Spire Healthcare Group plc (SPI) Earnings Call Transcript & Summary

Good morning, and welcome to Spire Healthcare's 2020 Full Year Results presentation. We're just going to pause for a moment for all the attendees to join. Well, it's 9:00, so I think we'll begin. [Operator Instructions] So I'd like to hand over to Justin Ash, CEO, to start the presentation.

Thank you, Cora. I've managed to unmute myself. It's a Zoom classic. Good morning, everybody. I hope you can hear me, and thank you for joining us at our full year results presentation. On Zoom again, I'm afraid, I do very much hope that soon we will meet in person. However, I think we all know the drill now. But if you do have any difficulties, please send an e-mail to Laura Young. This morning, I'm going to provide an introduction and reflections on both our performance and the wider market in 2020 and early 2021 and our plans for delivery this year before asking Jitesh Sodha, our CFO, to present the financial results. And after that, John Forrest, our COO, will cover Spire's strategic plans for this year and beyond. We will then take Q&A. So Cora can make sure you are all on mute, we'll begin. I believe everyone at Spire can be really pleased with the way they've responded to the COVID pandemic. Our colleagues worked tirelessly to make a positive difference to our patients' lives. I am proud of the way we provided vital support to the NHS. We agreed on historic support package in order to meet the countries and media public health objectives of protecting the NHS and saving lives. This was then adapted in the summer of 2020 and again at the end of the year. Then in the early days of 2021, we had to scramble to respond to the rapidly evolving COVID environment, which led to a third national lockdown. The team demonstrated remarkable operational flexibility. As lockdown eased, we supported a rapid return to private care last year. We focused on efficiency and flow-through, driving good financial performance despite the very difficult circumstances. As importantly, we've strengthened the Spire business and delivered measurable progress on our purpose, all of which provides a strong platform to deliver growth in 2021 and beyond. So let's turn to 2020 in more detail. Clearly, it was an unprecedented year. In supporting the NHS, Spire led by example. We saw over 210,000 NHS patients, including over 85,000 surgical treatments. In particular, Spire led the sector in cancer provision. We've also accommodated entire service lines for neighboring NHS hospitals, loaned PPE and vital equipment, and some of our colleagues volunteered to work in NHS trusts or Nightingale Hospitals. Again, in early 2021, as the new variant spread, Spire responded with speed. Nine of our sites are currently acting as cancer hubs. And in January, we delivered 1,500 high urgency treatments, again sector-leading. At the peak of the third wave of COVID this year, 13 of our sites were in surge. Others had restricted service-level agreements and transfers out, meaning they could only support urgent NHS work. Now of course, the NHS contracts were equally an important financial underpin for the business. They were fair in covering costs, but not permitting the profit when activity was mainly NHS COVID response. As the year progressed, Spire provided an increasing cost rebate as private volumes grew. As a result of this extraordinary partnership, Spire and our NHS counterparts have developed strong mutual relationships, and we will look to maintain and strengthen these in the future. I was touched by the many positive comments from NHS colleagues, and I thank them in return for everything they've done for all of us. Overall, the private sector response demonstrated that we are a fundamental part of the U.K.'s health care infrastructure. Now when the contract allowed, we rapidly addressed the private waiting list. Self-pay proved a star performer, recovering more quickly than PMI as patients faced with long waits sought self-funded care. We've also seen that admissions tracked with consumer sentiment around coming to hospital, so building confidence in Spire's safe protocols was important. With limited capacity, we focused private care in order of clinical priority. This favored more complex care, resulting in an increase in average revenue per case. We also supported our consultant partners to rebuild their private practices. And overall, the progress of private activity was very encouraging. In 2020, we learnt a lot as an organization. Our efficient operations drove rapidly improved returns and ensured a strong performance in H2 with revenues up 6% and EBITDA up 8%. This performance was assisted by the more complex private treatment mix, which I've just referred. Whilst COVID security measures like testing created a significant cost burden, we have worked hard to accelerate efficiency programs to mitigate these. Many of these have digital transformation at their core, and we made very positive strides forward with several new platforms. We also acted quickly to manage our cash, suspend the dividends, negotiating covenant waivers with our supported lenders and reducing planned CapEx, whilst still ensuring necessary investments in our estates continued. As a result, we've been able to reduce net bank debt in the period. Now as you'd expect, Spire continued to strengthen its medical and clinical governance during the year. We did not allow governance standards to slip during the pandemic. We granted temporary practicing privileges to almost 1,600 NHS doctors to accommodate new services and included trainees in many of our hospitals. The cascade of governance oversight was intensive during the period, including increased frequency of executive and Board scrutiny of an environment where we introduced many new treatments in our hospitals. When COVID prevented physical visits and inspections, we moved to a virtual process, and I was delighted to be able to visit every site at least once either virtually or physically. Our green pathways allowed a rapid return to near-normal capacity, and we maintain these assiduously. In addition, as of the 1st of March, 9,500 Spire colleagues have been vaccinated against COVID, representing over 90% of all FTEs. Our uncompromising approach to patient safety is perhaps now more important than ever, and this commitment delivered further improvements with 90% of our facilities now rated good, outstanding or the equivalent in Wales and Scotland. And as I announced in September, I was delighted to be able to welcome Gillian Fairfield and Cathy Cale to our Executive Committee. Cathy is now in the process of appointing 3 regional medical directors to further strengthen our governance. 2020 was also the year that the Paterson Independent Inquiry reported and made recommendations to the government. One of those was that Spire should check that all patients have been contacted, offered support and given a treatment plan, if appropriate. We delivered on that recommendation thoroughly and have contacted over 5,500 living patients of Paterson to whom we have the details. This is a comprehensive exercise with patient support at its heart, and we have not stinted in its execution. You will see we have provided for the costs of this exercise and ongoing patient support, which will continue throughout 2021. Chief executives should always thank their teams. But this year, it is so genuinely heartfelt by me. Nothing we have achieved would have been possible without the hard work and dedication of our colleagues and consultant partners. I thank them again for their professionalism and commitment during this most challenging period. Now we all believe that the purpose we developed and launched in 2019 allowed us to respond so well last year by ensuring that all decisions were guided by a purpose, we've built a stronger business. And we're committed to measuring delivery of our purpose, and I'm delighted to report findings. 