Ramsay Health Care Limited (RHC) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our FY '22 half year results presentation webcast. My name is Craig McNally, and I'm the Managing Director and CEO of Ramsay Healthcare, and I'm joined by Martyn Roberts, our Group Chief Financial Officer. Today, we will provide an overview of our performance for the 6-month period and a brief update on our strategy, including the recently completed acquisition of Elysium Healthcare, before covering off on the outlook for the group. Moving to an overview of the 6-month period. As we highlighted in our November update, the COVID environment has continued to impact our activities with further waves of the virus resulting in government-mandated restrictions on capacity utilization and a material impact on the availability of our people, doctors and patients, driving significant disruption in our operating environment and higher costs. Importantly, underlying demand for health care services remains strong in all our regions. And when the operating environment permits, we've seen strong growth in demand. Ramsay's people and doctors have continued to assist governments in France, the Nordics, Malaysia, Indonesia and Australia in dealing with the pandemic through the treatment of COVID cases, the treatment of critical non-COVID patients and running activities such as vaccination and testing clinics. I'd like to take this opportunity to thank our teams for continuing to support our patients and the communities in which we operate, embodying Ramsay's purpose of People Caring for People. The management of employee availability in the short term due to fatigue, illness and isolation orders has had a significant impact on costs and activity levels over the period and is expected to be a key issue facing the business while COVID lingers in the community. The recruitment and retention of our people in the medium term are significant challenges facing us and the global health care industry more broadly. Ramsay is investing to attract, develop and retain industry-leading talent to support our growth and culture. The investment in brownfield and greenfield expansion and the upgrade of our facilities footprint has remained a key focus during the period with new facilities opened in Australia, the U.K. and Europe and the investment in a significant pipeline of developments continues. We have continued to build on our digital and data foundations with the aim of leveraging our existing business base and supporting entry into adjacent health services. Our recently appointed Global Chief Digital and Data Officer, Dr. Rachna Gandhi, is working with our teams to build out our global digital and data road map as well as leading the development of the strategy in Australia. As we recently announced, we successfully completed the acquisition of leading U.K.-based mental health care provider, Elysium Healthcare, a business that we believe will deliver opportunities for organic and inorganic growth in the U.K. as well as collaborating with our mental health care businesses in Australia and Europe, to ensure Ramsay continues to deliver leading patient outcomes in this critical area. Martyn will go through the balance sheet in more detail, but it remains strong, and we continue to have capacity to support further investment in our growth plans. Our Ramsay care strategy continues to develop and is focused on driving action through healthier people stronger communities and a thriving planet. Importantly, the business remains well positioned to benefit from the additional volume that has been created by the backlog of elective surgery and a building pipeline of nonsurgical cases. Moving to the group performance. The financial impact of COVID on Ramsay over the last 6-month period has been severe, primarily reflecting the significant increase in COVID cases in the community in all markets compared to prior periods. The increasing cases drove surgical capacity restrictions and movement and isolation orders which resulted in lower activity, skewed case mix and significantly higher costs. These impacts resulted in a decline in profit before tax of 23.8%. There were a number of nonrecurring items in this year and last year's results primarily around profit on the sale of assets and transaction costs. Stripping these items out, group profit before tax declined 1.3% over the previous period, a credible result given the stressful external environment the business has been operating under. The Board determined a fully franked dividend of $0.485 per share, which was flat on the prior period. Moving to the results in Australia. Our New South Wales and Victorian activities were the most severely impacted by surgical restrictions across the 6-month period, however, our hospitals in Queensland and Western Australia were not immune to the disruption, in particular the increased costs and decline in activity created by isolation orders on the availability of our people, doctors and patients. Case mix issues, higher personnel costs due to the impact of surgical restrictions and viability agreement requirements, as well as the impact of isolation orders and higher supply costs, including PPE, impacted margins over the period. The estimated impact of the disruption over the 6-month period on the Australian business was $107 million. Despite the difficult operating environment, the business continued to invest in its development pipeline and while some projects scheduled to commence in FY '22, have been delayed due to the impact of COVID on the building industry and external approval processes, the pipeline remains strong, and a number of large projects were successfully completed during the period. Turning to the outlook. Business activity has continued to be impacted in January and February by the reintroduction of surgical restrictions in New South Wales and Victoria, the allocation of capacity to the public hospital system in Queensland and the impact of isolation orders on activity levels and costs in all states. In January, total admissions per workday declined 11.5% on the prior period, and case mix remained unfavorable with private patient activity in New South Wales and Victoria restricted, it was replaced by public patient activity under state COVID arrangements with little or no margin, and overnight rehab and site patients have also been heavily impacted. The impact on our January results of the disruption is estimated to have been $48 million, reflecting the extreme severity of the impact in the month. We currently don't expect the extent of this impact to extend for the 6 months of the second half of FY '22 on the basis that surgical restrictions are being eased in all states, except Western Australia and Omicron covered case numbers appear to have peaked in January, which will reduce the costs resulting from disruptions relating to isolation orders. We expect the road out of the current environment will be volatile in the short term, and the financial impact in the second half of FY '22 is expected to once again be material. The total impact will depend on the duration of the current restrictions, which have eased in recent weeks and the profile of the pandemic in Australia moving forward. Over the medium term, we believe the business remains well placed to benefit from the strong underlying demand for health care services in the community. Moving to look at some of the trends in admissions and case mix over the last 6 months, it is becoming increasingly difficult to look through the numbers, given the impact of COVID on our activities has now run across 4, 6-month reporting periods. However, you can see in the chart in the left-hand corner, the change in admissions across the various categories against last year, where disruptions from COVID was principally in Victoria and against the first half of FY '20, which was pre-COVID. You can see that in areas such as psych and rehab, we continue to be impacted against the pre-COVID environment. The decline in surgical admissions primarily reflects New South Wales capacity restrictions, given that it is our biggest market, and as you can see in the right-hand chart, while Victoria had restrictions in place during the half, they were not as severe as in the prior period. The increase in maternity admissions since the pandemic continued during the half. Based on current forward bookings, the stronger volumes experienced over the last 12 months are expected to normalize to pre-COVID levels going forward. At the bottom of the page, we have the monthly trends in admissions per workday against the same period in FY '21 and FY '20. The bottom left chart shows the stronger performance in surgical admissions against FY '20 than FY '21, reflecting the strong growth experienced in surgical admissions in the first half of FY '21, following the first wave of the pandemic and the end of the extended lockdown in Victoria. The decline in January reflects the peak of Omicron cases in the community in New South Wales, Victoria and Queensland and a surge in a number of our doctors and team members unavailable to work due to isolation orders combined with the reintroduction of restrictions in New South Wales and Victoria. The Victorian restrictions in January were the most onerous we have had and resulted in surgical admissions being more than 50% below the prior period. Turning to the investment pipeline, and during the period, the business invested $91.1 million in its development pipeline and delivered projects with a total investment value of $164.3 million, including the development of a 12-bay emergency department at Hollywood Private Hospital in Western Australia. As our Australian CEO, Carmel Monaghan, outlined at our Investor Day prior to Christmas, our investment in emergency departments over the last few years has delivered strong returns with a solid flow of inpatients delivered through our emergency departments. Since its opening, the Hollywood ED has performed well, supporting the additional investment in bed capacity and diagnostic facilities. For FY '22, total spend is expected to be marginally below the bottom end of our original forecast range due to COVID-driven project delays. Spend will be pushed into the FY '23 to FY '25 period. Importantly, based on the APRA data, our commitment to investing in our facilities and improving the layout of our campuses has driven an improvement in our market share over the last few years. Turning to the U.K. The business reverted to its traditional pre-COVID operating arrangements with NHS England from the 1st of April 2021. COVID cases in the U.K. post the so-called Freedom Day in July, increased dramatically, resulting in the introduction of isolation orders and movement restrictions, which impacted the availability of patients, doctors and employees at short notice, resulting in material procedure cancellations and significantly higher personnel costs. The result was also impacted by the significantly higher costs associated with the environment, including testing staff and higher PPE costs. It is estimated the impact of these costs on the business was GBP 3 million per month. The result includes $24.7 million of transaction costs associated with the proposed Spire Healthcare scheme of arrangement and the recently completed Elysium Healthcare transaction. Capital expenditure for the period was $29.2 million with projects including the completion of Buckshaw Hospital in Chorley, the third hospital the business has opened during the pandemic. Following the appointment of Dr. Andy Jones as Group Chief Growth Officer in December, we have appointed Nick Costa, formerly COO of Ramsay U.K. to become the CEO of the business. Given the Omicron-driven rise in hospitalizations in the public sector prior to Christmas, Ramsay has entered into a new volume-based agreement with NHS England to cover the period from the 10th of January to the 31st of March 2022, unless terminated early by mutual agreement. The agreement allows Ramsay to treat private patients, which have continued to increase as a proportion of overall admissions, reflecting strong demand from the self-pay market. Business activity in the second half of FY '22 will depend on the ongoing impact of COVID on cancellations due to the availability of staff, doctors and patients. The business continued to be significantly disrupted in January, and staffing costs remain higher than pre-pandemic levels. Ramsay is actively working with the U.K. government and the NHS around the model for the delivery of additional capacity over the medium-to-long term to address the expanding public waitlist for elective surgery and nonsurgical services. Ramsay Sante continued its commitment to take care of COVID patients in Europe with more than 4,000 patients treated in France, 1,500 in critical care, and more than 500 in Sweden. The business has continued to support governments to manage the pandemic through both COVID testing and vaccinations. Sante reported strong activity growth overall, largely driven by the out of hospital segments. The business reported more than 5 million patient visits during the period, up 13% on the prior period, with 64% of visits accessing out of hospital services, up from 60% from the same period last year. Total European revenue increased 2.1% on the prior period. Excluding the nonrecurring items in this period and the prior period, revenue growth was 4.6% and EBIT increased 14.8% on the prior period, primarily reflecting the benefit of organic growth and acquisitions made over the last 12 months. The growth was principally driven by the Nordics region, reporting revenue growth of 11.5% and EBITDAR growth of 24.1%. The business continued to invest in innovation, enhancing care quality and accessibility. Capital expenditure for the half was $199.7 million and included the launch of its new digital front door in France. Consistent with its strategy to enter adjacent health care services, during the period, Ramsay Sante acquired an ophthalmology business in Sweden, a public primary care business in Denmark, and an IVF business in Norway. The total investment was approximately EUR 38 million, with a further deferred consideration of EUR 48 million, subject to certain performance hurdles. Turning to the outlook for the second half, and the French government has indicated that a new revenue decree providing support for private hospital operators will be issued for the period covering the 1st of January to the 30th of June 2022. However, the details of the new decree have not been announced. Earnings in France in the second half will be dictated by the shape of the current and any future waves of COVID cases and the level of hospitalizations, combined with the availability of staff heavily impacted by absenteeism caused by COVID and general fatigue. The Nordics will continue to benefit from its skew of activities to primary care and the bolt-on acquisitions it has completed over the last 12 months. The elective surgery waiting list in both France and the Nordics continue to grow, and Ramsay is well positioned to benefit from activity when the operating environment improves. Again, the most significant issue will be staffing availability to meet the demand. Ramsay's 50-50 Asian joint venture, Ramsay Sime Darby, reported higher operating results for the 6-month period, assisted by the inclusion of the Bukit Tinggi Medical Center in Malaysia, which was acquired in May 2021. Excluding the contribution from the new center, revenue grew 3.9% over the prior period, driven by growth in the provision of COVID-related services, including testing, vaccination and treatment of public patients and a higher number of private patients. The 18.6% decline in Ramsay's share of profit to $7.9 million reflects a materially higher effective tax rate in this period. In the second half of FY '22, Ramsay Sime Darby is expected to continue to benefit from the recovery of patients in Malaysia following the easing of restrictions and the inclusion of the new hospital. Indonesia is expected to see a more gradual improvement in patient volumes given the more material impact of COVID on business activity. We are making good progress in delivering our Ramsay Cares Sustainability Strategy. Our goals and targets cover a wide range of social and environmental issues, a number of which are also targets under our sustainability linked loan. Our focus includes leadership and training and the mental health and wellbeing of our people. We also have a significant program aimed at reducing our carbon footprint, waste and single-use plastics. We're undertaking a climate vulnerability assessment of our facilities in each region at the current time, and working to understand our Scope 3 carbon emissions. We continue to support innovative research and are focused on responsible sourcing across our medical supply chains. We are confident that we are tracking well against our FY '22 sustainability linked loan targets. I'll now hand you over to Martyn to run through the financials in more detail.

Thanks very much, Craig, and good morning, everyone. As Craig has said, COVID has had a material impact on the results in the half however, we remain in a strong financial position. Turning to the P&L. The components of total revenue are slightly distorted this half, primarily due to the U.K. business moving back to its pre-COVID commercial arrangements with the NHSE, which saw its revenue contribution move from revenue from governments under support contracts back to revenue from patients. The growth in total revenue was 1.2%. But if you strip out asset sales and the contribution from the German hospitals in Europe in the PCP, total revenue growth was 2.8%, primarily driven by growth in Europe. As Craig mentioned earlier, while we don't report core and non-core profit anymore, there were a number of items that impacted the result compared to the prior period, which we thought would be useful for you to understand. Firstly, transaction costs in this period were $36.1 million compared to $3.2 million in the PCP and consisted of the aforementioned fees associated with the Elysium and Spire in the U.K., $7.2 million of fees in Europe, including deferred costs associated with prior period acquisitions and $4.2 million of costs in Australia. Profit on sale -- on asset sales in Europe was $11.5 million compared to $46.6 million in the PCP on assets in Europe and Australia including the sale of the German assets. It's important to remind everyone that in the second half of FY '21, the profit on the sale of the German assets of $25.7 million was offset by indemnities and warranties associated with the sale of $24 million. The expensing of IT and other assets of $12.8 million primarily relates to an internal decision to increase the threshold for capitalizing assets and was principally incurred in the Australian business. We took impairment to $5.6 million in the Australian business related to some residual IT investments. And the French business received a refund of a prior period overpayment of rent of $8.3 million. And as previously announced, we took advantage of lower interest rates to terminate 2 fixed rate loan facilities totaling $200 million, which were due to expire in FY '25. The net upfront cost of the early repayment were $11.3 million, which is included in net financing costs. The effective tax rate for the period was 31.2% compared to 33% for the PCP and the full year effective tax rate is expected to be between 34% and 35%. Moving to cash flow, and the significant move in working capital is mostly the result of the return of amounts to the French government provided under the revenue guarantee decree. At the current time, we believe we have returned to an equilibrium state in relation to payments under the decree. Cash capital expenditure increased significantly, reflecting the strong development pipeline. And the large movements in divestments and financing cash flows reflects the repayment of the amount held in escrow at the 30th of June 2021 for the Spire transaction. Moving to capital expenditure in more detail. Total spend across the regions increased 8% on the PCP to $386.3 million, driven by the increase in the development pipeline in Australia. Due to COVID-related delays in external approvals and general building activity in Australia, group capital expenditure for the full year is now expected to be in the range of $830 million to $980 million. This does not reflect cancellations of the projects and spend in FY '23 through FY '25 is expected to be higher as a result. I would note that this range does not include any spend for the Elysium business, which we're still working through at the current time. I've already covered off the main movements on the balance sheet for the period being the movement in working capital associated with the return of funds to the French government and the repayment of funding associated with the Spire transaction. Leverage at the funding group level on the 31st of December was 1x however as you can see on Slide 18, we have provided you with leverage at both the funding group and on a consolidated basis, assuming that the Elysium transaction had taken place on the 31st of December 2021. On that basis, funding group leverage was 2.4x, and our undrawn debt capacity at cash headroom was $424.5 million. On this pro forma basis, Ramsay's FFO adjusted leverage was 4.2x, which exceeds the target FFO adjusted leverage of 4x consistent with our investment-grade rating. However, as per Fitch's report on the 14th of December, we do not expect a negative rating action given we are expecting leverage to drop below 4x within 12 to 18 months of the completion of the Elysium transaction assuming that the COVID operating environment improves over the time. And with that, I'll now hand you back to Craig for some comments on our strategy and the outlook.

Thanks, Martyn. Given we went through our strategy at the Investor Briefings prior to Christmas, I won't go into detail now, but suffice to say that despite the challenging operating environment over the last 6 months, all regions have maintained focus and made significant progress on our medium- to long-term vision to be a leading integrated health care provider. The acquisition of Elysium combined with the acquisition of 3 adjacent health care businesses in the Nordics and a material increase in the investment in our development pipeline, are all consistent with placing the business in a good position to capitalize on the strong demand for health care services that we see continuing for the long term. We are pleased to have successfully closed the Elysium transaction on the 31st of January. Martyn, Our Group Chief People Officer, Colleen Harris and I went over to the U.K. for the close of the transaction to welcome the team and visited a number of the Elysium sites. We were all extremely impressed with the depth of talent and quality of the facilities and services they deliver, and we're excited to have them as part of the group. We received very positive feedback from the team on becoming part of the wider Ramsay family. And work is already underway to ensure we realize the synergies and deliver the mid-single-digit EPS accretion in FY '23, which was identified at the time of the announcement. The business will operate separately from the U.K. hospital business and the CEO of the business since formation, Joy Chamberlain, is now reporting directly to me and has joined the Ramsay Global Executive Committee. We have included on this slide the unaudited results for the year to the end of December '21, which reflect another strong year of growth for the business despite the impact of higher staffing costs due to the pandemic as the Omicron wave took hold. As you can see, the business has grown quickly over the last few years through both acquisitions and organic growth. And we believe there is further opportunities for growth in the market. We've included the next slide just to remind you of the relative size of the business, the mix of payers and locations. And Slide 23 gives a snapshot of Ramsay's global portfolio of health care services post Elysium and the strength we have now built in mental health care services across our regions. So turning to the outlook for the group. We expect to see volumes across the business start to improve as restrictions ease following the business disruption in January and February caused by the Omicron wave of cases, which will appear at the moment to have peaked in most of our jurisdictions. We do expect that over the remainder of the second half of FY '22, activity levels will continue to be volatile, and costs will remain elevated. Over the medium term, the business will benefit from the additional volume created by the backlog of elective surgery and nonsurgical services, both in the public and private sector. We do expect that higher costs associated with staffing and increased PPE usage and pricing will start to decline as the environment normalizes. But they are likely to be higher than pre-COVID levels in FY '23. We'll be working closely with governments, clinicians and other stakeholders to develop strategies to assist the whole industry to operate more efficiently and effectively in an endemic COVID environment. Before I open up for questions, I'd just like to again thank our teams for what they do for our communities. Happy to take questions now.

[Operator Instructions] Your first question comes from Lyanne Harrison with Bank of America.

Can I start with outlook? So you mentioned that there'll be volatility over the near term, and you expect some of those volumes to start to come back. But you also say that staffing availability is critical to meet demand. Can you talk about that in a little bit more detail? And in terms of which geographies is where staffing is faring better or worse than others?

Sure. Workforce issues are the main -- certainly the main issues for the executive and the Board alike. And making sure that our workforce is well, is available is critical to be able to provide services in the future. So I think that goes without saying. The pressure on workforce over the last 6, 12, 18 months does vary from region to region, depending on the level of COVID activity and whether we're treating COVID patients directly or other patients. But it's fair to say that all regions have experienced -- staff in all regions have experienced sort of changing environments, more challenging environments. And so fatigue is a factor. The isolation orders that have existed in all of our markets have resulted in us having to wear significant additional costs. So what are we doing about it? We've got both short-term strategies and medium- to long-term strategies to make sure we remain the preferred employer in our markets. We're very conscious of what the staff need. We've engaged with the staff significantly over the last 18 months or so. And so each region is different. So I don't want to prioritize one over the other in terms of the impact. But for example, Australia this month will employ 550 new graduate nurses, which is a massive increase on what we've done previously. And that just indicates that we're conscious of what we need to be putting in place for the future. I mean that particular initiative will come with an elevated cost for a period of time until those people become productive. And it does take some time. It's a 2-year program. But we've got initiatives in all of our markets. And I think in an environment where staff haven't been able to be as mobile as it might otherwise have been with border closed, et cetera, we'll see that come back into the market. There is short-term issues with that from an Australian perspective, staff who haven't been able to travel back to their homes in U.K. or Europe, we'll do that. But borders being open will allow us to recruit people from overseas more readily as well. So look, we're very conscious of it. It's the issue that takes up most of our time at the moment. But we're pretty confident what we have put in place and are putting in place will position us well.

And just one more question then on staff. Obviously, we've seen an increase in the staffing costs this half. Is that increase sustainable in terms of was there upward pressure on wages? Or is that largely being caused by annual leave, sick leave challenges in -- over COVID?

Yes. It's largely caused by isolation and the impacts of COVID. So if we go around the globe. Australia, we've fundamentally got all our EBAs in place. So that will provide us some consistency, understanding where we're going to be over the next 2 or 3 years. And they haven't been out of line with what we've seen historically. What we are seeing in Europe, however, is some upward pressure on wage rates. In France, you would have recollected from the last results released, last period, there was a significant increase in nurses wages in France, which was by and large covered by an increase in tariff. I think we'll still continue to see that pressure as we move forward. But the mechanisms that are available for recovery of that in terms of the calculation of tariff provide us some comfort. We'll continue to see upward pressure on wages in the U.K. And that's still -- I think there's still a reasonable Brexit hangover in there. But also the pressure on staff fatigue has made that recruitment of additional staff has been necessary. And I'll probably point out in the U.K., we have put on more resources in the last 12 months to position us for the longer term. Now that's come with a fairly heavy cost impact. But we think it was the right thing to do to position the business for what we expect to be the surge in volume that will come through. Now that volume hasn't come through yet, and a lot of it principally because of the level of cancellations that occur at the last minute. So the -- it's probably fair to say that productivity levels in the U.K. are probably pretty low, but they will get back to where they need to be.

Your next question comes from Andrew Goodsall with MST Marquee.

Just if I'm right, last November, it seemed to me that across the nation, there was a 2-week window or so where there were no restrictions. I'm just wondering if we can learn anything from that time. My understanding at the time it was almost impossible to get operating theater space in Sydney. So just wondering whether you can sort of see a scenario ex-COVID where that sort of environment might be a longer duration environment going forward.

Yes. Thanks, Andrew. I do see that. What I think we'll see that's a little different from previous and the 2-week window we had without restrictions wasn't particularly long, obviously, in the scheme of things. So what we saw previously going back over the last couple of years is when restrictions were lifted, we saw a quick spike in surgical activity that then settled below that spike, but still at a premium to where it had been historically. So the difference actually going forward really as a result of the level of Omicron cases and the impact that's had on community behavior as well as staff isolation, et cetera, is we probably won't see that spike come back immediately. We'll just see a more gradual return -- or not return, but a gradual increase in volumes to still be at a premium level. So we're still anticipating that we're going to have pressure on feed lists in the fullness of time because ultimately, the work has to be done.

And maybe just picking up on that. In terms of your order book, what are you seeing, say, 4 to 8 weeks out? Is that you're already starting to see a bit of that kick in?

Yes. As -- just in this week, as we've seen sort of the restrictions ease and yes, we're starting to see that activity start to come back pretty quickly. But I don't expect -- as I've just said, I don't expect it to be that quick peak straight out of restrictions. Remembering restrictions aren't completely lifted. We've still got 25% activity thresholds for Victoria and New South Wales. I think the thing that will also be -- and I just sort of alluded to it, I think that will be different going forward I anticipate is just the community behaviors in terms of how quickly they come back to the system.

Yes. More of a fourth quarter, perhaps more visibility there.

Yes, probably.

And just a final one for me. Previously, you just talked to where the French tariff is going. I know there's the overlay of the sort of guarantees there at the moment. But -- and we had a big boost to the tariff last year to pick up nursing salaries, but just where you sort of feel that's going this year?

Yes. No clear indication yet. The government has -- I won't say they've announced, but they've told the sector that the notification of tariff will be delayed. So it is effective from the 1st of March, but we're probably not expecting it to get the detail until later in March. But yes, there's a lot of lobbying going on, as you can imagine. So let's see where that comes out. The -- we're still -- we're now into the third year of the 3-year cycle with the 0.2% increase as the floor. It's just the discussion around it.

Your next question comes from David Low with JPMorgan.

Just a sort of bigger picture question about the half we're in now. I mean, we've got government support arrangements in place across all regions. And while we might sort of exit the fourth quarter with things starting to normalize, is it right to assume that with that support in place and the restrictions that come with it that, frankly, this year's earnings are a bit of a -- aren't going to give us much of a read into what to expect into the future and really for now, we're looking at FY '23 when potentially some of these government support programs are out of the way and we can see a return to normal, whatever shape that comes in?

David, I think that's absolutely right. And because of the nature of the government support is varied across the markets, our access to it. I mean in Australia, for the 6 months, I think we've got $3.8 million of viability support. So it was immaterial in the scheme of things because what happens is in those periods where the restrictions are severe, and we'll lose money, the reconciliation period covers a longer period that includes when we -- the periods where we make money. So that's offset. So we're effectively -- not that I want to get on a soapbox, but we're effectively paying for the support we're giving government, and we're more than happy to do so in this circumstance. But FY '23 will be very different, I think.

Well, here's hoping. All right, just another question...

With that, we all hope.

The $107 million impact in Australia. What is that? I mean, how did you calculate it? I mean when I look at that, add it back, it brings the EBITDAR back to where numbers were in the first half of '19. I'm just trying to understand what that number is and whether we can really use it.

Yes. Well, David, it's Martyn. So the Australian team do some pretty detailed calculations. Firstly, they look at the hospitals that were in the restricted areas. And also then look at the impact of the surgical restrictions. So you've got the reduced activity on the top line as a result of surgical restrictions. Then you've also got the increased costs that we've had that we've been running for a long time, the increased PPE, you've got the screening at the front door, those kinds of things. And also any kind of backup cost of staff who've been in isolation and those kinds of things. So it's done on a sort of region-by-region basis, and essentially tries to estimate what would our business have been absent COVID. And then they take the difference between the two, but it strips out any unrelated sort of missed activity. There's an unproductive hospital in a region where there's no restriction that doesn't get included in that number. It is very much aimed at the hospitals that were either under restrictions or under disruptions.

Okay. Again, I'm not sure how useful that's going to be for us, I mean I don't mean that as a criticism. I just think, frankly, this year and the previous year or 2 have been not a great guide. And last question. I mean, as we look into FY '23, I mean, we're hearing very clear feedback out of the U.S., and I know Ramsay not in the U.S. that staffing is reducing activity. We can't get enough nurses to undertake the activity, that the demand that is out there. And then projecting into FY '23 and knowing what you do know about staff and what you're planning to do over the next few months, do you think the availability of staff is going to restrict the recovery in a meaningful way?

The key to that question is the meaningful way. In Australia -- I'll go around the regions because that might be better to understand it. In Australia, we haven't had to reduce services in any material sense. There's been the occasion because of lack of staff even despite the isolation. So as we go forward, and we're conscious about the initiatives we put in place to make sure that we recruit and retain staff, we're probably more comfortable there. France is a region where delivery of services has been more significantly impacted by availability of staff. And the team in France are working hard as you can imagine, to make sure that retention and recruitment improves, and that is happening. And I think as -- I mean it's sort of a subjective call. But as the impact of COVID reduces, people are less concerned about exceeding health care which is one of the issues that has faced the market in France. U.K., the issue will be, as I said before we've got more staff than we probably need at the moment in the U.K. So we're probably more confident there that services won't be restricted because of staffing issues. But in all -- and the same in Scandinavia. But in all the markets, you can't underestimate the different impacts of fatigue, where the system is at the moment. So I'll say it time and again that it is the most significant issue that we're putting time into.

Your next question comes from Saul Hadassin with Barrenjoey Capital.

Craig, just a question for me, and that's just thinking about cost inflation potentially running through to FY '23. How receptive are payers across maybe Australia and U.K. in particular, looking at price as a lever for -- in terms of ability to try and offset some of that pressure? And I guess in absence of either Australian insurers coming to the table or indeed the NHS increasing funding. Do you have any other levers that you can look at to try and sort of preserve that margin once volume does indeed improve?

Okay. Thanks, Saul. A few bits in that question. So if I come -- if I do with margin, and I'll give you the same answer I always give on margin. Margin, volumes, obviously, are an upward driver of margin. And so with volume coming back into the system, that should give a tailwind to margin. So then you've got pricing and costs. And we've talked about costs. Pricing, when you look across the different regions, I mean, in the U.K., we've got 3/4 of our revenue coming from the NHS. The NHS tariff increase is something that applies to the whole system. And so we, along with other players in the system, putting our 2 bobs work into what we think the implications of increased costs should be on tariff. And we haven't got a clear view on that. So that will be determined by the NHS. The private pay component of the business is increasing in the U.K. And the negotiations with the PMIs, as they call in the U.K., the insurers have been positive, and we're pretty comfortable with the direction that's heading. The big one obviously, is Australia. And what we see is the health funds in particularly rude financial health. And it comes down to the negotiation at the time of the renewal of the agreement. And we will certainly be pushing the case of the increasing cost base and what's needed for the system to continue to prosper, so it can reinvest to make sure that quality outcomes are there for the patients. But it is up to those negotiations that occur at a particular time. But it's a much better environment than it has been in the past.

And just to follow up. Craig, can you remind me when you have your large insurance contract up for renewal in Australia?

Well, I won't remind you because I don't think I've told you before. Yes, look, we've got one this year. I mean they're all roll on pretty much 3-year cycles. So there's -- one of the larger ones this year is probably the indication.

Your next question comes from David Bailey with Macquarie.

One for you, Martyn, actually. Can you just talk us through the repayment of the funds after the French government? Does that imply that your obviously being paid revenue on a monthly basis relative to fiscal '19, but then the activity levels are below that? Is that what's driving that repayment of funds back to the French government?

David, you broke up there, but I think the question was about the change in the working capital in France, yes? We might have lost you. Hopefully, you can hear me. But I think as we called out in June, we actually owed the French government, EUR 121 million because they've been giving us cash advances or various different governments around the country be giving us cash advances as part of the revenue guarantee scheme. They started to wind that back. during the last half. And in fact, we've kind of gone back to sort of normal-ish kind of treatment and relationship now. And to the extent that they now owe us EUR 75 million, so it's EUR 196 million swing in the half in terms of the working capital, which is the large part of that $426 million change in the working capital that we put in the balance sheet. So we probably see that kind of continuing now going forward. This is more sort of normal relationship now as we invoice them, and it had to come to pass at some stage. We've been calling that out for a while that, that was going to unwind, and it did so in the half.

Yes. Okay. Got that. And just in Australia, a number of one-off items you've called out that there was a provision for the virtual business. Not sure. Is that to assume that, that basically offset the one-off items you called out in the presentation?

Sorry, we didn't get that. Apologies. The line is really bad that you're on.

Sorry. It's just the provision that went through in Australia for the corporate cost pretty much offsetting the one-off [indiscernible].

Oh, the provision releases. Yes, so obviously, every half, we look at the provisions that we've gotten. There were some that were pending a review of the situation that didn't eventuate. And so you saw that unwind, I think it was $19 million. So yes, that does, to some extent, offset some of the one-off costs that we have here.

Okay. And then just a broader question. We know that waiting list on the public side continues to rise. Can you just talk at a high level, any thoughts you've got around how that might be impacting PHO visitation as a driver of volumes going forward? And then also that opportunity which you have to also previously, but just interested in your thoughts there.

Yes. Again, David, we couldn't get all the questions, but I think I've got the gist of it. If it's about the pressure on public systems and the potential impact that has on -- so an increase in PHI membership. If that wasn't the question, I'll make that up as the question. The -- well, I think it's a tailwind for private health insurance, isn't it? As access to the public system becomes more difficult, and I think without me getting on the soapbox, I mean, access to the public hospital system was becoming harder pre-COVID. COVID has just exacerbated that, and I think shown some cracks in the public hospital system. That has to be a tailwind for private health insurance membership. But let's see what sort of level of tailwind that would be. If that wasn't the question, I apologize.

Your next question comes from Gretel Janu with Credit Suisse.

Just wanted to start with Australia and the chart on Slide 7. So I'm a bit surprised that the weakness in surgical and nonsurgical admissions in November versus FY '20, I shouldn't say weakness. But I was expecting it to be a bit higher just given that that's when the restrictions were easing. So I guess, why weren't we seeing more pent-up demand coming through then? And is that, going back to some of your comments earlier, what we should expect when restrictions eased significantly, more gradual improvement?

Well, I'm not sure I agree with the premise that the restrictions eased significantly in that period. So there was still significant restrictions in Victoria, particularly, which is more so than we had the previous year. So for me, it was no surprise that we saw a decline in volume there.

Okay. Okay. That's fine. And then just moving on to Europe. So significant acceleration in profitability in the second quarter versus first quarter. Was that just COVID recovery and pent-up demand coming through or anything else that you can point to that will continue on into this half?

Yes, Gretel. Two elements to that. Firstly, the Nordics had a really strong quarter, and they've been performing particularly well. That business is going from strength to strength. And as Craig said, we had a couple of bolt-on acquisitions in there as well, which have helped. But really, it's around -- if you remember when we announced or announced -- when we updated the market on our first quarter results, the result was way below the same quarter in the prior year. And we said at the time that, that was really due to the time we had a revenue guarantee scheme in France. And that, that would kind of even things out when it comes to the half, and that's pretty much what's eventuated. So if you back out all the kind of nonrecurring that we said, the French result was only slightly up on the prior period for the half. And after having been massively down for the first quarter. So it's really the construct of the revenue guarantee scheme smoothing things out for the half was the most material factor. And then an improvement in the Nordics, as I said.

Yes. Okay. That makes sense. And then just on the U.K. as well. For the first quarter, you did talk about a lot of last minute cancellations being the biggest impact. Did that ease in the second quarter? It doesn't seem as though it has given us their EBIT loss has accelerated in the second quarter. But, yes, just some further color on that would be great.

Yes. No, it didn't actually so -- which we were anticipating it would, but then obviously, Omicron came and smashed things. Again, if you back out those transaction costs, the costs that we ran in the U.K. business, first quarter versus second quarter was almost exactly the same. So our cost base was flat. But we actually had $10 million less in revenue in the second quarter than we had in the first quarter. which is pretty much the difference in the EBIT result quarter-on-quarter. And that's really as a result of the fact we did have probably almost as much, if not more, cancellations in that second quarter, particularly in December as Omicron was starting to pick up again and drive things through. And you really had a lot -- starting to get a lot higher COVID cases in December than we had in the first quarter. So that was really the main reason.

Your next question comes from Sean Laaman with Morgan Stanley.

Just to start with France. France was a much better outcome than what we had thought and was pretty impressive seeing that you've got marginally lower government income in that number. And then some of the discussions we had sort of running into the end of the half suggested along what you're suggesting at the Strategy Day in December that nurse costs were real issues. So I'm kind of wondering why the margins sort of held in so well. Was it just a simple case of tariffs looking after that increase in nurses costs? And then how do you think about it going forward? I mean, is tariff going to continue to offset that increase in nurses costs? Or does it get better or worse from here?

We have [indiscernible]. I think the difference from France to other regions is it's a revenue guarantee. So France can manage its cost base. So whilst there was cost impositions on staff availability, isolation, absenteeism, et cetera, activity was down, so they could manage to that lower activity. And then fundamentally, whilst it might not be -- 100% tariff is designed to cover cost -- staff cost increases. Now that's always a bit of a negotiation. But that's the way the mechanism should work and has worked in the past. It won't always -- as I say, it won't always be 100%, but it gives us a level of comfort about where that tariff level will be in order to be able to maintain margin.

Not that I want to start any fireworks, but I'll ask the question. You mentioned that the insurers are in a good financial position, which is arguably true. But we also now running into the election or in an election year, sorry, that many ventures are foregoing their rate increases. So I suspect that's just a bit of play to keep the government happy and keep members in. Does that feed in any way, shape or form into your thinking around the negotiation table?

I mean you have to factor anything in, but I'm quite happy to ignore that. It just depends on the circumstances at the time of the negotiation, Sean. And I don't think the level of revenue loss for them in the short-term period of the delaying their premium increases really does factor into longer-term arrangements.

Great. Makes a lot of sense, Craig. Two more quick ones for you, Martyn, if I may. Just the tax rate guidance for the year. Sort of what's driving that? Seems sort of higher than what we were expecting.

It's mainly in France. So it's quite interesting tax kind of regime in France where there's a number of different taxes that you get levied and coupling them aren't necessarily move in line with your profit before tax. So we are anticipating a lot higher tax rate in the second half in France, mainly due to that.

Great. And one last one, just on the leverage. So you mentioned that you sort of work towards Elysium being digested and you get below 4x. Should we be thinking in terms of potential other M&A that it won't happen until that point because?

