Ryman Healthcare Limited

Thank you for standing by and welcome to the Ryman Healthcare half year results briefing. All participants are in a listen only mode. There'll be a presentation followed by a question and answer session. If you'd like to ask a question today, you need to press the start key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ryman Healthcare's Chairman, Dean Hamilton. Please go ahead.

Welcome everybody. I'm Dean Hamilton, Executive Chair of Ryman. We appreciate you dialling in today. There's a lot to cover today, but just before we get into the presentation, I'd like to take the opportunity to acknowledge the passing, sadly, this year of one of our two founders, Kevin Hickman. Kevin, along with John Ryder, founded Ryman 40 years ago and essentially pioneered integrated retirement living and aged care as we know it today. It literally didn't exist before both John and Kevin. Along with others, I was fortunate to attend the service for Kevin at the Christchurch Town Hall. It was certainly humbling to hear of his contribution, not only to our sector, but also to athletics and to his other real passion, and that was horse racing. A great pioneer with an enormous legacy. Certainly, Kevin, a life well lived. With me today in the room is our new CEO, Naomi James, and Rob Woodgate, our CFO. Naomi started with us on the 4th of November. We've purposely left Naomi free in November to travel around the business, to meet our team members, to meet residents, to meet with a number of our stakeholders. As of tomorrow, I will step back to a non-executive chair role, and Naomi will lead the organisation. Given Naomi's recent arrival, Rob and I will present today's result. Naomi will make a few comments at the end, and we'll all be open for Q&A. We've got an hour. We'll present for around 40 minutes and then move to Q&A. I'm also conscious we've got meetings with a number of you over the next week. In terms of the agenda, Rob will cover financials and capital management, and I'll present the balance. A brief snapshot at 30 September, we had 49 open and operating villages, nine of those of which also had a construction element at them included in that 49. We now have over 9,500 retirement village units, over 4,600 aged care beds, and combined we've now got over 2,000 units and beds in Victoria, some 14% of our overall portfolio. We've got a further 4,700 units and beds in our land bank. Just recently tipped past 15,000 residents and over 7,700 team members. Stepping back, we own over 15% of all independent retirement units in New Zealand, and over 10% of all aged care beds in New Zealand. And interestingly, we provide as many patient bed nights annually in New Zealand as the entire hospital system. Whilst we're gonna talk a lot about numbers today, at the heart of Ryman, we are care and resident experience. We provide care good enough for mum and dad. Importantly, as we move through this transition, our residents remain at the centre of everything we do. This year in New Zealand, we're proud to be acknowledged for the first time across three separate cohorts as best in class. We remain a highly trusted brand, thanks to the hard work and compassion provided by our over 7,500 team members. On to a review of the six months to 30 September. Whilst the period hasn't been without challenges, I think we've achieved a lot. I'd like to take you back briefly to March 2023. The company was in discussions with both James Miller and myself to join the board. From the outside, we could see a number of the issues, but we asked the board as part of our due diligence to retain a third party to solicit feedback from investors and analysts, many of you on the call today, on the views of the company. there were three quite confronting common themes. One, there was a loss of confidence in the board. Secondly, there was a loss of confidence in the management team. And thirdly, there was a loss of confidence in the numbers, including the non-GAAP measures. With the support of the whole board, we've set about rebuilding that confidence. In terms of governance and leadership, we've completed the board renewal process, and that will be with Claire retiring at the end of the year, will be set at the 31st of December. We have a new executive team, including Naomi, and all are on a new remuneration structure. In terms of financials, once James and I joined the board, the Audit and Risk Committee commissioned an independent review by PwC of our financial reporting, both relative to the sector, relative to best practice, and also how directors were exercising judgment. This led to a list of key actions we needed to undertake. Unfortunately, these changes take time and energy and capacity of the team, and in the short term create a lot of noise in the numbers. We saw this at the full year result, and we're seeing it again today. I'm pleased to say we're nearer to the end than the start of this process. You will notice a significant impact on our numbers today, also through lower capitalization, and Rob will step through that later. In terms of the highlights, net