83% of patients agree that Spire Healthcare has made a positive difference to their lives; 92% felt our teams had offered outstanding care; and 94% felt their care was personalized. We will continue to track this measure as we seek to improve it further. I will now turn to our key strategic pillars. They continue to be appropriate and indeed 2020 and its impact underlined their relevance. We remain committed to being first choice for private patients with private income the majority of our business. The pandemic has created a private waiting list. And as we see infection rates ease again, activity is building. There's also been a structural shift in consumer sentiment positively towards private hospitals, with 51 of our target market more likely to consider a private hospital than before due to their awareness of the increase in NHS waiting lists. And as we showed you at the interim results, the Spire target market, which represents about 10% of all U.K. adults, is less anxious of the general population about coming to a hospital. These consumer trends underpin our confidence in the recovery of private demand. The NHS will continue to use Spire and other providers as key partners going forward. We're all aware of the pressure on waiting list. Around 4.5 million people are already on the list. The number of people waiting more than a year has gone up hundredfold. And predictions from the reform think-tank are that the waiting list could rise to 10 million people once normal GP diagnosis returns. The strong partnership built with the NHS means that the independent sector will play a key role in waiting list reduction going forward. Spire has been admitted onto the framework, and we expect commissioning to build from Q2. The recently published white paper is supported by the independent sector's role in elective hospital care and of the patient's right to choice. We believe this will support the long-term role of Spire in NHS provision. Quality will remain a competitive advantage and an underpin to Spire's business. In particular, as we raise clinical standards, this will help expand the range of treatments we can provide and increase the complexity of patient we can care for, which means our ARPC and flow-through will improve. It also makes Spire more appealing to consultants as a safe place to bring patients. Overall, maintaining a hard-earned reputation for high quality of care will be a key platform to Spire's future success. Finally, but critically, whilst we have made progress, the management team remains fully aware there is still more work to do to demonstrate the continuous track record of improving revenue, profit and cash. We proved ourselves and the business resilient and adaptable during the crisis. We do have significant additional costs of operating in a COVID environment. Depending on how the wider environment plays out, we plan to absorb this in our trading expectations. And we have heard and understood the importance of improving ROCE as well as being prudent on leverage. Our investment and operational plans target a steady improvement in ROCE in the months and years ahead. We've determined the key actions we would focus on in 2021 to further develop the Spire platform, some of which John Forrest will give more detail on. At the headline level, we plan to leverage our progress in digitization, maximize our current capacity, seek to improve ROCE through margin efficiency and clear investment plans. We'll continue to ensure we have an open patient-first culture and make gains in delivering our purpose. And finally, on our plans, we will invest in our ESG strategy. Spire's approach to health care is very ESG compatible given our positive social impact and strong governance. Specifically, with regards to the environment, we've made good progress in reducing our carbon emissions by 34% per pound of revenue in the last 5 years. From October this year, all our electricity will be purchased from sustainable sources. And I'm pleased to announce that Board has signed off an ambitious plan to be carbon-neutral by 2030 with specific actions and GBP 16 million of investment to achieve this. We plan to further develop our ESG strategy which lives in our business, and we'll communicate this later in the year. Turning to our prospects for 2021. You will, of course, appreciate that Spire faces the same challenges as any company at this time in predicting how our market and so our performance will evolve. The unexpected Q1 crisis means we've not yet seen how the business performs in the new normal. We have, however, a core planning hypothesis for our guidance. Firstly, our plans assume continued high COVID prevalence and restrictions in Q1 with the NHS requiring surge capacity. In Q2, we plan for reducing COVID infection and an easing of lockdowns. In H2, we look forward to low case numbers and the second vaccine to those affected against known variants with some resurgence of infections in local pockets, but not enough to impact our business materially. Overall, we believe there is strong pent-up demand from all 3 payer groups. The speed at which that appears will depend on the success of the campaign to reduce the impact of COVID. For private care, our assessment is that good demand will continue in non-surge sites in Q1. We anticipate growing private activity in the whole estate in Q2 with self-pay recovery outpacing PMI. In H2, we anticipate normal levels of private demand for both PMI and self-pay. We expect to remain NHS focused in Q1. The NHS is still absorbed with COVID response currently. So we anticipate that commissioning through the framework will build during Q2 and reach full momentum in H2. The NHS has a priority to treat those with greatest clinical need and whom have been waiting the longest. We therefore anticipate a more acute mix of work in Q2 with a return to more normal mix later in the year. In the undesirable event the NHS finds itself under COVID pressure again, we would, of course, be ready to help nationally or locally. The cost burden of COVID is weighted towards testing, PPE and additional staffing for infection control. We will be cautious in maintaining safe pathways and maximizing capacity. We have plans for testing, PPE and extra staffing to continue throughout the year, but with an easing of some protocols as risk reduces. Throughout the year, we will work to mitigate costs, and indeed, we've already been successful in materially driving down the unit cost of testing and PPE, and we will adapt as the circumstances unfold. Clearly, the outlook cannot be certain at this stage. However, as we consider the trends, the challenges and the opportunities before us, we remain cautiously optimistic of an overall return to 2019 trading in 2021. I'm pleased to report that trading in 2021 to date is in line with the Board's expectations, albeit with a very different business mix to that expected a few weeks ago. We have much to do to ensure success. But at this stage, our visibility of demand and the progress of our key actions justifies we believe that cautious optimism. Thank you. I will now hand over to Jitesh and John to take you through our financial results and those forward plans.

