Q3 2022 Extendicare Inc Earnings Call
Thank you for standing by this is the conference operator welcome to the extended care, Inc. Third quarter 2022 Analyst Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
I would now like to turn the conference over to Jillian Fountain, Vice President Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone and welcome to extended care third quarter 2022 results conference call.
With me today are president and CEO , Michael Greer, and our senior Vice President and CFO David Bacon.
Our Q3 results were disseminated yesterday and are available on our website.
Yeah, you're a webcast of today's call is also available on our website along with an accompanying slide presentation, which viewers make JAKKS itself.
A replay of the call will be available later this afternoon until November 25.
The replay numbers and Passcodes have been provided in our press release.
And an archived recording of this call will also be available on our website.
Before we get started please be reminded that today's call may include forward looking statements such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today.
I've identified such factors in our public filings with the securities regulators and suggest that you refer to those filings.
With that I'll turn the call over to Michael.
Thank you Dan and good morning.
Before we begin on November 11.
It is important that we take a moment to acknowledge and remember those who have served our country.
And had the courage to defend our shared ideals and values in the face of a men's personal risk.
And our capacity is as seniors care provider. It has been our profound privilege to know and serve many veterans the sacrifice much to defend our freedom and way of life.
Today, we honor those euros for their service to our country and remind ourselves that we owe them, our gratitude and respect.
Now, let's turn to our results for the quarter.
Our sector continues to be impacted by multiple challenges.
COVID-19 remains an ever present concern in our homes, even as our society moved on from pandemic related restrictions.
High levels of Covid transmission in the community continue to result in outbreaks in our homes.
These outbreaks drive higher costs related to infection control and slow the pace of our occupancy recovery.
Also increased sick leave due to infection or isolation protocols exacerbates sector wide staffing challenges.
Fortunately widespread vaccination has dramatically reduced the incidence of severe illness.
The introduced introduction of bi valent Covid vaccines in September offers a new tool to protect our residents and uptake of boosters continues to be robust.
Throughout the quarter most of our homes experienced an outbreak.
As of yesterday, well of our 53 long term care homes, where an outbreak.
The shortage of caregivers continues to create challenges for the whole health system.
In home health care record low unemployment and labor shortages are making it difficult to grow average daily volume. Despite the continued strong demand for our services.
Staff shortages are also driving increased costs from higher wages and benefits overtime and travel costs.
Increased spending on recruitment retention and training is also adding to pressure on our home health care NOI margins.
We continue to invest in educating new caregivers through college partnerships and in house training programs.
In addition, various provincial and federal government programs are providing funding to increase staff capacity.
However, it will take time for the impacts of these programs to be felt.
We will continue to incur elevated COVID-19 related costs in our ongoing efforts to protect our residents patients clients and staff until the threat of the pandemic has abated.
We have received funding to cover 90% of these costs, leaving the accumulative unfunded COVID-19 costs from continuing operations at $22 $9 million.
As of the end of Q3, the Ontario Ministry of long term care had fully allocated all the prevention and containment funding. It is in house today.
While additional funding has not been announced yet.
We expect provincial support for Covid costs to continue as long as outbreaks persist across the LTC sector.
Alberta, and Manitoba has already indicated their intention to continue to provide pandemic funding support for the foreseeable future.
While we are grateful for the support we have received we will likely continue to experience volatility in our financial and operating results until pandemic impacts receipt and the labor market returns to a more balanced state.
Turning to slide four in October we completed the transition of ownership and operations of our five Saskatchewan long term care homes to the Saskatchewan Health Authority.
The aggregate purchase price of $13 $1 million will result in a gain on sale net of taxes and closing costs of approximately $4 $9 million in Q4.
Work continues to prepare for the close of our previously announced transactions with Rivera and axiom.
These transactions will enable us to transition our long term care operations to a more capital efficient platform for growth.
Regulatory approvals in Ontario, and Manitoba are still in progress.
In the meantime, we are working with Revere and axiom on a comprehensive integration plan to ensure a smooth and expedient transition following approval.
We have incurred approximately $5 $2 million year to date in strategic transformation costs related to these activities.
The aggregate consideration to be paid on closing of these transactions remains an estimated $70 million.
At the same time, we continue to return capital to shareholders by purchasing shares under the NCI V that we initiated in June following the completion of the sale of our retirement living segment.
As at November nine we had purchased for cancellation approximately $3 6 million common shares at a cost of $25 $5 million and representing a weighted average price per share of $7.08.
Moving to slide five we continue to make progress on our 'twenty long term care redevelopment projects, which represent 4248, new or replacement beds.
