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Edited Transcript of EHE.AX earnings conference call or presentation 19-Aug-19 11:30pm GMT

Full Year 2019 Estia Health Ltd Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Estia Health Ltd earnings conference call or presentation Monday, August 19, 2019 at 11:30:00pm 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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* 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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Ian Thorley, Estia Health Limited - MD, CEO & Director [1]

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Good morning, everyone, and thank you for joining myself and Steve Lemlin, CFO, for Estia's 2019 Full Year Results Call.

I'd ask everyone to keep their questions until the end of the presentation, at which time we'll be pleased to answer matters that may require further examination.

Although FY '19 has been challenging, we are relatively pleased with our overall results.

During past year, we invested in additional resources and systems to meet the new operating conditions and to support the ongoing provision of high-quality care for our residents.

The announcement of the Aged Care Royal Commission in September 2018, the establishment of the Aged Care Quality Council in January 2019 and thereafter, the legislation introduced in July 2019 has seen increased focus on the sector. Community expectations have increased, and this is only right. We believe the changes introduced by the government over the last 6 months and those that will inevitably come from the Royal Commission will be important to restore community trust in the broader aged care sector.

In addition to strengthening our operating model to meet the new standards, we have invested further in growing the portfolio, opening a new home in Southport in May and Estia Maroochydore has its official opening on Thursday.

The 2 new homes we opened last financial year performed strongly to Estia's key operating metrics. Our balance sheet is strong and to support further growth and further changes that might occur with regard to resident mix.

We have recently refinanced the business on favorable terms, expanding the number of banks to 3 and we have the ability to increase our debt capacity if required.

Slide 5 shows the extent of Estia's portfolio. We are one of Australia's largest aged care providers, and we benefit from scale and market penetration.

Our networking spread mitigates the risk of being overweighed in any one market. We have a strong metropolitan presence, and this gives us a strong management oversight over our homes.

Our regional facilities generally operate in clusters around large regional cities. This focus gives us operating efficiency, access to labor markets and good referral networks.

Our homes are positioned to appeal to a broad cross-section of the community and we remain focused on being a specialist residential aged care provider.

90% of our available beds are single rooms. This is a very important part of our market attractiveness, and we continue to rereview the services we provide and how we can best meet community expectations.

In May 2019, we closed Mona Vale and we are reviewing development options for that site. We've also undertaken -- we have also taken 48 beds offline from the 1st of July 2019 and strategic options are being considered in the relevant homes. Planning continues on, on the sites and progress on these projects will be considered in greater detail later in the presentation.

Turning to Slide 6. Our financial results were at the top end of our revised guidance, with EBITDA of $94 million, an effective 4.3% increase on FY '18 EBITDA. I note that this is inclusive of the additional government funding, Royal Commission costs, the impact start-up cost of the 2 new homes in Queensland and the closure of Mona Vale. We've broken out the details of our mature homes in the appendices so there is absolute clarity in the year-on-year performance.

Average occupancy for the year was 93.6%, 8.6% decline on the prior year, 94.2%. Occupancy is a key management discipline, and we continually refine our refer engagement model to meet our occupancy targets. Some of our homes are being impacted by specific competitive challenges, and we're responding to those changes with local solutions.

Spot occupancy as at 16th of August was 94.1%, 22 residents up on the 30th of June. This does not include our new Southport home, which is at 45.5% occupancy as of today.

RAD inflows were $14.6 million, and this is substantially down on previous years. There has been changes in RAD/DAP preferences and the financial status of residents.

For each of the past 2 years, the concessional resident ratio has increased 2% per year. This trend is reflected in the broader market.

Today, we announced a final dividend of $0.078 per share fully franked, making the full FY '19 dividend of $0.158 a share, 100% of NPAT.

Our policy remains to distribute no less than 70% of NPAT. The company has also reintroduced the dividend reinvestment plan.

Subject to there being no material changes in market or regulatory conditions, we also advise our guidance for FY '20 EBITDA between $86 million and $90 million from our mature portfolio of homes.

The key financial metrics of the year are highlighted in Slide 7 and Steve will talk to these more fully.

In summary, our total revenue increased 7.1% on FY '18, EBITDA increased 4.3%, and net profit after tax uplift of 0.3% on FY '18 reflected increased depreciation and impairment charges.

Net bank debt of $110.4 million provides the capacity for the $120 million of approved capital projects either in planning or underway in FY '20.

Slide 18 (sic) [8]. Operational review. There is no doubt that FY '19 was a challenging period for the sector. Our focus has been on future-proofing business with additional investment in our people, our portfolio and our systems. This investment has had an impact on margin.

Historically, Estia had a strong accreditation record but regulatory changes incurred and required additional cost to ensure a proper introduction of new standards as well as the ongoing performance against the new regulations. This has seen additional investment in staff education, new technologies, customer engagement and service developments. A number of our homes have had unmet outcomes, which we have satisfactorily resolved in the designated time frames. We have had no sanctions.

Our people are at strength, and we have invested in multiple initiatives to ensure that we have got leadership depth and skill across all levels of the organization. This is also important to meet the needs of a growing business. Providing career pathways is an important way of managing the retention of our staff and our turnover of staff has stabilized at around 21%.

I would now like to hand over to Steve.

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Steve Lemlin, Estia Health Limited - CFO [2]

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Thank you, Ian, and I'll turn to our summary profit and loss account on Slide 10.

Excluding the impact of the temporary funding increase, total operating revenue increased by 6%, driven by 17,000 more occupied bed days compared to FY '18 as a result of the full year impact of the homes opened in FY '18.

Government revenue increase reflected the impact of the significant refurbishment program, which Ian will talk to in more detail later, the reintroduction of ACFI indexation from 1 July 2018, and an increase in supportives for concessional resident.

Resident revenue increase was more modest, still reflecting higher bed days, but seeing the reduction from higher numbers of concessional residents and increasing price competitiveness and sensitivity for unsupported residents.

Full year staff costs increased by $29 million or 8.2% as a result of the full year impact of the additional cost this year of new homes, which opened during FY '18, which contributed around $80 million of those costs. Staff EBA increases averaged around 3% and the sustained investments in care, quality, compliance and our admissions and occupancy programs contributed the remainder.

As a result, EBITDA on the mature homes declined by 4.7% in the year to $86.6 million, in line with the revised guidance issued in May '19, and against the backdrop -- background of the well-publicized revenue and cost pressures being experienced in the sector.

Though the EBITDA on mature homes, we show separately the $10.3 million impact from the temporary funding increase, which was provided by the government between March and June of this year, and which has seized in full effective 1st of July.

We show only the direct incremental costs associated with managing our response to the Royal Commission, including the detailed and substantial request information in January, and costs incurred as the hearings have progressed and ensuring that all matters being addressed could be responded to comprehensively, swiftly and appropriately, had the company been called to appear.

Total of net losses to date associated with the opening of Southport in May 2019 and preparing for the opening of Maroochydore in Queensland this week totaled $685,000 in the period.

The costs associated with the closure of the old noncontemporary home at Mona Vale in New South Wales of $538,000.

Total EBITDA after all of the above items, was $93.967 million, an increase of 4.3% compared to FY '18.

Depreciation, amortization and impairment costs of $29.1 million were an increase of $3 million compared to FY '18, representing the full year depreciation of the new homes, increased charges from significantly refurbished homes and accelerated depreciation from the early closure of Mona Vale.

We note here that depreciation on new homes is at a full rate immediately the home is opened in accordance with accounting standards, and we do not depreciate on a pro rata basis relevant -- relative to occupancy during ramp-up phase.

Net finance costs of $6.99 million were approximately $300,000 less than FY '18, reflecting lower interest rates, continued tight working capital and cash management, which has offset increased debt levels.

Capitalized interest was also higher, reflecting the level of construction work in progress.

Income tax expense for the period was 28.5% of income, which is in line with prior periods and slightly below 30% as a result of prior period adjustments and a small contribution from historically acquired losses.

Moving on to Slide 11, and we look at our key P&L metrics on mature homes.

Mature homes are defined as homes which were fully operational during the year, i.e., were not in ramp-up mode. FY '19, the only home excluded from these metrics was Southport, which opened at the end of May.

In addition to excluding the ramp-up cost of the new homes at Southport and Maroochydore, the metrics reported here on mature homes also exclude the temporary funding increase, Royal Commission costs and the costs associated with the closure of Mona Vale. These metrics thus provide a fulsome picture of our normalized operating model or same-store basis.

Whilst occupancy has fallen during the year and is below both our expectations and prior experience and averaging 93.6% for the year, and finishing the year at 93% this represents a relatively sound performance against industry averages reported by ACFA and others.

Occupancy is the single most crucial contributor to profitability, the 1% movement resulting in an increase or decrease in EBITDA of around $5 million due to the fact that marginal movements in occupancy across the portfolio, do not lead to a corresponding reduction in staffing levels and other costs.

Ian will talk more later about our investment strategy in relation to occupancy, which will become increasingly important in an environment of high-end competition and increased consumer awareness within a world of consumer-directed care.

We note here that since June, our occupancy has increased, and at 16th of August was 94.1%, representing 5,594 residents in our 5,944 operational beds.

Moving on to our other key metrics. And government revenue per occupied bed day increased by 5% as a result of the partial reintroduction of ACFI indexation and the contribution from the higher accommodation supplements and the significant refurbishment program and a higher concessional resident population.

Residents and other revenues on a per occupied bed day basis increased by 2.6%, reflecting the higher concessional mix, which I will talk to in a short while, increased competitive environment and regulatory constraints associated with the basic daily coffee and additional services.

Moving on to our operating costs, which are shown on an operating bed day basis, consistent with industry norms, because these costs are largely fixed at marginal level of occupancy movements, particularly staffing levels required to maintain care and quality performance. The increase in combined staff costs and non-wage costs averaged 5.9% in the period as a result of EBA increases and sustained increase in quality, compliance, occupancy and consulting support costs to maintain quality and performance during a challenging period.

As a result, our EBITDA margin has fallen to 15%, while still generating in excess of $15,000 per resident per year, a reduction of 4.7% from FY '18.

Whilst these declines in margin percentage are disappointing, we note the well-publicized pressures being experienced by the sector and being called out by ACFA in the seventh report and in the submission to the Royal Commission and also by StewartBrown, the latter noting that around 40% of providers in the industry are now approaching at an EBITDA loss.

Ian will talk later around reforming the sector to ensure the long-term sustainability required in order to bring investments in the sector to meet growing demand.

We show in appendix E the view of the half year financials, metrics and trends, which identify the challenging second 6 months of FY '19.

Whilst the second half is always the less profitable half in the first 6 months of the year due to the lesser number of days and higher number of public holidays, this year, the second half was also adversely impacted by lower occupancy and continued higher staff and compliance-related costs during the period.

Moving on to Slide 12, and we'll look at our balance sheet, net debt and cash flow.

Net debt finished the year at $110.4 million, of which $42.3 million is represented by construction work in progress, which is not yet income generating. Our bank debt gearing ratio at 30th of June of 1.3x EBITDA remains well below our target range of 1.5 to 1.9x EBITDA.

Bank facilities of $330 million at the end of the year, leave us with undrawn facilities in excess of $200 million, allowing us to absorb short-term RAD movements, maintain dividend payout ratios and fund our capital investments into the future.

Our bank facilities were renewed last week in full with a maturity of November 2022 and a new additional accordion facility of $130 million.

Our 2 long-term bankers, Westpac and CBI continued to support us, and we have introduced ANZ as a third syndicate member.

Cash flow conversion from operating activities remains around 100% of EBITDA and capital investments of $93.8 million in the period, with the highest made yet by Estia since listing and delivering new capacity from greenfield and brownfield developments, and we will talk to our development pipeline later in the presentation

Dividends paid during the year of $41.7 million continued to reflect our 100% impact payout ratio.

As foreshadowed at the half year, net RAD inflows during the period were lower than experienced previously, and I will now talk to RADs in more detail as I move to Slide 13.

Here we show our RAD and bond bridge, analyzing the increase in our RAD balance from $791.5 million to $805 million by the end of the year. Consistent with sector experience, we have seen a preference away from RADs, in favor of DAPs during the year, and I will show that in a little more detail on Slide 14.

Slide 13 focuses, however, on the value of RADs, and as is shown, our incoming RADs from mature homes during the year were $227.8 million, at an incoming average agreed price of $417,000. This compares with outgoing RADs from departing residents, which totaled $222.5 million, at an average outgoing price of $352,000. The differential between incoming and outgoing RAD prices remain significant and around $65,000 on average during the period.

We've also highlighted separately here the $2.8 million of RAD refunds, which were made following the closure of the Mona Vale home in May.

Incoming new resident RADs received for the first time at the new homes, which opened in FY '18 at Kogarah and the Twin Waters, totaled $12.1 million. On 1st of July 2019, Twin Waters and Kogarah are regarded as mature homes with normal rotating RAD balances.

With an increase in probate balance at the year-end to $106.8 million, the net RAD inflows for the period from mature homes was slightly in excess of $5 million. This lower level of RAD inflow reflects resident mix and resident choice and reflects the importance of sustaining a strong balance sheet and funding lines to manage short-term movements in RAD balances.

Appendix G provides a detailed analysis of RADs and bonds, highlighting that we still hold 434 pre-July '14 bonds with a total value of $88.9 million with an average value of $204,000 compared to the average incoming RAD price of $416,000. This represents a potentially realizable uplift in RAD balances. And as can be seen, RADs outside of new homes are moving towards a more static and rotating nature of capital, as expected one from the July 2014 reforms that had time to affect the majority of residents in care.

Moving to Slide 14, where we show our resident profile, and overall, we have seen a decrease of 108 residents in the total resident population, which includes the effect of the closure of Mona Vale. The decline has been more pronounced in our non-concessional population, which has impacted the number of RAD and debt payers, the combination payers have increased marginally.

As we've highlighted previously in light of occupancy pressures, our willingness to widen the net in terms of occupancy, the flexibility of our portfolio and strength of our balance sheet has meant that we've been willing and able to attract concessional residents at homes, which have experienced occupancy pressures. This has resulted in an increase in concessional population consistent with that seen in the last 2 years of 2% to 47%.

As noted in the ACFA report, RAD preference continues to decline across the sector, for the preference of DAP or combination payments. The impact of the fall in the housing market across Australia appears to have impacted the ability of incoming residents to pay RADs, reflecting an unwillingness or inability to sell homes in a falling housing market.

As noted earlier, our average incoming RAD price continues to increase, albeit modestly, and we have experienced some RAD price competition in certain homes, but not consistently across the portfolio and not enough to affect average incoming RAD prices.

Concessional residents are profitable, particularly when path supported at significantly refurbished homes, as 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.

Whilst we note the reported stabilization of the housing market, we also note the transactional activity remains low with FY '19, seeing the number of house sales at the lowest level since the 1991 recession according to CoreLogic.

We believe it is this level of transactional activity and liquidity as opposed to price levels, which creates the ability of residents to fund that accommodation with RADs rather than DAPs.

I'll just refer here before I hand back to Ian to the upcoming effects of the new leasing standards of IFRS 16, which will have a material impact to our reported EBITDA in FY '20 and beyond as a result of the treatment of not only our operating leases but our 7 lease payments in corporate offices, but will have a more material impact in relation to the imputing of an accommodation charge in relation to RADs held in future periods.

We have shown the estimated impact of this in appendix J for future reference.

I will now hand back to Ian, who will talk to our growth and development strategy.

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

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Thank you, Steve. If we refer to Slide 16, I note that we're investing in our homes to ensure that we're meeting the increasing expectations of the community. This also includes improving additional service offerings and ensuring that they're attractive compared to our competitors. In addition to development, with growth in our portfolio, we remain open to acquisitions that fit within our strategic positioning, we observe an increasing volume of homes being offered for sale.

In Slide 17 we look at the invested capital in FY '19, which totaled $93.8 million, up $30 million on the previous year. This included the construction of the 2 new homes, investing in future period developments, plus refurbishment and asset life cycle work in our older homes, a latter, at a total cost of almost $40 million. The number of significant refurbishment homes increased 30% on FY '18 and as of the 30th of June, 33 homes qualified for the higher accommodation supplement.

Looking forward, we will have another 15 homes with 1,562 beds undergoing refurbishment in FY '20.

We are investing approximately $4 million in sustainability works in FY '20, with an expected return of $700,000 per annum in utility savings.

We've identified the opportunity to redevelop some of our smaller, older homes, and we will discuss these at the appropriate time.

Slides 18 and 19 highlight projects under development. Kogarah and Twin Waters have had good RAD flows, the operational performance, particularly the quick occupancy growth was pleasing.

Twin Waters was constructed by Living Choice to operate the retirement within village from which we are colocated.

Living Choice was also our construction partner at Southport and Maroochydore, and we have leveraged construction efficiencies with each project.

Our Southport home has been well supported, and the initial occupancy is very encouraging. Southport is another example of the asset recycling of older homes. These projects are an important element of our capital program as they have proven these strong financial contributors with solid ramp-up post commissioning because of the established relationships we have in those markets.

The final case study is Maroochydore. Pre-commissioning has been smooth. Like our Twin Waters home, Maroochydore will have a resort-type design that fits the local community. Resident services include lifestyle things such as cafe, hair salon, cinema and private dining. The home is also a specialist dementia unit.

Slide 19 highlights our development pipeline. Blakehurst is underway, having resolved the demolition and site remediation issues that delayed commencement of the project.

We previously operated a home on this site, and we know the market very well.

Site demolition has occurred at St Ives and construction is expected to commence in February.

Approval has been granted to transfer licenses to the project.

The home will also provide an outpatient, allied health and physiotherapy service to the local community. This is a new service line for the company, and we will roll it out in other appropriate locations.

We remain committed to Wollongong, having completed demolition. The requirement to resubmit the DA has slowed the project.

Today, we announce 3 new projects. Burton is an 80-bed home that we operate in South Australia. We are adding 28 beds, granted in the 2019 ACAR round. Apart from additional bed capacity, we will also gain operational efficiencies. Aldgate, also in South Australia, received 96 beds in the 2019 ACAR, we have commenced preplanning for the redevelopment of the small, inefficient 30-bed home.

The final project that I wish to mention is a 108-bed home in Maitland. We have exchanged contracts for land and 108 licenses, completion being subject to government approval. The project will strengthen our mid-North Coast network.

We now have approximately 600 beds under development or in planning for delivery over the next 3 to 4 years.

Slides 22 to 25, highlight the important operational activities that we focus on. In 2019, we commissioned Korn Ferry to undertake a review of the competencies of our customer-facing employees. The development of competency-based recruitment, training and appraisals will ensure that we equip our people to provide the resident-centered care that is central to the new standards.

Nurse ratios have been a focus of the Royal Commission hearings. We have operated a registered nurse-led, acuity-based staffing model for many years. Registered nurses are rostered 24/7 in all of our homes.

Our use of casual and agency staff is modest and being able to offer permanent employment makes us an attractive employer as well as supporting better resident care and service quality.

The transition to aged care program equips nurses who've not worked in aged care with the skills required to succeed in this sector.

Our biannual staff engagement survey was launched last week. This is the second time we've undertaken this survey and the data informs how we can build and maintain the culture we want for Estia.

Slide 24, focuses on the resident. During the year, we've continued to refer in our resident services, culture impacts on staff interaction with residents, hence, the investment we are making in the people space, but we are also continually revising our services, such as food and lifestyle programs and improved our offerings in this area.

We bought in-house, taken services in 5 homes that previously had provided food on an external contract basis in the first half of the year.

We believe that resident choice and quality improves when such services are delivered under our direct control. We've conducted a number of Masterchef programs in the year to enhance the dining experience, provide for more resident choice and achieve higher nutritional standards.

We've also commenced an extensive customer survey program using same tools as the quality and safety commission to ensure that we're meeting the needs of our residents.

Clinical risk at Estia is monitored by the Executive Risk Committee and is a key focus for the Board and the Board Risk Committee.

Our clinical indicators are subject to monthly review with our Senior Operational Managers, and we have modified our systems to comply with the new mandatory reporting of clinical indicators with the first group to be submitted in October 2019.

Slide 25 highlights our environmental, social and governance initiatives.

Environmental. Building on the first tranche of carbon-reduction projects undertaken in 29 homes in 2018, we have commenced a similar program to install energy-efficient, LED-lighting and solid programs in another 28 homes. Scheduled to be completed in the first half of FY '20, we anticipate annual energy cost reductions of $700,000 on our investment of $4 million.

