Life Healthcare : Annual results webcast transcript

Conference call transcript

9 December 2022

ANNUAL RESULTS

Mark Wadley

Good day, ladies and gentlemen, and welcome to Life Healthcare's audited group results for the 12 months ended 30 September 2022. All attendees will be in listen only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing * and then 0. Please note that this event is being recorded. I would now like to hand the conference over to the Group Chief Executive, Peter Wharton-Hood. Please go ahead, sir.

Peter Wharton-Hood

Thank you very much and welcome ladies and gentlemen to our annual results presentation. I'll kick it off by making an opening comment that we demonstrated strong underlying operating performance across all our markets. In our key metrics split across southern Africa, Alliance Medical, internationally and at group level, one can see that the key metrics have started to show green arrows, green shoots and a positive improvement at most levels of our company. Whilst this is a 12 month operating review, I urge you to pay attention to some of the statistics that are representative of what happened to underlying volumes in the second half of the year, which Adam and Mark will take you through a little bit later on.

You can see for the full year paid patient days were up by 5.8%. But I'll draw your attention later on to the fact that in the second half paid patient days were actually up by more than 9%. Theatre minutes up by 14.8% for the year, second half up 18.4%. Occupancy levels at 61.9% for the year, second half of the year sitting at just short of 65%. Revenue for the year up 5%, and EBITDA up 7.2%. Across our international business we see encouraging increases in underlying volumes, PET-CT up by 11%, the Italian operations up by 7.5%, Irish operations up by a commendable 24.4%, and revenues topping out at R7.7 billion for the year.

At a group level we exceeded R28 billion revenue for the year, normalised EBITDA at exactly R5 billion. And we're delighted to declare a final dividend of 25 cents. Our diversification strategy continues to work. Our international domestic split in revenue at 70/30 outside of South Africa, acute versus nonacute at 60, our normalised EBITDA at 70/30 and our acute versus nonacute EBITDA at 70/30. So, the direction of travel is along the lines of the plan that we articulated two years ago, which we will deliver by the end of 2026.

Underpinning our strategy and action, we can see that we've taken our ESG journey seriously. It's a group imperative. We've increased our renewable energy usage. We made progress towards environmental targets, and these will be linked to the performance of our executives. As far as targets are concerned, 2030 will get zero waste to landfill and 2050 zero emissions. We're very cautious about our water usage. We've actively installed solar across our complexes and internationally we are electrifying our [unclear]. From a social perspective we

1

see this broken down into three key focus areas of community, education and healthcare. We believe this makes for a sustainable business.

We continue to deliver improvement in our diversity inclusion metrics. We see ourselves as being a force for good with targeted community support. Across healthcare we want to improve access. We have more than 20,000 pro bono cataract surgeries which we performed during the year. We have a screening partnership with Pink Drive. We've got bursaries and training for nurses and specialists in South Africa. We've helped improve access to clean drinking water and food relief partnerships with NGOs.

Our technology journey continues. What are we doing? We are modernising infrastructure, strengthening our cybersecurity, implementing our custom hospital information system, and introducing digital technology, data analytics and AI processes across the stack. What do we hope to achieve? We think that by modernising the infrastructure, we'll be able to exploit new technologies to the full advantage, both at the clinical and operating level. Our cyber function will protect the business and patient information as required. Our hospital information system has been a long term project to manage the commercial process or the process of the patient journey through our hospitals. And the introduction of advanced data analytics we see as us being able to leverage our data across the business for efficient resource utilisation at a very high level. That's the picture. I'll now hand you over to Adam to take you through our South African operations.

Adam Pyle

Thank you, Pete, and good morning, everyone. The Life Healthcare business in South Africa think experienced a very good year. And I'll provide an update on our acute hospital business, our complementary service lines of business, as well as our healthcare services division. And I'll finish off just covering the quality slide. So, you look at the slide. We started about a year coming out of the Delta wave, and we were soon into the Omicron wave in December. We also had to navigate a wave five in June and July this year. But what you can see from the graph on the right is the decreasing percentage of COVID PPDs, which we have compared to 2021. So, in 2021, between 19% and 24% of our total PPDs were COVID PPDs. That has dropped to just over 7% in H1 and then halved again to just 3.5% in H2.

This is reflective of both the lower number of COVID admissions we've had as well as the lower severity of these COVID admissions. The result of this is a normalisation of our underlying case mix. And what we saw over the full year is that our hospital admissions increased by nearly 16%. But what we experienced was a decrease in our length of stay of nearly 9%. We've also experienced a lower revenue per admission of nearly 10%. So, though that results in a lower increase at a revenue level, we do view this as a positive sign in the sense the businesses moving on from COVID-19 and our case mix is returning to what we experienced pre COVID-19. The bottom right hand graph shows the stronger H2 We experienced with admissions growing by nearly 21% over H2 2021. And the solid blue line you can see the decrease in the length of stay.

