Extendicare's (EXETF) CEO Tim Lukenda on Q1 2016 Results - Earnings Call Transcript

| About: Extendicare, Inc. (EXETF)

Extendicare Inc. (OTCPK:EXETF) Q1 2016 Earnings Conference Call May 13, 2016 10:00 AM ET

Executives

Jillian Fountain - Corporate Secretary

Tim Lukenda - CEO

Elaine Everson - CFO

Analysts

Jonathan Kelcher - TD Securities

Doug Loe - Echelon Wealth Partners

Yash Sankpal - CIBC

Michael Smith - RBC Capital Markets

Operator

Good morning ladies and gentlemen. Welcome to Extendicare Inc. First Quarter Results Conference Call. Please be advised 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

Thank you, Donna. Good morning everyone and welcome to Extendicare’s 2016 first quarter results conference call. With me today are Tim Lukenda, Extendicare's President and Chief Executive Officer, and Elaine Everson, your Vice President and Chief Financial Officer.

The Q1 results were disseminated yesterday and are 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 an accompanying slide presentation which viewers may advance themselves. A replay of the call will be available from noon today until midnight on November May 27. The replay numbers and pass code 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 regarding our future operations. Such statements involve known and unknown risks and uncertainties that may cause the actual results to differ materially from those expressed or implied today. We have identified such factors in our public filings with the securities commission 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. The first quarter of 2016 reflects the start of the repositioning that we are undertaking to rebalance our business across the continuum of care. Our financial results for the quarter reflected an improvement in revenue of $60 million or 30% over last year and an increase in adjusted EBITDA of $300,000 and AFFO from continuing operations of $5 million. Operationally in February we closed on 2 newly opened retirement communities in Saskatchewan, Yorkton Crossing and West Park crossing for $40.5 million. Each contained 79 suites and offer combined independent enhanced living and memory care.

These retirement communities expand our existing presence in Saskatchewan where we currently operate 5 LPC centers and two other recently acquired retirement communities. And last month we were pleased to announce that ParaMed has obtained a four year contract with the Vancouver Coastal Health Authority that’s anticipated to add a further 330,000 home healthcare hours and $11.5 million of revenue annually. Our core long-term care operations experienced occupancy of 98% across Canada this quarter up slightly from 97.4%. Our private accommodation occupancy in Ontario was up in both the A & C beds which drives a higher average daily rate.

This improvement in preferred accommodation was driven largely by the improvement in preferred in our Timmins and St. Mary’s centers. The average daily revenue rate of our long-term care centers increased by 1.7% over Q1 2015 and beginning in April, a 2% increase on the Ontario nursing and program envelopes coupled with CMI adjustment is anticipated to add $1.8 million of additional funding per annum. Our growing portfolio of private-pay, a street [ph] lifestyle communities now consists of six recently acquired communities with 506 suites. These communities offer a range of independent and enhanced living and memory care services. The average occupancy of our six centers including the two newly opened centers in Saskatchewan was 61% this quarter. If we consider just the four that we acquired last fall, the average occupancy of those centers has moved up to 72% this quarter from 64% in Q4 2015.

The contribution to AFFO from this segment was about $1.3 million or $1.5, inclusive of income support during the lease up period. We are pleased that our new VP of retirement Mark Lugowski, an experienced retirement operators started with us in March. And we are since added a marketing director. So overall the new retirement division is definitely taking shape.

On the development side progress continues on three retirement communities under development representing an additional 304 suites in Ontario, the three new communities are located in Simcoe, Bolton and Uxbridge. Total cost for all three of these projects is expected to be CAD81 million or approximately CAD266,000 per suite. And our expected to generate stabilized NOI of CAD6 million. The first project Simcoe is expected to be completed by Q4 of '16 and Bolton and Uxbridge by the fall of 2017.

