Regis Healthcare Limited (REG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Regis Healthcare FY '22 Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Linda Mellors, Managing Director and CEO. Please go ahead.

Thanks very much, Darcy. Welcome everybody to the Regis Healthcare results presentation for the half year ended 31 December 2021. My name is Linda Mellors, Managing Director and Chief Executive Officer of Regis. I'd like to begin today by acknowledging the Boon Wurrung people of the Kulin Nation, traditional custodians of the land on which we meet today, and pay my respects to their elders past and present. I extend that respect to any aboriginal or Torres Strait Islander people joining us on the call. With me today is Rick Rostolis, our Chief Financial Officer. Rick will take you through the detailed financial information later in our presentation. Our presentation today is in 5 parts. I will start with updates in relation to sector reform activity and the ongoing COVID-19 pandemic. We will then provide a summary of our financial and operational performance for the half year, followed by some other matters and the company's strategy and outlook. We'll be pleased to take any questions at the end of the presentation. So starting with the aged care sector reform. The extremely challenging conditions of the aged care sector over the last 6 or more years have again intensified. The sector's challenges are broadly known and have been documented over many years in multiple reports, including the reports of the Royal Commission. The sector was already under considerable pressure before the COVID-19 global pandemic, which is now in its third year. Long-term underfunding of the sector has had predictable outcomes in terms of workforce design and pressures, pay rates that are too low to be competitive with other sectors, declining profitability across all provider types, an increasing proportion of nonviable operators and closures of residential aged care facilities. Regis strongly supports the need for sector reform and commends the government's expressed commitments to an appropriate funding model, quality and safety improvements and work for support. Many of the reforms are complex and require deep consultation with the sector to avoid unintended consequences and return the sector to certainty and a sustainable footing. While the first bill arising from the Australian government's response to the Royal Commission is passed, the second bill has been before parliament since September 2021 and may now not be settled before the federal election. This substantial delay puts the timing of key reforms at risk, including the Independent Hospital Pricing Authority expansion to include aged care and the changeover in care funding [ XE ] to [ NX ]. The sector is making positive progress towards the establishment of a single industry body. Transformation of the sector's representation is an important step to a stronger industry voice to support the sector's purpose, performance, needs and aspirations. Regis notes a range of cumbersome, duplicative and inflexible government reporting and regulatory systems as a key issue to be addressed by government, which will allow us to meet our compliance and other obligations efficiently. Meanwhile, Regis continues a proactive approach to review and reform internally, using best practice information and evidence of guidance where sector-specific information is not available. Our strategic plan contains clear goals related to the reform agenda, and we are well on track despite the pandemic pressures. And I'll speak more to this later in our presentation. So moving now to COVID-19. Regis continues to maintain all necessary support to protect residents, clients and employees from the street and impacts of COVID-19. The key features of our response remain our pandemic planning committee, PPE hubs, testing protocols and outbreak management plans. Sector improvements over the half and since include better balancing of infection prevention and control responses with the overall needs and preferences of residents, including in relation to their physical and mental health, socialization and well-being. From mid-2021, community transmission increased in New South Wales and Victoria with resultant increases in exposures and outbreaks at our homes in those states. Around Christmas 2021, the Omicron variant took hold, bringing increased transmission rates across all the jurisdictions in which Regis operates with the exception of Western Australia. Regis managed a significant number of exposures and outbreaks from late December until the end of January. Regis managed this period as well as could be expected in large part due to the extraordinary sacrifices and changes that our workforce made to ensure our homes operated effectively. And this was despite many of our employees being impacted through infection furloughing or caring for their own family members. Since the beginning of the pandemic, Regis has paid employees a supplement to work in a home in outbreak, and our PPE has ensured we could quickly provide safety equipment as needed across our portfolio. Regis has coordinated a national program to provide vaccinations to our residents, employees and volunteers. Our program for [ JSIS-1 and 2 ] was successful with full vaccination compliance achieved for the Regis workforce and more than 90% of our residents receiving both doses, noting that residents have a choice about whether to be vaccinated. Our booster vaccination program is largely complete with homes receiving 2 on-site clinics and now more than 94% of residents eligible for a booster dose having received one. Regis achieved full compliance with our COVID-19 vaccination policy for our workforce. This policy has been updated to include booster doses, and we expect full compliance again. Our experience, consistent with other reports is that the Omicron wave has resulted in less severe illness and a much lower case fatality rate due in large part to high vaccination rates and new treatments. Regis has maintained a constant focus on care and service levels through well considered and executed outbreak management and business continuity plans. The Board and executives have paid particular attention to care outcomes, workforce pressures and well-being PPE availability and, of course, our operations, revenues and expenses. So moving now to our financial and operational results. Revenue from services was $364.2 million, up 3.1% on the prior corresponding period. The company delivered a half year adjusted EBITDA of $44.1 million, and NPAT before amortization of operational placements of $10.6 million. This result is a strong one, given the environment we currently face but is below reasonable expectations in a properly funded environment. Adjusted EBITDA includes additional revenue provided through a $10 per resident per day uplift in the basic daily fee, but excludes COVID-19 expenses of $4.5 million, and Rick will explain these factors in detail shortly. The key highlights of our results include increased average occupancy over the period and across the entire portfolio to 89.3%, which is a pleasing result in the current operating context but below our internal targets. The overall improvement is the result of strong management focus and strategy execution despite the challenging times. Net RAD cash flow of $47.1 million is, again, a strong result for the group. Net debt reduced by $82.7 million or almost 58% to $60.8 million at 31 December. And the Board has declared an interim dividend of $0.0352 per ordinary share, 50% franked and payable on the 8th of April 2022. And I'll now hand over to is the financial and operational performance of the business in greater detail.

