May 25, 2020
Transcript of presentation results
Netcare Interim Results 25th May 2020
1H20 Results
Netcare Group
Results for the six months ended March 2020
Richard Friedland
Good morning Ladies and Gentlemen welcome to this group presentation for the six months to the end of March 2020. Welcome also to the Chair of Netcare, Thevendrie Brewer and other members of the Netcare Board and the Senior Management Team, who are also on this call. That we are living in extraordinary times and facing unprecedented challenges is obvious to all of us. At the very outset I want to pause here, pause to thank, acknowledge, respect and pay tribute to the extraordinary work done by our management teams, staff and doctors on the front line across
South Africa and Lesotho, for their incredible efforts during this challenging time in caring for, and treating our patients. I also want to thank our Chair and Board Members who’ve been meeting weekly since the lockdown began in order to ensure we have a collective, and drawn up approach, to this Pandemic.
In our SENS this morning we notified you of the resignation of Lynelle Bagwandeen, our Group
Companies secretary and general council. Lynelle has made a truly extraordinary contribution to
Netcare, and we’ve had the real privilege of working with her and access to her expertise and council for the past nine years. We will sorely miss her and wish her well in her new endeavours.
We also advised you at our year-end results of the appointment of Davie Kneale as a non-executive director to the board of Netcare. David needs no introduction, as the former CEO of Clicks over the past 13 years, was responsible for its extraordinary growth, and transformed Clicks into the hugely successful company and market leader it is today. David is already making a very valuable contribution to Netcare, and we all look forward to benefitting from his significant experience, insight, and commercial nous.
I will start today’s presentation with an overview of our Group's performance, and the operational performance of our various divisions, as well as an update on COVID-19, before handing over to our
Chief Financial Officer Keith Donald Gibson, who will unpack our financial performance in more detail. I will conclude the presentation with how we see COVID-19 potentially impacting us over the remainder of the year.
Turning to an overview of our performance over the period. Looking at our performance overall the first five months to the end of February was very much business as usual, and Netcare delivered a solid underlying operational performance, in line with the guidance given to the market. On the
9th of March, we treated our first COVID-19 case, and March became a transitionary period, materially impacted by extensive COVID-19 preparations, and curtailed patient volumes.
The month of April was significantly impacted by the COVID-19 lockdown, in particular affecting non-urgent surgery, medical and trauma cases. Given the impact of COVID-19 on our performance for March trying to determine the impact for Netcare going forward is obviously, critically important and to this end, we’ve internally developed a model to better understand it. This model is dynamic and allows us to manage daily bed capacity, using a risk stratification approach.
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1H20 Results
Notwithstanding the various inputs into this model, the potential impact of COVID-19 introduces significant forecast risk. We believe that future margins will be impacted by increased risk mitigation costs, lower volumes, and significant changes to case mix. Given how dramatic the change in performance in March and April was, and the high level of uncertainty, we have taken a number of precautionary steps which are unprecedented in Netcare's 23-year history. These include, firstly withdrawing our full-year guidance due to a high degree of uncertainty in the second half of the financial year. Secondly, suspending the interim dividend to preserve cash. Thirdly we’ve effected a number of cash preservation measures, and also obtained a precautionary covenant waiver, and finally, we’ve secured a R4.8 bn of committed facilities to bolster liquidity.
Looking broadly at our financial performance over the past six months, and doing so on a normalised basis to exclude the impact of IFRS 16, and the exceptional item comprising a once-off, non-cash, share-based payment expense on the B-BBEE transaction. Revenue rose 1.8% to R10.7 billion, EBITDA rose 1% to R2.1 billion, adjusted headline earnings per share from continuing operations declined by 6.3% to 79 cents. Pleasingly we sustained a healthy net debt to EBITDA ratio of 1.5 times, and we achieved a return on invested capital of 18.1%.
Turning to an overview of our operations, and looking at the key activity drivers in more detail, it’s helpful to split these last six months into the first five months to the end of February, prior to the impact of COVID-19, and then the full six months in order to understand the impact of COVID-19 in
March and on the full six months. As you can see, overall patient days declined by 1.2% for the first five months, but by 2.6% for the full six months, given the impact of March. Total hospital patient days declined by 1.7% for the first five months, but by 3.2% for the full six months. Total mental patient days conversely grew by 4.7% for the first five months, but only by 2.9% for the full six months, and as you can see this had a commensurate effect on acute occupancy in the group. And finally, in terms of primary care, patient visits declined 5.3% for the first five months, and by only
4.8% for the six months, due to an increase in visits to GPs ahead of the lockdown.
Turning now to hospitals and emergency services, revenue grew by 2.5% to 10.4 billion, as a result of a 2.1% growth in acute hospital revenue, and 11.4% in growth in mental health revenue, and a
5.6% increase in acute hospital revenue per patient day. EBITDA declined by 1.6%, largely as a result of central costs of R25 million related to enhancing our data capabilities, new business development, and the estimated impact of COVID-19. Overall, our EBITDA margin percentage declined by some 80 basis points to 20%. Now if one excludes the central costs and the estimated impact of COVID-19, acute hospital EBITDA margin was 20.6%. In our primary care division, revenue declined by 12.5% to 342 million as a result of 15 Medicross day clinics being integrated into the hospital division from 1 October 2019, and the rationalisation of 7 loss-making clinics. Stripping out these factors, underlying revenue growth of 7.3% was achieved. EBITDA generated year on year remained flat despite the decline in revenue, and this was achieved as a result of the benefits of the clinic rationalization, and prior period restructuring costs as a result EBITDA margin rose by 190 basis points to 15.2%.