On the back of this increase in admissions, we look at both the acute and complementary businesses. We finished the year with a 62% occupancy, and we had a much stronger performance in H2. And the graph on the top right shows our occupancies are just over 65% for the second half. And Q4 occupancies were 66.5%. So again, a continued improvement. The bottom left graph shows the occupancy split between facilities. And you

2

can see the improvement in H2 2022, where the percentage of facilities, over 60% have improved dramatically. And we do expect this trend to continue going forward. The graph on the bottom right shows the improvement in both revenue and EBITDA margin from H2 over H1.

If we just look at the acute hospital business, we had a full year PPD growth of 5.4% and our theatre minutes grew by nearly 15% from prior, so a really good underlying performance. Then if you look at the second half, we had an even better performance with our PPDs growing at over 9% and our theatre minutes at just over 18%. And acute hospitals H2 occupancies are nearly 65%, which is good. For the full year our acute hospital revenue was 5.3% which was lower than one would normally expect with that underlying PPD growth, but again this is reflective of the change to a more normalised case mix. The graph on the top right shows the breakdown between this, and you can see the PPD growth, the tariff increase and the negative case mix change impact. One can see how this case mix change impact has reversed when you compare it to 2020 and 2021.

If you move on to the complementary services businesses, which had a really strong year, it is slightly different to the acute business in the sense that that the activity was fairly evenly spread across both halves. The PPDs for the mental health and acute rehab business grew by 9.4% for the full year and 12% for H2 verses H2 2021. This growth is reflected in occupancy percentage for H2 which is over 73%. Renal dialysis and oncology continue to show good underlying growth. And this resulted in a 15% full year revenue growth. And there you had 22% revenue growth in H2 versus prior year. There is less of a case mix impact in the complementary lines of business when you compare it to the acute business. And the revenue in H2 also benefited from the acquisition of the non-clinical operations of East Coast Radiology in February and Eugene Marais Radiology in August.

The Life Healthcare imaging business did approximately 19,000 MRI and CT scans and roughly 100,000 x-rays and other scans in 2022, which when you consider that in the prior this business was non-existent, a really good performance this year. The photo on this slide is the Varian Ethos radiotherapy machine at Life Vincent Pallotti. This machine is the first in South Africa, one of only 60 in the world. And it delivers a highly advanced, precise and personalised oncology treatment to patients. The purchase of the Ethos machine is an expression of our intention of growing our oncology business, but also improve the delivery of cancer treatment. This is one of a number of steps we've taken to grow our oncology business. As an example, at Life Vincent Pallotti we are also adding a new chemotherapy unit, as well as adding additional oncologist doctor rooms.

If we turn to our healthcare services division, and I'll start here with the Life Health Solutions business. So, in 2021, we mentioned the increased revenue and EBITDA Life Healthcare Solutions had received from the COVID screening and contract tracing, which we introduced during the COVID pandemic. This revenue and EBITDA started to normalise in the second half of 2021 and there was very little revenue in this regard in 2022. So, the occupational health and wellness business is a really competitive one. And so, this year, we've gone through a process in terms of reviewing our cost base, developing new products, new sales channels and developing systems. I'd say it's been somewhat of a reset year for the business. And we do expect a much better year in 2023.

Life Nkanyisa, which is the new brand for Life Esidimeni, meaning the bringer of light, is the largest healthcare PPP in South Africa with over 1 million PPDs. And to put that into context, Life Nkanyisa has just over 3,000 beds.

3

And the acute and complementary business has nearly 9,000 beds and they delivered 2 million PPDs. So, it goes to show you the volume of patients that we treat in Life Nkanyisa. It had a steady year, growing revenue in line with CPI. And despite some overhang from COVID-19 costs, they have managed this fairly well.

If you look at the segmental breakdown, the underlying activities result in a revenue growth of 5% with the acute and complementary businesses growing by 6% off the back of an overall 5.8% PPD growth, but at lower revenue due to the normalisation of the case mix I mentioned earlier. Normalised EBITDA grew by 7.2%. At an operational level normalised EBITDA grew by 15% with the acute and complementary businesses growing by 18.3%. In the acute and complementary businesses, we have been able to improve margins, increase underlying activity, improved operational leverage and improved efficiencies. We are now starting to see the benefits coming through from our increased investment in our integrated clinical products, increase investment in data analytics, IT and cyber. And these benefits will become clearer going forward. And just an example, we are launching our first integrated clinical approach in 2023.

