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Edited Transcript of EXE.TO earnings conference call or presentation 15-Aug-19 3:00pm GMT

Q2 2019 Extendicare Inc Earnings Call

MARKHAM Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Extendicare Inc earnings conference call or presentation Thursday, August 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Bacon

Extendicare Inc. - Senior VP & CFO

* Jillian E. Fountain

Extendicare Inc. - VP of IR

* Michael R. Guerriere

Extendicare Inc. - CEO, President & Director

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Conference Call Participants

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* Chris Couprie

CIBC Capital Markets, Research Division - Research Analyst

* Lorne Kalmar

TD Securities Equity Research - Associate

* Yashwant Sankpal

Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Extendicare Inc. second quarter conference call. Please be advised that this call is being recorded.

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

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Jillian E. Fountain, Extendicare Inc. - VP of IR [2]

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Thank you, Francis. Thank you, and good morning, everyone. Welcome to Extendicare's 2019 Second Quarter Results Conference Call. With me today is Extendicare's President and CEO, Michael Guerriere; and Senior Vice President and CFO, David Bacon.

Our 2019 second quarter results were disseminated yesterday and are available on our website along with the supplemental information package. The audio webcast of today's call is also available on our website, along with an accompanying slide presentation, which viewers may advance themselves. A replay of the call will be available later this afternoon until August 30. The replay numbers and passcodes for which have been provided in our press release, and an archived recording of this call will also be available on our website.

Before we get started, please be reminded that today's call may include forward-looking statements regarding our future operations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors in our public filings with the securities commissions and suggest that you refer to those filings.

As we discuss our performance, please bear in mind that all figures are in Canadian dollars unless otherwise noted. With that, I'll turn the call over to Michael.

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [3]

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Thank you, Jillian, and good morning, everyone. As you can see from our second quarter results, we are continuing to execute on our plan to drive profitable growth. We have made significant progress in 2019, recording solid results with increased revenue and profitability in our long-term care and retirement living operations, while we continue to make progress on our ParaMed transformation.

We are building on our strong foundation by investing in our people, technology and improved operational performance. As the demand for seniors care services continues to rise with an aging population and favorable government policy trends, the investments we're making position the company to benefit from the significant growth opportunity this represents.

As David will elaborate on in a few minutes, we had solid second quarter results with increased revenue driven by funding enhancements and growth in our retirement living segment. While earnings were down from Q2 2018, this was largely due to higher costs, including an additional statutory holiday and ongoing ParaMed transformation activity.

On Slide 3, we'll talk about the ParaMed progress. As we've discussed previously, we're in the process of strengthening our ParaMed business by moving to a new cloud-based system that will better enable the company to meet increasing demand for home health services.

When the ParaMed Transformation is complete, Extendicare will have an enhanced ability to optimize scheduling, automate work processes, reduce turnover and provide better support for Extendicare's valued staff. We are already seeing the benefits of this effort with a 1.4% increase in the average daily hours of service provided in Q2 compared to the first quarter of 2019, along with increased NOI margins.

Our original estimate of a $12 million investment in the transformation remains unchanged. Of the estimated $7 million total that will be incurred in 2019, $3.3 million was spent in the first 6 months of the year. 71% of our home care volumes, excluding our B.C. business, are flowing through the system and we are on track for substantial completion by the end of 2019.

Progress also continues managing ParaMed's exit from the B.C. Home health care market. Final dates for the transfer of the operations to the B.C. Health Authorities are being finalized, but we expect the process to complete no later than the first quarter of 2020.

On the next slide, the results of our long-term care operations in Q2 benefited from funding enhancements, but these will be short-lived, unfortunately. During the quarter, the Ontario government announced its fiscal 2019, '20 funding changes for long-term care. Effective April 1, long-term care providers received a 1% increase to the flow-through and accommodation envelopes. And the preferred accommodation rates increased by 2.3% effective July 1.

However, effective October 1, the government is eliminating the structural compliance premiums for eligible Class A, B and C beds. Consequently, the net impact of the 1% increase and elimination of the compliance premiums to Extendicare is flat for Q4 and into next year.

