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Edited Transcript of EHE.AX earnings conference call or presentation 24-Feb-20 10:30pm GMT

Half Year 2020 Estia Health Ltd Earnings Call

Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Estia Health Ltd earnings conference call or presentation Monday, February 24, 2020 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian Thorley

Estia Health Limited - MD, CEO & Director

* Steve Lemlin

Estia Health Limited - CFO

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Conference Call Participants

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* David A. Low

JP Morgan Chase & Co, Research Division - Research Analyst

* David Andrew Stanton

Jefferies LLC, Research Division - Equity Analyst

* Matthew Johnston

Macquarie Research - Analyst

* Ronan Barratt

Moelis Australia Securities Pty Ltd, Research Division - Analyst

* Thomas Godfrey

UBS Investment Bank, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the Estia Health Limited FY '20 Half Year Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Ian Thorley, CEO and Managing Director. Please go ahead.

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Ian Thorley, Estia Health Limited - MD, CEO & Director [2]

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Good morning, everyone, and thank you for joining Steve Lemlin, CFO, and myself, for the FY '20 Half Year Investor Briefing for Estia Health. I'd request questions be held until the time that we've made available at the end of our presentation.

The aged care sector in Australia is in a state of flux with new regulatory standards, changes in the role of the Aged Care Quality and Safety Commission and the intense scrutiny created by the Royal Commission as it considers the future design of aged care services. Margin compression is also having a significant impact on the residential care sector.

Slide 4 shows the scale of Estia's operations. During the period, we opened another new home in Queensland and upgraded homes as part of a significant refurbishment program. We are actively managing the portfolio and have a program of capital recycling if a home is not meeting contemporary expectations and strategies to reposition are not available. Our spread of operations across multiple states and the concentration within operating clusters is the strength of the business.

Slide 5 highlights the aged care continuum and the different services that provide for the health needs of older Australians. Choice of how and when care is delivered is highly aligned to the health care required. Residential aged care is an essential component of the social infrastructure that underpins accessibility and universality, key tenets of Australian health policy. Not all older Australians have lived full independent lives in their homes due to clinical and sociodemographic reasons. Not all older people have security of accommodation. In many cases, residential care is the best and only choice for many Australians to receive safe and appropriate aged care.

The policy and funding support for home care is appropriate. We see home care being complementary to what we do. Residential care provides essential support for home care services such as providing respite to ensure people can live at home for longer periods. Furthermore, residential services are essential in supporting the efficiency of the acute hospital system.

Going to Slide 6, financial overview. I will summarize the key metrics for the period. Although financial performance has declined year-on-year, we consider our half year FY '20 result to be sound given the broader financing and funding issues impacting the sector. I'd like to think that these results reflect the range of services, the quality of our portfolio and Estia's operating disciplines.

Operating EBITDA on mature homes was $40.9 million, down 12.6% compared to the first half of FY '19. EBITDA margin was 14.1%. Average occupancy for the half was 93.7%. And spot occupancy was 93.6% as of Friday, 21st of February.

RAD inflows of $11.9 million on the 2 new homes met expectations, while the total net RAD inflows of $22.2 million during the period maintains the trend of the latter part of FY '19. Overall, RAD balances increased to $826.5 million.

Capital investment in new homes and refurbishments totaled $46.3 million. We have also further invested in our quality and compliance systems during the period. The investment in these underlying systems is strengthening the business and ultimately, our competitive advantage.

NPAT of $14.3 million was down 32.1% on the first half of FY '19 but does not include the expected gain on the sale of Mona Vale, which will be recognized in the second half of FY '20. We announced today our interim dividend of $0.054 per share fully franked, which is approximately 100% of NPAT. The dividend reinvestment plan will apply in full to the interim dividend.

Operational overview. Our goal is to optimize the financial performance of existing assets, improve the portfolio through refurbishment and capital recycling and have profitable growth. Slide 7 highlights our first half FY '20 achievements, and these will be reviewed in greater detail in the presentation. However, I would like to particularly mention our stable occupancy, the success of our 2 new homes, initiatives to strengthen quality and governance, a further improvement in our LTIFR and the progress we have made in expanding our development pipeline.

Steve will now present the detailed financial report.

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Steve Lemlin, Estia Health Limited - CFO [3]

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Thank you, Ian. And turning to Slide 9, I'll begin with the summary profit and loss account. This period has seen the adoption and impact of AASB 16 for the first time, which has material impact on the P&L account. And I'll just highlight key items before I talk to the results in detail.

