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Edited Transcript of REG.AX earnings conference call or presentation 22-Aug-19 1:00am GMT

Full Year 2019 Regis Healthcare Ltd Earnings Call

Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Regis Healthcare Ltd earnings conference call or presentation Thursday, August 22, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Noonan

Regis Healthcare Limited - CFO

* Ross James Johnston

Regis Healthcare Limited

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Conference Call Participants

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* David A. Low

JP Morgan Chase & Co, Research Division - Research Analyst

* Matthew Johnston

Macquarie Research - Analyst

* Steven David Wheen

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* Thomas Godfrey

UBS Investment Bank, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Regis Healthcare results for the full year ended 30th June 2019. (Operator Instructions) I would now like to hand the conference over to Mr. Ross Johnston, Managing Director and Chief Executive Officer. Please go ahead.

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Ross James Johnston, Regis Healthcare Limited [2]

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Thank you. Welcome to the Regis results presentation for the period ending 30th of June 2019. Joining me today is David Noonan, our CFO; Kirsty Nottle, Executive General Manager, Investor Relations. And it's also our opportunity to introduce our incoming CEO and Managing Director, Linda Mellors, who takes over for me on September 4.

Our presentation today is in 3 parts: firstly, business and financial highlights; portfolio overview and growth strategy; summary and outlook. We have also provided some appendices with further details for your reference.

Firstly, financial highlights. During this period, the industry-wide challenges continue to impact the business. Our revenue of $647.1 million is 9% higher than in FY '18. Normalized EBITDA of $111.4 million is 5% lower than in FY '18, and NPAT of $47.2 million is within our guidance range. We note that throughout this presentation, we'll refer to EBITDA and NPAT on a normalized basis, which is net of the direct costs associated with the Royal Commission and a noncash fair value gain on retirement living sites, which is a result of the usual independent revaluation process for accounting purposes.

The normalized EBITDA during this period reflects another solid performance with the group of new Facilities ramping up, the additional federal government funding boost received in the second half of FY '19, the continuation of the industry-wide occupancy headwinds impacting the steady state portfolio and headwinds from the annual indexation of 1.2% compared with our Enterprise Agreement wage increases of circa 3%, the continued impact of the federal government funding cuts to residential aged care funding and the associated increase in expenses implemented in 2017 and 2018.

Normalized NPAT was $47.2 million, which was in line with our guidance range and 17% lower than in FY '18. Net operating cash flow of $220.1 million includes net RAD cash flow of $142.9 million, which was more than double the FY '18 results of $62.6 million. This was a result of a strong performance from the Facilities ramping up.

Capital expenditure during the period was $68.7 million on developments, significant refurbishment and other projects. Average occupancy was 92.7% with closing occupancy of 92.4% after the removal of the 64 places at the 30th of June 2019, circa 1%. This represents 100% of reported NPAT -- sorry, a fully franked final dividend of $0.0711 per share was declared by directors. This represents 100% of the reported NPAT for the second half, less a $5.1 million noncash fair value gain on the retirement living sites.

Now looking at our key operational statistics for the year. The statistics are shown on Page 5 and reflect our view that operations continue to deliver a solid performance in the face of industry headwinds. Operational places decreased but did not move by a material amount, following the delivery of the final 3 Facilities in our development program during the first half. There is an adjustment of 64 places being made inactive as a part of the asset renewal program in the second half. Our steady state sites continue to be impacted by the occupancy challenges across the industry, which have been well publicized. However, our ramping up Facilities still delivered a solid performance.

Government revenue per resident bed day was $199 for the year, compared with $198 for FY '18. This reflected the reinstatement of COPE this year, increased contribution from Significant Refurbishment program offset by the impact of the federal government funding cuts. The $199 excludes the additional government funding boost, which was a one-off payment at the end of the period, which contributed $10 per occupied bed day in the second half, which averaged out at $5 per occupied bed day for the year.