Three of these projects are currently under construction and are progressing toward opening between the third quarter of <unk> 23 in the first quarter of 24.
Labor shortages and supply chain disruptions did delay our Kingston project into Q4 'twenty three.
And rising construction cost and interest rates have made it challenging to start construction on any additional projects.
We remain fully committed to redevelop being our older sea bed homes.
We are actively engaged with industry partners and the Ontario government to enhance the government's capital funding program to address construction inflation and make these projects economically feasible.
We are working to have up to six more projects ready to break ground before the end of 2023, if business conditions are favorable.
Now I will turn to a few operational highlights on slide six.
Despite the prevalence of Covid in the community and outbreaks in our homes long term care average occupancy improved 90 basis points in the quarter.
While navigating the challenges of the pandemic and the tight labor market. We are also faced with inflationary pressures that are significantly impacting our operating costs.
Funding rate increases have lagged inflation in our long term care segment negatively impacting our financial performance without D. C. NOI margins down 230 basis points from the prior year.
And our home health care segment, and extremely tight labor market combined with ongoing pandemic related staff absenteeism and seasonal impacts.
Resulted in lower average daily volumes of 25% on a sequential basis.
And our S. G P customer base, we continued to see strong growth during the quarter up four 7% from Q2 and up 21% year over year.
The pandemic continues to cause volatility in our results with ongoing mismatches between costs and funding.
And <unk> related spending increased during the quarter to $22 $5 million.
400000 from Q2 as outbreaks continue in our long term care homes throughout the quarter.
Our COVID-19 costs were largely funded.
And included $1 $1 million for the prior year, resulting in net unfunded costs 500000 in the quarter.
With that I'll turn it over to our CFO , David Bacon, who will comment on our consolidated and segmented financial results for the third quarter.
David.
Thanks, Michael.
I'll start by providing an overview of our consolidated results for the quarter, followed by some financial highlights of our individual business segments and our liquidity position.
As a reminder, our retirement living communities that were disposed of in May and the Saskatchewan long term care operations sold after quarter end have been classified as discontinued in our financial results.
This quarter, we reported $3 6 million in costs related to the strategic transformation of the company in connection with the Rivera and axiom transactions.
Bringing the total cost to date to $5 2 million.
We've reported these costs as a separate line item in other expense and we'll continue to track. These costs on a go forward basis, which will be excluded from <unk> and EBITDA.
Turning now to slide eight and our consolidated results.
We continue to receive Covid funding support under various provincial programs.
Our net unfunded COVID-19 cost impacted our consolidated adjusted EBITDA continuing operations by 500000 this quarter.
On a year over year basis, our consolidated revenue increased eight 7% or $24 6 million to $308 $9 million.
This increase was driven primarily by long term care funding enhancements, including funding for additional hours of care timing.
Timing of spending and the flow through care envelope.
Home health care billing rate increases and growth and other operations.
This was partially offset by lower Covid funding support of $9 million and a one 2% decline in home health care average daily volumes.
NOI decreased by 18, 9% or $5 5 million to $23 5 million with a margin of seven 6% compared to 10, 2% in the prior year quarter.
Driven by higher operating costs across our segments lower home health care daily volumes.
At a net increase in unfunded COVID-19 costs of $1 3 million.
Our consolidated adjusted EBITDA decreased 40% or $6 8 million to $10 million due to the lower NOI and increased administrative costs $3 million.
Yeah.
<unk> per share was <unk> <unk> in Q3 down from 11 cents per share in the prior year period, reflecting.
The decline in earnings, including the loss of approximately <unk> <unk> per share from the disposed retirement living segment and higher maintenance Capex.
Turning to our individual business segments on slide nine long term care operations saw revenue increased by $16 6 million or nine 5% in Q3, driven by funding enhancements and timing of flow through spending, including $19 5 million in Ontario flow through funding.
This was partially offset by lower Covid expense funding $4 6 million.
NOI decreased by $3 million in Q3 to $13 9 million and represented seven 2% of revenue.
Excluding a reduction in COVID-19 recoveries of $1 1 million NOI declined by $1 9 million, reflecting the significant inflationary impacts on operating costs, including labor utilities supplies and insurance. These.
These inflationary impacts have not been offset by sufficient increases in funding, including the lack of an OE rate increase in Ontario long term care in April of this year.
Our NOI margins adjusted to exclude the impact of Covid were seven 8% compared to 10, 1% in Q3 of 2021.
In addition to the inflationary pressures margin percentages are down approximately a 100 basis points from the impact of the Ontario flow through funding increases.
Including the phase in of the four hours of care and the now permanent $3 per hour wage increase for <unk>.
