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

Great. Well, good morning, and welcome to Spire Healthcare's interim results presentation. This is our third set of results on the Zoom platform. So you should all be familiar with the process. [Operator Instructions] So now I'd like to set the scene for the results by playing our first-ever TV advert before handing over to our new Chair, Sir Ian Cheshire for his opening remarks.

Mr. Don's good to go.

Great. I'll let him know. [Presentation]

Great. I'd now like to hand over to Sir Ian for his opening remarks, and then we'll share the screen again.

Thanks. Thanks, Cora, and good morning to everyone. And I just wanted to start with a very brief scene set before Justin and Jitesh talk about where we are going. We really want to just touch and draw a line on the past few months to do in relation to the bid. And I think I just wanted to make a couple of points there, which was -- just to remind people, this was an unsolicited offer, which the Board took seriously. It had to put that offer to its shareholders. 72% did actually vote to accept, not enough to trigger the offer requiring 75%, and we completely respect the views of all our shareholders and it was the right thing to do for the shareholders to decide. But we now move forward, that is over. And I think the second message is to really underline just what a strong future Spire has. The Board is completely committed to the management team. And I would just like to congratulate the teams all across Spire who've kept the hospitals running at full tilt in the middle of a pandemic. It's quite a remarkable achievement. So in the future, I think we're now dealing with a situation where we've got really clear strategic direction, a strong demand backdrop and a real opportunity for self-help. And we're very aware talking to our investors that there is more opportunity ahead of us. But I think, unusually for a lot of businesses, this is an opportunity that we have in our hands and one that we can really develop and see a long-term future here. So the Board is fully behind the business. We're very excited about the opportunities. Really, admire the way the businesses cope with unbelievable level of challenge. And the detail you'll hear from Justin and Jitesh, I think, underlines the scale of the opportunity that we have. This is the sort of reset look forward moment for Spire. Thanks very much.