Estia has 7 homes under lease and the lease expenditure for these totals $3 million in the period. Under AASB 16, this cost is removed from pre-EBITDA expenses and replaced with an increase in depreciation of $2.3 million and the finance charges of $1.1 million in the half year.

The other material impact of the application of AASB 16 relates to the recognition of noncash income on RAD and bond balances. The impact of this is to recognize in the period $21.9 million of noncash revenue and an associated increase in finance costs of the same amount, with no net impact to profit before tax. We've shown in Appendix C on Slide 33 a summary of the impact of AASB 16 on the P&L account in order to aid understanding of this new standard. The net impact on the half year accounts is to reduce profit before tax by $0.4 million and increase assets and liabilities by approximately $68 million at 31 December '19.

So focusing on Slide 9 and consistent with prior years, we've shown the impact of homes in ramp-up separately to performance on mature homes. For FY '19, the homes in ramp-up mode and excluded from these metrics were Southport, which opened in May 2019 and Maroochydore, which opened in August 2019. In addition to excluding the net ramp-up losses of the new homes, we also show separately the direct costs associated with responding to the Royal Commission and in prior periods, the temporary funding increase and the costs associated with the closure of Mona Vale.

This presentation thus provides a fulsome picture of our normalized operating model on a same store basis. Overall revenue in the period decreased by 0.1%, and this is a result of slightly higher revenue rates, which I'll come to on the next slide, offset by 20,628 less occupied bed days in the period. 18,768 of these days resulted from reduced bed capacity following the closure of the Mona Vale home and reconfiguration of 3 homes in Victoria and New South Wales. I'll talk to the revenue rate and occupancy impact later.

So moving to the expenditure line. An increased staff costs arise primarily from EBA increases, an increase in cost at home level associated with managing and responding to the impact of the new quality standards and accreditation visits, and a contribution from the full year impact of in-sourcing of catering at some homes during FY '19.

Nonwage costs are lower than the prior corresponding period and second half FY '19, reflecting tight cost control, procurement efficiencies, utility savings at a volume and rate level as well as the in-sourcing of catering already referred to. So on a like-for-like basis, pre-AASB 16 EBITDA on mature homes compared to first half FY '19 fell by 12.6% from $46.9 million to $40.9 million, although increased by 3% from the second half FY '19. This is the EBITDA to which we provide earnings guidance, and this result is in line with the trading update and revised guidance issued on the 9th of December 2019.

As you'll see on the next slide, this reflects the margin compression being seen in the sector with government-controlled revenue rate increases not keeping pace with staff pay increases, predominant -- which are predominantly through EBA agreements. Imputed noncash revenue on the RAD and bond balance in accordance with AASB 16 is $21.9 million. And as I referred to earlier, there's an equivalent cost in the finance side, and these net -- noncash items have no net impact on the profit before or after tax.

Direct costs associated with the Royal Commission in the period were only $70,000, reflecting the fact that Estia has not been called to appear or asked to respond to information requests during the period. And Ian will talk more about the Royal Commission later.

The net loss in the period from the new homes at Southport and Maroochydore was -- of $796,000 was a strong result derived from excellent occupancy performance reflecting the quality and market attractiveness of these 2 homes. We'll provide more detail on these homes later in the presentation. And performance has been such to date that we can now reasonably expect these homes on a combined basis to operate at least at breakeven EBITDA in the second half.

Depreciation and amortization expense does include $2.3 million arising from the adoption of AASB 16 and otherwise reflects the increase in the opening of new homes and increased charges from significantly refurbished homes. We note here in accordance with accounting standards, depreciation on new homes is at a full rate immediately the home is opened, and we do not depreciate on a pro rata basis relevant -- relative to occupancy during ramp-up phase.

A small gain of $0.3 million on the disposal of 2 small parcels of nonoperational land in the period for $1.8 million. And as Ian said, these results do not include the expected profit before tax of $7.8 million on the sale of the Mona Vale site, which will be reflected in the second half. Whilst the sale is unconditional and contractually binding, the proceeds will not be received until later in the second half year. And under accounting recognition rules, the profit cannot be recognized until the proceeds are received and control of the asset passes to the acquirer.

Net finance costs of $26.4 million include $23 million of costs associated with AASB 16 and the remaining interest charges on a like-for-like basis of $3.3 million, consistent with prior periods.

Profit before tax of $20.2 million represents a fall of around 30% from the prior corresponding period and also a similar fall from the preceding 6 months, although the latter period included $10 million of temporary funding increase, which ceased on the 30th of June 2019. Excluding the temporary funding increase, profit before tax increased by 9% compared to the second half FY '19.