Lastly, I'll finish on our quality slide. We had a good overall quality performance. And with this normalisation of our case mix in the second half, we can start comparing to our pre COVID-19 years. We also took the opportunity during COVID-19 to review what we measure from a quality perspective. And as part of our continuous drive to improve patient safety and clinical outcomes, and to increase the potential, identify trends, identify opportunities for improvement, we've made a number of changes in terms of what we measure and how we measure. And this is a good reflection in terms of how we look at our clinical outcomes as well as overall patient experience. Thank you. I will now hand over to Mark Chapman, our CEO of Alliance Medical.

Mark Chapman

Okay. Thank you, Adam. Good morning, everybody. Over the next few slides, I want to highlight how we're seeing the growth in diagnostics and indeed, how diagnostics is having an increased role in the patient pathway. So why diagnostics? We know we operate with an ageing population, and certainly an increased disease burden, which requires diagnostic investigations. We also know that earlier diagnostics translates into improved outcomes for patients, lower total cost of care and improved efficiency. However, we can still see the variation to the chart to the right for MRI, CT and PET-CT. In the markets that we operate we're still lagging a little bit behind some of our peers in Europe, and certainly in the US. And indeed, I think the Financial Times this morning highlights the spending in the UK, which includes some of that thinking.

So, we also know that the population based diagnostic programmes are starting to kick in. Indeed, we can see that in the UK with lung cancer screening programmes. I'm pleased to say that the team in the UK are now starting to implement some of these programmes across regions. Looking forward, the theranostics and the therapies and interventional radiology will provide further opportunities for the business. So, just to recap on our footprint as well, we are market leaders in our position where we operate, certainly in our three core regions of the UK, with market leading position in the imaging services, the PET-CT and radiopharmacy, which again is a unique vertically integrated proposition for molecular imaging. And in Ireland and Italy, that market leading position in the imaging services. Also in Germany, I think it's worth noting our network of cyclotrons is a leading position in Germany, which also provides a good distribution network across northern Europe. Certainly, when we start looking at the future, for our preparation for NeuraCeq manufacturing, we are in a good position.

4

So, if you look at the markets, just look at the UK, I think it's probably worth just going through to highlight the history of the growth. So, if you look at the average growth rates in CT, MRI, and PET-CT before COVID, and the comparison on the right post COVID. So, I think that highlights the resilience of diagnostics. We do expect that growth to continue. Certainly, when you look at the demographics, and what I was saying earlier about the ageing profiles and the disease burdens, I think that underlines our underlying performance this year in 2022 of a 10% revenue growth. And if you look at the markets in the UK, Italy and Ireland, all the health services are under stress. And we can see that with the NHS, the ASL in Italy in the HSE in Ireland. And we are supporting the services accordingly. And the waiting list in the UK, as an example, continues to grow over 7 million. So, we believe the opportunity is there.

I will now just go through a quick overview of the different territories, starting with the UK. The UK accounts for 55% of the revenue. What we have seen is the mix during COVID. The diagnostic imaging sort of overtook that mix of the molecular imaging, and you can see in 2022 H2, the molecular imaging, which is the PET-CT and the radiopharmacy, has moved to 55% of the revenues in the country. We also see the increasing number of scanners in two key areas, the PET-CT, which is no surprise when you start seeing the growth and the utilisation on those scanners, which you'll see shortly, requires additional PET-CT.

And also, the CT opportunity. I think everyone's aware of the CT COVID support during COVID for the NHS. Those facilities and mobiles are still in existence and are being utilised. And the chart to the right you can see this revenue mix. Yes, in 2021 you could see the increase of mobiles from a revenue mix supporting the COVID initiatives. But they are all trending in the growth. And you can see the growth in the PET-CT mobiles. It has been normalised now, but good utilisation. A bit more of a business as usual. Tariff and also diagnostics I'm pleased to see is coming back to pre-COVID and it's growing accordingly.

But just to unpack that a little bit more, if you look at the molecular imaging, where the picture in the top right is Sidcup, which is the first digital PET-CT scanner that we deployed into the UK with the NHS. You can see the growth with the molecular imaging over the last six years. Double digit at 11.8% is encouraging. And you can also see the utilisation in the top right chart, which has been driven by increasing the capacity on the existing base, but also, using the innovation of the digital PET-CTs where on an analogue you'd probably be doing around 15 to 20 scans per day and on the digital it's circuit 30 with an ambition to grow that as well as that innovation matures.

So, in summary, looking forward, the PET-CT, we do see the continuation of this growth. There is an inflationary protection within the contract which I've explained in the past. We do see an additional growth in the medium term of 11 scanners to support the growth that we're seeing in this part of the business. And also, we need to make sure that the cyclotron capacity matches that growth through additional cyclotrons, but also, we've concluded a refurbishment of the programme and to make sure the cyclotron provision is fit for purpose over the next five to 10 years.

If I look at the diagnostic imaging part of the UK, I think it's worth mentioning that it was slightly inflated due to the COVID-19 support. However, the underlying growth is starting to come through very nicely. And that's

5