Resident income per occupied bed day once more grew slightly from the previous comparable period at $83 per day in FY '19 compared with $80 per day for FY '18. This is due to most of the Facilities ramping up, offering additional services packages.

The staff cost-to-revenue ratio was 69.1% for the year compared with 66.9% in FY '18. The difference is the impact of the Enterprise Agreement increase has been higher than the COPE increase. It also reflects the higher staff cost to revenue percentage in the ramping up facilities. We note that when the additional funding boost is excluded, the staff cost to revenue percentage was 70.2%.

The number of RADs held increased during the period with circa 48% of the portfolio having paid a lump sum payment in the form a RAD when looking at all RAD payers in part or in full. This reflects the higher number of RAD payers in the new Facilities ramping up. The average RAD held per RAD paying resident increased to $404,900 for FY '19 from $378,000 in FY '18. The average incoming RAD of $478,600 was in line with the first half and exceeded the FY '18 result of $467,100. This reflects the market pricing and location of the new facilities.

You can also see that the average incoming DAP rate is $46.30 and that the average percentage DAP paid for combination payments is 59%.

So I'll now hand over to our CFO, David Noonan, for the discussion on the financial results. David?

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David Noonan, Regis Healthcare Limited - CFO [3]

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Thank you, Ross, and good morning, everyone. Turning to Page 6. I'll firstly step you through the waterfall bridge, which explains the key drivers of the EBITDA movement from $117 million in FY '18 to $111 million in FY '19. This was a 5% lower result than in FY '18. We also note that an additional funding boost of $10.8 million was received in the second half of FY '19. Our growth initiatives contributed $6.3 million of additional EBITDA, driven by our new Facilities and also the Presbyterian Care Tasmania portfolio, which continues to progress towards the steady state portfolio run rate.

Operating losses from our 3 Facilities in their first year of operation were $1.5 million. These Facilities are tracking to plan. Overall, the Facilities ramping up performed to expectations from an occupancy and an EBITDA perspective. Lower occupancy across the industry impacted the steady state portfolio, particularly in several of the older Facilities and those Facilities with some shared rooms.

The headwinds from the government cuts to residential aged care funding continue to impact the EBITDA for the whole portfolio but in particular in the steady state facilities. The cuts included expenses associated with the changes to the ACFI funding instrument. In FY '19, these were partially offset by the $10.8 million the company received from the additional government funding boost received in the second half. The other challenge for Regis and for all providers in the industry is the annual indexation of income from COPE, which at 1.2% was less than the underlying cost increases of circa 3%.

This slide also includes some analysis of our staffing expenses for the year. Staffing expenses were higher than in FY '18. The actual increase from FY '18 to FY '19 was $49.5 million in total. The key items in this include $14.4 million from the steady state Facilities driven by the annual increase in our Enterprise Agreements, which averaged 3% across the aged care business; an additional $32.8 million of staff expenses related to ramping up and acquire facilities. There was also a $2 million noncash increase in long service leave expenses, which is an accounting adjustment required due to the decline in the long-term bond rates.

Now turning to the waterfall chart on Page 7. We note that the normalized NPAT result of $47.2 million was within our guidance range and 17% lower than FY '18. Interest and depreciation expenses have both continued to increase as a result of the completion of the greenfield developments. Our effective tax rate was circa 28 -- 27%.

I'll now take you through the cash flow movements for the period, which are shown on Slide 8. The net operating cash flow of $220.1 million was underpinned by a normalized EBITDA of $111.4 million and a net RAD cash flow of $142.9 million. Our net RAD cash flow for the year was more than double the FY '18 net RAD cash flow of $63 million. This reflected the continuation of the Facilities ramping up, performing to expectations, both in terms of the number and value of RADs. We also note the average incoming RADs in the steady state portfolio again showed a modest improvement during the period.

Our key investment activities during the period included total CapEx on development, significant refurbishment, land and other projects of $68.7 million. A successful RAD result for the period enabled debt repayment of just over $100 million during the year.

