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

Good morning, everyone, and thank you for joining us today, as we present our FY '24 Interim Results. I'm Craig McNally, and I'm joined by Martyn Roberts, our Group Chief Financial Officer. Today, we'll provide an overview of our performance for the first 6 months of FY '24, followed by an update on our Group's strategic direction and outlook. Before I begin, I'd like to mention that in 2024, Ramsay Health Care celebrates our 60th anniversary. It's 60 years since Paul Ramsay opened a small private hospital in Sydney's northern suburbs, and we've grown from there to become a leading Australian company and one of the largest private healthcare operators in the world. I'm immensely proud of our achievements over the decades and grateful to the incredible teams, past and present, who have shared and driven our success and who deliver outstanding outcomes for our patients. As we pay tribute to Paul's incredible legacy, we are looking forward to the exciting opportunities and possibilities ahead. So turning to the results. Over the half, we were pleased to see continued improvement in activity levels across all our regions, with 5.4% growth in total hospital admissions. This, combined with annual tariff uplifts and indexation, drove revenue growth of 7.8% on a constant currency basis. While the activity mix continues to evolve in all regions, patents are starting to normalize. We made some progress agreeing new terms with payers over the half year, and Ramsay will continue to push for further indexation increases from both government payers globally and private health insurers to ensure we are compensated for general and industry-specific inflation incurred over the last few years. We've also made good progress accelerating a range of transformation programs across the Group to drive sustainable top line growth, productivity improvements and operating efficiencies. Some of these benefits are visible in today's results, but there's also a lot more to do with focus on improving returns from all regions. We're incredibly pleased with the outcome of the Ramsay Sime Darby sale process, which reflects the benefits of running a considered competitive process and our commitment to disciplined portfolio management. Proceeds from the sale of RSD, which settled on the 28th of December, combined with our program to extend the funding Group's debt maturities and establish a more orderly maturation profile has strengthened the funding Group's balance sheet. We remain confident that increased activity levels combined with indexation uplift, should drive earnings growth in FY '24. We expect the results to be weighted to the second half, particularly in Europe, which is expected to return to its normal seasonality, absent the smoothing impact of government support payments. Turning to the results briefly and the headline statutory profit includes the net profit after tax of $618 million from the sale of RSD. The EBIT result from continuing operations was driven by improved earnings from Australia and strong growth from the U.K. region, offset by lower earnings from Europe and higher net financing charges. The weakness in the Aussie dollar against the euro and pound during the half also impacted earnings. We've included results in both constant currency and local currency in the reporting pack. The contribution from non-recurring items during the period was significantly lower than in the prior period, primarily due to a large profit on the sale of property in Europe in the prior year. Non-cash mark-to-market movements on interest rate swaps had an impact on net financing costs, swinging from a positive contribution of $22 million to a negative contribution of $19.6 million. Removing the impact of non-recurring items, EBIT increased 5% on the prior period and NPAT declined 3.1%. The Board determined to pay a fully franked dividend of $0.40 per share, which is at the top end of our payout ratio range based on earnings, excluding the profit on the sale of RSD. This reflects our confidence in the underlying earnings momentum of the business. As I've said, earnings are expected to be weighted to the second half of the year, and we would expect the full year dividend to reflect that. Moving to the results in Australia. Overall, volume growth combined with indexation from health funds led to revenue growth of 6% for the half. During the period, the team maintained a strong focus on mandate on managing operating costs, and we're starting to see some normalization of labor and supply price growth. As foreshadowed, digital and data and cybersecurity OpEx combined was $21.8 million higher than in the prior period at $34.4 million. Excluding the increase in OpEx, EBIT grew by 7.8%. Our focus on improving labor productivity has returned most metrics to pre-COVID levels. While sick leave and agency use have improved, both continue to fluctuate with outbreaks of COVID and other viruses in the community. Our investment in programs to advance our digital capabilities are expected to deliver further productivity benefits, as they rolled out more widely. Some of these innovations are being trialed in our new hospital in Epping in Melbourne that opened earlier this month, including a new clinical communications platform, keeping our teams connected and improving productivity and patient safety. Importantly, the business was successful in negotiating improved revenue indexation with several health funds and public payers during the half, with the full benefit to flow through in the second half. We recognize that the private healthcare, sector as a critical provider of infrastructure in this country needs to focus on remaining an attractive option for consumers in a challenging economic environment. However, to be able to continue to invest in delivering optimal outcomes for patients, the sector needs to be financially sustainable. Looking at key trends in activity in Australia. In the first half, surgical and medical admissions continued to grow at rates above historical leverages with particularly strong growth in rehab activity, reflecting above-trend growth in orthopedic surgery at some Ramsay facilities, new capacity and programs at some sites and also the closure of a number of stand-alone competitors. After growth through COVID, maternity has returned to pre-COVID trends of declining births. In this environment, Ramsay has closed or consolidated maternity services, where it makes sense. While site admissions were flat overall, site patient days increased 4% over the prior period, reflecting an improvement in inpatient volume with day admissions per work day flat on the prior period, but weaker compared to pre-COVID levels. Turning to the investment pipeline in Australia. The Australian business continues to be purposefully extended its leading position in existing strongholds with greenfield and brownfield hospital developments. On the back of higher construction costs, challenges in the construction sector, slow approval process times and higher interest rates, we've slowed down our pipeline of projects, reducing our full year development CapEx range by $40 million to $210 million to $260 million. Projects set for completion in the second half include the first stage of our redevelopment, Lake Macquarie in New South Wales and an expansion of St Andrew's Hospital in Queensland. Work continues on the major expansion of Warringal Hospital in Melbourne with the first stage of the redevelopment, including 3 new wards and ICU and new theaters recently opened. The focus continues to be on developments at our major sites that strengthen our core hospital presence. To this end, during the half, the Board approved a new greenfield short-stay facility in Southwest Sydney and a major expansion of the private hospital on the Joondalup site in Perth. These projects are expected to commence in the next 6 months. In the out-of-hospital area, we continued to make selective investments in our new and adjacent out of hospital services, including expanding our psychology clinic network to 20 sites. As I've said, we continued to progress our digital and data strategy, which has multiple streams of work with the initial investment focus on building our foundations, improving efficiency and productivity and driving better outcomes for our patients, people and doctors. During the half, we invested $33.4 million in a range of projects with $6.5 million of costs capitalized and the rest expensed. We now expect FY '24 OpEx net of benefits to be slightly lower than the originally forecast in the range of $55 million to $65 million and CapEx in the range of $12 million to $18 million. One area of focus is the development of our digital front door, the single entry into digital Ramsay ecosystem for our patients, our doctors and our teams, which was piloted at the start of FY '24 and is now rolled out to 9 Ramsay hospitals. In the second half of the year, the project is on track to be expanded and rolled out to a further 21 sites with additional capability. This is in line with our approach to continue to iterate and mature the solution over time to cater for different therapeutic areas and patient experiences. We continue to expect net OpEx to peak in FY '25 at $70 million to $80 million and to become an overall net benefit to the business in FY '28. CapEx associated with current projects is also expected to peak through FY '25 and '26 at between $70 million to $80 million. As we've flagged previously, the final accounting treatment of major projects may change depending on vendor selection and accounting assessment at the time. Turning to the outlook for the Australian business. Ramsay Australia has an unmatched portfolio of strategically located, high-quality hospitals that are attractive to clinicians and patients and provide valuable services for payers. This is evidenced by our strong performance relative to the industry in Australia, where many of our competitors are losing money. Our development program, combined with our focus in key out-of-hospital specialty areas, as well as our private emergency department strategy are designed to enhance and protect our strategic position in the market into the future. We will continue to drive sustainable operation efficiencies and productivity through our performance acceleration program, which is delivering improvements in cost control, revenue management and procurement programs. In FY '24, we expect EBIT to improve on the previous period, driven by mid-single-digit volume growth and indexation combined with productivity improvements coming from labor management and cost-saving initiatives. Turning to the U.K. region, which reported a 114% overall increase in EBIT in local currency. With the acute care business, continuing its strong trajectory of improvement and the changes being made at Elysium starting to flow through to improved earnings. Ramsay U.K., our acute hospital business reported 28.5% revenue growth and an 84% increase in EBIT or 17.4% and 66.6% in constant currency, respectively, driven by 10% growth in admissions, a higher acuity mix and the initial benefits of productivity