November 23, 2020
Transcript of presentation results
Netcare Limited
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23 November 2020
Netcare Limited
RICHARD FRIEDLAND
A very warm welcome to Netcare limited group results presentation for the year ended the
30th of September 2020. A warm welcome also to the chair of Netcare, Thevendrie Brewer, members of the Netcare board, the executive committee and our senior management team. I want to pause here, pause to thank, acknowledge and pay tribute to the extraordinary work done by our management teams and staff, and all our health care workers, nurses, doctors, paramedics, pharmacists, allied health professionals, support staff, IT and technical teams and administration teams on the frontline across South Africa and Lesotho, for their remarkable efforts in caring for and treating our patients during this pandemic. I also want to thank our chair and the board of directors for their ongoing support, and sage guidance provided throughout this very challenging period, this is very much appreciated. We also recognize the enormous loss of life in South Africa and globally from the pandemic, and the profound pain it has caused. Our thoughts and prayers remain with all of those who have lost their loved ones.
Our presentation today is therefore dedicated to the thousands of healthcare workers across
South Africa, in the public and private sector, who have risked their lives in the fight against
COVID-19, and especially to those who lost their lives in the process. South Africa owes a huge debt of gratitude to our frontline warriors. I will begin with an overview of our group's performance and the operational performance of our various divisions, as well as the impact of COVID-19, before handing over to our Chief Financial Officer Keith Gibson, who will unpack our financial results in more detail. I will conclude the presentation with a review of our strategy, share some detail on three exciting initiatives, and finally present our guidance for the year ahead.
Turning to the overview of our performance for the year. At Netcare we feel privileged to play a role in supporting our country through the pandemic, 2020 has very much been a year of two very different halves, the first half before COVID-19, and a second half coping with the devastating impact of the pandemic and attempts to recover from it. Looking at our performance overall, and the first half in particular, 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 we've given the market. After the peak of the pandemic in July, and from about the middle of August, we've begun to experience a positive recovery in volumes and admissions in our hospitals and Akeso, and an increase in
GP and dental visits. Now many people have asked what health care delivery will look like after COVID-19. In reality, healthcare delivery was not exactly pristine, prior to the pandemic, and COVID-19 has exposed the deep fault lines in the delivery of health care. What it has
Executive Directors
R H Friedland (CEO), KN Gibson (CFO)
Non-Executive Directors
T Brewer (Chairperson), M J Kuscus, K Moroka, M Bower, B Bulo, L Human, D Kneale
Company Secretary
C Vikisi Reg. No. 1996/008242/06 done however, is very strongly and definitively reaffirm just how relevant the strategy is, which we have embarked upon in terms of Person Centered, health and care, digitally enabled and data driven. I'm very pleased to inform you, that having put most of our strategic projects on hold during the pandemic, we have now reignited the engines and are back on track in terms of rolling these out.
Looking broadly at our financial performance now over the past year, and doing so on a normalized basis to exclude the impact of IFRS 16, and the exceptional items referenced at the bottom of this slide. Revenue declined by 12.7%, to R18.8 billion, EBITDA declined by
52.4% to just over R2 billion, demonstrating the significant negative leverage of reduced volumes on our relatively high fixed cost base. Adjusted HEPS declined by 72.2% to 47.6%, our nett debt to EBITDA ratio climbed to 3.1 times, versus a ratio of 1.2 times last year. And as a result of our intentional cash preservation strategy through the pandemic, cash and committed facilities of R5.6 billion were available to us at year end. Unfortunately, given all of this, and the fact that we're still operating under a covenant waiver, no dividend has been declared by the board.
Turning now to our operational review in more detail. Looking at key activity drivers in more detail, it's helpful to split this past year into the first five months to the end of February, prior to the impact of COVID-19, then the remaining seven months, and finally, the full year in order to understand the impact of COVID-19. As you can see, total patient days declined by
1.2% in the first five months, but by 32.2% in the remaining seven months, and almost 20% for the full year. Acute hospital patient days declined by 1.7% in the first five months, but by
31.6% in the remaining seven months, and again by almost 20% for the full year. Total mental health patient days grew by 4.7% in the first five months, but declined by 37.6% in the remaining seven months, and by just over 21% for the full year. As can be seen from this table, this had a commensurate effect on occupancy in this division. In terms of primary care, patient visits declined by 4% in the first five months, and by 25.5% in the remaining seven months, and by almost 17% for the full year. Looking at this slightly differently, and graphically, and in terms of the timing of the various stages of the lockdown, this graph demonstrates the significant drop off in patient volumes in our hospital division. As a result of the level five lockdown imposed, the cessation of elective surgery, and the slow relaxation of these lockdown measures through to September. One can also observe the continued recovery in patient volumes through October, and pleasingly we have reached a 57% occupancy during this past week in November, or differently put, we have recovered 86% of the volume as compared to November last year. This graph similarly demonstrates the precipitous drop off in patient volumes in our mental health division, as a result of the level five lockdown imposed, the cessation of group therapy sessions, and the slow relaxation of these lockdown measures through to September. Patient volumes have continued to recover through October with average occupancies of 68%.
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Netcare 911 experienced a 47% drop in patient volumes, as a result of level five lockdown.
The ban on the sale of alcohol and the curfew imposed, followed again by the slow relaxation of these lockdown measures through to September. These volumes have recovered and are now at approximately 87% of pre COVID levels. And finally, the drop off in patients in our primary care division, as a result of the level five lockdown imposed and the recovery through to October, is shown in this last graph. GP visits have recovered to approximately 88% of pre
COVID levels, and dental visits have fully recovered. Let's take a look at the hospital emergency services division in more detail. Revenue declined by 12.7% to R18.25 billion, largely as a result of the decline in activity elucidated in previous slides, this also comprised a revenue decline of 12.8% in our hospitals, and a 18.6% decline in mental health revenue, and an 8.7% increase in acute hospital revenue per patient day, largely as a result of our COVID-
19 admissions, and also a higher mix of more severe admissions. EBITDA declined by 52%, mainly as a result of a decline in volumes, but also due to additional operating costs attributable to COVID-19, of about R300 million, and a loss of R78 million in doctors and third party rentals and parking income.
A further 100 million was invested in strategic projects. This included R15 million for the
CareOn Project, R22 million for the development of our Microsoft Azure Cloud Data Platform and analytics capabilities, and R63 million on new business development. As a result of all of this, our overall EBITDA margin percentage declined to 11.2% from 20.4% in 2019. Primary
Care, revenue has been restated to reflect the impact of the 15 Medicross day clinics integrated into our hospital division from 1 October 2019. Revenue declined by 12.8% to
R611 million due to the impact of COVID-19 and the rationalization of seven loss making clinics. