Life Healthcare Group Holdings Limited (LHC) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Life Healthcare Unaudited Group Interim Results. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Peter Wharton-Hood. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the executive management presentation for the 6 months ended March 2023. We are delighted to report a strong business performance during the 6 months, underpinned by exceptional performances both in South Africa and internationally. Our Southern African business grew revenue by 11.6% to just short of ZAR 11 billion. Nearly normalized EBITDA up 13.5% to ZAR 1.8 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 explain in more detail by Adam later on. From a strategy perspective, in South Africa, we're 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 off the back of our diversification away from acute revenue, we're also entrusted in the care of Fresenius Medical Care's renal dialysis patients across 51 clinics in South Africa, Eswatini and Namibia. Internationally, Alliance Medical Group grew revenue by an impressive 15.5% to just over ZAR 4.4 billion with a normalized EBITDA up nearly 11% at just short of ZAR 1 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 center rollout program, and we now have 7 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, revenue is up nearly 13% to just over ZAR 15 billion, a normalized EBITDA up 13.5% to just short of ZAR 3 billion or ZAR 2.8 billion, to be precise. And we've declared an interim dividend up 13.5%, in line with the operating performance of the company to give shareholders a payback of ZAR 0.17 per share. At a group level, from a strategy perspective, we are seeing positive news on LMI, which I'll expand upon a little bit later. The ZAR 3 billion question in Life Healthcare currently is how our capital allocation procedures work. We've been asked this a number of times. Falls under the subcommittee of the Board's responsibility, our Investment Committee, which is both sophisticated and detailed in its approach. You can break the ZAR 3 billion down into 2 broad categories, that which you 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 optimizing the arrangement of the debt portfolio across the footprint. Internationally, it's bolstering our strong partnerships with a 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 center 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's every exciting prospect of growing our investment in Neuraceq. All told, for the year -- for the full year, that will come to ZAR 2.9 billion. Some things about acquisitions, we've announced during the course of the 6 months under review, our acquisition of TheraMed and the assumption of responsibilities and implied acquisition of Fresenius Medical Healthcare 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 by ordinary dividends, special dividends or share buybacks, as would be seen appropriate under the circumstances. As I alluded to earlier, we've had some very positive news flow on Life Molecular Imaging during the course of the 6 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 via spinal fluid test, a blood test or what we believe to be the highest accuracy test being out of a PET-CT scan. We aren't the only player around the world that has an approved amyloid detecting isotope. Lilly MG 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 1/3 of the market share, and we've already got the capability to produce Neuraceq around the world. The key point to commercialization learners 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 demand for Neuraceq will go up. There are 2 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 Eisai/Biogen's table. And it's clear that by the sixth of July, as far as we're concerned, we think that these will be formally and finally approved. Eli Lilly also has a cure under review, and we think that they will get approval later 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 U.S., the EU and the U.K. We've excluded the Asian analysis at this stage because we don't 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-CT scan. If our assumptions upfront are correct and we have 1/3 of the global market share, it means that we 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, and we are very optimistic for the way forward for Life Molecular as and when the big medical aids in the United States agreed to reimburse for the treatment of Alzheimer's off the back of approved drugs. The last point that I'd like to mention, which has also been newsworthy during the past 6 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. 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 the 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.