For our Alberta operations, the government funding changes that normally take effect April 1 have been delayed until the fall when the new government's 2019,'20 budget is expected. However, the resident accommodation rate increases in Alberta did take effect on July 1 with an increase of 1.6%, representing approximately $500,000 of additional revenue annually for Extendicare.

On the long-term care redevelopment front, the Ontario government has amended the base construction funding subsidy from $16.65 to $18.03 per bed. Extendicare's projects are in various stages of planning and approvals, but none are under construction at present. Factors such as escalating construction costs and the timing of project approvals will affect the sequencing and duration of the redevelopment program. Management is working closely with our industry partners in the Ontario government with the goal of advancing these projects.

Turning to Slide 5 on retirement living. During the first half of 2019, we continue to see growth from our retirement living operations with rising occupancy trends across our stabilized and lease-up communities. The average occupancy of the stabilized retirement living communities increased to 94.7% for the first 6 months of 2019 compared with 89.5% for the same period last year.

In our lease-up communities, we experienced sequential quarter-over-quarter growth. Including Bolton Mills that opened in January 2019, occupancy of those lease-up facilities grew from 64% at March 31 to 72% at June 30, 2019.

On the development front, Extendicare's 124 suite Barrie retirement living community is scheduled to open in Q4 of this year. We have had strong pre-lease activity, with deposits on hand for 71% of the suites. As a result of this response, we are targeting stabilized occupancy of 92% within 24 months of opening, ahead of our initial expectations. Further expansion plans are in the making to almost double the size of our Port Hope retirement community, which we hope to break ground on later this year. We will continue to assess other potential growth opportunities in a disciplined fashion.

On Slide 6, our fifth contract services and SGP group purchasing continued to be important growth drivers for Extendicare. These services grew by 10.5% in the first half of the year, representing 2% of our total revenue and 10% of total NOI.

As of June 30, Extendicare provided contract services to 53 long-term care homes and retirement living communities for third-party owners through Extendicare Assist. SGP provides services to third parties, representing approximately 58,700 seniors residents across Canada.

With that, I now turn to David Bacon, our Chief Financial Officer, to provide insight into our financial results for the second quarter.

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [4]

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Thanks, Michael. Today, I'll first provide an overview of our overall financial performance for the second quarter, and I'll provide some highlights of the individual business segments.

Turning first to Slide 8. Revenue for the second quarter was up 1.6% or $4.5 million to $284 million compared to Q2 2018. The increase in revenue was primarily driven by long-term care funding enhancements, growth in retirement living and the recognition of incremental home health care funding to offset 2018 cost related to Bill 148, which I will speak more about in a moment.

Net operating income for the second quarter was down 2.7% or $1 million to $35.3 million compared to Q2 2018, reflecting the impact of increased funding enhancements and growth of our retirement living and other Canadian operations, offset by lower health care volumes and increased operating costs and the impact of an additional statutory holiday in the second quarter of 2019 compared to the same period in 2018. NOI margins were 12.4%, down from 13% in Q2 2018.

Adjusted EBITDA for the second quarter was down 8.6% or $2.4 million to $25 million compared to Q2 2018, reflecting the decline in NOI and higher administrative costs. Adjusted EBITDA margins were 8.8%, down from 9.8% in Q2 2018.

AFFO declined by $2.2 million to $14.9 million in the second quarter compared to Q2 2018, impacted by lower earnings as noted above and higher current income taxes, partially offset by lower maintenance CapEx. Fully diluted AFFO per share for the second quarter was $0.161. For the first 6 months of 2019, the company declared dividends of $21.3 million representing a payout ratio of 77% compared to 67% for the same period last year.

Turning now to Slide 9, I'd like to highlight some items that impacted the comparability of our second quarter results. As you know, we had been accruing for incremental funding expected to be received from the Local Health Integration Networks related to increased costs in 2018 associated with Ontario's Bill 148 legislation. We recently received confirmation from the LHINs regarding the final amount of funding we will receive related to our increased cost in 2018, which was higher than that -- than we had accrued in our 2018 results.