Having unpacked our overall performance for the six months, let’s take a closer look at our COVID-
19 experience and the impact of the lockdown. Since our first case on the 9th of March, we’ve treated 643 COVID positive patients in total. Of these, 337 have required admission, and 306 have been treated either at our Medicross dental and medical centers, or been seen at our hospital
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1H20 Results emergency departments. In terms of those admitted, 55% were treated in general wards, 9% accommodated in a subacute setting, and 36% in either High care or ICU.
In terms of the impact of the lockdown, demand for health care has fallen significantly. This slide will demonstrate to external and national data points which serve as useful proxies for what happened to medical cases, and emergency surgical cases, remembering of course that we stopped semi-urgent or elective surgery at the end of March. The graph on the left-hand side represents data from one of the major pathology providers Ampath, and demonstrates the significant reduction, year on year in the typical respiratory viruses seen during April, shown here as a reduction of positive tests or viral specimens, these would be your typical viruses causing infections, and in many cases requiring hospitalisation. And in this graph, 2019 is represented in the light blue, and 2020 represented in beige. This is a useful proxy for a large proportion of medical admissions, which would ordinarily be seen over this period.
The graph on the right-hand side represents South Africa’s weekly deaths from unnatural causes, from the 1st of January of this year until the end of April, and it demonstrates an approximately 60% reduction in deaths against forecasts which is demonstrated by the light blue dotted line. This is a very useful proxy for all trauma-related emergency surgery, for example, motor vehicle accidents and violence. With this in mind, let’s now take a look at our activity as a result of the COVID-19 lockdown. This graph clearly demonstrates the very significant diminutions in all forms of hospital activity from about the middle of March through the announcement of this state of disaster, and the lockdown on the 27th of March, until the end of April. As a result of this overall activity, patient days in April declined by 50.7%. In hospitals, there was a 49.5% decline in patient days, in mental health a 63.3% decline in patient days, and in primary care, a decline in visits of some 53.3%. As you can see now from that green shaded area of the graph, this represents acute hospital activity from the 1st of May, when the lockdown was partially relaxed, until last week on Thursday the 25th of May, pleasingly activity is beginning to return, or be it slowly, and is tracking towards a 15% increase as compared to April.
Focusing specifically on COVID-19, we wanted to devote a few slides outlining our approach to this
Pandemic. At the outset, I think it’s important to emphasise that the textbook on this Pandemic has yet to be written, and we are all on a vertical learning curve as we contribute to discovering more about this virus. Over two and a half thousand scientific articles have been published on
COVID-19 since January of this year, and the more we progress on the front line of treating patients and trying to contain its spread, the more we realize how little we really know, and understand about this virus, and how it will evolve into the future.
Also, this is a virus and pandemic that unlike many before it relies so crucially on a fundamental paradigm shift in human behaviour, as a result, it’s incredibly difficult and challenging to contain its transmission. We are realising through our own experience in Netcare, that until this sociological shift in society as a whole is firmly embedded, both in the workplace, and also at home, and in our various communities, the successful control of this Pandemic will be difficult to achieve. Having said this we’ve adopted an abundance of caution approach to developing a framework for the management of this Pandemic, and it’s been developed from a combination of the principals of
Disaster Management, the principals of Occupational Health and Safety, our quadruple aim and is firmly grounded on the guidelines and policies of the National Department of Health, the National
Institute of Communicable Diseases, and the World Health Organization.
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In terms of the principles of Disaster Management, we’ve established clear command and control structures, which have been cascaded throughout the group. These include an overarching gold command structure to manage the Pandemic, a 24-hour central joint operations committee or JOC,
JOCs at each hospital, and clinical COVID-19 committees at each facility comprising of clinicians and management. We’ve adopted a phased approach to our preparedness which allows us to escalate into interventions and changes as and when we move, or increase risk or demand. So as you can see, on the left-hand side, we began with our preparation in mid-January of this year and rapidly moved to a containment phase when the first case was announced in early March. As communities spread became more prevalent, we increased our interventions within our facilities, particularly in regard to enhanced tracking, tracing and surveillance, and we are now preparing to potentially enter the surge phase, particularly in the Western Cape, which is a structured approach to the demand for increased capacity. Every one of our facilities has a surge plan in place to deal with this.
In terms of the principles of occupational, health, and safety, we’ve adopted the classic six hierarchy of controls in order to implement a myriad of precautionary, preventative and risk-stratified measures in our approach to this Pandemic across all of our facilities. This slide demonstrates the six controls and details the vast amount of measures we’ve put in place, as summarised on the right-hand side next to each control. Time will not allow me to go through each one, but in essence, it moves from the most important, being elimination or removal of risk, to personal protective equipment, this does not diminish the importance of PPE but rather seeks to emphasise from an occupational health and safety principles perspective, that all of the other interventions need to be in place if this intervention is to be absolutely successful. Whilst this is the classic and widely accepted approach to a Pandemic or an infectious disease, from an occupational health and safety perspective, given our learnings and experience from COVID-19, as I mentioned earlier on, we would rate behaviour, currently ranked fifth as the most important single intervention. And as you can see under behavior, we’ve put co-responsibility to ensure our workplace safety, and it’s the responsibility on all stakeholders to change their fundamental behaviour to stop the spread of
COVID-19. Behaviors including the compliance to the lockdown, hand hygiene, social distancing, and universal mask policy, and appropriate and safe use of PPE.
Finally, we’ve also utilised the principles of the quadruple aim, a cornerstone of our consistency of care strategy, to ensure we optimise patient, health care worker, and doctor safety, and look after their wellbeing. This slide details the array of interventions aimed at looking after our front line staff, and in particular, their safety. One of our observations thus far is the significant burden of anxiety that our front line staff carry during this Pandemic. Besides all the training and protective measures, such as PPE, masks, aprons, and visors that we provide, as well as free flu vaccinations, a key element is psychosocial support through our ICAS Employer Wellness Programs and on-site counselling where necessary. The need for this Ladies and Gentlemen cannot be underestimated.