Thank you, Ian, and good morning, everybody. The leadership team and our colleagues across Spire did not allow the approach from Ramsay to distractors from caring for our patients or driving forward the business, and we remain focused on delivering our strategy for long-term value creation. Post bid, as Ian has said, we have a fantastic opportunity to frame a new phase in the evolution of Spire. We're proud of the business we've built, founded as it is on high quality and outstanding care, and we're excited about the future. This new phase of delivery and execution builds on our proven strategic pillars. As a reminder, these are: firstly, we are committed to being first choice for private patients with private income, our primary growth driver, whilst remaining a key partner to the NHS. We maintain a relentless focus on quality as both the underpin to our growth and to ensure a sustainable business. And the successful delivery of this strategy works to improve revenue, profit and cash, augmented through efficiency programs based on the many opportunities we have to digitalize and streamline our business processes and reduce operating costs. The environment in 2021 continues to demonstrate this is the right strategy to improve quality of earnings. I'm pleased with the way we executed this strategy in H1. We refocused quickly on private patients from Q2 with outstanding results, having maintained our support for the NHS in their time of need during Q1 and conscious that NHS commissioning was likely to be low in Q2. We continue to invest in our clinical teams, our patient franchise and quality credentials to firmly establish the Spire Healthcare brand. And we kept close visibility on the changing COVID environment and its operational implications and focused on managing down its cost. As a result, revenue was well ahead of H1 '19, with EBITDA in line with H1 '19 despite COVID restrictions. We have in addition, now put in place the necessary foundations to deliver material efficiencies in 2022 and beyond and deliver margin improvement. I'm now going to review these points in more detail. So back in 2018, you may remember, we laid out our strategic intent that a deliberate focus on private patients should protect Spire from the unpredictable nature of NHS commissioning, and in Q2 '21, it did exactly that. Starting with our first strategic pillar, to be the first choice for private patients, let me walk you through these bullets. We successfully drove a higher mix of private patients in Q2. The increase in NHS waiting lists and the shift in consumer sentiment towards private hospitals has created a strong demand for private health care. We invested early to build our private capabilities, and we're therefore able to deliver impressive self-pay growth in Q2, whilst optimizing the recovery in PMI. As predicted in Q2, our case mix was more complex combined with a higher proportion of private patients. This group average revenue per case up significantly. The combination of strong private growth and higher ARPC combined with the early benefits from our efficiency programs is driving an increase in our underlying margins before COVID costs, as Jitesh will detail later. These improvements in our business performance are firmly built on the continued strengthening of our brand and consumer satisfaction, leading to market share recovery as we exited the NHS contract. Turning to our second strategic pillar. As I've said already, our focus on private patients protected Spire from unpredictable NHS commissioning in Q2. But our strategy is to remain a key partner and we stand ready to support when needed. NHS activity is currently lower than in 2019. As Spire is holding share in elective admissions whilst gaining share in referrals. So let's look at the background on some of these points in more detail. By focusing on our strategy, we delivered record revenue growth of 13.5% and private growth of 7.7%, measured here against 2019, not 2020 as a more useful comparator. Private growth was 25% in Q2 on the same basis, with self-pay revenue up a remarkable 81%. With Q1 focused on supporting the NHS, this payout represented 44% of group revenues in the quarter. However, in Q2, 76% of our income came from private patients close to our long-term aim to reach 80% private mix. The momentum in self-pay continues, and we've record waiting list of over 5.5 million at present, we believe we are seeing a structural change in the market. This is supported by our latest consumer research, which indicates just that. 79% of our target audience are aware of the increase in NHS waiting list and 53% are more likely to consider a private hospital assist pandemic as a result a 11% strongly so. Successive targeted digital and more recently TV campaigns have driven a remarkable improvement in prompted brand awareness from 58% to 69% over the last 2 years, whilst our competitors' brand awareness have remained static in the areas where they compete this time. As we just saw, our TV ad embodies our values and is a great call to action. Spire is now a true national brand. This performance is rooted in the continuing progress we've made to deliver our purpose, with 85% of patients saying we made a positive difference to their lives. 93% say in day case was outstanding and 95% agree that day case was personalized, all up versus the H2 '20 results. I thank our wonderful colleagues and consultant partners for the important care they provide and for their continued ability to achieve such endorsements from our patients despite the ongoing difficulty presented by the current operating environment. Thank you to all at Spire. 2020 and Q1 '21 were unusual periods to Spire's business mix in terms of specialities. We were chosen by the NHS to focus on cancer care and higher acuity work, such as the cystic fibrosis service at Spire Manchester. This slide shows hip and knee volume for the National Joint Registry data set for our addressable market. As you can see, our competitor sites were more focused on other procedures such as hips and knees in 2020 and early '21, with an inevitable loss in Spire's share as a result, albeit in a much smaller market at the time. We were delighted, therefore, to see our volumes rebound from April as the business returned to a more usual mix of specialities driven by self-pay and back to historic levels of market share. The data is not yet complete for May and June, but initial reports indicate the market share rebound has been sustained. I would add that market share gain is not our sell focused, as we've always maintained pricing discipline for all payers. Private mix is prioritized over market share and pricing discipline over buying share. These charts show total NHS volumes performed in the independent sector with the dark blue bars representing 2019 and 2021 in green. As you can see, NHS activity is slowly returning, but it's still down over 20% compared to 2019 in June, which is the latest data available. We're pleased to have maintaining share in NHS elective emissions in Q2 despite our private focus and have grown share in both GP referrals and outpatient appointments, both of which are key to growing future activity. We do anticipate that the NHS will need more help in the months ahead, especially in 2022, and we're having constructive conversations with them at all levels. It is likely in our view that some of the extra $1 billion announced this week for elective recovery will be used by trusts and CCGs on independent sector support. And certainly, many of our local NHS contacts are keen to make use of Spire. So the private mix may pull back in H2 with more capacity for NHS and private work in the peak Q4 period. Of course, our focus on quality remains paramount, and our investment in a robust quality network and culture continues to pay off. It is evident in the excellent patient feedback we continue to get. I was pleased by the very positive feedback from consultants during the bid period about how they consider Spire's quality standards to be both a reassurance and a differentiator. The CQC has recently moved to a new system of inspection moving from preannounced to unannounced inspections. To be successful, sites must therefore be inspection-ready at all times and have the necessary documentation to demonstrate consistent patient safety and governance. This approach favors the efforts we've put in over the last 3 years, including the creation of our own internal audit team to ensure we are inspection-ready across the estate. A number of other important initiatives have also been established over the last year, including a company-wide quality improvement program and the implementation of the NHS Get It Right First Time program as a vanguard provider. We believe we are also the first independent sector provided to a point of medical examiner to review patient deaths and identifying the learnings to share across the group. Spire is unique in having a nationally accredited network of laboratories, a new cash reaccreditation has been universally positive. We're also proud to be the only independent provider with an in-house nurse apprenticeship program in the U.K. with 166 nurse apprentices recruited in Q2 and a further 115 is expected to do across a number of functions by year-end. This in-house solution to the national nursing shortage represents a GBP 5 million investment this year, net of government support and become self-funding in future years. And finally, on quality, we were delighted to be awarded Best Health Care Provider Partnership with the NHS by the Health Service Journal, a much coveted award. I cannot overemphasize the importance of our colleagues in caring for our patients and keeping them safe. We've worked hard to support them through these challenging times. And I was, therefore, delighted this in our latest colleague survey engagement had risen again. 84% are proud to work at Spire, up 4 percentage points. 87% that they would recommend Spire to friends and family and 73% are excited about the future of Spire. This last measure is particularly encouraging. It's up 11% and it refers to the future of Spire as a strong independent company as this survey was conducted before Ramsay's approach was announced. As I stated at the beginning of the presentation, the successful delivery of the first 3 pillars of our strategy will deliver improving revenue, profit and cash, which we further supplement through efficiency programs. Health care remains a complex business exposed to numerous risks, which are hard to mitigate. The COVID-19 pandemic is clearly one of those, but we are actively driving down the direct operational costs that we can control. And we have a comprehensive program of projects to deliver at least GBP 15 million of operational cost savings and drive margin improvement from 2022. The GBP 15 million is a quantification of the savings programs we have been working on. These are now clearly identified and either launched or ready to launch and include developing support services once in one place and leveraging the benefit of our rollout of digital systems, significantly improving administration and clinical efficiency through Spire's version of the NHS Craft model, which integrates high levels of safety with effective use of resources and further procurement savings. The 2022 savings are part of a phase of cost reduction and efficiency programs, which will continue and increase in impact in future years. We are also working closely with Mediclinic to ensure we benefit from their expertise and resources to accelerate these plans and to identify joint synergies. I thank Ronnie and his team for their ongoing support. I'm pleased to report that the core digital -- digitization programs for 2021, which you should be familiar with are progressing well. Electronic pre-operative assessment has now been deployed in 8 sites, delivering more joined up convenient care with a more efficient use of resources. Our new pricing system is now 28 sites, an important contributor to self-pay growth. We are also progressing in the developments of various modules to create our electronic patient record. Thank you. I'm now going to hand over to Jitesh to talk you through the financial review before I close with the statement on our outlook for the medium term. Jitesh?