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, we are -- 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 58.5% in H1 '22. In addition to the good growth in activities, we've seen a normalization 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 yes, we've always said before that as a group, we've always had a higher medical DPD 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 effective what we saw in 2019. Pete mentioned the new network deals, and they became effective in January 2023. And we are -- and they're starting to contribute to our increased activities, but this is really early days and they are 3-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. Just in terms of the challenges in SA, working in SA is not for the faint hearted. We were all impacted by load shedding. The last 6 months, we spent roughly an additional ZAR 40 million on diesel compared to prior year. One hospital in Queenstown got flooded twice in 3 weeks due to heavy rainfall and also just because of infrastructure issues in the time. And of course, there's been a lot said in terms of the issue on nurses over the last few days. It is very frustrating. But we remain hopeful that -- and we can read some form of agreement, which allows us to train more nurses, which the country desperately needs. Just in terms of our business, we continue to invest in our underlying infrastructure. Last year, we spent ZAR 1.6 billion in CapEx on our infrastructure. And this year, we'll spend roughly ZAR 1.3 billion, ZAR 1.4 billion. And in addition to investing in our facilities, we're the -- although we look to drive our occupancy percentage primarily, there are certain hospitals where there's an opportunity of adding additional beds. For example, we're adding ICU beds in Life Vincent Pallotti, additional beds in Life Westville and Life Wilgeheuwel and there's additional projects we're currently working on at Life Peglarae and Life Hilton, which we'll 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 modernization of our underlying IT infrastructure network, and this will give us a platform for which we can move forward. We continue to invest in our IT platform and systems that 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 6 months, we have closed 1 standalone birthing unit. And we've also closed a standalone acute rehab unit. We still feel very positive by acute rehab as a business line. And we'll look to continue to grow their business line, but they will -- we close 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 ZAR 10.5 billion. And within that, you see that the hospitals and complementary services grew revenue by 13.1%. And this revenue growth is off a strong PPD growth of 12.5% for the period. Normalized EBITDA grew by 13.5%, and we signed to get some 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 our health care services, which consists of Life Nkanyisa and Life Health Solutions grew the operational EBITDA by 16.9%. Life Nkanyisa had a really solid 6 months, and even 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 now coming through. So although we saw a decline in our revenue in that -- in Healthcare Services, the improvement in EBITDA is a reflection of the work that's been done by management. And finally, you see that the normalized EBITDA margin increased from 17.1% to 17.4%. This breaking down, 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 a 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 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 that we show the quarters, we said quarter 2 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%. Interest in terms of case mix, you can see that the -- we've now switched back to a 51%: 49%, medical: surgical case mix for the hospitals. And if you combine the conferential service lines as well, we're back into a sort of 55%: 45% split, which is what we were in 2019. As a reflection of the change in case mix, you can see was a 13% increase in PPDs, but only a 6.3% increase in theater minutes. It shows the faster rate of medical PPDs we saw over the last 6 months. As an aside, I just wanted to show you that our cathlab activity in the cardiac side of the business has done exceptional well over the last 6 months, the 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 slow at just under 3%. That's also impacted by the close of the 1 unit. And if you're closing a rehab unit which has a -- have a length of stay of between 25 and 30 days, you have to start working on that closure over a period of months. Sudden impact on overall acute rehab PPD numbers. But they still have high occupancies across that business. And you can see our occupancy levels for the half finished at just over 70%. And again, if you look at the graph on the bottom right, quarter 2 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 and complementary services outside of imaging, oncology, we still saw good growth with a 10% increase in treatments, and renal dialysis treatments increased by 8% from the prior half. So the -- 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 the 45 clinics in SA, 5 in Namibia and 1 in Eswatini and roughly 2,500 patients with chronic kidney disease. This transaction is set to go to the ComCom, but we are very excited with this transaction and our ability to roll out our value-based care platform to a broader base of patients. Our aims are -- they aren't very simple, they are quite difficult to do, but certainly is to provide improved clinical outcomes, improved patient experience and with a decreased overall cost in terms of the treatment of these patients, and that's how we talk about Fresenius and trusting the care of their patients to us, the quality of care we will provide these patients going forward. I just want to have one quick slide in terms of our imaging business in SA. The existing SA imaging practice continue to perform well and ahead of business case. You can see there's an improvement in the facility numbers. The 7 and 8, the 7 relates to H1 2022 and the 8 facilities is H1 2023. So good activities coming through, which we expected because in the prior year, we only had East Coast Radiology from February onwards. And in addition to that, the good performance, we will be looking at other potential acquisitions for the remainder of this year. And I suppose you could say that we've added a new line of business within our imaging and SA through the acquisition of TheraMed Nuclear, which adds PET-CT and SPECT-CT to our existing imaging business. TheraMed Nuclear consists of 3 outpatient nuclear medicine sites in Gauteng. And we are -- we've explained before that we are in a JV. We are busy building 2 cyclotrons. And those cyclotrons will produce the radioisotope, which you need for a PET-CT. So this complements the cyclotron business. And then the PET-CT business will complement our oncology strategy. So we feel that it's all aligned, and the building blocks are slowly coming into place. And finally, I just like to just touch on our value-based care strategy, which we're putting a lot of emphasis on. Value-based care is a term which is quite loosely used, but it's actually very difficult to do. And so we have a -- we basically talking about coordinated patient-centric journeys, which we design. And to do that, you need to have a unified patient engagement and clinical management system to enable this. And we are the first Life Health care -- the first sales force health cloud installation in Africa in this regard. You then obviously have to leverage your data analytics to design and manage these products to ensure that you have clinical excellence and efficiency. Then outside of that, you have to have your network of facilities to provide that care. And of course, you have to have the value-based reimbursement models in place to ensure that you are aligned with the funders and as provider, you're aligned and, of course, as patients, you're aligned. This is a complicated journey, and it's one we started off with renal dialysis in terms of the rollout of our renal product across our business, and we have a range of other products that are in the pipeline. Just want to finish off by thanking the SA staff and doctors for an excellent 6 months. And I'll now hand over to Mark Chapman, who you'd be pleased to know doesn't have a croaky voice.

