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 for the Six Months Ended 31 March 2025 and the Cash Dividend Declaration. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the conference over to CEO, Mr. Peter Wharton-Hood. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to our results presentation. I'm joined in Johannesburg with my 2 colleagues, Pieter van der Westhuizen and Adam Pyle, and we'll jump straight into the review of the 6-month performance. I think in the highlight sense, we could move straight to the PPD growth, which we feel we predicted and proud to report, was up 2% during the period under review. Occupancy is on track to get to the 70% that we're also targeting. Overall revenue growth of 8.1% during what was quite a difficult period. Our Hospitals EBITDA up 10.2%. Normalized earnings per share, which Pieter will go through a little bit later on, because it's important to understand how we got to that, up 9.1%. And an interim dividend, continuing our positive return of cash to shareholders, up 10.5% and ZAR 0.21 per share. If one looks at the progress that we made during the first half of 2025. We gave some undertakings at the end of the last financial year. We've added 20 ICU beds, another 62 beds expected in the second half. The Life Paarl Valley Hospital will be under construction in the second half of this year, and we completed a further imaging transaction. In the Drive category, the PPD growth of 2% is on -- is a result of, I think, 3 years of efforts in rearranging our business and our relationships with funders and doctors to get to more activity in our hospitals and the resultant increase in occupancy to 68.6%, we think, is on track to hit the optimal 70%. From the optimization perspective, we know that in the context of how our business is starting to be presented, it is far simpler. And in the context of extracting further value, we will have to look at those underperforming assets which are on the radar chart and are under review. We'll get better at controlling our overheads. We have some efficiency initiatives underway, particularly in the head office. The acquisition of the renal dialysis units is in progress. And we've got further 2 value-based care products in the pipeline. From a strategy perspective, I think that we will now start repeating this in our engagements with shareholders. We know that -- and we want to hold ourselves out to be with an unchanged strategy for some time. We think we are in the growth phase. We will grow our footprint in strategic locations, greenfield, like the Life Paarl Valley Hospital. Excitingly, there are a number of brownfield expansion opportunities to our existing facilities. And in an earlier call this morning, the reason why we are in favor of these brownfield expansion opportunities is we know that the moment we cut the red tape and open the facilities, they fill up very, very quickly within days, if not a couple of weeks. So there's clearly demand in certain areas, and we will definitely tap into them. The acquisition of new facilities, given our strong balance sheet, is always within our radar. And the expansion of the complementary lines of business, which we commenced about 5 years ago, will continue. In the Drive category, it's all around making sure that our facilities are increasingly utilized. The general practitioner channel is one of our most important referral channels to our key specialists and that will continue to be optimized. Our emergency unit channel continues to grow. Doctor recruitment and the retention of our key customers, being our doctors, is an incredibly important management initiative, which continues, and you'll see later on that we recruited a further 71 doctors during the 6 months. Funders and our network arrangements are very, very important. And of course, the value-based care and integrated care products are an important offering to our funders. In the optimization category, and this is not a road that lasts forever. We know that we have to optimize our assets that are underutilized or underperforming and there are a variety of initiatives in different shapes and forms underway to deliver that. And streamlining business operations with a largely simplified business that we've presented to you today, post all the corporate finance activity that's taken place over the last 3 years, it's now important to show that a streamlined business operates very, very effectively and reliably. Underpinning all of that will be the constant revisit of our mantra on capital allocation, justifying where the money gets spent, and of course, those -- the money that gets returned to shareholders. The capabilities that underpin all of the strategy remain unchanged. We see our footprint is a key strength. The strong balance sheet will keep repeating as to why we believe that, that puts us in a competitive position. The heart of the business is our compassionate people. And then the refinement of our strategy through the use of technology and data, the constant focus on clinical excellence and of course, our relationship with doctors rounds out a strategy which I think is now very clear and easy to understand, and the magic is in its execution. If one looks at the overall footprint that we've now -- that we will constantly be repeating the acute hospitals, emergency units and day facilities make up the core of our business, supplemented by our mental health, physical rehabilitation and renal dialysis businesses. Of course, the radiopharmaceutical headline there takes us into the imaging space, which has got a long runway and lots more to do, particularly in the nuclear medicine and the expansion of our imaging sites. And our oncology business has also commenced and got some traction, but also has a long way to go. Life Nkanyisa is in the spotlight. You'll notice that we have had some contractual challenges, but we also know how important that business is, both to Life Healthcare and society. So it remains very firmly in focus. And our Life Health Solutions business also needs to be optimized through the acquisition of more contracts with customers. From an operational perspective, we can see that the revenue by segment continues to improve. Our focus on Complementary Services has paid off, and the good revenue growth in the hospitals is certainly one that we are pleased to report. The occupancy improvement continues, the doctor recruitment emphasis continues and the improvement in operational margins is the result of years of work and is not yet finished. Our growth plans to selectively broaden the footprint, I have explained in our expansion ambitions, and the optimization of underlying portfolios assets continues with the recent disposal of Life St Mary’'s in Mthatha. The excellent working capital management underpins the essence of our organization so that our cash generation is a higher percentage of the EBITDA generated. And as we can see, it's regrettable that we lost some contracts in Life Nkanyisa, but we are firmly in play to recover some of that over the next 6 months. If one looks at the acute hospitals, the occupancy improvement is also as a result of years of work and the quarterly occupancy trend in the top right-hand part of the slide epitomizes exactly what we want to see happen. Our occupancy at 68.3% is not yet the 70%, but can recall that we are pretty close to the activity levels in the pre-COVID era, the era of 2019, which shows that our promise to sweat the assets continues to be delivered upon. ICU occupancy, realized it in our brownfield expansion opportunities, they're largely ICU beds. And you can see that level of occupancy easily justifies further expansion in that particular capacity across the hospitals. The PPD growth of 2% was slightly ahead of internal expectations and a positive trend that we're capitalizing upon. And the rest of the activity levels inside the hospital are in line with that growth. The revenue -- overall revenue growth of 7.9% was ahead of the tariff increases granted by the funders and reflects the improvement in activity levels in the hospitals with a normalized EBITDA improving ahead of the revenue growth. Year-to-date, April 2025, bearing in mind that the first 6 months was flattered by the move in the calendar and the public holidays, the PPD growth is at 1.2% and occupancy levels at 68.3%, which is completely understandable given that the shift in the Easter holidays moved into April during the course of 2025, but importantly, if you compare the occupancies to the prior year, we're now at 68.3% versus 66.9% for the first 7 months of this financial year. The Complementary Services scorecard records a healthy result. Be careful of looking at the big numbers in renal dialysis that's, of course, distorted by the acquisition. The like-for-like increase at 7.3%, a more realistic reflection of underlying volume growth. And the improvement in normalized EBITDA in the Complementary Services realm clearly shows that our ambition statement to grow them was correct and its health contribution to earnings, we think will continue. Again, not to underestimate the impact of the shift in the public holidays reflect on the year-to-date April 2025 growth, where PPD growth is at 2.4% and occupancy levels a healthy 71.8% compared to the prior year 70.4%. With that, I will hand you over to Pieter van der Westhuizen, who will start with the Life Molecular Imaging transaction review.