profit before tax and fair value movements, was a loss of 79.8 million, down 17.8 million on the prior half. Cash flow from existing operations was minus 7.8, down 24.8 million on the first half 24, and cash flow from developments, whilst negative at 44.7, was a significant 132 million better than the comparable period in first half 24. On the consumer and resident reputation front, we talked about the recognitions, It's important to note we've had positive and stable resident MPS across care, serviced and independent living throughout the year. Our MPS for all of those residents remains above 40. In terms of our business improvement, we've done what we said we'd do in our September update. We have new RV unit pricing structure implemented on the 1st of October. And our new services and support structure is in an advanced stage. Obviously more on that later. In aged care, our occupancy in mature care centres stayed high at 96%. There's been movement in the regulatory front. Proposed new legislation in Australia is positive for us. However, the impact will take time as it has been grandfathered at 1st of July 2025 for existing residents. In New Zealand, where the majority of our care beds are, Health New Zealand Te Whare Ora, the review of aged care funding continues. Whilst the sector has limited visibility on that review, we understand there's a potential framework for consultation coming out in coming months. In terms of sales and stock, a key part of today is covering this topic. In what is a relatively tough market, we have had record settlements achieved in the period of 827 auras and $651 million of gross receipts, our highest level in the last three years. Positively, we achieved that whilst we maintained our pricing. Despite this progress with strong first half new deliveries, our stock built up to 12% unoccupied units at the half albeit 45% of these are under contract. On development, we had a good first six months. We've delivered 667 retirement units and aged care beds. We opened three new buildings at James Waddy, Merrin Corbin, and Keith Park in New Zealand. These are all fabulous facilities for our residents. In terms of capital management, our debt ended up $50 million higher at the half year relative to March 2024 at $2.56 billion. And as we've previously advised, we had amendments to our financial comments for testing periods through to March 2026. We've touched on a number of our metrics for the first half. In terms of our retirement unit occupancy, we averaged 87.9% for the period. It slipped slightly as we brought new stock on. Our aged care occupancy across the portfolio was 91.7%, down slightly. The mature was steady at 96%, and the developing was at 59%. Our gross resale margin at 26.6%. was three points lower than what we achieved last year. Whilst we maintained our pricing, our cash resale margin did compress. With two years of flat pricing, mathematically margins per unit and as a percentage will compress. More so in service departments given the shorter tenure. In independent units, two of the nine years are now relatively flat. We're looking forward to markets improving and being able to stop that compression. In terms of total sales of RV units, of the 827, 224 were new, and 603 were resales. Turning to governance and leadership. It's been a period of significant change, with five new directors commencing since June 2023. I'm really pleased with the caliber of directive we've been able to attract across Australasia. The latest addition is Scott Pritchard, known to many of you. He's an experienced public company CEO. He's also an experienced developer, who I'm sure will make a positive contribution as we transition from a construction mindset to a developer's mindset, where we will partner a lot of our design and construction. As previously advised, I'm returning to a non-executive role tomorrow. At that point, all of the board will be considered independent. I'd also like to take the opportunity to thank Claire for her 10 years on the board and stepping into the interim chair role in 2022. In terms of the executive team, we have a new structure, we have a new team, we have a new CEO in Naomi, and we have new remuneration structure. I'm delighted to welcome Naomi as our CEO. Naomi brings a proven track record in transformation and as a successful public company CEO. I'm confident we've got the makings of a high performance leadership team. In terms of business improvement, we've had a big focus over the last six months. We talked to you about it at a high level in May and we provided an update in September. For us, it's been about how do we find the right balance between great care for our residents and great returns for our shareholders. They need to comfortably coexist. Our opportunity overview covered five areas. Our revenue settings, both in retirement and in care, our services and support structure, our new development processes, our existing village performance, our culture and change capability. We then moved to prioritise our efforts more recently into two areas. Firstly, resetting our DMF and