In the case of health care worker exposure, we ensure that testing and isolation is fully compensated for, with full payment and special leave. Many of our workers are unable to self- isolate or quarantine themselves safely, and we provide accommodation for them at Netcare's cost.
In order to augment the various interventions already mentioned, and given the sheer size and scale of what we are trying to achieve, we’ve implemented four digital technologies in order to streamline and make several of our new processes more efficient and seamless. This slide demonstrates three examples of this. Firstly, we’ve introduced a digital access control for all personal entering our facilities, be they patients, doctors, staff or contractors. Instead of waiting in
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1H20 Results a queue and having to repeat demographic information on a daily basis, this can be seamlessly completed on their mobile devices. Also, patients with chronic illnesses such as renal disease requiring dialysis, and cancer patients requiring radio or chemotherapy, are particularly at risk during this pandemic, and so we are introducing digital prehospital surveillance or remote surveillance screening tool, to ensure that we monitor their symptoms and wellbeing away from the hospital, and in between treatments. And finally, and thirdly, we built a digital track and trace application tool that allows us to contact all staff who have had exposure to a COVID-19 positive person, and this allows us to track their wellbeing during isolation, and their need for any further assistance.
This slide demonstrates the live dashboard created to track all of these screenings on a daily basis throughout Netcare, and it gives you really a feel of the scale of our screenings, for example, this is from Thursday last week, and demonstrates the 28 thousand and 47 people were screened on that day before being allowed to enter the facility. You can see that just under 28 thousand people had their temperature taken, most of them were classified as green, in other words, given unfettered access to the hospital, over 2 thousand required some form of escalation to our screening escalation centre, because they answered affirmative to one of the many questions we screened them on, 126 were denied entrance to our facilities and this measured screening over 59 facilities.
At the bottom you can see some of the questions that people answered affirmatively to, whether it was the loss of smell or they were ill, or they had a travel risk, or they had been tested, and the reasons why those were escalated, and in the middle is a breakdown in a pie chart, just of the categories of people we tested, be they staff, doctors, contractors or patients.
And finally, moving to the fourth intervention, which is telemedicine. Telemedicine enables clinicians to continue providing care to patients without exposing people to unnecessary risks.
Importantly the Health Professional Council of South Africa has revised its guidelines to enable broader use to telemedicine, and medical schemes have amended their benefits to better cater to telemedicine. And we believe in a post COVID world, telemedicine adoption is likely to grow. And so, as a result, we’ve developed a telemedicine solution with unique functionality. There is absolutely no need to down load or install an APP, all of the data is fully protected and encrypted.
There is a dial-in option for patients who don’t have access to data, it will integrate into our electronic health records and billing systems, and there are no third-party booking costs.
Finally in terms of the rollout. The rollout in Medicross is in progress and will be completed by the end of this month. We intend to roll this out to all of our hospital's specialists in June and roll out to Akeso and hospital emergency departments, and Netcare's occupational health in July. That concludes Ladies and Gentlemen the first part of the presentation, I’m now going to hand over to
Keith to unpack our financial results in more detail.
Keith Gibson
Thank you, Richard and good morning Ladies and Gentlemen. So following on from the overview, the business landscape and our operational performance, let’s now turn our attention to the
Netcare Group’s financial results for the first six months of the 2020 financial year. As has already been highlighted, the Netcare Group produced resilient financial performance in the first half of FY
2020, in a rapidly changing landscape, both within the broader economic environment and in circumstances that are specific to the sector. The performance over the past 6 months can be split into the first 5 months, where it was mostly business as usual, followed by a month of unusual circumstances and business disruption, brought about by the onset of the COVID-19 Pandemic. In
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1H20 Results addition to the impact of COVID-19 on the results, the group also adopted IFRS 16 with effect from
1 October 2019, and Netcare adopted the modified approach for implementing this new accounting standard on leases, meaning that the prior period results have not been restated, and we therefore provided addition disclosure to aid comparability in period on period performance.
We pushed ahead with our cost saving initiatives, which produced good results, particularly in the areas of payroll, catering and medical support costs, allowing us to maintain our EBITDA margin in line with guidance during the period prior to the onset of the Pandemic. We did, however, increase our central costs, as we guided in November 2019, as the business invests in building up a data platform, analytics capabilities, and new business lines.
In terms of corporate activity, approximately R250 million were utilized to buy back and cancel 12.7 million Netcare shares, during November and December of 2019, and we also completed our triple
B-BBEE ownership scheme on the 15th October 2019, which served to strengthen the ownership component of our empowerment rating, and resulted in an improved over all B-BBEE score card taking Netcare to level 4 status. And finally, Netcare remains in a healthy financial position at 31
March 2020, with low levels of gearing and secure access to almost R5 billion of unutilized committed banking facilities.
So let’s begin by looking at the group statement of profit or loss for the 6 months ended 31 March
2020. And I remind you that the FY 2020 results are reported on an IRFS 16 basis, while the FY 2019 numbers have not been restated. Revenue amounted to R10.7 billion. As compared to R10.5 billion for the prior period, and grew by 1.8%. EBITDA for the first half amounted to almost R2.4 billion, increasing by 12.1%, but this increase is flattened by the exclusion of rental charges in FY 2020, under IRFS 16 accounting, and for the same reason the group EBITDA margin increased by 200 basis points from 20% to 22%. Operating profit increased by 2.2% to almost R1.8 billion. Other net financial expenses decreased marginally from R246 million to R241 million, benefitting from a lower average cost of debt.
