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

Thank you for standing by, and welcome to the Ramsay Healthcare FY '23 Interim Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Craig McNally, Managing Director and CEO. Please go ahead.

Good morning, everyone and thank you for joining us for our FY '23 first half results presentation webcast. My name is Craig McNally, and I am the Managing Director & CEO of Ramsay Health Care, and I am joined by Martyn Roberts our Group Chief Financial Officer. Today we will provide an overview of our performance for the 6-month period, an update on our strategic direction, before covering off on the outlook for the Group. As always, I would like to start by thanking Ramsay's people and clinicians who have delivered the results today. The focus has been on providing the highest quality care to our patients and supporting colleagues and local communities impacted by regional issues such as natural disasters and conflict. On behalf of the Board and senior management team I would like to recognize their contribution in a challenging environment and thank them for their ongoing efforts. Turning to the key themes in the business at the current time. The momentum in activity we reported in our first quarter trading update continued into the second quarter. While the December/ January trading period was impacted by the resurgence in COVID cases and a spike in flu cases in the northern hemisphere, combined with doctors taking extended summer leave in Australia, I am pleased to say that we have returned to a positive momentum in activity levels in late January and into February. In response to the industry wide labor shortages, we have implemented a range of measures across the regions over the last eighteen months. There has been a particular focus on critical skills gaps and we are starting to see the benefits, with vacancy levels declining from their peaks, in particular in Ramsay Santé, where vacancy rates are down 69% from the peak in January 2022. While the situation has improved, recruitment, retention and development of employees remains a key focus. During the 6-month period we successfully completed negotiations with health funds both in Australia and the UK at rates that are more reflective of the current environment. We continue to work constructively with public health authorities in each of our regions to assist with reducing backlogs and returning systems to the provision of timely, quality healthcare. We are working with all stakeholders to ensure the higher costs of operating in the current environment are reflected in the setting of public sector tariffs. We continued to invest in brownfield and greenfield expansion and redevelopment opportunities, although the pace has slowed due to bottlenecks in the planning and building sectors. We have also pursued our digital and data initiatives designed to drive growth in the business and enable transformation of business processes to improve operating efficiency. We are in a strong position to take advantage of the long-term dynamics driving the healthcare sector, leveraging the benefits of global collaboration and insight to establish communities of best practice to adapt to our local markets. As you can see from this slide each region has a range of initiatives running in parallel to reduce vacancy rates, tackle critical staff shortages and retain our key talent. It is pleasing to see that there has been an improvement in vacancy rates as a result. However, there is no easy fix to these issues which have been exacerbated by COVID and they will remain our primary focus for the foreseeable future. Our priority areas include: providing flexible working conditions; more accessible learning and training opportunities; expanding our leadership programs; and investing in technology to simplify processes and allow our people to spend more time with our patients. Moving to the Group performance. All our regions experienced growth in surgical activity over the 6-month period, this continued to be more heavily skewed to day surgery primarily because a large proportion of deferred surgery during COVID was lower acuity day surgery and there has also been an acceleration of the trend towards day surgery in some elective specialties in France. Non-surgical admissions have seen a more mixed picture with France and the UK seeing some growth and Australia still seeing a slower recovery, in particular in mental health day patients. The changes in mix compared to pre-COVID continued to impact margin recovery over the half. The estimated direct impact of COVID on the results in Australia and the UK combined was $66.8 million in the first quarter and this declined to an immaterial impact in the second quarter. We expect there will be residual COVID related costs in the business while the virus continues to circulate in the community. The result includes a number of non-recurring items which we have called out, the key one this period was a profit on the sale of a property in the Nordics portfolio, on an after tax and minority interest basis the contribution to the result was $19.3 million. The Board determined a fully franked interim dividend of 50 cents per share, up 3.1% on the PCP representing a payout ratio of just over 60%. You will also notice that we have reinstated the DRP as an additional option for shareholders. As we move towards a more normalized operating environment the Board is of the view that a target payout ratio range of 60-70% of statutory net profit is appropriate. Moving to the result in Australia. In Australia the operating environment improved progressively across the first 5 months of the period, driving an improvement in activity levels and importantly a reduction in the costs associated with patient and doctor cancellations and staff sick leave. In line with the rest of the healthcare sector, the Australian business has continued to be impacted by staff shortages in selected hospitals and within specific critical skills. This has limited capacity utilization in some hospitals. In response we have introduced several initiatives to address this challenge. These programs are having an impact with vacancies declining 20-30% since March 2022 and staff turnover is declining from the peaks. We have completed negotiations on a number of health fund contracts during the period at rates that are more reflective of the current environment, ensuring that we are adequately reimbursed for higher costs across the business. Turning to the outlook. Following the expiry of the COVID viability agreements, Ramsay has agreed new contracts with state governments on commercial terms for public work moving forward. Given the large backlog of public work we expect increasing demand from the public sector in the coming years. While the amount of work we receive will depend on the funding provided to these programs, we believe these agreements will deliver additional volume and assist with managing theatre utilization and labor costs. COVID cases in the most recent wave peaked in late December and the business has seen a decline in staff absenteeism through January. We did see doctors take extended summer holidays after several years of COVID curtailed breaks however we are seeing an increase in activity in February. In the medium term we will continue to focus on investing in our strategically important, high value hospital network to ensure that our facilities meet the future demand for healthcare services. We will also invest in our new and adjacent out of hospital services including our day surgery strategy, our Ramsay Psychology clinics, Ramsay Health Plus, our allied health clinics, Ramsay Pharmacy and in our in-community service Ramsay Connect. This strategy is designed to extend our relationship with the patient, making healthcare more seamless for them and creates a referral channel for our hospital network. Our digital and data strategy will support all of these channels to ensure they are as efficient and productive as they can be while also improving the patient outcome and experience. Given the impact of COVID in the first half of FY '22 and in this half, a comparison of activity trends between the 2 periods is of only limited value. An assessment of the progress of the recovery in the market can be made to an extent looking at activity levels compared to 1H FY '20 which was pre COVID. Total admissions per workday for the 6-month period increased 3.6% on 1H FY '20 with day patients increasing 6.5%, recovering more quickly than overnight patients which declined 2.2% due to non-surgical overnight patients being down. As you can see in the graphs surgical activity has rebounded more quickly than non-surgical activity increasing 7.4% compared to 1H FY '20. Mental health admissions have been the biggest drag on non-surgical volumes due to a reluctance by both patients and psychiatrists to come back into a hospital setting. We are working on a number of initiatives to address this and are seeing some early success. Total