weekly fee structures to reflect not only residents staying longer, but also to reflect the fact that the operating costs of our villages had escalated substantially over the last four years through COVID and beyond, whether that's in rates, insurance, electricity or labour. Secondly, we're focused on reorganising our non-village overhead, our support and services team and our non-village expenditure. Our cost per resident had grown materially over time. I'll touch more on these now. In terms of our new pricing structure, you're all well aware of our changes we introduced at the first of October. It's very early days, but so far, approximately 75% of new sales contracts entered into are at 30%, and they've all been achieved at the price list. The majority of the balance of new sales have been at 25%, and we have consistently achieved at least a 5% premium to our price list. In terms of the weekly fees of those new sales, roughly half are electing the fixed weekly option, and approximately half are electing on indexed. Whilst these changes aren't going to have a material impact on our cash over the next couple of years, they will create significant long-term value for shareholders. In terms of new services and support, as we've shared previously, the move to the regional model was, in hindsight, premature for Ryman. With our historical underinvestment in systems, we simply replicated overhead in New Zealand, Australia, and the group. We actually got diseconomies of scale per resident as we expanded. We've now moved to a one Ryman model. We've disbanded the regional overhead. We've reduced layers. And we are setting out new ways of working. We've had a heightened focus on costs, whether that's IT, whether it's our leasing, whether it's our travel, or the like. At the same time, we've been downsizing our in-house DDC function. as we complete existing projects and get ready to transition to an outsourced delivery model for new villages. The reorganisation has been significant and has been challenging for everybody involved. I'd like to express my thanks to all the team as to how they've worked through the process and supported each other. While some have left, a number have taken on new or more senior roles. In terms of financial impact, We've achieved $18 million of annualized savings to date in our gross non-village operating expenses, and that's across employee costs and other costs. One-off costs to date are approximately $10 million, including $6.5 million expensed in the first half. Onto the financials, and I'll now hand over to Rob.

Thanks, Dean. As Dean mentioned earlier, we introduced a number of accounting changes in response to the review. On the changes that we've made to the statements, I acknowledge that they are somewhat tricky to work through. We've tried our best to lay out the changes, and we don't expect this to be the norm. However, to get through the changes, we do need to show a number of restatements. We've made a number of these changes in the past six months, and these are all significant changes with the aim of improving our reporting and transparency, and I'll cover these off in the next few slides. The key changes identified earlier on were the recognition of AURAs with a change in the sale being based on the occupation and recognising available units on the basis that they are practically complete. And the changes Dean highlighted on the business improvement program has led us to revise other areas including resident tenure and changes to the valuation where positions have been reviewed after making changes to our pricing model. In the period, we appointed PwC as our new auditor And whilst the accounts are not formally reviewed or audited, we have been in active discussions with the partner on positions we've taken in today's presentation. Just moving to the metrics, on the cash flow from existing operations, we saw a cash outflow of $7.8 million, down from a $17.1 million inflow last year. This was largely down to changes made to interest capitalisation, which saw an increase to the net cash interest. Capitalisation has been updated to align with active developments, and where we have less activity, it will result in more interest remaining in the operating cash flow. I'll come back to this point later. Cash flow from development activity was an outflow of $44.7 million and an improvement on the first half of 2024 of an outflow of $177.3 million, with lower levels of land acquisitions and lower cost capitalised to development activity. Net debt remains steady at $2.56 billion. IFRS profit before tax and fair value was a loss of $79.8 million from a reported first half loss last year of $17.8 million. And whilst care and village fees increased by 11% and DMF increased by 9%, there are increases in operating expenses and interest costs, and with changes in the rate of capitalisation seeing more costs in total expenses. Moving on to the changes in financial reporting. We've detailed in the financial statements where we've made restatements to prior periods, and on pages 12 to 15 of those interim accounts, we