We then have the introduction of a new cost, being the interest charge recognized on our lease liabilities introduced by IRFS 16, which amounted to a R185 million for the 6 months. Consequently, profit before tax for the first half reduced by 10.2% to approximately R1.4 billion. The Group’s tax charge decreased slightly, from R430 million to R404 million representing an effective tax rate at
29.1%. And profits after tax from continued operations amounted to just under R1 billion, reduced by 11.8% against the comparative period. We then need to take account of the exceptional item of R348 million, which is a once off, and importantly a non-cash share based payment expense, or
IRFS 2 charge, relating to our triple B-BBEE ownership transaction, and this results in a bottom line profit for the period of R635 million
Now in order to assist with the obstacles to direct period on period comparability that both IRFS 16 and COVID-19 have introduced, in this slide, we’ve set out a reconciliation in which we strip out the accounting effects of IRFS 16, and the estimated operational impact of COVID-19 arriving at an underlying result, which provides a better understanding of the real performance of the Group. So beginning with IRFS 16, the EBITDA line benefits from R233 millions of rental expense, which is no longer recognized under IRFS 16, and this is offset by additional depreciation charges of R184 million on the right of use assets recognized under the IRFS 16, resulting in a net benefit under IRFS
16, reporting a R49 million at the operating profit line. We then recognize an interest charge of
R185 million on the lease liability arising under IRFS 16, and all of the above results in a negative
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1H20 Results impact from adopting IRFS 16 on the Groups results of R136 million before tax, and R98 million on an after tax basis.
In the next column, we have set out the estimated impact of COVID-19 on the Group for the month of March 2020. And this impact predominantly comprises the effect of lost activity, as well as additional operating costs incurred in our Pandemic preparations. And as reflected in the table we estimate that the disruption in activity due to COVID-19 resulted in lower revenue of R143 million, translating into lower EBITDA of R64 million and equating to a negative impact of R45 million on an after tax basis. Therefore the Groups results presented on an underlying basis reflect the following.
We have revenue growth at 3.2% to approximately R10.9 billion, we have EBITDA growth of 4% to just under R2.2 billion, and operating profit increase of 3.1% to R1.8 billion, and an increase of 1% in profit after tax from continuing operations amounting to R1.1 billion.
I’ve included the slide on our triple B-BBEE ownership transaction which was completed in October
2019, but given that the transaction was reported on in our 2019 accounts as an event after the reporting period, and was also covered in our results presentation in November last year, I won’t spend too much time on this slide. The transaction involved that further allocation of Netcare shares, which are owned by the Health Partners for Life Trust, and these shares are fully paid up following our 2015 restructure scheme, and therefore there is not related external debt, and nor are the shares encumbered in any way as collateral for any third party debt. This transaction demonstrates Netcare’s commitment to transformation, and one of the key objectives of the transaction was to strengthen the ownership component to our B-BBEE score card, and this transaction not only assisted in us achieving a level 4 status, from level 5 in 2018, but it accomplished this in a manner which allowed Netcare’s 20 350 employees, to participate in, and benefit from, the transaction.
Next, we move onto headline earnings per share, which is presented on a continuing operational basis, and as usual, we’ve presented the HEPS metric, which has been determined and calculated according to the regulatory requirements. And we also present an adjusted HEPS figure in which we strip out exceptional and unsustainable items as the primary measure used by management to asses performance. So beginning with HEPS, this has decreased from 80.7 cents per share in the prior period, to 44 cents for the first half of FY 2020. And the bulk of this reduction in attributable to two factors being firstly, the once off non cash share payment, share based payment expense on our triple B-BBEE transaction, which reduced HEPS by 26 cents, and secondly the adoption of IRFS
16, which reduced HEPS by 7.3 cents. Group adjusted HEPS from continuing operations amounts to 71.7 cents, and is decreased by 14.9% against H1 2019. However this is also not directly comparable, as the current period results is reported on an IRFS 16 basis, and the comparative numbers haven’t been restated. So excluding the impact of IRFS 16, we see that the adjusted HEPS equates to 79 cents for H1 2020, reflecting a lower decline of 6.3% against the comparative period.
And then if we also take into account the estimated impact of COVID-19 on the March 2020 results, our adjusted HEPS increases by another 3.4 cents to 82.4 cents against the prior periods, 84.3 cents.
Moving onto the group statement of financial position, we see that total assets as at 31 March 2020 amounted to R26.7 billion and increased from R21.4 billion at September 2019. Of this increase,
R3.8 billion is attributable to the recognition to a right of use asset on our leases, raised under IRFS
16 accounting, and this is offset by the corresponding recognition of lease liabilities, with a carrying balance of just under R4 billion as at 31 March 2020.
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1H20 Results
Capex spent during the period amounted to R451 million, of which R142 million related to expansionary projects. And in order to preserve cash we’ve elected to defer uncommitted and new capital projects, totaling approximately R800 million. Capital expenditure for the full financial year is estimated to total in the region of R1 billion. Assets classified as held for sale comprises Netcare’s
56.9% interest in GHG PropCo 2 at a carrying value at a carrying value of R226 million. Now, this investment consisted of 6 hospital properties in the UK, which were sold in January 2020, and based on latest estimates and exchange rates, Netcare’s share of the net proceeds, after the settlement of debt and related expenses, is expected to amount to approximately R665 million, and these funds will be repatriated in H2 2020. And finally, total shareholders’ equity decreased from R10.2 billion to R10.0 billion, and the reduction here was impacted by share buy-back and cancellation, of approximately R250 million.
As we usually do, let’s take a more in-depth look at our debt position. Gross debt amounted to
R8.2 billion at 31 March 2020, offset by cash balances of just under R2.0 billion, and therefore, net debt totaled R6.2 billion at the half-year-end, increasing by R1.1 billion since September 2019, but very much in line with our cash flow seasonality which can be seen by the variance of only R49 million in net debt levels against March 2019.