Thank you, Adam, and good morning, everybody. I'm pleased to say that H1 has produced a very solid set of results with the revenues up 15.5%, which resulted in a 10.8% growth in EBITDA, whilst operating in a high inflationary period across the Eurozone, which presented its challenges. So it's been a strong start to the year. The core business, we increased revenues across all geographies, which you'll see shortly. We continue to negotiate with multiple public sector partners, contracts and also tariffs in the inflationary period that we see ourselves in. And the PET-CT continuation strategy is firmly ongoing within a work stream. There's always lots of opportunity in diagnostics in the business. And you'll see the diagram to the right, the opening of one of our CDCs with the PM in the U.K. So we continue to grow this pipeline of CDCs in discussions with the NHS. And the focus is also on ensuring that we grow and establish the existing CDCs that we already contracted out, of which I'll come on to shortly. We are developing 4 new sites in Ireland, which goes hand-in-hand with the volume growth that they are seeing and the opportunities. And we continue on the strategy of growing bolt-on acquisitions across the region. We also continue to invest in our current footprint. We have a sort of a scanner replacement program in place, and we want to maintain the average age of our scanning portfolio around just below the 7 years overall. We continue to invest in the cyclotron maintenance program, the refurbishment to ensure that with the future growth of PET-CT, we have the capacity within the cyclotrons. And we continue to invest in more efficient fleets for the mobile staff and the staff across the board whilst we're investing in electric vehicles, obviously supporting our ESG agenda. To deliver these results has had its challenges in the last 6 months. And I think the obvious one is we've been operating across the Eurozone, highest levels of inflation in decades. There have been some limited tariff relief in parts, and we've also had some resources assisting with the due diligence relating to the expressions of interest that Pete spoke about previously. So we've had a strong operational results. The 15.5% has been driven by the continuing growth in the PET-CT scans across the U.K., along with the growth in Ireland and Northern Europe. And we've had some benefit from the FX movement, which you'll see on the left. I think it's also worth noting that the EBITDA margin has been well managed to the 20.3%, as we've seen increase in energy and staff costs across the 6 months, increased head count as we ramp up for the benefits of the CDCs. And there's been some case mix with some new contracts. As an example, the program of lung cancer screening in the U.K., which is strategically the right thing to do, but sometimes coming in at a slightly lower margin, by way of example. So it's a breakdown into the 3 main geographies. The U.K., good volume growth in DI. When I say DI, that's MRI PET -- sorry, MRI/CT and other, and molecular imaging is the PET-CT part of the business. The mobile assets have had a slower start to the year than was anticipated. This is linked a little bit to the NHS spending cycle. And I'm pleased to say come April, we're seeing the utilization of the mobile fleet increase. There have been the pressures, as I continue to talk about around the NHS, although we are expecting some tariff increases. And if you look at the last 4 years within the NHS tariff increases, they've gone up 8%. And we need to manage our costs accordingly to support the mobile fleet with the fuel costs. I'm also pleased to say that we've had 2 large CDCs go live in the first half of the year in Torrington and also in Oldham. You'll see to the charts, we continue to be a main supplier and partner to the NHS with 92% of the services in U.K. with the public sector. And you'll see the split between molecular imaging and diagnostic imaging moving back to sort of the pre-COVID levels, where molecular imaging is now at 55% of the revenues in the U.K. So just to break the U.K. down into those 2 parts. Molecular Imaging, PET-CT growth at just shy of 10%. There was some seasonalized weakness over December and a number of bank holidays as well, which seem to be more this year than previous. Margin expansion comes with that volume growth as the marginal economics continue to kick in. And we do have the inflationary protection mechanisms around that contract, and we'll see that the tariff increase for the scans increasing by 4% from April 2023. And we continue with the PET-CT continuation. Pleased to say that the CDCs provide an opportunity where we can co-locate PET-CT and to advance the services within the community for that offering. If we look at Diagnostic Imaging, up 4.1%. There has been a little bit of a lag with Diagnostic Imaging in the U.K. compared to the other regions. But I'm pleased to say that in the last quarter, that started to increase. And you'll also see that that's against the backdrop of increasing waiting lists in the U.K. with the NHS. And then the CDCs continue to be a very strong opportunity, which I detailed previously in the last presentation. But you'll see that we have 7 up and running. We do have a strong pipeline going forward. The target from the NHS is around 160 imaging centers over the medium term. And I think it's fair to say there's a very positive signaling from the NHS to work with the independent sector and to provide these solutions. And more recently, in last couple of weeks, both conservative and labor parties have been talking very encouraging about working with the independent sector to support the NHS. Final slide, just to look at Italy and then Ireland. You'll see that the Italian volumes are slightly down at 4.4% for H1. This is against the previous year, where there was spot awards from the NSL budget, which was favorable last year. However, please note that the revenues are still up 7.1%, and the EBITDA follows that as well. So there's been positive growth in the revenues. This is due to increasing some of the self-pay in the region of 10% to 15%, which has obviously helped support not only the volume declines against that like-for-like, but also the inflationary pressures of the salaries and the energy increases that we're seeing in Italy. And then finally, in Ireland, you'll see it's been very strong growth in Ireland. This is being supported by the CHO contracts and the HSE, which is the public services supporting the increased need of diagnostics. And Malcolm and his team have taken the opportunities. You can see there's 4 new sites being developed this year, and you can see the growth since 2017. So I foresee that to continue going forward. Okay. Thank you for that. I'd now like to pass it over to Pieter to go through the finances.

