Extendicare Inc. Q1 2023 Earnings Call
Thank you first in them by this is the conference operator welcome to the standard Care, Inc. First part of 'twenty to 'twenty three 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.
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I'd now like to turn the conference over to Jillian Fountain, Vice President Investor Relations. Please go ahead.
Thank you operator.
Everyone welcome to extended Carey's first quarter 2023 results conference call.
With me today are extended curious president and CEO , Michael Greer, and our senior Vice President and CFO David Bacon.
Our Q1 results were disseminated yesterday and are available on our website.
The audio webcast of today's call is also available on our website along with an accompanying slide presentation, which viewers may advance themselves.
A replay of the call will be available later this afternoon until May 19.
Replay numbers and Passcodes have been provided in our press release and an archived recording of this call will also be made available on our website.
Before we get started please be reminded that today's call may include forward looking statements statements.
Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today.
We have 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 Jillian and good morning.
I'm pleased to report that in the first quarter, we saw improvement in our financial results and growth in our key operating metrics across all our business segments.
This was supported by continued easing of pandemic impact and a significant recovery of our 2022 unfunded COVID-19 costs.
I'll begin our presentation today with an update on COVID-19 funding and its impact on our operations.
Well I'll breaks were prevalent throughout the winter they dropped off significantly as we entered the second quarter.
Accordingly, the Ontario government updated COVID-19 guidance for long term care homes to phase out many prevention and containment measures at the end of the quarter.
Including the elimination of biweekly testing of asymptomatic staff.
And relaxing of certain screening and physical distancing requirements.
With clear signs that the pandemic is transitioning to endemic status.
We've been able to resume the more vibrant social interaction in our homes that our residents and their families have missed for so long.
These changes mean pandemic related costs across the business are winding down.
Although some infection control protocols adopted during the pandemic have become permanent.
The April 1st step up in direct care funding in Ontario, we will address any related costs.
With fewer outbreaks occupancy has continued to recover.
<unk> improvement in our preferred accommodation of occupancy.
Accordingly, both the Ontario, and Manitoba government announced the end of pandemic funding effective April 1st.
Funding related to prior period, COVID-19 cost once again drove volatility in our financial results this quarter.
We recognized $13 $1 million in prevention and containment funding related to costs incurred last year.
Resulting in a net recovery of Covid costs of $12 1 million in the quarter.
We are grateful for the funding we have received from provincial governments to support long term care throughout the pandemic.
We do not anticipate any further material recovery of COVID-19 costs.
Turning to our strategic transactions on slide four we continued to advance through the regulatory approval process in Ontario, and Manitoba in connection with our previously announced strategic partnerships with axiom and Rivera.
We anticipate being able to close both transactions in Q3 this year.
This will mark a key milestone for extended care as we transition to a less capital intensive growth model to meet the increasing care needs of an aging population.
In anticipation of regulatory approval, we have advanced a comprehensive integration plan. So we are ready to effect a smooth transition soon after approval is received.
These transactions are consistent with our strategy to leverage our deep expertise and scale to drive higher margin growth in our managed services segment.
This capital efficient business model will provide extended care with greater flexibility to allocate capital to growth initiatives, including acquisitions.
The aggregate consideration to be paid on closing of these transactions remains an estimated $70 million.
Though we were not active under our N. CIB in Q1, we purchased an additional 520800 common shares for cancellation subsequent to the quarter end.
Since the bed launched in June 2022, we returned $38 $4 million to shareholders.
Moving to slide five we continue to pursue our redevelopment agenda with the launch of our fourth redevelopment project in Peterborough.
The new 256, bad long term care home will replace the existing 172 class C home that we currently operate in that community.
Total investment in the project is estimated to be $96.6 million and construction is scheduled to commence in the second quarter with projected completion in Q4 2025.
Together with our Sudbury Kingston in Statesville projects. The four homes will comprise 960, new beds, replacing 834 class C beds.
We continue to work to break ground on up to three further projects. This year to take advantage of the time limited capital funding supplement of $35 per DM available in Ontario.
Tendered construction costs and receipt of applicable regulatory approvals will largely determine whether and when they might proceed.
We are also working to advance the balance of our 'twenty project portfolio to ensure they are construction ready and anticipation of capital funding that may be made available in the future.
Turning to operational highlights on slide six.
Performance improved in each of our business segments in the first quarter.
Outbreaks in our homes eased throughout the quarter, enabling us to improve long term care occupancy by 60 basis points over Q4 2022.
Underlying the significant recovery of unfunded COVID-19 costs in the first quarter, we continue to experience staffing challenges and inflationary pressures that impact our operating costs.
