of US 7 million, which we expect to receive in the second quarter.
Our interest coverage in debt to gross book value metrics remained strong at year end at 3.1 times, and 49%, respectively, and our debt maturity profile as well positions with that I'll pass it back to Michael for his closing remarks.
Thanks, David.
The changes, we're making to our business are part of our strategy to drive sustainable growth and profitability.
2019 was a transition year for our apparel met operations.
With the transformation project now almost complete our exit from the BC home health care market behind US, we expect to drive growth and performance improvements in this segment than 2020.
These changes combined with our solid long term care operations continued growth in the system Thats GP and lease up activity in the retirement segment position us for sustainable value creation for our shareholders and 2020 and beyond.
Our dedicated team members are focused on improving the quality of care, we deliver to meet the needs of Canada is growing seniors population.
With that we'd be happy to take any questions you may have.
Operator.
Thank you, we'll now take questions from the telephone line. If you have a question and you're using a speakerphone. Please limit your handset before making your selection.
You have a question. Please press star one on your telephone keypad, if at any time you wish to cancel your question. Please press the pound fine. Please press star one at this time if you have a question there will be a brief pause while the participants register for questions. Thank you for your patience.
And our first question is from how well Lee from National Bank Financial Your line is open. Please go ahead.
Hi, good morning.
I'd now.
Just wondering if we could talk a bit about the the flu season and everything that's going on obviously related to that.
Can you just talked about what you're sort of internal view is and what sort of preparedness steps are taking right now.
So why would you say flu season.
Looking about the Kogut 19, Im tired both I think so just the how is the current sort of I don't know with the Wright medical term is the traditional flu season, those and then maybe if yeah, we could just talk about.
The cobot stuff too because it is coming up a little bit with clients sure.
Yeah. So.
On the flu season front, it's pretty much been power for the course this year.
Weve side.
You know, we're starting to be in that down.
The.
The down slope of the season as we get into the spring.
So it's it's not been anything different from what what we've seen in the past.
As far as the though the co that.
19 story.
No I don't want to understate the significance of this virus, but.
We also shouldn't be alarmist about it either.
You know, we're dealing with a new pathogen that has a profile that is very similar to influenza.
The only difference is the absence of a vaccine, which which does make it a danger for our residents and clients.
But we have very well developed protocols for dealing with respiratory outbreaks and these are ideally suited for the Kogut 19 prevention. So the team knows what to do and and so we're continuing to do it.
It certainly looks like the likelihood of community transmission in Canada is becoming more probable as we watch things play out around the world. If so we're prepared to ride it out as we do every flu season.
The one additional consideration.
I'd point out is the possibility that the hype around this new virus results in increased absenteeism, among our staff, but the fact that it you know, it's generally a mild illness and otherwise healthy adults should help to mitigate that that risk. So.
In our view, it's it's it's it's very similar to.
To influenza in its and its and its profile and and what we need to do about it the thing that makes it more difficult is watching the news coverage everyday and.
And the hype associated with it.
Okay.
And then just looking at the Sep Sep business.
You've made strides on the revenue front when should we expect to see the NOI returns or growth after the investments.
I think right away so.
We made those investments.
And.
There were seeing at 55% margin now, it's a little bit lower margin than we've seen in the past, we've really made a decision to trade off.
A little bit of margin for faster growth and that seems to be playing out.
Much the way, we expected with you know significantly larger client base now I and we have a significant pipeline of additional.
Potential clients due to join that business. So I think our our growth going forward will show the same margins that that we've seen in the past and so you'll see.
The annualized growing in tandem with the revenues, Okay, and then just lastly.
A lot of the focus and the retirement business has been on completing development and leasing them up.
But you would certainly be getting into renewals at a lot of several of your facilities.
What is the rent growth.
You're trying to seek right now.
The retirement.
Retirement business.
Yes, so David hotels are as David here, so in from a from a rent perspective.
You are looking into sort of in the 2% to 2.5% range overall across our portfolio, obviously, Ontario, Mark is a little different thats. The Scott you want on that front, but on an overall basis, that's sort of the range.
Okay perfect. Thank you very much.
Thank you.
Our next question is from Lauren Calmar from TD Securities. Your line is open. Please go ahead.
Thanks, Good morning.
I learned onboarding.
So there was a in regards to the Ontario government announced let me back on ending February 25th could you give a little bit more color on the impact that may have on.
Health business if any.
Yeah sure sure so.
The absence of that legislation is too.
Recreate.
The or isolate the old CETAC structure and spin it out from the New Ontario House Agency.