I will now hand back over to Ross, who will take you through Slide 9.

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Ross James Johnston, Regis Healthcare Limited [4]

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Thanks, David. So this slide shows that the profile of RAD/DAP mix and combination payments has remained consistent with prior periods. The number of incoming residents electing to pay a full RAD has remained steady at circa 57% to 58% over the last 2 years, which increased from 51% in FY '17. This reflects the ramping up of Facilities from the development program. This also shows that the Significant Refurbishment program is nearing its completion, and we now have 96% of all the Supported Residents in Regis Facilities living in an enhanced living environment.

The pie charts to the top right of this slide show that for incoming residents during FY '19, the percentage of full RAD payers showed little movement from FY '18 at 57%. There was a small swing of 2% from full DAP payers to combination RAD/DAP payments. These choices depend on the individual circumstances, including the residents' preference or ability to fund daily payments versus a lump sum.

The change in resident profile, as shown in the column graph at the bottom of the slide, shows the following trends: firstly, the percentage of supported residents and full RAD paying residents were broadly similar to the prior period. Across the whole portfolio, there was a small shift from full DAP paying residents to combination of RAD/DAP payers. You can see that the 10-year statistics have not materially moved, but both the tenure and the duration of stay have slightly increased.

In the next section, we look at the company's portfolio and growth strategy. At 30th of June, the company had 63 facilities, which did not change from the first half. There were 7,078 operational places, of which 94% are single bedrooms and 21 are Club Services Facilities. You can also see in the table that the Significant Refurbishment program has now been completed at 41 non-Club Services Facilities with a further 7 Facilities having been approved as significantly refurbished during FY '19 and anticipate that a further 3 will be approved during the first half of FY '20. We continue to review the older facilities, particularly those where there are some shared rooms, as a part of our asset renewal program.

Now moving to our growth strategy, turning to Page 12. The company's current strategy is that of a disciplined balance sheet management whilst remaining focused on value-enhancing growth opportunities. The company currently has 4 key areas of focus, and these are summarized on this slide. There are -- these are the performance of ramp-up facilities, the quality of the existing portfolio and continuing to deliver further growth by greenfield developments and acquisitions.

The first area of focus is to ensure that the new Facilities ramping up achieve pro forma outcomes. New Facilities delivered from the development pipeline have created high-quality facilities. These are ramping up their operations with a focus on care, quality and compliance. Solid progress is being made towards achieving the company pro forma for EBITDA, net RAD cash flow and occupancy. The net RAD inflow from these Facilities has been used to retire debt.

Second area is our asset renewal plan. The asset renewal program has a focus on older Facilities and shared rooms. 64 places were made inactive during the second half of FY '19 as an outcome of an ongoing review process. It also includes the extensions planned for several Facilities where land is available and additional scale makes sense. You can see 2 of these in the development program and construction is planned to commence shortly.

The third area is the continuation of our development pipeline and greenfield facilities. The development program will be modest going forward given the industry environment we are operating in at present. The current program is preparing to deliver circa 600 new places with preparations underway to commence construction of 2 greenfield developments in FY '20 and FY '21. The focus continues to be -- has been consistently our position on principally urban locations, which can support our club services offer.

Finally, continuation of our strategy to seek acquisition opportunities for single Facilities and portfolios that meet our criteria. All acquisition opportunities which come to market continue to be analyzed. Some have been poor quality assets or had compliance issues. Market activity in the acquisition space appears to be increasing, although completed transactions are few with reasons for sale varied.

So on the next slide, Slide 13, you can see an overview of Facilities ramping up that have been delivered from our development program. The program delivered 1,247 places by the end of FY '19. All of these Facilities are Club Services Facilities in metropolitan locations with the exception of Elemore Vale, which is in Newcastle, New South Wales. These developments have been delivered on or ahead of schedule and are performing to expectations on key care, operational and financial metrics.