Thank you, Justin. So over the next few slides, I will show how in the first half we have delivered against our guidance of trading in line with 2019. And in the process, we have successfully deleveraged the balance sheet with our covenant net debt-to-EBITDA ratio down to 2.7x. There has been exceptional self-pay growth. PMI admissions are improving and PMI revenue grew in Q2 due to a more complex mix. The NHS business is split between the COVID contract in Q1, which was a busy period, and Q2 when the NHS has been commissioning less. It is important to highlight that whilst the economy has opened up with very few COVID restrictions in place as everyone goes about their daily lives. As a responsible hospital operator, we are protecting clinical capacity and patient safety by ensuring COVID controls are managed and maintained. The increasing rate of COVID in the so-called pandemic has significantly impacted the business in July and August. Overall, as we look forward, the outlook for demand is positive, whilst we have to continue to express some caution due to COVID. And we have continued and will continue with our program of operational improvement at self-help to move the business forward and improve margins whilst maintaining our focus on cash, leverage and the balance sheet. As the business is materially different -- sorry, that's drilling at the background. I couldn't make it up with you. Hopefully, it will stop. As the business was materially different in 2020, we're using 2019 as the primary comparative this year's performance. Revenue of GBP 558 million is 13.5% ahead of H1 2019 and EBITDA of GBP 96 million and EBIT of GBP 48.5 million were GBP 0.8 million and GBP 2.9 million short of the same period in 2019. And this is despite the impact of increased COVID costs of at least GBP 16 million. The underlying performance of the business was very healthy. We continue to invest in our hospitals, spending GBP 26.5 million of CapEx. And as I have already said, our net bank debt improved with positive free cash flow, bringing the bank covenant ratio down to 2.7x, which is the lowest since 2016 and materially lower than the 3.67x reported at year-end 2018. This is a slide we showed at the full year results in March, where we set out our expectations for the year ahead and highlighted that the operating environment would be materially different in Q1 compared to Q2. As we explained previously, in Q1, there was a national lockdown with very high levels of COVID and NHS capacity stretched in many areas. By the second quarter, the vaccine program was beginning to have an effect and lockdown was easing and rates of COVID infections were falling. This led to different impacts in each of the 2 quarters. So in Q1, we had a volume-based contract with the NHS and supported the NHS in search sites where COVID rates were highest by prioritizing and supporting NHS. In Q2, we reverted to the framework contract and expected a gradual build in work as the NHS began commissioning. However, in Q2, NHS commissioning on the framework has been low, although NHS volumes are slowly returning primarily through PRS. Our prediction that our private business would grow proved to be accurate. And I hope did they grow -- in Q1, our private business grew in nonsearch sites where we were not prioritizing the NHS and the trend grew substantially in the second quarter, especially with self-pay. Throughout this period, we have maintained safe patient pathways and incurred additional costs due to COVID for testing, PPE and additional staff. We have actively managed these costs and reduced them where we can. Our testing costs, for instance, have reduced from GBP 3 million per month to less than GBP 1 million a month. These charts should now be familiar to most of you. The line in Spire green is our 2019 number. The red line is 2020, with the dramatic impacts of COVID clear, and the dark blue line is our year-to-date 2021. There are 2 charts showing first outpatient consultations and inpatient daycase submissions. The record and exceptional growth of self-pay is clearly demonstrated in these charts. We're delighted that we invested early in 2019 and 2020 in our self-pay capabilities to enable us to respond to this demand and we launched our first-ever TV advertising campaign, which has been highly successful in driving self-pay growth. We can see that from Q2, PMI outpatient volumes reached then exceeded 2019 levels. Whilst the admissions did reach 2019 levels, the impact of COVID in July and August is clear as admission levels fell below 2019. However, there is a backlog of PMI work, and we do expect PMI volumes to recover. Looking at the red line and the right-hand chart for admissions, you can clearly see the significant amount of work we did to support the NHS during COVID last year. And the dark blue line shows that, that continued into Q1 of this year. There is then a material drop from Q2 as we moved on to the framework contract. We expect to drop in NHS activity at the start of Q2, and NHS commissioning has been slow to grow. If we look at total admissions, we can see the growth back to 2019 levels by Q2. The drop in admissions in July and August due to the pandemic is also evident on this chart. But despite the lower admissions in July and August, a strong mix and average revenue per case meant that revenue was still positive compared to 2019. Due to the nature of the NHS contract in 2020 and in Q1 '21, it is more helpful to compare the second quarter of '21 with the second quarter of 2019 for an understanding of how the business is trading. And this table compares our private business, both self-pay and PMI in Q2 of 2019. And whilst I've already provided a summary of admission volumes on the previous chart, it is worth noting that we are also delivering a more complex mix of work. And this can be seen by a 9.2% increase in average revenue per case in PMI and a 28.3% increase in self-pay average revenue per case. Despite 5% lower admissions, PMI revenue was 5% higher than 2019, and sub-pay admissions were 50% higher with revenue growth of more than 80% post that effect. In contrast, using the same Q2 '21 comparison with Q2 2019, the lower NHS commissioning is clear to see with nearly 24% lower admissions and 13.6% lower revenue. The unpredictability of NHS commissioning reinforces our strategy to focus on private growth. Earlier, I said we had good confidence in demand going forward. The start of the funnel for us is relevant inquiries. And this chart shows that increased levels of inquiries have been maintained despite the July and August drop in admissions and provides good confidence in our outlook for demand. This chart compares 2019, 2020 and 2021 bookings using our online portal. The significant increase in volumes this year shows that this has been a worthwhile digital