Thank you, Justin. It seems as if banging on walls and interruptions from children, pets and trombone lessons have been a feature of the year, haven't they? 12 months ago during our prelims presentation, we've presented confidently about the year ahead. Within 3 weeks of that presentation, we had a deal to support the NHS across the country. And Justin has explained how we have managed through the pandemic some of the key assumptions for 2021. This was a year where we had to manage the business differently. We focused on supporting the NHS and providing outstanding care to vulnerable patients, while delivering on our purpose. The aim was to meet the needs of our patients and to be in good shape to perform on the other side of the pandemic. I think we've managed this pandemic very well, both operationally and financially. In such an extraordinary year, it's easy to say that everything unusual is COVID related. However, there are some key messages from our numbers that we can take to use into 2021. But firstly, some things just are a result of COVID. The NHS contract and its structure means that at many levels, comparing numbers with prior or future periods does not make sense. The business model in 2020 with a cost-based contract, including rent and interest payments, makes analyzing revenue, gross margin, EBITDA and EBIT trends between 2020 and either 2019 or 2021 challenging. The NHS contracts impact the 12-month period from April 2020 to March '21, and this impact is not evenly spread over the 12 months nor does it fit neatly within our own financial calendar. Early in the pandemic, there was a real concern that capacity in hospitals would be significantly reduced, perhaps by 40% to 60% due to the cleaning regimes that were required to prevent the spread of infection. However, the investments we made to implement safe patient pathways ensured that we were able to maintain volumes. And despite the pandemic and lockdowns and the significant drop in volumes in March through to June, total admissions last year were at 84% of 2019, clearly demonstrating the success of these safe patient pathways. Our hospitals were not idle, they were busy. But other key impacts during the year helped shape our view of 2021 and how we may perform in a post-pandemic environment. There was a strong recovery of private volumes in the latter part of the year, and we can use this experience to inform our view of the year ahead. Average revenue per case for private admissions was higher in 2020 than in 2019 with average revenue per insured case 6.8% higher and self-pay 14.1% higher. We've seen that in the pandemic environment, there are inevitably fewer admissions, but these tend to be focused on higher acuity with higher associated ARPC. John will speak in a while about the evidence of strong pent-up demand, which provides us with confidence for our anticipated recovery later in the year and beyond. With the safe patient pathways comes a significant cost for testing, PPE and managing in the COVID environment. Our guidance assumes that this runs at approximately GBP 3 million per month. Again, this is both an opportunity and a risk depending on how COVID develops. Again, John will speak about this in a little while. But above all, we've maintained our focus on cash management. So I'd like to remind you, as we signaled last year, we're now presenting our numbers on a post-IFRS 16 basis and no longer showing pre-IFRS 16 comparisons. Revenue was GBP 920 million, adjusted EBITDA was GBP 161 million and adjusted EBIT GBP 67 million. There are GBP 212 million of adjusting items. Most of this relates to a goodwill write-down, which was communicated at the interims. Management of cash and balance sheet has been more important than P&L management in this period. We continue to invest in our estate and spent GBP 50 million in CapEx, down from the GBP 70 million we originally planned for and guided to at the start of 2020. Net bank debt improved to GBP 314.5 million, and we agreed facility extension and covenant waivers. We suspended the dividend in April, while we focused on cash, and we'll review our dividend policy when we return to normal trading. And we continue to have a focus on cash. Free cash flow for last year was GBP 34.7 million. So our funnel starts with inquiries and moves through our patients to admissions within associated time line. This chart compares admissions in 2020 in red with 2019 in [ spire ] green. You can see the expected drop in April as all routine elective procedures were canceled in the first lockdown and the excellent recovery in admissions after we signed the variation to the NHS contract. And we signed a new volume-based contract in December 2020 for Q1 of this year before the impacts of the new variant of COVID were known. This contract was not structured to support the NHS during the full lockdown, but we've worked well with the NHS to try and make this work. NHS admissions were 21% up year-on-year despite the impact of the first lockdown in March and April. I've been asked if our hospitals were quiet during COVID. I think this demonstrates the significant support we were able to give the NHS and patients with a focus on urgent cancer and other work during the year. Private revenues fell in the first half of 2020 due to the first wave of COVID, which essentially prohibited all but the most urgent cases. You can see here the strong recovery in private revenues in the second half. In 2021, it's a new variant spread -- as the new variant spread, Spire responded at speed to support the NHS. By mid-January, at the peak of the third wave of COVID, 13 of our sites were in surge and others had restricted service-level agreements for transfers out. Naturally, this had an impact on our private admissions in those hospitals. However, analysis of our activity in our sites that were not impacted by surge provides confidence in our full year outlook. Self-pay recovery has been very encouraging. So these 2 charts show outpatient consultations and admissions in our 25 non-surge sites. Again, 2019 is in [ spire ] green, and 2020 is in red, and the start of 2021 is in dark blue. Despite lockdown, last autumn, we saw growth in outpatient consultations, which were running ahead of 2019 and admissions close to 2019 levels. The dark blue line on the chart clearly shows the growth in 2021. We are ahead of prior year in these sites despite a major nationwide lockdown. The equivalent charts for the whole portfolio are in the appendix. The same chart for PMI performance in non-surge sites show a very similar story to self-pay. Outpatient consultations recovered to near 2019 levels in Q4, and admissions naturally lagged consultations and recovered strongly from April onwards to around 80% of 2019 levels by mid-December. There is a difference between the PMI and the self-pay patient journey, which goes some way to explaining the outperformance in self-pay. Firstly, PMI referrals are usually through a GP, while self-pay patients can come directly to Spire. Restricted GP access has created a delay to PMI referrals. And secondly, our work has tended to focus on higher acuity. Lower acuity cases through PMI will take longer to come through. Our insurance partners have experienced from previous SARS and MERS pandemics, which suggests that volume does return after pandemic. Again, however, the data shows encouraging signs of an uptick in outpatient consultations, which are a lead indicator to admissions. The EBITDA bridge highlights most of the comments I've already made. There was a fall in private volumes, though increased acuity and mix means that the higher ARPC mitigated some of the drop in volume. The NHS contract contributes to EBITDA because rent and interest costs are part of the cost recovery, but below EBITDA. And that has been, and continues to be, a significant cost for managing our hospitals in the COVID environment. We're also proud of the significant contribution by all of our Spire colleagues, and we're delighted to award a GBP 500 thank you gift to every colleague who was not on the bonus scheme. Our net bank debt reduced by GBP 15.5 million in the year. During the year, there was a working capital benefit from the NHS paying weekly in advance, though this reversed in the second half as certain amounts were retained by NHS England at the end of the year until full and final reconciliation, which will be completed during the first half of this year. This along with Brexit stock planning explains the movement in working capital in the second half of the year. We originally planned GBP 70 million of CapEx and spent approximately GBP 50 million. We will now spend the deferred CapEx in 2021, so CapEx will be approximately GBP 90 million to GBP 95 million. So on average, our CapEx will be as planned over the 2 years. Of the CapEx spent this year, GBP 10 million to GBP 15 million will be lease financed, as we will be able -- as we were able to secure attractive terms for the replacement of a further 10 MRI and CT scanners. I'd like to thank our banks for being highly supportive during the year. We renegotiated covenants twice and extended our current facility by 1 year to July 2023. Covenants were waived for last year and have been waived again for the June 2021 test period. Net debt-to-EBITDA headroom of up to 6x is available, if we are consistently above 4x in the second half of the year. And there is a new liquidity test to replace the financial covenants, which we are comfortably within. Adjusting items comprises of 2 main areas, a GBP 200 million write-down of goodwill, which was communicated in the first half and a net charge of GBP 12.8 million as a result of implementing the findings from the Paterson inquiry, which was published last year. There are 2 elements to this chart. GBP 11.6 million credit awarded to Spire in a court ruling against RSA, which is subject to a request for leave to appeal and a charge of GBP 22 million to cover the cost of reviewing and recalling and managing the ongoing support of Paterson patients. So despite the impact of the new variant of COVID and the lockdown in Q1 of 2021, trading is currently in line with our expectations. The charts I showed earlier demonstrate that volumes recovered well last year with a similar recovery in our non-surge sites this year, which lends confidence to our view that total private activity should recover again this year. The new NHS framework contract will take a period to bed down, but subject to the ongoing uncertainties of the COVID environment, there is a significant pent-up demand, and we have good reason to remain cautiously optimistic. I'll now hand over to John.

