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

[Audio Gap] to the Presentation of our Results for the Full Year Ending 31st December 2022. I'm Justin Ash, Chief Executive. Very nice to see you in person, it's good to be back here. Those of you who have been around a long time, will remember 3 years ago, just before the pandemic and I was in crutches. So things are getting better. Thanks to Instinctif for hosting us. Unfortunately, and I might add irritatingly, ongoing works in the building where our offices are so noisy that we couldn't hold the meeting there. Today's event is hybrid. So welcome to everybody joining online. There will be a Q&A at the end. Obviously, you can ask questions in the room. If you're on Zoom and you want to ask a question, please submit your name and organization into the Q&A function on your screen. In the meantime, you're on muted. And if you've got any problems, please contact Laura Young at the address on the screen. So as what has been delighted to welcome all our visitors, we have ex co here. And just by way of introduction, most of them you've met will be in the Q&A. We've also got Rachel King, who's our new HR Director and Lisa Grant, who joins today as our new Group Clinical Director and Chief Nurse. So welcome to them. Stand up just so people can see who you are, please. Great. So I'm going to kick off with an overview of our performance. I'm delighted to say that Jitesh is fully back, and he's going to present the details of the financials. Thank you very much to Harbant for all his very good work last year. And at the end, I'm going to talk about ongoing developments and the outlook for '23. And I'm going to be bringing in Peter Corfield, our Chief Commercial Officer, to talk about our most recent acquisition. First a reminder of our strategy that, we set out at our Capital Markets Day event last June. Our purpose, which sits above everything we do, is to make a positive difference to people's lives through outstanding personalized care. As the demand for healthcare, both in and out of hospital remains intense, our aim is to help meet these needs by running great hospitals and developing new services. The 5 pillars of this strategy are the continued growth in our existing hospitals with increasing margins to maintain our strong quality and safety credentials in which we have invested so much in recent years. As a people business to recruit, retain and develop a great workforce, as a responsible business to champion sustainability and to extend and expand our proposition, developing new services, which meet the new and changing needs of patients and the populations in today's environment. So through this, we will deliver strong financial performance and improving shareholder returns and I'm going to talk about progress against these pillars later. But turning to the numbers for 2022. 2022 for Spire was a year of positive financial performance, and I'm pleased with the way we performed and delivered on our guidance, which was overall in '22, we expect to see good revenue growth, continued adjusted EBITDA growth and a further increase in ROCE with an improvement in margins. Revenue was up compared with 2021, driven by strong growth in self-pay and PMI. Adjusted EBITDA and EBIT were up despite the continuing impacts of COVID, raised sickness levels and inflation. Adjusted EBIT was up 30.2% on 2021 and 8.2% on 2019, the last full year prior to the pandemic and adjusted EBITDA, taking into account depreciation was up 14.2% on '21 and 7.7% on 2019. Our efficiencies program delivered more than GBP 15 million savings in line with plan, and our return on capital invested was also up materially to 6.2%. Now we continue to recognize we have more to do with a medium-term goal of ROCE of 10% or greater in line with our WACC. Given the financial strength of the business, and strong capital position as well as our confidence in the outlook for the period ahead, I'm delighted to say that we proposed to pay a modest dividend, the first we've been able to pay since the start of the pandemic. So I'll now touch on some of the drivers behind our performance. In summary, the year saw 2 key dynamics, which we were able to navigate successfully -- unpredictable operating environment. 