Thanks, Linda, and good morning, everyone. Just turning to Slide 7 of the deck. The first half of FY '22 has once again been challenging for the business, with COVID-19, including the Omicron variant, ongoing funding shortfalls and workforce supply constraints being key issues confronting the company. Additional government-funded basic daily fee from 1 July 2021 was welcome, but was absorbed by enterprise agreement wage increases that are only partially offset by indexation, increased consumables and a significant burden of additional non-value regulatory compliance and reporting. Notably and most disappointingly, there was no government support by way of additional funding to combat the substantial costs associated with the COVID-19 preventative and protective activities put in place by the company. Notwithstanding the many issues faced by the business, management has remained focused on improving occupancy for the provision of quality care, service and accommodation. As Linda has mentioned, revenue from services of $364.2 million was up 3.1% on the previous corresponding period or 5.5% when excluding the previous year's COVID funding. With the additional government funding basic daily fee revenue of $11.6 million, the most significant contribution. Government revenue of $260 million was up 3% on the first half of 2021 or 6.3%, excluding the prior period COVID funding, and made up 71% of revenue from services. The increase in government revenue also included the 1.1% COPE indexation. As already mentioned, the government did not provide any COVID funding to the sector during the first half of 2022. I note in the first half of '21, Regis received $7.7 million of COVID-19 funding. Resident revenue of $100 million was up 3.8% on the prior corresponding period, reflecting increased DAPs and a small recovery in additional services fees. The increase in average occupancy to 89.3% is across the entire portfolio of 64 homes, and I'll come back to occupancy in a moment. Other income is comprised of RAD invitation of $31.4 million as required by AASB 16 leases. There is no impact on overall profit from AASB 16 adjustments. Staff expenses of $260 million, which excludes $3.7 million of direct COVID-19 staff expenses, accounted for 71.4% of revenue from services. The increase in staff expenses was primarily due to enterprise agreement wage increases, which averaged circa 2.5% as opposed to indexation, which was only 1.1% and once again clearly inadequate to absorb the EA impacts despite the Royal Commission recommendation to address this and significant overtime in agency fees due to continuing workforce supply constraints. Adjusted EBITDA of $44.1 million excludes the impact of AASB 16 and direct COVID costs and is up 13% on the previous corresponding period. EBITDA was influenced by a number of factors, including higher average occupancy across a number of our homes as we recovered from the lows of the second wave of COVID-19 in the first half of 2021. Depreciation was slightly down on the previous corresponding period, while finance costs, excluding the impact of AASB 16, were lower in line with a significant reduction in the net debt level. As a result of the Australian government's decision to discontinue operational places from July 1 '24, and in accordance with accounting standards and guidelines issued by ASIC, the company has commenced amortizing the value of operational places from 1 October 21 on a straight-line basis to June 30, 2024. This was flagged to the market back in December. As a result, the company has incurred a noncash amortization expense of $20.3 million with a partial reversal to the related deferred tax liability of $6 million, therefore, a net $14.3 million. Accordingly, the company will report net profit after tax before amortization, which I'll refer to as NPATA going forward as this better represents the financial performance of the business. NPATA for the 6 months ended 31 December '21, was $10.6 million. Moving to Slide 8. Average available operational places across all homes reduced the 7,104 half-on-half, mainly due to the closure of 1 of our Melbourne-based homes in September 2020. As mentioned, average occupancy was up from 88.3% in the prior first half to 89.3%, with Victoria's occupancy improving from the lows of the COVID-19 second wave. Western Australia also showed improvement with Tasmania and South Australia relatively flat. New South Wales occupancy was down half-on-half with that state the most impacted by COVID outbreaks and lockdowns. Pleasingly, spot occupancy across all residential aged care homes improved to 90.7% at 31 December 2021 and remains at 90.4% at 18 February. We expect that COVID-19, whether it be Omicron or other emerging variants, will have an impact on occupancy during the second half of the financial year, with Western Australia now clearly front of mind. We have a continued focus on improving occupancy across all homes and the result reflects in part the positive effect of targeted management initiatives, as Linda mentioned, despite the impact of COVID-19. Aged care revenue per occupied bed day was up 5.4%, with government revenue per occupied bed day up 6.3% on the prior corresponding period, supported by the additional basic daily fee, COPE indexation and influenced by the increased acuity of residents. Aged care resident revenue per occupied bed day was up 3.8%, with a recovery in