No, I mean, we won't let that drive our behavior in M&A. There's other ways of funding M&A. And there's other aspects that we can do to raise money. And you have got M&A opportunities that make a lot of sense, don't come along every minute. So you've got to be in a position to take them when you can. So we continue to look at opportunities around the world, and we'll make sure that we can try and fund those. It's important to know as well that, that anticipation of getting below 4x does take into account the elevated CapEx that we've got in Australia. So it's not like that that's going to prevent us from being able to continue to invest in our pipeline in Australia as well. So that does take that into account.

Your next question comes from John Deakin-Bell with Citi.

Two questions. One was just about the CapEx and the return on capital employed. I know this period, it's roughly 50-50 Australia versus Europe in the sort of total CapEx, it's normally a bit more weighted to Australia. But given the much lower returns in Europe, can you just explain to us what your expectations are for the return on capital in Australia, which is much higher, obviously, versus Europe on the CapEx side?

Yes. Well, I would say that if you're looking at historical returns on capital, obviously, you've got much higher returns in Australia, a, because you've got very highly depreciated assets without much goodwill sitting there as opposed to what we've got in Europe. So I wouldn't take the historical returns as any kind of indication of what our expectation is going forward. We have the exact same investment hurdles in Australia as we do in Europe. And I think we set those out in the Investor Day. So it's a 10% IRR, 10% cash ROIC in year 3. And so they're the same expectations, whether it be an investment in the U.K., in France, in the Nordics or Australia. And so we -- Craig and I review all those and allocate capital accordingly to the best returning projects that are in front of us. But they do have the same -- exactly the same investment hurdles.

And if you -- and I understand about the historical, but I'm talking about the incremental return. If you went back over, say, the last 3 to 5 years and reviewed that, would the incremental return that you've got in Australia be the same as Europe or would have been greater?

It's probably greater because there hasn't been a significant acquisition in Australia. So Australian investment has been around brownfields. And the Europe, the significant acquisition was Capio, which we took a longer-term strategic view on and probably accepted a slightly lower return profile in the first few years. So I think your observation is probably right, but there's reasons for that. It's not the reason for the way we look at things.

Okay. And just finally, on the -- Martyn, just remind us on the cost of debt. I understand you've picked some lower rates and paid upfront, which is all very sensible. But the -- your debt is -- the margin is largely fixed for a period of time, but the floating -- the BBSW, that's variable depending on prevailing interest rates, correct?

Yes. But we have swapped any of those variables in the short term into fixed rates. I can't remember off the top of my head what period we've got fixed, but it will be at least a year.

Sure, sure. But in the event, obviously, it appears that rates globally going up, perhaps not in Europe as much. But in the event in 2 or 3 years' time, that BBSW goes up 100 or 200 basis points, your -- just to be clear, the cost of interest -- total cost would be materially higher in a couple of years, which, given the leverage, would mean that the overall cost of interest would be quite a bit higher in future years, right?

In future years, yes.

Yes. And you take that into account when you make acquisitions like the Elysium?

Absolutely. Absolutely, yes.

Your next question comes from David Stanton with Jefferies.

I'd just like to follow up on a previous question about the U.K. You talked about cost base being flat in first quarter, second quarter ex transactions with lower revenue. And you've also had those transaction costs in the period that gave you a loss in EBIT terms in the U.K. Should we be thinking that, that loss will be turned around into the second half? Or are we looking at some level of loss into the second half given the ongoing issues in the U.K., please?

This is going to sound like a nonanswer, but it depends on the revenue line, to be honest. I mean, as we sit here today, cases are coming down. Certainly, the positive thing, let's -- well, in the short term, we'll see what the results are of people not even having to isolate if they're COVID-positive should result in reduced cancellations going forward. But that's really going to be the most important determinant for us in the second half is whether people are still canceling and not coming forward for their operations. If that doesn't happen, then absolutely it will turn around. Yes. As Craig said, we're set up to be able to accommodate significant increase in volumes. And if those come through, then the profitability will flow straight down through to the bottom line.

Understood. And then you've talked to delays in brownfields. I wonder if I could ask my usual question about brownfield operating in 2022. You've opened 3 in the half. You said previously that you would open 11 in F '22. Is it -- what number should we be thinking for F '22 now? And potentially, if you could give us the number into '23 as well.

Thanks, David. I think FY '20 -- I'll stand corrected on this. I think F '22 in total is 8 operating theaters, and I think we're running it to 6 and 11. I'll come back to you with the specifics. It's moved around a little bit as things fall in and out of financial years.

I think whatever we've told you before, if you add FY '22 and FY '23 together, it should be the same number. But as Craig said, someone slipped out of FY '22 and FY '23, potentially.

Yes.

Your next question comes from Chris Cooper with Goldman Sachs.

Martyn, you began to answer my question just then. I mean I'm curious about the cancellation rate in the U.K. Could you quantify what that was in the period? How many booked procedures did not happen? And I guess by extension, what I'm interested in here is, as you said yourself just then, I mean, the country is obviously moving very rapidly here to reduce isolation periods. Any reason we really shouldn't be considering a much lower cancellation rate for the second half?

Well, on the -- Chris, on the cancellation rate, I'll -- it's around the order of 15% to 20%. 20% on the high end, but around 15%, 2,000 to 3,000 cancellations a month on sort of 16,000 bookings.

And the early signs around the reduction in isolation period is improving that number?

It's too early. It is too early. So January was still impacted. So I mean, the early signs would be just the last week or 2. And what we're really interested in is -- the rest of the world is interested in is what the experience of the U.K. is going to be in terms of sort of total freedom. So what we should see is we will still have the processes in place for hospital staff in terms of isolation. But we should see a general relaxing of that in the community, which should, in turn, result in a decrease in those cancellations. But I think the whole world is looking at the U.K. experience from sort of this week onwards.

Yes. Okay. And just one more on the U.K. before one on Australia, if you don't mind. So the private pay segment is outperforming NHS referrals again here. Is this something to do with the pandemic? Or is there something else driving that? And I'm just curious to hear what sort of margin impact that is giving you in the U.K. business.

No, it is more due to the pandemic. So what you're seeing is just with the -- well, it's the pandemic exacerbating what was already a difficult environment for access. So we're certainly seeing an increase in self-pay across case mix where it is self-pay, I won't say it was exclusively at the lower acuity services, but it's biased towards that. So we're seeing more self-pay across the case mix, which is just, I think, a direct reflection of increasing waiting lists in the public sector. Now -- I mean, what that does the margin, we get a better margin on the private pay in the U.K. than we do on the public. But volume, as you've heard me say many times, volume cures many yields. And the volume is still on the NHS side. So whilst we've got significant increases or percentage increases in the private, the main game is still NHS volume.