As at the 30th of June 2019, 850 or 68% of the 1,247 places were occupied and $240 million of net RAD cash flow had been collected. It is anticipated that a further $90 million to $140 million of net RAD cash flow will come from the completion of the ramp-up of these facilities.

Moving now to asset values. Regis' asset portfolio is one of the most significant and diversified in Australia. The current value is $1.29 billion. 92% of the portfolio is in metro or large regional cities.

Potential to unlock further value exists from 3 areas: firstly, the development of 2 retirement living sites, which have a book value of -- sorry, a book or market value of circa $70 million being the Blackburn South 70,000 square meter site with a median house price of $1 million and our site in Nedlands in WA, which is 55,000 square meters with a median house price of $1.5 million. There is also a potential from the expansion of the retirement living operations at the existing 3 co-located retirement village and aged care sites in Queensland, where we have surplus land of 26,000 square meters. Finally, there is potential from the development of the existing aged care land bank, including sites in Camberwell and Palm Beach in Queensland. The current program is illustrated on the next slide.

The next page, Page 15 shows the current development program, which is more modest than the previous program. This table shows 6 aged care developments, of which 4 are greenfield and 2 are extensions, which are expected to deliver a total of 655 new places. The timing for the first 4 projects anticipates first residents in FY '21 through to FY '23. The Inala and Greenmount projects are part of a larger site redevelopment, so the timing is yet to be confirmed due to other dependencies.

So as a reminder, our 3 criteria for including developments in the published pipeline are: firstly, the land is owned by the company; development approval has been granted or where we have a reasonable certainty as to the time frame within which this will occur; and lastly, licenses held or sufficient licenses held to commence mobilization.

Now turning to Page 15. In our previous business update, we introduced some detail around Regis' retirement living business, which the company has the potential to unlock further value. The company has 588 Independent Living Units across 6 Retirement Villages, each of which is co-located with Aged Care Facilities. Our experience shows that co-located Retirement Villages and Aged Care Facilities can be complementary, offering a continuum of care to residents.

The Blackburn South, Victoria and Nedlands, WA locations are in the company's current development program. Stage 1 of the Blackburn South redevelopment is planned to commence in FY '20. The development will involve the construction of more than 350 retirement living units. Overall, the redevelopment will be in 9 stages over a 10-year period. The company has received planning approval for 4 of the 9 stages and has finalized the master plan for the site. Detailed design of stage 1 is underway and civil works have commenced. In Nedlands, WA, master planning is underway for another 9-stage project, which the company recently received planning approval.

So I'll now hand back to David to take us through Slide 17. Thanks, David.

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David Noonan, Regis Healthcare Limited - CFO [5]

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Thank you, Ross. As anticipated, debt reduced significantly by $101 million during the period. Reduction in debt has been driven by the increased RAD cash flow, which was more than double the FY '18 result. It's anticipated that another -- that a further $90 million to $140 million of net RAD cash flow will come from the completion of the ramp-up of the new places.

As shown in the table, we presented our debt in 2 categories, core debt and development debt. Development debt represents the cost of the land and buildings that are currently in our development pipeline and are yet to be opened. $50.6 million of debt remains in development debt. The total debt as at 30 June of $303.2 million is well within our covenants, with the current facility limit being $540 million. The core debt-to-EBITDA ratio as at 30 June was 2.1x, having reduced from 2.6x as at 31 December 2018. Capital expenditure in FY '19 was $68.7 million, of which $64.9 million was associated with the aged care business and $3.8 million relating to the retirement living business.

I'll now hand back over to Ross.

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Ross James Johnston, Regis Healthcare Limited [6]

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Thanks, David. Now moving to the industry update. So on Page '18, we've provided an aged care industry update. During the year, a significant change was the introduction of the new quality standards, which came in on the 1st of July. These new standards have been designed to more actively involve consumers. A new Single Aged Care Quality Framework took effect from the 1st of July 2019. This is designed to more actively involve consumers, making -- sorry, consumers' decision-makings about their key care with a key focus on dignity and choice. So during FY '19, Regis invested significant resources into educating and communicating the new framework to all staff, residents and clients to help them fully understand the framework as well as working with residents and clients to realize their well-being goals.

