Netcare Ltd Unsp/Adr

Good morning, ladies and gentlemen, and a very warm welcome to Netcare Limited's interim group results presentation for the six months ended the 31st of March, 2022. A warm welcome to the Chair of Netcare, Thavenry Brewer, members of the Netcare Board, our EXCO, and our senior management teams. Let me express my sincere thanks to our management teams and NetCare staff across all of our divisions for their hard work, collective efforts and commitment over the past six months. And also thanks go to our board for their support and guidance. I'm going to begin with a overview of our group's performance and the operational performance of our various divisions before handing over to our Chief Financial Officer, Keith Norman Gibson, who will unpack our financial results in more detail. I'll conclude by providing more detail on the progress we have made on certain strategic areas and present our outlook and guidance for the remainder of the year. Turning to an overview of our performance over the past six months, we've experienced an improvement in financial performance for H1 of this year versus the same period last year. The fourth wave of COVID-19 was characterized by a decoupling of the rates of community spread from the rate of hospital admissions. Once the fourth wave subsided in late January, we saw the demand for private health care services return. The rollout of our major hospital electronic medical records known as Care On is progressing well and is in line with budget and timelines and on track to deliver the expected efficiencies. Our other major strategic projects remain on track And pleasingly, we have now opened our new flagship 427-bed NetCare Alberton Hospital, one of four in our stable with more than 400 beds, and the NetCo, NetCare, a Keso Richards Bay mental health facility. Importantly, our sustainability strategy continues to deliver benefits and is achieving both local and international recognition. The strong recovery in financial performance can be seen across all of our key metrics as compared to the same period last year. Revenue rose 2.3% to 10.3 billion, and we achieved good operating leverage as evidenced by the 8.8% increase in our EBITDA to 1.6 billion rands. Adjusted headline earnings per share rose by 28.9% to 35.2 cents. our net debt to EBITDA ratio strengthened to 1.7 times versus a ratio of two times in the comparative period. Given the greater certainty regarding the impact of COVID-19 on our funding requirements, we've been able to comfortably reduce our committed facilities by 2 billion rands, but still have cash and committed facilities of 3.4 billion rands available to us. As a result of the improved performance, we are pleased to declare an interim dividend of 20 cents per share. Turning to a more detailed overview of operations. As mentioned earlier, the fourth wave was distinct from previous waves as we noted a decoupling of the direct correlation between the rates of community transmission and the rate of hospitalization. The graph here of total COVID-19 positive cases in South Africa during and between waves highlights the correlation of hospital admissions and demonstrates this decoupling effect circled in red on the graph. So despite a higher peak of positive cases, we saw a significantly lower degree of hospitalization. As a result of this, we had a 70% decline in COVID-19 patient days for the period versus H1 2021. In addition, of those cases admitted to hospital, the majority were what we have termed incidental and admitted with COVID-19. In other words, admitted for other reasons and then discovered to be COVID-19 positive versus the minority of those cases admitted because of or for COVID-19 and very sick from it. As you may recall, we were among the first globally to identify and recognize this decoupling phenomenon and the occurrence of so-called incidental COVID-19 and published our findings in this regard. This decoupling phenomenon has continued as has the pattern of incidental COVID as we experienced the most recent surge in cases. And I'm going to talk to this a bit later. Our patient days grew across all our major divisions with a 2.3% increase in acute patient days and a 6.1% increase in mental health. Primary care visits increased by 3.1%. This was despite a significant diminution in activity over December and January due to the fourth wave. The bar chart on the left-hand side demonstrates the improvement year on year in occupancy in our hospitals, and in particular, February and March 2022, which matched our pre-COVID-19 occupancy. The pre-COVID-19 occupancy is shown as the H1 2020 bar on the left-hand side, representing the period October 2019 to March 2020. Similarly, on the right-hand graph, we can see the occupancy trends over the prior six months and compared to previous periods, with March just beginning to approximate pre-COVID-19 occupancy. In our hospital and emergency services division, revenue rose by 2.2% to 10 billion. This was impacted by a 0.8% reduction in acute revenue per patient day and a reduction in acute length of stay by 10% to 4.2 days, both reflecting case mix levels now starting to normalize to pre-COVID-19 levels. The division demonstrated very good operating leverage with EBITDA rising by 8% to over 1.5 billion rands. EBITDA margin expanded by 80 basis points to 15.5% as a result of stringent cost management and reduction in COVID-19 PPE utilization. If we exclude strategic investment costs of 110 million, the underlying margin is 16.6%. In our primary care division, revenue rose by 5.5% as a result of a 3.1% increase in patient visits and a 3.6% increase in occupational health activity. Pleasingly, EBITDA rose by 31.5%, demonstrating the outstanding operating leverage achieved across the division. As a result, EBITDA margins strengthened by 460 basis points to 23% on the back of stringent cost management and staffing optimisation. Patient visits, as demonstrated by the graphic on the right-hand side here at the bottom of the slide, continue to grow but still remain below pre-COVID-19 activity. Now, as we emerge from the last two years of dealing with the acute impact of various COVID-19 waves, we are now beginning to see the emergence of patients suffering from long-term complications of COVID-19, a phenomenon known as long COVID. This describes a wide range of over 200 physical and mental health conditions and symptoms that can present after COVID-19 infection with different patterns of progression and duration of symptoms. Our early data supports published studies showing increased care seeking behavior and readmissions for patients who contracted COVID-19. In fact, those that have been hospitalized, especially in ICU and high care and are older than 65 years of age are at a higher risk of significant complications. It's too early to really fully quantify the impact and globally our understanding of long COVID is developing, but it is likely to have an impact on future medical demand in terms of primary care chronic renal and acute care, as well as mental health. This slide graphically displays the wide array of long-term effects reported and the prevalence of each. As you can see, it demonstrates that long COVID is a syndrome that can affect virtually every aspect of our bodies to varying degrees of occurrence and severity. I'll now hand over to Keith to unpack our financial performance in more detail.