additional services fees and increased DAPs the main contributors. Staff expenses per occupied bed day increased primarily due to the impact of EA increases and the significant costs associated with additional overtime and agency fees. This is a result of workforce supply issues that were already prevalent in the sector, but exacerbated by border closures and direct COVID-19 impacts. The number and value of RADs held increased during the half, with the average RAD held now at $436,000, up 2.4% on the prior corresponding period. Over to Slide 9. We presented on this slide the impact of one-off and normalization items during the half. Of note are the following items. Again, no COVID-19 funding received in the half compared to the previous corresponding period, where $7.7 million was received. Direct COVID-19 expenses of $4.5 million that included staff expenses of $3.7 million and $800,000 of other costs including PPE and infection prevention and control. As we have previously mentioned, COVID-19 protection measures are now ingrained in the business with a level of ongoing infection prevention and control included in our cost profile and not included in the $4.5 million mentioned as one-off. I would also like to note that the company has applied for several grants under the government's aged care support program that total in excess of $3 million. Should the grants be approved, we will recognize this as income in the second half of the financial year. We also expect to apply for further grants as a result of the Omicron outbreak, which hit the sector hard in December, with ongoing financial impact expected throughout the second half of the financial year. The normalization adjustment relates to the noncash amortization of operational places that I've previously mentioned. This will be a recurring normalization adjustment from 2022 through to 2024. On Slide 10, net debt and cash flow. Given the ongoing and prolonged funding uncertainty surrounding the sector, the company has continued to take a conservative and disciplined approach to managing debt. Net operating cash flow of $126.7 million includes government funding received in advance for January '22 of $40.1 million and was underpinned by EBITDA. And despite the negative impacts of COVID-19 lockdowns, net RAD cash inflow of $47.1 million. Importantly, I note that RAD cash flows for the half year were positive in most states and came from mature homes as we currently have no ramp-ups in the portfolio, a very strong result. Total net debt at 31 December '21 of $60.8 million, including government funding received in advance, was well within our bank facility limit. The total reduction in net bank debt over the last 12 months has been $82.7 million or 58% and is now reflected in a significantly reduced leverage ratio of 1.3x. The extension of $150 million tranche of our syndicated debt facility will occur prior to June 30, 2022. As Linda has mentioned, the Board of Directors resolved to pay an interim dividend of $0.0352 per share, 50% franked payable in April. The interim dividend represents 100% of NPATA. Over to Slide 11. During the half, the company spent $30.7 million on capital expenditure. This is significantly up, almost 4x up, on the $7.6 million in the first half of the previous corresponding period and includes a $15 million purchase of land in Belrose, New South Wales. We've approved plans for a future residential aged care home. The current level of expenditure continues to reflect the Board's decision to pause a number of planned development initiatives until the policy and funding environment is more certain and supportive of appropriate returns on investments in new developments. For residential aged care developments in the pipeline, including Camberwell 21 in Belrose, activities such as preparing land for commencement, development approval and design documentation are underway in readiness to commence construction once conditions are favorable to do so. I'd also like to note that the intended deregulation of operational places presents new market opportunities for Regis to invest in geographic areas previously not open to the business. The removal of operational places will increase competition around quality of care, service and accommodation, which should be an advantage to providers such as Regis that have a strong balance sheet and access to capital to further develop the sector. Certainty around future funding needs to be addressed as a key government priority, including the transition from [ XE ] to [ NX ]. COVID aside, the sector, including Regis, expects more from government including urgent action to fix the known and long-standing underfunding of care needs and the workforce supply issues. Over to Slide 12. As you can see on the slide, the move away from RAD to RAD/DAP combos continued during the half year with 100% RAD payers now representing 56% of non-concessional residents. Residents paying a RAD/DAP combo have increased during the half year, while debt payers as a percent of permanent residents remain steady. With the MPIR attached to DAPs at a low 4.04%, it is likely that the industry trend preference in DAPs will continue to be favored in the second half of the financial year. Notwithstanding this, the 31 December '21 paid up RAD balance of $1.2 billion was up on the balance of 30 June '21, despite the cover challenges. And with that, I'll hand you back to Linda.