Moving to our home health care operations we have benefited from the acquisition last year that doubles the size of this business segment in terms of employees and hours of service, and expanded our presence across six provinces. And our same store operations have experienced a volume increase of 3.4% this quarter over Q1 of '15. While the Ontario government funded home care system is expected to undergo significant change with the amalgamation of the CCACs into their corresponding wins, we are confident that we are well positioned as the largest private sector provider to navigate these changes successfully. And our -- new award of ours in BC demonstrates our ability to grow our platform across other jurisdictions.

Turning to our other Canadian operations, they are comprised of two complementary divisions, our Extendicare Assist Manage Services and our SGP Purchasing Partner Network, both of which have experienced impressive growth in clients, revenue and NOI over the past couple of years. Since the beginning of the year SGP has increased its customer base by 26% to 37,300 resident served with a further 4,400 to on board in Q2. SGP significant additions to its network this year included the Good Samaritan Society and Effective Pricing Solution Inc. EPS is an alliance of retirement and long term care communities and group homes for seniors with 85 sites across Canada serving more than 10,200 residents. The Good Samaritan Society is a non-profit charity providing complex continuing care assisted in support of living and other specialized health and community care services in Alberta and British Colombia to about 3,000 residence. We believe that the expertise delivered the third parties credits of beneficial relationships that will continue the drive growth from these businesses segment.

With that I'll turn things over to Elaine for a more detailed look at our financial performance. Elaine?

Elaine Everson

Thanks Tim and good morning everyone. Now turning to our results for the first quarter of 2016 Slide 10 provides a summary of our key financial line items. Revenue grew by CAD60.2 million or 29.8% with our acquisitions contributing CAD51.4 million of that increase and growth from same store operations contributing CAD8.8 million, or 4.4% increase over Q1 of 2015. Net operating income from continuing operations improved by CAD2.3 million or 8.8% to CAD28.1 million this quarter, representing 10.7% of revenue. NOI includes CAD3.8 million from our retirement and home house acquisition at on a same store basis our Canadian operations generated NOI of CAD22.5 million and our continuing U.S. operations generated NOI of CAD1.8 million. the NOI margins for the quarter reflects the timing of incrementally higher sat-day [ph] cost this quarter, fewer clients being served from our remaining U.S. IP hosting subsidiary as well as the impact of the shift in the mix of our business with the home health acquisition in 2015 and the lease up of our new retirement community.

AFFO from continuing operations improved by CAD5.1 million and included a CAD2.3 million contribution from the home health acquisition, CAD1.3 million contributions from the retirement acquisition lower than finance cost of CAD2.3 million and an increase in government capital funding of the CAD1 million due to a retroactive funding received on two re-developed long term care centers. These were offset in part by higher admin and lease cost. Which will impacted by our acquisition and by some non-recurring professional fees and on ongoing cost in connection with sale of our U.S. operations.

Now turning to slide 11, the components of our revenue from continue operations are reflected the CAD5.3 million increase in our long term care revenue included the impact of an additional day this quarter funding enhancements and continued improvement in our preferred accommodation revenue. Same store home health revenue improved by CAD3.9 million primarily due to a 3.4% increase in hours of service delivered and some enhance funding support a wage increase to the PSW.

Revenues from our management and group purchasing operations grew by CAD900,000 this quarter due to the continued growth in client service and the acquisition contributed 51.4 million to this revenue resulting in an overall 31.9% improvement from our Canadian operation.

Slide 12 provides the net operating income by operating segment. The change in NOI from our total same store Canadian operations this quarter has been impacted by a number of factors. The increased business volumes at the home health management services and group purchasing businesses, long-term care funding enhancements and higher preferred revenue which were offset by timing in the spending under the Ontario long-term care funding envelope and increased labor cost including higher additional stack cost.

We look forward to the integration with our acquired home care business and see opportunities to reduce cost in our combined structure. The acquisitions contributed 3.8 million to NOI resulting in an overall 13.3% improvement in our Canadian operations and with the contribution of 1.8 million from the U.S. continuing operations, our total NOI was CAD28.1 million this quarter. After administration and lease cost, our adjusted EBITDA was reported at CAD16.5 million.