investment and one that provides us with more visibility of the private patient pathway. The focus on cash over the last 3 years has resulted in lower net bank debt. And I want to thank our bank lending group, who have been very supportive throughout the COVID environment. When looking at our balance sheet, the introduction of IFRS 16, shows the lease obligations we have as debt-like instruments. This provides a different perspective on our debt profile to simply looking at the bank debt. On this basis, the overall net debt-to-EBITDA ratio is 6x compared to our net -- our bank leverage ratio of 2.7x. And as we begin to consider the renewal of our current bank facility, we are now in a good position to review our overall leverage capital structure and dividend policy. There were GBP 2.3 million of adjusting items in the first half. Most of these were costs associated with the unsuccessful bid for the company by Ramsay. We continue with active management of our portfolio. We have agreed to an early termination of the lease on our Sussex Hospital and hand it back to the trust 5 years ahead of schedule. This is the smallest hospital in our portfolio which generated GBP 8.4 million of revenue and GBP 0.4 million of EBITDA in 2019. After CapEx, the cash generation from the hospital was broadly flat to negative. And we will continue to look at our portfolio and we'll consider opportunistic bolt-on acquisitions to fill any white space in our network. We're also removing more than 1/3 or 15 of the legal entities in our corporate structure. This complex and time-consuming task is a demonstration of good housekeeping and our strategic focus on simplification, efficiency and cost reduction. And whilst we are focused on free cash flow and improving our ROCE, this is not at the expense of maintaining and improving our hospitals. We continue our rollout of maintenance CapEx through our estate refurbishments and upgrades. The approach of working as a group rather than a collection of independent hospitals enables us to run company-wide equipment replacement programs. For instance, we're replacing aged plain film and diagnostic equipment throughout our estate with a coordinated approach to procurement, yielding good price savings. We have already replaced 6 of the 10 MRI and CT scanners scheduled for this year and have a program for a further 5 for H1 2022 already scheduled. And to meet increased demand, we have added an additional temporary theater in Norwich and are investing to enhance our 2 hospitals in Edinburgh. Shawfair which is currently offering daycase procedures only will benefit from the addition of 3 high-grade laminate flow through theaters and patient accommodation so it can support overnight inpatient cases, whilst we will expand the outpatient services and add more beds at Murrayfield. Profiles built in Edinburgh will be able to deliver care to a wider range of patients. And our digital program continues with the rollout of electronic pre-assessment and our pricing system well underway. We have upgraded the infrastructure to be more resilient and to enable us to build further digital capabilities with programs underway to replace paper-based patient communication with electronic messaging and to improve our digital bookings processes. And last time, we announced target the net carbon zero emissions by 2030. That program is well underway with all electricity purchased from noncarbon sources from October of this year, and local improvements, including LED lighting, more efficient boilers and the introduction of solar panels. So turning to the second half of the year. COVID cases have been running close to the highest of Q1 lockdown this summer. And new cases were 50x higher in July 2021 than in July 2020. For hospitals, that means we have to work harder to maintain safe patient pathways and to ensure COVID security. You can see here how we have reduced testing and other consumable costs throughout -- through improved procurement, changes to our testing protocols and increased efficiency in safe staffing to maintain COVID security. The current cost of testing in PPE is about GBP 2 million per month, down from nearly GBP 4 million in March, and we have plans to reduce this further. However, the combined effect of the higher rates of COVID in the community, and the so-called pandemic has driven significant growth in colleague absence, particularly in July and August. But more significant has been the impact of cancellations. These result from colleague patient or consulted absence due to sickness or track and trace enforced isolation. And replacing these cancellations at short notice is made hard above a 3-day self isolation period required after a negative PCR testing for patients. The combined effect of these COVID-specific costs reduced EBITDA by an average of GBP 4 million per month in July and August. However, just as we have proven our ability to drive down testing and PPE costs, we anticipate improvements in our ability to handle the other impacts of COVID and the higher cost in July and August should be viewed in the context of higher admissions. I would add that the vast majority of cancer patients have rebooked, so these are not eminently losses. So putting all that together, this is the slide we showed you at the full year results in March. Our original expectation for the second half was an environment with low COVID prevalence as the second dose of vaccine took effect and although we acknowledge the potential for further regional spikes of new variants. July and August has shown a different picture with high levels of COVID, leading to a pandemic and stricter isolation rules for health care workers. We expect demand from private patients to remain strong in both self-pay and PMI. We also expect a steady improvement in NHS commissioning as the NHS looks to manage waitings. We will continue to manage and mitigate COVID costs whilst maintaining commissioning pathways. And that said, if the trends we saw in July and August continue, we are likely to see additional operating costs due to higher absenteeism and higher levels of cancellations. And it is this uncertainty that makes it challenging to give full year guidance. But I am optimistic about the strong demand for our services and I am optimistic about our efficiency programs and controlling operating costs. But I remain cautious about COVID. The outlook in H2 is highly dependent on the impact of COVID for the remainder of the year. Underlying demand for our services is excellent, and we expect revenue to be materially ahead of 2019. And subject to no material increases in cancellations and absence because of COVID, we expect EBITDA to recover from July and August levels to trade in line with 2019 for the last 4 months of the year. I'll now hand back to Justin for some closing remarks.

