APM Human Services International Limited (APM) Earnings Call Transcript & Summary

Good day, and welcome to the APM Half Year 2023 Results Presentation. [Operator Instructions] It is now my pleasure to introduce Executive Chair, Megan Wynne.

Welcome, everyone, and thank you for joining us today for our FY '23 half year results presentation. I wish to acknowledge the traditional custodians of the land on which we live and meet upon today. We pay our respects to elders, past and present of all Aboriginal and Torres Strait Islander nations. Globally, APM recognizes the significance of indigenous people's communities and the important role they play within our own workforce and the world. My name is Megan Wynne, and I'm the Founder and Executive Chair of APM. I'm joined today by Mike Anghie, our Group CEO; Steve Fewster, our Group CFO; and Matt Cooper, our GM of Investor Relations. Firstly, we wish to thank you for your support as shareholders. Today, we'll present our half yearly results and share how we, as management, see the business, the market and our excitement for the company's outlook. If you could please move to Slide 6, and I'll pass it to Mike.

Thanks, Meg. Hi, everyone. Today, we're a team of 14,000 team members supporting more than 2 million people across our 7 countries, delivering on our purpose of moving better lives. As you can see on this slide, our strategy is to deliver market-leading performance, which drives organic growth, diversify the depth and breadth of our service offerings to a lot of the clients that we know best, integrate and optimize acquisitions in our core business and to sketch an execute on strategic M&A that helps us to build a scale to existing businesses or support us to enter new markets and adjacent services, where we can ultimately be a market leader. In the first half, we continued to execute on this strategy. From an organic growth perspective, within the mobilization of Workforce Australia, the debt reallocation and a 2-year contract extension. Extensions and retender wins in the U.K. with the work health program and the NCS new contract and mobilization of the Canadian contracts and continued rewind across the U.S.  We continue to integrate and optimize our acquisitions with all acquisitions completed in FY '22 growing strongly. The acquisition of Equus in the U.S. supports our strategy of continuing to diversify the business and access new market opportunities. The acquisition of Everyday Independence takes us to a leadership position in Allied Health and NDS therapy and the small acquisition of Springday, our digital health offering and enhances our mental health service delivery. And importantly, we continue to deliver on our purpose of enabling better lives, not just in our funded services, but on behalf of all of us in Germany, where we have now supported over 3,700 refugees from Ukraine, who settled in Germany on a pro bono basis. It's been another half where we continue to deliver on our promises to our customers, our people and our stakeholders. From a financial perspective, we've had another strong half, delivering growth and supporting investments for the future. Revenue was up 39% to $863.7 million. EBITDA is up 21% to $167.4 million and NPATA is up 11% to $85.4 million. We continue to generate strong cash flow and the directors have declared a half year fully franked dividend of $0.05 per share. I'll pass to Steve to run through the financials in more detail.

Thanks, Mike, and good morning to everyone. On Slide 8, we provide a summary of APM's P&L. On a PCP basis, revenue for the half was up $240 million or 39% to $853 million. This was delivered through a combination of organic growth and the businesses we acquired. Organic growth for the half was 13% and came largely from our health business in Australia and the restart scheme in the U.K. This growth reflects the strength of the core business for supporting major opportunities such as the start-up of Workforce Australia and the mobilization of new contracts commencing in the second half, particularly in Canada. Acquisitions for the half contributed 26% revenue growth, with acquisition of Equus completing in November, this business contributed 22 months of revenue. We'll go through segment performance and outlook shortly. Underlying EBITDA for the half was up 21% and underlying NPAT increased by 11%. The growing contribution from lower-margin North American market contributes to the lower margin in the half, together with the investment in building scale into health, disability and HK businesses, as we optimize our health visibility in aged-care businesses, you'll see average margins increase. During the half, our effective tax rate was 23%.  Turning to Slide 10. During this half, we have again mobilized a number of new contracts and completed the acquisition of Equus. We finished the half with a strong balance sheet where our leverage ratio is 2.4x underlying EBITDA. Over the short term, we expect this to trend back to 2x, given the inherent growth that exists within the business. In July '22, following strong interest from the debt market, we successfully replaced our $590 million Term Loan B facility with an $840 million syndicated multi-currency revolving corporate facility. The refinance delivered a 240 basis point margin sale. This saving has now been offset by increases in the base rate. The facility has since spent increase to $1.04 billion. This is now delivered for capacity and flexibility to confidently pursue our growth strategy. We're also very proud of the fact that this is the first corporate facility in Australia that is being recognized as a social loan. This recognizes the social contribution APM makes within the countries that we operate. At 31 December, we had available liquidity of $310 million.  On this slide, we now show you our cash flow. The waterfall highlights the reasons why we saw a point in time unusually lower cash conversion. This was due to the start-up of Workforce Australia contract, the maturity in the restart scheme, investing in the start of the Canadian contract and the timing of receipts in the U.S. business. In the second half, cash conversion will increase as we receive outcome payments from Workforce Australia and the restart contract. We'll also see the collection cycle in the U.S. kick-in, and we'll receive payments for the services that are now being delivered under the Veterans contract in Canada. We expect the cash conversion will return to historical levels of above 85% in the coming periods. Over to Mike.