The leverage of the business remains healthy, with net debt to EBITDA coverage of 1.5 times against
1.2 times at September 2019, but again, consistent with March 2019, and I must highlight that these metrics are reflected on a pre IFRS 16 basis to be consistent across the reporting periods, but you’ll see that the post IFRS 16 metrics are included in the blue panel for reference.
The cost of debt has reduced slightly from 8.6% to 7.9%, as a result of recent reductions in borrowing rates. Net interest paid declined slightly to R240 million from R246 million in H1 2019.
However, total net interest paid increases by a further R185 million in the current period after including the interest on the lease liability introduced by IFRS 16.Interest cover remains healthy at
7.2 times, and finally just a reminder that in early March 2020, GCR reaffirmed Netcare’s long term credit rating of AA-, and our short-term rating of A1+.
Finally, let’s take a look at our debt facilities. And given the pressures introduced by the COVID-19
Pandemic and the need for secure access to liquidity, I’m going to focus on committed banking facilities. At the half-year-end Netcare had cash balances of almost R2.0 billion on hand, as well as committed, but undrawn, debt facilities of R2.5 billion at its disposal. However as you can see from the donut graphs, since then, we have secured additional committed facilities, increasing our undrawn, committed facilities from R2.5 billion at March 2020, to R4.8 billion currently.
In addition to the securing of additional facilities, Netcare’s also adopted a prudent and precautionary approach to liquidity management by introducing a number of cash preservation initiatives, which include the reduced utilization of agency staff, the deferral of non-critical projects, the deferral of uncommitted and new capital projects of roughly R800 million, and the decision not to pay an interim dividend.
The receipt of the UK property disposal proceeds of approximately R665 million in H2 2020 provides an additional level of liquidity comfort. As a precautionary measure, we’ve also obtained covenant waivers of our September 2020 covenant test, which is due to be reported on in November 2020.
The business is therefore well placed to withstand potential operating losses which may arise in the uncertain environment introduced by the COVID-19 pandemic. And finally from my side, before I
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1H20 Results hand back to Richard, I’d just like to extend my thanks and gratitude to our Finance staff across the
Group, who have had to adapt very quickly to different ways of working and they’ve done so without disruption or delay to our reporting, which is no small effort. Thanks and back to Richard.
Richard Friedland
Thanks very, very much, Keith. Ladies and Gentlemen the key question driving uncertainty at the moment both globally, in South Africa and for us in Netcare, is how to fully comprehend the potential impact of this Pandemic. In trying to understand and quantify the uncertainty we face, we have built an internally focused model to try and predict the impacts of COVID-19 on Netcare.
I want to emphasize that our model is for internal purposes only, and is used to guide our efforts as we prepare for what is to come. It’s not a substitute for any other models in the public domain, nor does it report to serve a similar purpose. A myriad of factors and assumptions influence our model, including epidemiological and behaviour ones, and this model is dynamic and adjusted daily based on actual experience, as more data is obtained.
Now having said all of this we have to acknowledge what George Box, a British statistician once famously said, “All models are wrong, but some are useful”. And for ours to be useful, it needs to answer three fundamental questions. Firstly, how long could it take for the surge to impact
Netcare, how many cases could we be treating, and by implication, will we have sufficient capacity, and thirdly, when would we possibly turn to a so-called normal operating environment.
In terms of predicting how long it could take for the surge to impact Netcare, and to be able to plan for the demand, we have modelled to scenarios, each at polar ends of what could happen. They are scenario A, or our best estimate, and scenario B, or our worst estimate. Scenario A is in the blue and scenario B in the grey. And without trying to sound like an economist, it may well be that the reality ends up somewhere in between. The key variable to the scenario’s that have been built, is predicting the rate of new COVID-19 cases per day. Again, there are a meridian of factors that influence the number of infections and are subject to potential change.
As you can see on the left-hand side, scenario A suggests that the peak of new infections is expected in July, and gradually tails off by September. In scenario B, the grey shaded graph, the peak of new infections is expected in August and is more severe. In this scenario, cases tail off by the end of the calendar year. And so Ladies and Gentlemen the implication for Netcare is that under scenario A the major impact of COVID-19 occurs within our financial year, to the end of September, and under the worst-case scenario B the impact continues through quarter 1 of financial year 2021.
Now answering a difficult question, will Netcare have enough capacity? The demand for hospitalization is dependent on three key factors. Firstly the number of COVID-19 infections, which
I’ve dealt with in the previous slide. Secondly, the percentage of people requiring hospitalization, and thirdly, the percentage of hospitalizations of those hospitalized who will require critical care.
We have estimated that approximately 20% of infected people will be requiring hospitalization.
This is based on our current South African experience and is also at the lower end of the
International experience of between 20 to 30%. We’ve also estimated that approximately 33% of those hospitalized will require some form of critical care, be it in ICU or High care, this equates to
6.7% of all infected people. And finally, we’ve estimated that patients will stay in the hospital for a period of 10 days, however, those that require critical care are estimated to occupy, or be in the hospital for 17 days.
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The second element of determining whether we have the capacity or not it would be useful to look and understand our current capacity in South Africa in terms of critical care beds. Currently, South
Africa has 6 040 critical care beds available. The private sector has a total of 3 780, and Netcare, as represented in the blue part of the bar charts, has just over 1 in 3 critical care beds in the private sector, and combining both the private and public sector has 1 in 5 in the country. Netcare's current ventilator capacity is 1 035 and increases to 1 427 if we include our anaesthetic machines that can also substitute as ventilators.
