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

In the context of our overall results, we'll start with a strong underlying performance of our businesses. In South Africa, revenue grew by a shade over 10%, normalized EBITDA by 6.6% with paid patient days rising by nearly 10% during the course of the year. Life Molecular Imaging had a strong performance with revenue growing by 18.2%. Off the back of the news, the PET CT is now being reimbursed in the U.S. for Alzheimer's disease care pathways and Neuraceq has also received approval to be used in China. The Alliance Medical Group, which we will discuss in more detail later on as the discontinued operation that we sold saw a growth in revenue in excess of 10%. We now -- we have reported that we have sold the business for GBP 910 million, the shareholder vote to approve the transaction will be on the 8th of December of this year, and we expect to close out all the conditions precedent by the beginning of quarter 2 of 2024. Overall, the group's revenue is up 10%, normalized EBITDA is up 4.4% with normalized earnings per share improving by 11.4%. We will declare final dividend out of continuing operations of ZAR 0.27. In our review of the Alliance Medical Group's performance, we see this as a positive transaction to sell the business as it unlocks significant shareholder value. We announced the transaction on the 5th of October 2023 valued at an enterprise value of GBP 910 million. We will use the proceeds to settle all our international debt and pay for the transaction costs, the balance being repatriated to South Africa. We anticipate distributing in excess of ZAR 8 billion to shareholders early in 2024. We will retain about ZAR 2 billion for further growth opportunities, and we have already earmarked those specifically for Fresenius renal based transaction and further investment in Life Molecular Imaging. The net proceeds have already been hedged by a deal contingent forward. And whilst the transaction is subject to a few conditions precedent, we do expect these to close out early in 2024. I must reiterate again that this disposal does not include Life Molecular Imaging. After the transaction is completed, our net debt-to-EBITDA ratio will be below 1x. When we look at the underlying performance in Alliance Medical Group for the year, it was a strong growth in volumes. And whilst we've held it as an asset classified as a discontinued operation, it is fair for us to report that the overall performance came off for volume growth of 7.3%, with the U.K. volumes up 9.5% and Irish volumes up 13%. Revenue grew by 10% and their normalized EBITDA by close to 6% to return of GDP 83 million during the year. When we talk about Life Molecular Imaging, it's important to note that the Neuraceq opportunity is gaining momentum. Our sales of Neuraceq, which is the primary driver of atomized revenue grew by 18% to close at ZAR 656 million for the year. Clinical trial revenue was up 7.7%, commercial sales up 29%. There is, however, still a reported EBITDA loss in the division primarily off the back of our investment in the sales and marketing team to drive Neuraceq sales. Headcount in the division rose to 122 people off a base of 104 last year, and we've extended the agreement with Alliance Medical to continue manufacturing and distributing Neuraceq in Europe. The table to the right-hand side shows the extent to which we've already achieved our global presence for Neuraceq where we have 44 active and contracted sites to manufacture Neuraceq around the world. On the bottom right-hand portion of the slide starts to show the most important metric by which we will judge Neuraceq success, and that is the sales of Neuraceq doses, be that commercial sales, clinical trials or those used in R&D. I'll now hand you over to Adam Pyle to take us through the South African results.