The persistence of outbreaks is hampering the pace of our occupancy recovery in long term care.
But the removal of occupancy protection, Ontario earlier. This year, we are required to achieve 97% occupancy for the 11 months ending December 31 2022.
Excluding closed word style beds no longer in use and isolation pits.
On this basis, our average adjusted occupancy for the eight months ended September 30th.
Its 96, 5% up 50 basis points for the five months ended June 30.
We continue to track a handful of Ontario long term care homes that may not fully recovered to the required 97% and have recorded an $800000 reduction in NOI for the shortfall in our year to date results.
In August the Ontario government confirmed its plans to permanently close third and fourth workstyle beds and announced its intention to phase out funding over two year period, starting in 2023.
We have a 185 word style beds in Ontario of which 76 will be reopened when they are replaced by single rooms that are new Kingston Sudbury of projects currently under construction.
We estimate the potential NOI impact in 2023 of the proposed Workstyle funding reduction to be approximately $1 1 billion.
Turning to slide 10.
Revenue in our home Health care segment grew $5 7 million or five 6% in Q3, driven by billing rate increases and additional funding to support the government's permanent wage increase for P. S. W.
The increase in revenue was partially offset by lower Covid endemic funding of $4 4 million and a decline in our average daily volumes of one 2% prior year quarter.
Pyramid NOI decreased by $3 5 million to $5 2 million with an NOI margin of four 8% compared to an eight 5% margin in the same period last year.
The decline in NOI reflects billing rate increases offset by higher wages and benefits travel and technology costs, including costs associated with the elevated levels of recruitment retention and training costs to address our staff capacity challenges.
On a sequential basis, excluding the impact of the net COVID-19 costs and the workers compensation rebate received last quarter. Our NOI margin was down 160 basis points, reflecting these higher operating costs from increased overtime and travel.
Including a temporary mileage premium provided to staff to address high fuel costs and higher back office costs to address the staffing challenges and the rise of Covid related staff absenteeism during the quarter.
Turning now to slide 11, the demand for our CIS services and SGP purchasing service continues to be strong.
SGP now supports 107003rd party beds as of the end of Q3 up 21% from a year ago and up four 7% sequentially.
Q3 revenue increased by $2 3 million or 34, 6% to $8 8 million from Q3 2021, largely due to growth in our SGP clients and the timing and mix of our assist services, which resulted in a $1 million increase in our NOI $4 5 million.
Okay.
Finally, turning to slide 12 extended care remains well positioned with strong liquidity with cash and cash equivalents, increasing to $175 million and access to a further $77 million in undrawn credit facilities at the end of the quarter.
In addition, the company has undrawn construction financing available and the aggregate of $142 million for our ongoing redevelopment construction projects.
Our maturity profile remains strong with only modest debt maturities coming due over the next two years and a debt to gross book value of 35, 2%.
Our liquidity position provides us with flexibility to allocate capital strategically whether in respect of our long term care redevelopment program, the pending Rivera transaction and other potential acquisitions and capital structure initiatives.
As Michael mentioned, we have been actively purchasing common shares through our issuer bid we initiated in June the.
CIB provides us the ability to purchase up to seven 8 million common shares for cancellation through to the end of June 2023.
Decisions regarding purchases of common shares will continue to be based on market conditions share price and our outlook for our capital needs.
With that I'll pass the call back to Michael for his closing remarks.
Thanks, David.
Extended care remains focused on providing high quality care for our residents patients and clients as we advance our transition to a growth oriented long term care and home health care provider.
We continue to face challenges from the pandemic and adapter mass, including inflationary pressures and a very tight labor market.
Accordingly, our financial performance will continue to be uneven.
Due to the timing of government funding increases in Covid related support.
Our strategic transactions with Revere and axiom will position us well to leverage our significant experience and scale to meet the growing demand for seniors care, which is being driven by demographic trends.
Despite near term volatility related to the pandemic we.
We remain optimistic about our positioning for growth and at the same time sustainable value creation for our shareholders.
Finally, we want to thank everyone across our organization for their dedication and commitment to our residents patients and our mission to help people live better.
With that we'll be happy to take any questions you might have.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any tier.
To withdraw your question. Please press Star then two we will pause for a moment as callers join the queue.
Our first question comes from Jonathan <unk> of TD Securities. Please go ahead.
Thanks, Good morning.
Yes.
First question just on.
I guess on LTC and just to start off I just wanted to clarify.
Zero point $8 million.
Product being.
Full occupancy.
Hitting you took in Q3 is that correct.
That's the year to date total.
Jonathan Yes.
We've provided 800, but we look at it every quarter so year to date, that's cumulative 800000.