Thank you, Mark, and good morning, everyone. Company had strong operational results 6 months driven by the exceptional [indiscernible] and good growth in the AMG business with scan volumes up 7.1%. Group revenue [indiscernible] translated into a normalized EBITDA and normalized EBITA at 13.5% and 14.9%, respectively. Earnings where they are ever impacted by the highest high interest rate, and the interest rate cost has gone up as a settlement of a tax matter in South Africa resulted in normalized earnings per share going up 1.1%. We did experience an IT outage at one of our service providers that impacted our ability to collect cash in the month of March. And hence, our cash from operations is down to ZAR 1.1 billion, where we would have expected it closer to be about ZAR 2.2 billion. CapEx spend for the 6 months has been ZAR 1.2 billion. This IT outage also increased our net debt to normalized EBITDA slightly to about 2.17x, as measured in terms of a bank covenants. I am pleased to say that this position has normalized at the end of May, and we have declared an interim dividend of ZAR 0.17 per share. And just looking at the income statement. What I want to highlight is that you can see that revenue up 12.9% and EBIT -- translating into EBITA at 14.9%. Operating profit, up 11.1%. There is an impairment in our international business of ZAR 33 million, where one of our clinics we've closed in London, and that's -- we actually impair the goodwill on that. Interest cost, as I said, has gone up. And you can see the breakdown interest on the SARS VAT matter, ZAR 47 million. And then in the Alliance business, we do have intercompany loan accounts that's denominated in different currencies. And with the exchange differences between the pound, euro and dollars resulted in a loss of ZAR 66 million. Attributable profit for the year at ZAR 547 million, 9% down against last year. Earnings per share, as I said, normalized earnings per share up 1.1%. And you can see that the adjustments that we made once-off is really the interest on the SARS VAT matter a ZAR 0.033 impact and then included in other few transaction costs. So normalized earnings per share at ZAR 0.446. On the right, showing the impact of the interest rates both in South Africa as well as international, the base interest rates have all gone up from last year, March to this year by between 200 to 400 bps in the period. And hence, although our net debt hasn't really moved, the interest cost has gone up substantially. On the balance sheet, normalized -- net debt to normalized EBITDA of 2.17x. And you can see the main impact or reason for that is the movement in our current assets moved up from September at around ZAR 5 billion to ZAR 6.6 billion, and it's relative a movement of about ZAR 1.2 billion in debtors due to the IT outage. We still have available ZAR 3.8 billion in facilities. On the cash flow, maintenance CapEx, although lower than last year for the same period, is largely impacted by some logistic issues in the international business where we have placed the order for machinery. Those will be delivered in the second half, and we do expect to spend our full allocation that we've estimated for this year of about ZAR 2.9 billion in both maintenance as well as in growth CapEx. I'm going to now hand you back to Pete.