Thank you, Jitesh. I will close the presentation by looking forward to our plans for 2021. As Justin outlined earlier, we have 6 clear areas of focus that we've developed to underpin the restart of our business delivery in 2021 and prepare for the future. And I'll now cover 5 of these in more detail. 2020 saw us make great progress in each of these areas. Leverage the digital progress that we accelerated during COVID, such as the virtual consultations developed and launched in COVID with 77,500 delivered since launch. We'll maximize the capacity of our hospitals to gear up to service both the private and NHS waiting list. We got back to 2019 levels of activity in the second half despite COVID restrictions, thanks to our safe patient pathways. And we can build on this to drive utilization and ARPC. We will drive efficiency to help offset the COVID costs, recover and then improve margin. We substantially offset COVID costs in the second half of 2020 and plan to do the same in 2021. We'll invest for growth. With GBP 50 million of investment delivered in 2020, we plan to continue to invest and, importantly, drive ROCE. And we will support and invest in our people, purpose and culture. A stable, highly skilled team are key to our success, and we were delighted to see colleague turnover reduce in 2020 from 15% to 12%. The most important thing for our future is that we continue to leverage our digital progress. And COVID gave us the opportunity to accelerate our programs, whilst our central teams were required to work from home. We simply need to be easy to do business with. And our digital development underpins our ongoing drive to eliminate unnecessary tasks, leverage our scale, do things one best way and reduce costs. Now I realize that rolling out change on this scale is never easy. So in 2021, we will focus our efforts on the delivery of a number of key projects. These will include direct bookings, where we aim to increase the percentage of activity booked online, electronic preoperative assessment, safely reducing costs and patient nurse facing time by up to 50% and pricing engine, where we will optimize and automate quoting and pricing in local markets. Further digital innovation projects are in development for 2022 and beyond, including sales and booking process and electronic patient record. We'll track our progress and the delivery of our digital agenda through the percentage of bookings made via digital tools and having clear rollout plans in place for next year. Now the crisis response saw us develop stronger direct marketing campaigns that are informing, advising and encouraging our patients to engage and book with us. These award-winning campaigns are delivering improved brand awareness, with prompted awareness now at 62%, up from 58% in 2019. And as a result, we're seeing very exciting levels of initial inquiries, and demand is building strongly despite the further lockdowns. Total inquiries are currently running at plus 29% above 2020. As COVID conditions improve, so local demand and activity improve. And the good news is these inquiries are converting to consultations. The rapid deployment of virtual consultations combined with increased demand for our online booking portals from both consultants and patients drove a 33% increase. Online booking gives us more visibility of that patient pathway. To deliver this demand, we will work to maximize safe clinical capacity and our safe patient pathway program underpins this. We have a unique opportunity to build back differently based on the learnings of historic patterns, but also the operational flexibility developed during our COVID response. The current rationing of available theater space for elective activity, as Jitesh showed you, demonstrated the impact we can have on ARPC when we have more control on activity and mix. Now the strategic partnership with the NHS also helped further develop the level of acuity and complex work that we can deliver. For example, in Nottingham, we brought forward the commissioning of our critical care unit to support cancer surgery for the NHS. This will now support NHS and private activity going forward. We'll measure our ability to maximize capacity via improved theater utilization. I am really proud of our performance through COVID and our clarity of purpose and the Spire culture and values have been key to our success. A culture of patient safety is the foundation of our business and underpins everything that we do. And as you know, key to a safe operation is a well-resourced, stable and skilled workforce. Finding or recruiting the right people is critical. And this year, we'll build on the success of 2020 and further enhance our capability by moving to a new regional recruitment model. Our overseas nurses program continues to deliver increased numbers of skilled nurses into our hospitals, with 154 planned to arrive over the next 12 weeks and a further 125 in the process of being recruited. Now whilst agency costs as a proportion of total clinical costs fell to 5% in 2020 from 8% in 2019, we do expect to see an increase in 2021 as activity builds. Longer term, we aim to reduce this below the pre-COVID level, and we'll report on it annually. Keeping our teams safe and looking after them in the midst of the pandemic has had a positive impact. Team churn reduced, and we improved our colleague engagement score, with 80% of our colleagues now proud to work for Spire. Professional development and learning are also vital in a health care setting. And we will continue to invest in the development of our teams from new starter nurses to MBA level qualifications for our senior leaders. And our focus on inclusion and diversity will also be further strengthened by our new future Black leaders program. We'll measure success in our people area by tracking improvements in colleague turnover and maintaining our colleague engagement score. Now we've already offset and absorbed significant COVID costs to deliver our 2020 outturn, and we will continue to aim to offset additional costs of COVID this year through operational control and also the opening of our in-house COVID testing lab and the adoption of new testing platforms as they develop. Securing margin improvement is key to our future, and our efficiency plans extend beyond digital innovation. We will secure further savings and benefits from improved procurement, improved revenue capture and by reducing labor costs. We will measure success in our journey to margin recovery by targeting a steady improvement in margin. Finally, we will invest between GBP 90 million and GBP 95 million of capital this year in our business, and we will focus in 2 key areas: maintenance CapEx, supporting investments in programs such as refurbishing and upgrading our estate and replacing plain film x-ray and diagnostic imaging equipment; and growth CapEx, which includes the investment into 10 replacement MRI and CT scanners supporting more efficient processes and higher volumes; as well as CapEx to support capacity enhancement, creating more clinical space; and further digital development. We will improve focus on return of investment by tracking ROCE. Thank you. I'll now hand you back to Justin to close.