have detailed the restatements and mapped these to this chart, or to this table. First point is operators' interest in the IP, sorry, investment property valuation, which include an adjustment to the accrued DMF, which applied a time-based discount factor. On reviewing this, the position did not get adjusted and should be shown at face value and not be discounted. This change saw us decrease investment property by $235 million and restate prior periods. The recognition of occupancy advances has changed to the point when the resident moves in. It was previously on the signing date of the ORA. This is a key change in aligning revenue recognition to the sector. The adjustment sees a $91 million decrease in the fair value movement with the change in the timing of the recognition, signing being the earlier occupation, and also removes the ORA debtor and corresponding liability. With the occupation date now being the triggering event and settlement normally taking place at the same time, we do not see the ORA resulting in a debtor in the accounts. The treatment of the debtor and liability sees a $515.8 million decrease in both positions, and this will be adjusted or has been adjusted in prior periods. The debtors that do remain now are either where residents have transferred internally and the units have not cash settled, or residents who have been granted possession prior to cash receipt. In this case, there are health related issues supporting this. The third point, development land. This has been classified going forward as investment property. In the past, it was property, plant and equipment. Land is held at fair value as determined by an independent valuation. and capitalised work in progress is held at cost and tested for impairment. The change has the accounts reclassifying the land held for development for $166.4 million and historically impairments for $147.5 million transferring from investment property and fair value movements. And in the period we saw a $28 million decrease through fair value movements with adjustments made to work in progress booked on development sites. Similarly, with development land, assets held for sale mirror the same criteria as for investment property and are held at fair value. Historical expenses relating to assets held for sale are reflected in the fair value movements and adjusted by $63 million. Finally, the expected tenure of residents in both independent and serviced units have increased to nine and four years. Previously, these were seven and three years. The change sees us extend the DMF revenue recognition period to align with the average resident tenure across both unit types. In the period, we saw a reduction in DMF of $1.8 million in the revenue applying the change on residents who took up occupation from 1 April. Moving on to the statutory profit and loss. The profit before tax and fair value movements was a loss of $79.8 million from a reported loss in first half 24 of $17.8 million. As I mentioned earlier, we saw revenue improvements in village and care fees up 11% and DMF up 14% as we opened more facilities through the period. Total expenses lifted by 27% with the underlying changes in operating expenses and finance costs linked to changes we've made in our approach to capitalisation. We no longer take marketing and establishment costs through to the project, and the point we commence capitalisation of costs to the site is when we deem it to be an active development. Working through to net profit after tax, the first half position was a net profit of $94.4 million, down 50%, from $187.1 million. There are two variances in play here. On the fair value movements, these came in at $254.6 million, up on the first half 24 by 113.2, reflecting underlying movements in the valuation and some of the changes I highlighted earlier. I'll come back to these when we go through the investment property slide details. Deferred taxes and expense of $80.4 million versus tax credit in the prior period of 63.5. This was reflecting two elements. a higher expected future taxable DMF following the new price changes, and also changes in New Zealand and Australia resulting in a lower recognition of tax losses. Jumping across to revenue, on aged care and occupancy, our mature villages, we saw occupancy remaining steady at 96.4%, up marginally on last year. When looking at all 43 care centres, we experienced good occupancy within the first half at 91.7%, marginally lower than the same period last year. This difference compared to the mature care performance reflects the opening of three care centres Dean mentioned, Miriam Corbin, James Waddy and Keith Park. Revenue on aged care, this was up 13% to $240.7 million, with revenue per occupied bed up 10% to $2,244 per week. On the retirement village side, we saw growth in village fees in both service departments up 15% and independent units up 21%. The change came from repricing of fixed weekly fees, which have lifted over previous years and prior to the business improvements that Dean mentioned. And this also coincided with opening of the main buildings and the removal