The Ontario government increased long term care funding by 2% effective April 1st lagging the inflationary cost increases of the past few years that are weighing on long term care margins.
We continue to work with other sector participants.
And the government to identify solutions and aligned funding to better address continued cost pressures.
In our home health care segment, we experienced a 2% sequential quarterly increase in our average daily volumes.
Representing growth of 6.1% from the prior year period.
While labor market shortages remain our most significant challenge.
Our retention and recruiting programs have enabled our return to growth.
We are experiencing strong demand for our services.
Driven by demographic trends and the health services backlog, which developed over the course of the pandemic.
Accordingly, and it's March budget, the Ontario government announced that it's accelerating a 569 million dollar investment in home health care funding, including $300 million allocated for contract rate increases to help stabilize staffing in the sector.
Although we are not yet clear on the exact details and timing of this rate increase the.
The funding will help us to meet the growing needs for home health services across the province.
Finally in our managed services segment, we continue to experience strong growth in our S. G P customer base, which increased 1.9% from Q4 and 13.1% from the prior year period.
With that I'll turn it over to our CFO , David Bacon to discuss our first quarter results in more detail.
Thanks, Michael.
I'll start by reviewing our consolidated results for the quarter, followed by some financial highlights of our business segments and our liquidity position.
On a year over year basis, Q1, consolidated revenue increased six 2% to $324 7 million.
This increase was driven primarily by long term care flow through funding enhancements and prior period funding.
Home health care rate increases and a six 1% increase in average daily volumes and managed services growth. This was partially offset by lower COVID-19 funding of $25 9 million.
Our Q1, NOI improved by $11 6 million to $44 6 million with an NOI margin of 13, 7%.
Impaired to 10, 8% in the prior year.
This was driven primarily by $13 1 million in Covid funding related to 2022 that was recognized in Q1.
Resulting in a year over year increase in net COVID-19 recoveries of $3 5 million.
Prior period long term care funding of $3 7 million in long term care funding enhancements and occupancy improvements.
Home health care volume growth in billing rate increases and growth in our managed services.
This was partially offset by higher operating costs across our segments.
Q1, adjusted EBITDA improved by $10 8 million to $31 million, reflecting the improvement in NOI, partially offset by higher administrative costs zero point $8 million.
As a reminder, we report one time costs related to the strategic transformation of the company in connection with the Rivera and axiom in transactions as a separate line item in other expense, which is excluded from <unk> on EBITDA.
This quarter, we reported $3 6 million in strategic transformation costs.
S F O per basic share was 24 cents in Q1 up from 14th in the prior year driven by the improvement in earnings and the impact of our share buyback activity in 2022.
Excluding the year over year impact of the net COVID-19 cost recoveries of prior period LTC funding <unk> per basic share increased by <unk> <unk> from Q1 of 2022.
We expect the volatility in our quarterly results will stabilize going forward given the end of pandemic funding easing of Covid protocols and the next step up in direct care hours in Ontario as of April one.
Our payout ratio for the quarter was 49%, excluding the COVID-19 recovery an out of period LTC funding our payout ratio remains elevated however, the estimated annualized <unk> per share contribution from the pending ribera and axiom transactions and our NCI b activity will improve our payout ratio going forward.
Forward.
Turning to our individual business segments, beginning with long term care.
We saw revenue increased by three 9% in Q1, driven by funding enhancements and timing of flow through spending improvements in occupancy and prior period funding adjustments.
NOI increased by $7 2 million in Q1 to $33 8 million, representing NOI margins of 16, 3%.
Excluding an increase in COVID-19 recoveries of $1 3 million NOI increased by $5 9 million, which included the benefit of $3 7 million in prior period funding adjustments funding enhancements and improvements in occupancy partially offset by higher operating costs.
Occupancy in our long term care homes continues to recover as the number of COVID-19 outbreaks declined throughout the quarter.
In addition flow through care envelope funding for ward style beds no longer in service is being phased out over the next two years starting April one.
However, 100% of the accommodation envelope funding will be preserved through this phase out period, which will provide support to our NOI for those homes impacted.
As a reminder, we closed a 185 award style beds in our Ontario homes.
Of which 84 will be reopened as private and semi private rooms, and the redevelopment projects currently under construction and scheduled to open between Q3 of 2023 and the first quarter of 2024.
The net impact of the 2% April 1st funding increase Michael mentioned earlier and the phase out of the flow through funding for the closed ward beds represents incremental annual revenue of approximately $4 million of which $2 2 million as accommodation envelope funding.
Turning now to our home health care segment.