Thank you, Pete. So in terms of the South African overview, I'll talk about our underlying activity growth. I'm also going to touch on the change that we are seeing in the Medical market. I'll talk about our acute and commentary lines of business and how that feeds into our results. Then I'll end with some commentary on our capital allocation 2023. So we had a really strong year in terms of our underlying activities. Our overall PPDs grew by 9.5%. This is off the back of our acute hospital PPDs growing by 10.2% Mental health and acute rehab PPDs up 6.8%, resulting in our overall occupancy percentage been 68.1%. And if you look at the graph on the bottom left, the occupancy levels, you'll see that our firstly, from 2022 to 2023, our acute hospitals grew the occupancy from 61.1% to 67.6%. So really good growth in occupancy levels there. We saw good growth in our complementary services with occupancies being just below 73%. And overall, occupancy has increased from 61.9% to 68.1%. So really good growth in occupancies and getting closer to 2019, and I'll touch on that a little bit later. And this growth is really driven by the continued recovery post COVID, but a really strong performance from our network deals, particularly with the introduction of the 2 significant networks from January this year. We've also seen good doctor recruitment and some additional beds added. In addition to the PPDs, we saw good business growth in our renal dialysis business, our oncology business and also from our Imaging business, which has been our results for the first time for a 12-month period. And if you look at the graph on the bottom right, which covers our revenue, you will see that there's a good improvement in our complementary services revenue to just over ZAR 1.6 billion. I think it's a 20% growth. And this is off of good growth in complementary services business lines as well as strong performance from imaging. And we are quite confident that the growth going forward in complementary will be strong over the next 3 to 5 years. If one moves on to the -- look at the market, although the market is flat in terms of lives, there are some changes happening within that. And the first trend we're seeing is that the percentage of members belonging to preferred networks continues to increase. And you can see from the table on the top right that the percentage of our PPDs from networks has grown by 50% since 2019. And we do expect this trend of more members belong in preferred negative deals to continue going forward. And as such as a company, one has to work out how one operates within this market and how one deals preferred networks. And our strategy has always been fairly clear that we want to be the #1 hospital group when it comes to referred network lives and the benefits we see coming through that this year in a flat market are the improved occupancies. We do understand the impact that this has on our revenue per PPD and the impact it has on margins. But we believe that the higher occupancies give us better scope going forward in terms of how we manage our costs. Looking at the second point is the aging medical aid membership. And within the schemes if you look at the information, you can see there's a reduction in members between the ages of 20 and 34 and there's an increase in members over the age of 60. And how that plays out in terms of admissions is that we've seen our average age admissions increased to 45 years from 43 in 2019, which is quite a significant shift in just 4 years. And if you look at the table on the bottom right, you'll see that our PPDs for the age of 20 to 39 is down 19% since 2019. But our PPDs for the 60-plus years is up 3.9%. And just for context, the PPD category of 60-plus is much bigger than the 20 to 39 years, but it does show the difference in terms of patients, the ton of patients coming through to our facilities. And that plays out in terms of the case mix, so our birth sit on 5%, while our Cathlab cases up over 23%. And you can see the increase in volume of knee replacements and hip replacements. So we are seeing a different case mix playing out. And we've been watching this trend for a number of years, and we are busy shaping our business accordingly to take into account this change in demographics. Looking at our acute hospital business. Yes, so strong growth in revenue of 10.3%, driven by an 8% increase in admissions and PPDs growing by 10.2%. So what we're seeing is a length of stay increase of 2% to 3.8 days per admission. And this is about 9% to 10% higher than it was pre COVID. And it's reflective of the case mix, list we saw the faster growth of medical PPDs as well as the aging population I've just spoken about. And if you look at the split between the PPDs, you can see medical PPDs excluding COVID-19, grew by over 20%. Our COVID PPDs, it should be a sort of a red arrow pointing down, is down by 73%, which is expected. And our surgical PPD is up 10.1%. So this year, we did see a case mix change going back to more of a normalized case mix, but that case mix change of more medically surgical did result in a lower revenue per PPD coming through. Good growth in the