of discounts we applied when facilities were not available to residents. Occupied unit days improved by 5% on both unit types. And on a revenue per occupied unit week, we saw a 2% increase in service departments to $827 per week, a 10% increase in independent units to $494 per week. Moving through to the expenses, on operating expenses, we've experienced a 12% increase in employee costs to $247.3 million, up $26 million in the prior period. This aligns with the additional staff supporting the opening of the main buildings, and also including here a general wage increases and one-off costs relating to the share scheme. Buildings and ground expenses have lifted, also linked to the increase in units in the main buildings, and we're experiencing ongoing inflation on rates and insurance. so in total increasing by 24%. Direct selling expenses were up, as was marketing, both by 28%, underpinning recent sales campaign activities and sales incentives to residents. Expenses that were capitalised to projects was down $13.8 million, or 29%. This reflecting a change made not to capitalise operating costs associated with the start-up of a village, and with the non-village expenses as a result of less development activity and associated overhead capitalisation. Our capitalisation policies remain under review as we work through the organisational restructure and through the changes to the build program. Finally, several one-offs are documented totaling $9.9 million with costs linked to the closing out of previous employee share schemes, restructuring costs associated through to September and write downs to inventory. Moving across to the next slide, finance costs. Our interest costs increased by $10.8 million to $92.9 million, reflecting the increase in the debt balance, with borrowings lifting to $2.5 billion, and underlying interest rates, with our average cost of debt at 6.5%. As I mentioned earlier, changes to the capitalisation of interest, with a move to capitalising on active developments, resulting in $21.9 million less capitalised borrowings. The combination of both the interest cost and the capitalisation saw the net finance cost on borrowings jump from $16.4 million to $48.8 million between the two comparative periods. Capitalisation to sites under construction decreased to $25 million, a drop of 29%, reflecting lower work in progress as in-flight sites moved to completion, including the three main buildings. Capitalisation on land bank sites decreased too, dropping to $6.4 million, with no capitalisation taken on the six of the ten greenfield sites and the village extension land holdings, and previously we capitalised interest on all land bank sites. As mentioned earlier, debt increased by 3% to $2.59 billion. Moving through to the cash flow from existing operations, one of our key metrics, whilst this decreased by $24.8 million to negative $7.8 million, we did see some solid results the village operations cash from village operations lifted by 24.2 million dollars to 16.6 million reflecting the growth in care and village fees and this was closely matched to the change in payments to suppliers and employees up 29.6 million dollars we did see a decrease in the amounts of village and technology capex decreasing 5.7 and 7.2 million dollars respectively net cash flow from the resales of ORAs decreased by $7.5 million to $69.6 million, driven by low gross margin on resales. Margins were compressed through the period, and these are largely dependent on unit price inflation. You can find more details on our resale volumes in the appendices. The resale units were up 9% across both countries, and average unit price on resale units remained flat. Non-village cash flow was down $14 million, also impacted by payments to suppliers and employees. And as we mentioned above, with the lower capitalisation of interest, this saw cash interest expense coming through the cash flow from existing operations and interest paid increasing from $20 million to $47.7 million. Moving through to the cash flow from development activity, this improved by $132.6 million to negative $44.7 million on the half. The cash from resident funding dropped by $10.1 million to $250.9 million. Within this, new sale settlements of RRAs dropped by $5.6 million. New sales RRAs were down 5%. with units sold in the second half of 25 being 224 units versus 236 in the prior period. As I mentioned before, the slide in the appendices, slide 49 I think it is, goes into more detail on the volumes of AURAs with the decrease coming through largely in the Australian market. This was partially offset with average unit prices having moved marginally higher on new sales units. and the net position on RADs in aged care beds decreased by $3 million. The significant moves on the development capex. There was a combined improvement of $44 million with lower land acquisitions and also having completed the settlement on Newtown. We also saw a slowdown in spend year on year on the in-flight projects as we made progress through the main village centres. This resulted in a decrease year on year of $67.3 