The Royal Commission into Aged Care Quality and Safety, which was announced on the 16th September 2018, continues. The Royal Commission interest -- interim report is to be provided by the 31st of October 2019 and its final report by the 30th of April 2020. Hearings have now been held in Adelaide, Perth and Broome, Darwin, Cairns, Mildura and Brisbane. Topics have been wide-ranging, including specialized clinical and dementia care, communication with and consent to treatment by family members, use of chemical and physical restraints, staffing levels, access to respite care, access to aged care for Aboriginal and Torres Strait Islanders and access to aged care in rural and remote areas and finally, younger people in aged care. A further industry update is that on the 10th of February, the federal government announced a new $662 million funding package as an additional boost to support older Australians.

As is being discussed throughout this presentation, the funding was paid in the second half and amounted to circa $10.8 million for Regis.

So moving to Page 20. So the FY '19 summary is that the financial performance continues to reflect growth from Facilities ramping up, offset by government funding cuts and occupancy headwinds. The $111.4 million normalized EBITDA includes circa $10.8 million of additional government funding received in the second half of FY '19. The reduction in EBITDA reflected the usual increase in staff costs from our Enterprise Agreements increases of circa 3% compared with the COPE indexation of 1.2% as well as occupancy pressure and the impact of the funding cuts.

The steady state portfolio was impacted by industry-wide headwinds, which affected both income and the number of RAD payers. Average occupancy compared with FY '18 was lower. The Facilities ramping up delivered solid performance against key metrics: care, quality and compliance, EBITDA, occupancy and RADs.

So our net operating cash flow of $220.1 million and net RAD cash flow of $142.9 million reflects Facilities ramping up, delivering to expectations. Net RAD cash flow was more than double the full year FY '18 result and enabled repayment of $101 million of debt.

Fully franked final -- the fully franked final dividend declared of $0.0711 per share is 100% of reported NPAT, excluding the noncash accounting adjustment of $5.1 million fair value gain on the retirement living sites.

A modest development program is being implemented as per the company's focused growth strategy. The development program continues with circa 600 available places in the current pipeline. Acquisition opportunities continue to be assessed.

So moving now to our outlook. As for the guidance we provided in the trading update released on -- to the ASX on the 6th of June, FY '20 NPAT normalized is anticipated to be $38 million. FY '20 normalized EBITDA is anticipated to be circa $105 million. This reflects the increase in EBITDA in FY '20 from the Facilities ramping up. EBITDA will be impacted by the difference between the annual indexation COPE increase to government care income and the annual expense increases, including Enterprise Agreements and other expenses. These are anticipated to be circa 1.4% and 3%, respectively.

It is also anticipated that circa $3 million of nonrecurrent expenses will be incurred in FY '20, including those associated with the implementation of regulatory changes, including the adoption of the new quality standards. Direct costs associated with responding to the Aged Care Royal Commission will continue to be normalized in FY '20. Aged care CapEx spend for FY '20 is anticipated to be circa $70 million. This includes the commencement of the construction of the next 3 aged care developments.

It is anticipated that Facilities ramping up will continue to contribute EBITDA -- sorry, will continue -- will contribute EBITDA of circa $22 million per annum when all new developments reach their steady state in FY '21, growing from $6.3 million in FY '19. In FY '20 and '21, a further $90 million to $140 million of net RAD cash flow is anticipated to come from the completion of the ramp-up of the new facilities, which comprise 1,247 new places. The company will continue to be disciplined with its balance sheet management whilst retaining focus on value-enhancing growth opportunities.

For the FY '20 year, it is anticipated the company's franking percentage will be in the range of 50% to 70%. The Board intends to continue with the approach of paying out up to 100% of NPAT as a dividend.