admissions per workday in January were 9.4% above the Omicron impacted PCP and 2.3% above FY '20 with the trends improving across the month and as I have said we are seeing improving trends in February. Turning to the investment pipeline in Australia. Spend on projects during the period was $101 million including on the Northern Hospital pictured here due for completion as planned at the end of the year. The business continued to invest in its development pipeline and while some projects scheduled to commence in FY '23 have been delayed such as Wollongong, due to the impact of COVID on the building industry and external approval processes, the pipeline remains strong. There was a number of smaller projects completed in the half year period with a net investment of $54.3 million. We continue to expect the development pipeline to be elevated for the next few years with new projects recently approved including a $180 million redevelopment of Warringal Hospital in Victoria which will see the facility almost double in size to be a 290-bed facility, stage one of the 3 stage project is expected to be completed in mid-2024 which will include 2 new operating theatres. We have also recently approved a $30 million expansion of the Port Macquarie Hospital which will include a new operating theatre, on-site radiology services and new medical consulting suites. We have commenced investment in our new digital and data strategy which has a number of streams, with the initial investment focused on building our foundations, improving efficiency and productivity and driving better outcomes for our staff, doctors and patients. Today we have provided you with estimates of the net cost of our initiatives over the next few years based on current investment plans. These investments will underpin the long-term growth of the business and will deliver significant benefits over time. A number of large projects are already underway, while additional key projects are scheduled to be launched over the next 18 months. We have also delivered a number of smaller automation projects that create immediate value for the business. The multi-year projects that have commenced include: An Electronic Health Record, HER, project where we are currently short-listing vendors; A Patient Hub project which will build out a full end-to-end seamless digital admission process and patient experience; and A Predictive Insights project designed to improve our capability in AI1 and machine learning to support improved decision making and scenario analysis. In FY '23 the focus of this work is to deliver better clinical coding and improved theatre utilization. Capping off the Asia Pacific region is our joint venture in South-East Asia, Ramsay Sime Darby which reported a strong half year result principally reflecting growth in inpatient activity in our Malaysian hospitals. The equity accounted after tax contribution increased 51.9% to $12 million. Turning to the UK. Ramsay UK, our acute hospital business, reported a good turnaround in performance with the operating environment improving progressively over the period, despite further small waves of COVID and a severe flu season. Admissions over the 6-month period increased 10.3% over the prior period with growth in admissions in all payor channels. NHS volumes increased by 11%, and private volumes increased by 9%. An impairment of $6.2 million taken in FY '18 relating to the performance of one of our hospitals, was reversed in the period due to a sustained improvement in performance over the past few years. The result in the prior year included a negative contribution from non-recurring transaction costs of $24.7 million. Removing the impact of non-recurring items EBIT increased from a negative $10.7 million to a $22.1 million contribution. Elysium, our UK mental health business, acquired on 31st January last year, performed in line with our expectations in the first 6 months of ownership. However while the business reported a 17.4% increase in revenue for the 1H FY '23, it has been impacted by labor shortages which became more acute moving into the second quarter reflecting the skew of their staffing mix to lower paid non-clinical workers in demand by many businesses across the UK economy and allied health workers equally in short supply across the stretched UK health system. This has resulted in increased agency use with higher rates, as well as the one-off costs of addressing the recruitment structure. Elysium have invested in a series of initiatives over the last few months and position applications and appointments have increased significantly from January. In March the business will open a centralized recruitment and onboarding hub which is expected to accelerate the time taken to bring new people through the induction process and into the business. Both our businesses have strong partnerships with the NHS which combined with the underlying market demand for acute hospital care and mental health services will drive growth in the medium term. Ramsay UK also expects to benefit from the growth in the privately insured market with success in open market tenders with a number of insurers over the last twelve months. Both businesses will continue to invest in their facility footprints where demand for new capacity is identified and repurpose or upgrade facilities to meet changes in the market. In the short term we expect both businesses to improve as volumes continue to grow and the benefits of management initiatives start to flow through, despite the acute inflationary pressures in the UK and ongoing staff shortages. Turning to Ramsay Santé, where after a slow start post the northern hemisphere summer activity levels did pick up across the half. The French result includes $93.8 million in revenue guarantee payments which is flat on the prior period and $112.7 million in cost support, an increase of $41.9 million. The cost compensation includes additional salary increases for staff which Ramsay Santé passes through and partial support for the significant impact of inflation on general operating expenses. The Nordics business received $12.6 million of government funded COVID cost support down on the $25.2 million of revenue and cost support in the PCP. The Nordics result was impacted by a decline in COVID related activities, such as testing, as well as lower volumes and average level of acuity at St. Görans hospital. Absenteeism due to sickness, and staff shortages impacted capacity utilization. The recently acquired GHP business combined with a number of other small acquisitions made last year in the Nordics contributed $177.9 million in revenue and $18.8 million in EBITDA. GHP's results have a seasonal bias to the second half of the fiscal year. The business is currently trading in line with expectations at the time of the acquisition. Ramsay Santé's EBIT result includes non-recurring items of $45.3 million compared to $12.6 million in the prior period. Removing the impact of non-recurring items, EBIT declined 27.2% on the PCP reflecting the inflationary pressures on costs, in particular labor costs, the impact of labor shortages on capacity utilization, a change in the mix of activity and the decline in COVID related activities such as testing. Turning to the outlook in the short-term Ramsay Santé's primary focus will be to continue to develop strategies to meet the dual challenges facing the sector firstly the significant inflationary pressures and the critical labor shortages. The French Government has indicated that it will extend the revenue guarantee from 1 January to 31 December 2023. This is yet to be confirmed by decree and the details of the structure are yet to be finally determined. Activity levels are improving following the decline in COVID cases from a recent wave over the Christmas/New Year period. The Nordics will be focused on the integration of recent acquisitions, the continued development of an integrated digital platform and resolving the performance of St. Görans. In the medium-term, Ramsay Santé will continue to focus on its strategy to become an integrated digi-physical health care business, attracting and retaining patents through the delivery of a contiguous health services pathway. This will encompass investment in new services including select investment in primary care, prevention services and outpatient and at home services as well as strengthening the base hospital network and exploring new payor opportunities. We continue to make progress on many fronts within our Ramsay Cares sustainability strategy which has the strong support of our people. We have made good headway on our climate change targets which are incorporated into our sustainability linked loans. We launched our global responsible sourcing policy during the half and external sustainability assessments have now been achieved for over 40% of our global spend and we are on track to meet our target of assessments on 80% of our spend by 2026. I will now hand you over to Martyn to run through the financials in more detail.

