Radius Residential Care Limited (RAD) Earnings Call Transcript & Summary

Welcome all to the presentation of Radius Care's half year results for the half year period to 31 -- sorry, to 30 September 2024. I'll present this morning with our Chief Financial Officer, Jeremy Edmonds; and Executive Chair, Managing Director, Brien Cree. At the end of the presentation, there will be time for questions. [Operator Instructions] And the format of this morning, I will give a brief overview of the business for the 6-month period, following which, Jeremy will provide a deeper dive analysis on the financials, then Brien and I will talk to our strategy and outlook. So turning to Page 5, please, of the presentation. Business highlights. So as we have indicated in the NZX release, it's been a strong year, strong half year performance to date with 8 months of the financial year now completed. Our metrics in FY '24 in the first half are all up. And highlighted on this page, as you can see, a few of those metrics. In particular, our EBITDAR per bed is up 10% from the prior comparable period of $12,000 per bed to around $13,500 per year, which is a key metric for our business. Our mix and occupancy have also improved, and our occupancy is currently around 93% and has been for the last few months. We also set out that in the period or just recently, last month, we completed the majority acquisition of Cibus Catering, which is another step in diversifying our revenue sources, which we'll talk about a bit more later on. Turning to Slide 6, financial highlights. As you can see, not in the financial highlights, but I was losing again with bowls to John at Matamata village. In fact, I lost 2 or 3 games in a row there. Fairly humbling. So we'll move on from the picture on the slide pretty rapidly to some of the financial highlights from the period. As I said, all of our key metrics are up. And this slide calls out several of them. The EBITDAR per bed, the underlying EBITDA at $10.6 million, which is, again, the highest EBITDA that we have recorded for a 6-month period. And pleasingly, accommodation supplements are now running at a rate of around $11 million a year. A few years ago, that number was around $6 million a year. So that's another pleasing metric from the half year. Our available funds from operations, or AFFO, and cash flow were both significantly up. And our reported net profit after tax increased by 39%. So all these metrics, as you can see, increased from a range of between 10% and 39%. Very pleasing. And at the same time, our drawn debt reduced by around $3 million. And we are -- we have declared a dividend of $0.065 per share for the period, which will be paid next month. So all these results stem from our people. This is a massively important slide, not only because you can see John playing Jenga at our lovely Millstream Village at Ashburton, but particularly, what we've called out, the care home managers, the regional managers and the executive team who are settled, stable and provide such commercial and care-based focus to our teams of 1,700 people. It's them who, every day, have to look after our residents and provide care to vulnerable residents. So they're well liked, and that's a critical success factor in the numbers we've just talked about, and Jeremy will talk more about shortly. Another couple of metrics on this page, as you can see, in our staff satisfaction survey, our staff are happy, which is great. Our turnover is reduced. It's now at an all-time low for the company at 23%. That's critical given the nursing problems that the industry faced a couple of years ago that we pivoted out of and came out of probably 12 months earlier than some competitors or most of our competitors. And our employee net promoter score, or ENPS, has increased by, as you can see, a significant amount as well as internal hires being significant. We've hired 60% of management positions internally, which is great to see our people coming through different roles. A critical part of the success of our business is our people. The final slide I want to cover off before I pass on to Jeremy is our certification. So in terms of Care Home Certification, there's a maximum period. And every time you're audited, you'll get either 1-, 2-, 3- or 4-year certification. And as you can see on this slide, a few years ago, we had 5 care homes with 4-year certification. We now have 15, and that is a testament to our team and their improvements and the metric that we talk about, a lot of continuous improvement of our care and to our residents. We're expecting that by year-end, that may be closer to 75%, which we're all very proud of the team contributing to that result. It's worth noting that certification is becoming harder to get. So in a way, our trend is bucking that harder trend of obtaining certification. So again, that's a really pleasing outcome from [ Rosie ] and everybody, all of our 1,700 people have contributed to that slide. So that's a brief overview of the business to date for the 6 months. I'm going to now hand over to Jeremy, and he will give a deeper dive on some of the financial metrics before Brien and I will talk to strategy and then finish up with our outlook. Jeremy.

Thank you, Andrew. And I'm very happy to share some of the highlights behind the main drivers of our strong performance for the first 6 months of FY '25. So starting with our main financial metrics, underlying EBITDA and underlying EBITDAR per care bed. For EBITDA, you'll see the strong growth over the last 3 years, and 14% up on the first half of last year, adjusted for the sale of Arran Court, which was 1 care home that we sold in January of this year. I'll talk more about revenue on the next slide, which was a very strong contributor to both metrics, but it's also worth highlighting the tight cost management that all members of the team have undertaken. We still have a macro environment where there is some underlying cost pressures on our business and some of our key operating costs and control of these, combined with revenue growth, contributed to the EBITDA growth. On EBITDAR per care bed, this metric excludes rent so that we can be comparable across leased care homes and owned care homes. And what's really important to note, for the $13,400 per care bed, this is just for 6 months. So the full year result will be approximately double this result. Again, that's strong revenue growth, mix and tight cost management across the portfolio that have contributed to this industry-leading result that we're very proud of. Moving on to revenue. So again, adjusted for Arran Court, revenue grew by 7% over the first half of the prior comparable period. And here, the drivers were, as Andrew had mentioned, occupancy growth and a continued focus on mix towards the high acuity, high revenue segment of the portfolio. And it's important to note also accommodation supplements were a strong contributor. This is where we get additional revenue for our premium rooms, and it's been an ongoing focus of ours to generate revenue from the premium parts of our portfolio. And then finally, where it all comes together is the dividend. As Andrew mentioned, we're pleased to announce an interim dividend of $0.065 per share, which will be fully imputed for New Zealand tax reasons. So this was very much a return to business as usual for dividends following the significant efforts over the last couple of years that we've put into reducing debt, strengthening our balance sheet, driving cash flow and improving business performance. So in terms of an outlook for dividend, we do expect that total dividends for FY '25 will go back to our dividend policy of somewhere between 50% and 70% of AFFO for the year. So with that, I'll hand back to Andrew and Brien to talk about strategy.

Thank you, Jeremy. So as I said, Brien and I will talk to strategy and then outlook and then open the floor to your questions. So over to you, Brien, for Slide 14.

Thank you. So look, I'll just -- I'll take you through the one slide, this Slide 14. There are 3 key areas for our strategic growth really, as a company, going forward. Firstly, we want to grow scale. And we can achieve this within our core aged care business through leasing care opportunities, and that includes build and leasebacks. And this is the best use of capital. It provides the highest level of return. M&A opportunities. We continue to look at M&A opportunities. Brownfield developments, which is the adding of villas to our existing sites. So those villages where we do have room to put in additional villas, that's what we are planning and proceeding with. And also greenfield developments. We are -- for example, we have the Belfast project which is a 100-bed care facility and some 75 villas, which starts -- which should be able to start that in the middle of FY -- well, the middle of calendar year '25. Secondly, we want to diversify revenue. And so you've seen that we've started doing this. We want to grow the Cibus Catering business. It's a specialist aged care food provider. It also has a number of clients from schools through to various levels of aged care. So we want to grow that business with our partners there. We want to grow RConnect. RConnect is the nursing bureau that we started in 2023 -- 2023-'24. That business has grown quite quickly. It has around 150 staff and is moving into more in-home care. So we want to expand that business. We also want to expand the Radius Shop. We've begun sourcing product direct from manufacturers overseas, and we have a plan to expand that online shopping experience for in-home care. Basically, for people who are at home, it provides them access to sort of equipment that they require when they're not ready to come in to care but do require some sort of support. Additionally, we want to expand into other health services beyond aged care. So what we are looking at there is in-home care. We have come -- gone some long way down the path of providing in-home care, which we do through RConnect. We also are looking at ACC in-home care as we expand out into the community, providing additional services basically that are aligned to health. And the third thing that we have begun working on is templating the Radius way as a full system offering for providing aged care. We see this including all our systems and processes, policies, procedures. We are packaging it together to be an offering that other providers will be able to take away and utilize as a stand-alone product for developing an aged care offering. And we see -- we believe there is an international market for this. And that's Slide 14. Thanks, Andrew.

Thank you, Brien. Yes, that's very exciting to be part of all of those strengths, and thanks, Brien, for presenting that. And it kind of runs nicely into Slide 15, the why are we different slide. And we talked about this at our shareholder meeting in August. But just to reiterate, we often get the question from retail investors, from analysts, why are we different? Why can we make $26,000, $27,000 per bed? And so I just wanted to spend a couple of minutes explaining the points of difference for Radius Care versus, say, other listed operators or other care operators. And we've identified 4 things, 4 key points of difference plus 1 thing that we are not. So I'll run through those quickly. You can see them on the slide. Our culture. We have focused, commercial and lean team, as Jeremy was saying, that deliver excellent care to our residents. So I think that's absolutely critical that we employ people through the lens of those key aspects to deliver care to our residents and to lead teams. And we have strong alignment between the executive team and the Board. Again, a critical aspect of the Radius Care culture. Our portfolio. We do like to inhibit a vast majority of larger scale sites, so over 60 beds, because effectively, that leads to increased profitability for each of our care homes and absolutely critical success factor. We also like to cluster our care homes, for instance, in Hamilton, we have 4 care homes within a very close radius. We can sub out staff and make that -- those care homes far more efficient through the cluster effect of the care homes in various regions. And also in relation to our portfolio, we concentrate on the higher-end acuity. So dementia, hospital-level care, psychogeriatric, which are higher revenue care streams than just rest home care. Thirdly, our intellectual property, our systems, our people and our processes are all designed to assist for care delivery, and as we've talked about, to be a more commercial-focused organization. And then finally, our brand, our reputation over the last couple of decades through Brien's leadership. Brien is always called the face of Radius. You'll hear him around about. You'll see him. Everybody knows Brien. And everybody knows the Radius Care quality that has existed for, as I said, a couple of decades now. And it's our job, as the custodians, to continue on with that. We run a strong -- we'll be running strong advertising campaigns to try and show that. And we do have an excellent reputation in care. So those are the 4 points of difference. We've known before what we are not. We're not a retirement village property developer. So we're not dependent on the real estate market, which is just as well given the last 3 years, and we don't need to build a certain number of units per year. We're not developers of -- for those units. Although we do have 4 villages and 150 units, which we resell as quickly as possible, we are not dependent on the real estate market. So in summary, we're the only listed company with a laser focus on care that delivers -- is able to deliver the $26,000 to $27,000 per care bed in the sector. So -- and we're very proud of these points of difference. So next slide is Cibus. As Brien mentioned that we talked about before, really great to have the Cibus acquisition completed and now own 51%. We've talked about what it provides. They have an excellent record of client service and retention. And as Brien said, we know them well, they have operated care -- sorry, they've operated their facilities at 10 of our care homes as well as other care homes and other services. So in the next few months and years, we're seeking to accelerate their growth, both through their service offerings and through the Cibus app. And hopefully, we can bring you more progress as we report every 6 months on the growth of Cibus moving forward. The final slide is the outlook slide. We continue -- we've talked about the 6 months to 30 September, we continued strong business momentum, nearly 8 months into the financial year. 31 March will come up quickly. We look forward to delivering our full year result then. We've already mentioned at the shareholder meeting that we will be delivering our FY '25 metrics, will be ahead of FY '24 key metrics, and we reiterate that point today. And additive to that is Cibus where the Cibus earnings and cash flow will be accretive to our second half financial year to 31 March. So as I said, we look forward to presenting that result to you in May. And thank you all for joining the call today. Thanks, Brien and Jeremy, for presenting. It's been a pleasure. [Operator Instructions] So I open the floor to questions now.