As a result, we recorded a $2.2 million increase in our accrued revenue estimates in the second quarter of 2019. Offsetting this incremental revenue is the impact of the additional statutory holiday of $1.7 million incurred in the second quarter and $900,000 in higher costs associated with the ParaMed transformation. These increased costs were partially offset at the adjusted EBITDA level by the adoption of IFRS 16, which reduced our administrative cost, but likewise increased depreciation and interest, as outlined in our MD&A.

Turning now to Slide 10. You can see that the net result of all of these factors had a minimal impact on our overall Q2 results when compared to the prior year of $400,000 in NOI and $300,000 in adjusted EBITDA. The net impact of these adjustments on our fully diluted AFFO per share in the second quarter is approximately $0.01.

I will now talk to each of the business line briefly. Turning first to our home health care operations on Slide 11. As I mentioned, the number of the factors impacting the comparability of the Home health care results this quarter included the $2.2 million of incremental revenue recognized in the second quarter related to Bill 148, higher operating cost of $1.4 million due to the timing of Good Friday, and incremental transformation cost. Adjusting for these factors, revenue declined by $3.8 million or 3.5% to $106 million due primarily to a volume decrease of 2.7% compared to Q2 2018.

NOI declined by $3.6 million to $9.5 million compared to Q2 2018 as we continued to be impacted by higher operating costs, which included the impact to the back-office administrative staff we added during the latter half of 2018 resulting in NOI margins of 8.9% in the second quarter, down from 11.9% in Q2 2018.

However, when we look at the second quarter compared to Q1 2019, we are encouraged to see that our average daily volumes increased by 1.4%, as Mike has indicated later, contributing to sequential growth in both the revenue and NOI impairments. As we previously indicated, the B.C. operations, which we are targeting to exit in Q1 of 2020, continue to cause margin pressure on our ParaMed results.

To help put it into perspective, this quarter, they contributed $12.6 million of revenue and an NOI loss of $300,000. Excluding these operations and the impact of the factors affecting the second quarter noted above, our NOI margin would have been 10.4% for Q2 of 2019 compared to 9.3% for Q1 of 2019.

Turning now to our long-term care operations. Funding enhancements contributed to revenue growth of $4.1 million or 2.6% and our NOI improved by $1.3 million or 7.2% compared to Q2 2018. As a result of increased funding, offset in part by the impact of $400,000 from the statutory holiday in the second quarter, NOI margin improved by 50 basis points to 12.1% from 11.6% for the same period last year and our average occupancy during the second quarter was 97.5%, up 30 basis points from Q2 of 2018.

Turning now to our retirement living operations, which enjoyed growth in revenue of 21.4% to $10 million and NOI growth of 24.3% to $2.9 million in the second quarter compared to Q2 of 2018. This was largely driven by an 850 basis point increase in our average occupancy of our same-store portfolio to 91.7% from 83.2% in Q2 of 2018 and occupancy improvements in our lease-up communities.

Turning now to our final business segment, our assisted SGP operations. Revenues grew by 7% to $5.9 million compared with Q2 of 2018. We have made investments in additional resources for these divisions in the latter half of 2018 to support the increase in clients over the past year. And as a result, our NOI was flat this quarter compared to Q2 of 2018, while still enjoying strong margin of 54.3%.

Turning now to Slide 15 and our financial position. The company's consolidated cash and short-term investments on hand was $84.4 million as of June 30, 2019, representing an increase of $18.5 million from year-end. In addition, the company has $65 million available to draw under its ParaMed credit facility.

During the quarter, we repatriated USD 10 million of cash from the Captive for our general corporate use, and we are in the process of repatriating a further USD 10 million by year-end. The company's long-term debt, including convertible debentures at face value and excluding deferred financing fees, was $573.2 million as of June 30, 2019, an increase of $25 million from year-end, reflecting a new mortgage of $16 million secured on a retirement living community and the renewal of our corporate office, head office lease, which resulted in the recognition of a lease obligation of $10.3 million in the second quarter under IFRS 16.

With that, I'll now pass it back to Michael for his closing remarks.