2022 saw a further high demand for private healthcare with patients seeking prompt, safe and effective diagnosis and treatment against a backdrop of continued strain in the NHS. We were determined to meet this demand, and our teams worked tirelessly to increase our capacity by 8% to enable us to do this. Self-pay revenue was almost double pre-pandemic levels in 2021. And this saw in 2022 -- and this saw a further increase. Meanwhile, the PMI industry has recovered well. Aviva, for example, recently disclosed it is providing coverage for 1.1 million people, up from 900,000 in 2020. Correspondingly, our own PMI business, although slow to recover initially from the pandemic, began to rebound strongly in H1, and this trend continued in H2 with new PMI patient volumes growing rapidly and admissions now back at pre-pandemic levels. And I'm very pleased that we were able to sign new multiyear agreements with Bupa, Aviva and Vitality during the year. So turning to the NHS. In 2022, our focus moved back to engagement with NHS GPs and local commissioners to maximize our capture of available referrals via the e-referrals system. By the end of the year, overall referrals were still marginally behind pre-pandemic levels as we focus on those procedure areas most appropriate for Spire. As a result, Spire NHS orthopedic referrals were significantly outperforming 2019 by year-end. We have also supported local NHS systems in treating those patients who've been waiting the longest. Spire played a part in the NHS achievement of reducing almost to 0, the list of NHS patients who've been waiting for over 2 years. And more recently, we've helped to treat those waiting over 1.5 years with trust who could not meet those targets on their own. In December, I was pleased to be invited to the launch of the government's Elective Recovery Taskforce at #10. And I hope it will pave the way for a closer partnership with the NHS and independent sector, where the sector is fully integrated into the solution for addressing the backlog. However, as I said earlier, 2022 was a challenging operating environment despite the strong demand. This was true for much of the economy, but particularly so for the healthcare sector. Although COVID has broadly disappeared from the news agenda, it continued to have a significant impact on our business during the year as did flu and other viruses, particularly during the early months, the summer and early autumn. Sickness absence levels amounts colleagues ran at 5.5% on average during '22, which compares to 2% pre-pandemic. And we also saw raised levels of sickness absence amongst consultants. This inevitably led to cancellations compounded by patients themselves canceling procedures due to COVID and other sickness. To minimize cancellations, we needed to rely on agency staff at a time when agencies were raising their prices as a result of inflation and increased demand. And all of these factors resulted in GBP 42.9 million in cost. This year, like the rest of the economy, inflation, particularly in relation to people costs also led to increased costs across the business. Nonetheless, I am really proud of the efforts of all our teams to mitigate and respond to these costs and pressures. We focused on more complex procedures and made appropriate adjustments to our pricing, generating a 10% increase in our average revenue per case. We successfully implemented our plan to generate over GBP 15 million of cost savings and deployed smart procurement to control costs. When we have late cancellations from patients, we knew which other patients we could bring in at short notice to avoid the free slot going to waste. As I said earlier, we enhanced our capacity, for example, by expanding our activities on Saturdays to increase our ability to meet demand. In short, we demonstrate that we are able to adapt successfully to changes in operating pressures. So although COVID sickness and inflation tempered our margin improvement over the year, we still saw an increase in margin from 16.1% to 17%. And when COVID and sickness levels eased in the final couple of months, we were able to deliver a particularly strong performance in November and December with increased margins and strong revenue growth. Our focus on quality remains at the heart of everything we do. I'm very pleased that our investment in safety and the overhauling of our governance and consultant oversight over the past 5 years has paid off. 98% of our inspected hospitals and clinics are now rated Good or Outstanding by the CQC, or the equivalent in Scotland and Wales, up from 69% in 2016. And we have only 1 hospital, which was historically not rated Good or Outstanding, which we still really hope will be inspected in the near future. Patient satisfaction remains high. Overall, 96% of patients rate their experience where this is good or very good. And here, you can see that very high proportions of our patients for we deliver on the main elements of our purpose, making a positive difference to patients' lives, providing outstanding care and providing personalized care. I'm delighted we've been able to maintain these high scores in a very busy year, and it's a testament to the standards of service delivery we provide every day. Of course, we remain vigilant. Quality of care is a daily discipline in every hospital and across our governance network. In summary, these are a good set of results and I'd like to pay tribute to our colleagues and consultant partners for all their hard work and commitment that have made these results possible. Thank you. I'll now turn to Jitesh to go through the financials in more detail.