Thanks, Steve. I'll go through each of our segments and how the business is evolving and what we're seeing in each market and cover outlook. Following the Equus acquisition, we've adjusted our segment to reflect the business we operate in Australia, New Zealand, North America and Rest of World. The changing segments was due to the acquisition of Equus and its materiality change in the business mix. As a result, we changed the structure and reporting and these segments better reflect the go-forward operating model that we manage the business by. As illustrated on this Slide 13, we continue to grow our business globally. Importantly, our strategy is to build a long-term sustainable business that can grow or deliver strong performance through all cycles. Diversity drives resilience, and we're well placed to respond to the challenging and changing market conditions. As you can see, we're increasing our presence in North America and Rest of World, and we're also diversifying our revenue model, growing our noncontract Consumer Choice business and balancing our service outcomes business with stable bitstream cost-plus businesses. We'll continue to execute on this diversification strategy and the second half will see continued diversification in contributions from acquisitions and the North America expansion. Moving to the next slide. In Australia, we've seen strong revenue growth in the half due to the ongoing growth in health visibility and aged care. The [indiscernible] in the half is down H1 FY '22 and up on H2 FY '22 due to our investment in health disability in aged care and the increased interest cost of additional tax. In terms of outlook, we expect to see growth in this segment in coming periods, supported by the investments we've made. Covering the key areas of business. Firstly, workforce Australia. This contract commenced in July 2022, which requires the onboarding and commence requirements prior to supporting clients on their journey to employment. The contract is building strong outcomes in comparison to industry benchmarks and will continue to mature into the second half. As Steve said, we'll continue to collect cash based on placements received in the first half into the second half. While there's no public market data available, based on our internal analysis of APM's performance versus the overall market, we managed a 20% performance margin.  Turning to Disability Employment Services. During the half, there were 3 significant events. Reallocation of clients contract extension for 2 years to 30 June 2025 and the commencement of consultation for the new program. We believe that all of these events are positive for APM. We'll see the benefits of the reallocation and investments in the DES kind awareness campaigns in future periods based on the clients that came in during that time. During the half, in DES, our market shares continue to grow due to our strong performance, given the program of lager participants with the ability to choose their providers. In terms of the future DES program, we believe there will be approach for quality, efficiency and effectiveness, which is a good framework for APM. In health disability and aged care, we continue to build scale and invest to optimize performance and meet market demand. Our investment is made in the key areas of talent attraction and retention, systems to allow our people to spend more time to client to provide important data and in expanding services and accessing new markets. During the first half, the business continued to improve from the COVID-19 period, and this provides a strong platform for growth and profitability in the future.  Turning to North America. North America is a key growth market for APM. During the half, we continued to grow with the implementation of the Ontario employment program, full half contribution from the DWS acquisition and the completion of the acquisition of Equus late in the half, which contributed 2 months results. As mentioned earlier, whilst our investment in North America reduces overall margins across the group, there is lower variability in performance, given the nature of the contracts being generally cost price or no margins. The Ontario Employment services market continues to progressively go to tender, and we're successful in the Phase 1 tender within New York region that will commence April 2023, and we're now operating in 2 of 6 regions of launches. We anticipate the Phase II tender results will be known later in March. With immense delivery of the veterans contract in Canada in December 2023 ahead of schedule after continuing to invest in the South during the half. And across North America, we'll continue to see the benefits of contract wins and acquisitions and growing in the future.  Moving to Slide 16 and Rest of World. The growth was driven by the maturity of the Restart contract. Volumes in the program continue to be lower than expected in the half given the strong employment conditions, and this will result in a lower half contribution in the second half, assuming current market conditions continue. The U.K. government stated the focus of increasing workforce participation rates, engagement with people with disability and employment and increasing -- and addressing the increasing health-related unemployment. As we've seen the Restart Scheme and its funding estimates reset based on volume point in time. We have a 21% market share, and we'll continue to be nimble to respond to the needs of that market. We've been successful in the tender for the MPS program and will deliver across the whole of England under the new program together with our partner, WHI. And in January 2022, we entered the Swedish market through the acquisition of Costera, and as the employment market performs, we expect the size to grow from $500 million to $800 million per annum. I'll pass to Megan now just to talk through the market fundamentals, and I'll come back to talk about outlook.