Now turning to our total AFFO and distributions per share on Slide 13, for Q1 2016 we reported AFFO of CAD0.139 and declared dividends of CAD0.12 per share representing a payout ratio of 86%. This is higher than our payout ratio of 48% in Q1 of 2015 because of sale of our U.S operation. However, we are already seeing significant improvements in our growth in AFFO from continuing operations from CAD0.081 in the first quarter of 2015 as we’ve benefitted from the redeployment of the proceeds from sale.

Maintenance CapEx spending was 1.1 million this quarter compared to 800,000 in the first quarter of 2015 each representing about 0.4% of revenue. It is our intention to spend approximately 1.5% of revenue annually and for the 2016 year we expect spending in the range of CAD13 million to CAD16 million on maintenance CapEx. With respect to growth CapEx, we spend 1.7 million this quarter an expensive spend in the range of 35 to 40 million this year related primarily to the three retirement development project. All of about 10 million of our growth CapEx spend this year will be financed. And this monthly secured construction financing of approximately CAD31 million on the first two of our retirement development project, representing about 65% of the anticipated cost. The loans are interest only based on floating rate. We anticipate similar financing on the third project in the third quarter of this and upon maturity of the construction loans we will seek permanent financing.

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

Tim Lukenda

Today, Extendicare is represented in 7 provinces with a broad footprint in long-term are with a 102 center, home healthcare with 47 locations and a growing retirement segment with 16 owned and managed communities. We are continuing to transform and build on our platform and existing leadership in the Canadian long-term care segment to meet the needs of the ageing population across the continuum of seniors care. Our goal is to be integrated across the continuum to deliver services where and when our customer, the Canadian senior and their family need us, and in doing so to be part of the solution to the demographics tsunami that is headed our country’s way. This is our strategy and we are executing on it in a disciplined manner.

We intent to further enhance our Canadian business by expanding our offering -- continuing to expand our offerings. First by building on our solid long-term care operations by redeveloping our long-term care centers and improving our long-term care revenue streams by providing an enhanced mix of preferred accommodations. Also by continuing to expand on our private pay retirement business lines through acquisitions and developments and by continuing to grow our home healthcare operations by growing our revenue in the private, pay home healthcare market and expanding the volume of services that we provide to our pyramid, home healthcare division.

Finally, by supporting the continuing growth of our Extendicare Assist Management Services and Silver Group purchasing divisions. At the same time, we will continue to focus on delivering strong results from our core operations and our new acquisitions. As outlined in our recently released proxy circular, we have undertaken a number of board governance and executive compensation initiatives to align our interest with those of our shareholders.

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

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone line. And the first question is from Jonathan Kelcher from TD Securities.

Jonathan Kelcher

Look first on the home health’s business. The same property NOI was down about a CAD1 million year-over-year and I guess 600,000 of that is due to the Easter Holiday being in Q1. Can you maybe give us a little more color on the remainder does it look like your revenues were up fairly nicely there?

Elaine Everson

Yes Jonathan, so in addition to that data as you referred to the net of our funding increases of some from CPACs [ph] has not kept pace with other cost increases so it’s really just the regular, a little bit of compression in the rates on the existing business.

Jonathan Kelcher

Okay but the -- but it has -- the government has matched the mandated wage increases alright?

Elaine Everson

On the PSW side absolutely, it's a bit initiative on their part.

Jonathan Kelcher

Okay so if we're looking at that going forward how should we look at that in terms of margins and revenue growth?

Elaine Everson

I think once we get the integration of the acquired home care business in with ours I would expect that those margins to return back to the you know closer to the levels that we’ve seen in the past in the 10% to 12% range.

Jonathan Kelcher

Okay, and would you expect, you’d expect similar margins for the new BC contract is there anything unique about BC versus Ontario.

Tim Lukenda

The advantage of the BC contract Jonathan is that we do have an office in that area, we’re supplying ours now. So we see this as an overlay on that existing infrastructure. Too early to tell exactly what the profitability would be from that specific segment or chunk of business but we think there's an opportunity to be equal or better on the margins because of the ability to gain synergies with that existing office.