Thank you, Justin. Justin started by saying that things are getting better because he's not on crutches. They're getting a little bit better for me, too, at least I could be here for the presentation this year. It has been an extraordinary year for me personally. And I want to start off by, in particular, thanking Harbant, but also the finance team and the business for stepping up and stepping in while I was off. I'm really proud of the team. I also want to thank everyone generally because the kind thoughts and the get-well wishes that I got really did support and help me. So thank you very much. But actually, I mean, it was quite an extraordinary year for the business. And Justin's already talked about the fact that we've managed the business well against a backdrop of good demand, but a difficult operating environment. And in that light, 2022 was a good year for Spire Healthcare, including financial performance with revenue earnings and margins significantly higher than the prior year. Starting at the P&L so, revenue was up 8.3% to GBP 1.2 billion, ahead of the medium-term CAGR target of 5% that we announced at the Capital Markets Day. We had our best EBITDA and EBIT for 5 years. Adjusted EBITDA was up 14.2% to GBP 203.5 million and adjusted EBIT up 3.2% to GBP 105.6 million. Adjusted EBITDA margin rose to -- from 16.1% to 17% and adjusted EBIT margin rose to 8.8% from 7.3%. ROCE, a measure that we're increasingly focused on increased from 4.9% to 6.2%. And adjusted profit before tax and statutory profit after tax had a welcome return to profitability, but it reflects an outcome that benefits from one-off deferred tax credit. We've focused on cash and debt management over the last few years, which has given us a strong platform to continue to invest and grow the business. We've invested GBP 90 million in our estate as well as with projects that increase our capacity, and I'll give some more detail in a little while. The net bank debt at the end of the year was GBP 250 million compared to GBP 235 million at 2021. We paid down bank debt by GBP 100 million, whilst refinancing the group's banking facilities. And this took place in February of '22, which means that the group agreed terms that were more favorable than had we waited to refinance later in the year. We also entered into interest rate swaps during the year, which hedged 75% of the interest risk on the bank loan this year. The EBITDA covenant ratio improved year-on-year from 2.3% times to 2.2 times at the end of 2022, which is significantly lower than leverage -- levels in 2018 to 2020 and is also the healthiest level we've had since 2016. Now this shows the payor mix, and we're pleased that overall private revenue now represents 73% of revenue compared to 69% in 2021 and 68% in the last pre-pandemic year. And last year, self-pay represented 28% and was a large portion of our revenue -- a larger portion of our revenue than NHS income, which was 25%. The share in revenue from self-pay has grown from 18% in 2019 to 28% in 2022. And self-pay revenue rose by 15.8% year-on-year. Total private revenue was up 14.5% year-on-year to GBP 876.7 million. Self-pay was up 15.8% to GBP 338 million as we continue to focus on making self-pay easy and accessible. And PMI revenue in 2022 was up 13.7% year-on-year to GBP 538.7 million. Turning to private volumes on an annual basis, split between new outpatient consultations and inpatient day case admissions and outpatient procedures from 2019 to 2022. It is pleasing to report that both areas grew by 8% year-on-year. It's important to consider inpatient day case admissions and outpatient procedures as a whole as we have -- consciously shifted some types of work to an outpatient environment to create more capacity for more complex cases in theater. We are increasingly looking at private on a combined basis as there is some evidence of substitution -- between these, payor mix, where patients may opt between self-pay or use PMI. On the whole, we expect the volume mix of private procedures to skew more towards PMI this year. Recent research conducted by Mintel predicts that the health insurance market will grow by 4% in 2023. So turning now to underlying payor type, I'll cover self-pay first. So we grew self-pay inpatient day case admissions by 9% year-on-year. This is on top of the 34% growth in 2021 since 2019. Self-pay ARPC grew by 7.4%. This is a reflection of both mix complexity and price. In self-pay, we have control over pricing and actively managed pricing using our digitized pricing system. This increase in ARPC contributes materially to the overall 15.8% increase in self-pay revenue. PMI volumes recovered strongly in the second half of the year with activity back to pre-pandemic levels. PMI ARPC grew 2.6%. Pricing