Our tax charge represents 29.2% of profit before tax, slightly lower than 30% as a result of adjustments in relation to prior periods. Estia remains a full Australian corporate taxpayer with no remittance of pretax interest or fees to associated or overseas entities.

So I'll move on to Slide 10 and just look at our key operating metrics on mature homes in more detail. Total occupied bed days were 2% lower than in the prior corresponding period, which represents 21,000 -- approximately 21,000 bed days driven mainly by the reduction in capacity and the closure of Mona Vale and room configurations at 3 homes in Victoria and New South Wales. We reported these in the June results, and we only make these adjustments at period end to ensure there's full transparency on our occupancy performance.

The lower occupancy rates on that reduced capacity further reduce the occupied bed days and associated revenue. This occupancy in the period was 93.7%, which is 0.2% lower than the first half FY '19. And spot occupancy on mature homes at 31 December was 93.3%. Ian will talk more to occupancy drivers later in the presentation. Appendix I on Slide 39 shows a full reconciliation of our bed numbers to occupied and available bed days during the period for both mature and new homes.

Government revenue on a per operating bed day basis increased by 2.2% from the prior corresponding period, reflecting the ACFI indexation increase of 1.4% from July '19, indexation of other government-controlled fee rate and the impact of the higher accommodation supplements resulting from our significant refurbishment program. The increase in resident revenue on a per occupied bed day basis was constrained to 1.1% as a result of the reduced MPIR and competitive pressures on room and AS pricing, that's additional services pricing at certain homes, resulting in an overall revenue increase on an occupied bed day basis of 1.9%.

I'll move on to our operating costs, which are shown on an operating or available bed day basis because these costs are largely fixed [at the marginal level of] occupancy movements, particularly staffing levels required to maintain care and quality performance. So on an available bed day basis, staff costs have increased by 5.5%, which reflects EBA increases, the impact of in-sourcing catering at some homes in FY '19 and the impact of the new quality standards and responding to accreditation visits, which I mentioned earlier. Nonwage cost increases were kept below CPI, together with the benefit associated with the impact of in-sourcing catering.

Overall, the operational metrics clearly reflect the ongoing margin compression being put on the industry with total costs increasing by 4.1% per available bed day compared to revenue increases of only 1.9% per occupied bed day. We've seen our average annualized EBITDA per occupied bed on mature homes reduce compared to first half FY '19 by 10.8% to $14,588, although we have largely sustained annualized EBITDA per occupied bed compared to the second half. As expected, staff costs as a percentage of revenue have increased slightly to 68.7% and nonwage costs, excluding rentals, have reduced slightly as a percentage of revenue.

EBITDA margin of 14.1% was slightly higher than the second half FY '19. That represented a fall of 2.1% below the prior corresponding period. Against the backdrop of significantly declining sector financial performance as reported by ACFA, StewartBrown and many representations of the Royal Commission, this is a sound performance achieved with considerable effort into occupancy and cost maintenance, whilst not adversely impacting care provided to residents.

So I'll move on to Slide 11, we'll look at our balance sheet, net debt and cash flow. Net debt finished the period at $96.9 million or $130.9 million if we adjust for the impact of the Government January revenue received in advance. Of this net debt, $21.3 million is represented by construction work in progress, which is not yet income generating. Our bank debt gearing ratio is 1.2x EBITDA, which remains below our target range of 1.5 to 1.9x EBITDA. Cash flows from operating activities were 87% of EBITDA as a result of period-related working capital movements, which reversed in the second half. And we continue to anticipate an approximate 100% cash conversion to EBITDA annually.

Net RAD inflows in the period were $22.2 million in total, which I'll talk to in more detail on the next slide. Our capital investment during the period was $46.3 million, with the breakdown being shown here between greenfield, brownfield, the significant refurbishment program and the sustainability and home enhancement programs. Ian will highlight our capital investments later in the presentation. It should be noted that the sustainability and significant refurbishment programs are now nearing completion and future capital expenditure levels on the mature homes can be expected to be at a lower level as a result.

Our bank facilities were renewed in full on 16th of August 2019 with a maturity of November 2022. Our 2 long-term bankers, Westpac and CBA, continue to support us and we've introduced ANZ as a third syndicate member. Bank facilities of $330 million at the end of the year leave us with undrawn facilities of approximately $211 million.