Jonathan Kelcher

Okay, so, 10% to 12% margins would be a fair way to look at it.

Tim Lukenda

Ideally. Again very early in that transition process.

Jonathan Kelcher

Yes, and then secondly on the capital funding from the government, yes there's a retroactive payment in there in Q1, what's a good run rate going forward for that?

Elaine Everson

Incrementally over what we’re seeing, probably in the neighborhood of 350,000 annually.

Jonathan Kelcher

Okay so, maybe a 100 grand a quarter versus Q4?

Elaine Everson

Versus Q4 yes, that's a good estimate.

Jonathan Kelcher

Okay, thanks I'll turn it back.

Tim Lukenda

Thanks Jonathan.

Operator

Thank you the next question is from Doug Loe from Echelon Wealth Partners, please go ahead.

Doug Loe

Home healthcare kind of leapt off the page for me as well, so if I could continue on that theme for just a minute. I can see in interim DNA, you did actually parse out the different operating margins for ParaMed and Revera Home Health and the gap between those two businesses was little bit larger than we thought it was, so just wondering if you would continue to expect the Revera component of the business to continue to operate, no pun intended, at lower margins or there's going to be a narrowing of your consolidate home health care margins going forward, to the extent that you'll sort of report any granularity there going forward.

And then second of all congratulations again on expanding your home health volumes in BC as announced earlier. Just wondered if you can give us sense on whether similar contracts of that magnitude in non-Ontario geographies is still a core focus for your business development team if we can expect some more announcements like that over the next couple of quarters and just how you envision the home health business growing in nontraditional geographies for you. And I'll leave it there, thanks.

Elaine Everson

So Doug I'll take the first question on the acquired home health margin versus our home health margins. When we acquired that business their margins were running lower than what we had been operating at on our side, so I would expect those to come close together as we work through the integration of the two businesses. So we'll just take a little time.

Tim Lukenda

And then on the business development side we do absolutely intend and do look at RFPs when they become available, we're very much on the lookout for those. It's hard to predict timing or success on individual RFPs but we're hopeful that we'll continue to land government, additional government hours of business in different jurisdictions where we operate or extension of our current operations. Then on top of that we are looking at ways of growing the private side of the home care business which include leveraging off of the existing customer base and providing additional hours of service as sort of a wraparound to the existing hours that are provided on the government fund basis.

Doug Loe

Great, great so just to be clear though, the substantial contract you just announced in Richmond, that's definitely not a one-off, I mean there are other opportunities that you are actively contemplating?

Tim Lukenda

From time to time there are, there's nothing imminent. But there are from time to time there are different pieces of business that we will bid on yes.

Doug Loe

Great, thanks Tim.

Operator

Thank you, the next question is from Yash Sankpal from CIBC, please go ahead.

Yash Sankpal

On this BC contract I'm just trying to understand how you guys, when you look at the -- you know potential contract -- how do you decide whether to go for it on a return basis like what kind of returns are you looking at.

Tim Lukenda

Generally we want to be at or above where we are presently with our returns on that business and where we think we're stabilized. As Elaine said we still have some room to go in improving the existing margins on the acquisition and we are working on that integration and improvement, but we look at being equal or better to where we are but we also look out ways we can leverage existing infrastructure to add more hours to the same day. So it’s a decision on a case-by-case basis as we look at these.

Yash Sankpal

You gave us the dollar figure that CAD11.5 million annually, right?

Elaine Everson

On the revenue side that’s correct.

Yash Sankpal

Yes, so I am assuming you look under revenue and you said okay 10% margins, or if we can improve this to say 12 and that’s how you think about it, right?

Tim Lukenda

Yes, I certainly-- additional revenue of that nature and an expectation of a margin in that order is attractive to us.

Yash Sankpal

And how do you apply that to your FFO share growth rate? I am just trying to understand the whole -- like okay, big contact is good, but is it really accretive on a FFO per share base?