Thank you, John. So in summary, we've managed well in challenging times. We've built capability. We have and we are leveraging our learnings. We're focused on relaunching our business, and demand is building. And we're well positioned to get back on track to deliver long-term growth. At this point, I would like to recognize Garry Watts and his enormous personal contribution to the business and in particular, his support to me during this challenging period and since I joined in 2017. During his 10 years on the Board, Garry has guided the company through IPO, and his experience has proved instrumental in helping the business develop into the company we are today. I thank him for his service to the company and wish him all the best going forward. And today, we're delighted to announce that Sir Ian Cheshire will take over from Garry as Chairman following the AGM on the 30th of May. So Ian, as I'm sure you know, has a long and distinguished career in international multisite retail. His considerable FTSE experience, deep understanding of the government business interface and broad ESG experience means he is ideally placed to guide Spire at such an important time for health care in the U.K. And I and the whole management team really look forward to welcoming him to Spire and working with him. Thank you for listening, and I'll now hand over to Cora to moderate the Q&A session.

Thank you, Justin. So I am going to start by trying to unmute the line of Charles Weston.

Hopefully, you can hear me? Brilliant. So 3 questions, please. First of all, on Page 24, you showed the outpatient and inpatient data. And inpatient has been consistently lagging outpatient rather than catching up as one might have expected. So could you just explain perhaps why that is the case and whether your confidence of accelerating performance in Q2 is based on sort of visibility of those 2 trends of inpatients catching up with outpatients? My second question is on agency costs. You mentioned it's now 5% of clinical cost, down from 8%. That's a very impressive reduction. Is that COVID-specific reduction? Or is that structural? And lastly, on operating leverage, please. What I'd like to get a sense of is for every extra pounds on the top line, how this will translate through the P&L. And I appreciate that's going to vary depending on where that pound comes from, both from a payer group perspective and the actual procedure. But if you could give us a range or an average or something to help us understand how that margin will creep up, that would be very helpful.