As a result of our debt capacity, solid RAD flows and disciplined capital management, Estia has a strong, well-capitalized balance sheet, certainly one of the strongest of the for-profit provider in the sector with total assets of approximately 1 point -- approximately $2 billion, supported by $754 million of shareholders' equity.

If I move on to Slide 12, I'll talk to our RAD bridge for the period. The attractiveness of RAD as an accommodation payment in preference to debt continues to be the case in a low interest rate environment, notwithstanding the reduction in the MPIR. Aided by improved transactional activity in the metropolitan housing markets, we've seen a recovery in RAD preferences with net RAD inflows on mature homes of $10.3 million in the period. With net incoming RADs from new homes at Southport and Maroochydore of $11.9 million, our combined net RAD flow -- inflow in the period was $22.2 million.

We also saw a reduction in probate liability compared to July 2019 of around $3.4 million. Incoming RADs from mature homes had an average agreed full RAD price of $436,000, an increase of around $20,000 from prior periods. The outgoing RAD/bond price averaged $387,000, an increase from prior periods but still sustaining the significant difference between incoming and outgoing RADs. At 31 December, we still hold a total of $74 million, representing 368 bonds relating to pre-July 14 residents with an average value of approximately $200,000. This represents a further RAD uplift opportunity in coming periods.

So I'll move to Slide 13 where we show our resident profile. At the end of the period, total residents had increased by 121 as a result of residents in our new homes offsetting the slightly lower occupancy level in mature homes in the period. We have an increase in the concessional population of 1% from June, whilst across the sector, the mix of concessional and nonconcessional residents has remained relatively constant. During a period of declining occupancy in the sector, our willingness to adapt to changing circumstances at a local level for periods of time has resulted in this increase in concessional residents.

Whilst concessional residents are certainly profitable, particularly when at significantly refurbished homes where average revenue can be in line with our company average revenue, they do not contribute capital funds. And this further emphasizes the need for a strong balance sheet, which is not beholden to ensuring a certain number of RADs received at the expense of occupancy. As I explained on the previous slide, our RAD flows on mature homes have been positive, and our new homes are ahead of expectations, reflecting our ability to efficiently and effectively manage the balance of occupancy and capital management.

So before I hand back to Ian, I'll just point out that we have a comprehensive set of appendices as usual which will guide investors and analysts through the detail of all these metrics and slides, including our transparent and comprehensive view of how we calculate occupancy and our mature and new homes. Ian?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [4]

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Thank you, Steve. Slide 15 highlights our approach to resident care. Not everyone can live independently in their homes and the needs-based nature of residential care is evident in the increasing frailty and age of people being admitted. Residential services are holistic and provide psychosocial support as well as complex clinical interventions. And the prevalence of dementia upon entry to residential care speaks to the special needs of many of our residents. These demands require an efficient coordination of a broad range of health professionals, registered nurses, therapists and doctors. Services are required to be provided 24/7 on a real-time, as-required basis.

To meet these increasing demands, we are building partnerships with specialist providers, and in some homes where services are available, we've introduced [enriched] services to avoid hospital admissions. This involves collaboration with primary health networks and public hospitals. We're evolving the design of our new homes to achieve a more home-like feel. Smaller communities, or what were previously called wards, are being created with a relatively small number of bedrooms clustered around dedicated dining activity and lounging areas. These designs are a feature of the homes opened in the last 12 months. Facilities for primary care and allied health are also being incorporated into the design of our pipeline projects, depending on their location. And our new homes have cafes, cinemas and other facilities to create an active lifestyle feel and also promote services accessible to local communities.

Slide 16 highlights our approach to the changing clinical needs and regulatory environment. In the past 6 months, we've increased our investment in quality systems and continued our focus on staff education, technology, customer engagement and service development. We've restructured our clinical processes and have appointed a professor of primary care as the Independent Chair of the Clinical Governance Committee. Furthermore, a clinical pharmacist has also been appointed to that committee to support the quality use of medicines and to ensure that psychotropic prescribing is appropriate. One of the recommendations of the interim report of the Royal Commission related to the use of psychotropic drugs and chemical restraint.

The results of our customer experience reporting undertaken by the Aged Care Quality and Safety Commission are pleasing, and we use these results to identify opportunity for service improvement. In the period, we appointed an external provider to facilitate benchmarking of clinical indicators. The clinical indicator program was established a number of years ago and underpins our quality surveillance and improvement programs. Clinical indicators direct our auditing and education activities and are reviewed monthly with the operations team. Externally benchmarking these indicators with approximately 600 other homes strengthens governance. We support the publication of information that will better inform the public of the performance of the sector. Our staffing model has registered nurses rostered 24/7 to provide leadership and ensure high clinical standards.