theater minutes, and I've covered the kind of cardiac activity and birth. I do want to touch on the occupancies and you can see the pie charts on the right. And although occupancy is not that far of 2019, when you look at the split, it's still quite a big difference. And so in 2023, we still have 19% of our beds with an occupancy below 60%, and this compares to 9% in 2019. And we only have 3% above 80% compared to 13%. So our strategy is, apart from increasing our occupancies to make sure we get the right mix and more of our occupancies and beds above 60%, and that's a key for us going forward. In addition to that, I just want to mention that ICU occupancies though are over 80% for the year, so higher than 2019 of 76%. And that's reflective of some of the case mix we see coming through. And we also had an excellent year in terms of our doctor recruitment. It's not just the number of doctors recruited at 104, which are net additions. It's the type of discipline of doctors that we're recruiting, which fits into how we're sort of reshaping parts of our business to deal with the changing and aging demographic. Moving on to our complementary lines of business, which is really an excellent performance for the year with revenue growth of over 20%. And this is built on the PPDs growing by 6.8%. So we had mental health up by 8.4%. Acute rehab 3.3%, and that 3.3%, we have excluded the close of our 1 acute rehab unit in [ Gauteng ]. We saw good growth in oncology and renal dialysis. And the slides that points on x-rays and MRI, CT and PET-CT percentages are high because they're in for 12 months, whereas in the prior year, I think we had East Coast Radiology and for 7 months and Eugene Marais Radiology in for 1 month. What's more interesting to us, suppose, if you look at the point on the top right about our underlying MRI and CT scan volumes growth. So it's on a 12-month comparison for '23 to '22, those underlying volumes grew by 14.6%. So we've had a really strong performance from our Imaging business, and it certainly exceeded our expectations and becomes a key growth area for us going forward. This feeds into our segmental breakdown. You can see our revenue up 10.1% and the split between hospitals and complementary services growing by 11%. And our health care service is down by 2.7% on the revenue line. We had a strong performance from Life Nkanyisa and the reduction in revenue is primarily due to Life Health Solutions. And it's how we're focusing our attention on making sure we have the right contracts in place and with the benefit we can see coming out in the normalized or operational EBITDA line. So operational EBITDA grew by 7.7% with hospitals and company services growing by 7.1%. And Healthcare Services, as you can see, growing by 22.7%. So the good performance from Life Nkanyisa and our reshaping of the Life Health Solutions business is starting to gain some traction. Just in terms of the -- you can see the corporate cost, which Pieter will deal with a little later in the finance section. But there has been continued investment in our value-based care products, which are essential to us going forward in terms of how we reshape the delivery of health care in our company, our IT infrastructure and our platform as well as an investment into data analytics. Just in terms of my last slide, we -- this last year, we spent ZAR 1 billion on our maintenance, and it's really an investment into our portfolio and our assets. And on top of that, we have been focusing our growth by facilities in areas that benefit from the market changes. So what you see is an increase in ICU and High Care beds, focus on emergency units, cardiology, oncology, renal dialysis et cetera. And that trend you will see going forward as we carefully map out how we grow our business in a market which shows very little growth from a membership perspective. We continue to invest in our technology, and we completed the modernization of our underlying IT infrastructure. I mean there's been continued investment into our IT platform and systems and security and cloud storage, and we've made good progress this year on those factors. And then finally, just on our acquisitions and disposals. We completed the acquisition of Theramed Nuclear and PET Vision. These are 3 outpatient molecular imaging sites. And this is part of our strategy of building a countrywide PET-CT network, and that process will continue in the next few years. We have -- with the Com-Com in terms of the Fresenius Medical Care acquisition, and we're just awaiting hopefully, approval from the SA Com-Com after receiving approval from the other 2 territories and then we continue to look at our portfolio of assets, and we closed one birthing unit, and we also closed an acute rehab unit. And discussions continue going forward and how we look at it. We continue to review our portfolio going forward. And then just finally, there's one point I'd like to mention is I just like to thank all our staff and our management and our doctors for the hard work and the quality of care they deliver to all the patients that come through our hospitals. And on that note, I will hand over to Pieter.