Great. Thank you, Charles. That's good questions. So just -- I'll answer the first question. I'll ask John to answer on agency, and I'll ask Jitesh to talk about operating leverage. So the first one, if you looked at our overall admissions, which Jitesh presented, we got back to prior year admissions. And NHS was 20% higher, and we had an overall capacity. So the main reason why we weren't doing more private treatment was we were capacity constrained. So what we did do is we focused on more higher acuity treatment within private and doing more higher acuity treatment also to a certain extent limits capacity because, on average, a more complex operation takes a longer period of time. So that's why partly why we have a private waiting list. So that's the actual -- the answer to the lag effect is we simply couldn't deal with all the inquiries and everything which came out of the consultation, given the fact we were devoted much more than normal to NHS. Anything to add to that, either of you guys. Great. I hope that answers that question. Thank you, Charles. And John, agency, where are we headed?

Yes. So Charles, you're right. So in 2020, we saw agency drop as a percentage from 8% the prior year to 5%. In the year 2021, I expect it to return to somewhere around the 8% mark. That's because in 2020, we took really strong action to make sure we control costs of the period, particularly the early part of the crisis, where due to elective suspension of activity, we were doing much less work, particularly in the theaters. So we're returning more to a normal level of activity. At the moment, it's been driven significantly by absence levels, which we're managing, but you'll imagine the COVID impact on absence makes it run at significantly higher levels. And we'll actively manage it back down, and that's why we'll report on it annually, and I intend to get it below the COVID levels in the medium term. There's a lot of work we can do to get people off agency and onto our permanent workforce and also bank, which is something we're developing with our Ryalto tool.

Thank you, John. Jitesh?

Thank you, Charles. So you're right, there is operating leverage. As we increase our revenue, we do see operating leverage come through. I can't give you the exact range that you're looking for, mainly because the environment is currently changing. The cost of COVID that we talked about with the GBP 3 million per month has an impact on margin and how that develops will also have an impact as we go along. And we also talked about the mix of work that we're targeting and the ARPC of work. So as we can leverage more towards self-pay and private work than NHS, again that -- the operating leverage of self-pay is materially higher than the operating leverage of NHS work.

Thanks, Jitesh. Charles, hopefully that answers your questions?

It does. If I could just follow-up on one, on the capacity point. What can you do to quickly improve your capacity to be able to deal with the wait list?

John?

Yes. Thanks, Charles. A lot of that is already done and in place. One of the ways we've managed to deliver the outturn we did was to maximize capacity to make sure we could deliver for both the NHS and importantly, when allowed to get our private activity back and our consultants working. So the headlines will be virtual consultations, 77,000 so far really opens up the front end of our funnel, make sure that we have the space and time to see patients, particularly follow-ups through virtual, allowing space for decision to treat in person. In theaters, it's good old-fashioned theater list management, capacity planning and extension of hours into the evening safely where we can and also into weekends and seen a significant increase in that, which also drives some of the flexible labor costs. Beyond that, we're investing some of our capital in further improvements to clinical space in the medium term. We're taking administration out as we roll out our systems, and that allows us to free space back up for more clinical purposes, particularly on the diagnostic and the speed of service of our new MRI scanners, the investment in x-ray and CT also helps us improve efficiency and throughput. So there's quite a lot there.

Cora?

Thanks, Charles. I'm now going to open the line of Miles Dixon.

Hopefully, you can all hear me? Excellent. I think the first question I'd love to hear a bit more about is the NHS framework on GBP 10 billion. So any indication or can you expand on how the GBP 10 billion may be drawn down or accessed over the next 4 years? And what type of work the NHS may seek for independent providers to prioritize or specifically to work with them on? And you briefly touched upon -- the second question, you briefly touched up on the white paper. You very clearly have been working at both local and national levels with the NHS. How do you expect that to change on the back of the white paper? And I would maybe need the third question, but after those 2.

Okay. So these are around -- guys, I think I might take those because it talks to the broader environment. So I think the world will look a bit different coming out of COVID to the world before. So the world before you had ERS, which was the majority of commissioning plus local contracts with trust, which broadly, if you remember, went away. About 3 years ago, they disappeared. So there's little weight in this work from trusts. I'm not sure about the -- I lose count of which billions are quoted against what, but there is clearly money for waiting list work, which is available, and there's a clear program to bring down waiting list. Now I think this will be a much more -- in fact, I'm confident it will be a much more coordinated activity than before. I think what NHS has done during this period is pull together coordination of visibility of where treatment is done. So our expectation is ERS, the guidance is to switch back on everywhere, but there'll be visibility of it from NHS England. And there's waiting list work, which comes from the trusts, which is commissioned either by CCGs or the trust through the framework. It will be in the picture of a holistic view of how waiting list is brought down with a particular view towards what's called 1 PTL or 52-week waiters, which is why we're guiding that there will be more complex work to begin with. Because what the NHS won't want is people who've been waiting for 2 weeks to suddenly pop up in ERS and people who have been waiting for 52 weeks languish on the waiting list. So there'll be a more collaborative effort overall, which I think is positive. And I think in the best scenario, we'll have much more predictability over NHS volumes because there'll be commissioning of volumes, it'll be coordinated. We have found that NHS England is very good when things aren't working well locally, but also, we've built very strong local relationships. So I think it will be a more planned environment which we can lean into. And I think from a white paper perspective, I don't think there's any doubt that we're now seen as part of the core infrastructure for delivering for elective care. The white paper is very clear that the independent sector has a key role to play in healthcare. I think you may find some very creative commissioning going forward in areas maybe like cancer and so on, where we can have genuine long-term partnerships, where we can have core sites that have sort of very long-term sort of implanted roles in the NHS. But I will also signal that our main business will always be private work. And one of the benefits here is we'll be able to sort of offer up what we wish to make available, which this year we think will be more than historically, but will even out over time and the sense that allows NHS to plan who's going to provide what. So it's a much more intensive communication exercise than it ever was before. And on the whole, we think that's a positive benefit. So hopefully, that gives you a view of how the future will work, Miles.