Okay. And just a last one on Australia. The step-up in COVID disruption to 48 million, I think the number was for the month of January. I mean, that's obviously a big step-up in run rate from what we saw in the first half. I think we all understand the reasons why. Is there any reason here that, that doesn't normalize back to the sort of first half average or below as the restrictions ease in the coming days?

Well, if there's no more COVID and no more restrictions, then clearly the run rate shouldn't have been better than where we were in the first half because we were under restrictions for most of that first half. So February will be severely impacted. That's for sure. And we've seen a continuation into the early part of February of reduction in activity in the same way we saw in January. But we have seen that restrictions are being lifted in New South Wales and in Victoria. We have been told that WA will go into restrictions in March. So WA will be impacted. So that's going to be a drag over the next few months. But absent any new waves of COVID and new restrictions, then -- post the end of February getting into March and beyond, then there's a bit of clear air there. So it certainly won't be in the magnitude of that number.

Absolutely. Absolutely, that's the case. And I'll even go on to say that even if there isn't -- I shouldn't sort of speculate on the future. But even if there is another wave of COVID, I think what we've seen -- and this is me getting on my soapbox again. What we've seen just in the last period from governments is a recognition that -- and we were saying it at the outset, but hindsight is a wonderful thing. The recognition that the level of restrictions on elective surgery activity were probably excessive. And so hopefully, governments learned -- I think what's happened over the last 18 months is the relationship between public and private sectors has increased. Government, both state and federal, much more aware of the capacity and capability of the private sector. And so that's been utilized. I think what has been lacking is an intimate understanding of how the private sector operates. And the level -- or the more agility that we have than the public sector and so we can respond quickly. And so to put long restrictions in place without understanding how quickly we could respond to them is an area of education, I think. So I would hope that -- well, I hope we don't see any more restrictions and that we're not facing another wave. But if we do, I hope it's handled a little differently in the future.

Very quick follow-up. Could you remind us of the materiality of the WA business?

WA business, in terms of the proportion of the Australian business? It is over 20%. But I'm going to say it's getting on to 25% of the business.

Your next question comes from Steve Wheen with Jarden.

Craig and Martyn, I just had a question on the Australian operations. In particular, as you've gone through COVID, you've indicated that mix hasn't been as optimal during that period. I just wonder, in the context of you winning share, is that sort of share that you'd probably not want as much in terms of the mix? And then the sort of extension of this question is, how long do you think it will take based on what sort of you're seeing in dealer bookings? How long will it take for you to sort of see that mix optimize factor levels that you would prefer it at?

Okay. To answer the first question. We run a comprehensive range of services and don't cherry pick on mix. So whatever volumes are coming through in different parts of the business, whether it's lower acuity work or higher acuity work, we're geared up to take. So I don't want to -- and seriously, I don't want to be in a position where we're cherry picking work because I think that's really short term. And I think the way we run our business is just to make sure that we have that comprehensive range of service provision that allows the swings and roundabouts to occur. So -- but in order -- so to get back to what would be a normal mix, whatever normal would be. Look, I think, one, we've got to have restrictions come off and I won't say how long is a piece of string. But I think there's pent-up demand, and you'll see a quick shift in mix. But whether it takes a month, 2 months, 3 months or longer to get back to what it is, I think is a bit speculative, but -- yes.

And so just drilling into mix a little bit more. Obviously, psych is clearly lagging. Can you sort of talk to what initiatives or how you can get that performing again? And what does psych look like in the U.K. as well? Is it matching what's going on in Australia?

Psych volumes in the U.K. for our business now, Elysium, a very different style of business. It's low and medium secure units. So these are involuntary patients who are coming to the system through different avenues, principally, the justice system and others. And so that flow of patients isn't materially impacted by COVID. Whereas in Australia and France, they're voluntary patients who will make choices about whether they want to be in a facility or not or their family who make choices. And the things that impact them, just general sentiment around COVID going to an institutional environment, things like -- it may sound a bit mundane, but things like visitor rules, not being able to have visitors and actually in rehab and -- longer-term rehab and psych programs, the ability to take you daily or go out on a visit was eliminated. So people couldn't sort of move out of the facility for the half a day or a day. And so that made it less attractive. Now you could argue, well, what does that mean in terms of an acute mental health episode, it does have an implication. So as things return to normal, and we don't have the level of COVID infection in the community and that then allows visitor rules to be relaxed as they are really from this week onwards in Australia, that will -- they will -- those deterrents for hospitalization will slowly be removed. And so you'll see activity come back because there is an unmet demand in those. So rehab is compounded because the surgical activity hasn't occurred, which would then be referred to rehab. But rehab also has all the other environmental impacts that you would see in mental health and to some extent, medical conditions, but there's another overlay on medical, which is having a flu season will drive respiratory admissions.

Yes. So, Craig, the weakness in psych you're characterizing in Australia is very much part of the decision process of the patient, not necessarily the willingness of psychiatrists to admit patients into your facilities?

No, I think psychiatrists are part of that equation and their reluctance to be -- so unlike other acute specialists, they're reluctant to be in inpatient environments. There's a bit of that. It's certainly not as much as it was over the last 12 or 18 months, but there's still a bit of that around. And so that will -- what we forecast is that will ease as well once the environment improves.

Yes. Last question for me. Just again, on Australia and the capacity that you're building into your facilities through the CapEx program. I understand it's only a timing difference, the change in CapEx in the current year. As you look across your competitors and given the challenging environment that perhaps might have been more acute for them, what are you seeing happening with capacity at their sites? Are you by far and away the most active on that front? Just to try and understand the landscape, are we seeing a big build out here that's not just being conducted by yourselves?

No, I think we're far and away the most active in that space. I think we've got some of our competitors who are so reliant on state viability payments just to survive, but they're not even thinking about capital investment. Yes. So no, I think we're clearly in front of the pack.

There are no further questions at this time. I'll now hand back to Mr. McNally for closing remarks.

Thank you. Thanks, everyone, for joining us. And I know it's a busy reporting season, so we appreciate your time. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.

Thanks.