Netcare Limited (NTC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, a very warm welcome to Netcare Limited's group results presentation for the year ended the 31st of March 2021. A warm welcome to the Chair of Netcare, Thevendrie Brewer, members of the Netcare Board, our Executive Committee and our senior management teams. It's been another challenging period, particularly having to deal with the second wave of COVID-19. And I want to, once again, pause to acknowledge thank and pay tribute to the extraordinary work done by our management teams and staff and everyone of our health care workers, including our nurses, doctors, paramedics, pharmacists, allied health professionals, support staff, IT, technical teams and administration teams, all on the front line for their truly remarkable efforts in caring for and treating out patients during this pandemic. Our presentation today is, once again, dedicated to all health care workers across South Africa and the public and private sector who have risk their lives in the fight against COVID-19, and especially to those who lost their lives in doing so. I also want to thank our Chair and the Board of Directors for their ongoing support and guidance provided through this difficult period. This is very much appreciated. As we now brace ourselves for a probable third wave, we recognize also the enormous and ongoing loss of lives in South Africa and globally from the pandemic, and the profound pain it continues to inflict. Our thoughts and prayers remain with all of those who have lost their loved ones. Turning to today's presentation, I will begin with an overview of our group's performance and the operational performance of our various divisions as well as the impact of COVID-19 before handing over to our Chief Financial Officer, Keith Gibson, who will unpack our financial results in more detail. We will conclude the presentation with a review of key focus areas for the remainder of the financial year and present our guidance for the rest of the year. Turning to an overview of our performance over the year so far. The past 6 months have been impacted by the emergence of a more contagious variant of COVID-19, which resulted in a second wave of infections. Despite having to admit a higher volume of pandemic patients, we were able to allocate our beds more efficiently given our experiences and lessons learned from the first wave. We're delighted that we've now managed to vaccinate over 30,000 of our health care workers, and we'll complete this -- complete the remainder over the next 2 weeks. Fortunately, despite the challenging macroeconomic environment, medical aid membership has remained resilient over this period. And notwithstanding significant delays due to COVID-19, our key strategic projects are once again back on track. A key feature of our results is that both operationally and financially, we were able to deliver a much improved performance in this period versus the last 6-month period. And finally, given the strong focus on sustainability, we are excited to have successfully raised, together with Standard Bank, the first green bond in Africa. Looking broadly at our financial performance over the past 6 months. You'll observe across all of our key financial metrics a consistent theme of a strong sequential improvement in our performance as compared to the second half of last year. This slide also demonstrates that, in spite of this, we have yet to fully recover to our pre-COVID-19 position. Revenue of ZAR 10.1 billion was 24% ahead of H2 2020, but 5.9% lower than the comparative pre-COVID-19 period. Similarly, EBITDA at ZAR 1.5 billion was substantially ahead of H2 2020, with 36.7% below the comparative pre-COVID-19 period. As a result, adjusted headline earnings per share declined by 61.9% to ZAR 0.273 as compared to H1 2020, but improved significantly as compared to H2 2020. Pleasingly, our net debt-to-EBITDA ratio has improved to 2x versus a ratio of 2.5x 6 months prior, but it's still higher than the 1.3x achieved in our pre-COVID-19 comparative period. We have ZAR 6.6 billion of cash committed -- cash and committed facilities available to the group as of the end of March 2021. And finally, taking the current fluid situation into account, no dividend has been declared by the Board. Let's take a more detailed look at our operations. Looking at our key activity drivers in more detail, we have presented these to again demonstrate the half-on-half sequential improvement versus H2 2020, in addition to the comparison to the pre-COVID-19 comparative period of H1 2020. Total patient days, including acute hospital and mental health patient days and primary care visits, improved significantly as compared to the previous 6 months, but are still to recover to the pre-COVID-19 levels seen in H1 2020. The same pattern is again reflected in our acute hospital occupancies, as can be seen on the right-hand side of this table. Let's look at hospital emergency services now in more detail. Again, an excellent sequential improvement in the performance, but still lagging our pre-COVID-19 comparative period. Revenue declined by 5.6% to ZAR 9.8 billion as compared to H1 2020, with EBITDA declining by 37% to ZAR 1.4 billion and operating profit by 48.7% to ZAR 900 million. The much improved sequential 6-month on 6-month performance is demonstrated here on the right-hand side of the slide. An EBITDA margin of 14.7% was achieved, again, lower than the 22% achieved in the comparative period. However, if one strips out the additional COVID-19-related costs of ZAR 316 million and strategic investments of ZAR 96 million, the margin improves to 18.9%. The revenue differentials between acute hospitals and mental health are demonstrated in this lower right-hand block. Turning now to look at acute hospital patient days. This is a graphic representation of our patient days in acute hospitals over the past 18 months. The vertical columns indicate the timing of the various national lockdown levels. The gray line represents normal non-COVID-19 patient days and the blue line, COVID-19 patient days. The impact of COVID-19 and the various lockdowns, and in particular level 5 and 4, initially on normal patient days and activity is clearly demonstrated here. So too is the timing and the relative size of the 2 COVID-19 waves. As you will have seen in our previous slides, this graphically demonstrates that while our patient days continue to improve as seen on the right-hand side of this graph, they have yet to recover to the pre-pandemic levels as shown on the left-hand side. Looking now at the impact of the pandemic over the past 12 months and the 2 financial reporting periods in particular compared to the exact period prior to this, this graph demonstrates the total patient day trend as a percentage of the prior non-pandemic period. These percentages are shown above the individual monthly patient day columns. For example, in March 2021, as you can see on the right-hand side of the screen, we achieved 90% of the patient day seen in March 2020. In December, for example, we achieved 104% of the prior year. Turning our attention now to Primary Care's financial performance. This same picture as hospital emergency services is mirrored here. Revenue, EBITDA and operating profit performance are all lower than the pre-pandemic comparative period, but substantially up on the past 6 months. Revenue was impacted by both lower patient visits and lower occupational health contract revenue during COVID-19. Pleasingly, we continue to see a very strong recovery in both activity and EBITDA due to stringent cost management, and we expect this to continue. Keith will detail the financial impact of COVID-19 pandemic on our financial performance, and I will focus here purely on the operational aspects. In total, we have treated more than 73,000 people for COVID-19. Of these, 44% or just over 32,000 patients required admission to hospital. Seeing in perspective, this is an extraordinarily high ratio of patients requiring hospitalization and really speaks to the virulence of this virus. 26% of these patients admitted were severely ill and require treatment in either high care or ICU, again, underscoring just how virulent the virus is. In terms of the second wave specifically, at the peak of the second wave, we had almost 3,400 COVID-positive patients in our hospital. The second wave was more contagious. And as a result, we experienced a 39% increase in admissions during the past 6 months, which roughly corresponded to the second wave versus the 6 months preceding that, which, again, approximates the first wave. Despite the significant increase in cases during the second wave, we only allocated 60% of our total beds to COVID-19 patients at the peak of the second wave versus approximately 80% in the first wave. This was off the back of our experiences and lessons learned from the first wave and the availability of quick COVID-19 screening tests in the form of the rapid antigen test. Unfortunately, as a consequence of the second wave, we were forced to suspend elective surgery in December 2020, only allowing for medically necessary and time-sensitive surgery. We resumed elective surgery in February of 2021. And tragically, 76 of our frontline heroes paid the highest price and sacrificed their lives in the battle against COVID-19. We continue to hold each one of them in our hearts. During the COVID pandemic, we divided our hospital into three zones: a green zone for COVID-19-free patients, a red zone for patients with COVID-19 and a yellow zone for so-called PUIs or patients undergoing investigation for COVID-19. This graph demonstrates the percentage of beds dedicated to each zone and the difference between the 2 waves of COVID-19. As already mentioned earlier, during the first wave, we had 80% of our beds dedicated to COVID-19 patients and PUIs. Despite a 39% increase in admissions during the second wave, we were able to more efficiently manage our bed capacity, such that we only had 60% of our capacity, as demonstrated here on the right-hand side of the slide dedicated to COVID-19 patients. In part, this is also due to having access to rapid screening or antigen tests for COVID-19. And this allowed us to safely reduce the number of dedicated yellow beds. Over the past year, one of our most important priorities has been to ensure we do everything possible and leave no stone unturned to protect our frontline workers. We're, therefore, delighted that over 30,000 of Netcare's frontline staff, doctors, allied health care professionals, paramedics and contracted staff have been vaccinated. We hope to complete the bulk of our administration in contract workers over the next 2 weeks. As we all know, vaccinating our health care workers in the broader population and importantly achieving herd immunity remains the most critical initiative to combat this pandemic and bring it under control. To this end, Netcare played an active role in partnering the Sisonke J&J vaccine program. Across our 4 hospital vaccination sites alone, we've vaccinated more than 65,000 health care workers during Phase Ia. We also provided vaccinators, administrators and site managers for several other sites throughout the country. As we enter Phase II of the vaccination program for the broader public, we will again make certain of our hospital sites available as well as open sites at 30 Medicross family medical and dental centers. Our occupational health division is also actively engaged in organizing vaccine programs for many of its clients. On the 21st of January this year, during the peak of the second wave, tragedy struck. Netcare 1 -- Netcare 911's emergency rescue helicopter was on route to KwaZulu-Natal on a mercy mission to put a critically ill COVID-19 patient on ECMO or heart-lung bypass and then transfer him back to Netcare Milpark Hospital. Tragically, the helicopter suffered a catastrophic malfunction. The ECMO team from Netcare Milpark, Netcare 911 paramedic and the pilot perished in the crash. This picture on the screen of the crash sites and the 5 crosses that we erected bears a poignant testimony to our fallen heroes who died fulfilling the highest calling in the service of others. I'll now hand over to Keith to take us through the financials.

Thank you, Richard, and good morning, ladies and gentlemen. Following on from the overview of our operational performance, let's now turn our attention to the group's financial results for the 6 months ended 31 March 2021. Netcare's financial performance for the first half of the 2021 financial year was negatively affected by the continued presence of COVID-19 throughout the 6-month period and, in particular, by the impacts of the severe second wave, which hit the country in December 2020. While we've not yet recovered to pre-pandemic activity levels, the group has delivered a steadily improving performance over the past 6 months, and this is reflected in strong growth when measured against the preceding 6-month period from April to September 2020. Netcare's statement to financial position remains strong and debt levels are manageable due to the implementation of cash preservation measures, and this has allowed us to continue investing in key capital projects that will deliver our strategic objectives for the business. And at the half year-end, Netcare's debt was lower than the levels reported at both September and March 2020, and cash on hand and committed undrawn banking facilities of ZAR 6.6 billion were available to the group. As has already been highlighted, COVID-19 had a significant impact on Netcare's financial performance. And it's difficult, if not impossible, to definitively quantify COVID's full financial impact on the business. And to do so requires certain estimations and assumptions to be made in order to paint a picture of what might have been if COVID-19 never happened. And the longer the pandemic endures, the more challenging it becomes to reliably measure its effects. However, we have broadly estimated that the negative impact on EBITDA was in the order of about ZAR 700 million from the loss of regular activity within our facilities. The cost of keeping patients, nurses, doctors, contractors and staff members safe during the pandemic amounted to approximately ZAR 316 million, and this is mostly spent on personal protective equipment, screening, training and sanitizing. In addition to these extra costs, our income also reduced by ZAR 23 million in the form of lower rentals received from doctors' rooms, imaging and diagnostics, coffee shops and retail pharmacies. And of course, less patients and restrictions on visitors also led to reduced parking income. We invested ZAR 29 million in additional COVID-19-related CapEx, mostly directed towards upgrading our on-site oxygen infrastructure and bulk storage capacity as well as telemetry management systems for measuring oxygen consumption. In the earlier review of our key activity drivers, Richard mentioned the strong sequential improvements in H1 2021 when compared to the previous 6-month period ended September 2020, but activity and occupancy still lag our pre-pandemic levels. And the graphs on this slide reveal how this translates into rands at a revenue, EBITDA and operating profit level. And you can clearly see the strong bounce back in the past 6 months: revenue increasing by 24%, EBITDA by 654% and operating profit by 332%. But the recovery still falls short of where we were before COVID-19 emerged. And the fourth graph sets out the group's net debt levels, which are lower than March 2020 when the pandemic began and have decreased by ZAR 351 million since September 2020. Turning to the group statement of profit or loss for the 6 months ended 31 March 2021. And I'll remind you that the traditional comparative period being the 6 months to 31 March 2020, was largely free of the impacts of COVID-19, and therefore has some shortcomings as a like-for-like comparator. And we've, therefore, also included the 6-month period ended September 2020 as a further comparator. However, as can be seen by looking down the percentage variance columns, the reality is that H1 2021 falls in between both comparators, in all cases, reflecting a sharp decline when measured against H1 of 2020, but showing a strong recovery when compared to H2 of 2020. Revenue for the half amounted to ZAR 10.1 billion compared to ZAR 10.7 billion in the prior period, representing a decrease of 5.9%. However, we experienced a 24% growth against H2 2020. EBITDA for the half amounted to ZAR 1.5 billion and declined by 36.7% from ZAR 2.4 billion in H1 2020. However, this result is an improvement of 654% from the preceding 6 months results. Included in EBITDA for the current period are care on costs of ZAR 22 million, data enablement costs of ZAR 10 million and new business development costs of ZAR 64 million. The group EBITDA margin dropped by 720 basis points from 22% to 14.8%, and this is primarily due to the negative impact of COVID-19. Operating profit decreased by 48.8% to ZAR 915 million, recovering well from the operating loss incurred in H2 of 2020. Other net financial expenses of ZAR 206 million, excluding the IFRS 16 interest on lease liabilities, decreased significantly against the ZAR 281 million charge in H2 2020. And it also improved against the ZAR 241 million cost in H1 2020, reflecting the benefit of lower average cost of debt. The IFRS 16 charge attributable to lease liabilities of ZAR 186 million remained constant across both comparative periods. Profit before tax reduced by 60.9% to ZAR 542 million. And the group's tax charge amounted to ZAR 167 million at an effective rate of 30.8%. And therefore, profit after tax for the first half of 2021 amounted to ZAR 375 million, which is well down on the usual levels of profitability, but significantly improved from the loss of ZAR 670 million in the preceding 6-month period. There are no exceptional items in the current period, but you will recall that the prior periods contained 2 fairly large exceptional items being a one-off noncash share-based payment expense of ZAR 348 million arising on our BEE transaction in H1 2020 and the ZAR 474 million after-tax profit arising from the disposal of our investment in GHG PropCo 2 following the sale of their U.K. properties in H2 2020. Next, we move on to headline earnings per share. And as usual, we've presented the HEPS metric in terms of the regulatory requirements. And we also present an adjusted HEPS figure in which we strip out exceptional and unsustainable items, noting that this is the primary measure used by management to assess performance. In the current period, there's not much difference between the HEPS figure of ZAR 0.266 and the adjusted HEPS metric of ZAR 0.273. The primary reason for the difference between the 2 metrics in H1 of 2020 is the exclusion from adjusted HEPS of the once-off noncash share-based payment expense of ZAR 348 million or equating to ZAR 0.26 arising on our BEE transaction. And looking at the graph at the bottom of the page, you can see that the severe impact of COVID-19 is evident in the decline of ZAR 1.109 in H2 of 2020 from the pre-COVID H1 2020 period. But notwithstanding the impact of a more severe second wave of COVID-19 experienced in H1 2021, our ability to better manage the impact is reflected in the ZAR 0.665 recovery in adjusted HEPS. Moving on to the group statement of financial position. We see that total assets at 31 March 2021 amounted to ZAR 27 billion, increasing from ZAR 25.9 billion at September 2020. The majority of the increase arises from higher cash and cash equivalents of ZAR 2.4 billion at March 2021 versus ZAR 1.5 billion at September 2020, and this is due to the inclusion of the ZAR 1 billion of proceeds received in March 2021 from the issue of South Africa's and Africa's first green bond, and I'll talk further on this shortly. CapEx spent during the period amounted to ZAR 473 million, of which ZAR 201 million relates to expansionary projects and the balance of ZAR 272 million relates to replacement CapEx. Working capital has been well managed. We are carrying higher levels of inventory at the period-end as a result of the procurement of additional PPE inventory reserves during the preceding period when there was a scarcity of global supply and long lead times. Inventory levels have reduced by ZAR 282 million in September 2020, and we expect to further wind down our holdings by the financial year-end. Total shareholders' equity increased from ZAR 9.8 billion to ZAR 10.2 billion, largely due to an improved operating performance in H1 2021 compared to H2 2020. Next, we'll take a more in-depth look at our debt position. Gross debt amounted to ZAR 8.5 billion at 31 March 2021, and this is offset by cash balances of ZAR 2.4 billion. Therefore, net debt totaled just under ZAR 6.1 billion at the half year, decreasing by ZAR 351 million in September 2020, reflecting solid cash generation and the benefits of our cash preservation measures. Eliminating the impacts of seasonality, you can see that net debt levels have decreased by ZAR 159 million from March 2020. The stronger performance in H1 2021 is reflected in the net debt to annualized EBITDA metric, which strengthened to 2.0x coverage at 31 March 2021 from 2.5x at September 2020. And just noting that this metric is calculated on annualized EBITDA measured after the adoption of IFRS 16. In September 2020, Netcare secured waivers of its banking covenants for the March 2021 period. These were necessary because the primary banking covenant metric requires the net debt-to-EBITDA ratio be below 2.75x, where EBITDA is measured excluding the impacts of IFRS 16 on a 12-month backward-looking basis. And for the March 2021 test EBITDA for the entire 12-month period was materially affected by the pandemic. The cost of debt has decreased by 180 basis points from 7.9% at March 2020 to 6.1% at March 2021 as a result of reductions in borrowing rates during the year. Currently, approximately 44% of the group's debt is at fixed interest rates, which is achieved with the aid of interest rate swaps. Net interest paid on debt decreased to ZAR 209 million in the current period from ZAR 240 million in H1 2020, reflecting the benefit of lower rates. We then include the interest charge on lease liabilities introduced by IFRS 16, which is consistent at ZAR 186 million, to arrive at a total net interest expense of ZAR 395 million against ZAR 425 million in the prior period. Interest cover has dropped from 2.3x to 4.2x as a result of our lower trading performance due to COVID-19. We're pleased to have retained our GCR long-term credit rating of AA- and A1+ for short-term debt. And finally, in March 2021, Netcare raised ZAR 1 billion through the issue of Africa's first green or sustainability-linked bond. And this instrument, which features a downward-only interest rate adjustment for the achievement of predetermined targets focused on reducing greenhouse gas emissions, is a practical example of how our well-entrenched sustainability program is able to deliver financial value to the business over and above the inherent environmental and societal benefits. Moving on to our debt facilities. And given the pressures introduced by the COVID-19 pandemic that need to ensure liquidity, I'm going to focus on committed banking facilities. At the half year-end, Netcare had cash balances of ZAR 2.4 billion on hand as well as committed but undrawn debt facilities of ZAR 4.2 billion at its disposal. And we, therefore, have access to resources of ZAR 6.6 billion in the aggregate from which to fund our future needs. We are maintaining a prudent approach to liquidity management by continuing with a number of cash preservation initiatives, which include the tight control of costs, managing our CapEx spend in terms of our asset-light strategy and the decision not to pay an interim dividend. Our debt maturity profile reflects manageable maturities of only ZAR 715 million in H2 of 2021, and we are in the process of arranging a combination of debt refinancing and extensions for certain of the FY 2022 maturities. So the business is, therefore, well placed to withstand the uncertainty of the months ahead. Turning to major CapEx plan for the remainder of FY 2021, we've been deliberate in curtailing CapEx to high growth areas and continued development of our IT platform. And this slide sets out certain key projects that will receive CapEx investment in FY 2021. Our largest project at ZAR 400 million is the ongoing construction of our new Alberton Hospital. This 427 bed facility is a replacement of our current Netcare Union and Netcare Clinton Hospitals and is scheduled for opening in April 2022. The new Akeso Richards Bay facility with 36 beds is due for completion by September 2021 and will utilize ZAR 30 million of Capex. Akeso is also developing a new 72-bed facility in the Eastern Cape, on which we will spend ZAR 40 million in fiscal year 2021, and this facility is scheduled to open in September of 2022. Then we'll progress our IT-focused strategy with a further ZAR 30 million earmarked for the CareOn digitization project and ZAR 70 million allocated to a full upgrade of our in-hospital WiFi and firewalls. And finally, I'd just like to extend my thanks and gratitude to our finance staff across the group for their efforts in preparing the results and the related materials. And I'm now going to hand back to Richard, who will take us through what lies ahead for Netcare in the remainder of the 2021 financial year and beyond.

Thank you, Keith. Now let's review our key focus areas for the remainder of the financial year. A quick recap of our strategy. The fundamental aim of our strategy is to create a competitive, sustainable advantage for Netcare. Our strategy builds on the 3 global health care mega trends of customer centricity, digitization and data, and combines and leverages these off our unique and evolving ecosystem of assets and system and services. This allows us to ultimately provide person-centered health and care that is digitally enabled and data-driven across our ecosystem. Our digitization drive and enhancing our data analytic capabilities remain a critical element of our strategy, and I'm going to take you through the next few slides to provide an update of where we are on this journey. As we've mentioned before, the COVID-19 pandemic has confirmed the relevance of our strategy. Fortunately, our programs are now back on track and remain within budget after extensive delays due to both the first and second waves. The capital costs for the entire program across Netcare over 10 years will amount to ZAR 650 million. We have spent ZAR 150 million to date with the bulk of the remaining expenditure to be spent over the next 2 years, and we continue to ensure absolute compliance to POPIA as well as maintaining a significant focus on cyber security. In terms of the rollout of Netcare's electronic medical records, in terms of the hospital digitization program, CareOn, we completed the rollout to 3 Western Cape hospitals this month. Netcare Milpark and rehabilitation hospitals in Gauteng will be completed in September 2021. And a further 3 hospitals will be started in October of this year, and 9 hospitals are currently undergoing infrastructure preparations. We successfully commenced the pilot for Akeso's electronic health record in April of this year and expect to complete the full rollout by September 2022. And finally, National Renal Care will complete its rollout by March 2022. In November last year, we introduced Netcare's innovative health care solutions business, which now operates under the NetcarePlus brand. This is a newly established division, which has been set up to create new and affordable ways to access private health care, particularly for those that are employed but uninsured. NetcarePlus' products are designed with really 4 key principles in mind. Firstly, ensuring access to the full Netcare ecosystem and an expanded network of trusted providers. Secondly, ensuring an integrated and seamless health care journey for our patients from sourcing, funding and receiving the best care. Thirdly, making the purchase of health care products incredibly simple, easy and quick with a strong focus on digital enablement. And finally, ensuring the products give certainty a price with no additional or hidden costs. NetcarePlus is now developed and made available 3 different types of health care products. The first products are aimed at making primary care accessible and affordable. These GP prepaid vouchers are available either as virtual consultations via telemedicine, face-to-face consultations and prepaid vouchers that include acute medication as well. The second type of product or voucher is the prepaid voucher -- prepaid procedures, such as cataract surgery, for example. And this includes all costs for the procedure with no additional expenses. The third product that has just been launched in the past month in conjunction with Hollard is aimed at providing comprehensive medical care for accidents and trauma. This product offers unlimited hospital treatments in Netcare and our network of hospitals, emergency, medical transport by Netcare 911, a family care benefit with a daily lump sum payment, 24-hour trauma counseling as well as, where relevant, assistance with claims from the road accident fund. Despite COVID-19, we've continued with our strategic imperative to transform both our company and contribute to transforming our society. An example of this is our involvement in the Youth Employment Scheme, or YES program. This is a two-pronged approach to tackle the endemic crisis of youth unemployment in our country. Firstly, by training and equipping our youth with the skills required to enter the labor market. And secondly, by creating spaces and opportunity for entrepreneurs to develop and grow their businesses. To this end, we've enrolled over 1,000 youth in various learning programs at Netcare. And of the 329 who have completed their programs, we found permanent employment for over 95% of them, mostly at Netcare. We've recently opened an Innovation Hub in Alexander and facilitated 3 new businesses, employing 38 youths. These businesses include a cut, make and trim factory, a culinary school and restaurant and a 3D printing lab. It also serves as a registration center for youth seeking work, and over 3,300 youths have enrolled in the program. Finally, let's focus on our guidance for the remainder of the financial year. It is clear to us that any potential return to a so-called new normal will be dependent very much on 3 critical factors: the emergence of a third wave; the vaccine rollout; and finally, the state of our economy. The emergence of a third wave, and indeed, any further waves is the single-most important factor. This is obviously something we are watching very carefully given the growing probability, and the advent of winter, the exact timing and more importantly, the severity linked to possible new or imported variants into South Africa as well as its geographic distribution remain the key determinants of a the potential impact on our business. The ability to achieve momentum and successfully scale the vaccination program remains the single-most important national initiative to return South Africa incorporated to any semblance of a new normal. Without herd immunity, the ongoing threat of infections could potentially paralyze South Africa and prevent a sustainable recovery. Even if this is achieved, the emergence of new variants remain a global challenge. And finally, the state of our economy and its ability to withstand further shocks in terms of the potential reintroduction of lockdown restrictions and its impacts on unemployment remain a significant concern. The subsequent impact on medical scheme membership remains an important barometer for us in terms of the health of the economy. We have seen occupancy steadily increase into May of this year, and this trend would be expected to continue, obviously dependent on the severity of a third wave. Importantly, vaccination of all of our frontline workers due for completion in the next 2 weeks will definitely contribute to a safer operating environment and improved patient sentiment and confidence. We continue to refine our approach to managing COVID-19 in order to minimize the disruption from a potential third wave. We will still incur COVID-19-related costs for the remainder of the year and into financial year 2022, but these are expected to be at lower levels than have occurred -- incurred to date. Margins are expected to continue to improve off a low base and capital expenditure of ZAR 1.2 billion remains in line with our original guidance. And finally, we would expect to resume dividend payments once the operating environment has stabilized or normalized. Ladies and gentlemen, that concludes the formal presentation for today, and we are happy to take any questions. Thank you.

Much of an impact has the coronavirus and lockdown measures had on slowing down trauma incidents, such as accidents, et cetera. And has this had a material impact on revenue?

Jacques, would you like to answer it?

We certainly have seen that the number of outpatient visits has dropped down by about 30%. In the height of the first wave, it was as much as 50%. But what we have seen is that our conversion rate, in other words, those patients arriving at the ED department that needs hospitalization, has actually increased from about 16% to 19%. So yes, there is an impact, but certainly the impact has lessened over the current period.

Thank you, Sharka. Next question comes from [ Flo ] at Investec. Can you please give us a sense of how sticky additional COVID costs are? Also, what percent of that negative ZAR 700 million EBITDA impact can be shared over the short to medium term?

Thanks, [ Marcel ]. I'll answer that. [ Flo ], thanks for the question. If I just go back to Slide 17 where I set out the impacts, I think there's really 2 legs to your question. The ZAR 700 million impact arises from the loss of normal activity. So moving into a post-COVID world, we would assume that activity would return to where it was, and therefore, that we would expect all of that to bounce back. I think the crepes of the question relates to the additional COVID-related costs of ZAR 316 million. And just to step you through that, broadly speaking, about 80% of that is PPE costs. The other 20%, we would expect not to continue in a post-COVID world. The PPE costs themselves are a function of utilization and pricing. Obviously, as I mentioned, the pricing of PPE is at quite elevated levels at the moment because of the circumstances in which they were bought in. And in a post-COVID world, it's very difficult to give you an exact answer. But just as a rough rule of thumb, we would probably expect about 1/3 of that 80% to remain.