[Operator Instructions] Will, you've got a question? [Operator Instructions]

Can you hear me?

Perfect. Yes. Fire away.

Yes. Congrats on the very strong results. It's awesome, good to say. First question, just around cost. So cost is, obviously, pretty impressive in the first half. Can you just talk to some of the specific initiatives that have helped to control those costs? And then secondly, looking into the second half of the year, with some of these kind of inflationary pressures subsiding, can you talk to the outlook for cost heading into the second half of the year?

Yes. So I'll lead and as always, Jeremy and/or Brien can fill in any gaps. I think it's a good call out, particularly in the higher inflation environment we've been through. A couple of things I'd just like to call out. We have a laser focus on our staff costs through our care homes and have maintained their focus, which I think is absolutely critical. And then secondly, we have a lead support office. I think we talked a year or 2 ago about having cost-out support office. We executed that plan and had $1.3 million cost-out initiatives that's now baked into to costs. And I think across the board, we just -- it comes back to culture a little bit as well. We do watch every dollar that we spend, and we make sure that we're very conscious on costs. So that's a kind of high level. I mean, I don't think we have anything specific for the second half, but anything Jeremy would love to add to that.

I think just in general, some of our operating costs like utilities, electricity, primarily and some of the other facility-related costs such as insurance, there was a bit of a hangover from the higher inflationary environment a year ago where we saw a significant upwards cost pressure in the first half for some of those costs. For the second half, we see that inflationary pressure easing. Certainly, electricity, as the markets return to normal and we move into the summer months, that will reduce pressure on the second half costs. Insurance, similarly, we have a market that seems to be returning more back to normal.

Cool. And then second one, maybe just about capital management. So how do you think about balancing continuing to pay down debt but then also looking at other opportunities and developing your other acquisitions like Cibus?

Yes. Well, look, obviously, debt has been a strong focus to date. We are very pleased that the debt has come down to $72 million now. We don't want to increase that debt rapidly or in any kind of severe way, but we are looking at capital-like acquisitions in particular. So a lot of the options that Brien talked around increasing our leased portfolio and some of the other capital-like options such as being an ACC-preferred supplier won't increase debt materially at all, particularly with the increased EBITDAR terms of new leases.

Cool. And then maybe just final one for me. It's obviously quite a tough environment out there for a lot of other care operators. What are you seeing in terms of opportunities there in terms of other care homes, which potentially you could snatch up from people who're doing a little bit tough.

I can answer that. So yes, there is a lot out there at the moment for sale. I think from our point of view, we are moving the business a little bit away from being dependent on just selling bedrooms. So whilst we are very interested in expanding from that core aged care business side, because that is our core business and will always be our core business, the fact remains that we see a lot of opportunity within the health sector that can be utilized through our national network. So whilst we are mindful of the fact that opportunities will come along, and I mean we bought -- in the last few years, we've bought 2 sites and they've been very successful, and we will continue to assess sites, existing sites, but it's not our -- it's not our only focus. So with that in mind, we're having a bit of a broad view of the general market as we move ourselves more to our health services business.

Any other questions? I don't think we've seen any notified yet, but we'll open -- keep the line open for another few seconds and then wish you a good Monday. You're like calling for last orders? No?

I would -- there is one interesting little comment I can make, and it goes towards using Teams for this call. Historically, we have used phone service, which cost us $10,000 a pop. This one is free. So that's a bit of an idea of how Radius works. We look at these things and we go, why are we spending $10,000? We can just use Teams. So I hope it's worked out for you guys.

Good call. Yes. Appreciate it. Yes, that's a really good call out. So look, with that, thank you all for joining the call. We look forward, as I said, to presenting again in May, our full year results, and I appreciate the interest in Radius Care as we move forward with our growth strategy.

Thanks, everyone.

Cheers.

Thank you.