and efficiency programs put in place over the last 18 months. Elysium reported a significant turnaround in operating performance with 22.9% growth in revenue and a 500% improvement in EBIT or 12.3% and 472.8%, respectively, in constant currency, driven by a focus on improving occupancy levels and reducing costs. Occupancy increased 5 percentage points by period compared to the prior period, but remains below target for some services. Reflecting the focus on recruitment and training, staff turnover declined and agency costs, as a percentage of labor cost improved by 6.6 percentage points compared to the prior period. Turning to the outlook for the U.K. Ramsay U.K. expects high single-digit volume growth for the full year, with ongoing growth expected in both NHS and private pay volumes. The business will continue to focus on mitigating ongoing inflationary pressures, particularly wage inflation. We expect ongoing improvement in the performance of the Elysium business with the focus on lifting occupancy and further improving recruitment and training to reduce agency costs and employee turnover. The business will also continue to focus on repurposing and developing services to match demand with select investments in new facilities based on demand from stakeholders. Turning to the European region, where Ramsay Sante saw 5.4% growth in hospital admissions, driven by 5% growth in France and a 10% growth in the Nordics region, reflecting an improved performance from its acute hospital business. The Nordics also reported good growth in primary healthcare admissions. Case mix in France continues to impact revenue growth. Like the U.K., the result benefited from a weaker Australian dollar. However, the results in euros was impacted by Swedish krona weakness against the euro. The reliance of the French business on the government's revenue guarantee scheme declined during the period, with payments reducing by 37% compared to the prior period, reflecting a return to more normal patterns of activity combined with the impact of modifications to the scheme in 2023. As we've highlighted previously, the transition away from one-off compensation payments for COVID costs, wage increases and inflation received over the last few years has impacted earnings. '23,'24 annual tariff increase, while reflecting inflation in the current year, did not factor in the compounding effect of cost inflation over the last few years, hurting margins. EBITDA in local currency declined 12.5% compared to the 73.5% or EUR 109 million decline in total government support payments and reflects the benefits of cost and other productivity measures the business has introduced over the last 12 months. The EBIT includes a positive contribution from non-recurring items of $7.8 million versus a positive contribution of $45.3 million, primarily related to a property sale in the Nordics in the prior period. After removing the impact of non-recurring items, EBIT from the Nordics region actually increased 9%. Turning to the outlook. Ramsay Sante is currently forecasting top line volume growth of low to mid-single-digit growth in France and higher in the Nordic region, driven by increased acute activity and contributions from recently established facilities. With the business transitioning from the smoothing effect provided by the revenue guarantee, Ramsay Sante's earnings will return to being weighted to the second half of the fiscal year. This reflects the return to pre-COVID seasonality and activity and includes the benefit of the tariff increase for the '24, '25 year, which will contribute to the final 4 months of the FY '24 results. The business remains in ongoing dialogue with payers, predominantly governments regarding cost compensation for the '23, '24 year and the level of tariff increase for '24, '25. However, these discussions take place against the backdrop of significant pressure on government budgets. Private sector is an important part of the French hospital services sector, delivering approximately 1/3 of total hospital activity, including over 50% of surgical procedures and an estimated 40% of cancer treatment and engages with over 200,000 health workers. It's our firm belief that the French government must take action to ensure the industry's sustainability through appropriate compensation for the impact of inflation. We remain focused on improving productivity and efficiency in the face of ongoing cost inflation that is expected to continue. The business will continue to optimize its hospital and clinic network in France, including investing in adjacent activities to strengthen its network and improve returns. We have made further progress on our Ramsay Cares sustainability strategy over the half. We're heavily focused on developing our people, and it was fantastic to see Ramsay Australia being recognized among the world's top 6 healthcare companies for women employees. And for the second year in a row, Ramsay was named the #1 health company for graduates. This month, we welcomed 400 new graduates in our Pathway Program in Australia on top of the 2 intakes that started in 2023. Participation in our Leadership Academies has grown across all regions. We continue to work towards our net zero greenhouse gas emissions goal and have now achieved 75% of our targets to install 6.3 megawatts of renewable energy projects by 2026. All our regions are rolling out new ways to reduce emissions and waste. 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 outlined, total revenue from patients grew by 13.8% or 7.8% in constant currency terms. This was driven by a 5.4% increase in hospital admissions across the Group, as well as annual indexation increases and improved occupancy and rates in Elysium. As you can see from the table in this slide, the growth was boosted by a weaker Australian dollar and particularly against the euro compared with the prior period. Depreciation, amortization and impairments increased by 11.4% compared to the prior period. This primarily reflects currency movements and increasing the depreciation of right-of-use assets in Ramsay Sante due to price indexation and a turnaround in impairments reflecting the write-back of an impairment in the prior period in the U.K. We've outlined a number of non-recurring items in the pack with the impact on EBIT and NPAT from continuing operations being significantly lower than the prior period at $6.9 million and negative $3.1 million, respectively, compared to positive contributions of $56.3 million and $34.4 million in the prior year. Stripping out the impact of all of these, Group EBIT from continuing operations increased by 5% and Group NPAT declined by 3.1%. Total interest expense increased 46.6% to $309.5 million or by 38% in constant currency terms. This was at the top end of our forecast range. However, it did include a negative non-cash mark-to-market on an interest rate swap in Ramsay Sante's debt of $19.6 million compared to a positive impact of $22 million in the prior period. Removing the impact of mark-to-market movements, net financing costs increased by 24.4% to $289.9 million. The effective tax rate for the half for continuing operations was 33.2% compared to 31.2% in the first half last year. The rate was higher than last year primarily due to higher CVAE taxes in France and Ramsay Sante's loss before tax result given the lower company tax rate of 25%. The rate was lower than our forecast of approximately 36% due to the non-accessibility of some non-recurring items, in particular, the remeasurement of options to buy back minority interests in the primary care business in Denmark further to Ramsay Sante increasing its shareholding. The key movements and changes in the balance sheet and cash flow related to the sale of RSD and the repayment and termination of debt facilities with the proceeds of the sale. Foreign currency translation has also had an impact on values in the balance sheet since the 30th of June, in particular on intangibles and right-of-use assets. Moving to leverage, on this slide, we've given you the funding Group net debt, interest cover and leverage ratios based on the calculation used by our banks and by Fitch. In the first half, we focused on extending our funding Group debt maturities and establishing a more orderly maturation profile. And we've successfully extended each of the 3 $500 million tranches of our sustainability linked loan by 2.25 years and put in place a new 6-year $500 million syndicated facility, which is well supported by existing and new banks. Importantly, the funding Group's base rates will not change, as a result of the new facilities due to our existing hedging programs. The funding Group's weighted average margin on the facilities will be circa 10 basis points higher, reflecting the longer tenor of the extended and new facilities. The funding Group weighted average cost of debt inclusive of margin at the 31st of December was 4.86%, and that's excluding Cares. At the 31st of December '23, approximately 93% of the funding Group debt was hedged at an average base rate, excluding lending margin of 3.16%. Turning to the consolidated Group debt profile, where you can see the only net movement of note other than the impact of currency translation was the repayment of facilities within the funding Group. Ramsay Sante's AASB117 debt metrics in euros as shown on the graph on the right, and its leverage ratio did increase primarily due to lower earnings in the period. The weighted average cost of debt for the consolidated Group at the end of December '23 was 4.88%, excluding CARES, and approximately 84% of the consolidated Group debt was hedged for FY '24 at an average base rate, excluding lending margin of 2.64%. Our FY '24 net interest expense is now expected to be in the range of $590 million to $620 million, which includes an estimate of the non-cash negative mark-to-market movement for the full year of $33 million, as well as some transaction costs associated with new funding Group facilities. Moving to capital expenditure, total spend across the regions was $409 million, with slightly higher spend in Australia and an increase in the U.K., reflecting new facilities in both the acute business and Elysium, as well as some investment in repurposing facility in Elysium. We expect full year spend to be in the range of $0.8 billion to $1 billion, which is slightly lower than our previous forecast due to lower spend in both Australia and France. In light of rising interest rates, we are applying a more conservative approach to new projects with our new hurdle rates being a post-tax IRR of greater than 12% and a post-tax cash ROIC of greater than 12% for brownfields and other investments by the end of year 3 and greenfields and acquisitions by the end of year 5. Both metrics have increased from the previous hurdle of being greater than 10%. The EPS accretion targets remain the same. Ramsay will retain a disciplined approach to capital investment, and we expect the balance sheet will be further bolstered by our strong cash generation capability. And with that, I'll now hand you back to Craig for some comments on the FY '24 outlook and longer-term strategic direction.