Thanks, Mike. If you could move to Slide 18, please. The world is facing the most challenging social and economic outlook for this year, with government focused on how they emerge stronger from the COVID-19 pandemic, closed the gap in unit quality, increased workforce participation to offset enduring skills and labor shortages and optimize social services to reduce the risk of further societal unrest. In employment services governments are focused on increasing workforce participation in the face of a rapidly changing world of work impacted by the digital and green transformations and demographic change. Government's capacity to create a multigenerational and inclusive workforce is a challenge providers such as APM can play an important role in supporting. In the United Kingdom, Chancellor Jeremy Hunt has tabled the need to help the millions of people outside of the workforce to fill the vacancies in the jobs market. Chancellor Hunter has also outlined his ambition to help more disabled people and those with mental illness into work, citing a 70% increase in disability claims in the pandemic. In our existing and emerging markets, disability inclusion is high on the agenda as is supporting labor market inclusions to young people in keeping people engaged to work longer.  The cost of care is rising globally, increasing the desire to keep people in their home longer and provide income community care as needed rather than fund more expensive residential care options. Globally, we're seeing an expanding demand for mental health and well-being services as well as employers supporting and enabling employees and their families to focus on prevention and early intervention. From a government stakeholder perspective, we're seeing a sharper focus to ensure the programs deliver a strong return on investment, both financially and societally. By way as example, in announcing our winning NCS National Citizen Service in the United Kingdom, a national program to 16- to 17-year-old to foster social cohesion and build important life and work skills, the NCS trust quoted that the program delivers value for money with GBP 3 of benefits to society for every GBP 1 spent. And in all recent tenders and retenders, we see the increasing emphasis of funders on engaging providers with a proven track record of delivering high-quality service with the organizational capability to ensure program success. For us at APR, we've operated in changing markets since 1994 and in some of our companies for many years longer. We will continue to adapt and invest to ensure we deliver best-in-class evidence-based services to meet the ever-changing needs of our clients and evolving market conditions, and importantly, to ensure we remain a trusted partner of our stakeholders will into the future.  If you could please move to Slide 19. As many of you will be aware, the Australian government is currently undertaking a reviewing of the National Disability Insurance Scheme. The overarching goal of this review is to put people with disability back at the center of the NDIS and to restore trust and confidence in the scheme. APM is responding to this review and is supportive of the government's objectives. The NDIS market is highly fragmented with more than 18,000 registered providers of support and a high number of unregistered providers with few national providers. Today at APM, we provide services to 30,000 of the 570,000 NDIS scheme participants presenting a significant opportunity for growth. We believe that as the market matures, APM is well placed to become the preeminent provider of support services within the NDIS. The business we're building supports the client from early childhood throughout their lives is focused on quality, efficiency and effectiveness, ensuring the participant is at the center of everything we do, whether that be plan management, therapy services or in-home support. I'll now pass you back to Mike if you could move to Slide 20.