Yes. And just lastly then on the complexity point, you -- I mean, you also mentioned in the presentation about your acuity going up. Is it a case that you've just arrived earlier at your final strategic destination earlier as a consequence of coronavirus? Or has it now increased your ambitions to do more complex work than before the pandemic?

Both.

Our next question is going to come from David Adlington.

Perfect. Hopefully, you can hear me. You've pointed towards normal demand from private payers in the second half. I was wondering if you thought you could see some super-normal demand given the pent-up demand in all your payers. And if so, how much capacity you have to meet that? And following on from Charles' question, how should we think about that flowing down to the margins? And then secondly, just given the waiting list and the fact that they're likely to extend even further,as GPs open up for referrals as well, how long do you think you might see that tailwind from pent-up demand to last for?

So Jitesh, the first one -- thank you very much, David. The first one is sort of demand question and then sort of cautiously optimistic view, how would you respond to them?

Yes. So clearly, the -- we're showing some caution in the way we're projecting things at the moment, as you would expect, because of the current environment and the current uncertainties. If you look at the tailwinds of the waiting list in the NHS as well as the pent-up demand that we're seeing through the inquiries, we can see from self-pay and PMI, that suggests that there will be a good level of demand that should be sustained over a period of time. The question is when will that arrive and when will the ramp-up come through. And what we're doing is what you would expect us to do and be natural on that and show the cautious optimism where we're clearly showing that we are optimistic about it. But with the uncertainties of COVID and how it may develop in new variants, we can't just throw caution to the wind as it were and assume that tomorrow we'll have super-normal demand. I think John answered the question around our ability to cope with demand quite well already and the measures we're taking and putting in place to be able to handle higher volumes when they come.

Thank you, Jitesh. And on the waiting list, so let's just look at the context because, I mean, it's not for us to predict how waiting list will evolve. But there's -- I think the latest number showed 224,000 people are waiting more than 52 weeks. And you have to look back, I think, at least 10 years to get those sorts of numbers. And if you look back 10 years, you'll see it took years to get that number down to manageable levels. So the unfortunate consequence of COVID is likely to be years of intractable waiting list volumes, I think. We, because of our strategy, will be available to help bring that down. And it is our conclusion from the consumer research and the demand that we're seeing is that will lead to a structural shift in favor of people choosing also for flexibility and certainty to go private. So I think the answer is years for better or for worse.

Great. And maybe just a follow-up question on vaccinations. Have you done any work into how -- when someone has a -- patient has a vaccination -- potential patient has vaccination, how that impacts their desire to come in and actually getting -- increase their desire to come in and get treatment?

Yes, we've done specific research and in particular, our PMI market is waiting to have the vaccine, and they will be encouraged to come in when they've had it. To specifically answer that question, I can confirm it will positively affect their intention according to their feedback.

Our latest data shows that about 42% of our target market would have had their first vaccine. And by the summer, if the current rollout plan continues, that should be -- it's obviously their second vaccination.

The research also showed how our team being vaccinated would encourage people to attend, and we're very pleased to report that we're over 90% and on track. So that will help as well.

We're now going to go to Alex Gibson.

I don't want to go over it too much again, but I think this whole NHS backlog because it was commented that the budget yesterday was actually only setting aside GBP 1 billion of funding to tackle elective backlogs. I'm just thinking clearly with the framework for them to use the private sector more, but given the limited funding, do you actually think it's realistic that you will see a much larger amount of outsourcing in 2021 than you would see in 2019 or just the trends that you would see? My second question is just on the accelerated projects that you talked about in the release. If you could give us an indication of what level of cost savings you expect to get through these programs and when that will hit the P&L? And then on the guidance, I guess, I am just trying to understand why it isn't talking about better than 2019. Because we're 2 years on, self-pay is pretty much close to 2019 levels, you have demand from PMI on the waiting list, NHS business, you have this layer on top of new outsourcing contracts. And then you have the COVID costs reducing and your GBP 7 million bonus to patient -- to your employees reducing. So it just seems like your EBIT level should be materially higher in addition to this complex shift of focus. So I'm just trying to understand, is it just about managing expectations here? Or is that actually something on -- in the next something that we're not incorporating in how you see the mix developing that will mean that you shouldn't see higher profit this year?