Thank you, Adam, and good morning, all. The results for 2023 reflects a good operational performance and especially a strong activity growth from the Southern African operations. The strong activity growth in SA with PPD is growing at 9.5% largely as a result of network gains and the revenue growth in LMI of 18% results in group revenue from continuing operations growing at 10.3%. Normalized EBITDA in SA resulted in a 6.6%. It's lower than the growth in revenue. And as Adam stated, this is due to a fact -- due to a number of factors: increased costs in corporate as well as mix changes and lower revenue per paid patient day in the Southern African operations. The EBITDA loss in LMI when resulted in normalized EBITDA growth from the group at 4.4%. Earnings for the group has been impacted by a number of nontrading related items, some of them which we've disclosed in the half year, but the largest one is the AMG impairment and transaction-related costs but we had to disclose as part of discontinued operations and it reflects for the current -- in the current period, ZAR 990 million loss, and I'll talk about that in the next slide. Contingent consideration in the prior year where we released a contingent consideration that was payable on LMI, give a tune of ZAR 457 million, made it difficult from a comparative basis in the current year. We settled the tax matter in the current year and in the current year, there's a charge of ZAR 47 million and in the prior year, an accrual of ZAR 199 million. So there's a net gain in the current year. The best metric that we think you need to look at from an earnings per share perspective is normalized earnings per share to strip out these nontrading-related items and that grew by 11.4%. That's also the metric that we use to determine the dividend. We had strong cash conversion and earnings growth, as I stated, on a normalized basis for cash generated as a percentage of normalized EBITDA, it's above 100%, above our metric of 95%. And it was an exceptional good job, specifically in the SA operations after the half year, where we had the impact of a failure at one of our service providers that impacted our ability to bulk and collect cash. And that's why we covered most of that money. Net debt to normalized EBITDA, it's at 2x. It does include the debt that we intend to repay as part of the disposal of Alliance. If that disposal goes -- when that disposal goes through in the new calendar year. Net debt to normalized EBITDA will be below 1x. The total dividend for the year increased 10% to ZAR 0.44. On Alliance Medical, as Pete stated, we disclosed it despite the discontinued operations, the ZAR 990 million is made up of a profit after tax loss of ZAR 90 million, largely driven by an increased finance costs in the Alliance business, but that had a good operating performance with operating profit increasing by 20%. Transaction costs already incurred in the transaction of roughly about ZAR 150 million as well as when the impairment that includes additional transaction costs to the tune of about ZAR 550 million. The strange thing with IFRS 5 is you need to fair value the asset, but you can't bring in the unrealized gains on exchange rates that will realize when the transaction closed. As at the end of September, the unrealized gains is ZAR 2.9 billion. So a potential profit if a transaction had to close out on 30 September would have been approximately ZAR 1.9 billion. Segmental results, excluding AMG. I just want to show you at the bottom right-hand side of the slide, as Adam stated, the income grew in corporate by 15.3% and the cost by 18.8%. I'll talk to you on the next slide in terms of the implications of that. Life Healthcare runs a centralized service operating model in the Southern Africa, where we've performed a large number of services on behalf of the business operations. These include central finance, debt collection, patient services, payroll functions and the like. The centralized service costs increased by 22%. It does include an increased insurance pool that we're creating to do self-insurance for our malpractice claims of around ZAR 60 million. And as Adam stated, we've also increased the investment in our value-based care products and our data analytics team that's part of the centralized services. If you strip out the insurance cost for centralized services, it increased by 10% only. IT, that's a function of 2 factors. One is the increased utilization of applications by users. So as we bring more users to -- in the digital, it does have an implication on licensing costs. And the second part of that, the licensing cost is denominated in dollars largely. So if the rand weakens that cost increases. And then thirdly, due to IT incident that we had in the half year, some of our key projects for cloud migration project has been delayed. And that will only be now being concluded in the new financial year. It does mean that we still have some duplicate costs coming through. That cost have increased by 20%. The 2 corporate costs that we can't split out to the South African operations that we service also part of the AMG business and the LMI business has grown by 8%. Most of that cost is the salary cost. So -- and then we've got the long-term incentive plan related to the people based at our corporate offices in Rosebank of ZAR 141 million for the current year. That's a total cost of roughly about 19% increase to the ZAR 1.5 billion. On the income statement, I just want to highlight a few items. The nontrading related items, as I've stated previously in the prior year, we had ZAR 299 