Okay, So EBIT, providing corridor along it wasn't it wasn't just the cost and all in the quarter yet not all in the quarter.
Okay.
That helps and then on the.
Estimated cost of phasing out the award style beds of $1 1 million. How did you covenant that is that just all the funding for those beds.
Yes that is our best view of.
The proposed.
Phase out, it's really focused on the OE side of the equation.
On the homes. So it's basically looking at what the OE funding is for those beds and then the timing of our construction projects because as I mentioned 76 of the 185 beds do come back into service and our two new homes that are expected to be finished by the end of next year.
So it's a focus on kind of the OE funding and the timing of when we think we'd be phasing out the 76 beds ourselves.
Into the new bulbs.
Okay.
And then just flipping over.
The home health care, the five 7% margin.
That you that you showed is adjusted as if Youre. If you guys are sort of stuck out of $25 an hour.
Which it seems just given all the labor issues that.
It's hard to see it going much higher than that over the near term as sort of five 5% to 6%. We should think about margins or is there should they can they trend up from there.
Yeah, I think a couple of thoughts on that.
Yes.
I guess two things there is yes.
Yeah, we are theres, a number of cost elements in our structure today with the sort of magnitude of.
The staffing capacity challenges and the turnover that we've spoken about in the staffing so theres a lot of inefficiency in our system in terms of scheduling rescheduling book ops sick leave pay.
Given where we are.
Still sending our staff a little further we have a temporary.
Fuel surcharges fuel rebate that we have given our employees to try and come back.
The cost of fuel so there's a lot of that is temporary and transient.
I guess my best view of that because I.
Look in guidance as hard here, but if you go back to 2021.
And you look at sort of our pattern as we were able to recover.
Out of that and some of that.
Inflationary pressure wasn't there you could see kind of the progression in the margins as we recovered our volumes so.
There was a lot of cost inefficiencies, but there is a lot of leverage there to see margin improvements as the volume comes back up again so.
Hard to say for Q4 and Q1 as we're still dealing with.
Sheer number of cases out there in terms of COVID-19 impacts to staffing and the broader.
Tightness in the labor market so.
Yes.
Longer term, we do think we should see margin progression back.
Towards those levels that we were seeing back in 'twenty, one as we were coming out of the depths of the first waves of the pandemic, but exactly the trajectory of that and how fast we can start to see some of that return an improvement above these levels as it's going to take a bit of time into into next year.
Okay and then the margin is shown on slide 10 of your your deck.
That's sort of your best guess.
Alright, I don't want to say best guess, but thats sort of what you think they.
Would be excluding sort of COVID-19 and it all sort of one time type of things.
Well that adjusted margin in the little table is adjusted out for Covid and workers comp one time, so that is that some of the effects of the costs.
So some more of your crew true long term.
Yes, yes.
Okay.
That's it for me I'll turn it back thanks.
Okay.
Once again, if you have a question. Please press Star then one.
Our next question comes from Tal Woolley of National Bank Financial. Please go ahead.
Hey, good morning, everybody.
Good afternoon morning, Shlomo [laughter].
I guess, Michael My first questions.
Its absence he is an issue.
You know continues to be a lingering challenge coming out of Covid.
As CEO of a commercial enterprise you are a medical doctor.
It's like what I'm asking is.
Are the Covid protocols, we've got right are we getting the balance right between patient protection and the cost to deliver services in your opinion.
Yeah look I guess I got a couple of perspectives on this it's a good question.
A lot of what we're seeing right now is <unk>.
They'll lingering pandemic effect, but also the aftermath of the pandemic.
Particularly in terms of surgeon inflation in the very very tight labor market.
The central banks around the world are working on that.
And so this is.
These are conditions that will subside.
You know probably in 2023, it's anybody's guess how quickly that will happen.
The meantime, march's happening did bring new caregivers into the health sector.
So.
Governments are responding to this challenge with the expanded college programs higher immigration targets revised Credentialing rules and these things will materially improve the availability and clinical professionals, but it will take some time for those to have to have their in fact.
In the meantime, we're focusing our efforts on our retention programs to complement recruiting that we've been doing to try to increase utilization of the existing staff.
And to.
To improve conditions for staff in the form of things like guaranteed hours more full time positions stronger relationships with supervisors enhanced training et cetera.
So really when you net it out.
Where where we're experiencing.
A challenge that.
Is is really directly related to the pandemic and its aftermath and we do believe that as these conditions abate will return to growth.
And as David was saying, we you know we delivered a nine 7% margin last year at this time.
And we're confident that we'll get there again.
And returned to growth as the market normalizes.
