Oceania Healthcare Limited (OCA.NZ) Earnings Call Transcript & Summary

Welcome to the Oceania Healthcare Limited Interim Results Announcement for HY 2026. [Operator Instructions] I would now like to hand the conference over to Suzanne Dvorak, Chief Executive Officer; and Kathryn Waugh, Chief Financial Officer. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us today. Back in mid-September, we talked you through our longer-term strategy and the work underway to prepare the organization for FY '27 to FY '31. At that time, we were clear that FY '26 would be a stabilization year, centered on consistent execution across our priority areas. Today's interim result is about where we are right now. And importantly, the early progress we are seeing as we deliver the first phase of the strategy. When we met in September, we set out our 3 priority areas for the stabilization phase of our strategy. First is sales performance. We have strengthened discipline and visibility across the sales process, tightened conversion pathways and improved how we manage applications and inquiries. This is about building repeatable systems that lead to performance across the network. Second is business excellence. This includes workplace efficiencies, more disciplined procurement, improvements in rostering and using technology to support a more consistent operating model. These initiatives underpin the uplift you will see in today's results. The third is capital management. Our focus is on reducing debt, releasing capital from development stock, progressing divestments and ensuring we pace development in a disciplined way. This strengthens the balance sheet and supports long-term value creation. These 3 priority areas remain the foundation of the work underway. Because our strategy update was launched in September, today's results reflect the very start of these initiatives. So building on these strategic priorities, I want to give you a brief summary of the half before we move into the detail. Across FY '26, we are seeing promising momentum in each of our priority areas. In sales performance, applications and occupancy have lifted steadily with clear traction at our key developments. The Helier has now reached nearly 55% occupancy, and Franklin presales have progressed to 35% for Stage 1. In business excellence, underlying EBITDA increased 23% to roughly $42 million, supported by improved care profitability and $4 million of cost savings realized. Care EBITDA per bed increased 45%, reflecting the strength of our care platform and the initial benefits of operational improvements. And in capital management, gearing has reduced to within our target range. Operating cash flow has increased 12%, and we have released a net $40 million from development stock since March. We also have 4 divestments progressing through to due diligence, which will support further capital release. So overall, this half shows a steady uplift in performance and the initial impact of the work we've put in place. The early indications are encouraging as we continue to stabilize the business and position it for the next phase of the strategy. Turning to the financial summary. The key items I want to highlight here are total comprehensive income and underlying EBITDA because these reflect the impact of the operational improvements we have spoken about. Total comprehensive income increased to over $40 million, driven by fair value movements across the property portfolio. This is a steady operating result in the current environment. Pro forma underlying EBITDA increased 23% to roughly $42 million while allowing for the impact of the closure of the Wesley Institute of Nursing Education. This improvement was driven by stronger care profitability, initial cost savings and the lift in sales performance we saw through the second quarter. Total sales volumes reached 271 units, which is right in the middle of our guidance range, demonstrating improved execution and market traction. Operating cash flow increased 12%. Net tangible assets increased to $1.57 per share. Our net debt increased -- decreased by $19 million. These are clear indicators that the stabilization work underway is taking hold and that the business is now beginning to show more consistent performance across its 4 areas. Let me now turn to sales performance, where we are seeing some of the clearer signs of momentum. I'll start with The Helier, a site, I know many of you will be waiting to hear about. This is where the progress over the past few weeks has been most visible. At November 20, occupancy stands at 54.5%. Since period end, we have seen a meaningful increase in applications, and that uplift is the direct result of the work we put in 6 months ago. We refined the product fit, embedded learnings from our marketability project and ran successful campaigns to target our strongest customer segments. These insights are now part of our internal IP, and we are applying them across to other villages. To give a sense of momentum, the range of sales applications has lifted from fewer than 2 per month between March and September to approximately 4 per month since the start of October. We are still targeting being able to reach the point of full development cash recovery by March 2026. That remains our clear focus. We're pleased to see this momentum building at one of our premier villages. Moving to Franklin, where we are seeing encouraging progress. For the first time, we have achieved meaningful presales ahead of completion with Stage 1 now at 35%, including a further application this morning. This is a clear indication that we are building the right product in the right location and that there is strong market demand for what we are delivering. The opening of the lodge in the coming weeks is a critical milestone and an important catalyst. It gives prospective residents something tangible to walk through, and we expect inquiry and conversion to strengthen, once people can experience the community center firsthand. The team has brought this stage in on time and within budget, demonstrating our development capability and our discipline. So in short, Franklin is tracking well, and the trajectory is encouraging as we head towards first stage completion. Over at Meadowbank, which many of you visited during the Investor Day tour, we have also seen a very encouraging start. Occupancy in the new building has been tracking ahead of expectations since final stage of the redevelopment was completed in June. This stage added 40 dementia suites and occupancy has reached over 50% within the first 4 months. It is a strong initial response for a new dementia development of this scale. The clinical team has done an excellent job establishing a new service and supporting families through this transition. This redevelopment completes the sixth and final stage of our Meadowbank site, and it is pleasing to see such strong engagement from residents and from the community. Despite a challenging housing market, our new sales performance and development margins have remained solid. What matters here is the resilience in demand for our product, particularly in care suites, where we continue to see strong sales and improving occupancy across key sites. Turning to resales, which also performed well. Total resale activity reached 180 units with care suites making up the majority of the volume. That reflects the continued depth of demand in this part of the portfolio. Villa resales remained steady, and we saw a lift in apartment resales as more recent developments move into their normal turnover cycle. What is notable this half is the balance across the resale mix. Our targeted marketing campaigns and strategic incentives have been effective in accelerating both resale and development stock turnover, which you can see reflected in these results. And finally, an update on development stock. In this half, we sold $65 million with $50 million of this from stock completed over 12 months ago. This is a solid step forward in clearing out older inventory. The progress was made even after adding $25 million in new inventory during the period. What this demonstrates is real momentum in our settlements and sales, thanks to stronger sales disciplines and targeted marketing. Looking ahead to the development pipeline, our focus is on maintaining discipline, preserving optionality and sequencing projects in a way that supports the balance sheet. A key part of this discipline is pacing delivery. We're targeting a maximum of approximately 60 units at a single location at any one time. This keeps development aligned with demand, supports settlement flow and helps manage working capital. This keeps development aligned with demand. In short, we are progressing development in a measured and financially disciplined way that supports our capital position. Alongside our development work, we are also progressing the business excellence program. And I'll now hand over to Kathryn to talk you through more of this.

Thanks, Suzanne, and good morning, everyone. When we spoke to you at the Investor Day, we discussed the broader cost out program with the $20 million annualized impact from FY '27. What we're focusing on today is what's already visible in the half year results and what you can expect in the full year. We are seeing clear operational uplift through workplace efficiencies, early improvements in rostering, stronger procurement discipline and the early benefits of the technology and process changes now embedded. The benefits of those shifts are already flowing through to the underlying result. So let me step you through that. On Slide 14, we've provided a normalized result. This has been adjusted for the impact of the closure of our Wesley Institute of Nursing Education and divestments, and it shows what's been happening in our core operations. The reconciliation to our statutory profit is in the appendices. While village earnings to date have remained steady, care profitability has improved materially, with care EBITDA per bed up over 40%. This demonstrates the strength and consistency of our Care operations. In the corporate segment, we've completed the restructure and embedded the tighter operating disciplines, which positions the organization well for our next phase of growth. $4 million in cost savings have been realized through this process during the half, and we remain on track to deliver $13.2 million during FY '26. The corporate restructure was completed over July and August, so the first half captured only 1 to 2 months of the benefit. Together with occupancy, sales and revenue opportunities, these cost improvements contributed to pro forma underlying EBITDA increasing 23% to $41.9 million for the 6 months. While we won't go through this on the call today, further detail on our care and village earnings, including our premium revenue breakdown, is available in the appendix. Care is a core strength for Oceania, particularly our care suite model. We now have 6 sites running with workplace efficiency initiatives, including smarter rostering and streamlined shifts. As we roll out these improvements to another 20 sites, we expect further lift in EBITDA. As an example, at our Eversley site in the Hawkes Bay, we have reduced overtime and supported stronger resident outcomes, including higher satisfaction and greater continuity of care, which has set benchmarks for our other sites. Our mature villages are operating above 94% occupancy. Even small increases in our occupancy will mean a significant upside for the group. EBITDA per bed is up strongly on last half, driven by occupancy growth, tighter cost management and the continued success of our care suite offer. Care suite development margins have also risen, reflecting the strong demand and the quality of our product. With the next wave of workplace efficiency initiatives underway, we're confident of even more progress in the second half. The corporate function is now rightsized and operating with much greater discipline and the numbers show this. Corporate costs have reduced following the rightsizing completed in the first half, with full benefits flowing through in the second half. That streamlining, combined with automation and simplification is positioning the function to support growth with greater discipline. During the half, we reduced these corporate staff costs by around 20%, supported by a combination of role consolidation and more efficient processes. What is important here is not just the cost reduction, but the capability and focus that the corporate team now has. The function is set up to support growth with clearer processes, stronger discipline and a more effective operating rhythm. Our team are now focused on execution, ensuring a minimum annualized $20 million cost out from FY '27. Importantly, despite the reductions in streamlining, our recent engagement check-in shows the corporate team remains highly committed to the work ahead. The new employee value proposition is supporting that, helping us attract and retain purpose-driven talent as we move to the next phase. I'll move now to capital management. It's absolutely central to all that we do, ensuring appropriate capital management and working to the best return possible for our shareholders. So let's start this section with where we're positioned today. Moving to Slide 18 for a view of our balance sheet. As you can see in the table on the top right-hand side of this slide, we have a strong headroom of $116 million available on current facilities. Moving to the bottom right, all of our covenants are met. In that bottom right table, you will see gearing is 34.8%, within our target range, and our ICR is at 2.5x. Overall, our balance sheet is well positioned with further debt reduction planned, giving us the flexibility we need as development activity progresses. I'd like now to step through how we're planning to further reduce debt in the short to medium term and continue to strengthen our balance sheet. As I said, we finished the half with gearing at 34.8%. And this slide shows the levers that will help us reduce that further. Please note this is an illustration rather than a forecast. It's intended to show the scale of the material reductions that are possible, not the timing. A main lever is the sell-down of unsold development stock, which represents around $104 million of capital that can be released as settlements occur. Alongside this, we have 2 other sources of capital release, the sale of bought back stock and planned future divestments. Together, these could contribute a further $80 million. When you combine all of our levers, we demonstrate the magnitude of what can be achieved through disciplined execution. I want to emphasize that while we remain fully committed to our gearing target, we'll continue to operate responsibly and with discipline, ensuring capital management strengthens the balance sheet, while still affording us plenty of room to grow. By maintaining a prudent gearing range, we put ourselves in the best position to invest sensibly and seize opportunities as they arise, supporting both stability and future growth. Divestments remain another important leader in strengthening the balance sheet from supporting the stabilization plan. Across the half, we continued to progress a number of properties through due diligence and several are now moving through to final stages. We have been very clear that we will only divest noncore sites, and that discipline has guided our discussions. We are targeting around $40 million of proceeds from the current subset of 4 sites, and the timing will depend on completion of due diligence and meeting our return thresholds. I'm very much focused on being able to give you a meaningful update at the year-end. These proceeds will further support our production and give us additional flexibility as we move into FY '27. Free cash flow is a new measure we introduced this year to give clearer visibility of the underlying cash generation of the business. You can see on the slide that the trajectory has improved since March as operating performance lifts, development stock reduces and capital discipline throws through the results. It's worth noting that around $30 million of all receivables from resales were outstanding at balance date. And a significant portion of that, just under $14 million has already been collected since period end. Had all of that resale cash settled by 30th September, we would already be in a positive free cash position. The timing of these settlements can impact the measure in any given period. but the underlying trajectory remains positive and continues to strengthen. The improvement is putting us back on a path where over time and when the market turns, we will be in a position to resume dividend payments. The trend you see here is a clear indicator that our stabilization phase is working. And we'll provide a further update at the FY '26 results. Moving to the financials. I'll now take you through the statutory GAAP position. These are high-level statutory positions and more detail is also contained within the appendices. Profit and loss. Looking at the profit and loss, the key movements reflect the themes we've already covered and they have resulted in an over 3x increase in our total comprehensive income. Finance costs have increased this period due to interest in relation to completed developments. This will reduce as we sell down our development stock. This not only helps our cash position moving forward, but also our statutory profit and loss, given the interest on debt associated with completed developments is expensed. Pleasingly, we have seen steady increases to our property portfolio with a $61 million increase this period. Overall, the profit and loss shows steady improvement across the core parts of the business with further uplift expected as the second half initiatives land. Moving to the cash flow. Operating cash flows increased this half. While there is a one-off GST refund relating to development expenditure, the underlying themes reflect stronger sales activity, higher care occupancy and the early benefits of the cost measures now in place. As the development stock reduces and as the settlements continue to flow, we expect operating cash generation to strengthen even further during the second half. On the investment side, the cash outflows have reduced sharply with Meadowbank now complete and only Franklin remaining under construction. This will decrease even further as we move to March. Overall, our cash flow performance is improving, and we expect the trend to strengthen. And finally, our balance sheet. We remain in good shape with total assets over $3 billion. Gearing, as mentioned earlier, is 34.8%, within our target range, and we have $116 million in headroom. We are positioned well to continue reducing debt, while maintaining flexibility to invest where it makes most sense for our growth. I'll now hand back to Suzanne, who will outline our priorities for the remainder of FY '26.

Thank you, Kathryn. Before we wrap up, I want to bring this back to how we will measure progress from here. Earlier in the year, we outlined the key areas we would track as part of the stabilization phase. What you see on this slide are the measures we will report against as we move through the strategy period. This slide does 3 things. First, it establishes a clear starting point. The first half gives us a consistent reference to measure progress across sales, development, care, engagement, gearing and cash flow. Second, it drives accountability and focus. Tracking results against our measures keeps us aligned to our stabilized, optimized growth pathway that we set out in September. And third, it enables transparent reporting. It shows measurable improvement over time in occupancy, development performance, gearing and free cash flow. To close out, I want to highlight where our focus will be for the remainder of FY '26. Across sales performance, the priority is continuing to lift sales cadence to reduce unsold development and aged stock. In business excellence, we will keep driving occupancy and deliver the $13.2 million of savings targeted for the year, and we remain focused on divestments, reducing debt and further reducing gearing as we recycle capital into the right developments at the right time. So in summary, we have a clear plan with clear metrics and momentum that is building for the next phase. Thank you again for your time today. I'd now like to open the floor to any questions.

[Operator Instructions] Your first question comes from Bianca Murphy with UBS.

Thanks for the update. So first question for me is just on your ICR at 2.5x. So you, of course, explained that by the removal of the education income, but it is still a decent drop from FY '25. So could you just comment on where you'd like to see your ICR to settle more medium term? Or are you just comfortable with where it is right now?

Bianca, it's Kathryn here. Yes, so we talked about how Wesley's gone out, that obviously contributed $3.7 million of cash EBITDA during the period. And we are confident it will rise again pre-March. And all of the things we talked about today with the cost out will obviously contribute to the bottom line. One of the other big levers was the settlements that I talked about. So we can only recognize DMF, for example, in our ICR once the cash comes in. So we are in control of our focus on debtors and just making sure those settlements come in. So sales and -- sales cost out and control of the debtors will see it increase. To the second part of your question about, are we comfortable where it is? We're obviously comfortable it's met and we would like to see it back in the 3s. And I think a long-term comfortable range is between 3 and 4x.

Okay. That's helpful. And then just on the 4 sites that are currently under due diligence at $40 million. Could you share what sort of premium or discount to book value that reflects?

