Ryman Healthcare Limited
Q4 2022 Earnings Call Transcript

Published: 19 May 2022

Greg Campbell:

Good morning, everybody. I am Greg Campbell. I am delighted to be here for the first time in the role of Chair of Ryman Healthcare and to present our Full Year Results for the year ended 31 March. Here with me in Christchurch, I have Richard Umbers, Group CEO; David Bennett, Group CFO and Cameron Holland, CEO of our Australian business. In a second, I'll hand over to Richard to give you an overview of the year. Cameron will then give you an update on progress in Australia and David Bennett will provide the financials. We of course welcome questions at the end. You can ask questions either online or over the phone and of course you can connect with us afterwards. For those of you on the phone, our operator will advise when you can -- when you are free to ask a question. We're planning to wrap up in 50 minutes. Today, we're announcing a strong result delivered during a period of considerable disruption. We've been tested like never before; firstly with Delta, which significantly affected Victoria and Auckland in particular. This was closely followed by Omicron arriving in Australia on Boxing Day and the wave is still making its presence felt. The resilience, commitment and professionalism of our team played a key role in helping us adapt quickly and respond decisively to changing circumstances. Our team's work has underlined that when things are tough, there's nothing better than living in a supportive community with the best of care on hand. It's enhanced our reputation for excellence and word of what we do continues to spread well beyond our village gates. We regard the strength of our reputation and brand as a considerable asset in uncertain times. In the past six months, other operators have closed more than 500 care beds around New Zealand because of funding pressures and skill shortages. That leaves 500 families desperate to find care for their loved ones, causing considerable distress and uncertainty. We're committed to building -- continuing to build to provide homes and care for as many people as we can. Care is paramount to what we do. It's in our name. We are committed to providing the highest standard of care possible, and it is key to our growth plans, key focus for management and the Board. And we are making sure we have the resources everybody needs today and into the future as we grow. It's an extremely exciting time to take over as Chair. I’ve had a long connection with Ryman and my 15 months on the Board has confirmed everything I thought about this special company and its wonderful purpose. As a Board, we are acutely aware how important Ryman's culture is and of protecting it. We are laser-focused on delivering a sustainable commercial performance in the current environment. In my view, these two ideas delivering on our care purpose and delivering our commercial outcome for shareholders are joined at the hip. Rising costs and inflationary pressures across Ryman, changes in the housing market, debt and interest rates are all issues that are top of our mind. Like you, we are well aware of the pressure on our share price in recent months. There's pressure on the whole sector and headwinds in the market, which we are not immune to. However, these headwinds do not faze our plans. Underlying everything is our absolute faith in the strength of our business model, our reputation, our culture, and the commitment of our team. The momentum and increased payoff we are seeing from our investment in Australia and our continued focus on executing our plans and delivering our long-term strategy. That's because Ryman has enormous potential to continue to deliver in the years ahead. Just a note on our Board structure, David Kerr, who has served on Ryman's Board for more than 28 years, including 22 years as Chair has let me know he will be stepping down at our Annual Meeting in July. That's a long stint, and I think everybody would agree. He deserves a break. David has put in a huge amount of work and effort over these years, and he has played an important part in the success of Ryman. He will be not gone completely however. David will be staying on as an Advisor to our Clinical Governance Committee. On behalf of the Board, shareholders and the team of residents of Ryman, I'd like to say, thanks. David's departure means it's a good time to carry out a formal external review of our Board structure, it's portfolios, and skills, so that we can ensure we're in the best possible shape into the future. We will update you more at the AGM as well as formerly farewelling David. Before I hand over to Richard, I'd like to recognize and thank the extraordinary efforts of Rymanians everywhere who have gone above and beyond to deliver an exceptional standard of care and this result. Over to you, Richard,
Richard Umbers:

Thank you, Greg. Morena, everyone. As Greg outlined, we've delivered a strong result in a challenging environment, demonstrating the resilience of the business and the strength of our team. I'd like to start off by setting out the key highlights of our result. Our audited underlying profit rose 13.6% to $255 million reported IFRS profit increased 64% to $693 million and this of course includes the investment property revaluations. The Board has decided that shareholders will receive a final dividend of $0.0136 per share. The total dividend for the year is $0.0224 per share unchanged from last year and within our pay-out range of 30% to 50% of the underlying profits. The record date for entitlements is June 03, and the dividend will be paid on June 17, 2022. Total assets approached $11 billion. We had total cash receipts of $1.4 billion up 18.7% on the prior year. Only 1.4% of the group's retirement village portfolio was available for resale at the 31 of March. We built 711 units and beds this year across the group in line with last year. As communicated at our half year result, our build program was impacted by COVID delays. We started work on four new sites during the year at Takapuna in Auckland, Northwood and Christchurch and Highett and Ringwood East in Melbourne. This brings our total villages under construction to 16. That's nine in New Zealand and another seven in Australia. We also have another 13 in our land bank. When complete these 29 villages under development and in our land bank will be home to over 9,000 new residents. We anticipate capital proceeds from them of over $6 billion. We're targeting a build rate of more than a 1,000 beds and units in the coming year, a significant increase on the 2022 financial year. In addition, we continue to build our land bank. During the year, we purchased four new sites and added additional land at two of our existing sites. These sites nicely complement our existing land bank with a mix of townhouses and apartment star developments improving our mix of capital intensity. Today, we are also announcing two new sites Rolleston in Canterbury and Coburg North in Melbourne. These are in addition to the two purchases made earlier in the year at Mulgrave and Kealba in Melbourne. Our construction team has successfully operated through COVID. We are however, continuing to experience some disruption to supply chain and some upward pressure on construction costs. The ongoing work and the exciting new acquisitions give us a great springboard for the growth as we continue to get ready for the increasing demand that lies ahead of us. We further strengthened our balance sheet during the year, and we further diversified our debt funding. Meanwhile, we continue to invest in the resident experience. Our Olympics at Ryman experience brought 700 competitors across 41 villages together to compete in the world's first retirement village games. We made the most of digital technology to link competitors across New Zealand and Victoria to compete in a range of sports from swimming, and walking and cycling, through to virtual bowls. It helped everyone forget about COVID just for a moment. The Olympics at Ryman was recognized with an Innovation Award at the Aging Asia awards in Singapore, which are regarded as the Oscars of the industry in our region. Setting up the team for success is critically important and our expansion necessitates good systems and processes. During the year, we move to a group and regional structure. The structure has bedded in nicely and means that functions and responsibilities are clearly defined across our two key markets and it's come into its own during COVID when travel was severely restricted and reflects the fact that Ryman is now an international business operating in two distinct markets. The imminent appointment of a New Zealand CEO will complete the final piece in that structure. Now, as Greg mentioned, the Omicron wave arrived just after Christmas in last year. The teams in Victoria, coped superbly, not only keeping residents safe, but providing a blueprint for our response, when it inevitably landed in New Zealand. This put a lot of pressure on our teams and as Greg said, their resilience and professionalism shone through. In times of crisis of which recently, of course we've seen plenty, trust is a valuable commodity. Being named the most trusted brand in our sector for the eighth time was a highlight for the entire team this year. We've now been able to turn our thoughts to the next phase of the pandemic. That's what we're calling living with COVID. We're optimistic that the COVID crisis is in the rear view mirror and living with COVID is the new normal. We have well practiced drills to keep our residents and teams safe and we can now look up to the journey ahead. I'd now like to take just a few moments to say something about my first seven months, getting to know Ryman. Getting around the villages, I've been blown away by the way that our purpose, that is care, drives all of us and just how amazing our team are at delivering on this purpose. And ultimately I've come to realize just how positive our residents are about their experiences with us because of this drive, this care that we offer, consistent, unmitigated focus on our purpose. The result is that the only regret our residents seem to have is that they did not move in sooner into a Ryman village. I've also been amazed to learn about the number of other things we have going on, things that most people don't know that our team do for their wider communities. Initiatives, like the Ryman Prize, our annual charity partner work, and our extensive partnerships with NGOs and arts organizations, both in New Zealand and in Victoria, which all serve to reinforce our social license. Our strategy is built on our purpose and since I joined, we've been doing a lot of work, further refining our strategy for the future. We offer care that is good enough for mom and dad and we do so in a commercially viable way to ensure we can bring the Ryman lifestyle to even more residents. We have a vertically integrated business model based around a continuum of care. It's proven its resilience during the recent challenge of COVID and we are committed to it. In delivering on our strategy, you can expect us to offer the best continuum of care for aging well. To deliver an unparalleled resident experience, to continue our expansion to new villages, targeting high value sites to meet the ever rising demand and you can also expect us to continue to invest in our people so that we can provide the leadership the sector needs. This Ryman team has the strength and capabilities to deliver and I'm very much looking forward to the year ahead. This is my focus, a strong and unremitting focus on care matched by strong commercial performance. Thanks for your time today. I'd now like to hand over to Cameron for an update on our progress in Australia.
Cameron Holland:

Thanks Richard and hello everyone. As mentioned, the Christmas dinner was barely cold before Omicron landed in Victoria and has proved to be a challenge that tested all our planning and preparation on how we respond to a widespread COVID outbreak in the community. We came through well and were delighted to pick up an award for the innovative way we tackled the virus. The judges described our approach as ahead of the curve and recognized Ryman's array of infection controller innovations, including moving staff into our villages who are more at risk of contracting the virus, developing a digital contract -- contact tracing tool and being the first aged care provider of Victoria to introduce rapid antigen testing for visitors. While the awards and industry accolades we've received for our COVID response are a testament to the outstanding work of our operations team, the result we've announced today tells a broader story of the strength and resilience of the business in Victoria. In Australia, we've achieved a significant lift in underlying profit from $32.1 million to $51.2 million, which is a remarkable achievement and a credit to the wider team's determination to find a way through the constant COVID disruption. While our operations team was busy doing a superb job, the construction side of the business in Victoria kept on pace and delivered on our full year plan despite intermittent COVID restrictions. We opened our new Raelene Boyle village at Aberfeldie. We completed more new village stages at Deborah Cheetham village in Ocean Grove and opened the care centers at both Charles Brownlow Village at Highton and John Flynn Village at Burwood East. Our John Flynn Village, independent apartments have proven particularly popular with over 95% pre-sold in our final stage. Construction is underway at our Ringwood East and Highett villages, and we have resubmitted our plans to [VCAP] (ph) for Mt Eliza and are expecting an outcome later this calendar year. We have purchased new sites at Kealba, Mulgrave and Essendon during the year and as Richard announced, I'm thrilled to share details of our most recent purchase in Coburg North, The site is near the popular Pentridge residential development in the fast growing suburb North of Melbourne. It will feature inner city apartments with multiple care options that reflect the changing demographics of the region. Also, during the year, we added land to existing sites. We acquired additional land adjacent to Deborah Cheetham Ocean Grove in response to extremely strong demand at that village, fueled in large part by pandemic we are in Melbourne looking for a sea change with the security and safety that our continuum of care model provides. And we also purchased our first operating village at Essendon Terrace, adjacent to our existing Essendon site. This provided an immediate foothold in the market while enabling an improved design for the future Essendon village. Having Omicron land just as we had come through a difficult year was far from ideal, but once the COVID clouds lifted, our sales came roaring back as pent-up demand in the market was released. As a result, we finished a year with a record sales for Ryman Australia. Ryman is now well and truly on the Australian map. As you may be aware, I've worked in the aged care industry sector in Australia for some time and was attracted to John Ryman because I hadn't seen anything quite like it before. The model is a disruptor, a change agent. And we feel very well positioned to showcase our continuum of care model and lead by example, during a period of very significant change back home in Australia. The plots we've received for our industry-leading response to COVID reflects this. We won two awards from the Victorian Chamber of Commerce Industry, including the Team Award for Innovation in our response to COVID Ryman is transforming how age care is delivered in Australia and we are now well on the road towards becoming an industry leader, both in scale and thought leadership. Today's result just underscores that. For investors, all the hard work and investment Ryman has made so far is being reflected in sales. Like New Zealand, there is plenty to keep an eye on, but we have restored the sternest examination the company has ever faced have come out the other side in great shape and feel well placed for whatever the year ahead brings. So thank you and over to you, David.
David Bennett:

Thanks Cam. Good morning, everyone. I hope you're keeping well. It's fair to say, there's been another interesting year for all of us on so many fronts. Given everything that has happened, I believe we are in a healthy position and can be very proud of the fact that today we are announcing a record profit of $693 million. This is a lift of $270 million or 64% on last year. The key driver of this was the unrealized fair value movement on investment property, which was $467 million. While these gains are unrealized, they are based on the pricing we have been able to achieve in the last 12 months as the valuation is based on recent sales activity and shows the growth and the value of our portfolio. Our underlying profit of $255 million was up 13.6% on last year. Current year underlying profit was despite the fact COVID remained a challenge and we spent an additional $20.9 million on protecting our residents and the team during the year. These costs largely consisted of additional staffing, security and resident welfare alongside additional PPE. These are the direct costs attributable, but ignore the other impacts such as the impact on sales, particularly during lockdown periods. The main driver of the growth in underlying profit was the lift in our resale earnings during the year. This again is a reflection of the increased pricing, which lifted our resales margin to 26.9%. I'd like to point out that due to the timing of these pricing increases during the year, we haven't seen the full benefit of these price increases captured in this year's result. We would expect re-sales earnings to further lift in the future. As the number of resales grow and on the back of our maturing portfolio and the benefit of these prices increases been captured for the full year. Our resale bank has grown to $1.85 billion. This is the resale earnings we would expect to realize over the coming years, without any further price increase. Demand for our villages is strong with only 120 units or 1.4% of our retirement village portfolio available for resale at the end of the year. Our development margin was 24% and this was despite rising construction costs and this reflects our ability to keep a tight rein on costs in the high level of demand for the Ryman offer in the marketplace. We carefully monitor the timing of our presales and adjust accordingly. Our average new sale price has increased to $814,000, which is double what it was five years ago. And this new sale pricing reflects our focus on high value locations over the last few years and we are now starting to see that focus come through in our resale pricing as well. Environment unit remains very affordable. Our residents are freeing up significant amounts of capital when they move into Ryman village. Taking Auckland as an example, prices would have to drop 27% before our residents stop freeing up capital. We also benefit from building in high value locations, which are highly sought after and are always in strong demand. Therefore, they're typically more resilient during any market correction. So we are in a strong position to weather any market correction and hold prices. In fact, we are likely to continue to lift prices over the coming year, as we are more affordable than ever before. Personally, I can't think of a better time than now to buy into Ryman village. Total receipts from residents were $1.4 billion up 18.7% on last year. Our operating cash flows were $586 million an increase of 41.8% on last year. We've invested $783 million into our portfolio during the year, which is spent on building new villages and continuing to invest in our existing portfolio through upgrades in the physical form and the resident experience. This is to ensure our villages remain in strong demand, and we unlock the embedded value of our existing portfolio. Our embedded value, which consists of our resale bank and accrued deferred management fees has lifted to $2.5 billion. Our gearing ratio has reduced to 43% on the back of our strong profit. We ended the year with $737 million of funding headroom. Our debt continues to affect the investment we have been making over the last few years. We have continued to diversify our debt with another successful SPP in April, which was nearly three times oversubscribed and this means the average tenure of our debt facilities is now approximately six years. With the hedging we have in place, one third of our debt is fixed. What all this means is we are in a strong position to continue to invest wisely in the business, to meet the demands of the rapidly aging population. And I must say, after having toured our sites recently, it's easier to see where the investment we have made over the last few years has gone. The quality and scale of our build has increased from what we are building a few years back. And they are assets that I believe will be very sought after for a lot of years to come. The high value nature of our 29 sites in development means we anticipate generating $6.8 billion of capital proceeds from these sites on sale down. And to put that into context, our 32 fully sold villages to date have contributed $3.6 billion of capital proceeds today. This shows the scale of the momentum we have been building over recent years, well timed with a demographic boom on our doorstep. Our total assets were agonizingly close to $11 billion, and this is up from $9 billion just 12 months ago. So how would I summarize the year? For me is a year which has experienced its fair share of challenges, but I think we can be proud of the position we've ended up in. I also look out to the year ahead and I'm excited about the developments we have in our pipeline, the investment we continue to make in our existing villages, our residents and our team. We are in great shape as we head into the biggest growth in the over 75 population, Australasia has ever seen. This is why we continue to invest today so that this generation can benefit from living in the Ryman village. And I want to leave you with one last number, and that is 10.1 million. This is how many hours have gone into caring and supporting our residents this year. Our team has done an amazing job and they make this company truly special. After all, care is what we are about. This is the key ingredient to our growth story. So thank you for your time and please take care of yourselves and back to you, Greg.
Greg Campbell:

Thanks very much, Dave. I'd like to now open up to any questions that from any of their first callers, right? If we could take our first call, please.
Operator:

[Operator instructions] Your first question comes from Stephen Ridgewell from Craigs IP. Please go ahead.
Stephen Ridgewell:

Yeah, good morning. And congratulations on the result, particularly the second half. Just wondering if you could give us a little bit more flavor on the performance in the March quarter, which I think you've called out was a record for the Australian business, but didn't talk to too much detail on the New Zealand business. And also just wondering if you give us a little bit of flavor in trading in the last few months, obviously, the investors in the marketers watching the New Zealand housing data pretty closely at the moment. So any additional detail you could provide would be appreciated. Thank you.
Greg Campbell:

Thank you very much, Steven. Well, certainly Australia was certainly where the recovery was led from in terms of the sales and the picture was quite different in New Zealand where Omicron was of course flowing through the country. Cam, perhaps you'd like to just talk a bit more about how that recovery took place.
Cameron Holland:

Yeah, well, we were very pleased to see that it was quite a swift recovery after the Omicron waive in January. So we're close to a 100 sales in in February and March. And what was particularly pleasing for me was that that was all of existing stock. So there were no new stage releases in the last couple of months of Q4 there. And so it was a really a remarkable result, very strong leads, excellent quality of appointments and significant activity on every site to drive those sales. And I was really pleased with the speed of the snap back.
Greg Campbell:

And Steven, if I could add, we're certainly seeing significant inquiry and demand is recovering returning well. There's no question we know Omicron arrived. It was a little more difficult but, frankly things have really opened up again and we are really confident about the future and execution of that.
Cameron Holland:

I think there's been quite a significant evolution of our brand through the COVID crisis, in the sense that when the crisis began, many people saw the retirement sector as somewhere where you would go perhaps to risk getting COVID. And I think what played out through the crisis is that we were able to demonstrate actually that we could protect our residents and what has played out as a result is that our inquiries are now higher than ever before as people see the benefit of moving into a village now in an environment where COVID is circulating freely in the community, and that -- as a result of that, we're seeing some of the highest levels of inquiry that we've ever seen.
Stephen Ridgewell:

You've flagged there's capital proceeds from the completion of the current land bank. Can you give us a steer over kind of what timeframe we should be thinking about for completion of that? Very, very broadly, obviously, but the rough timeframe for completion of that, and then is there any steer even broadly you can give us for Ryman desperations for build rate in FY '23. Thank you.
Cameron Holland:

Yeah, sure. I think what I'll do is I'll just turn to Dave if you can talk more about that. We do of course take a very long term view of our real estate and Dave, perhaps you'd like to elaborate.
David Bennett:

Yeah, thanks. Steven, and thanks, Richard. On that $6.8 billion Steven that relates to the total capital proceeds we would get from those sites. So some of those sites, we would've received some of that already. So like your William Sanders development that's already underway. What that is though is the total proceeds that those 29 sites will generate. So really we would be expecting to realize that over the next four or five years as we build out and develop those sites in our land bank, but obviously we will be looking to add additional sites over time as well to sort of continue lifting that.
Greg Campbell:

Next question.
Stephen Ridgewell:

Circling back, sorry. The second part of that question was, are you able to give us any steer on build rate aspirations for Q4 '23?
David Bennett:

Yeah, I think with the build number, Steven, obviously it's something that we monitor closely. We've got really good building blocks in place and all going to plan, we would expect to build sort of over a thousand for next year. But yeah, we'll continue to monitor that, but that is our expectation at this point.
Stephen Ridgewell:

Great. Thank you. And just one last one for me, if I may, construction cost, you did call out pressure there and that's been wildly reported, of course. Just with the prices you're getting on new sales and perhaps the demand you're seeing, can you give us a sense as to whether you think, you can kind of hold development margin there or thereabouts from what you've reported in FY '22 just that at 24% or would you might see that to come back a bit this year?
Cameron Holland:

Obviously very difficult to predict what's going to happen in the housing market. There's very mixed views out there. What I think is very encouraging though, is that we have managed actually to build our combined margin over the course of the last 12 months, despite the fact that construction costs have been going up over that period. So I guess there are some encouraging signs and I believe that we've demonstrated that we've got resilience to be able to manage through a situation of rising construction costs, particularly in a market where we've demonstrated we've got some room to move on price. And if you think about the increases in housing last year, some 30% or so, we were conservative in the way we put up prices through that period. And as a result of that, we've got some gap between the medium prices in the market and the prices that we sell our units for. Does that answer your question?
Stephen Ridgewell:

Thanks very much. That's all for me.
Cameron Holland:

Thanks Steven. Next question if we could please.
Operator:

Thank you. Your next question comes from Nick Mar from Macquarie. Please go ahead.
Nick Mar:

Good morning, guys. Just wanting to understand a bit about sort of settlements and what you're seeing at the moment, receivables could step up a bit during period and sort of looking at the cash from new sales versus the actual sales numbers and the building new sales debts. There was a bit of a step up there. Could you just talk about that and whether there's been any changes to how you all been your accounting for those new sales? I couldn't see the sort of contracts not settled and contracts not booked from the pre-service time.
Cameron Holland:

Dave?
David Bennett:

Yes. Perfect. So in terms of the basis that we are, we're booking those net -- it is consistent with prior years. The lift and debt is obviously just a function of timing of when people do move in, but in terms of settlements, we're not seeing any push out in timing of those at this stage. It is obviously something we monitor closely, but everything is at this stage consistent with prior years.
Nick Mar:

Great. And then on the land bank, yeah, the land bank lifting have you got any view on there that needs to get to hit your medium term aspirations in terms of build rate and on land, you said signs of, bit of price come through, things will change the housing market.
Cameron Holland:

Well of course during the course of the year, we were very pleased that we were able to continue investing for the long term for the business. And I guess for us, this is one of the highlights of the result, not just the financial performance, but also being able to build for the future. And at the moment, we are very confident that we're on track with the amount of land we're buying into the business to give us that future proofing. But as you know, as you go through the planning and approval process there are issues that can arise, but we believe that we've got the ability now with quite a significant land bank to be able to manage the ebb and flow if you like of new sites coming on stream. Dave, do you want to add anything to that?
David Bennett:

No. I think that captures most of that. I think the key for us is we are always sort of looking to keep adding and stay in the marketplace for new sites. But we've also been focusing a lot on the consented sort of basis of our land bank, because that gives us certainty of our build numbers going into the next few years.
Nick Mar:

Yeah. And sort of the second part around main pricing, any changes there?
Cameron Holland:

In pricing of land pricing.
David Bennett:

I don't think has been yet, but there's probably something we are monitoring. You are just starting to hear some noise of sort of development land starting to come back a little bit particularly in the banking construction costs, but yeah, that's something we are obviously monitoring.
Nick Mar:

Great. So that's for me, thanks.
Operator:

Thank you. Your next question comes from Shane Solly from Harbour Asset Management. Please go ahead.
Shane Solly:

Good morning, everybody. And firstly, congratulations on the strong result; the team's really hard work looking after residents and Dr. Kerr thanking him for his stewardship. I've got three questions if I may? Firstly the care piece of your business is crucial. Care profitability has obviously been under pressure. The governments, both New Zealand, Australia are been slow to support the work. Can you talk about what you're doing with your care offer going forward to lift or sustain profitability?
Cameron Holland:

Hi Shane. Look, look really good question and, clearly care profitability is something that we are focusing heavily on. Care is underfunded. There's no doubt about that. We are really engaging with government to find a solution to that long term. As I mentioned in my opening remarks, 500 beds were lost in New Zealand in the last six months, which is quite concerning. We do of course have a vertical integration and continuum of care model. So, our residents can take some solace from that, that we can provide opportunity for them. What I would say though is we are looking with interest of the most recent budget, $14.9 billion announced is the greatest we've seen for health over the last four years and, we have got an aging population, which is driving our growth of course, and it's front and center for us. We are really interested to see, the finer detail of the $14.9 billion over the four years. However, the minister has repeatedly provided messages to who support the growing population. So like you, we are intrigued to see the finer detail on that. We think we are part of the solution working collaboratively with government to provide an opportunity for the aging population and the increasing care needs for the community. So we'll certainly be looking at that hardly hard. Any other comments from the team here? No. No. Perfect.
Shane Solly:

Just a second question. If I may then, given the headwinds, you noted in terms of growth the flexibility and the development profile to actually deal with changes and conditions. Could you just talk a little bit about that?
Cameron Holland:

I think probably the fundamental dimension is that we offer operated a continuum of care model and a vertically integrated model, which means that there are several links in the chain, which create value for us. And there is a natural ebb and flow, as we've just heard in the previous question. At the moment, the care component of this is under pressure, but our model is robust enough in that we delivered a result through the other elements of the value chain and that therefore gives us a resilience that maybe some other players in the marketplace don't have. Dave, perhaps you've got some other views.
David Bennett:

Yeah. And just to sort of, to that Shane, I think if you're sort of look at, if you look at the land bank we are looking at the mix of our developments a little bit. We are a care business and we are very committed to care and looking after our residents, but we are just making sure we have that mix, right, given the current sort of funding sources and levels in place.
Cameron Holland:

And I think the particular focus, the area of the market that we focus on which is towards the mid to upper end, the wealthiest generation in the history of mankind is now coming off into the ages of retirement. And it's a particularly resilient base of potential residents for us. And I think we're very well positioned therefore, to capitalize on that and that, to some extent mitigate some of the headwinds that are prevalent in the market at the moment.
David Bennett:

Sorry Shane. Just repeat that. It just broke up for us.
Shane Solly:

Sorry guys, in terms of the capital structure to support growth you have addressed or extended your debt, which is fantastic. Can you just talk about, that loop back between the realization and where the -- what capital structure you see is ideal going forward?
Cameron Holland:

Yeah, I think with that Shane, as we sort of touched on before, we look at the debt and the composition of that debt and it is to fund new villages that we are building. So our land bank and our village is under construction. We do make sure we actively manage that and we are I guess making sure we have the appropriate funding lines in place. In terms of the capital management structure, we have announced in November last year, a tweak to our dividend policy with a more flexible range with a 30% to 50% payout and this year's dividend is consistent with last year, which does represent a slight decrease on our typical or historical 50% payout. So for that is making sure we keep a bit of more cash in the business to fund our future growth. But also looking at that debt and the investments we are making, it's important we keep investing in our existing villages and resident experience too. When you look at that embedded value of $2.45 billion, that's in our existing portfolio, that's cash, we're going to free up in the next five, six, seven years. And ironically, it's incredibly close to that oval debt number two. So we've almost got two ways of paying down our bank debt through selling down our new stock as we build it, but also that the cash that's pent up in our existing business.
Operator:

Thank you. Your next question comes from Andrew Steele from Jarden. Please go ahead.
Andrew Steele:

Good morning guys. The first one for me is on underlying rate cost inflation, you've touched on -- there's clear pressure on bill cost. What are your expectations for underlying operating costs inflation and for build cost inflation for year ahead?
Cameron Holland:

I probably hand to Dave to actually answer that, but we do have a very, very strong supply chain and supply base that we've built up over many years, which gives us some comfort that we're well positioned to manage it. But there's no question that we're facing some of those headwinds, Dave?
David Bennett:

Yeah. And I think on -- if we look at this sort of overall cost pressure like construction, the supply chain has been under pressure and that is seeing cost lift there's sort of talk of 5%, 6% even 10% lift in construction. We are working with our suppliers and making sure we have really good sort of planning lines in place. And we are working with them to make sure that we reign in any cost inflation that we possibly can. The key for us is also making sure we can sort of monitor the pricing that we are looking to achieve as well to capture some of that as well. And then if you look at the operating sort side of the business, CPI has lifted and obviously that's something we are trying to address as a sector with the government through the age care funding to address that as well. But a lot of our cost inflation that comes through the P&L is actually just us opening new villages as well. So about half of the increase in the operating expenses relates to new villages that have come on stream this year and when you couple that with another sort of over $20 million spent on COVID, I look forward to one day as maybe not having to spend quite so much on that as well.
Cameron Holland:

Yeah, I think just to add to that from the Australian perspective, we're obviously seeing cost pressures and inflation and construction products as well. I get the sense that it's not to the extent of the Australia -- of the New Zealand region and our long-term relationships and work on -- we've been doing on procurement over the last 12 months and beyond it's definitely set us up pretty well to be able to absorb that, but also to address the price rises on the other side as well to cover it. And I think, going forward, we're a couple of months ahead on the COVID curve. So hopefully the COVID cost impacts that we've had over the last couple of years are starting to diminish and we can look forward to a living with COVID moment where we we've got that largely under control.
Andrew Steele:

So I think just to follow up one if I look at the increasing revenue over the last year, which was $53 million and then the growth in cost of $21 million. So it's going to be $21 million, sorry, and so clearly our I guess in operating loss switch opening up there and given your fixed fee model and funding pressures, how should we expect this to develop into FY '23? Should that gap open up further between moving new costs, or would you expect that there's some elements in there which new COVID related, which we should see it actually close a little bit.
Cameron Holland:

Yeah. I think there are very mixed signals we're getting about where costs are going depending on where you look. I think, there are, there are cost lines that are going through the labor line, obviously with the cost pressures around people. The costs on PPE for example, is something that's under particular pressure right now and obviously given the medical challenges. And then there's the construction cost increases as well and there are very mixed views about how that's going to play out. A lot of it is dependent on global supply chains, and there is some evidence or some talk that this is more about, the location of products as it is about -- there is actually the -- there is actually the materials in place. So I think it's a mixed picture at the moment as how those costs are actually going to play out. What I would emphasize though from the Ryman perspective is just the mitigations that we put in place to be able to manage through that. We being vertically integrated, we manage our own construction programs. We can decide when we start, when we release stages, how we do the refurbishments, we can -- given our scale, we can also use that scale to be able to source alternative supply as well when things are in short supply. So it's a mixed picture I have to say. Would any of my colleagues like to add anything to that?
Richard Umbers:

Yeah, I can. I think in Australian context the other thing to keep in mind is that we do have a large number of developing villages. And so we opened up two new care centers just this year and the other two are fairly relatively new. So that ramp up period does take a bit of a time, but hopefully by the end of this year, that those should be largely full. I think the other thing to consider really is that there is quite a lot of legislative change going on in Australia this year. And there will be some changes to the funding profile largely with the main age care funding instrument changing to the Australian national age care classification in October. And, Ryman's model on the continuum of care basis is reasonably well set up for that change. And, we should look forward to that funding change helping us beyond that October deadline.
Cameron Holland:

Yeah. I'll add to Andrew was, we are laser focused on the costs as well. So we'll do with everything within our power. And I think the other thing that was touched on by Richard was given our network, we're able to move our supply around and phase that accordingly when it comes to supply and the demand of various products. So we're not immune to it, of course, but I think we are better placed than maybe some potential single operators in that regard. Well, I know we are, so, but undoubtedly, it's something that exercises the mind of, of the team and I've got confidence that we'll keep ahead of that curve.
Operator:

Thank you. Your next question comes from Aaron Ibbotson from Forsyth Barr. Please go ahead.
Aaron Ibbotson:

Hi there. Good morning, everyone and again, congratulations on a good set of results all around. I got a couple of questions on FY '23 if sort of forward looking if it's possible. So, first one, you talked to over a thousand delivered units, which would obviously be a quite big step up from the last couple of years. And I'm just curious to know if there's anything you can guide us towards what you expect the sort of CapEx number to deliver those would be? And then I might as well run with my second question directly and that relates to just your interest expense. If I heard you correctly, you mentioned that you had a third of your debt fixed. I was just wondering, does it that mean that the sort of other two thirds is fully floating and am I assuming the right thing, if I'm assuming that this is going to drift up with the general interest cost in the market, or is there any other hedges or stuff in place that I should be aware of?
David Bennett:

Perfect, thank you. Oh, I can probably answer both of those for you. So in relation to the CapEx question, we don't give specific guidance, but if you look at our CapEx this year to sort of deliver 700 beds and units if you were to sort of extrapolate that out to a thousand beds and units, you'd probably be in the rough ballpark. It's probably the easiest way to look at that. And then in terms of the interest expense issue, right so we've got one third of it sort of is fix, it does mean the other two thirds is floating. It's something we continue to monitor, but I think just with the interest expense, it's look -- it's one cost loan that we do monitor, but there's a significant upside on sort of the other sides of the revenue line as well, in terms of the extra volume we're going to or development earnings, we're going to generate from the lift in our build program. And also the sort of under rented resale earnings this year, given the pricing increases that occurred during the year haven't had the full benefit. So I think, yeah, there's plenty more upside to look at as well.
Aaron Ibbotson:

Very good. And specifically on cash, I guess if I look at resales cash flow versus the resales revenues was roughly a $100 million lower on the cash flow line. A lot of that was in the first half, but I'd sort of expected that to come back in this half. So I'm just curious to know, should we expect that sort of a $100 million to come in with a delayed effect in the first half of '23? Or how should we think about re-sales? It seems like roughly a $100 million of resales have gone into receivables.
Cameron Holland:

Yeah. I think with the -- and it's just important to remember around year end, what was happening in the country with Omicron. So people were, I guess, just that little bit slower to move and to particularly people that weren't necessarily selling their house. So we did see a few people just sort of delay slightly, and obviously we were a bit more mindful of when people could move into it, some of our villages. So yes, we would expect to capture that in the first half of this year.
Operator:

Thank you. Your next question comes from John from Custodians [ph]. Please go ahead.
Unidentified Analyst:

Look, thank you for agreeing to take my question. I've got three quick questions. First of all David, I notice on Appendix 17 on Page 40 of the presentation, you have the Deborah Cheetham village center as being open. My understanding it's actually still under construction. Am I correct?
David Bennett:

It's both. Of course. So it's like the village is open with the independent units. So we have a village manager and a number of residents living on site already. And obviously the rest of the site is still under construction, including the main building and the care facility.
Cameron Holland:

And this of course is the typical picture for a large number of our villages because we take a very long-term view and open them in a series of stages. And the first stage at Deborah Cheetham is open and functioning with the team in place and that will now over the next few years, in fact have a series of new releases and new stages to it. You had other questions, John, I think,
Unidentified Analyst:

And, my perception on my phone is not very good, so not be clearly. But the second question is if I'm correct, you've delivered 419 units in the second half, and my right are saying with only eight of those, the eight villas that were built at James Wattie were actually complete. And the other 411 would be units nearing completion. So 411 of the 419 actually haven't been finished.
Cameron Holland:

Dave, you're probably well placed to answer that, but obviously we have quite strict procedures for the way we judge where what stage a individual unit is at. But Dave, do you want to elaborate?
David Bennett:

Yeah, I'd need to double check that, but look John, I think the key with that is the way we've assessed that near complete is completely consistent with what we've done in previous years. So we have got people moving into our villages right throughout the year, and a lot of those move-ins have been occurring in the last few weeks as well.
Cameron Holland:

And I think John, I think you've reached out to us and we, maybe we could have a conversation at some point about those. They're quite detailed some of those questions you've got there and will come on with the right information for you. So maybe if we could move to your third question.
Unidentified Analyst:

Okay. And I would appreciate that talk face to face. But my third question is you've said that there is a record profit in Australia. As I mentioned when I was listen to you, I was at the at Burwood East village three weeks ago. And of course the final apartment building would the 104 apartments, which you're saying is nearing complexion. The structure' not complete. The roof's not on; the planning's not on by your own admission, you're telling your guests, your residents, that it won't be completed until November. In an environment of rising construction costs, how can you actually calculate the profit if the thing's only half built?
Cameron Holland:

Yeah, John, maybe I could, as David has mentioned, we have a formal policy it's consistently applied. We only book units with contracts on those and, the key judgements that we make -- made by management, the directors auditors, and everyone's comfortable with that. And I think, as I openly mentioned before you have reached out to us and we're happy to meet with you around the detail, but the directors and the management and the auditors are comfortable with the position that we've taken on that judgment. So maybe if we could hold the rest of those conversations to when we have an opportunity to discuss them. Thank you.
Operator:

Thank you. That does conclude the phone question. I'll now hand back.
Cameron Holland:

Okay. If we, could have the online questions, if there's any, please.
Richard Umbers:

Yes. question from Kim Centre [ph], there's first bit for Dave Bennett. Referring to the income statement, revenues have increased by 228% in the last 10 years, but expenses have increased by 311%. What steps are being taken to reverse this trend?
David Bennett:

Yeah, there's a lot of aspects that are involved in that. Obviously the revenue number just includes the care fees and the deferred measurement fees. It doesn't include our resale earnings and development earnings, but the cost base doesn't include a lot of the costs associated with generating those earnings as well. So it is something that we are obviously trying to look at the cost base and the revenue match of that. COVID has also had an impact on that as well, but the key is that yeah, there's is a slight mismatch between that revenue line and the cost line associated with the resales earnings in particular.
Richard Umbers:

Second question from Kim, for Cameron. Mount Eliza suffered further consent problems during the year. And you've resubmitted your plans to VCAP [ph]. What's the potential relief with this site, given the downsizing of your plans?
Cameron Holland:

All right. Well, so yeah, during the year we obviously went to VCAP back in July and we were actually quite pleased with other than the decision in the end, but the response from VCAP at the time was that they did support our proposal. But just wanted some tweaks to the scale. So we're in the process of making those tweaks. We've resubmitted through council that timeline has passed and now we've have resubmitted through the VCAP. There will be a hearing later in a year. They do take the previous decision into account in the next decision. So, we're looking forward to pleating our case once again later on this year, and hopefully we'll have a result towards the end of this year.
Richard Umbers:

Thanks, Cameron. Question from Andrew [ph] for David Bennett, clarification on payments to residents of $346 million. What is this for? Is it a refund of the 80% occupation, right. When the unit apartment has been vacated?
David Bennett:

Yes, that is correct. That's what that relates to
Richard Umbers:

One more question. This is from Joshua Litton for Cameron. Why has Ryman purchased another site in Coburg North when a year ago it sold another site in Coburg in arguably a better location or demographic. And second part is David Bennett still managing development after Mr. Moore stepped down in September?
David Bennett:

Yeah. So thanks, that's a good question. I think the Coburg area is one of distinct interest for Ryman. We think it's a great location obviously. And one that really fits well within our strategy of buying in premium locations, close to urban centers. So it's six hector sites within 15 hectors of Melbourne don't grow on trees very often. And this side is about two and a half hectors is a fantastic size for us in our model going forward. I think in terms of the site change what we did notice and part of the analysis on the previous site was the capital intensity acquired to build a site like that, which was, I think the plan was rigidly for 11 stories. I think the right decision was made that that was not the right time to invest that much capital in one site in our current growth plans in Australia. And frankly I think that's a mature sign of great portfolio management, and I can't take any credit for it because it all happened before I arrived, but I think it was a perfect decision and now that I'm really excited actually, that we found a site that we can invest in stages and release in a patent that has appropriate capital velocity. And one that is in an area that we know is rapidly changing demographic with a very high media house price and a great part of Melbourne.
Cameron Holland:

The second part of that was the development in New Zealand. So Chris Stevens, our Chief Construction Officer is currently looking after the development aspects of the business instead of me.
Richard Umbers:

No, no more questions from the net. Thank you.
Cameron Holland:

Well look thank you. I just maybe conclude and look, we wanted to offer a really sincere thanks for your time and attention today and for your great questions. As I mentioned, we are proud of what has been a strong result delivered during, a very interesting period of considerable disruption and the resilience, the commitment and professionalism of our team played a key role in helping us, respond decisively to these changing circumstances. We look forward to reporting back to you in six month's time and seeing a number of you of course at our AGM. So I just wanted to pass on our thanks. Wish you all the very best. Keep COVID safe and we look forward to seeing you again shortly. So all the very best.

Ryman Healthcare Limited Q4 2022 Earnings Call Transcript

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Ryman Healthcare Limited
Q4 2022 Earnings Call Transcript