Thanks Craig and good morning, everyone. As Craig has outlined the 9.8% increase in revenue reflects improved surgical activity levels combined with the contribution from recently acquired businesses of $560 million. All regions felt the impact of high inflation, in particular labor costs, along with specific costs related to operating in a COVID environment including higher staff absenteeism and patient and list cancellations at short notice. As Craig mentioned, the result includes non-recurring items which we have given you more detail on in the review of results of operations. The after tax and minority interest contribution this year was $34.4 million compared to a negative $33.1 million contribution in the prior period. The main components this year were the profit on the sale of property in Ramsay Santé and the non-cash mark to market of swaps in the Ramsay Santé debt facilities. Operating cashflow increased 146.2% on the pcp reflecting an improvement in the operating environment and the change in working capital. Net financing costs ex IFRS 16, excluding the impact of swap mark to market movements in this year and last year, increased 39% reflecting higher base rates and higher average drawn debt across the period compared to the PCP. Full year total net interest expense including AASB 16 Leases is currently forecast to be in the range of $430 million to 460 million subject to movements in base rates and mark to market movements in swaps. Cashflow includes receipts from the sale of land and property in the Nordics of $55.7 million and the acquisition by Elysium of 2 UK based child and adolescent mental health services facilities for $68.1 million. There is a deferred payment associated with the sale of property in the Nordics of $30.5 million classified as a non-current asset. Moving to leverage. On this slide we have given you the Funding Group net debt and leverage ratios on a AASB 17 basis and the Consolidated Group leverage both pre and post AASB16. It is the Funding Group metrics which are used by our banks and Fitch. As we noted in our first quarter results release, the Funding Group lenders agreed to increase the maximum allowable leverage ratio within the Funding Group banking covenants from 3.5x to 4x to take into account the short-term impact of COVID. We ended the 6 month period at just over 3.5x and we expect that as the operating environment normalizes our leverage ratio will decline. Reflective of the current environment the weighted average cost of our consolidated debt has increased from 3.24% excluding CARES at the beginning of FY '23 to 4.3% at the end of January 2023. With regard to funding we continue to explore opportunities to diversify the Funding Group's sources of financing and extend the duration of its debt. Moving to capital expenditure in more detail. Total spend across the regions declined 4.2% on the PCP to $370 million, driven by a decline in spend in Ramsay Santé and the acute hospital business in the UK after a high level of investment in the past 2 years. Spend in Australia was above the prior period but below our previous forecast due to the impact of building approval delays and other related bottlenecks. Our full year spend is now expected to be lower than forecast at $705 million to $810 million. We continue to expect that capex will be at elevated levels for the next few years. I will now hand you back to Craig for some comments on strategy and the outlook.