Good morning, ladies and gentlemen. In terms of LMI or Life Molecular Imaging, the transaction is now in the final stages of being closed out. We received shareholder approval in early April. And the key outstanding matter or closing condition is now the South African Reserve Bank approval. So we do expect this transaction to be closed out in our -- second half of our financial year. We've announced LMI transaction in January, with the initial upfront payment of $350 million and potential further milestone payments of up to $400 million. Unfortunately, from an accounting perspective, how the transaction will be spanning out, we will need to recognize the liabilities associated with the transaction, but we cannot recognize the profit on disposal until the transaction closes. On this slide, we demonstrate that we estimate a net profit on disposal of approximately ZAR 2.8 billion, but we have to recognize at this stage liabilities of ZAR 2.9 billion in the first half. And therefore, in the second half, we will have the profit coming through of estimate about ZAR 5.7 billion. Also, just to reconfirm, when the transaction closes and the cash flows, we do -- we will distribute a bulk of the proceeds back to shareholders again. In terms of the highlights of the financial results. Good revenue growth. It's been driven by good activity growth in Southern Africa as well as a reasonable tariff that we got from a medical aids from January. We expanded operational margins on a like-for-like basis across the board other than in health care services due to operational leverage in the hospital business, but also good cost management, strong cash generated from operations benefited from a good trading results, but also exceptional good working capital management in this half compared to last year. Return on capital employed is at this half 17.5%. On a like-for-like basis, last year -- improvement from last year, that was around 17%. We will declare a dividend up 10.5% interim dividend of [Technical Difficulty] and I'll come back to that slide just later. On the income statement, revenue up 8.1%. We have stripped out, on this slide, the pro forma adjustments related to the fair value adjustment for LMI that's included in the results, the ZAR 2.9 billion that I previously spoke to. Operating profit, up 7.5%. And then profit before tax, up 2.4%. Included in these results is an incentive charge. If you remember correctly, at the end of last year, we -- LMI did tremendous second half, driven by the RM2 transaction and that RM2 transaction had an impact on the incentives -- longer-term incentives and that then had a result of the first half not being comparable against last year. On a year-to-date basis, at the end of the financial year, it will normalize, and you will see that incentives will normalize against prior year. Total attributable profit on a like-for-like basis also last year, we had the disposal of AMG in the first half; therefore, the best way to look at it, on continuing operations, is up 3.4%. On a segmental basis, Hospitals business, up revenue 6.7%. But included in last year, we had the St. Mary's business that we disposed of in this half. On a like-for-like basis, revenues up 7.9%. Similar on the Complementary Services business line, the Fresenius acquisition is included on a like-for-like basis, that's up 8.2%. Pete spoke to the Healthcare Services where we've lost some contracts in Life Nkanyisa. Even though that they've lost the contract, they've been able to have good margins or slight margin improvement. The Healthcare Services margin has moved up from 13.5% to 14.1%. At the bottom right of the slide, I just -- we wanted to show you what's really happening in the corporate cost line and also the impact of the incentives. In last year, the incentive charge for the first half was ZAR 128 million and this year it's ZAR 182 million on a year-to-date basis. Head office costs in isolation only grew by 1.9%. And that includes IT costs that's mainly driven by foreign-denominated licensing fees of 10.1%. So we have been able to reduce the head office costs. Cash flow, extremely strong. Free cash flow, in this half ZAR 560 million compared to last year, where it was a slight loss, really driven by the improvement in the working capital, but also good trading activities. We have concluded an acquisition of a property in this half of ZAR 350 million. And our growth CapEx, that we're very excited about, will deliver in future additional returns. We spent ZAR 207 million. Also included in this half was a special dividend that we paid to shareholders in January or the RM2 transaction where we just paid north of ZAR 1 billion. From a net debt position, our total debt is ZAR 4 billion, including lease liabilities of ZAR 750 million. There is debt maturing in the next 2 months of ZAR 500 million part of our bond program, and we will refinance that bond. Balance sheet. Really strong balance sheet. Gearing at -- or net debt to EBITDA at 0.65 of a turn, and return on capital of 17.5%. Earnings per share. Normalized earnings per share, we think, is a fair reflection of how to look at this half trading compared to last year, growing at 9.1%. And then on that basis, the Board has decided to declare an interim dividend of ZAR 0.21, up 10.5%. I'm going to hand you now over to Pete to take you through the outlook.

Thank you, Pieter. From an outlook perspective, again, focusing on the respective 3 aspects of the strategy being grow, optimize -- grow, drive and optimize. In the growth category, we'll add a further 82 beds, start building the hospital and the brownfields expansions being cath lab at Kingsbury; vascular lab at Rosepark; 2 more imaging transactions, which we think will complete; and 2 new PET-CT sites, which will open, together with the commercial production of radioisotope out of the cyclotrons in the second half of the year. From a Drive perspective, we've spoken about how we intend to get our occupancies to the 70% level and we anticipate a PPD growth overall for the year in the region of 1.5%, just slightly down from the PPD growth recorded in the first 6 months. But as I explained earlier, that was caused, to some extent, by the distortion and move in the Easter holidays into the first -- into the second half of the year. From an optimization perspective, which is really the next level of responsibilities that executives have got to focus on given the simplification that has gone through the group, we now have to tighten up on those assets, which are not performing at the required levels of return. We will continue to focus on overheads. I think what we reported shows our intent to make sure that we keep the head office overheads under control, if not in a declining function. And there's still work to complete in integrating the FMC transaction and the Life Renal Dialysis units. We think that the renal dialysis integrated care product will also be completed by the end of the calendar year. With that, we conclude our presentation and happy to take questions. So I'll hand back to the operator.

[Operator Instructions]. At this stage, we have no questions coming from the lines, I will now hand over to Adam Pyle for written questions from the webcast.

Right. We're just busy looking at the questions that are coming in.

I think we can start with the first question coming from [ Warren Riley ]. Your disclosure shows that the FMC acquisition [Technical Difficulty].

Ladies and gentlemen, apologies. Please remain online. The main venue will be rejoining us shortly. [Operator Instructions].

[Technical Difficulty] from that business, and that has hurt some of our patient numbers. But in the context of how we see it going forward, we remain completely optimistic that we've made the correct acquisition. The footprint will be correctly bedded down and integrated into our existing dialysis businesses. And the outlook for us is positive. And the short-term small EBITDA loss that is recorded there is just a [Technical Difficulty].

Ladies and gentlemen, apologies, we seem to have technical difficulties from the venue. They are rejoining us shortly.

[Technical Difficulty] we have negotiated this part of the LMI transaction that these milestone payments flow will directly come through to Life Healthcare. There's also a question about the incentive charge. What is the estimation in terms of the incentive charge for the second half? The incentive charge will be at a similar charge that it has been for the first half. And you will see that the charge in the second half of last year has been at a similar charge that it's been for this half.

I think the balance of the questions that have come in refer back to the questions we've just answered now. In terms of the questions around Fresenius. So that really is the questions that we received so far.

We have no further questions on the feed.

Thank you. Confirming, we don't have any further questions from the webcast?

No.

Thank you. At this point, we have no questions on the telephone lines either. Gentlemen, I'd like to hand back for closing remarks.

Thank you very much for your questions. And of course, our Investor Relations team, Adam Pyle, and our CFO, Pieter van der Westhuizen, and his team are available to take more direct questions on a one-to-one basis during the course of the next meeting. Thank you very much for your attendance.

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.