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [5]

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Thanks, David. So turning to Slide 16. In closing, I'm pleased with the progress we've made this quarter. We increased revenue and profitability. And while we incurred short-term costs associated with driving improvements and maintaining our high quality level of care for our clients, these investments will support long-term growth and value creation.

Extendicare offers a unique breadth of service across the continuum of care and will meet the rising demand of Canadians seeking the best possible care for themselves and their loved ones. Thanks to the dedication of our team of 23,000 caring employees, we are helping thousands of Canadians to live better every day.

And with that, we'd be happy to take any questions you may have. Francis?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Lorne Kalmar from TD Securities.

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Lorne Kalmar, TD Securities Equity Research - Associate [2]

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Just on the ERP program. Could you guys give some color, maybe, around how it's progressing relative to expectations? And any challenges you guys have encountered thus far with the implementation?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [3]

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Sure. Let me start on that front. Let's start by just commenting on the average daily volumes that we saw in Q2, which were up 1.4% relative to Q1. We were quite happy to see that. That's what we are expecting in terms of seeing volume increases being the first real sign that we're making progress with that implementation. That's about a 6% increase annualized. And that's in the zone to meet a 4% market growth plus start to regain some of the share that we've been leaving on the table in that business.

Of course, we would like to see it higher. But a couple of our offices are still not getting the benefit of the system and are still having trouble with volumes, which are offsetting gains elsewhere in the business. So we've got a mixed bag. We've got some of our districts really doing well and growing and some of them that are still having volume challenges.

The other point, of course, is we're still battling on the labor front to get the people that we need to deliver the services. But we've seen a marked drop in our attrition over the last year. It's about 1/3 the pace that we saw in the first half of last year. So we're very pleased with our progress on that front.

So the progress is a bit variable, but it's moving in the right direction. So we're confident we're going to get the results from that investment that we expected.

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Lorne Kalmar, TD Securities Equity Research - Associate [4]

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Okay. Great. Maybe for David. The $2.2 million accrual, is that -- that's a onetime item, correct? Like that won't continue to flow through?

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [5]

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Yes. Yes.

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Lorne Kalmar, TD Securities Equity Research - Associate [6]

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Okay. And then was there anything, like the LTC portfolio did quite well this quarter. Was there anything onetime in there?

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [7]

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No. Not really. I think it's a little bit of the timing that comes into play in terms of the envelope's spending as well. But -- and the cumulative effect of sort of incremental increases in some of the funding last year as well as some of the increases we saw coming in, in April. So it's just like the accommodation increase in Alberta kicking in and the 1% coming in Ontario. So...

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Lorne Kalmar, TD Securities Equity Research - Associate [8]

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Okay. And then, just lastly, with construction costs rising and it seems to be across the spectrum, the retirement supply, outpatient demand currently, how do you guys think about the future retirement developments going forward?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [9]

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Well, I think we're being -- we've always been very opportunistic on that front, being very selective in terms of the markets that we're operating in to try to avoid some of the challenges we've seen in the industry with overbuilding. Our occupancy numbers seem to have bucked the trend by increasing this quarter. We were really pleased to see that.

So we're being very selective in how we're moving forward. We don't have anything to announce at this point, but I think that's the way that we'll continue to look at that industry segment going forward.

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Lorne Kalmar, TD Securities Equity Research - Associate [10]

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Okay. And just lastly for me, I guess, excluding Barrieview, where do you see the lease-up retirement occupancy getting to by year-end? Or is there a target? Or...

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [11]

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Excluding Barrieview...

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Lorne Kalmar, TD Securities Equity Research - Associate [12]

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Wait, is that -- well, yes, I guess it's still under construction, but...

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [13]

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Yes. I don't think -- we don't have that stabilized. I mean we look more at stabilized versus sort of by year-end, right? So I think that stabilized portfolio, excluding Barrie, was there tracking to about $16.5 million of stabilized NOI there.

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Operator [14]

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The next question is from Chris Couprie from CIBC.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [15]

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Just want to turn back to the sequential improvement in volumes at ParaMed. Any sense for how much of that is just seasonal at all? Because I think Q4 was -- or sorry, Q1 was challenged on weather.