Thanks Martyn. We have continued to invest in and make progress against our strategy despite all the distractions of the difficult operating environment. We believe we are in a relatively unique position amongst our global healthcare competitors and this means we are well placed to win share and benefit from the growing demand for healthcare services across all delivery platforms. Our strategy is divided into 4 pillars and is guided by our vision to be a leading integrated healthcare provider. The first pillar is growing, modernizing, and leveraging our world class hospital network to strategically grow our existing market share through organic growth, brownfield and greenfield expansion, and strategic acquisitions. The second pillar is to move purposefully into new and adjacent services focused on moving along the patient pathway, retaining that patient relationship by providing coordinated care using our data and digital capabilities to improve the experience for our patients and clinicians. The third pillar is about extracting the highest potential value from the business through operational excellence. Building on our strong global advantage in strategic sourcing will continue to be one of the key areas of focus. And finally, the fourth pillar is about reinforcing Ramsay's strong organizational foundations to underpin the strategy and ensure we leverage our scale. And now turning to the trading outlook. Underlying earnings growth for the remainder of FY ‘23 will benefit from the additional capacity created over the last few years combined with full year contributions from Elysium and recent acquisitions in Europe. Capacity utilization is subject to our ability to cover labor force shortages in critical areas. The focus remains on driving the synergies from recent acquisitions, realizing the growth opportunities and improving returns. The path out of COVID is not expected to be smooth as the healthcare services sector continues to be impacted more than other industries. Ramsay continues to focus on negotiating improved terms with payors to reflect the inflationary environment and COVID related costs, leveraging the Group's global scale in procurement and driving efficiency and productivity improvements. I believe the outlook for the Group remains strong despite the short-term environment remaining variable. Our world class hospital network combined with our outstanding people and clinicians give us confidence that we are well placed to take advantage of the positive long-term dynamics driving the healthcare industry. We continue to expect a gradual recovery through FY '23 and more normalized conditions from FY '24 onwards. We will now open for questions.

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

Martyn -- can I start with inflation and your cost pressures that you're seeing currently. So what I'm hearing based on your comments, is that you're continuing to see inflation broadly and more particularly in labor. And so can you provide some color on what you saw in terms of labor rates increments through the first half and how that compared with broader national wage increases that we've seen? And particularly for those critical areas, have you seen wage cost increase more significantly than the rest of your general employees?

Okay. I'll take that initially and Martyn can chip in if he needs to. I mean it really is hard to overgeneralize and particularly when we're looking at different markets. So there is no doubt that we're seeing increased pressure on wages as all industries are. We're not seeing anything out of kilter with what we see across all the markets. I mean there are elements and you called out some of the critical skills areas. But there are elements in geographies where there is a bit more pressure. But when we look at that and we make our assumptions about where that wage growth is heading. We are looking at -- in the negotiations we have with payers, whether they are private insurers or we're lobbying for government tariff increases. We are absolutely mindful of where wage inflation is going. So we are looking to neutralize that, but those negotiations, obviously, still need to occur in many respects. Over the last 6 months, there hasn't been -- we've had PPAs negotiated in Australia. We've had wage increases in Europe and U.K. more particularly. So there is a mix of impact in the 6-month period. And likewise, there's a mix of impact on pricing. So some of the negotiations have been completed, which reflect that. But other negotiations and sort of if I reflect on French tariffs, the French tariffs, which were issued nearly 12 months ago, didn't really anticipate the increasing inflationary costs that we saw, particularly through the second half of the year. And so there's -- sometimes there's a bit of a lag, and I'm going to say more generally, there's a bit of a lag. Sometimes we are able to adequately predict in advance. It's a mixed bag. Do you want to add anything, Martyn?

Yes. No. I mean -- and as you quite rightly pointed out, labor inflation is by far and away, the biggest number for us. I mean, we're not seeing inflation, particularly in PPE, for example, whereas it probably should have gone down, it's probably stayed flat. So -- and then other costs are more insignificant. And we generally have done a pretty good job in procurement but trying to sort of curtail any kind of inflationary pressures there. And as Craig said, probably the highest wage inflation is in France, and we got some compensation for it, but it didn't cover the whole inflation. And so there's that lag that Craig said.

Yes. And for France calendar '23 because they're running calendar years. Wage inflation there was sort of mid-3s, around mid-3s.

And since you mentioned the negotiations you're having with them or you have had or having with private health insurers and also with government, to the extent that they're neutralizing this inflation, I'm assuming that it's not full coverage of inflation given that you mentioned the lag. But how do you also factor in, particularly for those multiyear agreements where we can see that inflation is not going away. How are you factoring that in through the negotiation process to say well prices or inflation costs are still going to go up over the next -- whether it's 1 or 2 or 3 agreements that you have?

I should just nuanced message. The guy changes don't always absolutely line up with inflation, but they are more reflective of the inflationary environment. And so we just do our best to anticipate what inflation is going to be, what we have multiyear agreements, as you say, on with health funds, but we have multiyear agreements on EBAs in Australia. So we have some line of sight on what we think will happen over the next few years. We make assumptions about where we think inflation is going to be. And we spend a lot of time make working on those assumptions and making them as robust as we can. And then you get down to the negotiation. And so we have one-on-one negotiations with health funds. We have industry negotiations with governments on tariffs. And obviously, we -- given what has been a steep increase in inflation through this year. Those negotiations take on a different tone than they have in the past. And I think we've called out on health funds in Australia, but those agreements that we had that were multiyear that did not reflect the inflationary environment that we've entered into. We would renegotiate those, and we're in the process of doing that.

Your next question comes from David Low with JPMorgan.

Just if we could start with what you're seeing domestically in the startup to 2023, I noticed you said that there was a protracted decline through more holidays, but things have picked up in January and February. And where I really want to go with the question, Craig, is just to understand what you think is likely in terms of activity levels versus pre-COVID levels? And perhaps if you could touch on the business' ability domestically to handle higher demand? Could we see greater utilization through this calendar year?

