Capital Senior Living Corporation

Thank you Wayne. Welcome everyone to the Q4 conference call.

I am joined on the call with John Billowits and Jamal Baksh. We as you know go directly to questions.

So Wayne if you could see those up, we’ll launch directly into.

We obviously, saw very strong operating margins in the quarter. You mentioned the MD&A that you undertook some operational improvements, and it looks like headcount went down a little bit from Q3 to Q4.

Were there any one-time costs associated with realizing these improvements and can you provide some color as to whether this level of margins may be sustainable in near term?

Yes, Thanos, its John here, couple of comments. Part of that margin improvement would be a decline in our bonus expense year-over-year as a percentage of gross revenues.

So that’s nothing to do with operational improvements. But there were some improvements in underlying margins in a couple of our businesses that we acquired last year that were -- when we acquired them sizable businesses that were marginally profitable.

And as you know it takes us some time to get those businesses up to our required levels of profitability or desired levels of profitability, so lot of those improvements were in companies we acquired late last year. We didn’t have any big acquisitions in Q3, Q4 of this year.

So what you’re seeing is our core business in a high level of profit.

And just to sort of comment on culture, Thanos. We don’t direct the operating groups, nor the individual business units underneath those operating groups to go out and perform.

We sort of hope that we have the right incentive programs in place and try and promulgate best practices throughout the organization, but we don’t say this quarter we would like 1% more operating margin from everyone. That’s not how we operate.

It’s a very decentralized kind of place.

Great, that’s helpful. I think you normally provide this information in Q1, but can you comment on whether there has been any trends of notes in your maintenance renewals and then your price increases on maintenance through 2011 or has that sort of activity been consistent with prior years?

I haven’t seen anything new, but that information hasn’t yet been compiled. It’s a pretty daunting task and we didn’t want to pile it on in the middle of the IFRS conversion.

Everyone has been hustling to get out the statements in the new format and it’s been a very busy time for all the finance departments in analytical type. So I’ll soon have that in hand and I’ll write it up in the President’s Letter for next quarter.

Okay, and maybe just one more for me. Can you talk about the M&A pipeline specifically as it relates to some of the larger opportunities you’re looking at, and in recent quarters it looks like you’ve been focusing on smaller opportunities, perhaps due to the distraction related to the review process last year.

How is the pipeline is looking at this point for maybe some of the larger prospects?

Just to correct things, we don’t focus on either small nor large, we just sort of generate whatever prospects we can, and if there are big ones in there, that’s a wonderful thing. As I look through the data, the number of large prospects that we have in the funnel right now is down quite a bit in terms of dollar value.

The number of more mid-sized prospects is better than it has been for a while. So in the short term, I am feeling just fine about our acquisition prospects.

I don’t know what sort of 6 months from now things will look like. So it’s very hard to judge.

And then just a caveat to all of that, our ability to predict acquisitions is extremely poor. We can certainly look at the signing of NDAs and LOIs, Non-Disclosure Agreements and Letters of Intent, a sort of leading indicator and get some sense to how many we close.

But the ones that are actually in legal sometimes they fall apart. People who is selling the business they’ve built for 20 or 30 years have an implicit belief in it, but their lawyers generally don’t.

And often try to shake their confidence in the -- as they are looking at reps and warranties and things of that nature.

And so, particularly lawyers have been working with entrepreneurs for many years. They don’t really have a huge incentive to help that entrepreneur sell the business.

They are much rather sort of keep them as a client and so they have mixed motives as we go into these sales processes. And so I always worry as we get down right to the altar whether these things are going to close.

Okay. That’s helpful.

Maybe sort of as a related question, what’s the typical sort of cycle from the time you identify an opportunity maybe in terms of the smaller acquisitions to the time that it actually closes and I realized it probably a huge standard deviation around that but what would it sort of trend to?

So with 10,000 odd suspects, people who would have identified in the sales -- in that sort of prospecting funnel, you can imagine that the lead time is many, many years. We only look at a few 100 years that actually come through a sale process.

Many of the ones that we approach are just exploring and they want to get a sense of what the value of their business is. They aren’t necessarily committed to a sale.

It’s a very hard thing to judge that. It’s not a sale cycle for a software system.

You’ve recently announced $4 a share dividend which is about 65% of your 2011 free cash flow. Can you talk a bit about the dividend in relation to the acquisition strategy in the past?

You’ve kind of spend all your free cash flow on acquisitions. Is this dividend going to impact that at all?

I think if you actually go back and look at the 2011 free cash flow and the amount that we spent on acquisitions, we fell far short of our free cash flow. So, although historically we have been able to keep pace with free cash flow.

So should we see 2011 as sort of the new benchmark then in terms of acquisitions size that you’re doing?

2011 was down from the prior year, so I am hoping not. We have more people working on M&A than we’ve ever had before.

We’re trying to get better at it. It’s a process that has relatively long feedback cycles.

So getting better at it takes time. I think we already do some unique things and that we do many small transactions, let’s call it $3 million type transactions which very few of the software or any other businesses do for that matter.

So we’re fairly unique in that respect. And ramping up the volume of those is an obvious way to deploy more capital and making sure that we do a great job on the filling the funnel end of the spectrum is something that we’re going to work at this year.

Okay. In terms of organic growth, so 2011 was stronger than it has been in recent years despite acontinuing difficult market.

Can you talk a bit about what’s driving that and whether you’re seeing more organic initiatives internally then you have in the past?