Okay. Thank you for the questions, Alex. So I'll deal with the last and the first question, then I'll ask Jitesh to talk about. So if we just deal holistically with guidance, as I said, we haven't yet returned to the new normal. So there's a range of possible scenarios. You can imagine, there's a scenario where things go even better than we expect, and there's a scenario where things knock us back because literally nobody in our position or any company can really predict what's going to happen in the next 3 quarters because we have managed to predict the external environment previously. So I think we are being cautiously optimistic. We have chosen that word appropriately. We'll see how it develops. You'll get a sense of how we're doing at the half year, but we think we've balanced the trends, the challenges and the opportunities. And we've basically given you the fact of how we're trading, which is what we're using to try and give that guidance. And we've given you the -- our expectation for the environment. So let's see how it plays out, but we think our guidance reflects the sort of balance of those things. The GBP 1 billion, I think it's very hard to know what to do with GBP 1 billion, GBP 10 billion, et cetera, because, of course, the NHS budget core includes all of the commissioning, which was done previously through the independent sector. So I am always a bit cautious about which sum is -- we didn't trumpet the GBP 10 billion and the GBP 1 billion is a fact. How much is it additive, how much is included, it's hard for us to say. What I can say is what we see is a clear intention to use the independent sector, a clear determination to bring down 52-week waiters, a much more planful approach to it and a real sense that this waiting list needs bringing down. Remember, we're not banking on the NHS being the biggest part of our business. We're banking on getting back to private being the biggest part of our business, but we will be a core provider and everything we're seeing gives us confidence that there will be a big part to play. I think that's the way to deal with all these various numbers which get banded around. And of course, the budget isn't the only place where NHS funding is announced. There have been announcements during the course of last year. And I would be surprised if there weren't more announcements in relation to relevant funding during the course of the year. So I hope that gives you a sense of both of those about how we're thinking about it and how to think about the wider market. Jitesh, the impact of cost savings on the P&L.

Yes. So our guidance this year assumes that we're absorbing GBP 38 million of COVID costs. So within our guidance, there's already underlying margin improvements that are built in within the numbers. The other area that I'll point you towards is the clear statements that we're making about focus on cash and ROCE improvement. So what we're doing is we're using those cost savings to absorb the costs that we're getting, and we're absolutely committed to the investments driving ROCE. We're not going to give you exact percentages over here. But I think at the moment, the direction of travel is very clear. And what we're doing is demonstrating to you how we're going to achieve that direction of travel.

I think we've got time for one last question. So I'm going to go to Kane at Numis.

Can you hear me?

I can hear you.

You've mentioned a focus on ROCE. You aim to improve this. And it seems you're sort of talking a bit of a game of both margin improvement, albeit flat as well as maybe some improved asset turnover. I mean would that be an accurate sort of assumption? I mean you're spending CapEx, but there's also a focus to sort of look at the digitization piece as a more of a non-bricks-and-mortar kind of expenditure, which may lead to better returns. Just trying to get a sense for how you actually intend on improving returns. And could you provide any color on the competitive landscape? I remember last half, you may have mentioned something around consolidation. And I appreciate obviously COVID made your hands full. But any comments on the competitive landscape would be appreciated. And just maybe finally, I'm sorry to beat the drum on this, but just on the guidance, 2019, 2021. I remember last time, you sort of really sort of made point of -- pinpoint -- sort of mentioned that you couldn't quite pinpoint the specific guidance. Do you have a better sense now whether it relates to volumes and activity or revenues or profitability when we talk about returning to FY '19?

So Jitesh, would you like to do on guidance and ROCE, and then I'll finish on the consolidation question. Thank you, Kane.

Yes. So first of all, where are we coming for from ROCE. I think for the last couple of years, we've been quite consistent that we're moving away from EBITDA as a single measure of the business here as a primary measure on how the business was looking at itself and focusing on cash and ROCE because the levels of CapEx that we were putting into the business, if you look at our ROCE now, it's below our cost of capital, and it's clearly not at a level that encourages investors to invest in the business. And so our goal has to be to improve our ROCE to above our cost of capital and ensure that invested money is well invested. I think in terms of how we're going to achieve that, again, John in his presentation really gave a very good clear view of how we can achieve that. So first of all, we have to keep -- maintain our existing asset base. We can't achieve it by not investing in our current assets. We have to keep them refurbished. We have to get our patients in. The focus on quality to distinguish ourselves from our competitors, but also to attract not just patients but consultants into the business. And then you hit the nail on the head in terms of digitization. We've said that the business has traditionally operated as 39 separate hospitals. And the processes have been really quite manual. And they are quite manual. We have a warehouse with 3.25 million patient records. And the positive side of that is it's a world of opportunity. It's a world of opportunity to digitize and drive efficiency. And what we're doing is we're putting the platform in place. In fact, we took last year to put that -- the digital platform in place to build our own hospital management system. And we're looking at the areas where we can get the best bang for our buck, frankly. We're starting off with electronic preassessments, and then we'll move on to our bookings processes and then other parts of the processes to drive those returns. In terms of guidance, as you can imagine, Kane, we look at the wording very carefully. When we go through the -- in the Board very carefully with the wording compared to where we're at. And so I'm not going to sort of breach that -- all that work that we did in putting the words together. But other than to say that we -- if there was anything materially different that we needed to announce today than we would have to, we would have done that. And we're confident with the words that we've put together. So I won't give you the specific wording on that.

Thank you, Jitesh. And Kane, on the consolidation point, so we do in the background take a closer look at the markets to look for opportunities in the market. And we are, by the way, very conscious that anything which constitutes consolidation or development or expansion has got to deliver on ROCE and part of the history has been that developments which have been done didn't deliver on ROCE, became a drag on it. So we mustn't repeat the past as we look to the future. And we've chosen to have a strategy, which focuses for the first 3 years at least and now on operational improvement on the core. We still think that's important, and we've got our heads down on that. I do think there are going to be opportunities at some point in the future. They tend to be opportunistic. It's the nature of the market. It's already quite consolidated. We do keep an eye on it. We are conscious of the investment return on everything. And should anything occur, of course, we'll tell the market. So I'm in the same position. There will be opportunities. They have to deliver a return, and we keep a close look on how we can develop the business when the time is right.

Great. Well, I think that's all we've got time for today. Thank you very much for joining our call. There will be a recording of this webinar available on our website after a period of time to get that ready. Thanks, again, and I will end the webinar.

Thank you.

Thank you. Bye-bye.