I think the last part of the question is the most important piece. So we absolutely saw doctors taking more extensive leave really from mid-December through January, and that is not what we've seen historically, pre-covered obviously. And I think that's just a reaction to this is the first opportunity everyone's had to get overseas and have a long holiday. And so I think it's understandable. What we have seen since -- really since school has gone back and since the Australia Day long weekend ostensibly, is a strong increase in surgical volumes, particularly -- and it is the staff availability that is the constraining factor. So anecdotally, as we talk to doctors and as we analyze other data points in the industry about specialist consultations as a proportion of GP attendances et cetera. They all point to demand coming back. Our conversations with doctors are really positive. And the constraining -- if there is a single constraining factor, it is the availability of operating per nurses. And so we've been working on that for some time. Our general recruitment strategies reflect the need for us to address any shortages in critical areas but also what we're doing around training staff, so internal training. And the great nurse program is an example of that. We're into the second year of that increase in numbers, and they'll be into specialty training such as operating theaters. So that will deliver an increased supply of workforce for us. So I'm not avoiding quantifying it, but if we get the supply side, right, in terms of staff availability, then we should see surgical volumes back at premium levels that we probably saw coming out of the restrictions in FY '20.

I might just add that to the most recent reference point would be at the 10% and 12% increase on pre-COVID and surgical volumes that we had -- that we reported in our first quarter results that were in September and October for all those sort of -- that little wave of coving came in December and the surgeons all went on holiday. So that's the most recent activity. And we're probably a slightly better staffing levels than we were back in September and October as well. I'll give you some indication of what can be done.

And my other question for you, just on interest costs. Can you give us some sense as to what interest costs are likely to be in the second half into FY '24, perhaps touching on the degree of hedging. I'd like to understand was the swaps benefit booked into that interest line. And sort of broadly, do you think consensus is capturing the likely interest costs well in their numbers at the moment, please?

I would say consensus is probably a bit all over the place for interest costs. We've given you our estimate for the full year, which includes the AASB 16 leases. So the current average cost of debt across the group is currently 4.3%. You have to make your own assumptions as to where base rates go to then extrapolate that through into the back end of this year and into FY '24.

Sorry, I must have missed it if you've given an estimate. Have you given a dollar estimate?

Yes. Page 30, I think. Or – [indiscernible] So -- in terms of hedging, I mean, our hedging goes out sort of 4.5 years, and it steps down gradually, we're normally sort of well above 50% for the first 12 months.

Your next question comes from Mathieu Chevrier with Citigroup.

You talked about more normalized trading conditions in FY '24. How should we think about margins across the for 3 different businesses?

General question. I mean in terms of margins, the result has got a lot of moving parts on it in this last 6 months. Our focus is on improving margins going forward. You probably -- that Q2 is the best indicator of that, albeit in Sante, you've got a whole bunch of nonrecurring items and we booked pretty much all the kind of COVID related support in the second quarter rather than the first quarter. But yes, I mean, just to tell you what margins are going to be going forward would be a forward-looking statement that we haven't given. Suffice to say, we are focused on improving our margins going forward. And when volumes come back, that's always good for margin when the mix of higher acuity work comes back, that's always good for margin. Metal Health comes back. That's good for margin. And as we said, we're trying to offset our cost inflation with negotiations with our payers.

Yes. And just in terms of relative to pre covered in FY '24, do you think you can get back there or especially in Australia? Or do you think it will take a little longer?

Well, I mean, FY '19 is becoming an increasingly long time ago, and our business is quite different now in terms of the breadth of activities we've got, the brownfield development we've done. So getting back to FY '19 becomes less and less of a relevant benchmark. We obviously have that insight in our plan over the next few years, we won't be there in FY '24. But the idea is we're more focused on improving our margins year-in-year-out as I said.

Understood. And then sorry to go back again in history, but in the 3 years before, COVID, your Australian revenue growth was about 5.5%. How should we think about the revenue growth over the next 2 to 3 years? -- taking into account that there is a backlog in the system. There's the contribution from the CapEx that you've completed. And then there's also the contributions of the public work that you're doing in inflation.

Well, I mean, for obvious reasons, we haven't given any guidance on revenue increases going forward. It's going to be a combination of all the things you just said. The one thing that probably will be slightly different than pre-COVID is the revenue rate indexation, as we've talked about already on the call, where that is more reflective of the cost inflation that we've got in our cost base. From a volume base, yes, we -- the plan is to obviously grow with the market and take market share from the brownfield activity that we've done and invested in it over the last 3 or 4 years, we've continued to invest and we'll continue to do so in the future. Sorry, the other positive for us versus pre-COVID has been that, I think it's 9 quarters now of consecutive increases in private health insurance participation in Australia. So you've got a record number of people in Australia now with private health insurance. So that should be a positive for us as well.

The next question comes from Andrew Goodsall with MST Marquee.

Just -- I know you've had a few questions now already on the sort of forward bookings, I guess, coming of February. Just trying to understand whether all states are back running at the same run rate or whether there's still some laggards across the mix of the country by state?

It's generally similar. And I think we've got a bigger constraint in Western Australia on staff absenteeism that's a bit higher than the rest of the country because we're still giving covered leave. I mean we follow the state government. The state government is still giving covered leave. That's due to expire at the end of March, but they've still got yet to make that decision. And so in Western Australia, for example, we've had over 100 people in the last week off with COVID leave where it's been next to nobody in the rest of the country. And in Victoria, Victoria is probably in a general sense under more pressure from staff shortages. So whilst I say it's generally the same across the country, I think they are the things to call out. It sounds like a bit of work to do in several states to get back to the same run rate still.

And just while we're on the state and the agreements with the public sector, are they more progressed and flowing in some states versus others.

Yes, I think that's absolutely the case. And I think that's just going to in the nature of the boost going forward, Andrew.

So again, the -- would you still see some opportunities that just haven't crystallized yet from some.

Absolutely. I think I called out in the speech. We certainly anticipate more, but it will -- it won't be consistent across states. I think some states will be more aggressive than others.