We also commissioned a materiality audit earlier this year to determine the matters that were important to our staff and our communities. This is being used to develop our sustainability strategy. Over 900 staff and 1,200 relatives provided the qualitative data for this study, which was being tested in focus groups in a number of our homes.

In regard to our social program, we've maintained our commitment to inclusiveness and diversity.

For the second year in succession, Estia is the highest ranked gender balanced ASX 200 company.

Work health and safety has again improved on last year. Our LTIFR 12-month average was 7.6% at year-end. This is now approximately 30% of the rate of lost time injuries we incurred prior to committing to improving our safety performance, and we've set further goals to improve this important metric.

We are pleased with our staff retention rates and have extended the employee assistance program for staff seeking independent support for their social well-being, over 200 of our staff sort this help over the past 12 months.

Governance. As foreshadowed, we have strengthened our commitment of managing risk. The Board Risk Committee has a deep dive program to review key operational risks, and in the past 12 months, we have strengthened controls to improve cyber and clinical risks.

The Board has continued its program of visiting homes to meet with residents and home-based management and spent 2 full days doing this in Victoria and South Australia during the past year.

Looking at Slides 27 and 28, we believe that the future of residential aged care remains strong. The undeniable forces and an aging population and the need for substantial investment favors those operators that have strong systems, proven operating performance and balance sheet strength.

ACFA's Royal Commission submission noted the likelihood of structural change within the sector and the need to ensure that this incur -- occurs in an orderly manner.

We strongly support ACFA's position.

ACFA also noted the fragmented structure of residential aged care with around 500 single owner-operator homes. Greater prudential regulation and governance is clearly part of the government agenda and the ability to meet the new operating environment will favor the scale operators.

Increasing consumer choice is clearly an important policy direction and the recent current -- and the recent discussion paper on the reform of ACAR is fundamentally about increasing resident choice of home.

Estia supports the freeing up of licenses, which, together with pricing reform and consumer choice, will facilitate structural change, including consolidation of the sector, and with that, improved quality standards and financial sustainability.

Reform rather than just more regulation will be required to restore the community's confidence in the sector. A competitive sector with informed customers supported with regulatory protection will address quality concerns and resolve the current structural inefficiencies.

We are observing an increase in complexity of residents entering residential aged care.

We do not believe such complex care can be effectively managed in the family home.

The Royal Commission has noted the demands placed on family and friends to support the current home-care model. Some estimates indicate that 2 billion hours of unpaid care is required annually to support the current home-care model. And this supply will be impacted with increasing female participation in the workforce, single-unit families and other demographic trends.

We support the underlying policy of home care, but we do not believe that is a substitute for the residential aged care model with scarce nursing resources can be more efficiently organized where social isolation is overcome by activities that enrich daily living.

Estia strongly supports the implementation of the key recommendations from multiple reviews that have provided solutions for a sustainable, high-quality residential aged care sector.

The timeliness of reform becomes more pressing, the sector financial performance continues to decline.

Our outlook for FY '20 is on Slide 29. Subject to no material changes to market or regulatory conditions, including the Royal Commission, we provide a guidance on the following. We expect EBITDA from our mature homes to be in the range of $86 million to $90 million. This excludes any costs associated with the Royal Commission and excludes the net losses of the 2 homes in ramp-up in the year, that's Southport and Maroochydore.

Our capital investment in FY '20 is expected to be in the range of $120 million to $150 million.

Our RAD flows are expected to be neutral to low in our mature homes. And in relation to our previously stated policies, we confirm our gearing ratio policy is maintained at 1.5 to 1.9x EBITDA and that we will continue our dividend policy of distributing a minimum of 70% of net profit after tax.

We will be making no comment on the class action, beyond saying that we will vigorously defend all allegations.

We look optimistically to the post Royal Commission era for the regulatory certainty that we believe it will bring.

Estia is a well-governed, equality-focused operator, with both scale and capital with the ability to respond to regulatory change in a post Royal Commission world, to invest in its people, portfolio and services and to grow capacity through development and acquisition.

I'm positive about our ability to meet the new challenges of the sector.

We are well positioned with our leadership depth, sector experience, ability to commit resources to meet regulatory demands, sound operational metrics and a solid balance sheet.

To the Estia staff, thank you for the work you do every day to support our residents and their families, be proud of the work that you do.

