Life Healthcare : Interim results webcast transcript

Conference call transcript

25 May 2023

INTERIM RESULTS

Operator

Good day, ladies and gentlemen, and welcome to the Life Healthcare unaudited group interim results. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing * then 0. Please note that this call is being recorded. I would now like to hand the conference over to Peter Wharton-Hood. Please go ahead.

Peter Wharton-Hood

Good morning, ladies and gentlemen, and welcome to the executive management presentation for the six months ended March 2023. We're delighted to report a strong business performance during the six months underpinned by exceptional performances both in South Africa and internationally. Our Southern African business grew revenue by 11.6% to just short of R11 billion, normalised EBITDA up 13.5% to R1.8 billion, off the back of a strong improvement in our paid patient days during the period under review, which increased by 12.5% and will be explained in more detail by Adam later on.

From a strategy perspective in South Africa, we are starting to see that the promises we made delivering our 2026 strategy take shape. We concluded some impressive new network deals in Southern Africa. Our energy program continues. We're delighted to announce the acquisition of TheraMed Nuclear. And on the back of our diversification away from acute revenue, we're also entrusted with the care of Fresenius Medical Care's renal dialysis patients across 51 clinics in South Africa, Eswatini and Namibia.

Internationally, our Alliance Medical Group grew revenue by an impressive 15.5% to just over R4.4 billion, with a normalised EBITDA of nearly 11% at just short of R1 billion. This was underpinned by strong PET-CT volumes in the United Kingdom and an impressive growth in Irish volumes that were nearly 17% up. From a strategy perspective, we continue to deliver on our community diagnostic centre roll-out programme, and we now have seven CDCs in operation and a healthy pipeline against which we can deliver, and Mark will explain that a little later on.

At a group level, revenues are up nearly 13% to just over R15 billion. Normalised EBITDA is up 13.5% to just short of R3 billion-or R2.8 billion, to be precise. We have declared an interim dividend up 13.5%, in line with the operating performance of the company, to give shareholders a payback of 17 cents per share. At a group level, from a strategy perspective, we are seeing positive news flow on LMI, which I will expand on a little bit later.

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The R3 billion question in Life Healthcare currently is how our capital allocation procedures work. We have been asked this a number of times. It falls under the sub-committee of the board's responsibility, our investment committee, which is both sophisticated and detailed in its approach. You can break the R3 billion down into two broad categories-that which is to seek to grow and sustain the existing business, which we call maintenance capex, and that money which is deployed to organic growth in the existing business and other innovation opportunities. In Southern Africa, the maintenance capex is all around organic volume growth, improving occupancy levels, and optimising the arrangement of the bed portfolio across the footprint. Internationally, it's bolstering our strong partnerships with the public health service and the necessary replacement of old scanners as and when the replacement becomes due.

From a growth capex perspective, domestically, you'll see that we're investing in renal and other value-based care products, our oncology centre of excellence, further imaging services and very exciting opportunities in radiopharmacy. Whilst our growth capex internationally is around expanding our partnerships with CDCs, exploring new markets. We will talk about selected acquisitions in due course. And of course, there is the ever exciting prospect of growing our investment in NeuraCeq. All told, for the full year that will come to R2.9 billion.

If one thinks about acquisitions, we have announced during the course of the six months under acquisition of TheraMed and the assumption of responsibilities and implied acquisition of Fresenius Medical Care in South Africa. Internationally, we've had some small bolt-on acquisitions of community-based diagnostic clinics in Italy and opportunities being pursued in the United Kingdom and Spain. All told, if excess cash is presented inside the business after our capital allocation process and the deployment thereof is concluded, it of course will be returned to shareholders, whether it be by ordinary dividends, special dividends or share buybacks, as would be appropriate under the circumstances.

As I alluded to earlier, we have had some very positive news flow on Life Molecular Imaging during the course of the six months under review. By way of a recap, NeuraCeq is an approved injectable radioisotope used in PET scans to detect beta amyloid deposits in the brain. It's an important medical term to understand because Alzheimer's has been proved to be attributed to the accumulation of beta amyloid in the brain, and clearly being able to detect it is our way of being able to diagnose whether a patient has Alzheimer's or not. There are other ways that you can detect beta amyloid in the human body, in the brain. They could be by a spinal fluid test, a blood test, or what we believe to be the highest accuracy test, being that of a PET-CT scan. We aren't the only player around the world that has an approved amyloid-detecting isotope. Lilly and GE Healthcare also have approved F18 isotopes in production.