Elaine Everson

So, on something like that when we look at our contact basis and [technical difficulty] capital required to grow on that side. So as long as it’s delivering returns to us further attractive its -- that’s the basis of our decision.

Yash Sankpal

[Multiple Speakers] Any new capital, new offices in the --?

Elaine Everson

No with existing home share business that we have in BC already we will not have to add much in this from an infrastructure perspective at all.

Operator

Thank you the next question is from Michael Smith from RBC Capital Markets. Please go ahead.

Michael Smith

Just wondering if you could give us a sense of the timing of your home health care business of the margins sort of coming together from the few existing with your acquisition over the next few quarters?

Tim Lukenda

It’s a difficult question to answer we are working diligently on it, but there is a number of challenges that are both external and internal. At the same time as we are going to this integration there is the process with the CCACs and the wins, that had some impact on the way we proceed on things, but also in some cases we’ll have unionized offices and non-unionized offices and we have to work through the how we bring those offices together, and there is other logistical issues. So the bottom line is, it will be a continual effort over the next year or so in order to get to the place where we think we can be on it. It's not something unfortunately we can snap our finger than do over night, but we are working diligently and trying to get to that point.

Michael Smith

And wanted you just give us some color on the labor cost?

Tim Lukenda

On the home health care business Michael?

Michael Smith

Yes, I mean you’ve obviously had some -- you had the increase, but there was some additional cost on a same store basis.

Elaine Everson

Within the homecare portfolio is that what you’re referring to Michael?

Michael Smith

Yes.

Elaine Everson

Yes, so it’s a sort of normal labor cost, we got the PSW for those are funded and in addition to that you would have some professional staff that would have increases, they may be based on the volume and seasons, there may be some incremental overtime to match off and serve those volumes. So it's those type of factors that should -- we should manage through as a volume increases.

Michael Smith

And so would there be a catch up instead of timing issue or it’s just manage to those issues?

Elaine Everson

I think we have managed through, I think it’s our focus to sort of where we can, sort of, reduce any if those premiums. So I would say that they would turn around our [indiscernible], but we would manage through those type of costs and improve.

Michael Smith

Like less overtime that kind of thing?

Elaine Everson

Yes, those type, absolutely, yes.

Michael Smith

And then just lastly, I’m wondering if you could just give us a little bit color on the U.S. [indiscernible], it was down and look I know its non-core, but just for modeling purposes?

Tim Lukenda

For modeling, let Elaine help you on the modeling purposes, in terms of commentary really the biggest driver of the decline was just an expected decline, I don’t know if expected is a right word but a decline in the volume of ours on the VCPI business that is a result of the sale of our U.S. operations and some of the services that were provided to the former Extendicare U.S. operations moving away from VCPI. So it's part of the follow through in that transition the acquirers of those properties could choose to continue the use VCPI or not use VCPI and there in various states of transition along those lines and so that’s really driving a decline in that volume.

VCPI is the non-core asset for us it's something that we are going to continue to explore timing and ways to divest that operation, it's just a matter of working through and finding an acceptable transaction to do that. We don’t describe significant value to it.

Elaine Everson

I think that and I would like to add to that I think it’s non-core and the U.S. operations has that VCPI as well as our costs and this is below an NOI level to manage through the run off of our captive so there are some costs that contribute to that US continuing segment from the capital [ph] as well.

Michael Smith

Okay thanks you.

Tim Lukenda

Thank you.

Operator

Thank you, [Operator Instructions], there are no further questions at this time, I'd like to turn the meeting back over to Ms. Fountain.

Jillian Fountain

Thank you Donna. This presentation is available on our website as are the calling numbers for an archived recording. Also as a reminder our annual shareholders meeting will be held in a couple of weeks on May 26th at the Royork Hotel beginning at 10:30 am, we invite our shareholders to join us at that time. Thank you everyone for joining us today.

Operator

Thank you, the conference has now ended; please disconnect your lines at this time and thank you for your participation.

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