So looking at this question, is whether we will have sufficient capacity, for our modelling purposes we’ve assumed that our market share of critical care beds will be a useful proxy for the volume of patients we may be able to see. In other words, 22% of all COVID-19 cases could be treated by
Netcare, and here the graph on the left-hand side demonstrates that under scenario A, our best case, we should have sufficient capacity to meet the overall general ward needs, that shown in the light blue, and sufficient capacity to meet critical care demand which is shown in the darker blue.
However, in scenario B, whilst we may have sufficient capacity to meet overall general ward demand, again the light blue shaded graph, we will have insufficient critical care capacity. And lastly, just importantly to caveat that these assumptions in this model do not inform specific geographic demand.
And finally, a key question asked by so many is when we would potentially return to a so-called normal operating environment. The model we’ve built allows us to guide our decisions around non-
COVID-19 medically necessary and time-sensitive surgeries. It builds on the daily COVID-19 experience, and trends, per hospital in our group. The table on the left-hand side demonstrates that activity could potentially return to normalized levels, depending on which scenario prevails. In scenario A we could see a slow return by financial year-end, and in scenario B, this would be delayed to 2021. On the right hand side, we have demonstrated the potential amount of patient days that we could experience, either in scenario A, or scenario B, given the COVID-19 Pandemic.
And so Ladies and Gentlemen just concluding this aspect of the presentation, we’re effectively saying that we’ve modelled two scenarios, In the best cases is scenario A, where we have an earlier more manageable peak to the surge of infections that will impact our financial year 2020, and a worst case scenario B, which will occur later in August, and will drag on through quarter 1 of 2021, but will also test quite severely our critical care capacity.
That Ladies and Gentlemen concludes our presentation for today, and we would be glad to take any questions. We will begin to take questions from those on the conference call first, and then we will move to those on the webcast to answer any questions you may have. Thank you very, very much.
Q&A
Facilitator
Thank you, sir. Ladies and Gentlemen for the benefits of the participants who are joined by the telephone lines please note you are welcome to ask a question by pressing * and then 1.
The first question comes from Kane of UBS.
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Question
Hi, good morning guys, just a couple of questions please. So given your guidance on occupancy, you must be a sort of a tad below 40 by now, with that in mind and obviously the uncertainty you pointed out, can you talk to your ability to manage the fixed costs of the business, I see you did make some comments in the SENS about agency staff, is sort of indicative of maybe 15%- 20% of your costs, that you sort of view as semi variables or semi fixed whichever way you want to look at it. Yes, I think just comment on that, and then just on the 643 cases that you’ve sighted in your release here, could you confirm the regional makeup of the admissions, and also how many of those have actually been state patients versus privately insured, and then just finally, just your last point around the capacity of critical care beds. In your scenario B, you stated, you obviously wouldn’t have sufficient critical care capacity, would you then be able to convert existing sort of general bed capacity, assuming you would have if you had availability of ventilators and aesthetic machines, thanks.
Richard Friedland
Jacques, we can’t hear you. Maybe Keith will take that question, thank you.
Keith Gibson
Ok, thanks for your questions. So yes, with respect to Agency Staff specifically, we typically make use of agency staff in the region of 15 to 20% of our employee base, and obviously, at lower occupancy levels that we’ve experienced through the COVID-19 crisis, that is an area that we are able to cut our costs down, and, ja, also we would see some cut in terms of overtime costs.
Richard Friedland
I’ll take the second question, I think it was the geographical spread of the cases. We saw 38% of our cases in KZN, and Western Cape 24%, in Gauteng 26%, in the Eastern Cape 9%, and 1% in each of Limpopo, Free State and the North West. I hope that answers your second question, Kane.
And then the third question was our surge capacity. Yes, we would most certainly be able to deal with the surge outside of just the critical care and the high care beds, in the sense that we would use the general wards. Again, many of the cases we are now seeing internationally, and the evolving medical treatment of COVID suggests that we need to ventilate less patients in full ventilation and use less invasive forms of ventilation, and so we believe we will cope. Again depending on the areas, and depending on where we have ICU beds. Again in terms of the last question on state patients, we have only treated four state patients, one in Umhlanga, one at
Garden City, and one at Fern Crest, and one in Johannesburg, obviously that doesn’t include tests done for COVID-19, following exposures as per tracking and tracing, and testing done in Netcare facilities, but actually treated in our facilities, 4 patients in total. I hope that answers it, can we move on.
Question
Thanks, Richard, just maybe while I’ve got you here, there is no agreement that you signed with
Government yet, is that just purely because it just haven’t seen the influx.
Richard Friedland
I’m going to ask Melanie Da Costa to take that question.
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Melanie Da Costa
Kane, so we can confirm that we tabled a proposal, so taking it from the beginning. We were requested to participate in a bilateral process. Netcare tabled its proposal over a month ago. I can confirm that over this weekend that we have seen a proposal from Government, but it’s still, you know, still early days, we have made comment, we made comment yesterday, but at this point still no agreement in place. What we have also done at the same time is, we tabled a proposal to the Western Cape whom we expect might be in need of our services, pretty urgently, in the next week.
Comment
Ok, thank you.
Facilitator
The next question comes from Anusha Joshi of ABSA.
Question
Good morning everyone, thank you for the presentation. I’ve got three questions. The first one is on PPD’s decline, PPD’s in respect of the PPD in hospital shutdowns and COVID-19’s related and other factors, do you care to elaborate, and the second question is on Capex. So what is the total
Capex that you plan to spend on COVID-19 figurations, including the R150 million that you have already spent for this year, and next and what’s the payback on that.
Richard Friedland
Thank you Anusha, I’m going to take that question you asked on occupancy, and I think that the most significant outbreak that we had and shutdown, was at Saint Augustine’s and Kingsway, and so if you take the 49.5% drop in patient days in April, 6.3% can be attributed to the SAN, to Saint
Augustine’s and Kingsway, of which Saint Augustine’s was 4.4%, and Kingsway was 1.9% as compared to April in 2019. If you look at it slightly differently in terms of occupancies, the reduction of 32.1% from April versus occupancies of 64.7%, 4% can be attributed, in total of which the SAN was 2.8%, and Kingsway 1.2%.