And just switching to France. Obviously, the results out overnight, and you've talked to the guarantee being extended to ‘23. They didn't talk to the tariffs, so just any thoughts there. And I also mentioned that the compensation for nursing salaries fell below. So just any comments on those 2?

Yes. So tariff negotiations are underway currently, and they're fairly robust. And I think there's probably been some media speculation about where those increases are being negotiated at which is sort of around the 5% is where we'd like to see them. But I think they are -- it's an industry negotiation and both the private and public hospital sector are aligned in the negotiations. So we'll get some clarity on that, hopefully, in the next month, but it's a pretty robust negotiation.

And any -- does that tariff -- I mean, I know the number you gave today was a gross up number to include those nursing salaries. But is that -- would that tariff at 5% include using shares of those [indiscernible].

Don't hold the 5% because that's just the media speculation.

Or whatever the number is in the tariff, is that expected sort of to plug any gaps in dosing service was just…

Yes. No, absolutely. It's trying to address the inflationary environment, which is predominantly around wage increases.

But as we've seen, Andrew, there have been other sort of one-off payments into the industry to compensate for either cost inflation or wage inflation or COVID costs and those kind of things. So we won't know the tariff until probably mid-March. I think they're telling us which is a bit later than normal. But there could be other things after that potentially, it may include all those things, it may not.

And I think the principle of the negotiation is trying to get to a simpler [indiscernible] bucket all in buckets rather than the different lumps of money to come elsewhere. And so I think that's part of the difficulty of [indiscernible].

Final one for me. Just the Nordics seem to have landed a couple of quite good contracts. Will they make a difference in the fourth quarter? Or is that too early?

Do you want to start it again, so probably didn't get the question.

Sorry, the Nordics looks like they've landed a couple of good contracts and whether they make a difference in fourth quarter this financial?

Look, no. I mean there's generally a role of tender processes, as you appreciate in the Nordics, and they contribute from time to time. So we should see some growth moving forward in the Nordics from that. And I think -- well, I think as I called out in the speech, the biggest issue in the Nordics, primary care is going strongly. Just the reimbursement structures around [indiscernible] reflect the increase in the inflationary environment. So those discussions are happening at the moment, and that's important for the Swedish performance.

Your next question comes from Gretel Janu with Credit Suisse.

I just want to go back to labor firstly. So just to understand the labor vacancy levels. And where do they stand currently relative to pre-COVID levels because I understand they're down from peaks, but just trying to understand that. And how much do you think labor is constraining your overall utilization at this point? And if you weren't constrained, what is the revenue growth you can get to?

What was the question about percentage of agency in Australia?

Agency, but then also overall vacancy levels as well?

Yes. So agency in Australia has always been very low and probably no more than 3% currently. So it's pretty insignificant. We've called out that was a big impact in the [indiscernible] result, but as in Australia, it's a very small number. And hard to put a number on what the opportunity is if we were fully staffed. Suffice to say, it's over and above some of those peak volumes that we had, I called out before, the 10%, 12% incremental surgical volumes that we had versus pre-COVID in September, October, give you an indication of what's possible even when we did have staff shortages. I think we've called out that the peak of the vacancies in Australia was back in March '22, and we're sort of 20% to 30% lower than that now and improving continually through. So we will see a progressive improvement in terms of what we can achieve.

[indiscernible] relative to recover is the vacancy levels still now?

Are still above, still significantly above.

But [indiscernible] down from where they were.

Yes.

Understood. And then just on...

Sorry, I'll just the decline in vacancy rates continues. So whilst we're down 20% to 30%, that is where we think we stop.

Yes. Understood. And then just on the [indiscernible] as well. So the EBITDA margin at this point in time is well below what the margins were at the time of the acquisition. I understand the factors there. But I guess, how are you viewing this acquisition now and its ability to reach the return targets that you initially set out?

Still really positive about it. It was a tough second quarter from a cost point of view and a staff shortage point of view, demand for the services is still strong. So there's a couple of other factors. We've undertaken some brownfield projects. We're doing some retooling and changing case mix in some facilities. So that's put a cost burden on [indiscernible] in the short term. But as those ramp up, that will -- they will deliver. So yes, still -- despite the disappointment, really, it was a disappointment in terms of where we finished the second quarter, still really positive about what the [indiscernible] will deliver.

Your next question comes from Sean Laaman with Morgan Stanley.

I just want to... Great. Great to hear. And well job managing the business across the pandemic. I mean, I see myself as just a rugby touch judge running up and down the sideline waving my flag, but I'm not playing the game. So I can't imagine how hard it would be. Yes. Well done. Yes. So with respect to sort of get border sort of opening in that, I'm just wondering if you could give us a sense of freeing up the crossflow of -- across borders of staff, if that's maybe providing a benefit to your recruitment plans in the future.

Yes. No, I think it does. And it's certainly better than it was when the borders were closed. I think Australia has still got a way to go, though. We're still not as competitive as other markets in the world in terms of the process to get people in. So I think the governments recognize that and hopefully, they do something about it. But we are seeing increased numbers of people cross borders, certainly U.K. and Australia and [indiscernible], particularly, we -- there's been a significant effort to recruit international health care workers. And so we're seeing good results from that. And I think as we look at -- I called out in the speeds to a certain extent, the next 3 months look really positive for onboarding people.

Sure. And with respect to the cost inflation as it pertains to staff and getting some -- or trying to bleed the payers a bit more. Sort of where you sit today, do you think there's been a -- or will be a complete offset of that wage inflation? Or do you think you'll have to be eating some as we get back to more normalized levels?

It's hard to know. And we certainly have that objective. I wouldn't say we're bleeding the insurers. They're pretty strong financially. So they can share that benefit around a bit. But yes, look, they're always a negotiation. They don't want to pay us as much as we want us for them to pay. So it's the tension in that negotiation that always delivers the result.

Sure. And maybe lastly, just given when leverage sits, just your thoughts on sort of M&A going forward. And I think you mentioned other adjacencies and maybe give us a flavor for what and where some of those adjacencies could be?

Yes. There's nothing material on foot at the moment. We continue to look. I think as we've said in the past, the most sort of obvious gap in our portfolio is radiology and imaging in Australia. We have those in-house in our other markets. That's something we'd like to pursue in Australia. There's still probably opportunities in terms of bolt-ons in [indiscernible], but nothing of any great significance or huge materiality that we're currently looking at the moment.

Your next question comes from David Stanton with Jefferies.

In terms of -- just to follow up on Sean's question. So is it fair to think that we -- you should be seeing at least cost and maybe cost plus increases for your new PHI contracts in Australia?

David, I think I answered that as best I could the Sean's question. So our objective is to have price increases that are more reflective of this environment. And that's a robust discussion. Now if we can get better than that, fantastic. But they're not, as you appreciate, not straightforward negotiations at any time.

Understood. And if all the complete renegotiation or renegotiation with every PHA is 100%. Where are you now? Are you at 80%, 60%, somewhere around that?

Yes. Well, well, I'm not sure -- so we're -- we are well progressed on the normal timetable, so that rolls around. And on some of the -- a couple of the health fund agreements that we are bringing forward the negotiation, we are well progressed on one of those and early days on another. Okay. So there's a bit of water to go under that bridge. But -- and moving on though, you talked to residual costs continuing in Australia. Can you potentially estimate those for us the impact or the EBIT impact of the or for the second half of F '23, please? Yes. Well, I mean, we've said that they're immaterial now, and that really comes about because it becomes more and more gray in terms of what is COVID related. We're not in any lockdowns or not in any surgical restrictions, et cetera. So we kind of want to move away from describing any dollars to that. And to be honest, the start shortages and inflation and probably more material challenges that we've got the direct COVID costs. Yes, there be more sort of inflated PPE, et cetera, but it's immaterial now.

Okay. So very small residual costs going forward?

Yes.

Okay. And then you also mentioned in Australia, you signed these new public hospital contracts, which has been mentioned in a question. I just want to check, are they material to earnings at any stage potentially have 24 onwards?

Not in the short term, whether they, in a few years' time, become more material. But all volume as a tailwind. So there's a positive volume coming in.

Understood. My last question, one I always ask. Can you tell me how many operating theaters you plan to open for '23 and for 24 in Australia, please?

[indiscernible] for '24. So 23, we've given you the number for the first half.

That's it.

And it is -- if I gave you a number, it would be wrong tomorrow because the projects are moving around quite a bit as we've said, due to approvals and builders falling over, et cetera. So we're kind of give you the broad CapEx number. But yes, to give you a specific [indiscernible] number, would be probably [ remiss ] of us to do that.

Your next question comes from Saul Hadassin with Barrenjoey Capital.

Just a couple of questions from me. The first one, just on France. I'm just trying to understand or get some context around the extension potentially of the revenue guarantee, I mean, modeling the earnings this region is proving quite challenging. So you mentioned that there is the notion that the revenue will be extended in terms of that guarantee. What happens on the cost side and that cost support? Is it an expectation that will continue to come through this calendar year? Is that totally separate to the discussions around that revenue guarantee?

Totally separate. I say totally separate. In principle, separate because the cost recovery stuff is being bundled into the tariff negotiation. So it depends on where that falls out and then what other sort of grants will come through the year. So they're always hard to predict. So the first thing to settle is tariff and what that is attempted to cover and then address what it doesn't cover.

So on that basis, the margin outlook for that division as those -- as that government support washes away, do you think the tariff -- if that tariff rate ends up being at that round about that 5% level would be enough to preserve your -- the second quarter margin that you delivered for Sante? I'm going to reiterate the future never have said that because it's not my number. That was just the media speculation number -- so yes -- so I've lost the rest of the question having answered that. [indiscernible] that region.

Yes. Look, I mean it's so critical, as you can appreciate on the outcome of the tariff negotiation. And if the tariff negotiation is where it should be, what we are seeing in the business is improving volumes. And so whilst it's a real positive to get the revenue guarantee as a safety net through the end of December this year, what we anticipate seeing through the year is continued increase in volumes so that when the -- our concern was always when the revenue guarantee came off where that gap was. We've got a year of working through that. So we're pretty positive about where we should come out of that. And as volumes increase, then they're a tailwind to margin.

Yes. And then just one other, just -- I know you're not really wanting to give a sort of a percentage growth rate for [ February ]. But if you look at volumes where they are in Australia now for the last few weeks, the insurers are continuing to say it's a benign claims environment. When you look back, say, at where admissions were in February, March of 2020, and you assume a historic CAGR volumes admission, say, 3%. Do you think your volumes are looking like they have grown at a rate of 3% on that basis? Or do you think it's still below where they would have otherwise been.

We had that trajectory from the start of FY '20, then they haven't caught up to that yet. And I think one of the -- again, I think what we've called out is, again, strong surgical volume increase and a bit more concern around nonsurgical, particularly mental health, and we particularly called out mental health day cases. And so mental health is still -- it's affected by, as I said, the psychiatrist willingness to come back to the full hospital practices they had. But it's also a patient reluctance. And the patient's reluctance still centers around sort of covered restrictions. So still having to wear a mask in a mental health facility isn't conducive to that environment. And so those things have to repair themselves. But the biggest issue is supplier psychiatrist. So just going back to the original question around growth, just to differentiate between surgical and nonsurgical growth.