And finally, I'd also like to thank our investors for your support of the company. And now I invite questions. The operator, we'll now take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question comes from Tom Godfrey of UBS.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [2]

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Can you hear me okay?

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Steve Lemlin, Estia Health Limited - CFO [3]

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We can, Tom.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [4]

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I'll just start off with staff costs, obviously, at the top end of your targeted range is a ratio to revenue for this year. I'm just wondering whether or not that's sort of still a realistic range heading into FY '20, given the underlying sort of negative jobs environment with ACFI and staff cost inflation?

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Steve Lemlin, Estia Health Limited - CFO [5]

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I think of the $28 million increase in staff costs this year, somewhere around $7 million to $8 million came from the new home. So the remaining increases, around 5.9% on a operational -- occupied bed day. Yes, it is higher than we've seen. It's at the top end of our percentage range. I think the levels probably will be sustained at that. We don't see -- the EBA increases are running around 3%. We don't see that we're going to be able to -- or nor would we want to reduce our investment in quality and assurance. But I think that's sort of looking forward, slightly ahead of the EBA rates is probably likely on mature home.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [6]

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Okay. Great. Maybe just turning to your development pipeline. The slide shows that FY '20 greenfield guidance, I think, for CapEx is now $30 million to $40 million versus $70 million to $80 million back in February. I'm just wondering what's sort of been pushed back or what dropped out there?

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Steve Lemlin, Estia Health Limited - CFO [7]

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There's -- the slight slowing with Blakehurst, that's taken a bit longer because of the remediation work there. So we have seen some slight delays on that. Wollongong's had a need for another DA to be submitted. So we have seen some delays there, Tom. We'd expect to develop those as quickly as we can. But that's the main reasons.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [8]

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Okay. Great. And then maybe just one more for me. Just on occupancy. It does seem like there's been a commendable turnaround in sort of first quarter of fiscal '20, I think you called out influenza impacts in South Australia, your May trading update. I just wonder if you could sort of comment on how big effect the flu has been more recently and what your expectations are into fiscal '20?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [9]

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The main hit, Tom, was around that time, around April time, May time in South Australia. And it was very significant in that state and largely confined there. In terms of what that might look like going forward, hard to predict always flu seasons. But the outbreak is -- tend to come early and as I say, it tend to hit us at that period of time. And it's a bit hard to predict what might happen for the rest of the year.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [10]

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Is it -- am I a little sort of push you and ask whether there are any facilities at the moment that are currently impacted or locked down?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [11]

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No. No facilities impacted in any material way at the present time.

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Operator [12]

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(Operator Instructions). Our next question is from Matt Johnston of Macquarie.

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Matthew Johnston, Macquarie Research - Analyst [13]

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Can you hear me?

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Steve Lemlin, Estia Health Limited - CFO [14]

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We can.

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Matthew Johnston, Macquarie Research - Analyst [15]

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Okay. Yes. Just first question, just on occupancy. Can you sort of talk to what you're expecting on occupancy for FY '20 in your guidance?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [16]

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So we don't guide on occupancy. It's clearly a major focus for the organization. As we indicated, there's been some competitive pressures, that we're responding to with local initiatives. And there was some impact in the second half regarding that flu issue in South Australia, but it's just something that we excessively pursue, we invest in developing strong relations and strong systems to ensure that we get strength of referrals and be able to convert them into full admissions. But we certainly won't be guiding on occupancy rates.

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Matthew Johnston, Macquarie Research - Analyst [17]

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Yes. And then just in terms of strategies, in terms of like supporting the occupancy outlook, I noticed that some of your peers have discounted certain rates. What do you sort of plan, if it does get a bit more competitive? Do you have any strategies you'll look to, to make sure that occupancy doesn't fall too low?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [18]

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I think our main strategy in regard to that is the ability with our balance sheet to be able to take a balanced resident profile with a supported or nonsupported. So -- but we do have that flexibility, and that's something that I think we've demonstrated in the past and over the last 12 months to be able to benefit through that balance sheet and not necessarily have to select the bond, RAD or non RAD payers.