In terms of the Capex related to COVID-19 specifically, we have R150m of Capex set aside, much of that was for new disinfection ultraviolet lights, mobile robots, and these are suitcase type instruments that can be used to disinfect Doctors rooms and inaccessible areas. We also introduced HEPA Filters, these are ultra-specialized air filtration filters that clear the air in ICUs.
We also purchased an additional 100 ventilators, and we improved the isolation facilities and cubicles in our ICUs and High care, and then we also purchased various head devices for our anesthetist, and ear nose and throat Specialists to protect them. Something known as powered air respirators and all of this was approximately R150m. We don’t envisage spending anything further from a Capex perspective on COVID-19 going forward, I hope that answers that question.
Comment
Yes, thank you so much.
Facilitator
The next question comes from Roy Campbell of RMB Morgan Stanley.
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Question
Thank you, good morning. My questions have actually been asked, but maybe just a follow up on the states patients for that you’ve had. Have you been reimbursed for those yet, and is so who is your client in this case, the Provincial Department or the National Department of Health, thank you.
Richard Friedland we haven’t been reimbursed at the moment. We’ve taken those cases through our Netcare
Foundation, and obviously when patients arrive as an emergency, the underlying principal is one of a sanctity of life, and we would never turn anyone away on any basis, and so those patients as we would treat as any other critical emergency would be seen through our foundation, but ordinarily the client would be the province, Melanie.
Melanie Da Costa
Yes, just to add to that, so Roy just to confirm that we understand that the budget with respect to these cases has been set up at a National level, but the MOUs will be signed at a provincial level.
So fund flow from the top, but contracting at provincial level.
Comment
Thank you very much.
Going onto the next question, which comes from Catherine Cunningham of JP Morgan.
Question
Hi, guys thanks for the presentation. Just one question from me, could you give us a sense of where revenue and EBITDA for the month of April was and how this is tracking so far for May.
Richard Friedland
Thank you, Catherine, I’m going to ask Keith to take that question.
Keith Gibson
Sure, so here in respect to the April results, at a revenue level our revenues were in the region of about a billion rand for the month, and given the low level of occupancies and activity, we did make a loss at the EBITDA level in the region of R150m.
Question
Can you give us a sense of where the track is from May…
Richard Friedland
Catherine, we’re seeing a ramp up towards a 15% improvement in the month of May over April.
But at this point we not going to talk to May results.
Keith Gibson
I think that is exactly right, I think it is fair to say that we had some extraordinary costs in the month of April as well, that we are not looking to continue through into May, and many of those were preparatory in terms of COVID-19, some will continue through, And May. April was an unusual month in terms of some extraordinary costs coming through, impacting that number as well. Besides, obviously, there is a significant diminution in the activity.
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Comment
Thank you very much.
Facilitator
The next question comes from Steph Erasmus of Avior Capital Markets.
Question
Thanks for the presentation, just one question from my side. I would just like to understand the progression of patient days in terms of Network patient days, so, last results we were guided that you had been included on the EVO, Gems Plan. Excluding COVID and all the other impacts, did that play out like you expected it to play out in H1 20?
Richard Friedland
Yes, Steph I think we covered a lot of this in our trading update to the market. Yes, the inclusion in the Gems Scheme and the new Tanzanite Option and we did see an uplift in terms of our patient days there, there was an impact in terms of the introduction in of an additional co- payment on another scheme, but yes, we were tracking pretty much in line with our guidance to the market up to the end of February, and then as you are well aware we dropped off activity wise during the month of March. I’d say our normalized patient day growth, excluding those factors, was in the region of about 0.5%, and yes, just going back to Gems, EVO we saw an increase there of about 20%.
Comment
Right, thank you. That’s all from me thanks.
Facilitator
I have no further questions from the lines at this stage.
Richard Friedland we move onto the webcam.
Webcast question
The first question on the webcast comes from Victoria Lambert. She asked, what were the major drivers of volume pick up in May i.e. emergency services or cardiology.
Richard Friedland
Primarily in May, the uplift in activity is a result of the resumption of non-urgent time sensitive cases, so that would be the primary driver.
Keith Gibson
We are seeing an uptake in emergency work, but again as the lockdown is relaxed we expect that to return to almost normal levels from an emergency perspective.
Webcast question the next question comes from Jovin Jackson. Can you give an indication of the occupancy rate or bed utilization rate of the public sector due to COVID-19, can you indicate when you think
Government will need your assistance due to lack of capacity in the public sector.
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Richard Friedland
I’m afraid we can’t answer that Jovin, and I think that is best answered by the National
Department of Health or the individual Provinces. What we are hearing is that in the Western
Cape where they are experiencing a very significant increase in the number of daily new infections, they are reaching capacity in their critical care beds in certain facilities, and we expect to see a surge in that Province specifically.
Webcast question
Ok, the next question from Peter Kromberg, are there any other noncore assets which can be used to generate additional liquidity, what are the company’s plans for the R2.9 billion debt maturing in less than a year.
Richard Friedland
Yes, as I’ve mentioned we have got R2bn of cash on hand, and almost R5 bn worth of undrawn committed bank facilities available to us. And in addition to that we have the benefits of the cash preservation measures, the deferral of Capex, the non-declaration of an interim dividend, and the
UK sales proceeds all coming in, that gives us a pot from which we are able to manage our debt maturities. Certainly, the ones that are coming up shortly, in June and July have effectively been prefunded by this basis, and those falling due thereafter are coming up towards the end of March next year, where we would expect some normalization in the debt markets.