Your next question comes from Steve Wheen with Jarden.

Yes. I just wanted to follow up on Saul's question on France. I totally agree. It's a bit of a black box to actually try and forecast that region. And so the first part of this is, we think with the consent decree that guarantees your revenue, does the tariff really play a part in that? Or -- because my understanding of the consent decree is it's just guaranteeing the amount of revenue that was being paid to you pre-COVID may be some indexation?

Well, I'm going to say that's the point. So the guarantee takes the volume or the revenue from 2019 and then an index that every year -- and so whatever the tariff indexation is should be applied to that revenue guarantee. So it is quite important.

Yes. Got it. Okay. And so then as you say, that will then determine whether or not there's the additional support payments for staff and costs. So that's all mixed in together as to whether it does or it doesn't cover that. Is that correct?

Well, I think it's what Craig said earlier is our hope is that we get an all-in kind of tariff increase that covers everything, but our experience to date would suggest that it maybe doesn't and then we get these one-off benefits as we booked in Q2 for compensation for inflation, compensation for wage inflation and all sorts of other things.

Okay and so that…

[indiscernible] obviously less predictable.

Yes, yes. Okay. So then if you think about that decree and then roll forward to when the decree won't be there. Are you -- I mean, you had an expectation for the second half of this year that the decree wouldn't be there. Are the volumes at a level whereby you would be able to deliver an improvement in your EBITDA for that region? Because I guess that's the disconnect right is whether or not we're back in the volume perspective to kind of allow us to sort of compensate for the loss of the decree.

So what we're seeing is not dissimilar to what we see in Australia -- stronger recovery in surgical volumes and nonsurgical volumes recovering a bit more slightly, albeit I think nonsurgical volumes are recovering more quickly in France than they are in Australia. But the surgical and nonsurgical volumes have a different rate of recovery. And so we forecast -- I mean, I'm not going to be [indiscernible] about it, but we sort of forecast where that growth is occurring through calendar '23, given that the revenue guarantee will be there right through calendar '23. We're pretty confident where we end up at the end of that. So it was a it was -- if the revenue you guarantee expired last December, then we'd have a bigger gap to fill than we are projecting that we'll have December '23.

Yes. And I'll probably just add that we called out that we received $93.8 million worth of revenue guarantee in the half. That was the same as what it was in the prior period. So that shows some hospitals were below where they were in 2019. But I mean, that's $94 million on a total revenue of $2.5 billion. So yes, that's -- it's very helpful, but it's becoming less material, but it does show you that there was that big wave in July, obviously, that would have been the predominant reason for that small shortfall, and it's on a hospital-by-hospital basis and not done in aggregate across [indiscernible]. So it does say that some hospitals are still slightly below 2019 in that half. if we don't have any more big wave, but we had in July and things get back to normal, then we probably should start to hopefully get off that revenue guarantee scheme at some stage if it starts to normalize.

And we'll take the revenue guarantee while it's...

Is a grade guarantee... for [indiscernible].

Last question. Understood. Last question was just around the rationalization of some of the hospitals in Europe. I just wonder if there's any other ones that you've identified that we might see in the next half or next year?

Nothing material that springs to mind Steve. There might be a few little things, but nothing material.

Yes. We've obviously got the big project in Norway. So where we acquired -- so we've got a hospital with a whole -- with a bit of land of car parts. We acquired the whole site -- we sold off the bit with the car parks. And that was a big profit on sale, but we also leased back the hospital as part of our overall development project that we're doing there. That will be bigger. But yes, I think as Craig said, we're always looking at the portfolio, but nothing of any great materiality that we've been considering currently.

There are some projects that are underway. There's a project in Marseille that's a multiyear project that will progress through the year, but the things are on foot. I can't think of anything material that's new.

And sorry, you just reminded me of something and you'd be disappointed if I didn't ask just about sale and leaseback -- you did indicate that you were looking at a potential process at your full year results. I just wondered what your updated thinking is on that front.

Yes. I think what we said was we were looking at how we might go about our process. We never said we were looking at doing a process. I think as we've said before, we've done a huge amount of work on looking at it in Australia and the outcome is that to reduce any kind of significant capital gains tax bill, you end up with a structure that, to be honest, is far too much disruption for the benefit that it would provide. So we paused it any consideration of that for the foreseeable future.

[Operator Instructions] Your next question comes from David Bailey with Macquarie.

My question is just around the balance sheet and CapEx. So commentary that it's expected to be lower than [ 705 to at 10% ]. Our first question is just how much lower? And then secondly, does the current level of leverage constrain your ability to deploy capital into CapEx projects in the second half of '23 and '24?

Yes. No, thanks, David. I may have mumbled my words there. So the point is that the [ $705 million to $ 810 million ] is our current forecast, it's lower than our previous forecast.

Okay. So in terms of the actual level of leverage 3.5x, just the plan just to let that delever naturally as cash flows improve or is there anything else you're considering over and above that figure that level of gearing down?

The main focus is on the operational performance delevering over time. We're not doing anything specific in terms of any sort of financial activities to try and boost that. We do see that 3.5% as the high point. We got the extra legal room from our banks, which was good. And -- but our absolute focus is now on that reducing as we improve our operational performance.

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

Okay. Thank you. Thanks, everyone, for your attendance. And again, I'd like to thank all our people for what they do. So thank you.

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