Into a separate organization.
Yes.
The regulations under that legislation have yet to be drafted so the details.
I will be important anywhere in the midst of a consultation process now around that so.
There's lots of opportunity for for the industry to have input into that.
Into the drafting of those those regulations I think the key elements of the legislation is that it continues the contract services model that we've been operating under for a long time.
What it does though in shape in terms of changes is introduces flexibility and where coordination can can be provided that's been provided in the linzer the CCH fees.
Hi consistently up until now and the legislation makes it more flexible so that hospitals in primary care could could could provide that.
We see that is as.
Helpful and providing closer collaboration with hospitals and doctors offices.
From a home care perspective, but we don't see it having a material impact.
On our business.
There is also language there about removing caps on services, but it's unclear how this will work within the Prudential budget framework. So.
It sounds good from a volume growth perspective.
But until we see what those regulations are it'll be very hard to interpret.
So in in short I think its.
A.
Another sort of incremental staff and evolving the home care business. The emphasis is on stability and incremental change I think it'll take time for any of these changes to have any kind of significant impact.
In the industry and in particular, I don't think it'll have any.
Packed in 2020, and we'll start to.
I will start to see some some influence on them on the market in 2021.
I think Nat.
Lauren I think it will be positive for us.
The investments we've been making in our cloud based solution make us the only large homecare provider in the province on a cloud based platform.
It positions us very well for integration with hospitals and doctors offices and other providers, we think will struggle with that because they have not made the investment to move to a cloud based solution. At this point. So we think were strategically well positioned to take advantage of any opportunities that come into the market as a result as the government.
[noise] changes.
Okay. That's great. Thank you for the color.
And then just sticking with Paramount have you guys seen any uptick for improvements in.
Recruiting.
We have in fact.
And one of the things that that were moving forward with.
Is creating an in house training program to build.
Our own.
Capabilities, we've launched that now in a couple of our districts.
We're also cooperating with some of the other homecare providers in the province, and we're actually sending.
Some of our staff to their training program. So there's a lot of.
Cooperation across providers, so I'm quite optimistic about how that's going to.
Help us to build up the team.
Okay sounds like a two pieces the good news on that front.
And then just lastly from me when do you guys expect to have that port hope expansion done.
Yes, the we're looking to break ground in the spring So April dependent on the timeframe.
It's about up 14 to 16 month construction plan.
And then we looking at leasing up two years thereafter.
Okay, great. Thank guys, so much I'll turn it back.
Thank you. Our next question is from Josh Finco from Laurentian Bank. Your line is open. Please go ahead.
Hi.
Good morning mining area.
So what kind of volume growth are you seeing in your home.
Division over the last two months.
Wow.
Yes, I think where where.
We are seeing some growth.
But at this point.
I'm not prepared to quantify it but I think we are.
Seeing what we expect.
Two.
To see as result of of having built the new system.
As as I've mentioned in the past, we always have kind of a six month proving in period for that you know for each district to.
Get used to the system and and.
Implement all of our standard operating procedures.
So.
That continues to do behave as expected.
So I think we'll be seeing.
[music].
The results of those those investments as we proceed through 2020.
Okay.
Alright.
Do you think your.
Vince.
Would be in Q1 on Q2.
Okay.
Well, maybe at the current level.
Then.
Assuming no onetime items.
Ill.
So couple of things I'd say on that on that front, yes first.
You are going to get that the impact of the the exit from BC. So we'll see a significant.
As a change in the margins as a result is bad and David David quantified that that impact earlier.
The.
Other point to make it here is that.
The back office investments that we need to handle the additional volumes have been made so as as volumes increase we're going to hold the back office costs steady and you'll see there for the margins expanding in tandem.
As you know as has the volumes increase so it's really only our variable costs of delivering the service in the home that will be going up as our volumes go up.
Because our back office investments have all been made and they've been trained on the new system. So we're ready to go.
Okay on that point I'm confused so you have installed this new student.
Machine our software.
But you're wanting more stuff for.
Am I missing something.
Well, yes, there's there's there is there our efficiency gains as a result of it yes, but nevertheless, where we're looking at at putting a staff in place to.
Handle the underlying market growth, which is about 4% a year.
Plus closing the gap in terms of all of the referrals that we're receiving that were not able to deliver today.
So there's a pretty significant volume increase that's.
Ah that's required.
You know two to meet that you know to meet those those demands in the market.
So so that's.
That's why we still need at some investment in the back office.
How many people I'm talking about.