Thank you very much, Pieter. It remains for me to take you through the outlook for the next 6 months. Off the back of our positive start to the year, delighted to say that we can forecast a PPD growth in Southern Africa approaching 10% for the full year. And as a result of the change in our business mix, we're expecting a margin expansion at the EBITDA level. We'll be very busy completing the integration of the current acquisitions and the deployment of the CapEx of ZAR 1.3 billion anticipated for the year. Internationally, we see volumes growing by between 6% and 8%, and we will concentrate on growing and establishing the volumes through the CDCs to which we already contracted. In a similar vein, we will continue to build the CDC partnerships with the NHS and deploy the CapEx estimated at around ZAR 1.6 billion for the full year. All in all, for the group, that implies a revenue growth in the region of somewhere between 10% and 12% and a significantly improved cash flow generation during the second half of the year as we recover from the situation of the IT failure that impacted us in the first half of the year. We will conclude the evaluation of the AMG proposals. And in the light of the positive news flow of Life Molecular Imaging, we will also continue to build out the required capabilities, principally in the United States of America to collect the benefits that we anticipate going forward. That concludes our presentation. We're now in a position to answer some of the questions that some of you may have.

[Operator Instructions] The first question is from Alex Comer of JPMorgan.

I've got a couple of questions, please. You haven't really given much margin guidance for the second half and yet we're looking for some operational gearing to come through from the extra volumes in SA. So I'm just wondering if you'd just like to sort of comment on whether or not you think margins will be up in the second half in SA similar in the U.K. Secondly, you gave some guidance for, I think, 300,000 to 400,000 scans for Neuraceq. I think historically, you've indicated maybe $1,000 per tracer. Does that still hence -- does that still hold? And therefore, does that point to a $300 million to $400 million market? And then I think also, you said the margin there would be around about 30%. So does that still hold? That's my second question. And then the third question, obviously, you had these unsolicited approaches from people to purchased AMG. I'm just wondering what your thinking there is? I think total assets on the book of about GBP 1 billion. I would assume that you're not prepared to sell this in a loss. Would that be a sensible assumption to make?

Adam here. I'll talk about the SA side. So I mean, we would -- with the underlying PPD growth, if we did get the 10% for the year, expect a further improvement in operational leverage, which should translate into better margins. We had -- I think we had indicated that there will be a little bit of pressure in the first half because what happens with these network deals, you give a -- you give the full discount upfront in terms across the whole business, and then it takes a while for the volumes to come through. So there is a bit of a lag, but we would expect to see some operational improvement coming through with the -- off the base of the increased volumes. I'll hand over to Pete.