We've been blessed with having a significant market share in all the global clinical trials to date, but of course what we're really saying is the reality is we couldn't sustain that market share over time. We'll probably end up with about one-third of the market share, and we've already got the capability to produce NeuraCeq around the world. The key point to commercialisation, then, is at what particular point will the demand for NeuraCeq go up? Clearly, we've explained the care pathway for Alzheimer's for some years now. And what we do understand is if a patient has a treatment pathway to cure Alzheimer's, we think the demand for the diagnostic will go up on the basis that if you know you can be cured, you can be diagnosed, and on that basis, we think that the demand for NeuraCeq will go up.

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There are two drugs currently in various phases that are seeing significant support internationally. We have had accelerated approval by the FDA on the 18th of January of this year for Leqembi from the Eisai / Biogen stable. It is clear that, by the 6th of July, as far as we are concerned, we think that these will be formally and finally approved. Eli Lilly also has a drug under review, and we think that they will get approval later in late in 2024. So, we therefore think that an approved drug for Alzheimer's is highly likely.

What does that mean for us as a company? We've done some very high level numbers and made some assumptions. We think there are about 36 million patients possibly suffering from Alzheimer's or dementia in the US, the EU and the UK. We have excluded the Asian analysis at this stage because we do not have enough data at our disposal. Of the 36 million, we think 17 million, or roughly half, of the patients will be eligible for a PET-CT scan. And conservatively, we think that gets us to somewhere between 1 million and 2 million patients per annum who will actually go for a PET-CET scan.

If our assumptions up front are correct and we have one-third of the global market share, it means that we're probably lined up to produce somewhere between 300,000 and 400,000 doses of NeuraCeq every year. We think the analysis is conservative. We think our logic is sound. We are very optimistic about the way forward for life medicine, as and when the big medical aids in the United States agree to reimburse for the treatment of Alzheimer's on the back of approved drugs.

The last point that I would like to mention, which has also been newsworthy during the past six months and more recently, concerns the cautionary announcement on the Life Healthcare company and, more specifically, around the unsolicited expressions of interest in Alliance Medical Group. I do maintain strongly that these were unsolicited. We were not seeking to sell our interest in Alliance Medical. Our external advisers have been appointed and are in the process of assisting the board in assessing the attractiveness of the proposals which have been submitted.

In line with our fiduciary responsibilities and under the guidance of the board, management are formally engaging with these third parties regarding their expressions of interest, and this engagement is ongoing as we update the market more recently. I must confirm that management and the board is taking these approaches seriously and is working hard to ascertain the viability, the execution risk and the potential to unlock value that has been contained in these approaches. As a result, the cautionary will remain in place until further announcements are made. I'd now like to hand you over to the Chief Executive of our Southern African Operations, Adam Pyle, to take you through the overview and detail of his results.

Adam Pyle

And I apologize for my croaky voice. My colleagues here are concerned that I'm going to give them a Louis Armstrong rendition. But you can rest easy because I assure you that's certainly not the case. Just in terms of our SA business, the recovery post-COVID is, continues to gain momentum. We have had a really good half in terms of our volume recovery. And if you look at the graph on the bottom right, you'll see that our occupancies for the half finished at 65.9%, which is a good recovery from a 58.5% in H1 2022. In addition to the good growth

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in activities, we've seen a normalisation of our case mix, which is important. And our case mix now is more reflective of what we see in 2019.

Coming out of COVID, the surgical admissions and PPDs recovered at a much faster rate than medical. And we've always said before that as a group, we've always had a higher medical PPD percentage. And what we've seen in this last half is a strong recovery on medical PPDs. And as I said, the case mix now is more reflective of what we saw in 2019. Pete mentioned the new network deals and they became effective in January 2023. And they're starting to contribute to our increased activities, but this is really early days. They are three year deals and we expect to see continued improvement in activities from these networks.

I will talk a little later on our renal dialysis business as well as the SA imaging business. In terms of the challenges in SA, working in SA is not for the faint-hearted. We are all impacted by load shedding. The last six months we spent roughly an additional R40 million on diesel compared to prior year. One hospital in Queenstown got flooded twice in three weeks due to heavy rainfall and also just because of infrastructure issues in the town. And of course, there's been a lot said in terms of the issue around nurses over the last few days. It's very frustrating. But we remain hopeful that we can reach some form of agreement which allows us to train more nurses, which the country desperately needs.

Just in terms of business, we continue to invest in our underlying infrastructure. Last year, we spent R1.6 billion capex on our infrastructure, and this year we'll spend roughly R1.4 billion. And in addition to investing in our facilities, although we look to drive our occupancy percentage primarily, there are certain hospitals where there's an opportunity of adding additional beds. For example, you'll be adding ICU beds at Life Vincent Pallotti, additional beds at Life Westville and Life Wilgeheuwel. And there's additional projects we're currently working on at Life Peglerae and Life Hilton, which will add bed capacity. We're very careful in terms of adding the bed capacity, and we only do it in those hospitals where we see good growth opportunities.