for PMI work is governed by terms of annual resets, which are typically inflation-linked mechanisms. The prices across the majority of these contracts are reset between January and April with respect to inflation over the past 12 months. So given this timing, the benefit of PMI price uplift will start to flow from Q2, 2023. The timing of these price rises will slightly skew revenue and margin growth this year towards H2. As expected, NHS revenue was down year-on-year by 6.1% in 2022. Following the group support in 2022 of the NHS -- sorry, in 2021 and 2020, 2020 of the NHS, we supported the NHS over COVID-19. And ARPC was up 14.6% as we focus on more complex care, especially orthopedics. We're -- pleased to continue supporting the NHS in caring for patients on their waiting list. As communicated in the Capital Markets Day, we have a medium-term financial objective to achieve an EBITDA margin in excess of 21%. This slide sets out the underlying factors that will determine margin and our associated degree of control. In 2022, margin increased to 17% from 16.1%. This rise is stated after the salary increases we introduced in September. We made good progress with our efficiency program in 2022, delivering more than GBP 15 million of cost savings, and we're targeting a further GBP 15 million across '23 and '24 with this largely starting to flow from the second half of this year. The last 2 significant factors are inflation and operational costs resulting from COVID and general sickness. We manage inflation risk by fixing elements of our cost base for the short and medium term. And we said before that, we've learned a great deal about managing the disruption caused by COVID. However, COVID and other illness can and do still result in disruption and higher cost. It is also difficult to predict the timing and scale of any future disruption. This chart shows the good progress made to lower EBITDA leverage over recent years, a consequence of disciplined cash management while still investing in the business. The EBITDA covenant leverage fell to 2.2x from 2.3x, and this is despite GBP 12 million for the acquisition of the Doctors Clinic Group and repaying GBP 13 million as we disclosed at the half year results to an insurer following a court appeal, which reversed an earlier decision where we'd received the cash. And this compares favorably with our objective to remain below 2.5x and gives us more flexibility on how we manage the business and environment of inflation and increasing interest rates. Under IFRS 16, we also must report our future lease rentals as debt on the balance sheet. Our EBITDA to total debt ratio decreased to 5.5x from 5.9x, but it's also important to recognize that IFRS 16 does not take into account the value of our freehold sites. Based on our latest valuation, the fair value of the own site remains around GBP 1.3 billion. These sites are held on our balance sheet at GBP 652 million. Using the freehold sites, our total loan-to-value ratio would be less than 1x. When managing our CapEx spend, we look at estate management and capacity enhancement. In the past 3 years, we've replaced and upgraded 26% of our MRI and CT scanners, 78% of our anesthesia equipment and 50% of our beds. We also look to enhance -- we've also looked to enhance capacity and last year, we invested in major projects, including the expansion of Shawfair Park in Edinburgh, which is now able to treat overnight patients for the first time and the conversion of admin buildings into an outpatient center at Spire Yale in North Wales, which I'm delighted to say, not just show the pictures, that we opened it this week for new patients. So we have an ongoing program to grow capacity through initiatives, which include extending current outpatient facilities, returning admin space and bedrooms to clinical usage and transition to modular theaters, increasing the number of laminar flow theaters and adopting an ambulatory theater model for minor operations. Alongside this, we're also disciplined when looking at portfolio management. In '21, we agreed to sell by Spire Sussex, and we purchase Spire Claremont Hospital. This switch resulted in a comparative ROCE improvement of 20%. In 2019, we sold the Bristol Oncology Centre and entered into a profit-sharing arrangement with the buyer. This was a positive move, generating a good return. And in 2022, the profit-sharing arrangement delivered ahead of our plan. And in December, we acquired The Doctors Clinic Group and Peter will speak more about this in a moment. So to summarize, in 2022 was a good year from a financial performance perspective. We achieved growth in ROCE and increased EBITDA margin, and we continue to benefit from having an improved balance sheet. Thank you. I'll hand back to Justin.