Yes, of course. So we're looking to be able to tell you all of the details pre the end of March, and we are in progress due diligence at the moment. And all of our sales, as you've seen in the best, when we look at them on aggregate, so some of them are part of a portfolio that's going, we're looking at or around CBRE.

Okay. And then lastly, just on full year sales. So for the first half, you of course, gave that guidance of 3% to 7% growth versus PCP. This result was sort of in the middle of that range. Is there any guidance you can give for the full year? Do you expect it to be similar sales growth in the first half, I guess?

Yes. Thanks, Bianca. Yes, we guided $265 million to $275 million. We've obviously landed at $271 million as you said. Those sales aren't necessarily lost that would have been at the higher range. They've come in, in October. For the full year, we're not giving specific guidance, but I would say we would expect at least that increase if you look at volumes. And when we were at the Investor Day and in those Investor Day materials, we also talked about the strong increase in applications that we've seen, and those applications we'll be looking to settle the majority of those in the second half.

Your next question comes from Arie Dekker with Jarden.

Thanks for very clear presentation. Just on the expectations for the second half. I just had a more specific question with regards apartments. It's obviously pretty high value, particularly with The Helier. So sales of apartment has been running at about 40 for the last 3 halves. Just given that increase in momentum that you've noted, Suzanne, would your expectation be that you can sell comfortably more apartments in the second half than you have over the last 2 halves?

Yes, our expectation is we can comfortably do that and yes, improve our results in the second half.

Yes. And so then taking that into account as well as perhaps the continuation of some release of the buyback stock and the short-term receivables, should we expect an acceleration of debt repayments in the second half on the level achieved in the first half?

Yes, Arie.

Yes, Arie, I'll pick that one up. So -- and yes, so as I pointed out, we had a kind of a decrease of around $18 million in the first half. As is in our accounts and as we've clearly said here, a lot of that was due to the GST. Second half, as you've said, we are expecting more apartment sales coming through. They are of higher value. We're also going to have the divestments, and we've also got a key focus on the debtors. So yes, you're quite right, the decrease in debt for the second half should be a lot better than the one you've just seen in the first half.

Okay. No, that's good. And like I guess if we were to sort of put a number on it, like do you think that -- I mean I think you did just under $20 million in the first half. I mean could that be as much as sort of $40 million or $50 million of debt repayment in the second half?

Yes, of course. The number I'd probably invite you to have been more of the $60 million. So if you think we've got $40 million of divestments, we're hoping to finish and we'll have at least $20 million from a sales perspective as well. We're hoping to exceed on [ $50 million. ]

Yes. Okay. So you're actually confident that the cash settlement of those 4 sites will occur in FY '26, the cash settlements won't flow through into FY '27.

And we're working with the prospective purchases on the moment of settlement in March. Obviously, these transactions will be subject to external approval of patrol and statutory supervisors, but it's certainly what both sides are working towards.

Great. Just progress at Franklin, pretty encouraging ahead of completing that first stage. Can you just give a bit of an update on your expectations for the size, if there is any change on the size of the next stage at Franklin, which presumably you'll be targeting for delivery in FY '27?

Yes. I'll start, and then I'll hand to Suzanne. And with Franklin, the way we've designed it is that we come out with small stages at a time. So first stage is 30. Second stage is around that as well, just slightly more than 30. And we'd also talked about we would start the construction of those villas as soon as we -- I'm happy with the level of presales. And Suzanne spoke today, I think in the presentation, we said 35, and that was off 11 presales. We've actually had another this morning, so we're at 12. So we have the lodge opening in the next week or so. We expect applications inquiries to increase again off the back of that. And so I'm not sure if that answers your question, Arie, but effectively, if you think of Stage 2 as being between 30 and 40, you'll be about right.

Yes, for delivery in '27. And then just on Gracelands, just your view on time frames for getting consent there and when that would sort of support the first deliveries?

Yes. So the team are working on the design and planning for that at the moment. And as you go through the consent process, you always talk 12 months absolute minimum. And our focus really at the moment from a starting construction in '27 is on Franklin and Gracelands. We'll see what happens with the consent process and we'll see what the market demand is as well before we commence there.