In closing, for the final time, I would like to thank the Board of Regis, my executive team, all of our employees for their support in progressing our growth plans, their contribution to our results and their ongoing commitment to resident care. And I would also like to thank -- sorry, to welcome Linda Mellors to Regis. Welcome, Linda. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Tom Godfrey from UBS.

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

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If I could just start with occupancy. I'm just trying to pin down average occupancy in second half of '19. At the trading update in early June, I think you guys called out second half to date was 91.6%. It's coming at 92.7% for the full second half. It either suggests a material uplift in June or that the denominator change, so i.e., you've removed the 64 places. Can you just sort of help us out with the like-for-like number?

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Ross James Johnston, Regis Healthcare Limited [3]

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Yes. Tom, it's Ross. Thanks for the question. So the denominator change is the answer to the question. So the 64 removed in the second half of FY '19, and they were still in the first half.

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

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Okay. And when you made the calculation at the start of June, they were still in there?

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Ross James Johnston, Regis Healthcare Limited [5]

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Yes, that's correct.

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

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Okay. Got it. And then maybe just following on from that, Ross. Is there an opportunity to improve group occupancy by taking more concessional residents? Or is the strategy to wait for the right funding mix?

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Ross James Johnston, Regis Healthcare Limited [7]

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No, we -- at the moment, we'll take all residents, actually, I think, right across the portfolio, Tom. So there's quite a bit of competition for residents from all providers across the industry given where occupancy is. And if it helps you, our estimate of the industry's occupancy as at 30th of June was about 89.6%, and that has reduced from 90.3% at 30th of June 2018. As far as our performance, we're above the industry's average occupancy at the moment. And we do have opportunities, and we continue to work on it.

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

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And just in terms of your line of sight on your portfolio for next year, is it sort of -- is flat occupancy a relatively solid assumption for our modeling?

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Ross James Johnston, Regis Healthcare Limited [9]

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Yes. Yes, it is.

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

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Okay. Great. Maybe just one more just in terms of the greenfield EBITDA guidance. FY '19 actually looked like it came in a bit ahead in terms of the EBITDA contribution, but obviously, you've reduced the full sort of run rate from $25 million to $22 million. Is it a function of you guys being ahead of where you thought you'd be in terms of occupancy but obviously a lower assumed bed profitability? Or can you just sort of step us through the drivers there?

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David Noonan, Regis Healthcare Limited - CFO [11]

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Yes. So Tom, it's David here. So the result for FY '19, which is sort of pretty much in line with what we're expecting, not really any upside. The $22 million for FY '21, which is our forecast, it was boosted $25 million, which you may have noticed in previous presentations. It's slightly lower again just because of the negative jaws that still sits there in the industry, the COPE being less than the wage and other cost increases. So as that's continuing just to play out in the industry, that's just starting to squeeze out a little bit at the back end. So that's the difference there, so.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [12]

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Okay. Not a problem. That's all for me. Congratulations again, Ross.

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Ross James Johnston, Regis Healthcare Limited [13]

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Thanks, Tom.

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Operator [14]

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

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [15]

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Ross, if you could just start with the RADs expectations. We certainly hear increasingly from some of the other operators that there's a decline in the number of residents choosing to take a RAD, which doesn't seem to be the case for Regis. Just wondering if you could comment on perhaps why there's the difference there.

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Ross James Johnston, Regis Healthcare Limited [16]

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Tom (sic) [David], I think it depends. It depends on where you are in the investment cycle. So we've obviously invested a lot of capital in the 1,247 places over the last 5 years. So you're still seeing the larger RADs from the capital investment coming through our portfolio, and I think -- I don't know who you're comparing us to, but a lot of providers, unless they have a development portfolio, are -- they have a steady state portfolio and their RAD cash flow is pretty steady probably is the best way to say it. If there's a dip in occupancy in the industry, that will flow through, through the RAD cash flows as it does through our revenue. Does that help?