I think it is more of an organic focus than there has been for a few years, partly because people are getting a little more optimistic about the economy and our client bases spending intentions. I think number of businesses we’re wrapping some process around the initiatives that hadn’t been there previously and that helps.

When senior management gets focused on organic growth invariably other people further down the organization also tend to turn their eyes to that.

So I am hopeful that we’ll see more activity on initiatives. I would happily trade a couple of points of EBIT for a couple of points of more of organic growth.

Doug Taylor in here for Scott Penner. On the M&A environment maybe you could talk a little bit about what you are seeing for pricing and competitive on the deals in the last couple of months?

We don’t really view it as changing over months. The things that we compete for are relatively inefficient markets because they are relatively small deals.

And the people who sell their businesses are making a decision that they make once every decade or two. The intriguing thing is what are those entrepreneurs do with their proceeds?

And right now, if you’re an entrepreneur and you sold your business, you first of all pay a wack o’ tax. You secondly go out and look for some sort of portfolio investments probably.

The yield on any kind of interest bearing instrument kind of sucks. The stock market hasn’t performed particularly well over the last few years.

It isn’t a great environment for an entrepreneur to redeploy capital, and so they look at their own business which they know and love and the amount of money that it generates for them plus the amount of lifestyle they can put through the income statement. And selling right now probably isn’t as good an alternative as when the rates of return they can get on, let’s say, government securities are much more attractive.

So I’d say that we are in a quieter environment than we have been, but that’s been the case for several years.

That’s helpful. Keying on the PTS business a little bit, you mentioned that you expect growth to moderate there, I mean do you see it as being stable year-over-year or is there a risk that pulls back from the strong 2011 performance?

It’s a large contract business and so if you get large contracts then you’re likely to grow, and if you don’t get large contracts, you’re likely to shrink, so very much dependent upon signing elephants. Obviously the back to base business is important and it tends to be attractive and we expect there to be a base line of that kind of activity but we’re always out there bidding on new contracts.

Okay. And then also on PTS, EBITDA there was down pretty significantly quarter-over-quarter, can you speak a bit about that decline.

Is it just because of the top line softened up a little bit?

Yes, most of the decline in Q4 was due to a bonus adjustment we had there. The business did very well in 2011 as you can see.

And hence we had a big accrual for bonuses in Q4. Other than that the bonus, the business performed well in terms of EBIT.

Great. Last question for me, the 10% to 15% adjusted tax rate you mentioned, is that still a good number for 2012?

Yes, that’s still the number that we’re using and certainly we’re comfortable with.

Shivalika Handa here on behalf of Mike Abramsky. I was just wondering if you could talk a bit about your expanded credit facility.

Do you expect now to be able to have more flexibility to compete with the larger acquisitions, is that a result of the dividend? Could you talk about your strategy around that?

Yes, the expanded financing facility was -- we took advantage of good markets in terms of credit. As you know it’s a very good time to refinance.

Our existing facility is also coming due this year. So it wasn’t really a function of building up our capacity to compete better on larger deals.

It was a function of markets -- the credit markets are in good shape. And then it obviously gives us the flexibility if those deals were to come up to compete.

So we’re happy with the facility. It’s a lower borrowing cost and it’s a long-term one, four years.

So we’re reasonably pleased with that.

Okay, great. And excluding PTS, were you pleased with what you saw in terms of organic growth in the quarter, and I guess for the full-year?

And do you see it being sustainable going forward?

Very pleased with the organic growth for the year. I would hope that it would go forward.

I am not as optimistic about that for the next year or so as I hope to be a year hence. I don’t get the sense that the economy is booming and that our clients are washing cash and profits so -- in particular in the private -- the public sector of it.

So it could be tough slogging for a while.

Okay, that’s fair. And then I guess on that note, if we do start to see signs of recovery in economy, what sort of the lag time between the macro backdrop and what you see in your business?

Would you say it will get better in H2 or is it really going to get pushed out into F13?

I think we tend to be a laggard as the economy rebounds. We’re capital goods, most of the businesses that we serve tend to be folks who have other needs for their capital, generally working capital needs as they start to expand and grow again.

In the public sector, they’re a little bit counter cyclical, so when times are tough they tend to open up those spigots and spend some money and that tends to help as when things are really tough.

But then when things start to recover, the public sector tends to start dialing back their spending and worrying about their deficits. So I’d say we’re a laggard.

I am not sure exactly how much we’re laggard by, but it’ll be 1 year or 2, I think.

Great, just 2 quick ones for me here. So as you sort of look ahead to 2012 and 2013, is 5% organic growth still a good benchmark, or sort of has that changed with the reasonable parts you’ve spoken about?

The 5% is our long-term sort of five year, yet Pinder’s down and says, what do we hope for, that’s the number that we’re targeting.

Okay, perfect. And then sort of as you look through your M&A pipeline, is that sort of skewed more towards public or private or North America.

How is that changed over the past 3 months or so, or has it changed at all?

We don’t even look at it that way. It’s just the stuff that we generate and sort of more along through the process.

It’s not like we have a strategic focus to go do particular deals in the southern U.S. We try and cover everywhere.

Thank you, Wayne. Thanks everyone for joining the call.

I look forward to seeing all of you for the Q1 AGM. And you’ll be receiving both the President’s Letter and the Q1 results prior to that and hopefully the attrition data that we’ll have in there will be useful to both the analysts and the investors in understanding the business a little better.

Thanks very much. Bye-bye now.