Thanks very much, Rick. Moving now to some other matters that I wish to draw your attention to. Firstly, the potential underpayments of employee entitlements was announced to the ASX on the ninth of August in 2021. The provision remains at $35 million as at the 31st of December 2021. With the assistance of external counsel, Regis continues to strongly depend on the 1P matter. And I've addressed the impact of the widespread Omicron variant and note that we expect ongoing clinical operational financial and workforce impacts in the second half. So I'd like to move now to some updates on our strategy and the elements of our progress. By way of context, I note that the pandemic has forced greater focus on tactic management of clinical and business outcomes. Notwithstanding this, management has ensured appropriate attention has been given to our important strategic goals and improvements. Successful execution of the 3-year strategic plan will keep Regis at the forefront of the best industry providers and place the company in a strong position in a post-reform environment. As an almost 30-year-old company dedicated to the care and service of older people, our purpose is clear and remains completely centered on providing personalized and respectful care that embraces the experience of aging. I've provided this strategy slide previously, so I'll now go to the key updates over the half. And the first pillar I'd like to speak to is our Regis culture of care. You can see on the left-hand side of the slide, the initiatives that Regis had in place prior to this reporting period. Importantly, Regis has a strong and improved clinical governance program in place, nurses rostered 24/7 across all our homes, a range of in-house senior clinical and operational support teams and electronic clinical management system, market-leading additional services offerings and a range of research projects with leading universities and partners. These are all important structures and platforms to underpin high-quality care and service experience for our residents and support for our frontline workers. We have added to our clinical care and research partnerships for arising translational research that will have rapid positive impacts on our resident care outcomes and workforce engagement. We are also prioritizing quality and safety data insights and predictive analysis, digital technology improvements and additional board quality and safety indicators that are also reported throughout our business. These improvements will support the transition to the coming star rating system and new care reporting requirements back to consumers. The second of our 3 pillars is positive people in practice. Regis is a people and service business, and the company has a long history of investment in teaching, training and support programs for our workforce. Our valued workforce supports attraction and retention of capable and engaged people, again, leading to better care and service outcomes. Regis' investments in this area contributed to the discretionary effort of our workforce throughout the pandemic, which has allowed Regis to reduce disruptions to our residents and clients. Management is progressing well through the strategic initiatives for the year, including a new workforce strategy and updated learning and development framework and our recently launched leadership capability framework. These are all essential programs of work to respond to the supply constraints and the training and development needs of the workforce going forward. Management is also executing our new safety strategy called the Regis circle of care, with employees guided to consider those in their circles, including resident clients and their families, colleagues, [ teachers ] and of course, the employees themselves and their family and friends. Our third pillar is ensuring our future. The Regis Board and Management Team have prioritized keeping ahead of sector reforms as far as possible, noting uncertainty regarding the details of some key reforms and dates in areas that are major operational changes facing the sector. Some examples include the shadow independent care assessment outcomes the new funding algorithm and the new aged care act. Management has completed as much preparation as possible for the new activity-based funding program, and we'll continue to prioritize this area over the next half when we do expect additional information to come from the Commonwealth Department of Health. The finance system upgrade is on budget and on schedule with completion expected in early March. This is a critical system update to accommodate the pending care payment changes and ensure automation of key workflows associated with the bulk of our revenue streams. Management completed a brand refresh, which is guiding our marketing