Thanks, Martyn. Turning to the FY '24 outlook, we continue to expect further growth in Group earnings from continuing operations, reflecting mid-single-digit top line growth, driven by low to mid-single-digit growth in activity levels combined with higher reimbursement rates. The results are expected to be weighted to the second half of the year. Margin recovery will be slowed by ongoing cost pressures that are not fully reflected in reimbursement structures combined with an increase in digital and data OpEx investment, which is an important plank for our future growth. Our immediate focus is on improving the performance and returns of the Australian and French hospital businesses and continuing the turnaround in the Elysium business. We will continue to review the business in the context of optimizing shareholder returns, and we are actively assessing a range of strategies to unlock value and drive improved performance from our portfolio of assets. On Slide 21, there's some guidance around various metrics for FY '24, which I'll leave you to read. Turning to a slide that many of you will be familiar with our long-term strategy. Our vision is to leverage our platform to be a leading healthcare provider of the future. We believe the growth of the private healthcare industry will be underpinned by structural tailwinds, including technological and clinical developments, rising health care expenditure, as a proportion of GDP, a growing and aging population and the associated rising incidence of chronic conditions, which all contribute to increasing healthcare costs for governments. We believe private healthcare providers have a critical role to play in supporting the healthcare system in the future and that establishing commercial solutions in partnership with governments will be an important part of that. With Ramsay's unmatched network of strategically located facilities, world-class healthcare teams, industry-leading investment in clinical excellence, trusted payer relationships, targeted push into new and adjacent services and investment in technology, we feel strongly that we are uniquely positioned to benefit from these tailwinds and deliver long-term benefits to all stakeholders. Our priority is to continue to leverage and strengthen our core hospital business through a series of transformation programs and by investing in a wider range of services that feed into and support our core, ultimately driving improved outcomes for patients. Finally, I want to say thank you to our remarkable people and our doctors, who demonstrate every day what it means to be people caring for people. I thank all the people, who have worked with us over the last 60 years to make Ramsay what it is today. I'll now open up for questions.