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [16]

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Yes. I think there may in fact be some seasonal effects. We'll have to see how that trend goes from quarter to quarter. I think what we're focused on more is looking at the individual districts of which we were broken into 18 different districts and we track each one individually. And as I mentioned earlier, some of them are hitting it out of the park now with some new system and our new operating procedures, and they're doing really well. Others are still challenged.

And so we're focused our energies now on a smaller number of districts that need help to automate and to improve their performance. So I do expect that the recovery for the remainder of the year is still going to be a little bit mixed as we get all of the districts pulling in the same direction and contributing to the gains. So yes, we'll have seasonal factors to some extent as well. But the numbers that we're quoting are based on average daily volumes. So that takes out some of the clauses of variability and allows us to understand what the underlying trend is. So we're anticipating that we'll continue to see growing momentum from a volume perspective over the next several quarters.

As far as the margins are concerned, as we've communicated before, the margin recovery will come a little bit later in the cycle. So we may not see much in the way of margin improvements until we get into Q1 of 2020.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [17]

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Okay. So if you look at the 71% of the centers that have already turned over, what percent of those are knocking out of the park? And what percent are still kind of in the ramp-up mode? And the ones that are kind of doing well, what type of volume growth are they seeing year-over-year?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [18]

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So it varies a lot. It's hard to answer the question because there's a couple of things. One is, it varies a lot office to office as to what the deficit was in the first place and how much business they were leaving on the table to start. The other element that is a variable as well as the information systems is the recruiting and retention issues in that particular office. So we have some offices that are fully staffed and other offices that are still recruiting to come up to a full staff complement.

We're also seeing that it takes a certain amount of time for an office to get used to the new system. Probably takes about 6 months for an office to get used to a new system and start getting the full benefit of the automation that's available there.

So with all of that, it's hard to answer the question. From a percentage -- 71% perspective, probably better to think about it as a 6-month lag from when the system comes into use to when we start seeing some solid and reliable performance improvement.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [19]

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Okay. Maybe another way to ask it is relative to 2018 levels, once everything is kind of at the stabilized rate relative to 2018 volume levels, where do you think you could be?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [20]

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Well, you mean in total volume for the business?

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [21]

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Yes, in terms of number of hours.

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [22]

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Yes. Well, I think we're running right now at a level that is -- can...

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [23]

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Sorry, I meant 2017 levels, before things started to roll over.

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [24]

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Yes. So look, the way we think about this is that the underlying market growth is about 4% a year. So if we're growing at 4% a year, we're keeping pace with the market. And if you look at the amount of business that we left on the table that -- where we have referrals that we were not able to fulfill, that was in excess of 10% of our total volume.

So that's why I made the point that a recovery from a volume perspective would look like 6% to 8% volume growth over several years before it levels out again back to, let's say, a steady-state growth of 4 plus -- 4% to 5%. Does that make sense?

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [25]

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Yes. That makes sense. I got it. And then, just staying along the lines of home health, with this transition to the Ontario Health teams, and the comments that you've made a few submissions and more selective for some, for the development of others. Maybe if you can just -- can you give any color as to kind of what exactly is in -- might happen with the transition from the Lynde to the OHTs? Like will you be renegotiating rates or anything like that?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [26]

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Look, the details of how this is going to work is still an open question. And the way that the government is pursuing this is to allow a very innovative environment. Meaning, that they're not being very prescriptive as to how this would happen. So at this point, we're participating in these proposals. As part of that, we're proposing costs for providing services. I think the rates are going to be quite different because some of the proposals, in fact, they're not based on hourly rates, but they're based on providing a block of care for a person over a period of time.

So it's quite a different model. And where we might even be contracted for providing care to a group of people over time. It's a significant step of assessing the needs of a particular individual that is currently done by the LHINs, done by the government agencies, and then they tell us how many hours they need and what the schedule is going to be. In the Ontario Health team environment, that won't be done by the LHINs anymore and we will be participating in providing some of that assessment working carefully -- closely with the hospitals.