Thank you, Jitesh. So lovely to have you back. So I'd like now to touch on progress against each of our strategic pillars, which I set out on the slide here. Our first pillar is to drive performance across our 39 hospitals. And we've talked a lot about this and how we navigate the dynamics of strong demand, but significant headwinds that we faced during the course of the year. An example of all the work we've done paying off is that we continue to have the highest market share of hip and knee procedures and our volumes continue to grow. The next pillar, quality and patient safety is our highest priority. As I've referenced, we revamped our governance and standards and the way we oversee the practice of our consultant partners over the past few years, bringing rigor and robustness to the process. To build on this in '21, we launched our quality improvement strategy and '22 saw us embark on a range of initiatives designed both to improve patient outcomes and improve operational and financial performance. Examples have included projects to reduce patients' length of stay in hospital for knee and hip replacements and the time it takes for patients to have an MRI scan, both of which serve to increase capacity and efficiency whilst benefiting patients. And I talked about our good or outstanding ratings earlier, which demonstrates that our investment in quality is paying off. This is the third year in a row that we've had only Good or Outstanding ratings from inspectors over the course of the year. The CQC will be updating their inspection methodology during '23, and we look forward to working with them as this is rolled out. The central pillar of our strategy is around investing in our workforce in the face of the well-documented shortage of healthcare workers. In this climate, we have to compete hard to recruit and retain the best talent. Clearly, an important part of this is centered on reward. We responded positively to workforce pressures with an average 5% pay-rise for colleagues in September, and many of our lower paid colleagues saw a rise of up to 16% over the course of the year. In the year ahead, we will complete an important piece of work to bring greater consistency and transparency to the way we reward our colleagues to make the system fairer and more compelling for them. '23 will also see us complete the in-sourcing of the whole of recruitment and on-boarding through which we aim for a better experience for our new colleagues and increased cost efficiency. Another key to success or retention of colleagues is our learning and development programs, and you've heard me talk about this on many occasions before. Around 1,000 of our colleagues are currently taking part in a development program and 5% of our permanent workforce, are participating in 1 of our apprenticeships. Successful recruitment and retention drives lower colleague turnover. For much of '22, we did see a rise in lever rate, but by the end of the year, this rate was falling. This reflects, we believe, our response to the 2 main reasons given for leading an exit interviews, career progression and paying conditions. And our investment in development and colleague pay rises appears to have traction, though we will need to do more to remain attractive. I'm very pleased that as a result of all of this, our colleagues remain very engaged with 80% of colleagues saying they were proud to work for Spire in our survey, which took place near the end of the year. And the investment we've also put back into making it easier for consultants to do business with us has resulted in increased satisfaction amongst consultants on the service we provide them in our recent consultant survey. The next pillar of our strategy is to become a leader on sustainability in our industry. We launched our sustainability strategy at our Capital Markets Day in June, and our aim is to be a net contributor to society in everything we do. And I believe that this is entirely consistent with being resilient and profit growth. We remain on track towards our target of becoming carbon neutral by 2030 and reduced our carbon emissions by 6% over the year. To do this, we are replacing gas-powered boilers, installing electric vehicle charging points, that's not just because I have Tesla, increased recycling rates and reduce the amount of waste we send to landfill. And we were pleased to be highly commended in the Business Green Leaders Award for net 0 strategy of the year. The next pillar of our strategy is selectively to invest to attract patients and meet more of their healthcare needs. As the demand for healthcare outside hospitals grows, Spire is working towards becoming an integrated healthcare provider with services in primary care, diagnostics, occupational health and long-term condition management. I'm now going to hand over to Peter, who will talk further on this and our most recent acquisition, The Doctors Clinic Group. Peter?