In addition to investing in our facilities, we have now completed the modernisation of our underlying IT infrastructure network, and this will give us a platform for which we can move forward. We continue to invest in the IT platform and systems, and we've made good progress in our cloud migration. And, of course, we continue to invest in our data analytical capabilities. We continue to look at our SA portfolio, and over the last six months we have closed one stand-alone birthing unit. And we've also closed a stand-alone acute rehab unit. We still feel very positive about acute rehab as a business line, and we'll continue to grow that business line, but we closed this unit because of particular issues around this unit.

In addition, we've said that we look to grow our non-acute part of our business, and so we've recently announced the acquisition of TheraMed Nuclear, which I'll touch on later, as well as the acquisition of the assets and operations of the renal dialysis clinics from Fresenius Medical Care. This transaction is still subject to competition commission approval.

If you look at the segmental breakdown of our numbers, we grew revenue by 11.6% to R10.5 billion. And within that you see that hospitals and complementary services grew revenue by 13.1%. And this revenue growth is off a strong PPT growth of 12.5% for the period. Normalised EBITDA grew by 13.5% and we're starting to get some

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benefit from operating leverage as well as some cost controls. And within that you see that at an operational EBITDA line, hospitals and complementary services grew by 13.7%. And healthcare services, which consists of Life Nkanyisa and Life Health Solutions, grew the operational EBITDA by 16.9%. Life Nkanyisa had a really solid six months. And we spoke about Life Health Solutions last year, which is our occupational health and wellness business, and we are busy going through a restructuring and the benefits of that are not coming through. So, although we saw a decline in our revenue in healthcare services, the improvement in EBITDA is a reflection of the work that's being done by management. And finally, you see that the normalised EBITDA margin increased from 17.1% to 17.4%.

Just breaking down [the Southern African results] I'll touch on the acute hospitals and complementary services and then renal dialysis and imaging. So, starting with acute hospitals first, you'll see that there's a revenue growth of 12.1% for the half, off the back of a 13.1% PPD growth, which is really strong PPD growth. If you look at the graph on the top right, you'll see that the red line is, certainly for the months of February and March, really close to 2019. That has resulted in occupancy moving up to 65.5% from 57.7% in the prior year. And if you look at the graph at the bottom right, where you show the quarters, you see that Q2 2023, our occupancy for acute hospitals was 69.8%. So, touching on 70%, which is good to see. And certainly, the occupancy in hospitals for the months of February and March was above 70%.

In terms of the case mix, you can see that we've now switched back to a 51/49 percentage medical-surgical case mix for the hospitals. And if you combine the complementary service lines as well, we're back into a sort of 55/45 percentage split, which is what we were in 2019. As a reflection of the change in case mix, you can see with a 13% increase in PPDs, but only a 6.3% increase in theatre minutes. It shows the faster rate of medical PPDs we saw over the last six months. As an aside, I just want to show you that our cath lab activity in the cardiac side of the business has done exceptionally well over the last six months, with a 22% growth. And our revenue per PPD was now down 0.9% on prior year, and that's a reflection of both the change in case mix, as well as the discount on our network deals.

Moving on to our complementary lines of business, a really excellent performance, revenue up 26%. That's off a base of an 8% PPD growth with mental health growing by 11.4%. Rehab a little slower, just under 3%. That's also impacted by the closure of one unit. You know, if you're closing a rehab unit, which has a length of stay of between 25 and 30 days, you have to start working on that closure over a period of months. So, that had an impact on the overall acute rehab PPD numbers. But they still have high occupancies across that business. And you can see occupancy levels for the half finished at just over 70%. And again, if you look at the graph on the bottom right, in Q2 2023, our occupancies were 74%. And certainly, for February and March, the occupancies for mental health and acute rehab were in the late 70s, which is very pleasing to see.

And the other lines of business within complementary services outside of imaging: oncology, we saw good growth with a 10% increase in treatments, and renal dialysis treatments increased by 8% in the prior half. So, I just want to talk a little bit about renal dialysis. We announced the acquisition of Fresenius Medical Care's Southern African renal dialysis business. So, there's 45 clinics in SA, five in Namibia, and one in Eswatini, and roughly 2,500 patients with chronic kidney disease. This transaction is supposed to go to the Competition Commission (Comp Com), but we are very excited with this transaction and our ability to roll out our value-

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