Thank you, Richard, and good morning, ladies and gentlemen. So following on from the overview of our operational performance, let's now turn our attention to the group's financial results for the six months ended 31 March 2022. NetCare delivered an improving financial performance for the first half of 2022, despite the continued presence of COVID-19, and the business has maintained its healthy statement of financial position and generated strong cash flows. While we've not yet recovered to pre-pandemic levels of activity, the group's performance continues to steadily improve, and this is reflected in the robust growth in the current six-month period as compared to H1 of 2021. Improving occupancy levels and cost efficiencies have generated pleasing operational leverage. We've continued investing in our facilities and our key strategic projects. And at the half year end, Netcare's net debt of 5.4 billion rands was notably lower than March 2021. And cash on hand and committed undrawn banking facilities of 3.4 billion rands were available to the group. Turning to the group statement of profitable loss for the six months ended 31 March 2022, the current period's results were impacted by the fourth wave of COVID-19 during December and January, driven by the Omicron variant, noting that the comparative period also experienced a severe second wave in the corresponding months. As already explained, the fourth wave saw a decoupling of the direct correlation between the rate of community transmission and the rate of hospitalization. And as a result, very low occupancies were experienced in the month of December and the early part of January. However, after the fourth wave subsided, we have seen demand for private health care services strengthen, resulting in higher occupancies during the last two months of the reporting period. And this has resulted in case mix shifting towards more normalized levels with 70% fewer COVID-19 patient days compared to H1 2021, resulting in a reducing length of stay and net revenue per patient day. Therefore, revenue for the first half amounted to 10.3 billion rands, which compares to 10.1 billion rands in the comparative period, an increase of 2.3%. H1 2022 revenue was 3.8% below that of H1 2020, which was the last half year period reported on before the outbreak of COVID-19. Included in EBITDA for the current period are strategic costs of 112 million rands against 96 million rands reported in the comparative period. Tight cost management, reduced PPE utilization and nursing efficiencies from improving occupancies result in pleasing operational leverage, with EBITDA for the half growing by 8.8% to 1.6 billion rands against 1.5 billion rands in H1 2021. And the group EBITDA margin improved by 100 basis points from 14.8% to 15.8%. Operating profit increased by 14% to exceed R1 billion, recovering well from R915 million in H1 2021. Other net financial expenses of R171 million decreased against the R206 million charge in the prior period, reflecting the benefit of lower average net debt balances at a slightly higher average cost of debt. The IFRS 16 interest charge attributable to lease liabilities of R190 million remained relatively consistent across both periods. Profit before tax increased by 26.4% to R685 million. while the group's tax charge amounted to R202 million at an effective rate of 29.5%, and profit after tax amounted to R483 million, representing a 28.8% improvement from R375 million in the prior period. There were two exceptional items in the current period. The first represents impairments of properties of 11 million rands, and the second relates to the impending change in the corporate tax rate from 28% to 27%, reducing the benefit to the group's net deferred tax assets. And after taking these exceptional items into account, profit for the six months amounted to 448 million rands against 375 million rands in the prior period. Next, we move on to headline earnings per share. And as usual, we've presented the standard HEPs metric, and we also present an adjusted HEPs figure