Thank you, Justin. Good morning, everyone. As Justin mentioned, we were delighted to welcome our new colleagues, Doctors Clinic Group in December. This acquisition is a strong fit with our strategy to expand our proposition with the addition of new service capability for Spire and the growing occupational health market while also bringing more scale and expertise in primary healthcare. This means we now have 3 areas of under our expansion strategy. Firstly, the development of our day case clinics with a plan to, launch new clinics in North Wales and Yorkshire on track for the end of this year. The expansion of our primary healthcare proposition, building on our established Spire GP service in 35 hospitals with 21 additional locations plus, very pleased to say our first chronic condition management subscription service was launched as a pilot at the end of last year, offering nurse-led support for type 2 diabetes. Finally, the addition of occupational health more on this in a minute, as we reported at the time, the acquisition of Doctors Clinic Group was a modest investment of GBP 12 million, giving us a growth platform while also offering synergies with the core hospital business. A key part of DCG's business is occupational health, which is increasingly becoming a politically important issue in the aftermath of COVID. We're really excited about the business as it gives us a real presence for the first time in health, safety and well-being space. DCG also gives Spire a low-risk entry into Central London primary healthcare market with its existing footprint. Looking at patient health in a little more detail, the acquisition enables Spire to extend its reach to service to over 700 new corporate partners at a time when businesses are increasingly looking to offer health and well-being benefits to their employees. Occupational health is a growing sector, and Spire will be able to offer a differentiated proposition. For example, we've been recently been approached by a number of corporates who are looking to develop rapid access to diagnostics and treatment pathways to support their workforce. We, therefore, believe the integration of the occupational health offering, combined with our core business presents an exciting growth opportunity. We'll rebrand the service to Spire this year, along with developing the referral pathways into hospital businesses. We will also explore further opportunities to introduce our insurance business in Spire. Finally, our existing GP business had a very strong year, seeing a 46% year-on-year increase in the number of appointments last year. With the acquisition of DCG, we now have over 125 GPs, creating 1 of the biggest networks in the U.K. As I mentioned, DCG operates up to 21 centers, and we're really pleased that we've already been able to launch a new enhanced facility in London Liverpool Street last week, which will extend GP services, but also offer minor operations. We're also providing access to DCG GPs to our referral tools to enable them to provide access to Spire hospitals in the wider London area. We'll continue to work with the team over the coming weeks to finalize our plans and look for other growth opportunities. As with occupational health, the business will be rebranded, Spire by the end of the year. So in summary, we've made good progress on our strategy to expand our services in 2022, and we look forward to sharing more progress in the coming months. I'm now going to hand back to Justin to talk about outlook for the rest of the year.

Thank you, Peter. Okay. So I'd like to bring things to a conclusion by looking ahead to 2023. 2022 ended strongly, and I'm really pleased so that we are seeing this momentum continuing into the early months of '23, with the business performing very well in January and February and strong growth in private revenue building on a record year last year. This sets us up well for the rest of 2023, and we anticipate seeing continued growth in revenue, profit and ROCE during the year. Turning firstly to demand, you'll see from a couple of research slides that we've put in the appendix to this presentation that overall consumer sentiment and our Target Private Consumer segment remains positive. Our target customers remain more resilient to the cost of living pressures. And in the last couple of months, they are also becoming more optimistic about their financial outlook than in the middle of last year. Based on trends so far in '23, we would expect strong PMI growth with revenue growth in self-pay also, but at a lower level of growth than '22. We are seeing an increase in NHS activity, which we also expect to continue, no doubt supported by the #10 taskforce recommendations in March. Targeted marketing will continue to drive private demand for us as we're expanding services and continuous service improvement initiatives. Clearly, this implies we will continue to expand capacity in the ways we have described above to meet this demand. We also anticipate delivering further margin improvement. Last year's material drag on margin improvement was COVID and sickness with costs, as we've said, of over GBP 42 million. This year, our margins will face inflationary pressures, workforce challenges, rising agency costs as well as the continued presence of COVID and flu in society, which in turn impacts sickness absence and cancellation levels. To ensure margin improvement despite this, we will drive further efficiencies and are on track to deliver another GBP 15 million of savings, mainly this year. We will also continue with pricing management as and where appropriate. The benefit of savings and pricing will be seen most strongly in margins in H2. And of course, we will continue the work to retain and recruit great colleagues. In the medium to long-term, we remain determined to meet the high demand in healthcare and retain our focus on improving ROCE and margins with a medium-term goal of ROCE at or above 10% and margins at or above 21% as we announced at Capital Markets Day. Inflation and wage pressures are notwithstanding, we are confident of continuing progress towards these goals this year and beyond. We are, of course, as committed as ever to delivering the highest quality patient care, which will underpin our resilience, sustainability and success in the years to come. In summary, in 2023, we expect to make further good progress and continued delivery of the group's strategy. Thank you.