Revenue was up $8 8 million or eight 9% in Q1, driven by growth in average daily volumes billing rate increases and additional funding to support the permanent three dollar per hour P. S. W. Wage enhancement of $6 5 million, partially offset by reduced COVID-19 funding of $6 9 million.
NOI increased by $3 7 million to $6 4 million with an NOI margin of 6% up 50 basis points from the prior year when adjusted for Covid impacts.
The improvement in NOI reflects these higher volumes and rate increases, partially offset by higher wages and benefits travel and technology costs, including the costs associated with our recruitment and retention and training programs to address our staffing capacity challenges.
On a sequential basis, our average daily volumes increased 2% due to the continued strong demand and modest evening easing of our staffing capacity challenges.
Excluding the impact of our net COVID-19 costs, our NOI margin declined 60 basis points from Q4 2022 due to seasonal impacts.
Turning now to slide 11, and we continue to see strong growth in our managed services segment comprised of our extended care assist and SGP group purchasing divisions.
G. P. Now supports over 111003rd party beds as of the end of Q1 up 13, 1% from a year ago and up one 9% sequentially.
Q1 revenue increased by 33, 4% to $9 7 million largely due to timing and mix of assist consulting services in the quarter and growth in our S. G. P clients served which resulted in a 700000 increase in NOI compared to the prior year.
Higher costs related to the mix of assists consulting services this quarter.
Contributed to the lower NOI margins.
Finally, turning to our financial position.
<unk> remains well positioned with strong liquidity, including cash and cash equivalents of $105 million and access to a further $77 million in undrawn credit facilities at the end of the quarter and.
In addition, we have $107 million in Undrawn construction financing available to fund the balance of the costs associated with our ongoing redevelopment projects.
Our maturity profile remains strong with only modest debt maturities coming due prior to 2025.
Our liquidity position continues to provide us with the flexibility to allocate capital strategically whether in respect of our long term care redevelopment program, depending where vera transaction or other potential acquisitions and capital structure initiatives.
As Michael mentioned with the common shares we acquired subsequent to the first quarter under our N. CIB. We have now acquired a total of approximately five 5 million shares at an average cost of $6 94.
Our current issuer bid provides us with the ability to purchase up to seven 8 million common shares through to the end of Q2 of 2023 and any decisions regarding purchases continue to be based on market conditions share price and the outlook of our capital needs.
With that I'll pass the call back to Michael for his long for his closing remarks.
Thanks, David.
With growth returning across all business segments and clear signs that the pandemic is transitioning to endemic status, we have a renewed sense of optimism.
We emerged from the pandemic with a clear strategy that leverages, our scale and expertise to deliver high quality long term care and home health care services, using a less capital intensive and higher margin business model.
The axiom in Rivera transactions breaking.
Breaking ground on our Peterborough redevelopment project and ongoing investments to expand home health care staffing capacity are all important steps in growing our ability to meet the needs of an aging population.
I'd be remiss, if I did not take this opportunity to extend my deep gratitude to all of the caregivers and team members across our organization, whose steadfast efforts over the last three years that help keep our residents and clients safe during this trying time.
Thank them for their continued commitment to helping people live better.
And lastly, a reminder, that our first in person annual shareholders' meeting since 2019 will be held on may 29th in Toronto.
Other details are available on our website and.
And we hope to see you there.
With that we'd be happy to take any questions that you may have.
Operator.
Well now begin the question and answer session to John's question queue. You May Press Star then one on your telephone keypad, you'll hear tone acknowledging your request.
He isn't a speakerphone please pick up your handset before pressing any Keith.
To withdraw your question. Please press Star then two.
Well pause for a moment as color shiny Q.
The first question comes from Jonathan Chang from T D Cohen.
Please go ahead.
Thanks, Good morning.
Starting with the.
Your development program I guess, the this project submission period to get the extra $35 a day in Ontario is done and it sounds like you guys got.
Three more projects in on time for that are there are there talk so similar programs.
Or with the Ontario government.
So.
Jonathan.
Our government has announced their intent to.
Fund 30000, new beds and 28000 replacement beds.
Over the next five to seven years.
So they've announced this this first year and we're working to get <unk>.
Further projects through that that program as far as what happens. After this year's program, where you know there's been no announcement about that so where we're waiting.
To hear what that might be but just looking at what's happened in the past.
The government seems to be assessing the the market didn't inflation in construction costs and setting it's it's.
It's it's a funding program on that basis.
So.
While we expect that there will be no further programs coming after this one.
We really don't have any any information any detailed information as to what that might look like.
Okay.
Do you think.
Like the 2%.
Increase on another accommodation I guess is lower than everybody.