and promotion activities and supporting our occupancy improvements. Our sales and marketing strategies are very much driven by data insights and monitored for efficiency and effectiveness. Management has also reviewed and updated the Regis design standards, which are our specific requirements for our partner architects and builders. The latest version pays particular attention to the future needs of residents living with dementia, infection prevention and control, efficient workforce management and building cost control. So moving now to our environmental, social and governance programs and these are summarized on this slide, which is now Slide 21. Overall, Regis is proud of our history, and our work to create not only happy and safe residential aged care environment for residents, families and employees, but also shared value in an essential industry for the Australian community. The Board of Management have re-communicated our purpose to our stakeholders in response to the negative sector sentiment over recent years. Aged care plays a vital role in the broader Australian social landscape and is a critical part of the service economy, with Regis providing an important opportunity for a wider investment community to support the sector. Regis has had strong governance and transparency in place and continues to ensure our systems and processes are contemporary and fix incentives. The company is in a strong position to meet the post-reform requirements in this area. Regis has continued to make gains in environmental sustainability, but this has been countered by an increase in single-use disposable item waste due to the pandemic. The company is reviewing waste management to see whether improvements can be made in our pandemic response as well as our longer-term program of work. Our solar panels, lighting changes, produce garden, coin farms and recycling programs are all meeting expectations in terms of cost savings, environmental impact and resident and employee engagement. I'd now like to move to our aged care developments on Slide 22. And Rick and I have both spoken of the company's support and developments due to the ongoing uncertainty around future funding and return on capital. The company is certainly expected by now to have clarity on the funding model and its impact on profitability. In the background, management continues to plan for future developments, and we have projects ready to commence if conditions improve. We're particularly keen to progress our development projects in Camberwell, Victoria and Toowong in Queensland. In line with our plan to derive benefit from the deregulated license conditions from 2024, the company acquired a parcel of land in Belrose, New South Wales, in August 2021 for a new residential aged care homes. As we've mentioned in prior presentations, we know that a substantial number of aged care homes in Australia are well beyond end of life and contemporary standards. With the right conditions, Regis will continue to build contemporary fit-for-purpose and desirable aged care homes for older Australians with high care and service standards. From an investor perspective, these homes are expected to have higher occupancy and RADs than older homes. So I'd like to finish today by providing some brief statements about the outlook and the areas that Regis seeks urgent priorities. So we will continue to prioritize our key drivers of quality care service and accommodation. And as I've said many times, high performance in these areas will support the continued improvement in occupancy, which is a key focus for us. Key drivers of success over this next half and beyond are valued, supported and appropriately paid workforce, a transparent and sustainable funding model and appropriate funding for the real ongoing costs of COVID-19 preparation and prevention activities. Regis continues to focus on the levers we can now control while pressing for change in other areas, particularly relating to national policy and funding reform. The company remains positive about growth prospects, including better conditions to recommence our development program, execution of our home care expansion strategy and coming market opportunities. At this point, the Board remains of the view that it's not prudent to put forward any earnings guidance given the ongoing policy and funding uncertainty and the ongoing impact of the COVID-19 pandemic. On behalf of the Regis Board, I would like to thank the entire Regis workforce and our executive team. Their extra diligence and care over the recent challenging period have contributed to better outcomes for our residents, clients and business. And with that, I'd like to thank you very much for joining us this morning. And I'll now hand back to our operator, Darcy, to open the meeting to questions.