So the model is quite different. And I think there will probably be more of a -- I'm hoping to see more of a pay-for-performance type of thing, where we're getting recognition for helping people to stay out of the hospital and to stay living independently. So it's a very different model. And just to give you some time frames. I mean I expect a certain number of these Ontario Health team proposals will be accepted. It'll take time to implement them. They'll probably operate for a year or 2 and then they'll be evaluated, and the best models would be replicated to the rest of the province.

So this is very much going to be, it's going to feel like a pilot kind of process, experimenting the different models for home care that'll probably last the next 2 years. So in terms of impacting our entire business and what will it do to rates and what will it do to growth, I think it's going to take quite a while before it has a meaningful top line or bottom line impact on care providers.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [27]

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Okay. So it sounds as though the model is more towards like a value-based care outcome -- outcomes driven? Is what you're thinking -- if it's possible to go towards? And if that were to be the case, I don't know if you've done any preliminary work on it as to how would that look for Extendicare? Or is it too early to really have any idea of that?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [28]

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Yes. Honestly, I think it's too early to be able to say that. I mean even my hope that it goes in that direction is just that, it's hope. I don't know what the government's response will be or the hospital's response will be. I mean there's lots of policy papers that are suggesting that we should move in that direction as a province. Other provinces have moved more in that direction. It's something that we've certainly seen in other countries. But that's no guarantee that that's the kind of model that the government will adopt in Ontario.

But another way of looking at it is that when you look at the cost structure of home care in Ontario today, that assessment and coordination function that's being undertaken by the LHINs is probably a 10% to 15% cost on the entire home care operation. So if that transitions into the Ontario Health teams, then there may be an opportunity to address that. But I think the biggest value-creation opportunity that we have here is in keeping people out of emergency departments and out of hospitals. And that's a very, very costly environment to care for people.

So if we can add services that reduce the burden of care on hospitals, there's a great deal of value-add that can happen there. So it's really an unknown. I wish I could give you more details. But that's why we're participating in so many of these because we want to learn along with the first adopters to make sure that we can adapt our business accordingly.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [29]

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Got it. Okay. And then, maybe just a quick follow-up on Lorne's question around the long-term care segment, the strong growth in the quarter. How should we think about the balance of the year on a same property basis?

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [30]

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Yes. I think -- as I think we indicated, for Q3, I mean, the increase, the 1% increase, we'll see that in Q3. But when the structural funding goes in Ontario for Q4, that essentially puts us at flat. And right now with the Alberta decision still deferred into the fall now until the new budget comes on the Alberta side. So I anticipate it's looking at a little bit of a dropoff from Q2 there as those 2 impacts come in, in the back half of the year, Chris.

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Operator [31]

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The next question is from Yash Sankpal from Laurentian Bank.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [32]

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I was just wondering your margins this quarter, home care margins moved from 8% to almost 9% in Q2. Where do you expect that figure to go in, say, Q3 and Q4?

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [33]

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I think, just looking out, I think the, as Michael had indicated, I think our focus is on volume in the short term, in terms of that's the first thing we'll see in the impact of the project. So from a margin perspective, I think some of that impact will come later. So we're not expecting a material uptick in margins in the second half of the year from -- if you look at kind of the normalized margins that are coming out of this quarter. So there'll be some improvement, but I wouldn't be modeling them thinking about a material improvement in the margins.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [34]

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Okay. All right. And how long do you think, given what you see now, how long do you think it'll take Q2 to have those steady margins? I know I had asked this question last quarter also. But now you had one quarter behind you and you are seeing various things. So where -- how long do you think it'll take you to have stabilized margins?

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [35]

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Well, I think what you're going to see is we're focused on getting the Procura platform and the transformation complete. There will be some districts that move into early 2020. I think that will drive volume towards the end of the year, as we've talked about. But as Michael talked about with there's -- it's really an individual branch level type progress that we see in this. So some of those branches that have full complement of staff that are adapting to the system well will perform better faster, whereas other ones where we have staffing gaps in there, those could take a little longer. So I still think you're going to see the margin upticks starting early part of next year in Q -- coming out of Q4 into Q1. I would hope by the middle of next year, we'll start to see some steady improvement in margins through 2020.