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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Yes, it does. I mean -- but I guess the question I'm asking is, is Regis in your steady state portfolio also seeing a similar trend. I mean I understand the new facility is RAD focused, et cetera, and is generating most of that RAD inflow. But what's happening with the steady state? And is Regis' experience different?

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Ross James Johnston, Regis Healthcare Limited [18]

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David, I'll hand that over to David.

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David Noonan, Regis Healthcare Limited - CFO [19]

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Thanks, David. So our steady state portfolio did again have a modest improvement year-on-year, both in the average incoming RAD price and in the total overall cash flow. But it's only fairly modest. The majority of our RAD cash flow of $142 million obviously was coming from the development pipeline, but we are experiencing still just slight uplift in steady state business at the moment.

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Ross James Johnston, Regis Healthcare Limited [20]

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And DAPs are pretty steady, too.

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David Noonan, Regis Healthcare Limited - CFO [21]

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Yes.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [22]

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So the weakness in the property market and the implications for steady state Facilities, would it be fair to say they have been in line with your expectations? Or has it been any material change?

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Ross James Johnston, Regis Healthcare Limited [23]

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Yes, pretty much, David. So over time, we've answered this question many, many times, but the softness in the property market, if you like, the median house price, we tend to find affects that data. So people's capacity to sell -- their preference to sell a home into a soft market is not their preference. So what we find, it takes longer to collect the RADs. So we'd seen that over many, many periods, over 10 years, basically.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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All right. And sorry to continue on the same topic. I mean I see that the RAD inflow, it was $240 million, so significantly improvement, yet your range of potential further inflow from RADs remains the same spread of $50 million. I mean it looks to me like the total expectation from new facilities in terms of RAD inflow hasn't changed. Yet as we get closer, you haven't tightened that range. Just wondering about the thinking there.

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David Noonan, Regis Healthcare Limited - CFO [25]

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As we get closer to that last bit of occupancy, it's probably a bit more flexibility or volatility in that last bit of occupancy. Obviously, we'll get to above the 90%. But whether we get to the very high 90s or the mid-90s or the low 90s is still to be decided, I suppose, on the market conditions at the time. So that's probably the flexibility at the end there, the variability at the end I would say.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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Okay. And look, just one sort of broad-ranging question there. I mean the Royal Commission is still in -- still continuing, and I don't particularly expect you to speak on the outcomes. But just wondering, given there is regular reports of how much pressure operators are under in terms of earnings, are you expecting that the government could act in the next budget on aged care funding? Or do you think we're realistically going to be waiting until the Royal Commission's out of the way, recommendations have clearly had time to consider -- to be considered, excuse me?

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Ross James Johnston, Regis Healthcare Limited [27]

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We've got the same crystal ball as you. So it would be great if they answer, but yes, we have no knowledge unfortunately at this time.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [28]

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No knowledge and no expectation, I take it then.

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Ross James Johnston, Regis Healthcare Limited [29]

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We'd love to get a funding adjustment. But yes, we continue to advocate principally through the aged care deals to the politicians. But if you look at the terms of reference for the Royal Commission, it's sustainability. And you can see it in their questioning in the public hearing. So I believe the second -- after the interim report in October, the Royal Commission will start to shift their focus towards sustainability.

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Operator [30]

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(Operator Instructions) Your next question comes from Matt Johnston from Macquarie.

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Matthew Johnston, Macquarie Research - Analyst [31]

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Just the first one, just clarifying on Tom's question around occupancy. Just trying to think about is there any strategies you guys can do or implement to sort of, I mean, optimize your assets in the short term.

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Ross James Johnston, Regis Healthcare Limited [32]

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Well, the answer to the question is we have arrived at things that we do constantly, reeducation, training, reviewing our sales function, looking at room pricing, looking at our RAD pricing. So it's -- as you can imagine, with 63 assets, it's a pretty dynamic process. Obviously, all trade in their local markets. So your reputation is very important. Yes. So we continue to work on all of those levers if you like.