During the period, a number of homes have unmet accreditation outcomes, which was satisfactorily addressed. We currently have 3 homes with unmet outcomes. There's no tolerance for noncompliance, and we continually review systems and resources and policies to ensure full compliance.

Slide 17 summarizes our workforce priorities. These activities are strategic in intent as they ultimately underpin the profitability of the business and the culture we desire to support good resident care. We have committed to mapping the competencies of the main resident-facing roles. These competencies form the foundation of recruitment, training and appraisal programs to ensure that our 7,500 employees are equipped to meet the needs of our residents. We are creating career pathways for our staff. We're running 2 management development programs, a new care manager stream commenced in 2019 and our accelerated home manager development program has been effective in seeing the appointment of participants to senior roles within our homes.

Our LTIFR has further improved and was 5.48 on a rolling 12-month basis as of the 31st of January 2020. The LTI has reduced from approximately 18 3 years ago. Our biannual staff culture survey undertaken in August 2019 indicated that we were performing better than industry benchmarks for those homes that participate in the Better Practice Australia survey program. Although the results were slightly down on 2017, we're pleased with the success we have had in improving culture in targeted homes. Staff turnover is stable at 20.4%, but again, we do not accept this as an end point.

Slide 18 looks at market share. Given the negative focus that the residential sector has attracted, we are pleased with the occupancy performance and our ability to increase market share. We're trying new approaches to sales and marketing to mitigate the impact of competition and other factors. Prospective residents and their families are becoming more discerning in their choice of where they receive their care, and our occupancy result demonstrates that our homes, services and care standards are well regarded.

Slide 19 demonstrates our commitment to sustainability. We seek to have a positive social impact and with the completion of the current phase of the solar and LED lighting program, 63 homes will have been retrofitted with energy-efficient systems. A new program of replacing inefficient water heating and gas dryers has commenced. We've partnered with a third party to monitor our electricity usage and achievement of our sustainability goals. We also completed an environmental and social risk baseline assessment. A climate change resilience assessment of our assets is also commencing.

We're also proud of our social programs and notably our gender diversity, which has resulted in 47% female participation on our executive team and our Board. And we're one of the most gender diverse of the ASX-listed companies.

Our growth is addressed on Pages 21 to 23. Total capital investment in the year was $46.3 million, and this included the construction of new homes and the refurbishment and improvement of existing ones. 8 homes with 810 beds completed significant refurbishment in the period, bringing the total number of homes qualifying for the higher accommodation supplement to 42. A further 8 homes are due to be completed, a significant refurbishment program by June 2020. Of the current pipeline, the Blakehurst project is on schedule. And St Ives has had ground preparation completed and substantive construction commences in the next couple of weeks. These homes will complement our Sydney networks.

Slide 22 profiles our recent commissionings. The 110-bed Southport home opened in May 2019 and reached 100% occupancy on the 9th of February 2020, and the 126-bed home at Maroochydore opened in August 2019 and current occupancy is 56%. Both homes are delivering financial performance ahead of expectations. Net losses associated with the opening of both was $800,000 in the period.

On Slide 23, we show our potential development pipeline with indicative dates for completion. With the current uncertainty regarding long-term funding and sector financial sustainability, we are exercising an appropriate degree of caution in our portfolio expansion. And not all of these projects represent fully committed spend. Whilst returns on new homes, when managed well, are still attractive, particularly with the associated RAD inflows, these are long-term assets and there must be a significant change to the current funding model to support the economics of large-scale future expansion.

As I said, Blakehurst and St Ives are underway, and both of these homes are in high sociodemographic areas. Other projects, including assessing the repositioning of some of our smaller homes, quartile 4 homes, are at various stages of planning, and we will finalize the timing of these projects as the Royal Commission recommendations and financing policy reform become clear. We have maintained the flexibility to accelerate or pare back the rate of the development of these new projects. We will continue to manage our capital resources carefully with the existing capital management parameters of profit generation, gearing targets, distributions to shareholders and the timing and quantum of RAD flows and the pace of capital investment. We'll continue to assess alternate funding models in relation to [new builds] and to align the timing of capital investment to RAD flows.

To this end, indicative capital investment for FY '21 is in the range of $95 million to $105 million, which includes a lower level of spend on refurbishments and sustainability projects as those programs conclude in the next 12 months. There were no business acquisitions completed in the period, though the group continues to assess opportunities against our investment criteria. The government has announced that an ACAR will be undertaken in 2020. We will consider making an application should the areas of high-need criteria fit with our strategic positioning.