million to $220 million. Capitalised interest was lower than the year-on-year position. As I mentioned before, we reviewed the capitalisation on projects with the criteria being under active development, and this has seen less capitalised costs in the development cash flow with the offset in interest costs in existing operations. Finally, on cash flow, moving to free cash flow, Combining both these positions, we saw free cash flow coming at negative $52.5 million, an improvement on first half 24 of $107.7 million. Moving through to capital management, we made a series of restatements to the positions from the five changes I highlighted earlier in the presentation, and we've shown the restated positions for the prior periods shown on the slide here. There was a transfer of development land from property plant and equipment to investment property, and restatements to investment property with accrued DMF being adjusted for the time discount factor I mentioned earlier. There's reclassifications on assets held for sale, moving these to investment property, adjustments made to the deferred tax asset on the accrued DMF adjustment, and changes to the ORAs and the debt and liability reflected in the trade and other receivables and net occupancy advances. Total equity is up by 74 million to 44.3 billion, and the NTA per share has increased by 22.3 cents to 589.7 cents per share. Net interest-bearing debt has increased marginally on the half, with total debt at 2.56 billion, and gearing remains above 37%, which is outside of our target range of 30% to 35%. On the bank covenants, the interest coverage ratio for September 24 was reported at 1.7 times. This is now reflecting the sales based on occupation and will do so going forward. We continue to operate under the revised ratios that we share with you in September, with the ratio at 1.5 for this half and also for the full year at 31 March 25, and then stepping up to 1.75 times in September next year and two times in March 26th. And in line with previous statements we've made, the company's intending to review the dividend policy in FY26, and as such, there has been no dividend declared for this period. Moving on to investment property. With the changes to accounting treatments, we felt it was necessary to show the restated investment property position. The March 24 position was reported at $10.04 billion. In the restated positions, we've reclassified land from property, plant and equipment to investment property, increasing the balance by $466 million. In parallel, we reclassified held for sale property and also applied the adjustment to the accrued DMF being the time-based discount. This resulted in a restated position of $10.26 billion. In the half, we increased the investment property balance with additions of $259.5 million The fair value movements in the period were a net $280.6 million based on independent value appraisals. The reported position for HIPAA 24 after the restatement and the valuation was $10.79 billion. Moving on to the investment property valuation, as we outlined in the full year, the independent valuation now underpins most of the positions with some of the previous judgments being eliminated from the investment property position. The table on the left hand side takes you through the March to September movements. In March and under our previous recognition policy, we relied on units being subject to an occupancy agreement or contract. This worked on the concept of near complete units. In September, we're using the occupancy as a recognition point and valuations are included on completed, not yet occupied units or stock that can be occupied. And development land and land bank transfers are being held at cost, now being at fair value and subject to the valuers' assessment. On the right-hand side of the slide, we show the valuers' assumptions, highlighting that the valuers have adjusted the unit price inflation in the earlier years, and also the discount rates, to accommodate their assessment of how the new DMF pricing impacts the investment property valuation. And the units included in the fair value valuation total 9,575, with available new sales stock based on a practical completion test. Finally, jumping across to funding and treasury, debt funding remains largely unchanged in its quantum of $3 billion, with drawn debt up $30 million. Post the balance sheet date, we have rolled forward $147 million of facilities with two of the domestic banks. We have no near-term facilities maturing, and all lines are non-current at the end of the year. Our bank group remains very supportive of the actions we've taken over the last three months. We reported a weighted average tenor of 2.7 years, and we'll be looking to work through our annual refinance program prior to the end of the full year, and we expect to restore some tenor at this point. Finally, the fixed rate debt has increased slightly in dollar terms to $1.65 billion, being 64% of the drawn debt. and the weighted average cost of drawn debt is standing at 6.5%, the same as last year. At this point, I'd like to hand you back to Dean.