in which we strip out exceptional and unsustainable items, noting that this is the primary measure used by management to assess performance. HEPs amounted to 31.9 cents for the half year, which is a 19.9% improvement on the 26.6 cents in H1 of 2021. while adjusted HEPs for the first half of 2022 amounted to 35.2 cents, increasing by 28.9% from the prior period's 27.3 cents. The Board has resolved to continue dividend distributions, which were resumed in the previous reporting period, and consequently I'm pleased to confirm that an interim dividend of 20 cents per share has been declared. Moving on to the group statement to financial position, I remind you that NetCare's capital management policy is to maintain a strong statement to financial position and to retain an investment grade credit rating while reducing the cost of capital with a safe level of debt. As at 31 March 2022, total assets amounted to 25.3 billion rands, decreasing slightly from 25.6 billion rands at September 2021. CapEx spent during the period amounted to R410 million, of which R169 million relates to expansionary projects, and the balance of R241 million relates to replacement CapEx. Working capital remains well managed. Inventory holdings have largely normalized as we continue to utilize the higher price PPE and drugs procured during the first wave. Total shareholders' equity remained flat at just under 10.6 billion rands, largely due to an improved operating performance, offset by the resumption of dividend distributions during the period. And finally, the group has a conservative debt-to-equity ratio of 0.5 times. Next, we'll take a more in-depth look at our debt position. Gross debt amounted to just under 6.8 billion rands at 31 March 2022, and this is offset by cash balances of approximately 1.4 billion rands. And therefore, net debt totalled 5.4 billion rands at the half-year end, increasing by only 48 million rands from September 2021 and reducing by 693 million rands from 31 March 2021. Net debt to annualized EBITDA remained at 1.7 times coverage at March 2022, and that's in line with September 2021 and strengthening from two times coverage at 31 March 2021. This metric is calculated in annualized EBITDA measured after the adoption of IFRS 16. In line with our policy, we retained our credit rating of AA- for long-term and A1- for short-term, as published by GCR in February 2022. The cost of debt has increased by 60 basis points from 5.9% at September 2021 to 6.5% at March 2022 as a result of the rising interest rate environment. Currently, approximately 50% of the group's debt is at fixed interest rates, which is achieved with the aid of interest rate swaps. NetCare is compliant with its banking covenants, which firstly require the net debt to EBITDA ratio to be below 2.75 times, where EBITDA is measured excluding the impacts of IFRS 16 on a 12-month backward-looking basis. And the second covenant metric is EBITDA to net interest cover, which must be greater than four times. And both of these covenants have been met with ample headroom. Moving on to our debt facilities, at the half year end, NetCare had cash balances of just under 1.4 billion rands on hand. And in light of increasing certainty of the potential impact of COVID-19 on our funding requirements, the group elected to reduce its committed facilities by 2.1 billion rands during the period. However, we have retained committed but undrawn debt facilities of 2 billion rands and we therefore have access to resources of 3.4 billion rands of cash on hand and committed debt facilities from which to fund our future needs. Our debt tenure reflects a manageable and appropriately staggered maturity profile and there's therefore sufficient capacity to manage our future capital needs. And finally, from my side, just a quick word of recognition and appreciation for our finance staff across the group for their considerable efforts in preparing the results and the related materials. And I'll now hand back to Richard, who will update you on the progress of our key strategic projects.