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Matthew Johnston, Macquarie Research - Analyst [19]

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Okay. Great. And then something I picked up, it's in the presentation, you've looked at some contracted losses and some bed losses. I didn't really have time to go through it. Have you disclosed any commercial terms on that?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [20]

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No. Not at this stage. What we've been able to do is secure that development site and with that site came the 108 licenses but we made no further disclosure at this stage.

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Matthew Johnston, Macquarie Research - Analyst [21]

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Okay. Great. And just a couple of ones for Steve, maybe just on D&A for FY '20, obviously, it picked up in FY '19. Should we expect an increase into FY '20?

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Steve Lemlin, Estia Health Limited - CFO [22]

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Given that the 2 new homes will come online and that will be depreciated in full for the full year, you would expect to see a higher level of depreciation outside of that, we've highlighted there the accelerated depreciation for the closure of Mona Vale, so you would expect to see slightly higher depreciation from those 2 new homes and also from the significant refurbishment programs. The sig refurb programs are not depreciated over the full 50 year life of a hire, as you'd expect, they are over a shorter period. So depreciation will be somewhat higher in FY '20.

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Matthew Johnston, Macquarie Research - Analyst [23]

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And then just last one for me. Royal Commission costs, I haven't -- didn't see anywhere -- expectations for FY '20 would -- assuming a similar amount on FY '19 be fair?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [24]

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We kind of anticipate, Matt, what the cost of the Royal Commission will have to play going forward. The FY '19 clearly was impacted by that intense amount of movement that was required to submit the data submission on the 7th of January. And I don't think we would anticipate to see something like that again. So I think, as I said, fairly hard to anticipate what it might look like, but it would -- I would anticipate that it would be -- feel different to FY '19.

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Operator [25]

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(Operator Instructions)

We have a question from Ronan Barratt of Moelis Australia.

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Ronan Barratt, Moelis Australia Securities Pty Ltd, Research Division - Analyst [26]

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Just firstly regarding -- just regarding competition, you mentioned there have been competitive pressures. But I guess, based on the visibility that you would have over new openings by competitors within the attachments, do you see those new supply risks easing at all over the course of F '20 versus what you've experienced over the past, say, 12 to 18 months?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [27]

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What I would say, Ronan, is that when something like that happens, we see the -- after a period of time, the market go back to some level of equilibrium. And I think we would anticipate that to be, again, the case in FY '20.

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Ronan Barratt, Moelis Australia Securities Pty Ltd, Research Division - Analyst [28]

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Okay. And then just with regard to the environment for acquisitions, I guess, just given their increasing level of sanctions that we're seeing handed down and some financial distress across areas of the sector at the moment, are you noticing sort of more sellers out there and any evidence of movement in vendor price expectations coming down towards levels that maybe you think look more reasonable?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [29]

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In regard to the latter, it's a bit mixed. But probably, there's probably some more realism required from the vendor side. But in terms of value and opportunity, we would observe that the last 3 months has probably seen more activity than the last 3 years. It's certainly increased substantially over the immediate past period.

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Steve Lemlin, Estia Health Limited - CFO [30]

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Yes, I think that's more people certainly looking to see if they can find buyers for their businesses. I'm not sure there's been much that's transacted at present. And as Ian mentioned, price expectations need to reflect the quality of the home, the mix of the home and the RAD balance as well. And I'm not sure that those are accurately reflected in some of the prices that people seem to be expecting.

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Ronan Barratt, Moelis Australia Securities Pty Ltd, Research Division - Analyst [31]

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Okay. And just lastly, with regards to occupancy, I guess, in the context of that increase that you saw post 30th June. Are you seeing any evidence of residents that may have deferred entry into homes since the Royal Commission was called, say, a year ago and the negative sentiment that has persisted since? Are you seeing any evidence of those sorts of residents in a position where maybe home care is no longer viable, and hence, they need to start entering homes?

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Ian Thorley, Estia Health Limited - MD, CEO & Director [32]

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Look, I think it's reasonably complicated for all of the obvious reasons that might have impacted on occupancy. But I think it'd be a fair comment around that the Royal Commission would have had some dampening in terms of people's propensity to come into residential aged care. And as we know, it's needs based. It's event-driven, and we certainly know that the people we care for, there are no real substitutes for it. And it will maybe that there is a reversion back to the normal pattern of inquiry and then full admission, but just at the moment, I think it might be too early to call that in any accurate way.