Thank you very much, Jitesh. So overall, I'm pleased to report that throughout 2021, our focus on operational delivery is building a business which is fit for the future in terms of growth, patient mix, efficiency and quality. COVID remains a material uncertainty, and we continue to try to adapt our guidance to the ever-changing environment, as you just heard from Jitesh. But in summary from me, we have an extremely positive start to 2021 with higher private mix and ARPC, validating our strategy to be first choice for private patients and we returned operating profit back to 2019 levels. This protected us against limited NHS commissioning, although we have experienced COVID-specific costs, which were higher in July and August in particular. We see continuing strong demand, especially in self-pay, which, coupled with an efficiency savings program and initiative to reduce COVID costs drive a positive midterm outlook. We're proud of what we've achieved this far and we look forward to the future with confidence that we have the right strategy, strong teams and many opportunities to improve and grow Spire. So thank you very much for listening. We'll now move to the Q&A. And Jitesh and I will be joined by Sir Ian and by John and Peter, our Chief Operating Officer and Group Commercial Director, to help answer questions as required. I think over to Cora to officiate.

Thank you. Our first question comes from Charles Weston. So Charles, please bear with me, I'm going to find your name and open up the line. Charles, if you are unmute, your open to talk now.

Can you hear me?

We can.

Brilliant. The 2 topics I wanted to touch on, please, both of them mainly financial in nature. The first on EBITDA. Jitesh, you pointed out on Page 31 that it's helpful to look at Q1 and Q2 quite separately and you helped us out with revenue. Can you help us out a little bit with EBITDA, roughly what portion of the H1 EBITDA would have been delivered in Q2, please? Clearly, you've given us some pointers with regard to the pandemic effect and the reducing cost of testing but it would be helpful to understand what the sort of base of Q2 was. So that's my first one. The second one is on costs, please. On the GBP 15 million of cost savings, which lines are they expected to appear in just from a modeling perspective? And could we see -- start to see some of this in H2? And what is -- what the staff costs running at? On an underlying basis, if you exclude all the COVID-related aspects, what's wage inflation? What's the sort of the use of temporary staff? And just as a last one on cost, is there any further cost or charge to be taken on the Paterson Inquiry and how come?

Jitesh, go ahead.

Okay. Thank you, Charles. I love it. 2 questions turns into 6. So looking at Q1 and Q2 EBITDA, Charles, I think breaking down Q1 and Q2, we did that to help show how the business was different in Q2. But breaking down the EBITDA between the 2 quarters, I don't think it will be particularly helpful. When we've given our guidance, we've been very specific about July and August and also very specific about the last 4 months compared to 2019 on EBITDA. So it gives you a very good and I think a clear way to get to where we're thinking in terms of the second half of the year. And costs, GBP 15 million, which lines will they appear. They'll actually appear across the Board, I'm afraid. So it's not that helped because some of those costs are bearing cost of goods sold. And so we'll be in margin, and some of them will appear in efficiencies below that line as well. And so we haven't broken that out, but we've got obviously a clear target list on that. But for modeling help, maybe Cora and I can have separate conversations with you and see we can help you with that. What our staff costs running out? Actually, in our technical guidance, we do -- and in our appendices, we do break out the percentage of costs related to clinical staffing and nonclinical staffing. So you'll be able to get that directly from there. Wage inflation and Paterson, my suggestion is on people and cost of people, maybe John might want to say a couple of words and on Paterson maybe Justin.