No incremental stop after.
Having as Sean Mushy.
Software.
That's that's not a number that we've precisely shared with the market in the past the ash I mean, I think you can infer it from.
From from our cost structures.
And.
I think you can infer it from a you know what we think are are.
You know our ultimate margins will be already returned to historical margins.
Okay.
Moving on to the LTC funding.
The discussions.
What have you.
He was able to quantify the impact that you see these changes will make you a and B C.
And I.
Sorry to quantify which impacts yes, so both <unk> and Ontario Goldman Charger.
Moving down a funding model right.
Right.
Yes, they're both theres nothing concrete from either Alberta, or Ontario on on the funding models.
Specifically.
What I can say is what we think about 2020.
As we as we indicated I think in Q3, Alberta.
Has.
Frozen funding for Hs, so from a from an outlook for rate increases in Alberta, We don't expect anything in 2020 from a from a care funding perspective, there will be some modest accommodation increases most likely.
And Ontario.
Nothing unusual at this point they are.
It is expected for 2020 and the the funding changes that they're looking at.
On the operating model, we don't really have anything concrete as to what their contemplating on that front and obviously, we've been working quite heavily with the ministry on the capital funding side on the redevelopment, but again nothing concrete on that front.
Okay and have you.
Hello to anything on the long term.
The program.
Anything.
Okay.
So yes, we've we've got nothing new to report at this point.
I will say that there's been a significant collaborative dialogue between the industry players.
Good long term care Association, and the Ontario government.
It's been going on for quite a few months. So we're we're very confident that the government understands the challenges faced by the industry. So we're optimistic about the future the redevelopment program, but we'll wait for further clarity before deciding how and when to proceed with with our 21 seabed.
Contracts.
Okay, and just one one more question.
What kind of services is Ami.
Using from a GP division.
Just bulk purchase or anything else.
No it's about above purchasing.
That I mean, that's that's what SGP does it's the assist side is that the business that provides other contract services, but at GP is just purchasing.
Okay. That's it for me thank you.
Thank you had.
Thank you. Our next question is from Chris who free from CNBC. Your line is open. Please go ahead.
Morning.
Hi, Chris Hey.
So last last quarter I asked if the rate of decline year over year in Paramount It was going to improve sequentially and you said you said basically yes, so what happened I guess.
Between the than what the conference call and ended the year.
Well not nothing happened I mean, the Q4 volumes were about.
0.3% higher than Q3, so I'd I'd sort of a quarter over quarter basis.
But.
That quarter is always a little softer because as and from a volume perspective, because it is a holiday.
So.
So we typically see little softer so we were.
You know, we were happy to see a quarter over quarter increase despite the seasonal.
Softness is there.
So.
You know from our perspective, where we're on track for the growth agenda, we're trying to achieve.
And then with respect to the investment that you've made into the into the business.
I recall you guys also made an investment.
Q4 of the prior year with that kind of objective that we're investing in anticipation of volume growth. So what is this I guess as new investment.
And well I guess what's changed.
Well, so we've been making those investments district by district as we go through.
Through you know across the business.
So as we put in the new computer system, we are re factoring the staff in in each office.
And setting it up for the volumes that we are targeting in the market.
So it was just a matter of continuing that effort and applying it flying that model.
To the districts that we implemented in Q4.
Okay. So if I'm looking at trying to see them looking at this correctly in terms of the.
The incremental investment.
Aid.
About $2 million to $3 million that sound about right.
Incremental how are you getting that number Chris.
Looking at the change in a normalized opex sequentially.
For full year.
Quarter over quarter.
Yeah, I don't I mean, it wouldn't be.
I'm not sure how you don't think stuff.
We can take that take that offline.
Okay, and so just in terms of the the labor.
Attrition rates I know you were making some progress last year.
How how to tower things looking kind of as you as you on the air.
That's that's about the same.
Okay.
Chris I look at that from sort of Q3 Q4 has been has been fairly consistent.
We still think there's some opportunities to improve it further but.
ER Q4 wasn't really much different from from Q3 in that regard.
Okay.
I think that's it for me thanks.
Thanks, Chris.
Thank you once again, please press star one on your telephone keypad. If you have a question.
[noise] once again, please press star one on your telephone keypad, if you have a question.
[noise] there no further questions I'd like to turn the meeting back over to Chilean Santander.
Thank you Kate.
That concludes our call for today. It's presentation is available on our website as are the call in numbers for an archive recording Pete.
Let's take it gives us the coffee have any further questions.
Thanks and have a good weekend.
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