Ramsay Health Care : ASX Announcement - Ramsay Health acquisition of UK mental health provider Elysium transcript of investor call

Ramsay Health Care - Acquisition of Elysium Healthcare

Slide 1 - Acquisition of Elysium Healthcare

Good morning everyone, and thank you for joining our conference call and webcast at such short notice. On the call today, we have our managing director and CEO, Craig McNally, our UK CEO, Dr. Andrew Jones, and our CFO, Martyn Roberts.

Slide 3 - Agenda

Slide three sets out the agenda for this morning. As always, following the presentation, there will be an opportunity to ask questions at the end. I will now hand the call over to Craig.

Slide 4 - Transaction Overview

Thanks, Kelly, and good morning everyone. Thanks for joining us today.

Slide 5 - Transaction delivers mid-single digit EPS accretion in FY23

I'm absolutely delighted that today we've announced that we've entered into an agreement to acquire Elysium Healthcare, which is a leading health acute mental health care business in the UK. The acquisition is expected to complete during the first quarter of calendar '22. The transaction offers a really attractive opportunity for us to expand into the UK mental health market. And it's compatible with our existing business in the UK, and certainly aligned with our vision of being a leading provider of integrated healthcare services, delivering high quality patient outcomes.

The c pre IFRS 16 consideration of 775 million pounds represents an FY21 EV to EBITDA multiple of 13.5 times. The multiple does not fully reflect the benefit of the investment that has been made in the business over the last 12 months, which will see an estimated 9.5% expansion in bed capacity by the end of 2021. And also doesn't reflect the estimated annual synergies of at least five million pounds per annum.

The acquisition includes post IFRA 16 lease liabilities of approximately 185 million pounds. The transaction will be fully funded from Ramsay's existing debt facilities, and there is no need to raise capital for the is transaction. The acquisition is expected to deliver mid-single- digit EPS growth in FY23 and meets Ramsay's internal investment hurdles, including earning a post-tax ROIC above 10% in year five. And the post-tax ROIC is not fundamentally different from pre-tax ROCE of 15%, and it's changed really due to the change in the lease standard.

Slide 6 - Transaction Highlights

I'd just like to take a moment now to talk at a high level about the benefits of the acquisition. As I've mentioned, the transaction enables Ramsay to expand into the mental healthcare market in the UK at scale, with opportunities for both organic and inorganic growth. The mental healthcare market is an attractive market, growing at rates above demand for other healthcare services. And it's driven by increasing awareness and improving diagnostics of mental health and learning disability conditions.

Both ourselves and Elysium have excellent relationships with the NHS, and this transaction will further strengthen that partnership. It also further builds our platform of services in the UK healthcare market, aligning with our long term vision to deliver outcome focused,

integrated care pathways. As a leading mental health provider in Australia and France and with services in our other territories, including Sweden, there is an opportunity to create value through cross-collaboration and the sharing of global best practise across the Ramsay group, which will drive improved patient outcomes.

And as I said, it will drive shareholder value with mid-single-digit EPS accretion in our first full year of ownership.

Slide 7 - Strategic Rationale

I'll now hand over to Andy who will explain why we are keen to grow in the UK mental health market. And he'll talk in greater detail about the business and the strategic rationale for the acquisition.

Slide 8 - The UK mental health care market

Thank you, Craig, and good morning everybody. I'm also very excited about this opportunity and appreciate everyone's support. Let's start by looking at the UK mental health market. In terms of size, the market's worth 15.2 billion pounds, and is growing at around 4% per annum. Currently, one in four people in the UK have experienced mental health issues, and I'll talk about demand in more detail in the next slide.

The UK government has made a strong commitment in the NHS long term plan to transform mental health services in the UK, and has indeed pledged to increase funding by 2.3 billion per annum by 2023/2024. There are capacity constraints across the sector, particularly in children and adolescent mental health services. And the NHS has committed to accelerating more support for these services. So as you can see, there is likely to be strong, underlying demand driving growth opportunities for Elysium over the coming years.