Thank you very much, Keith. Now let's take a closer look at some of our key strategic initiatives. As already mentioned, we opened the new NetCare Albertson Hospital in April of this year, replacing both NetCare Union and Clinton Hospitals. The hospital consists of 427 beds, of which 135 are ICU and high care beds. Importantly, it has a level one accredited accident and emergency department, one of only three accredited in South Africa to deal with the highest level of trauma. It's also equipped with two emergency helicopter landing areas. And from an environmental sustainability perspective, the new hospital is also one of our largest and most advanced. with solar PV energy that will generate savings of two gigawatt hours of electricity per year, equating to approximately four million of savings. In addition, our greywater recycling system is expected to reduce water consumption by 60 to 70%. There's been a strong demand for services since opening, with occupancy of close to 80% being achieved. On the 12th of May, we opened this 36-bed facility in Richards Bay. There is strong underlying regional demand for mental health, which is reflected in high occupancies in Netcares, a Keso KwaZulu-Natal facilities with long waiting lists. This facility forms part of an expansion pipeline of mental health offerings with facilities also planned in the Eastern Cape and Limpopo. Our digitization and data-driven strategy remains on track within budget and is achieving good adoption by our healthcare colleagues. In terms of the hospital rollout, we've implemented care on in a further seven hospitals this year to date and are on track to implement in a further six hospitals by the end of 2022, giving us a total of 20 hospitals that will be completed. Rollout across all hospitals is expected to be completed by the end of 2023. The rollout of our primary care electronic medical record called HEAL to all Medi-Cross GP and dental practices is also on track and due to be completed by December of this year. Our EMR for occupational health is largely completed. In ACESO, a number of care-on modules have been rolled out with additional modules to be completed by year-end as well. National Renal Care has completed the rollout of its EMR called Nefron, and this has been integrated with a mobile application for patients. And finally, in cancer care, we also have an EMR development underway. The digitization of our hospitals and real-time mobile-enabled clinical records integrates all aspects of healthcare delivery, involving our doctors, nurses, pharmacists, allied healthcare professionals, and all hospital infrastructure, equipment, clinical units, pharmacy, radiology, and pathology. The complexity of this undertaking is not always fully understood and appreciated. And so I wanted to pause here to share some of the statistics that illustrate the sheer size and scale of this. Thus far, we have digitized 14 hospitals. We've connected over 6,000 medical devices to the electronic medical record. We've processed more than 1.1 million electronic scripts, issued over 700,000 drug alerts to our clinicians and doctors regarding drug dosages, drug interactions, or safety advice. We've digitally ordered and received more than 300,000 pathology and radiology results We've trained over 8,000 healthcare professionals and have more than 5,000 iPads now in use. And currently, at any one time, we have over 1,600 concurrent live users of the EMR. All data is collected, stored, and immediately available to healthcare professionals, and I stress, in real time. And we are growing our data generated by a staggering five gigabytes per day. Clearly, once we've completed the rollout across all of our hospitals, these statistics will rise significantly. And importantly, the benefits to patient safety, improved clinical outcomes, and patient engagement are rapidly emerging. We're delighted to announce a landmark partnership which demonstrates the tangible benefits of electronic medical records to both doctors and patients. South Africa continues to experience a high burden of medical legal claims. However, in the United States, on the other hand, they are seeing a significant decline in both the frequency and quantum of claims as a result of the pervasive use of electronic medical records. This, together with measures that focus on patient safety and outcomes, all of which have contributed to this trend. NetCare has now partnered with Ethiqual, a leading and innovative insurer, to ensure specialists in NetCare who are using the care on EMR are able to benefit directly from the lower medico-legal risk attributable to the use of EMRs. specialists using CARE-ON effectively will be eligible for a cashback benefit of up to 15% of their annual premium on renewal of the ethical policy with terms and conditions applying. As mentioned earlier, we've completed the implementation of a fully integrated EMR for patients receiving dialysis, as well as the national renal care app. Treatment records are now available for patients after each dialysis session by the National Renal Care App, which is available on Google Play or on the Apple App Store. The app also provides up-to-date information on blood tests and other clinical information. It's focused on providing dietary and holistic lifestyle advice and allows renal patients to actively engage in managing and improving their health care, quality of life and increasing their longevity. We firmly believe that the electronic integration of dialysis machines and treatment protocols will increase patient safety and improve clinical outcomes, ultimately also resulting in the lower cost of care. As part of enhancing our digital engagement with patients, our enhanced patient portal is now tailored to the user and their specific healthcare needs. Through NetCare AppointMED, a member of the public can find an appropriate medical professional and book medical appointments online. By completing a digital online pre-admission process, patients are able to avoid paperwork and queues at the reception counters in our hospitals. And coming soon, the ability to provide feedback on one's hospital stay electronically and the ability to download hospital discharge summaries and electronic prescriptions. Of course, our patients' experience of care and driving continual improvement in best and safest care is the cornerstone of what we strive to achieve. As Compassion is one of our core values in NetCare, we've partnered with Stanford University's Applied Compassion Training Academy over the last two years to train senior clinical managers and will soon be offering this course locally. Given what our frontline workers have endured over the past two years, we've also been implementing compassion-based training across all hospitals, not only to support our teams, but also to improve