Everybody in the industry was hoping or do you think that has any relation to the amount of commitment the government's making or for the 30000, new beds and 28000 replacement beds.
I I'm I'm not sure how they would be related.
I I, so I'm not I'm not sure Jonathan what your question is that what did that because they are putting a lot into capital.
They haven't put as much into operating I I'm not sure exactly what you mean.
Like the the.
2% seems kind of low to me.
Curious as to some of the reasons why and is that is that something that the ministry understands.
And more.
Well, you think they'll make it up over time or.
Our how are those discussions going.
Well.
We're continuing that to share with the government what are inflationary pressures are.
You know taken with that.
The capital investments and the flow through funding that they're providing they've they've invested a lot in.
Long term care over the last few years, it's really.
On a historic level of investment.
Now compared to what we've seen in the last the last few decades I think there is some fine tuning about.
How they're allocating funding that still needs to be done and that's the nature of the conversations that we're having.
As to what what costs might be funded in the occupancy envelope versus.
Some of the other the other care envelopes.
So I'm not sure how those.
Out of those talks will play out, but certainly we're having conversations with governments to make them aware I mean again looking at history.
Over the long term.
The government has.
A very good track record.
Funding longterm care appropriate lead to cover costs.
So.
We do expect.
Long term.
That that.
This will sort itself.
Okay and then just lastly on the on your development project.
Yes, there is.
My Maths right, you've got about $163 million to spend.
And maybe 107 million left under Undrawn construction financing for that sort of thing because the balance there is sort of equity that you need to contribute to the projects.
A fair way to look at it.
Yeah, I'd say on the three that are already in flight Jonathan those are all of our equity is in those projects. So the cost for the balance to complete those through the opening is through the credit facilities that are undrawn on the Peterborough project that's starting.
We will have a an equity commitment.
To fund initially before we get into financing on that project. So.
As we disclosed the adjusted sort of cost outlook on that projects around $96 million. So if you think of our equity needs on that for construction in the.
15% range that would be the.
Equity commitment over I'd say, the next couple of quarters until we get into a financing.
Okay.
You don't have a construction financing in place on that.
No not yet.
Yeah correct yeah.
Okay. That's it for me I'll turn it back.
Once again, if you have a question. Please press Star then one.
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This concludes the question and answer session.
The next question comes from Paul <unk> from National Bank.
Financial.
I'm sorry for the confusion. Please go ahead.
Hey, good morning.
Thanks Al.
Just to go.
I'll go back to the funding question on LTC I think.
One of the other publicly traded peers have sort of said.
You know, 10% was kind of the number that they thought.
Needed to be achieved.
All of the time.
Two sort of <unk>.
Balance out the inflationary impacts borne on the on the accommodation side.
Does that sort of scan with your perspective.
Yeah, I think you're just to confirm you're talking there about what type of increase.
They were they were thinking we would need to recover from the inflation of recent years I think that's the 10% youre referring to yes.
Yeah, Yeah I think.
That there is there is as Mike mentioned, a lot of discussions going on with the Ministry and are and the other operators around this that if you did go back over the last three years.
We had a 9% to 10% gap between the rate increases we did experience and the two and what we've been receiving so there is a gap there that is about the size of the gap of the last three years.
And as you know Mike.
<unk> said over the fullness of time mid long term historically.
The government has gotten those costs are the funding in line with the cost but there is there is a gap given the high.
Inflation, we've experienced in the last two three years. So we continue to talk to the government to with our partners about other ways to two to address that shortfall.
But there is going to be some short term pressure here.
On margins as we work through that.
Okay.
And then my understanding is coming out of I believe it was the budgetary process with the government. The federal I think it's called like a technical table or something like that to sort of studied this issue.
Are there can you just talk a little bit more about that and what that might mean going forward.
Well I think one of the things that's been a strength of the sector for for many years as the open dialogue with the government and sharing what what are cost pressures are so that the government understands them and can see.
<unk>.
Funding.
Our policy appropriately.
And when you look at what's been happening the last few years, although the inflationary increases have been below inflation.
<unk> funding in our flow through envelopes to move us to the four hours of care, which was announced a few years ago is actually quite large it's close to 30% over over a.
Three to four year period.
So there is there is a balance problem in terms of the way the various envelopes are.
Our funded and so the technical table is being assembled to look at that and look at whether theres. Some rebalancing in the various funding elements that has to happen.
Two.
You know to make sure that that the homes can operate.
You know appropriately into the future. So you know my view is that.
Ah, Yes that government has has has the funding.
At the macro level largely right.
There's some technical details that are important in terms of which envelopes, it's flowing through and the technical table said, it's mine too to looking at that and I'm working to sort it out.