In the context of the Life Molecular observation that you make, yes, our high level and very conservative estimates around 300,000 to 400,000 doses is correct. That's as per the slide. Insofar as the market clearing price of Neuraceq is concerned or any other competitor, radioisotope going forward. It's quite difficult for us to predict that because the market and the pricing is, as you would appreciate, completely immature. In the clinical trials that were conducted, Neuraceq was going for $2,000 a dose. Insofar as how that market plays out as it matures relative to demand and supply, we'd have to keep a watching brief on it. So at this particular point, I would submit the $2,000 a dose is probably top-ish, but I'd be hesitant to be able to say where the market clearing price actually plays out going forward. And I think you'll find different price levels present themselves in different markets. Cyclotron production capacity being one of the core components in the production cycle that you have to take cognizance of. And market pricing regulations also vary across different countries. So apologies, a vague answer, but I'm telling you what the best knowledge that management has at the moment and the only real price that we can point to is where it was in the clinical trials. Insofar as your questions around Alliance Medical are concerned, I reiterate the way that we expressed it in the cautionary announcement we issued to all shareholders more recently. Of course, we're taking the approaches seriously. And at this particular point, the steps we are taking in answer to one of the questions on the webcast is we need to ascertain the viability of the approaches that have been made. We need to be able to interpret and understand any possible execution risk that comes by way of these interests. And of course, when it comes to price, we said that we have to understand the potential to unlock value. So we've given no indication on price, and we'll continue to remain silent on that topic. But we do know that we will do what's in the best interest of the company.

I'll ask one more question, if that's okay. Would Neuraceq be going with AMG? Or would you retain an interest in that?

We've specifically said an answer to expressions of interest in Alliance Medical Group that LMI is excluded. Any other questions?

The next question is from Roy Campbell of RMB Morgan Stanley.

First question has just been answered. That's just whether LMI would form part of the discussions that you're having. Second question, please, is the 4% increase in your PET scans. Is this the first time that you've got an inflationary increase on those? And then perhaps you can just give us a feel for what the current inflation is in U.K. and Europe relative to what the potential recovery in that inflation could be? And then last one is just the interest on the VAT. For Pieter, is that for the full 6 months? And can we expect that to recurring fee into -- until the settlement is settled?

Yes, regarding the PET and the contract for the PET Wave 1, there's inflationary protection that's in the contract. So it's reviewed every year. If inflationary goes ahead of the 3.5%, then there's a calculation that's performed, and that shore-up is the following year. In answer to -- sorry, just remind me the second question.

Just in terms of your current -- the inflation that you're seeing now. So we've seen the H1 performance. Now you're going to be getting, obviously, an inflationary increase for the PET scans. But if you can just give us an indication of current inflation or cost inflation?

Yes. So current inflation at the moment in the U.K., it was ahead of 10%. I think yesterday, it came in at 8.4%. So we can see it coming down. Some of the challenges that we see are still within the utilities and the costs, which there's certainly a lag. I think the wholesale market is coming down across Europe, but we're not seeing this at site level at the moment. So I think also to answer Alex's question around the margin, I think with the inflationary pressures that we have, wage salary is now being settled broadly around 5%. And we foresee the second half to be similar to the first half. But I think at the beginning of the next financial year, we'll start seeing inflationary come down. And now I'll pass it over to Pieter for the tax question.

And -- so a very short answer. That's actually the final number. We have settled that matter now in source. So there won't be a recurring charge coming through in the next half.

Any more questions?

Next question is from Anuja Joshi of SBG Securities.

Two questions on South Africa and two on AMG. I missed some of Adam's commentary, so I'm not sure if Adam already covered it. So in South Africa, your revenue per PPD declined by 0.9% in the first half. What's the split for tariff increase and case mix impact? And the second question is what's your South Africa hospital occupancy in April and May?

Anuja, there was a 0.9% decrease in the acute revenue, the PPD, what was the split between the discounts and the case mix. That's your question, first question?

Yes. What's the split for tariff increase and the case mix impact?

I mean I think roughly, look, roughly, the split is -- if you look at what we're seeing elsewhere in terms of revenue PPD numbers because of the case mix, I suspect we would have had probably have a revenue PPD of 1% increase without the discounts. And so you're pretty going from the increase. So it's probably 2/3 is case mix and 1/3 is the discounts coming through roughly. Well, April is a little bit quiet because of the holidays, but we're expecting May to be sort of back at March levels, so above 70%.