[Operator Instructions] Your first question comes from David Low from JPMorgan.

Can I just start with just a clarification. So the mid-single-digit top line growth, is that pre-FX? Because frankly, it implies a pretty small growth in the second half on a reported basis.

That's volumes, I think we said.

Is it. Very clear. So that's a volume number. So mid-single-digit volume growth is a full year expectation? I mean, [ that's like ] top line growth, I can't remember it, okay, anyway.

Yes. But constant currency. Yes.

Good. Get that one out of the way. The commentary on funding, if I could just get a quick overview of what your expectations are [indiscernible]. One, if we could start domestically and just take a little bit more of an understanding of what came through in the half, finished from better rates from health funds and what that will contribute in the full year and ongoing? And if I could get you to comment a little on France as well and this news that this [ EUR 0.5 billion ] coming to the system, as an additional funding and what Ramsay expects to [ fund ] or expects to get from that, please?

Yes. Thanks, David. Maybe not surprised, I'm not going to give you the specifics on funding increases. However, as we've said previously, and as I've said in my speech, the renegotiations that we've had with health funds in the Australian environment have been positive, and we expect that to flow through. And our position has really been around recovery on the inflationary costs that we saw. We'll have more negotiations coming up over the period, as they go through their cycle and that will still be the intent we have. So I'm not going to quantify what those increases are. In terms of France, yes, lots of negotiation from an industry perspective with government. Unfortunately, there's been 4 health ministers in France over the last few months. So that has made a continuity of those negotiations difficult. The extra money coming into the system, there's been speculation about that. We haven't seen anything concrete. However, we're in there fighting for our fair share of that, assuming that it's coming. Again, I can't quantify what that may be and whether there's definitely anything coming soon.

Okay. If I could just get one clarification there. So I certainly don't expect you to give me a blow-by-blow account of the different funds. But certainly, I think in August, the commentary was that some payers were at rates that weren't acceptable. But what I'm really trying to get an understanding of is how much benefit from a better rate came through in the half we just saw, like the full 6-month contribution of new rates, is it meaningful? Or is it -- that's going to be lost in the detail?

It's not material in the first 6 months. You'll see a lot more benefit in the second half. There was some -- there was some, but not a huge amount. Yes.

Your next question comes from Lyanne Harrison from Bank of America.

Can I just come back to David's question about mid-single-digit top line growth driven by low to mid-single-digit volume growth. I think in the first half, we saw very strong growth across most or all of your regions, why would you, in your view, that we can't maintain that similar growth in the second half, as we saw in the first half on volumes?

Well, we did -- I mean, we did obviously benefit from trading over the last big COVID wave, which was in July, August in the prior year. So that certainly was some of the benefit in terms of why we had some of the growth that we had in the first half. And then, we're -- hard to predict volume growth, and we're obviously conservative when we think of these things, but that's our current sort of view of where we think we're going to land for the full year.