Yes. Yes. Thanks, Jitesh. On the wage inflation side of things, the most significant factor has been replacing absence during periods of sickness. Agency usage is broadly in line with normal patterns, but the rate that we had to pay was higher due to pressure from other people using agency as well as the pressures are felt across the health care sector. Nothing else really to slide other than in the first half. We delivered the compliance with IR35, which saw a shift of a number of agency workers moving to bank and joining us as being a sort of dedicated resource for ourselves.

And finally, as regards Paterson, clearly, we're absolutely determined to virtually we can to support the victims. We believe we have fully accounted for that GBP 22 million. That includes the cost of doing the recall, which are substantial, and it includes what we believe on an actuarial basis to be the appropriate amount for a fund, which we have led for those who have been newly identified to claim, and we have transferred money into that fund. I'm just not quite sure if that sum is in the public domain. But we believe net-net, that we have appropriately accrued subject to anything else that might come up. But at the moment, we think we have done so appropriately.

Thanks, Charles. We'll now go to Hassan Al-Wakeel. Hassan I have unmuted your line. So if you unmute, you can speak.

Can you hear me?

We can.

Brilliant. I have 3 questions, please. So firstly, could you talk about the NHS framework and whether you've seen any meaningful commissioning thus far and your expectations for this in the short and medium term? Secondly, on the EBITDA outlook for this year, to be clear, is your base case for around GBP 8 million lower than 2019, i.e., around GBP 180 million? And how comfortable do you feel based on the current bookings that you're seeing and the current demand environment that you could potentially make up some or all of this shortfall, assuming no significant further absenteeism and a potential ramp in commissioning? And then finally, you mentioned the meaningful increase in ARPC in both private businesses. Could you talk a bit about how the mix and acuity has shifted and how sustainable you think this is?

Jitesh, how about I answer the first and last question, and I leave the middle ones for you to reflect on? So thank you for those questions. So use of the framework has been extremely low. So most of what I showed in my chart is coming through ARS. And actually, we work very hard to make sure as a sector that ARS remains switched on because we are alive to the fact that the new framework would be slow to start in any event. And most of that work is ARS work. We have contracts signed for the vast majority, not all now, our trust and CCGs under the framework. So we've got a way of working because you have to sign up with each individual for us to do so. So we're really well placed should there be commissioning. The barrier to then commissioning has been partly getting going. So we're starting to see a bit of it, and it tends to come in burst, but also funding. They simply haven't had the funding. And indeed, the block contracts with the NHS pretty much incentivized not funding an independent sector. What will happen in the future? Well, it is the nature of NHS that it is hard to predict. I think that it is highly likely that we'll start seeing more framework commissioning. And our view is it will really start coming in 2022 because winter pressures are likely to be severe. So I think we will see that NHS number get back to 2019 at least. I think it will be slow. We're not expecting huge announcements. There is buried in the government announcement of reference to working with NHS specialist surgery sites and private sector sites because we are specialty surgery sites, and we have continuous conversations. We expect it to go up. We're probably not expecting some massive leads or big announcements of significant funds. So I hope that answers that question. So the increase in ARPC, there's 2 features to it. The significant growth in self-pay, which brings to the higher ARPC. We expect that to continue. And the second bit is the complexity across all patient groups. So these are more complex cases, which requires more prothesis or requires more in patient care and therefore has a higher spend associated with it. All the evidence is that will continue through a period of time. It should theoretically start reducing in future years as we work through the waiting list. However, these weighting lists are so high and because waiting lists are driving self-pay, it is possible that we'll continue to see this level of complexity for a period of time. It is quite unusual that the private mix, which is a significant part of it, we see continuing to be strong as we go forward. So you just -- hopefully, those answers fit with your perception and I'll leave it to you to answer the other 2 questions.

Thanks, Justin. Hassan, let me tackle the questions 2 and 3 together because mathematically, from our statement, you've clearly calculated it -- calculated our statement correctly. The real question is your third one, which is, well, could it be better? Or I suppose the other side is what -- the caution could it be worse? We've -- when you looking forward, you've got to clearly look at both sides of the equation, and we've come up with something that we think is achievable and challenging. And it's clearly given what we've said about July and August, a better scenario than July and August. And so we're backing ourselves to deliver better performance in the second half of the year. Could it be better? Maybe yes, because the demand is there. Could it be worse with the pandemic? Maybe, and we've tried to say that as well. So we've given our best view of how we would perform operating well in this current environment.

Thanks, Hassan. We're now going to go to Grace Lee at Jefferies. You can now speak, if you unmute.