And just 2 questions on AMG. So what sort of volume and pricing impact do you anticipate if or when your long-term contracts with NHS in the U.K. expire or get renewed? And can you perhaps comment on the CapEx profile for AMG in FY '24 and beyond?

Okay. Thank you. So yes, regarding the tariffs. We expect because the tariff is, as I say, the NHS currency, the impact of the inflation pressure is across all sites and hospital trusts. So we are getting some guidance that the tariffs will increase. And again, at renewals, the currency we operate in around scanning is the tariff. So I think there's some protection around that. We don't see it going further down in new contract renewals and certainly in new contracts. And the CapEx going forward through to 2024. I think from a maintenance point of view, the guidance in sterling is probably around the GBP 20 million to GBP 25 million. And then for the growth CapEx, it really depends on the level of CDCs that will come through the pipeline. And the CDC ranges from GBP 4 million to GBP 5 million up to circa GBP 10 million, depending on the size and the maturity of it, how many scanners go in from day 1. And they are generally 10 to 15-year contracts at the moment that we're seeing. Okay.

I would now like to hand over for webcast questions.

If we go through the list of questions on the webcast, the first one that one would like to look at is the diesel cost for this year. We've estimated in our SENS announcement to be somewhere around about ZAR 40 million additional costs. And we see that as part of continuing operations. We've not normalized for that figure because we don't see it going away, and we think we've got load shedding with us for some time to come. Insofar as protection against higher finance costs going forward, our hedging policy is intact. And we see probably the rate cycle with a small increase going forward, but not in the context of worth hedging the next piece of the increase. So we're expecting the rate cycle to turn in our favor going forward.

The discretion on the diesel costs. So the -- so it was additional ZAR 40 million rough we spent around about ZAR 48 million on diesel costs in the first 6 months, and we expect that to probably increase in the next 6 months as we go through winter. What that number looks like, we are not sure. But we expect it to be higher than the ZAR 48 million we spent in the first 6 months.

Insofar as a question that came for us as to the contingency plans for a potential grid failure in South Africa. Our risk function under the supervision of our Board Risk Committee has carried out a detailed evaluation on a site-by-site basis and at this particular juncture, it's absolutely clear, we can't make all our hospitals completely energy independent, and we are, therefore, reliant on double backup diesel generation during the moments of load shedding in after hours or when the sun goes down, we have complementary sources of solar power during the day. But at this particular point, the technology doesn't exist on a cost-effective basis to go to inverter-driven battery supplementation for entire hospital complexes. So potential grid failure does place our infrastructure at risk once the diesel generation capacity runs out. And at that particular point in time, we'll have to do -- make every effort on a best efforts basis. There's a question on the capital investment that would really require to boost new receipt production. We don't need to invest in more cyclotron capacity. We've actually concluded arrangements between Life Molecular Imaging and Alliance Medical on an arm's length basis for sufficient production capacity to take care of the anticipated demand in Europe. And we've completed a number of sublicensing and manufacturing deals with other cyclotron owners around the world in anticipation of the increase in demand. In the context of -- there's a question here as to why health insurers would prefer PET-CT scans versus spinal fluid tests. And that goes back to the slide, which says the 3 options available for the detection of beta amyloid in the body have varying degrees of accuracy and the ability to concentrate or identify where the beta-amyloid deposits are concentrated. So blood test can give you a generic outcome as to amyloid -- the presence of beta amyloid in your body as can a cerebral spinal fluid test. A PET-CT scan will tell you the concentration of beta amyloid in the brain specifically. And that is in our consideration exactly why the PET-CT scan is the most reliable form of testing. In our analysis, on Page 10 of our presentation, that's why we've noted that not every person that has Alzheimer's will necessarily go for a PET-CT scan. And that's why we've said perhaps it will be in the region of 10% would be sent for a PET-CT scan. I think that has covered the questions on the webcast. Any other questions before we close?

We have no other questions on the conference call.

I'd like to thank everyone for attending the presentation and thank you from the executive to all our staff through our hospital complexes around the world and to our doctors for a considerable effort under difficult circumstances and a very pleasing result. Thank you very much.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your line.