The other thing as part of this is as we finish the project, as we talked about earlier, we did ramp up some of our administrative staff and back-office staff to help with this. So as the system gets in and we get used to and we start to leverage those efficiencies. I mean there will be opportunities there, too, on the cost side to help with the margin improvement.

So I would say first half of next year coming out of Q4 into next year and into first half, you'll -- we'll start to see more regular trending on the margins.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [36]

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All right. Okay. And then you said something about your staff turnover. Did I hear it correctly that it fell -- dropped by 1/3?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [37]

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Yes. Our turnover in the home care business dropped to 1/3 where it was in the first 6 months of 2018. So it dropped by over 60%. So it was a very significant drop. We put a lot of programs in place along with our new system to train and onboard our staff, and we've strengthened management. David referred to the back-office augmentation that we made late last year, added a lot of supervisory staff and scheduling staff to support the front lines. We did that first, and we're now growing into that expanded back-office. And that's where a lot of our margin growth is going to come from because we'll be able to sustain the volume growth that we're planning without expanding the back-office staff because we've already done that.

So we'll grow into that infrastructure that we've created, and that's where we'll see the margin expansion coming from.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [38]

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But the issue was with the front line staff, right? You are not getting enough PSWs. I think that was the issue. So I'm just trying to understand what exactly you did with respect to those employees that dropped the turnover so much. Was it the wage increase? Or a combination?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [39]

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No. No. So it was having good support for them, having people in terms of coaches and supervisors and trainers so that they felt strongly supported in the work that they were doing. We've put recruiters in every district office who are helping us to recruit local staff. That's helping a great deal. We've got better onboarding and training programs. We've got better IT for them to use as tools for doing their work. And one of the biggest things that we've done is improved our scheduling with the new system, which allows us to make sure that our staff have full hours. So making sure that somebody has a full slate of work for a particular day is important in terms of determining what their total take-home pay is. So that has helped a lot as well.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [40]

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That's good to know. And then, I want to switch to the retirement home portfolio. Given what your competitors are facing right now, where do you think your stabilized occupancy will be by year-end? Are you seeing any supply pressures?

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [41]

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Well, in the markets where we're operating, we're not seeing the same supply pressures that some of the others are seeing. We do have it in some markets, but not others. So overall, our occupancy has been trending in the right direction. I think in our stabilized portfolios, I think we're expecting occupancy to stay at about the level we've got now for the remainder of the year. The lease-up will continue to increase, of course.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [42]

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Sorry. Can you repeat the last part.

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Michael R. Guerriere, Extendicare Inc. - CEO, President & Director [43]

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The lease-up properties will continue to increase in their utilization. But that's always hard to predict exactly what that's going to -- what's going to happen there quarter-over-quarter.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [44]

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Right. And just one last question, on the transaction costs in the quarter. Just wondering why that number was so big relatively. If you could provide some color around that.

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [45]

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Which cost is that, Yash?

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [46]

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With Sandpiper, the agreement cost...

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [47]

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Yes. I mean those costs are the combination of the legal and advisory cost for both us and Sandpiper as part of reaching the agreement with Sandpiper in the quarter. So that's just -- I mean it's all professional costs. So by definition, those tend to be expensive. So...

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [48]

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So you are assuming Sandpiper's cost as well?

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David E. Bacon, Extendicare Inc. - Senior VP & CFO [49]

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Yes. That's customary in those arrangements.

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Operator [50]

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The next question is from Chris Couprie from CIBC.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [51]

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Sorry, my questions have been answered.

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Operator [52]

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(Operator Instructions) There are no questions registered at this time. I'm giving the lead back over to you, Ms. Fountain.

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Jillian E. Fountain, Extendicare Inc. - VP of IR [53]

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Thank you very much, Francis. That concludes our call for today.

The presentation is available on our website as are the call-in numbers for an archived recording. Please don't hesitate to give us a call if you have any further questions.

Thank you, again, everyone, for joining us. And have a good afternoon.

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Operator [54]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.