Can you hear me? I will limit my questions to 2 questions. It is kind of a follow-up sort of nature of question just because of that sort of upside, downside potentials and trying to sort of contextualize them. So I think I'll start with the cost side. So pandemic GBP 4 million per month you've seen in July and August. Can I just confirm that the other cost -- sort of cost relating to testing and consumable costs, they sort of remained about GBP 2 million that I think you mentioned in June, in July and August? And how much of that are you expecting to sort of decline as opposed to that total pandemic effects of the GBP 4 million that you are sort of seeing in dry August. So that's the one side of the question. And I suppose if I could sort of a follow up on that and say, like if there are sort of any plans to sort of mitigate these pandemic impacts from the business perspective. And then my second question is on the revenue private side. And obviously, the PMI admissions and you've highlighted that it's slightly down 5% versus FY '19, and there is a sort of backlog of that. When do you expect that to sort of kick in? And what sort of phasing could we sort of expect in terms of 2021 and 2022 if I could?

I'm going to suggest that Jitesh answers to cost question, but John talked about mitigating actions for COVID going forward and that Peter talked a bit about the PMI market.

Yes. Yes. Okay. So on the cost question, first of all, the GBP 4 million per month impact in July and August was an EBITDA impact and wasn't just cost. The biggest impact of that was cancellations, which is in effect, lost revenue and loss admissions going through. So it isn't just cost. The GBP 2 million a month we -- will that remain at the same level? No, we expect it to reduce and we plan to reduce it. And that's probably a good point for me to hand over to John to talk about how we plan to reduce it and the mitigating impacts with us.

Thanks, Jitesh. I think there are a couple of points worth just exploring clearly, maintaining safe clinical capacity is the #1 priority. So keeping COVID out of our hospitals have been since the very beginning, a key focus, and that's worked really well. To help us mitigate those costs of cancellations and absence further, there are a number of key steps. So retaining all of our pathways is the cycle first step, so making sure that we have got infection control and COVID secure measures in place. And so that's why we'll continue testing, albeit on a new regime, which will also help us speed up the time to process patients. At the moment, it takes approximately 3 days from testing to the patient being able to go into theater. We've got a new approach to testing, which will go live shortly that will shorten the 3 days to 2 days, and we have a target of getting to 1 day alongside rapid PCR testing in key sites where we can do on the spot testing, balancing that out with the cost versus reward. And the second thing we're focused on is maintaining vaccination program. We've had a really good response to that. Keeping our patients, our colleagues and consultants say for about 96% and working on the balance and the weighting, the outlook of consultation on whether job should be compulsory in the health care setting, and working also with the benefit of EPRA and our preoperative assessment teams to have short notice waiting list and be ahead of the bookings curve to make sure we maximize our flexibility when we do get short notice and disruption. And then finally, the key ingredient really our hospital teams, the hospital directors and our directors of clinical service working relentlessly, frankly, to maintain utilization of our facilities when things do unfortunately cancel be it due to absence sickness or COVID across patients, consultants and the team. So that's the focus for cost control.

Okay. So I'll pick up on the PMI pace. As you say, we saw a slower recovery so far with the PMI, which is in line with what's going on in the market. That's been driven in part by the access to GPs to attain a referral, which is either a requirement under a policy or is a perceived requirement under PMI. We're working with the PMI partners to make sure that we improve and continue to make access to patients, and that's included 2,000 new consultants going on to our PMI portals only in the last couple of weeks to just make it easier for them to book. In terms of outlook, very much expect the recovery to continue this year. I'm not going to make a prediction in terms of the upside for next year. That can come later, but I am working with the actuarial teams at the PMIs to just make sure we stay close to see what they're seeing because obviously, they see the first part of that model when PMI inquiries come in.

Hope that answered your question, Grace. We will now turn to David Adlington. Let me just find you in the list. Yes, go ahead, David.

Perfect. So 2 questions really. So just on the cost side, just to be clear, the GBP 15 million firstly, that's absolute cost savings that you're not expecting to reinvest. We will see those drop through. And secondly, you're obviously making progress in terms of reducing the cost of testing and PPE. Obviously, there will be an annualization effect into next year as well. That's on top of that GBP 15 million, just to sort of clarify that. And then secondly, just a bigger picture in terms of managing the NHS demand, assuming that it does come back. Obviously, you had a big bounce in self-pay and we should expect that to continue. So how do you manage those 2 demands for your services? And just a quick follow-up on that as well. I mean in terms of that self-pay balance, how much of that do you think is pent-up demand who would have had self-pay anyway versus new structural demand because of what's going on in the NHS?