Okay. And then on your margin recovery, you're talking about ongoing cost pressures not fully reflected in reimbursement structures and David asked the question about reimbursement. But in terms of the cost pressures, where are you still seeing pressure? I mean, you spoke about normalization of labor in some geographies. So is the worst past us? Or are you see still seeing pressure in some geographies and some segments?

I think the worst is past us. But the sort of wage inflation, as you lock in EBAs for 3-year cycles that have factored that in. We are seeing supply costs temper. So we're not seeing the increases that we did see. So it's about being able to forecast that going forward and then getting reimbursement rates that reflect that.

Okay. And last question on CapEx, Slide 18. Quite significant CapEx in France in the second half. What is that being spent on? And can you talk the rationale behind that, particularly given reimbursement rates or tariffs in France has been more challenging than other markets?

Most of the investment in France at the moment is maintenance CapEx. And as you can imagine, we've got a very, very significant portfolio over there. There are some growth CapEx, and we do have quite a strong strategy on imaging. So there's some investment in MRI machines and those kind of things. But a lot of it is routine and compliance. It's just the phasing [ bit ] of spend really.

Your next question comes from Gretel Janu from E&P.

I just want to start with the guidance of the stronger second half. So can you just give us some indications about how you've traded into January and February?

Without being specific about it, we've certainly seen -- January started slowly. I think we saw -- and this is in the Australian context. We saw more leave early in January and then volumes have recovered well second half of January and into February. So, yes.

Okay. And so, February has been strong, how would you characterize the month of Feb?

I'm not going to do that, Gretel. But it's not out of whack with where we thought we should be.

Okay. Understood. And then just on Australia margin, so previously, you've guided to flat margins for FY '24. I guess, does that still hold now? And how should we think about margin improvement from here given just your -- still cost pressures and expectations of digital costs then peaking into FY '25?

Yes. So I think what we said before, it still holds true that any margin recovery that we could have through volume improvements and productivity improvements, et cetera, Australia would be offset by the increased spend in digital and data. That still holds true. And then beyond then, the spend obviously starts to sort of the year-on-year delta in the digital and data spend starts to flatten off, and we start to get some of the benefits through. And as we've said that the benefits will outweigh the cost in FY '28. So our expectation is that margins beyond this year should start to improve year-on-year.

So even into FY '25, given the fact that digital costs will peak in '25, you still are expecting margin improvement?

All other things being equal and lots of -- there's a lot of water that are flowing to the bridge between now and then, but yes.

Your next question comes from Steve Wheen from Jarden.

Craig, I just wondering, if we could push a little bit further with the negotiations with the payers. Just with regard to the timing, so you've obviously completed with Medibank in December with the addition or the renegotiation. Where are you with the rest of the insurers? And is that sort of going to be partial contributions from those payers during second half?

Yes, there's nothing imminent. We're probably in the back half of the calendar year before there's anything material. So yes, I think that's where it's at.

Okay. And then speaking with some of your unlisted competitors, they were talking about one-off payments as a -- so it's not being built into the base for indexation in the future. Is that the basis that we should be looking at, particularly, as we start to contemplate FY '25 as well?

Look, we won't talk about the details that is the principle. I think when we've talked about other payer negotiations, getting one-off payments through the COVID period was something that sort of crept in a little bit, but things have got to be in the base going forward.

Okay. I'm just curious as your commentary in the outlook around strategies to unlock value. Is there any sort of examples you could give us to help us sort of contemplate what you're trying to flag here?

No, I mean, certainly, the -- and it's not a new exercise. The Board continually reviews the business in terms of increasing shareholder returns, as I said in the speech. We're constantly looking at what are the strategies we could pursue to unlock that value. And I think the sale of RSD is a good example of that. But we took a disciplined approach. We took our time to make sure we factored in all the considerations that we needed to, and then we executed, and we got a great outcome on that. And [ that with a ] particular circumstances that sat around RSD, and we'll look at the whole portfolio, and there are different circumstances that sit in each of the regions and parts of the portfolio. And we'll look at the best way to continue to increase shareholder returns and unlock that value without -- and I won't be specific on it. And if and when we get to a position, where we've made a decision, we'll make an announcement at that time, so.

Okay. Final question. Just with back to the Australian business. Just curious as to the trend of day versus overnight stay and how that is sort of evolving for you how you can compensate for that shift towards day procedures with regards to the business going forward?

Yes. It's -- I mean, as we've said for many years, Steve, we do anticipate day procedure growth to be greater than inpatient activity. But what we're seeing now is a bit of a flattening of that in terms of the proportion of our work that's undertaken on a day basis. And I think that's a little bit of where the catch-up was as well. Now how long that lasts for? Not sure. But I think as you look well into the future, I think we'll still see faster growth in that less acute environment [Technical difficulty] adjust that cost base accordingly for whatever the service profile we have.

Your next question comes from Mathieu Chevrier from Citi.

You stated in your remarks that many of your competitors are losing money. Has that changed significantly, you think the proportion of people, who are losing money in the industry? Because I guess, there was always a tale of smaller operators not making any money?

Yes. I think if you do -- look at the public information, particularly around the non-for-profits, but others as well. I think you can do your own analysis on where that is, and that's a much more acute position for the industry than it has been for a long time. And so, I think -- I don't want to be dancing on anyone's grade at all, but the industry needs and will swing from that position. And as the industry improves, we're really well placed in terms of the portfolio of assets we have and the investments that we've made to continue to ride that upswing. But certainly, the industry across the board is suffering more than I've seen it in my career.

And on the funding front, I mean, is there anything you think -- is there anything you believe the federal government could be announcing as part of the May budget that could help the industry?

Look, I think the -- it's a good question. There's many detailed aspects in that, and I'm not going to go into those because the subject of discussions at an industry level with government. But I think it's certainly obvious that payers have had an improved financial position coming through COVID. I'm not sure the government can do a lot about the balance between insurers and providers but recognizing that it's the providers, who are wearing the inflationary impacts and need to be compensated accordingly is important.

One final one for Martyn. Looking at Europe, it's been unusually difficult to forecast. Should we be taking first half EBIT and assume a 55%, 60% second half SKU?

See, I'll be giving you guidance on EBIT. If I told you that what we have said is that the balance between first half and second half will revert back to sort of pre-COVID type level. Certainly, in Europe, we do see a large difference between first half and second half. The same is true for the U.K., clearly, because of the July and August holiday period. Clearly, the reverse is true in Australia because of January, but it's not to the same extent. So that's why when you add it all up together, you do get a higher weight of profit in the second half [ to ] the first half.

Your next question comes from Saul Hadassin from Barrenjoey Capital.

Martyn, just following up on that question as it relates to particularly the European region. If we do go back to pre-COVID, I think the last half, we had normal earnings in Sante, it was a [ 30%, 70% ] EBIT split. So I'm just trying to understand the contribution from the revenue guarantee this half, which we weren't expecting. Is the assumption that, that will continue into second half? In other words, volumes are not back to where they should be, so you're still getting that revenue guarantee? And is the [ 30%, 70% ] EBIT [indiscernible] still a reasonable estimate for -- particularly for France second half profitability?

That sounds quite extreme, and you may -- I don't know whether you're looking at FY '19, which obviously had Capio in the second half. It's not that extreme. So [ 30%, 70% ] is way over the top. In terms of revenue guarantee, it is continuing, but we don't know in what form. So I think we've been through -- they over -- they went through a very complicated adjustment in 2023 by only applying 70% of the gap that we had. And so -- but I mean, it did reduce from first half '23, we had $93.8 million, and this half just gone up with $64.7 million. That's before you take into account all the other cost support activities that we have, which were huge. So as the volume continues to increase, we would expect the reliance on the French revenue guarantee scheme to continue to decrease, but that's by virtue of the fact that we're getting revenue by billings. So...

Yes. And I think it's not across the board either. I think it's an important point.

Yes.

Just some geographies, particularly regional areas, where recovery is slower than we've seen in the major metropolitan areas.

Yes. Has the tariff been announced in France for the '24, '25 year?

No, it hasn't. So we're probably not optimistic it's going to be announced tonight. I don't think it commences on 1st of March. So we -- last year, I think we were sort of [ nearly ] April before we got the announcement. So we're probably not expecting something different here.

Okay. Can I just ask on the U.K. acute MedSurg business, so very good revenue growth, but only $10 million of Australian EBIT after leases. What's the issue there? And is it -- again, is it just the ramp in cost inflation and you're not getting sufficient NHS tariff to offset that?

Well, we're coming back from a very, very challenging situation that we had during COVID. I think it wouldn't take away from the great work that the team has done over there in terms of increasing the profitability. Yes, when you apply your AASB16 accounting and all those kind of things, you do end up with a reduced amount. But it's still a good contributor to the business going forward. I think the other thing that we want to highlight as well is the big turnaround in Elysium for the U.K. segment, that's been extreme. And the team has done a fantastic job turning that business around. And so, we're kind of back on track, probably a year behind, where we thought we would be for Elysium, but we're certainly back on track now and massively reduced agency costs and occupancy coming right back up again. So we're feeling pretty confident about the future in the U.K.

Thanks, Martyn. And last one, just [Technical difficulty] the operating cash flow pretty weak in the half, effectively no net operating cash flow after lease costs, lease expenses. Just wondering is that the working capital headwind in this half, will that unwind in the second half completely? Are you expecting a much better operating cash flow results second half?

Yes, I did see your note this morning. So I'm not sure, where you got your number from. But yes, it wasn't a strong cash flow this half as the same half last year. Our operating cash flow was $208 million versus $441 million last year. We have had some challenges in revenue collection from governments, in particular, and also from some of the private health insurers, particularly as we change and change rates with private health insurance, it takes a while to get through those. So there have been a few challenges with that, but we're working on those programs going forward. There were a couple of provision releases as well within the result. You've seen the one with regards to our increase in shares in that business in Denmark that we talked about. So that was sort of a negative from a working capital perspective. And we did spend $30 million extra in CapEx versus the prior year as well. So that's why we end up with a free cash flow position that's quite a bit different to last year.

Understood. Yes. Just a clarification, our cash flow deducts the repayment of lease principal, obviously, which is a rent cost. So it's AASB16 reversed, so you get a AASB17 cash flow.

I'd love to have a conversation with you and go through the detail of that at some stage, so and [ stats there ] would be good.

Your next question comes from Craig Wong-Pan from Royal Bank of Canada.

Just wanted to understand with the new hurdle rates for CapEx, that sort of higher return that's required. I mean, does that potentially reduce the level of kind of like overall CapEx that you're thinking about spending? Like were there [ any ] projects previously in that sort of 10% to 12% range, which might not be approved now under the new rates?

Well, certainly, it does make it more challenging to find projects that we do allocate capital to, but I think that's appropriate. I think what we -- when we were together on the Gold Coast, I think we've said that we haven't really approved anything below 12% in the past 6 months anyway because we were conscious of the fact that our WACC had gone up, and we're just formalizing that now to make sure everyone is aware of the discipline we're approaching. The CapEx spend is naturally, as you'll have seen over the last 3 years, it slowed down versus where we said it would be originally, and that's not just because of the hurdle rates. It's also a bit just because of the slowness it takes to get business approvals. We've got, I think, 3 brownfield projects under construction, where our builders have gone buff. And so, you've got to find a new builder and get those things going again. And so that's slowing down the program as much as anything else. So yes, it's -- on the margins and what it means is the teams have to go back and value engineer those projects and really sort of sweat the asset, as hard as possible in terms of what they're putting forward to make sure we can get things that do make those hurdle rates. Then Craig and I reject way more that come across our best than we approve, and that will continue to be the case.

Okay. And I just want to understand on kind of cost inflation sort of across your regions. I mean, has that changed much over the past kind of few months to 6 months since you kind of last provided an update?

Which regime, sorry, Craig?

Just across different, I mean, if you could kind of sort of go by each geography like has there been much kind of cost inflation changes for Australia, sort of Europe, the U.K.

So I mean, certainly, in the last few months, I mean, by virtue of the fact that Sydney, Australia has got EBAs locked in, so wage inflation doesn't change massively month-to-month but within short periods. I think what we've seen is supply costs and PPE, for example, which is not a huge amount, but is a good indicator, has been pretty much flat over the last 18 months to 2 years, but off a number that's way higher than what it was pre-COVID. So the prices went up massively during COVID, they then came down to a level that was still above COVID and a flat line since then. Same probably is true with [ procedures ]. Things like electricity and gas are not a big part of our expense bill at all. I think they're less than 2% in Australia of our total expenses, for example, that's mainly around wage inflation, and there's not been a huge change in that since we last spoke.

And in sort of the U.K. and Europe has kind of wage inflation, is that normalizing now?

It depends what you consider normal really, but it hasn't changed much, I would say. Yes.

It hasn't...

Yes. I think that's probably the most important point. We don't see it going up in terms of an increase in those percentage increases. Stabilized rather than normalized would probably be the better word.

Your next question comes from Andrew Goodsall from MST Marquee.

Just on France, obviously, there's some short-term money on the table at the moment. But just wondering your views on the prospect of a long-term fix there in terms of funding. And then in terms of your own strategy, are you doing work to progress how you're going to approach Europe longer term?

I'll start at a high level. I mean I think there's a recognition within France of the need to increase funding in the health sector. I think the reality is the French economy is under significant pressure. So to allocate that money to help means taking it off somewhere else, and I think that's a real challenge for us. So I'm not -- I won't say -- but the industry is working hard to put its case to government or not as I mentioned in the speech, not only tariff increases from tomorrow onwards, but still a recovery of inflationary costs that impacted the system over the last year or 2. So I couldn't say I'm optimistic. However, I think there's a reality that the system still needs additional money. And in saying that, the French government through the last few years has been -- has recognized the needs of the system, but that doesn't mean that it continues at that level given the pressures they've got through the economy. And then what we're doing, I mean, the team in France have done a great job in managing costs and looking at structural cost reduction, and we'll continue to do that. France, particularly, I don't know, we can say, and the Nordics. The rollout of the digital strategy continues. It's certainly started at a different level from Australia. So the impact is not anticipated -- anticipated to be as great in terms of investment in the short term. But they're all initiatives that are trying to position the business in -- differently and in a better position moving forward.

Okay. And maybe just a couple for Martyn. Just the first one, actually, just a bit of [ miss if I may ]. The insurers say that hospitals have got a habit of holding back claims ahead of a rate increase. So I'm not saying that you do that, but can we expect second half collection to be a bit better? And -- maybe is that maybe the rates have come up a little bit with some of your renegotiations?

I would say that we're focused on increasing our claims, but it's not by virtue of reversing what you just said. But we are focused on working capital, absolutely. Yes.

Yes. I mean, it's the claim related showing the person was admitted not to when you send the bills.

Yes, yes.

Okay, just a coincidence then. Second one was the drag from the new hospital opening. I know it's probably going to be pretty small, but just trying to balance that up with...

Yes. I think we previously said it's about a 1 percentage point drag on EBIT margins this year.

Yes. Okay. So [Technical difficulty] turning around sort of [ '25, '26-ish ].

Well, I mean, as I said earlier, it takes 5 years for greenfield to really hit its straps. So it will be in a loss-making position for the first couple of years.

So really is [ '26 ]. And the final one for me, just a bit of just understanding sort of November, December, we saw the APRA data yesterday it seemed a little bit weaker. There was a comment to us that COVID did have a little bit of an impact in November, December. So just in Australia, just trying to [Technical difficulty] whether you imagined that?

Yes. Look, it was certainly an increased impact, but it wasn't that material. And I think we struggled with the APRA data all the time as we talk about just the timing of some of that data. And I think the APRA data is probably a little clouded in terms of benefits paid with where the member rebates are sitting in the APRA data as well so.

Yes. Yes. It's probably more the case. There's a few quite small headwinds there that probably reverse in the second half, perhaps.

Yes.

Your next question comes from David Stanton from Jefferies.

Just a follow-up on Saul's previous questions. I just want to understand, first half, second half get a bit more granular in terms of the cash flow profile that we should be expecting. Is there anything really to point out in terms of second half cash flow expectations that please?

Nothing in particular I can give you. With that, other than -- yes, as I said, we have had some issues with cash collections. We're really focused on improving that through the second half, below to give you any kind of target or number that were improved by.