And do you have an idea of the timeframe for that.
I think the intent is to get this done and then you know in the next few months so that in the fall timeframe. Some some adjustments can be made but that's a guess on my part, but it's not.
It's not anything that I've seen.
Published anywhere.
Okay and then.
Just on the long term care.
NOI this quarter. So you report close to 34 million.
If I'm.
Sitting on the outside trying to work that down to kind of a normalized number I would deduct the 12 million in.
That are in prior pandemic net of the pandemic costs.
And then I think there was a $6 million waive settlement.
And then I think another prior period reduction or a prior period expense reimbursement of Manitoba, when I take all that out I get to you know a number of sort of in the low $15 million range is that kind of like what we should be thinking about as sort of a working number.
On a go forward basis once all of these programs start to fall off.
Yeah, I think that's the right sort of view of Q1 and the adjustments in terms of launching off point for the year.
Are the rate increases that we did get kick in in April the 2%.
We're still waiting for Manitoba, and Alberta as decisions on on rate increases and they generally kick in in April as well.
And there is always some seasonal pressure on margins in Q1, just with with timing of non rate increases and some employee benefits tight cost that kind of restart in the in the first quarter thing.
Yes, eight and a half is the right number you've got your adjustments right. There for Q1 and Thats. The starting point, but we are going to have some we're still waiting for the rest of the rate increases from from the west to come in on top of the 2% we got at Ontario.
Okay.
And then as we get closer to the closing of these Rivera and axiom transactions.
Are we expecting all of these are you know because of a bunch of different transactions will all of these close look to be are they submitted for review like kind of like together and you expect them to all kind of close at the same time or do they.
Potentially happen in stages.
Well.
We've submitted them all together to be to be considered together.
<unk> point.
We're hopeful that we're going to see.
<unk>.
<unk> approval in <unk> in Q3, but we cant be sure until the government finishes its process.
So.
We know that there is.
Activity going on in evaluating our applications. We know that all of them are are proceeding through in both provinces.
So but until the government renders its decision we can't be sure.
Of.
Of all of them coming through together, but we are.
Hopeful that they will.
Okay.
And the.
Gil.
You're obviously scaling up like your management platform for this and you highlighted in the initial announcement I think it's about 70.
$17 million in annualized revenue for picking up Rivera coffee bags.
You learn some more management fees on the class a joint venture with Rivera.
Sure.
Should we anticipate all of that falling to the bottom line like can you do that in the context of your current staff stock level or is there do you need to like <unk>.
Somebody has to.
Take on these management agreements.
Yes, no there there will be.
Costs with that and in infrastructure related if you think about it taking on the management of 56 homes.
There is a there is going to be some investment in the support services for that so I think when we talked.
We first announced around the $17 million in sort of revenue and management fees. We did talk also that.
Sort of NOI contribution from that would be would be in the.
<unk> 40, 45% range.
What we spoke about at the time of the announcement. So there is there is a cost to support an incremental 56 homes for sure.
Okay and.
The.
Yeah.
B E.
Actually the axiom development JV is the plan then to shift.
The stuff you already have.
Sort of in process into those J views.
Or is that.
Going to be a future projects only.
No the.
Bharti committed to selling into the joint venture the three projects that are under construction and will be.
Working towards moving Peterborough and as well the desired.
That will come in and the way we operate going forward on redevelopment would be too.
<unk> get too.
Construction ready tender stage full approval, we'd be looking to move those into the JV and have them actually being constructed.
And within the joint venture as opposed to having those on our own balance sheets from construction. The goal is to have them.
Constructed.
Within the JV going forward.
And so look we would expect those types of transactions happen fairly quickly at Q3 or is that.
Something that comes in.
And the time thereafter.
Just trying to understand I think how much overall change we should be expecting by the end of Q3 with all the stuff.
Yeah, I think as Mike mentioned.
Or does it you know we submitted approving these all as a package and we and we're working toward our ideal would be that everything.
Comes to comes together within Q in Q3, so the view would be that the JV is as is.
For the first four development projects would go into the JV in Q3, and we'd also close on the management contract and the existing 15% interest in the axiom the existing axiom JV as well all of that ideally would come together within the same quarter.
Got it alright, thanks, very much gentlemen, I appreciate it.
Thanks Todd.
Once again, if you have a question. Please press Star then one.
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.
Resin patients available on our website as are the call in numbers for an archived recording.
Thank you again for joining us and please don't hesitate to give us a call. If you have any questions.
Thank you.
This concludes.
The conference call you may disconnect. Your lines. Thank you for participating and have a plan.
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