Slide 25 looks at the Royal Commission. The Royal Commission handed down an interim report in October 2019 with the final report due in November '20. The interim report made 3 recommendations: to provide more home care packages to reduce waiting lists for higher level care; to respond to the significant overreliance on chemical restraint in aged care; and to stop the flow of younger people with a disability entering aged care facilities.

In January 2020, Estia along with other operators submitted information in relation to staff hours worked in all homes over the last 5 years, and this request was complied with by the requested date. Recent Royal Commission hearings have been examining matters of system redesign and potential new staffing models.

Slide 26, sector reform. Since the publication of the Aged Care Road Map in 2016, there have been a number of significant reviews commissioned by the government into the operation of the sector. We have contributed to a number of these reviews and continue to advocate for the development of a financially sustainable, consumer-focused sector. We looked at funding and financing arrangements that will support the financial viability of efficient providers and provide investment returns sufficient to attract capital required to meet the changing needs of the sector.

Looking at Slide 27, the future provision of aged care services is going to impact -- be impacted by an undeniable aging demographic. The fragmented nature of the residential sector is well documented with a number approximately 500 single owner-operator homes. Operating success is dependent on management skill, meeting increasing governance requirements, capital adequacy and the efficiencies associated with scale of operations. The Aged Care Financing Authority has specifically identified an expectation of transition to a more competitive market, where well-managed providers with good governance structures who are innovative, efficient and responsive to consumers' needs at prices consumers are prepared to pay will expand, while underperforming providers will contract or leave the market.

ACFA further states that facilitating greater competition in the market for aged care services will not only enhance the services available to consumers, it will also promote the sustainability by encouraging better performing and financially sound providers to expand at the expense of lesser performing providers. We look forward to how these matters are addressed as sustainability is further examined by the Royal Commission. Estia Health is a well governed, quality-focused operator with scale and capital prepared to invest in its people, portfolio and systems and services; is well positioned to adapt to regulatory change in a more competitive consumer-directed environment.

Slide 28, FY '20 outlook. EBITDA forecast is unchanged from the 9th December ASX announcement. Subject to no material change in occupancy and revenue rates observed at the end of November during the remainder of the financial year, FY '20 EBITDA on mature homes on a pre-AASB 16 like-for-like basis within the range of $78 million to $82 million is expected. We also note here our capital investment and RAD outlook and reaffirm our target bank debt gearing range and dividend policy.

When I look to the future, I see Estia as a quality-focused operator with scale and capital, investing in our people, providing the highest standards of care for our residents and meeting the needs of the communities we serve.

And finally, before we open for questions, I'd like to finish by acknowledging our team at Estia, the people, with 365 days a year, worked with dedication and commitment in support of the care and the comfort of our residents and their families, who create the success of Estia and demonstrate the best that residential aged care can be. Thank you, and we are now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from David Low from JPMorgan.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Perhaps, if we could just start with the occupancy trends. I was just wondering if you could expand a little bit on what you're seeing on the ground. I mean -- particularly in terms of supply, whether there's additional supply coming on and what impact you've seen from the changes in the availability of home care packages, please?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [3]

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David, our occupancy doesn't demonstrate one particular trend right across the entire portfolio. It really has got more regional characteristics. Some of those might relate to new competition. And as a result of that, we respond accordingly. But certainly, we have dedicated additional resources to generating the results that we've had.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Well, perhaps just a follow-up then. I mean have you -- we've seen a lot of pressure on occupancy, particularly given the publicity around the Royal Commission and the media coverage before that. That's moved on a little bit. The Royal Commission barely seems to be in the news these days. Have you seen any signs that that resistance to moving into residential aged care is easing as it gets out of the media?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [5]

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We haven't seen a large degree of variance that's been associated with any particular announcements. I think our occupancy, David, has been relatively stable through the full period and subsequent to that. As I say, what we do observe is more regional variations. Some of that is created with the opening of new competition, but we always adapt to that and develop policies to maintain occupancy at the rates that we've been achieving them.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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Okay. And perhaps if I could just squeeze in one other. I mean on the guidance, I mean quite a commendable result to get EBITDA sequential improvement. Can you remind us of the seasonality in this business? I mean -- because if we doubled the first half, it looks like you're comfortably in that guidance range. Just wondering what we should think about in this period, in the period we're in now, please?