Sure. Sure. And I guess my second and final question. In previous sort of result commentary, you talked to some clinicians in Australia, perhaps not working as hard as they used to pre-COVID given the activity that we've seen or the activity growth that we've seen, what would be your comments now? Do you think the doctors are working as hard as they were pre-COVID, I'd be interested in your views on that? And what does that mean for the longer term as well?

Yes. Thanks, David. Let me just clarify. What we've seen is -- and I think we continue to see with less work after hours, so less evening operating [ data less with weekends ]. However, we are -- as our volume has increased, we're seeing more of that work done on a routine Monday to Friday basis. So I'm not going to say the doctors aren't working as hard. But I think what we have is -- and this is a longer-term issue for the system really. And we've talked about it for a number of years as well, is that the generational change in the doctor profile and work life balance comes into it, and that was accelerated through COVID means that you need more doctors to service not just the same demand, but the increasing demand. And so that's the focus of -- for us and I think for the industry and then making sure that we're as efficient as possible. So doctors can get through more volume of work in a period of time. So my comment was not a criticism of doctors, not working hard. It was just the reality, I think, of the way that we see the work coming through and when doctors are wanting to work.

No, I never said that doctors aren't working hard. I know 2 [indiscernible] doctors, who work very hard. But I guess, my question then as a follow-up is how do you attract more doctors in on a longer-term view? I know this is a qualitative question, but I'm interested in your views, how do you outcompete your peers?

Look, going back to the fundamentals of portfolio investments, so what doctors are looking for generally is that their patients are getting great outcome and experience that they're able to operate -- they just operate in a general sense. They're able to operate in an efficient environment, where they're comfortable that the quality of the nursing staff and other clinical staff in a hospital environment are going to make sure that the patient gets a great outcome. The investments we make in is not just in physical infrastructure, but clinical infrastructure, in clinical technology, the training and development of our people, all makes a better environment for doctors, and we obviously have some [ magnet ] hospitals. It is just keep on doing that. That's been what we've done for a long time, and we keep doing that. I mean, I think we're in a position -- that -- we've got, as I said in the speech a couple of times, we've got an outstanding portfolio of hospitals, particularly across the regions. But if we focus on Australia and France, we've got the premier portfolios in those markets. We need to keep investing in making sure that they keep improving. We continue to concentrate on building more theaters. Our involvement in teaching and research. We certainly punch above our weight in many aspects, but none more so than our involvement in teaching and research, which again makes us a place that doctors keen to work. The investment that we're making in digital technology and the transformation process of that part of the business -- well, not just part of the business, but the business to be focused on patient experience, doctor experience, making it easy for us for people to deal with us through the introduction of more digitized processes and technology. All that investment comes together to allow us to recruit more doctors than the rest of the industry.

Your next question comes from Laura Sutcliffe from UBS.

Just one on the U.K. to start with, please. If you look at the top line growth there, so you're expecting high single-digit volume growth in the second half of the year, is that sustainable after the end of FY '24 in your view, the elective waiting list they're still pretty long.

Yes. We think it's a multiyear position. The waiting list, I think the official number -- the latest official number for waiting list in the NHS is about 7.5 million people. The unofficial number is significantly higher than that. And I think all sides of politics have given reduction in waiting list the priority. So we're not concerned that the U.K. election changes that position. And so, we're confident that we'll continue to see volume increases for the periods to come.

Okay. And then just for Elysium, you've spoken about sort of your continued confidence in the turnaround there. Margins still don't look to be that far above 0. So just maybe you could talk to your confidence level that they can get into the high single digit beyond, where do you think it ultimately lands for Elysium?

Well, I mean, the EBIT margin for Elysium in the first half was 5.4%, I think. And so, that's a half, where we were improving during the half, I would say. So our expectations for the second half are higher again than that. And there's really no structural impediment to that business getting back to the same margins it was experiencing during -- just before we bought it in the first 6 months after we acquired it. By virtue of the fact that of all of the companies, we've actually had reimbursement rates that have actually reflected the inflation, not only this year, but in prior years as well. And so, that business, the agency spend that we talked about before, if you remember, that was a massive issue last year. It was up almost towards 30% of our personnel costs. I think in January, it was down as low as 12%, and they've recruited over 1,500 net new employees over the last 12 months. So they've done a fantastic job in stabilizing the workforce. Occupancy is up 6 percentage points from the prior year. And that's just the last final thing now is just filling those 1 or 2 extra beds in each facility, which having a stable workforce allows us to do from a safety perspective. So we've got every confidence that they can continue to drive improvements not only into the second half, but beyond that as well.

All right. And then maybe one final one on Australia. Just on costs, how close is your use of agency staff at this point to what you think is optimal?

It's actually pretty low anyway. So it's not materially above what it would be. You're talking a handful of percent...

3% to 4%.

Yes, for agency. So it's not a massive issue for us. But -- and you want some agency to get flexibility to deal with sort of peaks and troughs in activity.

You have a follow-up question from Steve Wheen from Jarden.

Sorry, quite a dull question for Martyn on the minority interest. Why -- I'm trying to just reconcile why that is a positive contribution after historically always been a share of the -- backing out the share of the profits from the French business?

It's always a dull question for me is that it's mainly because Ramsay Sante made a loss in the period.

So that's the -- there's no other factors that go into that. That is reflecting...

No. It's -- I mean, there were some very small JVs and things that we've got in Australia with radiologists et cetera, but the lion's share of that number is all in relation to Ramsay Sante.

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

Okay. Thanks, everyone for being available and participating. We'll close it there. Thank you.

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