Webcast question
Thank you. The next question from Michelle was, has your supply chain be effected by COVID-19.
Keith Gibson
Thank you, I’ll take that. Michelle our supply chain has not been effected by COVID-19, other than the purchasing of PPE, which I think you’ll understand, there is a global worldwide shortage, and we’re being subject to the same extraordinary increases in the costs of basic PPE such as gowns and masks, and that’s clearly had a cost impact, but other than that our supply chain has been intact.
Webcast question
Ok, the next one from Avinash. Hi all, can you give an indication of what your elective procedures are, can some be cancelled completely, is it a case of simply delaying a bit, and those procedures will need to happen at some point. And then second question if you can, how has your medical versus surgical case mix changed and what’s the expectation going forward.
Richard Friedland
I’m going to ask our Medical Doctor, Dr Laubscher to answer the first question, and the second one on surgical medical mix, we’ll come to.
Dr Laubscher
Thank you, good morning and thank you for the question. So in terms of elective procedures, we have issued towards the end of March a document on the cessation of non-urgent PA elective surgery, and in line with International publications and research, and guide lines published, we’ve issued resumption on elective surgery, referring to medically necessary time sensitive surgery,
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1H20 Results and de-emphasizing elective surgery. So what that means is allowing surgeries to continue, if the continuation of that surgery is going to positively impact the patients’ quality of life, or the outcome of the medical procedure, and the decision on the continuation of the surgeries are on three factors, related to three factors. The first is on the patients’ factor, in other words, the urgency of the persons own medical condition, and the consent to be treated in a facility where such an individual may be exposed to the risk of COVID. Secondly, on the capacity constraint in the facility, so allowing for ICU and theatre capacity to be available, and thirdly and most importantly, on the clinical decision on the clinician. The clinician will have to weigh up disease factors, procedure factors, and personal factors of the patient to make such a decision. So we will see how this unfolds and how this capacity gets constrained there will be an impact on that factor, on the decision making to continue with elective surgery.
Avi on your question with respect to the surgical medical ratio, the trend continue as they have over the last few years, but surgicals remain 60% of admissions.
Webcast question our next question comes from Neil Brand Jonker. When you do the scenario planning do you also plot infections under medical scheme members, do you set aside a percentage of beds for medical scheme members when you sign the agreements with the State, can you please elaborate on this.
Richard Friedland
Thank you, Neil, I’m going to answer that question, but I’m also going to ask Teshlin Akaloo who heads our innovative products division and who is an actuary, who joined us, he was the chief actuary for Discovery Vitality, to answer that in short.
Richard Friedland
Our model assumes that we will be absorbing, particularly in scenario B, a number of state patients, but primarily the bulk of the patients coming through our facilities will be private in the early phase.
Teshlin Akaloo we have done various scenarios to look at how the mix of business can change, and see how we can quickly plan for that. What we don’t know is the percentage of medical scheme patients will peak versus what we’re going to actually see. And we have made a few assumptions, but like
Richard said there are various scenarios that we do have, scenarios A and B, and we have polar ends of the spectrum, what we will probably see is somewhere in between.
Webcast question the next question comes from Jonathan du Toit. Why did trade and other receivable increase by
R406m, from 31 March 2019, and by R1 007m from September 2019.
Richard Friedland
Thanks, I’ll take that question. So yes, our working capital cycle does have an element of seasonality to it, it is normally at its lowest point when we report in September, and does push out during the course of the year. However not withstanding that the debtor’s book still remains in very good shape, 95% plus of our work is paid for in terms of Medical Aids, and Privates and that book still remains under 30 days, as compared with prior years.
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Webcast question the next question comes from Warren Riley. Hi, could you rate a break even occupancy under
COVID operation conditions, taking into account cost savings on agency staff where applicable?
Richard Friedland
Thanks, I’ll take the question as well. It’s obviously difficult to answer that question, because of the number of variables that exist in that equation. Indicatively we would suggest that that occupancy level would be at around 50%, however, it is very dependent on the mix of patients that we would receive into the facilities.
Webcast question
Ok, the second last question from Victoria. Can you provide more color on when you think patient volumes will begin to normalize.
Richard Friedland
So, Victoria I think we made that very clear in terms of the actuarial model that’s been built, and we showed you under the various scenarios’, so what we were saying is under scenario A, where the peak of new infections or the surge occurs in July, we believe that there will be a return to a form of normality towards the end of September. In other words under scenario A we believe we’ll have enough capacity both in our High care and ICUs, as well as our general wards to cope with the demand of COVID-19 patients, and also a semi urgent, or time sensitive surgeries that are non COVID related. However, under scenario B where the surge in infections, new infections, occurs later in August, it’s going to be more severe, and the impact of that is going to be felt into our first quarter, which is our October through to December of 2021, our financial year, and we don’t see levels returning to normal by the end of September, but rather closer to the end of
December 2020.
Webcast question the last question again from Victoria. What does the impact of the South African rand depreciation by 20% on cogs have?
Richard Friedland so that variation in the exchange rate may lead producers to come back to us with price increases, it depends on the nature of the goods supplied. Where the goods pass through, we are obviously able to recover that. However, where the goods are consumables related, that is typically picked up by ourselves that will be factored into our tariff negotiations, as we go into the next cycle.
Webcast question
One last question came in from Diketse Nkele. In terms of cost structure what percentage if fixed, and what percentage is variable.
Richard Friedland
Again that is in the region of about 50%, 50/50.
Webcast question
Thank you very much, any concluding remarks.
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Richard Friedland
No, thank you very, very much for your attention this morning Ladies and Gentlemen, and for joining us on this call, and I’m afraid we can’t invite you for any snacks or drinks, other than on a virtual basis. Good morning to you all.
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