Yes, as far as as weather just to directly address your question about.
You know, whether our pandemic risk.
Responses as appropriate.
I think you can always quibble with when things are initiated and when things are are ending but broadly I think I think we've got it right.
The test of that is really the pressure that we're seeing on hospitals and whether the health care system is able to manage.
The level of infections that were seeing in the community.
And I think where we're running that pretty close to the Red line. So I think I think we're.
Can it continue to have.
Some challenge over that and debate over the next four or five months as to what is the appropriate.
Health response to this situation as we come out of the pandemic and get to more normal.
Kind of flu season and other viral.
Pathogens that are that are always there, but but.
Are coming back with a bit of engines this year, because they've been absent for the last couple of years.
Yeah.
When you think about the tariff as well.
What's your sort of working theory for how long it could take.
For it to really sort of be.
You know kind of squashed leg in terms of like just not seeing.
The case volume and stuff like that I appreciate that.
Barry it's come along and there may be less less harmful.
But it's still obviously having.
And the impact on service delivery and the health care system, what's what's sort of the best thinking you know of right now in terms of like how long it will take for that to kind of really wind down.
So look I. The first thing I would say and that's in that question is is there a lot of other people much better qualified.
To to predict that did meet.
For sure and.
And and I would also say that those better qualified people have been getting it wrong for a couple of years. So.
Far be it for me too.
To make that kind of prediction, but I would point to a data point that just came out this week.
You know the World Health organization.
But looking at at at Covid related death rates worldwide.
And and you know this year Theyre down 90%.
From where where they were last year. So we are clearly in the.
The waning phase of the pandemic.
And in that period, when it becomes and damage.
And when the whole population develops.
Resistance to the virus.
So.
We're definitely in that declining phase exactly how long that'll Jake.
I think most people feel that we're gonna have a bit of a challenging winter, although the debate is whether.
The winter issue is really COVID-19 or it's going to be more other viruses like influenza.
Respiratory syncytial virus has been.
Quite significant this year.
So.
All the indicators are that we're getting back to normal although still reacting to that.
The wide swath that the pandemic is cut into that to the whole kind of healthcare dynamic. So we're you know we're getting there.
It's.
We've reflected on the fact that this is our 11th quarter of reporting COVID-19 impacts on the business.
Think we've got a couple more quarters to go certainly.
Q4, Q1, and then after that.
It's anybody's guess, but but I do think we're on the declining.
Side of this curve.
Okay. That's helpful. I appreciate that.
And then just some I'm wondering if.
Apologize if some of the preamble soon because its covered.
But.
Just with respect to the strategic transactions with Rivera and axiom.
Can you give us just some ideas on what's your best estimate of the timing.
The acquisition of the Rivera class a equity interest.
That's one of the Rivera class C beds in the beginning of the Dropdowns to axiom.
Yeah, we do not have good visibility on that.
Aye.
Remind you of a couple of things so first of all where we're looking for approval from two different provinces.
So we've got we've got two different kind of regulatory <unk>.
<unk> is that we are.
Navigating we.
We don't have.
Any indication of.
What the timing might be.
You know, we're certainly hoping to get approval early in 2023, but but that's you know that's not a prediction.
So.
Fortunately I can't really provide much more much more clarity than that certainly when we get some clarity, we'll let the market know.
Is the expectation that all of these things will get approved simultaneously or does it happen in pieces.
We've proposed it as a single.
Approval, that's that's the nature of our application.
All of these things are very much related to each other.
But.
You know again.
I can't really predict.
You know how the government might want to parse through.
The elements of our.
Our transactions.
And with the class the JV with axiom I'm, just wondering like can you sort of get like Oh.
Lincoln approval for about structure or does each dropdown have to get approved.
Well.
I think there's probably two elements there so.
The first is that any any license transfer.
Going to require a separate approval so.
Ah.
That that.
But that doesn't necessarily involve significant delays for single home.
Hum.
And certainly the the thinking is that that once the framework.
Has been approved that individual transactions will not be a heavy lift.
And we actually have a.
Precedent for that because we've seen this kind of capital structure joint venture before certainly Rivera.
Has had that with axiom for some years.
And that is not introduced any significant delays in the ability to redeveloped homes. So we.
We would anticipate that that's the way it will continue going forward.
Okay. That's great I appreciate your perspective, Michael Thank you.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Jillian fountain for any closing remarks.
Thank you operator that concludes our call for today. This presentation is available on our website as well as are the call in numbers for an archived recording.
Thank you everyone for joining us today, please don't hesitate to give us a call if you have any questions.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yes.
Okay.
[music].
Okay.