Thank you, Keith. We have no further questions. Should we pause for a minute to see if anything has come through? And we have a question from [ Homotso ]. Do you still believe there's a reasonable level of elective procedures that need to be caught up? If so, have you been able to quantify the value of this pent-up demand?

It's very difficult to quantify that pent-up demand. What I can say is that, in normal circumstances, our pure elective percentage of admissions is roughly 28%. Now as you could see in those troughs and peak slides that Richard spoke about, when you have a height of the COVID surge, your electives can drop down as much as 12%. And it takes quite a number of days or months for it to recover. And an example, in the month of December, for example, the -- or January at least, the elective surgeries reduced to 12%. And in the month of March, it recovered to 31%. So it's still not up to our normal levels of 28%. So there is a recovery, but one would expect that you would see more recoveries in the months to come and as we move to a community -- herd immunity.

Thank, Jacques. We have a question from [ Nick Kricker ]. I'm trying to determine the replacement cost of Netcare's beds. Using the numbers from the new Alberton Hospital, it seems that CapEx per bed is ZAR 1.4 million. Is this a fair proximation of building a new bed? Secondly, what EBITDA do you plan to generate from the Alberton Hospital once it's mature? And thirdly, how long will the hospital take in order to mature?

I'm making a forecast of Alberton.

Good morning, everyone. It's Melanie Da Costa here. So we did a significant amount of work on this for the health care market inquiry, and I think that there's -- all those papers were actually published. This is an FTI piece of research that covered the replacement cost of beds. You will also note that there are standardized models as to what a new hospital should look like based on the regulations published by the CSIR. And in the basis of the research that was led there, I don't think that Alberton is a fair comparator for various reasons, which we can get into in the one-on-ones. But it would probably be fair to state that, that replacement cost could comfortably be in excess of the ZAR 3 million per bed, if not ZAR 3.5 million. Marcel, sorry, what was the second question?

How much EBITDA do we expect to generate?

I'll pass over to Jacques.

The Alberton Hospital is actually not a new hospital, but it is a combination of the current Union Hospital and Clinton Hospital, plus the transfer of 35 underutilized beds from Mulbarton close by, creating a 427-bed hospital that will give us better returns than the current ones and plan to be opened at -- in April 2022.

Thank you, Jacques. We have some questions from Anuja, and I think most of these have been answered. So I'm just going to go to the ones that I think are outstanding. Could you please give some color on the impact of Netcare's participation in new hospital networks like Polmed in the current financial year? Do you expect any additional volumes due to this in the second half?

Thank you. So there were quite a few networks in which we had increased participation, but I think the most significant is Polmed. So you will note that both Bonitas and the Polmed network are basically open to all providers. They had issued a limited network from 2019. They have not taken that through to their full contract period and have effectively opened for all participants, including Netcare as a function of that. We've already seen positive patient days, and so we certainly experienced that over the last 3 months. Our thought is that we could certainly recover 50% to 70% of the volumes lost. I think we have guided the market in the past about 20,000 patient days annualized on that basis. That was the most significant of the DSPs. Thank you.

We have a number of questions on electives, which I think have mostly been answered. Just a follow-up from [ Anthony Cedric from Apax ]. There is speculation that regarding elective procedures that have been delayed since the start of cohort, do you think this is the case? And if so, why are we not seeing it through faster recovery in occupancies to catch up?

As indicated earlier, it is very difficult to determine what exactly is that pent-up demand. There certainly is still a concern of the general public. And a lot of procedures we're hearing from doctors are postponed until hopefully we can get that herd immunity and vaccinations can actually really start taking off. There is a recovery, as I mentioned earlier on. Normally, our elective -- pure elective rate is 28% of total admissions, and we have seen months where it moves up to as much as 32%. The last 7 days, for example, in May, I'm happy to say that our occupancy levels is now just over 60%.

I think that concludes the questions. We haven't any further questions on the line. I hand back to Richard for some concluding comments.

Thank you very much for your attendance today, ladies and gentlemen, and we remain available to take any further questions or queries that you may have in the coming days and weeks. Thank you so much.