Extendicare's (EXETF) CEO Tim Lukenda on Q1 2014 Results - Earnings Call Transcript

| About: Extendicare, Inc. (EXETF)

Extendicare, Inc. (OTCPK:EXETF) Q1 2014 Results Earnings Conference Call May 8, 2014 10:00 AM ET

Executives

Jillian Fountain - Corporate Secretary

Tim Lukenda - President and CEO

Dylan Mann - SVP and Chief Financial Officer

Analysts

Alex Avery - CIBC

Jonathan Kelcher - TD Securities

Operator

Good morning ladies and gentlemen. Welcome to the Extendicare, Inc. First Quarter Results Conference Call. Please be advised, that this call is being recorded.

I would now like to turn the meeting over to Ms. Jillian Fountain. Please go ahead, Ms. Fountain.

Jillian Fountain

Good morning, everyone and welcome to Extendicare’s 2014 first quarter results conference call. With me today are Tim Lukenda, Extendicare’s President and Chief Executive Officer; and Dylan Mann, Senior Vice President and Chief Financial Officer as well as other members of our management team.

The 2014 first quarter news release was disseminated yesterday and is available on our website along with the supplemental information package. The audio webcast of today's call is also available on our website along with accompanying slide presentation, which viewers may advance themselves. A replay of the call will be available from noon today until midnight on May 23rd. The replay numbers and passcodes have been provided in our press release. 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 regarding our future operations. Such statements involving known and unknown risks and other 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 Commissions and suggest that you refer to those filings.

As we discuss 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 Tim Lukenda.

Tim Lukenda

Thanks Jillian and good morning everyone. We are generally pleased with our overall results this quarter. Revenue adjusted EBITDA and AFFO all improved over Q1 2013, despite the challenging census and regulatory environment in the U.S.

Turning to our Canadian operations slide 3, our average daily revenue rates increased by 1.8% over Q1, 2013 and our occupancy rates remained unchanged at a solid 98%. Our adjusted EBITDA and AFFO were impacted by the startup of the new Northern Ontario Centers and the discontinuation of the Alberta homecare business on a same facility basis it was relatively flat.

Tuning now to slide 4, on our Canadian homecare operations. Our Ontario volumes this quarter were up by 7.5% over Q1, 2013. However our volumes were down sequentially from Q4, 2013 by 1.1% which is not unusual as the government manages its fiscal budget for its March year end. The Ontario government has publically stated its intension to continue to expand access to homecare for more seniors in the province.

We expect that our superior quality service delivery will ensure both retention and growth of current volumes under the Ontario government’s plan to grow community based care. We believe paramed is an important part of our company strategy going forward.

Turning to our U.S. operations performance metrics. Our Medicare rates have been impacted by the reduction in funding resulting from the U.S. government sequestration and the reduction in reimbursement for bad debt. As a result despite the 1.3% market basket increase, our average daily Medicare Part A rate declined by 1.3% over Q1, 2013. However our Managed Care rates improve by 1.6% over Q1, 2013 primarily due to changes in acuity mix. Sequentially our average Medicare and Managed Care rates each improved by 0.3% over Q4 of ‘13.

With regard to our U.S. census levels, we are pleased with the sequential upturn consistent with annual seasonal trends. However we remain below our Q1 ‘13 level as we continue to experience softness in many of our markets. This is an industry wide trend reported by many operators and is a result of overall economic weakness combined with government initiatives to reduce healthcare spending by diverting long-term care patients to more home and community settings.

Our same facility average daily census this quarter was 177 below the Q1 2013 level due to declines in Skilled Mix and Medicaid census, both of which improved sequentially from Q4 2013. Our average same facility occupancy was 84.9% this quarter improved from Q4 2013 of 83.4% but down from 85.5% in Q1 2013.

With that I will turn things over to Dylan for a more detailed look at our financial performance. Dylan?

Dylan Mann

Thanks Tim and good morning. On slide seven is a summary of our 2014 first quarter results compared to Q1 2013. In reviewing our results I removed the effect of foreign exchange. Revenue improved by 800,000 with improvements from the Canadian operations partially offset by a decline from U.S. operations due to lower census.