Thanks, Megan. As you can see on this slide, our business has a strong foundation of existing and new contracts that continue to scale and grow, opportunities are growing health different aged care businesses and contributions from strategic acquisitions that support growth. Based on the market conditions that we're currently seen in each of our markets globally, we have significant growth inherent in our business that we have today and can respond to the market changes as we've done so since 1994. In Australia, we'll see our health is an aged care businesses continue to grow as we optimize the businesses through investment in talent, systems, diversifying services and expanding market presence. In addition, we'll have a 5-month contribution from everyday dependence in the second half and a full year contribution beyond that. We'll see Workforce Australia continue to mature. Indeed, we'll start to see the outcome contributions from relocated price and clients attracted to the business during our campaigns. And in the Rest of World, we'll have the new one contract that we have won partly offsetting a softer expected second half than we start. We're focused on the U.K. market as government continues to respond to its desire to increase workforce participation, given the many millions of working age people are not engaged in the workforce.  In North America, we'll have a full half contribution from the acquisition of Equus and the commencement of the Canadian vectors contract and growth in Ontario in point of services in the second half of the financial year and beyond. We'll continue to pursue new opportunities in the market, and in Canada, we await the Phase II tender results for the Ontario employment services program. We await the functional assessments tender results, should we be successful would be a major achievement as it is a new market for us as a new entrant. We continue to pursue new contract opportunity in North America and across corporate health. As an example, over the weekend, we have won a new dog core contract in the U.S. with a total contract value of USD 55 million over 5 years. We're actively accepting organic opportunities in new markets. Overall, assuming no material changes in the markets where we operate, we'll see growth into the second half -- the second half NPAT skew similar to FY '22, which was 54%.  Moving to Slide 21. And in closing, we're focally ensuring that we're delivering on our promises to our customers and continue to deliver high-quality services across our business. This quality is critical, and we believe ensures our success. To do this, we're investing in our amazing people and attracting new talent to our growth. The attraction and retention of talent is a key focus for our leadership and our teams. We'll continue to diversify the business and hedge the geographic contributions and revenue models that will provide the resilience to build a sustainable business that can grow year-on-year for the long term. Australia is the most significant market globally as the NDA is the largest human services market and opportunity globally. Its performance success is important for all Australians and not just for participants, and we believe we are a positive solution. And whilst we're a leading player today, it is still a very small part of the APM business, and we're in various core part of the overall handy. Today, we're building a leading health visibility and aged care business, and we've only just started this journey and will focus on execution and optimization in the coming periods to drive growth and value. The world of Human Services, as Megan has covered as underlying themes that will drive new market opportunities and investments, and we operate in diverse markets where there are new opportunities in core programs and adjacent programs to refocus on especially in North America, Europe and new markets.  From an acquisition perspective, it's important that we digest what we have and optimize its performance. And whilst there are many opportunities in the market will continue to be disciplined. The first half organic growth was 13% and acquisition growth 20%, 26%, both of which are significant in any market. And we expect that to rebalance to favor organic growth over the medium term and revert to our long-term average of 2/3, 1/3 over that period. We expect that the platform we have today given the full year impact of acquisitions and contract awards, together with continued organic growth in health, visibility and aged care will fuel growth into FY '24 and beyond, realizing our goal to deliver medium-term profit growth in the mid-teens pro. Finally, I'd like to thank the APM team members that wake up each day with the sole objective to support our clients to improve their lives and all our stakeholders and trust us to provide essential services. That ends the presentation, and I'd be happy to answer any questions. Thank you.

[Operator Instructions] Our first question comes from the line of Michael Peet with Goldman Sachs.

First one, just on the cash flow and the working capital build. Firstly, maybe, Steve, can you just confirm you mentioned you expect to get back to over 85%. Is that in the second half itself? Or is that by the full year? I guess, I'm thinking will cash conversion be greater than 100 in the second half or I'm going down the wrong track there? And just a little bit more color, if you could, on the $68 million working capital build for Workforce Australia and the other contracts, et cetera. I mean how much was Workforce Australia? Does that sort of come back to you? What exactly is it? Is it you're just waiting to get paid by the government, I'm assuming. But if you could just give us more color on that, that would be great.

Yes. Great. In terms of clarifying the 85%, we expect H2 to be at that 85% conversion rate. So for the full year, it will be below, I guess, what we historically achieved, but we'd expect that to revert back to those historical levels in FY '24. So you see back around 85-plus percent in FY '24 on a full year basis. In terms of what's driving that $67 million working capital buildup, the Workforce Australia and the Restart Scheme in the U.K. It's around the timing of when those outcome payments are received. So what we're seeing now, particularly with Workforce Australia, the 26-week outcome receipts have started to come through in January and then again through February. So as an example, as we is our strongest inflow of 26-week outcomes on that program. So we're starting to see that cash conversion coming through from that program. And those 2 account for around about $37 million in the half. In terms of North America, it's quite a seasonal market. So it was quite pronounced with the addition of equity. So what we'll start to see, particularly March and April is quite a strong cash inflow from that part of our business. It's typical. We saw that last year with our brand business. We're seeing it again this year.  But as I said, with the size of Equus and the 2 months of trading from Equus, that's certainly far more pronounced on this half. So that would account for around about $15 million. And then in terms of mobilization costs, so that's us getting ready for the delivery of services under that veteran contract that commenced on 1 in January. But in the meantime, we've taken out property leases, we've recruited people. We've got ourselves set up to be ready to deliver on the services and there's about $7 million that gets capitalized under the balance sheet for that expenditure, but there's no cash inflow. So as we start to deliver services in January onwards, we'll start to get research for those costs. So they are the main things that have driven that cash. Most of them are one-off and unique because of the timing of when the contract started. And then that North American piece will be a seasonality piece that we'll see a year-on-year.