Slide 9 - Increasing demand and unmet needs

Mental health services are continuing to experience rising demands, but in many cases, exceed the available capacity in adult, children, and young people services. COVID has unfortunately also impacted the demand for mental health services. It is estimated that these services in England will need additional capacity for around eight and a half million adults and 1.5 million children and young people, a total of 10 million who will need new or additional mental health support over the next three to five years as a direct consequence of the pandemic.

The independent sector, which we are part of, comprises the private sector, charitable organisations and public local authorities. And these are expected to continue to meet the growing demand in the sector backed by the continued outsourcing of NHS services.

Slide 10 - Introduction to Elysium

Moving to the Elysium business, it is a leading independent operator of long-term medium and low secure hospitals and complex care homes for individuals with mental health conditions. The company was formed through forced divestitures in December, 2016, and since then has grown organically and through acquisition from 22 to 72 operational sites, with approximately 2000 beds and employing 6,000 people.

Elysium maintains 78% good or outstanding Care Quality Commission CQC scores across its portfolio, and it works collaboratively with commissioners to meet the UK government's objectives of treating patients as close to home as possible with the right level of security required. We recognise the significant skills and expertise of Elysium's management and employees. Elysium and Ramsay UK will run independently of each other with the CEO of Elysium, Joy Chamberlain, remaining a CEO of the business following the completion of the acquisition.

Slide 11 - Introduction to Elysium

Moving to the introduction. In terms of service provision, Elysium operates across the acuity spectrum of the UK mental health market, with a particular focus on high acuity care. The business is divided into three segments. Mental health is the largest of these three segments, representing approximately 79% of revenue. Elysium operates both medium and low secure services, specialist services, treating conditions such as personality and eating disorders, acute or psychiatric intensive care units and non-secure rehab services for adults with mental illness or learning disability.

The second segment is in complex care, which represents approximately 10% of revenue and offers both operating hospital and non-hospital-based care. This includes residential rehab and recovery services for a wide range of conditions, including learning disabilities, autism, and other mental health issues. And finally, like Ramsay in the UK, Elysium is a provider of neurological rehabilitation and acquired brain injury services, which represents approximately 11% of revenue.

Slide 12 - A stronger network with an expanding reach of services

We have set out the key operational and financial metrics for both Elysium and Ramsay UK for 2021 on slide 12. As you can see, the combination of Elysium and Ramsay significantly expands our services and our presence in the UK healthcare market and delivers combined revenues of just over 900 million pounds.

Slide 13 - Complementing the integrated global portfolio

As Craig mentioned earlier, Elysium offers an attractive opportunity for Ramsay to expand into the UK mental health market, complementing our existing in the UK healthcare market, working closely with the NHS. It also offers opportunities for collaboration across the Ramsay global business, where we have leading positions in mental health and in Australia and France particular.

Thank you. I'll now hand back to Craig, who'll cover the key takeaways from the presentation.

Slide 14 - Conclusion

Thanks, Andy.

Slide 15 - A unique opportunity to enter the mental healthcare

In summary, we have been operating the UK market for the best part of 15 years, and this acquisition provides us with the opportunity to enter the mental health market, which is a segment of healthcare we know well and understand across the Ramsay network. And we believe our understanding of the sector combined with the demonstrated expertise of the

Elysium team will enable us to continue to grow the business above underlying market growth while driving improved outcomes for patients, clinicians, and strengthening our relationships with payers, particularly the NHS.

Our shared focus on high quality patient outcomes, operational excellence, and developing industry-leading talent will support exceptional patient care across the UK's acute and mental health sectors. The acquisition is expected to create attractive value for Ramsay's shareholders, as Elysium's business plan and clear strategy position will enable significant growth over the next five plus years. The transaction is expected to be finalised early in 2022, when we look forward to welcoming Elysium's people, patients, and partners to the global Ramsay team. Happy now to open for questions that you have for Andy, Martyn or myself. Thank you.