Adjusted EBITDA improved by $1.2 million and as a percentage of revenue was 8.1% this quarter versus 7.9% last year. EBITDA in our U.S. operations improved by US$1.7 million of which US$1.4 million was from same facility operations. Results were favorably impacted by a $2.7 million decline in the provision for self insured liabilities and lower labor costs of $1 million this was partially offset by a decline in census levels.

EBITDA from our Canadian operations declined by $500,000 from Q1 2013 of which $100,000 was from same facility operations. Same facility operations were unfavorably impacted this quarter by prior period revenue adjustments of $400,000.

Slide 8 represents our AFFO by quarter, which breaks out the component parts of our U.S. and Canadian operations exclusive of maintenance CapEx spending and lastly the impact of foreign exchange.

In addition in the table below the bar graph, we reported the quarterly income tax figures. Excluding the impact of foreign exchange, our AFFO in Q1 2014 of $21.5 million improved by $2.1 million over Q1 2013. $2.8 million of this improvement was from U.S. operations due to an increase in EBITDA and lower interest costs while AFFO from the Canadian operations declined by $700,000 primarily due to a decline in EBITDA and higher interest costs.

Current income taxes for Q1 2014 represented 15.4% of pre-tax FFO compared to 18.6% for Q1 2013. Both quarters were favorably impacted by operating loss carryforwards which was substantially utilize this quarter.

Going forward, we anticipate that our annual effective tax rate on FFO will increase to between 23% and 26%. Our maintenance CapEx spending was $4.7 million or 0.9% of revenue this quarter, unchanged from Q1 2013. Our CapEx spending ramps up to the year, and we anticipate spending between 1.5% and 2% of revenue for the year.

For Q1, 2014, we reported AFFO of $0.25 and declared dividends of $0.12 per share representing a payout ratio 49%.

Turning to slide 10, let me now review our balance sheet. Our cash position has improved to a $113 million from $96 million at year-end, our total debt at the end of the year was $1.2 billion. With the exception of our U.S. line of credit, our debt is at a fixed rate carrying a weighted average rate of 4.9%, and terms to term to maturity of 19 years. Our interest coverage ratio based on a trailing 12 months at the end of March 2014 was 2.7 times. Our consolidated leverage ratio was 7.7 times.

The 2014 convertible debentures mature at the end of June. We are in the process of securing financing for up to a US$100 on a selection of our 57 unencumbered homes, which we will use to repay these convertible debentures.

I’ll now turn the presentation back to Tim for his closing remarks.

Tim Lukenda

Thanks Dylan. Turning to the latest on the U.S. funding environment. On April 1 of this year, the President signed in the law the Protecting Access to Medicare Act of 2014. This legislation includes the latest postponement or Doc Fix of the annual proposed reduction to the Medicare Part B fee screen rates. This Doc Fix runs through April 1 of 2015, while the industry continues to lobby for a more permanent solution.

In addition, the legislation postpones the implementation of ICD-10 code sets that was scheduled to begin on October 1, 2014, by at least one year and extends the therapy cap exception process to April 1, 2015.

The legislation also includes a value-based purchasing initiative, whereby providers can earn incentives for reducing hospital readmissions. The incentives are to be funded via a 2% rate cut in fiscal year 2019, of which up to 70% will be transferred to an incentive pool. We are pleased with CMS announcement on May 1, 2014, proposing a net market basket increase in Medicare Part A revenue rates of 2%, effective October 1, 2014. This consist s of a market basket increase of 2.4% minus a productivity adjustment of 0.4%. We estimate that this will provide us with additional Medicare Part A and Managed Care revenue of approximately US$7.1 million per annum.

In Ontario, though the government's budget was defeated, we were pleased to hear that the proposed budget included funding for the capital redevelopment of the province’s older nursing centers although no details, were provided. Also included were plans to extend the maximum term on the license of the new centers from 25 to 30 years. Given the upcoming election, the program remains uncertain. However, we remain hopeful of a satisfactory outcome.