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Steve Lemlin, Estia Health Limited - CFO [7]

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Yes, I'll take that question, David. There are 2 less days in the second half. We've got a leap year this year. So (inaudible) the next [3 years left]. There are more public holidays as well. So generally, the second half is a slightly worse result than the first. At the bottom of our guidance range, that would indicate a result of probably $3.8 million worth in the first half and at the top of the range and in line with performance. So we've got reduced margin and less days, the increased cost of working public holidays.

Obviously, the key impact in all of this, which you've asked questions at the end of the day is the occupancy. And any material movement in that will have a significant corresponding impact. So there is that degree of seasonality. And during the turbulent period that the sector has seen, we've got a pretty good record, I think, of keeping the market informed. And whilst we don't intend to move to sort of monthly occupancy figures, we'll obviously keep the market updated on any material movements and ensure we comply with our continuous disclosure obligations.

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Operator [8]

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Your next question comes from David Stanton from Jefferies.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [9]

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Look, you've called out competition and the fact that you're moving to a sort of more different model, a smaller, more flexible setup of homes in some of your new facilities. I just would be interested to hear what you had to say regards what that means for longer-term occupancy within your portfolio as a general rule. And what that means for costs, particularly employee cost, whether you can flex that downwards in line with smaller facilities.

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Ian Thorley, Estia Health Limited - MD, CEO & Director [10]

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When I talk about smaller facilities, I'm not talking about in total bed numbers. If we look at our new homes in Queensland, one was 110, the other one was 126. What I'm referring to is the internal design and the intimacy that we're trying to create in not having large-scale central facilities like dining rooms and lounges. We're trying to break those up and have, as I say, more intimate feel within the home. And by doing that, we don't necessarily see that there's a major cost detriment. We still get efficient usage of our staff. And in terms of capital development costs, again, we don't see a significant premium in having these designs. So just to be very clear to -- for the avoidance of all doubt, we will be continuing to build homes in the range 110, 130 beds, but all -- they will look different internally.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [11]

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Understood. And sorry, could you perhaps comment on occupancy. Where do you see occupancy longer term on that basis?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [12]

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Well, I look at the -- I look at how we've had a positive response to the 2 new homes we've opened. In terms of occupancy in the longer term, I don't think I'm confident in trying to project how that might look going forward. We do know that there's a major age-related demographic that's going to support aged care services. And how that might be split between residential and other complementary services, I think that's a bit speculative and I'm not going to go there. But I guess the one thing that we have got the capacity of doing in managing our occupancy is that strong balance sheet. And Steve and I have spoken about this in the past, but we have got the ability to flex between RAD and concessional residents. And that flexibility that that strong balance sheet gives us -- certainly supports our occupancy performance.

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Operator [13]

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Your next question comes from Matt Johnston from Macquarie.

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Matthew Johnston, Macquarie Research - Analyst [14]

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Maybe just could you comment on the MPIR, maybe any initial impacts you have seen, and how long we should think about for the full impacts to be grandfathered through the Estia portfolio

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Steve Lemlin, Estia Health Limited - CFO [15]

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Yes, Matt. The drop from about a year ago is about 1%. [My analysis] another 0.5% drop in September. So in July, the impact on this period is about $300,000, $400,000. So looking at your metrics, we will have around about 3,000 new residents a year. And if you apply our incoming and outgoing mix that we give, you can work out roughly what that will be over a period of time. And what the MPIR remains at is probably going to stay low. I don't know whether it's going to drop lower. So it will take around about 2.5 years. That's our average length of stay for that to work its way through the resident population.

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Matthew Johnston, Macquarie Research - Analyst [16]

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And just in terms of offsetting measures, I know like aged care facility has been offsetting for a number of years now. Do you envisage any way to be -- offset some of the earnings headwinds?

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Steve Lemlin, Estia Health Limited - CFO [17]

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Look, it's very difficult. We -- clearly, if the government is controlling revenue rate increases at the rate that they have been and wage pressure in the sector continues at that level, it is -- there comes a point that it's very difficult to continue offsetting those headwinds. I think when you look at the new homes that we've opened up and the performance of those, getting a greater proportion of your portfolio performing at high levels will add to it. But I think as ACFA called out, and Ian quoted from them, this -- the financial sustainability is a key issue for the Royal Commission, and we support ACFA's contentions around that. There is a limit with a very high staff cost component within this business as to where you can manage that headwind for sure.

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Operator [18]

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Your next question comes from Tom Godfrey from UBS.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [19]

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Can you hear me okay?