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Matthew Johnston, Macquarie Research - Analyst [33]

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Has anything been successful recently?

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Ross James Johnston, Regis Healthcare Limited [34]

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Yes. But we got -- again, we got 63 sites. So it's tough. So occupancy in some of the regional areas is pretty good, actually, but that's due to like a competition. But the rest of the portfolio in the big cities, it's -- we manage it daily.

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Matthew Johnston, Macquarie Research - Analyst [35]

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Okay. Great. And then just on -- you've given us the aged care CapEx. You've obviously indicated construction starts FY '20 for the retirement. Can you give us any guide on what retirement CapEx you're thinking about? Was that kind of -- you have flexibility to see how your balance sheet is going through the year?

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Ross James Johnston, Regis Healthcare Limited [36]

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Our expectation is somewhere between $10 million and $20 million at this time.

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Matthew Johnston, Macquarie Research - Analyst [37]

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Okay. And then I just want to pick up on, say, FY '19 total gross outflows from a nominal perspective decline on FY '18. And I know some of your peers, the probate liabilities have increased over the year-end. Just trying to get a feel -- with occupancy slowing and gross outflows sort of weaker, just trying to figure out the relationship there, because I would have thought that outflows go up when occupancy goes down.

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David Noonan, Regis Healthcare Limited - CFO [38]

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Generally, that would be the case, Matt. That's correct. So we don't specifically disclose our receivable or probate balance. As our business gets bigger, our probate balance gets larger naturally, but you're correct. In theory, as occupancy -- if you have a decline in occupancy, that probate balance will grow for the short term, and then the RADs will come out of probate eventually. But you're correct in your analysis.

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Matthew Johnston, Macquarie Research - Analyst [39]

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Okay. And then just a final one. Just from an industry perspective, obviously, the development returns stack up at the moment. And obviously, there is a short-term industry, structural and regulatory issues where the mature sites are going backwards. Just trying to understand around the thought processing in developing more beds. It kind of sends a signal that a bit of the development returns are good, so you don't really need more incentives.

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Ross James Johnston, Regis Healthcare Limited [40]

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Not quite sure how is that. You can see in our announcements we've reduced our number of developments that we're going to put into the field. So I think we're doing 120 places over the next couple of years. That's significantly less than what we've done in the past. There's a lot more opportunities in the market to acquire assets at the moment. And that's moved quite significantly in the last 3 to 6 months. So I think we see opportunity from an acquisition perspective. But obviously, as always, you need the right sort of asset, right quality, right location. Yes, development returns are still good.

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Operator [41]

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(Operator Instructions) Your next question comes from Steve Wheen from Evans & Partners.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [42]

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I just had a question on flu. Could you give a comment on that and its impacts potentially on occupancy? But perhaps more importantly on wages, whether or not you've had to dial up the usage of agency staff and whether or not we could expect that those wages, if that has been the case, might start to revert back?

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Ross James Johnston, Regis Healthcare Limited [43]

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We really haven't seen any substantive impact from flu this season across the business. And the flow-on from that is agency expense is pretty static actually for us. So despite what you read, it's been a pretty quiet flu season for us, for Regis.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [44]

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Yes, yes, sure. And then just I guess this is more a question that's been guided by one of your competitors, but they saw quite a snap back in occupancy post year-end. Is there any comment that you can make about yours on that sort of basis?

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Ross James Johnston, Regis Healthcare Limited [45]

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Yes. We see our occupancy is pretty flat at the moment. I think we answered that question just before. The industry stats, if it helps you, we think the industry occupancy has dropped 50 points in the last few months actually. So our occupancy we see is pretty flat at the moment.

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Operator [46]

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There are no further questions at this time. I'll now hand back to Mr. Johnston for closing remarks.

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Ross James Johnston, Regis Healthcare Limited [47]

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All right. Just on behalf of Regis, I'd like to thank everybody for participating in the call today. Welcome, Linda again, and we'll see you run the traps over the next few days. So thank you.