To conclude, I'd like to repeat some of my remarks from yesterday's annual meeting. During this past year, we have worked diligently to complete a transaction that would separate our Canadian and U.S. businesses. Our preference is to do this by way of a sale of our U.S. business.

As we announced last quarter, we are working with the prospective buyer and have had negotiations relating to a transaction involving the sale of the U.S. business in a tax efficient matter. However, these negotiations are dependent in part on the satisfactory resolution of the previously announced Department of Justice and Office of Inspector General Investigations.

The ultimate resolution of these investigations will include an agreement between Extendicare and the OIG involving certain monitoring and oversight responsibilities, some of which may pertain to any buyer of the U.S. business going forward. For this reason, knowing the outcome of these matters has been a pre-condition in the negotiations.

If the investigations can be resolved in an acceptable manner to us and the perspective buyer, we expect that the separation of the businesses will be affected by way of a sale of the U.S. business. If not, we will nevertheless proceed to separate the Canadian and U.S. businesses, utilizing one of several alternative techniques that are being considered and analyzed by the strategic committee. The status quo is not an option. Through it all, we remained focus on delivering quality care to optimize the performance and value of Extendicare for our shareholders.

This concludes our prepared remarks. We would now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We’ll now take questions from the telephone lines. (Operator Instructions). Our first question is from Alex Avery from CIBC. Please go ahead.

Alex Avery - CIBC

Thank you. Good morning.

Tim Lukenda

Good morning Alex.

Alex Avery - CIBC

I was just hoping to I guess get some of your thinking behind the plan to refinance the corporate unsecured convertible debentures with EHSI line of credit. Just how that decision came about I mean you’ve got fairly material cash position and it is a corporate obligation moving into the U.S. corporate structure?

Dylan Mann

Just-- this is Dylan, Alex. Just to clarify we’re not using our U.S. line of credit to take out the debentures. We’re planning on putting financing on a group of buildings that are part of the 57 unencumbered assets. And our thinking there is that we’ll be moving debt where it belongs into the U.S. that these debentures that are coming due were taken out to fund activities for our U.S. company and so we’re moving it to the appropriate company within our structure.

Alex Avery - CIBC

Okay. Is there any read through to the strategic review process that is ongoing?

Tim Lukenda

Not really, Alex. I mean I think in the ordinary course we are looking to refinance or repay those debentures. We decided that this was the best approach from our cost standpoint and as Dylan said, sort of appropriateness within our capital structure where the debt belongs. So, it may align with strategic options, but it wasn’t driven by the strategic options as such.

Alex Avery - CIBC

Okay. And then just turning to the OIS investigation, you mentioned I guess some general description or some of the potential terms of resolution. Can you provide us I guess a spectrum of what the potential outcomes could be?

Tim Lukenda

I don’t have specific numbers to speak to you at this stage, Alex, but I guess what I was hoping to convey is that a typical settlement with the U.S. federal government on matters of this kind, particularly in the healthcare sector involve usually some monetary payment as one part and secondly what’s called a corporate integrity agreement that has ongoing oversight or monitoring obligations on the entity for a period of time after that.

So, there is these two separate pieces. We expect that if we decide to settle, it will be because we believe it’s in our best interest to do that on the terms that are finally negotiated in order to put the matter behind us and move forward. If we don’t find that the terms get to an acceptable level and that we get the comfort that we need to feel that it’s appropriate to settle those on those terms and move forward then we’ll be in a situation where we would be moving forward without a settlement and dealing with the matter as it arises in terms of the government’s intentions to pursue this matter.

So it’s going to be a case of either we resolve it because we are comfortable doing so or not. And if we do so, it will have these two.

Alex Avery - CIBC

Okay. And what is a corporate integrity agreement?

Tim Lukenda

Corporate integrity agreement is something that healthcare providers enter into with the Office of Inspector General, the OIG that govern your operations for a period of time going forward and involve usually the agreement to hire a monitor, which is a third-party that would come in from time-to-time, check the operations, work with management on any areas for improvement and it’s a process that the federal government likes to use to ensure compliance with what their concerns were and whatever they are to address and oversee the operations for a period of time and that’s typical in healthcare settlement agreements.