levels of compassion for our patients. In terms of our quality of care, we now report publicly on 85 quality measures across six divisions. This can be found on our website. Our quality reviews, in accordance with the Office of Healthcare Standards Compliance, are now fully digitized, and we achieved international ISO 9001-2015 accreditation in 2021 for a fourth consecutive year. One of our key strategies is to increase access to NetCare's facilities for those who are not fully insured or have health policies that may not allow them access. This slide demonstrates the progress we've made over the last six months. In October last year, we launched prepaid dental vouchers. In January, we launched GapCare, a product offering comprehensive gap cover and access to NetCare's facilities not listed on any designated service provider network. And in March of this year, we extended our prepaid vouchers by including ear, nose and throat procedures. Importantly, we're now registered as a financial services provider and we've extended our sales reach by partnering with Checkers and Mr. Price in making our vouchers available in their stores. As part of our transformation strategy, we have co-developed two new and exciting businesses that empower enterprise supplier development. We've established NetCare Diagnostics, which has partnered with a newly established black female-owned pathology practice. NetCare provides the equipment and infrastructure, logistics, administration, finance, and operational support to the pathologists. Thus far, we've installed 113 blood gas analyzers in NetCare's ICUs and high care units. There are a number of benefits in this partnership, including ensuring a high level of accuracy through point-of-care testing, reduced costs of pathology, and improved access to affordable healthcare. The second business is Decimiter Services, a 51% black female-owned decimetry services business, which measures the exposure of healthcare personnel to radiation from x-rays and other devices and enhances protection of healthcare professionals exposed to radiation. It utilizes the very latest available calibration technology and has been implemented across all of our NetCare facilities and external clients. It's also fully accredited by the South African National Accreditation System. And finally, in terms of our strategic updates, environmental sustainability is a critical strategic pillar and, as mentioned earlier, continues to deliver benefits and has achieved both international and local recognition. NetCare is the only healthcare institution in the world to win gold medals in all four categories in the 2021 Global Healthcare Climate Challenge Awards, organized by Global Green and Healthy Hospitals, an initiative of healthy care without harm. This was awarded to NetCare for the second year in a row. And as you can see from the footnote below, this organization comprises over 1500 members across 75 countries and representing over 60,000 hospitals. We're the first healthcare organization in Africa to join the UN's Race to Zero 2050 Challenge. In April of this year, we were awarded the Commercial Corporate Company of the Year Award in South Africa by the South African Energy Efficiency Confederation for, and I quote, outstanding accomplishments in developing, organizing, managing, and implementing our corporate energy management program. And lastly, our environmental performance targets are now linked to remuneration. Finally, turning to our outlook and guidance for the remainder of the financial year. The outlook is essentially guided by the potential evolution of COVID-19 and external factors. In terms of COVID-19, this is largely dependent on whether we will continue to experience sub-variants of Omicron. In other words, serial mutations of the same variant, such as BA.1, BA.2, 3, 4, and 5, et cetera, or new variants that are distinct from previous ones. This is important because continued subvariants will probably result in milder symptomatology, lower hospital admissions and mortality, and in fact, may signal the transition from a pandemic to an endemic state. In this case, recovery towards COVID-19 activity is far more certain. However, on the other hand, new variants may potentially be more virulent, with the risk of increased hospital admissions, higher acuity and mortality, and may result in continued potential future waves. If this is the case, we can expect ongoing disruption, which will slow recovery. Also, as mentioned in detail and detailed earlier, we may start to see the emergence of long COVID, resulting in both mild and severe chronic medical conditions as a result of COVID-19 infection. Globally, our understanding of these conditions is still developing, but it may increase demand for healthcare services. In terms of external factors, the stability of our national electricity grid, the severe national shortage of nursing personnel, global supply chain constraints, inflationary pressures and rising interest rates may all negatively impact on our performance over the next period. Therefore, in the absence of further severe COVID-19 waves and or inflationary impacts, we are guiding towards patient day growth of between 2% to 3% and revenue growth of 3% to 4%. We expect to spend R273 million of OPEX and R227 million of CAPEX on strategic projects. And in terms of EBITDA margin, and if we were to exclude strategic costs, the underlying margins that we've achieved in this H1 of 2022 are expected to strengthen in line with improving occupancies. And finally, We expect to spend 1.4 billion on CapEx this year. And that, colleagues, concludes the formal presentation of our results, and we're happy to now open the webcast to questions. Thank you very much.

Thank you, Richard. Our first question comes from Flo at Investec. How many new doctors and specialists have been onboarded or given admission privileges on the back of a care-on implementation?

We have given 81 new doctors privileges in NetCare. Unfortunately, 28 also have left, either as a result of retirement or some going to the opposition. Certainly, it is an attraction to offer the care on electronic medical record to doctors as well, over and above our normal benefits that we offer those doctors. That excludes the ACASO doctors that have been onboarded.

Thank you, Jacques. We have a question from Taylor Ginsberg from Mbombo Wealth. Does NetCare take any steps to prevent or punish doctors who over-treat their patients and make patients undergo unnecessary operations and procedures in order to maximize patient bills? I am aware that all the hospital groups are guilty of this.

Thank you very, very much. I think there is always a concern that's raised by certain medical schemes and funders of the potential of over-servicing. We run an extremely diligent clinical governance division.