Jitesh, I'll answer the second question, and then you answer the first question. So it is a constant balancing act in terms of NHS versus PMI versus self-pay. So the first thing I would say is if somebody's care is urgent, whatever the payer, they will go to the front of the queue be it on the day or be it on the week. So we constantly manage clinical necessity on a daily basis. Having really supported the NHS, the first quarter and the second quarter, we've really lent into supporting private patients. And there has been a focus, partly driven by consultants themselves on self-pay patients. So going forward, we'll balance that mix. If there is more NHS demand, then we can fit that into a certain extent. NHS demand is a little bit more flexible so it can help with our scheduling. So that is our job is managing those 3. And that's why I've said you may see the mix go back to more NHS as a percentage, but we're also going into our busier period where we have more capacity. I don't just think self-pay is about -- as I've said, there's a structural change here. And there are clearly new patients. And we're seeing just reference group has increased, I think, by 4% or 5%, so the number of people who are both able to afford and who are thinking of self-pay has gone up 4% or 5%. The market is increasing. I think we're probably helping increase the market by advertising into it. And if it were just people coming up waiting lists, it's people who realized it's not even worth trying to get on to the waiting list who are going from that. One thing is changing structurally here, a lot of the same. I didn't even bother call in the GP. Something has changed. Jitesh, for the first question?

Thanks, Justin. The GBP 15 million is clear and identified cost savings that we will be able to point to and measure and check. And we are acutely focused on margin improvement going forward. The testing and PPE reduction is not part of that GBP 15 million of impact. That is a separate of focus that we have.

Thanks, David. We'll now go to Victoria Lambert. I have allowed you to talk. Go ahead.

We can't hear you, Victoria. Are you on mute?

Okay. We'll ask Victoria works out what's not quite right there. We'll go instead to Kane. You should now be able to talk, if you unmute yourself Kane.

Can you hear me?

We can.

Great. I got just very few follow-ups. Just on sort of general work you would do for the NHS, is it sort of fair to say that sort of outsourcing sort of just generally will lag and the NHS is always sort of typically filling its own buckets first? And then just on the inquiries, I mean, obviously, it looks like some nice momentum. I'm just wondering, is there sort of any way to quantify some of that in terms of sort of what the conversion rate you actually kind of get from some of these sort of inquiries? And do you have a sort of number you could point to? And then just finally, I know recently sort of a couple of months back, you sort of spoke about the need to invest further and consider the availability of staff, if you were to see a sort of an accelerated sort of admission story. With that in mind, where do you think we are today with sort of -- you've obviously had some good momentum in Q2, the private pay up 25%. Yes, we can't extrapolate that up. So where do you think that inflection point is where you -- where that investment is required, that more significant investment is required, i.e., you're at 6% to 7% of sales in terms of capital? Where does that potentially go? I'm just trying to guess the sort of super demand sort of scenario?

Thanks, Kane. Interesting questions. So if I take the first one, yes, the NHS does fill up its own facilities before outsourcing. So that's another reason for why we suspect it will grow. And also why winter precious is likely to create more outsourcing because essentially, they then get either filled up or overwhelmed in that regard. So that's the first point. So the inflation point is an interesting question. From a CapEx perspective, where you can see that we've got -- we've opened a new theater in Norwich. We're investing CapEx in Edinburgh. So from a CapEx perspective, it's an ongoing part of our CapEx that we were able to assess when we need to add in to cope with demand, and we have a very good picture of that. So I think the super demand scenario is less relevant than we just continually invest. I mean for us, it is more about making sure we have a pipeline of good colleagues so that we can cope with the increased demand. And that's, for instance, why we're investing so heavily in apprenticeship program because there is a shortage of supply, and we're making sure that we can self-help, just as you'll remember, we brought over several hundred nursing colleagues from overseas to supplement shortage. So we've spent a lot of time building a pipeline to cope with that. Sorry, Kane, I forgot about the middle question.

Yes. I was just asking, so if 1 could quantify sort of the inquiries charts are really nice to see. Is there a way for us to sort of -- is there a conversion rate you aim for? Or how do you look at that?

Peter?

As you know, Kane, the market is incredibly complex in terms of the referral pathways and they come through multiple different areas. So you won't be surprised to know that yes, I do measure conversion rates. What I'm looking at is conversion rate through a multitude of different channels. So giving you 1 conversion rate is meaningless as what we're looking at is directing more and more patients through our digital channels direct to us. But we're also looking at the conversion from referrals to GP and also referrals direct to consultants. So there's multiple different referral pathways and the key here is investing in the technology but also our capabilities. So for example, developing our outsourcing over the local center and enhancing their capability with HMS, our basic core hospital management system to enable them to convert more inquiries. So yes, I do have conversion rates, but they are multiple and probably not relevant for this call.

All right. And maybe just while I got you, just I sort of noticed obviously estates some news around sort of higher taxes to fund health care sort of any comments you can make on that? How do you see that impacting sort of the NHS and sort of the role you may play?

Well I think it's in the context of the GBP 1 billion and about commissioning. I think it's all bundled in the same thing. It's just how they fund it.

Thanks, Kane. I think we've reached the end of our time. Thank you so much for your interest in Spire Healthcare. And some really interesting questions. If there's anything that you didn't get covered on the call, then please feel free to reach out to me directly. And with that, I will end the webinar.

Thank you, everybody.

Thank you.

Thank you.