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Steve Lemlin, Estia Health Limited - CFO [20]

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We can, Tom.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [21]

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Just wondering, as the focus of the hearings has shifted to system redesign and sustainability in the Royal Commission so far this year, Ian, just interested on your thoughts as to what's coming out so far and any implications for where you think they're heading?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [22]

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Tom, I think it's a little bit early to say. Clearly, the consultation paper #1 looked at a whole range of different service types, some which are nice and within the sector already. But clearly, there was some suggestion that they will be expanded. But I think that given the fact that the Royal Commission has got, whatever it is, another 7 or 8 months to run and they'll be looking at more things such as workforce and sustainability, I think it might be a little bit too early to make any call because system redesign, funding sustainability, workforce, all of those are interrelated parts and one cannot form a policy position without considering the whole. So I just think, Tom, it's a bit early to make a definitive call.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [23]

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Okay. We'll wait for November. If I could just have one quick follow-up just around the RAD cash flow guidance and apologies if I did miss this. But mature home RAD inflows should be broadly in line with the first half of fiscal '20. Does that imply we expect another $10 million in second half? Or is that basically saying that 0 in the second half?

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Steve Lemlin, Estia Health Limited - CFO [24]

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No, we had $10 million in the first half, and the indications are that that would be what we would expect in the second half. We haven't seen anything subsequent to December to contradict that expectation, Tom. There's definitely transactional activity in the housing market, and we see that that is a big contributor. Obviously, the wider economic implications at play at the moment, but we'd be -- we may -- the housing market may be impacted by it. But at the moment, that's correct, around about $10 million.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [25]

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Okay. So $20 million for the full year. I think it was just the wording getting me mixed up, but all good.

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Ian Thorley, Estia Health Limited - MD, CEO & Director [26]

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Yes.

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Steve Lemlin, Estia Health Limited - CFO [27]

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Yes.

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Operator [28]

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Your next question comes from Ronan Barratt from Moelis.

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Ronan Barratt, Moelis Australia Securities Pty Ltd, Research Division - Analyst [29]

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Look, just one regarding the environment for acquisitions. Could you just describe any changes you've seen in that environment over the last 6 months? Are you seeing more interesting opportunities now? And has there been any movement in vendor price expectations?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [30]

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I -- Ronan, we're still seeing plenty of opportunity being brought to the market. I do think that there is a small change in vendor expectation, but we would still think that it's overvalued. And I think I'd make the other observation as well in terms of the opportunities we've looked at and they have been substantial. There's a fair degree of unattractiveness about them in that many of them are businesses that have been struggling for a substantial period of time, and we would not necessarily see them as being attractive in terms of what the financial, cultural and clinical turnaround would be required to integrate them into our portfolio.

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Steve Lemlin, Estia Health Limited - CFO [31]

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Yes. So I think -- Ronan, this is Steve. The -- we're seeing certainly more evidence of smaller, single owner operators just closing the door. There's one announced in Victoria last week in Sunbury. You look at some of those homes, they wouldn't be an attractive purchase for the reasons that Ian has outlined. So I think some of the sector consolidation will happen by these lower -- lesser attractive, smaller homes just deciding to exit the market. So we are seeing some of that happen publicly as you could see in the press last week but also anecdotally.

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Operator [32]

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Your next question is a follow-up question from David Stanton from Jefferies.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [33]

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Look, a couple of housekeeping questions, if I may. Employee cost expense has increased as you highlighted. I mean should we be thinking second half in absolute terms, second half around the first half number?

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Steve Lemlin, Estia Health Limited - CFO [34]

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David, I don't want to go into detail line-by-line. I think it -- generally the second half, as I said to David around seasonality, it has more public holidays. They do see a slightly higher cost in that period. That increase of around 5% is not one we'd hope to see continue. However, it's difficult to make any specific predictions. So I think from a housekeeping point of view, that's probably a reasonable expectation.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [35]

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Okay. And then again a follow-up on that tax rate higher than we were thinking. I mean -- for F '20, can you help us with the tax rate, if possible?

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Steve Lemlin, Estia Health Limited - CFO [36]

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Yes. The tax rate should be around 30%. There's a little bit each year, 0.5%, that we pick up from small losses. But for accounting reasons, this gets a bit technical on the call, don't get recognized into deferred tax. But generally, 29% to 30% is -- that's what we pay and that sort will be -- the tax on Mona Vale in this period will be fully taxable. So yes, around about 30% is probably the right one to model going forward.

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Operator [37]

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There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.