million, in the current year at ZAR 29 million loss. In the prior year, it's ZAR 437 million related to the contingent consideration in LMI and then offset by the SARS matter of ZAR 157 million. Profit after tax, down 12.8% against last year and the discontinued operations of ZAR 990 million. Earnings per share, due to the discontinued operations, it's quite messy. But as I stated, the one metric that we think is best to look at this normalized earnings per share from continuing operations, up 11.4% to roughly ZAR 0.90, ZAR 0.891 compared to last year at ZAR 0.80. So it's a like-for-like from comparison. We're still in a strong financial position. Alliance based on a net basis is reflected as assets held for sale of ZAR 19 billion. Either transaction was closed at the end of September 2023. We would have realized approximately ZAR 21 billion, as I've reflected roughly about ZAR 2 billion gain. We will then utilize those funds as we stated in the earlier communication to firstly repay the international debt of around ZAR 8.7 billion, repatriate the balance back to South Africa. Service for transaction-related costs and repay GBP 360 million of roughly about ZAR 8.4 billion back to shareholders and retained about ZAR 2 billion for growth opportunities that we've identified. Net debt of ZAR 12.3 billion, as I stated, that still reflect the debt of international business of ZAR 8.7 billion. And we do expect to spend ZAR 2.3 billion of CapEx in 2024. On the cash flow, free cash from continuing operations grew by 78% from ZAR 576 million in the prior year to about ZAR 1 billion. So ZAR 1 billion is roughly about 28% or 30% of EBITDA, and that's a metric that we will keep tracking going forward, but we want to generate this free cash. How we define free cash is EBITDA less working capital investment, less interest, less tax, less maintenance CapEx and less minority distributions, that's where we've got [ doctor shielding ] in our -- some of our hospital facilities and an employee share plan. That ZAR 1 billion is when the quantity that we see as available for growth opportunities and for distributions back to shareholders. I'm going to hand you now over to Pete to do the capital allocation and outlook.

Thank you very much, Pieter and Adam. And in closing, it's important for us to express our sentiments around how we're going to spend money. Effectively, the split between growth and maintenance CapEx and operations such as ours is a very important and necessary distinction. Our growth CapEx will deliver some exciting organic growth and innovation opportunities. We've spoken about the need to expand our ICU, High Care and general ward capabilities across our acute settings, investing in renal and other value-based care products is in line with our expansion of complementary services revenue, and we will continue with the Oncology centre of Excellence strategy. We are also very excited by our diagnostic and molecular imaging strategy, and we're in the process, as we've reported earlier, building the 2 cyclotrons in Gauteng and will expand a PET-CT network in South Africa in due course. Internationally, there's a small CapEx requirement for manufacturing kits for Neuraceq at the cyclotron manufacturers themselves. And we will seek additional approvals in other markets to be able to market Neuraceq as well as invest in the pipeline investments already in play in Life Molecular with a stage-gated manner for a new isotope under Stage III FDA clinical trials to detect the presence of tower. Inorganic growth opportunities come along the lines of the Fresenius Medical Care acquisition in the renal dialysis space. And we've also targeted a hospital property, which we currently lease and is important to us that we feel that we own along with our ownership strategy for the rest of the property portfolio. We have said on all our calls that we are unlikely to pursue any international M&A transactions. From a maintenance CapEx perspective, in Southern Africa, it's important that we both grow and sustain our existing business, and our embedded footprint requires money to be spent in order to secure the organic volume growth and drive optimal occupancy levels. When that is all said and done, the excess cash is promised to be returned to shareholders by way of ordinary dividends, which we've already announced special dividends and share buybacks, which we've already telegraphed as a result of the cash coming from the AMG transaction. From an outlook perspective, we are confident that we'll see increased occupancies through our hospital networks as a result of the network deals that we've concluded and the active doctor recruitment, which we are always engaged in. We're targeting a PPD growth of around 3%. We will be focused to maintain our EBITDA margin and focus on cost reduction activities where appropriate. We, in Life Molecular, the main emphasis here is to drive the commercial sales of Neuraceq, and we'll continue to invest appropriately in the required sales and marketing teams as we expand in the United States and later on in Europe. In conclusion, from a group perspective, we have to make sure that we deliver the AMG disposal according to the time lines promised. And we will also make sure that the cost base is optimized thereafter as a result of such a sale. We have also promised to distribute the net proceeds to shareholders. And thereafter, we will review the dividend policy for the company going forward. Thank you very much for your attention, and apologies for the challenges we faced earlier in the day to deliver this presentation to you.