Okay. Just another question, just on Workforce Australia. Could you give us a sense of should we expect that to be fully ramped in the second half? Or is there more sort of seasoning from a profit point of view? And I mentioned cash flow, there could be a little bit more investment there as well. But if you could just give us a bit more color on that, whether the -- what I'm getting at is the second half really what we should be annualizing here? Or is there sort of more growth to come across the group?

The second half will be more reflective of the go forward, assuming there's no significant change in unemployment. Just to give you some data, what we've seen in the past is a 1% increase in unemployment as between 150,000 to 200,000 people in the program. So if we're sitting here today, then it will -- second half is more to a go-forward subject to there be no major change to clients, which, I guess, everyone's got a view on head.

And our next question comes from the line of Tim Plumbe with UBS.

Just a couple of questions from me, if possible, please. Michael, you gave a bit of color in terms of the tender pipeline, Ontario Stage 2 contract, I think you mentioned in March timing. Can you remind us of the scale of that opportunity there and then maybe the scale and timing of the subsequent stages within that pipeline? And then maybe just touch on other key contracts that are in the tender pipeline at the moment in terms of scale and timing, please?

Yes. Thanks, Tim. So in terms of pipeline, MCS was probably the first one in the pipeline, we've been announced the successful bid of the new program. That's -- that we moved to Ontario close services. So Phase 2 is the is underway. At the moment, we expect results sometime in March. The total size of that phase is about $200 million with a contract value of around CAD 60 million per annum for the region that obviously, we think we're well placed for. And then the final phase is a total contract value of $300 million. However, that's yet to be split into what size of each individual contract would be. In terms of functional assessments, functional assessment, as we said, it's a new market for us in the U.K. We've bid that those results are expected in the final -- in Q4. And we've been through all the processes there, and now we're awaiting those results. In terms of other market opportunities and what we're looking at, at the moment, whilst we don't outline our pipeline in the North American marketplace, one of the reasons we've gone and invested in that marketplace is obviously the size and scale.  And it's good to see that we're now on winning new important rebids. So we've rewon the Puerto Rico job Corp contract, USD 100 million contracts over 5 years, a great rewin to prove that even as Equus we can continue to do that. And now what we've done, if you may recall, we put a team in this huge job core in the U.S. And we've just won our first new job core contract just outside Buffalo, which is $55 million over 5 years. So they are really good contract wins that we have a really strong pipeline in that marketplace. As well as globally, there's a lot happening in human services as indicated, and we'll continue -- our team will continue to pursue opportunities organically in all the markets that we're in as well as the markets where stakeholders are asking us to come to.

And our next question comes from the line of Gretel Janu with Credit Suisse.

Just firstly, just with Equus, it seems to really outperform in that 2 months. Was there anything in particular that we should be aware of there in terms of seasonality? Or did that just do better than your original expectations?

Gretel, I think -- I mean the business performed to what we expected during due diligence. I think all our North American businesses are performing really strongly. Now understanding that we've been invested in the other ones for a period and obviously being focused on Canada for a long time. So Equus is performing as we expected. But we're really pleased that -- of the way the team is fitting in and the fact that they're winning grid is. And we're adding value and we sort of combined the BD resources and learning from each other. So I think it's performing as we expected. But the overall, we're really happy with the way the overall North American business is performing understanding though that the contracts are outside of Canada are fairly small. So it's incremental steps rather than major steps.

Yes. No, understood. And then just in terms of early start Australia, are you able to give us any indication of how that performed in the half?

Yes. Look, so from a health perspective, as you know, early start in the health business was pretty challenged during the COVID period, and those results were really transparent about that. I mean as what we're seeing now is those businesses return to profitability. In the first half, they will continue to grow in scale. We're investing, of course, in talent because this is a market that talents everything, and we need to put great therapists into our clinics in the markets and the have demand. So there's an investment ahead of the curve, both in terms of headcount but also in terms of it takes time to train people up. So back to profitability, but a long way to go, and we're really looking forward to those businesses, continue to, I guess, mature and optimize and market return to some normality going forward.

Understood. And then secondly, just in terms of the outlook, how much do you anticipate interest costs to rise in the second half?

Interest costs, I think, in the first half around $18 million. And we're probably looking around $21 million in the second half.

Okay. Excellent. And then in terms of integration costs as well, how much do you expect that to impact the overall cash results?