[Operator Instructions] Your first question comes from Tom Godfrey from MST.

Can you hear me okay?

Yes. Perfectly.

Great. And if I could just start with occupancy. And I just wanted to clarify the bed count number you're using in the denominator for the 90.4% spot occupancy in Feb. I think the number you quoted for 31 December and the Jan trading update was 7,059. Can I just clarify that, Rick?

Yes, that's the same number at Feb, Tom.

So on that basis, you sort of -- it looks like you've only really lost 20-odd residents through the last couple of months. It seems like a pretty solid outcome given the operating conditions in Omicron disruptions you've faced. So I'm just sort of playing that through to profitability. Is it really just been a step-up in costs? Have you actually seen a significant sort of step down in your EBITDA run rate through Jan and Feb. If you just sort of speak to profitability through the first couple of months and then what you're seeing on the occupancy side?

Sorry, the first couple of months of the second half?

Yes.

I don't think we're here to talk about that, but I'll just make a general comment that it's more cost-related than occupancy related. As you can see, occupancy pleasingly is held in there, notwithstanding all the issues. But I'm not here to comment on the first couple of months of the second half.

Okay. No. Understood. And I suppose, maybe just thinking or looking forward, I suppose Omicron has had a bit of an impact just in terms of the demand environment and the willingness of people to put family members into care. I suppose just some more comments around how you see that playing out through the second half, and how quickly the sector can sort of bounce back the sentiment was?

Sure. I'm happy to take that one, Tom. So I think the Omicron peak was very fast, and it's coming off just as quickly. So I think that's really important compared to some of the longer waves that we saw earlier in the pandemic, and we're seeing good inquiry levels and to a level than interest. And you will also have seen and read in the media, the pressure that hospitals have been under as well. So I think none of us can sort of predict the future in this pandemic environment, but things are steady.

Got it. No, that's good color. Maybe just next question, just around the purchase in Belrose, I suppose I'm keen to sort of more understand the thinking around that one just in the context of your current sort of pause on development and aged care investments and also in the context of selling Palm Beach a year or 2 ago, just the decision to purchase there?

Yes. So look, I'm happy to take that one as well, Tom. So we are very much looking ahead to the deregulated license environment and looking at regions and suburbs, where we'd like to build, but we haven't been able to before now. So we do still bank land and the Belrose opportunity, with a land banking opportunity, it does have development approval for a residential aged care facility. And as I said in my presentation, we're really keen to recommence development, pending the certainty around funding and the return on capital.

Got it. And maybe just last one for Rick, just around the sort of sequential step down in depreciation. Is that purely just tied to some of the home closures? And what should we sort of expect into the second half?

I'd expect similarly in the second half, Tom, the step down, look, to be honest a bit, it's just clean up in the prior year, which is my first half year. So you'll see a similar number come through in the second half as what you're seeing in the first.

[Operator Instructions] Your next question comes from Vanessa Thomson from Jefferies.

Just a follow on from Tom's question about depreciation in the second half, if we think about amortization in the second half, given the 1 October start, will we have that kind of 1/3, 2/3 kind of skew. Is that the right way to think about amortization in the second half?

Vanessa, we actually declared those numbers back in December to the ASX. So if you look at that [indiscernible] amortization is very separate to depreciation. So you're right. We're basically taking the balance of what was $223-odd million of operational places on our balance sheet and amortizing over 33 months on a straight-line basis.

Okay. Sorry. And then on development, I appreciate the uncertainty, and you've spoken about return on capital and funding clarity. I guess it's a bit pie in the sky, but how -- like would it be conceivable that you could start construction in the second half?

Yes. Absolutely, Vanessa. So the funding certainty, we've been waiting for a while now for some more detail. It was certainly expected before now and it has been delayed. But yes, we have projects ready to go.

Okay. Great. Good to hear. And my last one was just about the increase in combination funding. And I was just wondering if you think that, that's a change in preference. I know, Rick, you spoke about the MPIR, just thinking about that going forward.

Look, I think as much as the MPIR has dropped away significantly, we know interest rates were about to rise. My view for what it's worth for the second half is that we won't see any further drop off in RAD. So I suspect we'll see a similar profile of residents in the second half of the year.

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

Thanks very much, Darcy, and thank you to everyone who's joined our call today. It's been good to share our half year results with you, and we look forward to the meetings that we'll have over the rest of the week. So thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.