Operator: Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speaker phone, please pick up the handset to ask your question. Your first question comes from Andrew Goodsall from MST Marque. Please go ahead.

Andrew Goodsall from MST Marquee: Thanks very much for taking my question. Just on slide 12, you've given us some of the earnings metrics for the company. Just trying to get a sense of how you'd see those. Was there a COVID tailwind there, or would you say that's normalised or you're just trying to contextualise how we should be thinking about that relative to forward growth?

Craig McNally: I'll start before I hand over to either Martyn or Andy. There's really no COVID impact. So, there's no COVID tailwind. It was pretty normalised through COVID. So, I think those numbers reflect that, but Martyn, you might like to add to that.

Martyn Roberts: Nothing to add, to be honest, Craig. This business has been in growth and is forecasted to be in growth. A lot of the activity they're doing is longer term treatment. So yeah, no real positive or negative, I would say.

Andrew Goodsall from MST Marquee: Terrific. And then, I guess just in terms of the pipeline obviously of providing some level long term complex care and psychiatric care, I'm just trying to understand what proportion of that care would you have some sort of forward visibility in terms of pipeline, just a waiting list.

Craig McNally:Well, there's certainly, I'm going to say, supply constraints. So there's a certainly demand that's outstripping the growth in supply at the moment. So if you get a reasonable view about where that's going, I think Andy's pointed out the commitment of government to add funding to the sector. That gives us a view on what that medium term opportunity might look like. And added to that, there is a bolt on acquisition opportunity that Elysium, given its private equity ownership coming to the end of its fund, really hasn't been funding. So we're really confident about what that short to medium term growth looks like.

Andrew Goodsall from MST Marquee: And final one for me, just some of these groups, particularly in mental health, had issues around governance, and so, just wondering what

your due diligence found here, just the level of comfort you've got just around that governance and clinical risk.

Craig McNally: We spent a lot of time on that, Andrew. Elysium are the outstanding provider in the market. And as you point out, the sector has had some issues over recent years. Elysium isn't immune to that. It's got a couple of things it needs to get right in a couple of facilities, but we did some extensive diligence on that. And obviously, putting our reputation on the line in terms of quality, it was a significant issue for us. But we're certainly confident that they've got the people and systems and the focus on clinical outcomes. They've certainly improved the ratings of each of the hospitals, as we've done in our UK business. But it's not something you rest on your laurels for, and I think what we bring to that is that increased focus and the systems to support that.

Craig McNally: Andy, you got any other comments you'd like to add that?

Dr Andrew Jones: No, I think that's well covered, Craig. We take great pride on the quality delivery of services in the UK, and that'll certainly continue, working with the Elysium team.

Andrew: Terrific. Thank you very much.

Craig McNally:You're welcome.

Operator: Thank you. Your next question comes from Saul Hadassin, from Barrenjoey Capital. Please go ahead.

Saul Hadassin from Barrenjoey: Thanks. Good morning guys. Thanks for taking my questions. First one, Craig, maybe just talk about on the base of the majority of funding comes from the NHS. I'm assuming this is tariff based in terms of how that funding is determined. And if so, can you give us a sense of what's been happening with tariff in this space for the last year, and what the outlook is?

Craig McNally: Yeah, it's not actually tariff based. They are negotiated prices mostly. And Andy can talk about in more detail, but what you do in this sector is you assess the needs of patients and the needs of patients vary individually, and then you negotiate the price for that patient effectively. And so that makes up the larger proportion of revenue. One of the beauties about that is that in that negotiation, you are picking up whatever the current estimates of cost base are, going forward. But it is a negotiation. Elysium's done well. You've seen growth in that average price, but you get down to local market conditions and competitive environments, et cetera, that come into that.

Craig McNally:Andy, you have anything you'd like to add?

Dr Andrew Jones: Yeah, those are the two main points, Craig, the baseline price, and then the negotiated increment. There are two other opportunities. Through COVID the NHS has block booked some facilities where it's become worried about capacity constraints. So that's an opportunity for the business. And then unfortunately, some patients have very special and