Alex Avery - CIBC

Okay. And then just lastly if this OIG situation isn’t resolved in the near-term you have said that you will pursue other means to separate the two companies. Can you give us a little bit better of an idea of what in the near-term represents?

Tim Lukenda

It’s a good question. There is government, resolution of these government matters have taken much longer than any of us anticipated that’s been frustration for us and probably for the government in some ways. But we have been trying to work through the issues to make sure that they are addressed appropriately if we do agree to a settlement and it’s taken longer than we would like. I believe the process is coming towards a conclusion, now that’s a vague statement, but I believe we’re getting to a point where we either going to know whether we have something that’s agreeable or not in the very near future. And certainly the first half of this year, we should know where we stand, then it’s a matter of resolution or not and then deciding which course of action would result from a strategic standpoint given the outcome of that process. And we have explored a number of different options. We've done the analysis. We're working through tax strategies and other factors to make sure that we know what are alternative courses of actions are and which one we would pursue depending on the outcome of the strategic process to do it as efficiently as possible.

Alex Avery - CIBC

Okay. And presumably the conditional buyer will also have some sort of a time constraint or a time horizon?

Tim Lukenda

I don’t -- I can’t speak to that. That would certainly be up to a buyer but we have not been told of any specific time horizon at this point in time.

Alex Avery - CIBC

Okay, that’s great. Thank you.

Tim Lukenda

Thank you.

Operator

(Operator Instructions). Our next question is from Jonathan Kelcher from TD Securities. Please go ahead.

Jonathan Kelcher - TD Securities

Thanks, good morning.

Tim Lukenda

Good morning, Jonathan.

Jonathan Kelcher - TD Securities

In your release, you alluded on the provision for self-insured liability. You alluded $2 million less versus Q1 last year because of Kentucky. Can we assume that there is going to be no more provisions from Kentucky or is that something we have to wait for the actuarial, the next actuarial review?

Dylan Mann

Based on our internal review by our risk management team, there was nothing attributable at our provision to Kentucky in this quarter but we will be having our independent third-party actuarial done in Q2. So, I would say, at this point, it's too early to tell, to be able to make that statement.

Tim Lukenda

And I think it's safe to say that we think the worst is behind us in terms of the claims experience, but how those play out in terms of the valuation relative to the reserves is always the issue and that's what the actuaries look at and estimate. So, we can't say with certainty we won't have dollar impact of those claims as they play out, but we think the experience is behind us from the standpoint of acquiring new claims.

Jonathan Kelcher - TD Securities

Okay. And also you’ve been -- I guess you have been guiding to $25 million annual run rate, Q1 was slightly above that pace. Is $25 million still the number for the year?

Dylan Mann

I'd say it's really too early to tell based on the first quarter. The provision was within our expectations for Q1.

Jonathan Kelcher - TD Securities

Okay. Is there seasonality to the provisions? You are just under $7.5 million that will be closer to 30, right?

Dylan Mann

Yes. I wouldn't base run rate of one quarter. So I just caution that it's too early to tell.

Jonathan Kelcher - TD Securities

Okay. And finally, can you just remind us how many Class B and Class C properties and beds you have in Ontario that would that will eventually be redeveloped?

Tim Lukenda

We're just heading on number four. We have no Bs, we have Cs and the Cs total about 3,100 beds and how many properties is that until?

Jillian Fountain

21 I think.

Tim Lukenda

21 I think properties for about 3,100 beds.

Jonathan Kelcher - TD Securities

Okay. That's it from me. Thanks. I'll turn it back.

Tim Lukenda

Thanks Jonathan.

Operator

Thank you. (Operator Instructions). We have no further questions registered at this time. So I would like to turn the meeting back over to you Ms. Fountain.

Jillian Fountain

Thank you very much. I’d like to thanks everyone for joining us today. And as a reminder, this presentation is available on our website as are the calling numbers for an archived recording. We look forward to discussing our second quarter results with you in August. Thank you.

Operator

Thank you. The conference call has now ended. Please disconnect your lines. Thank you for your participation.

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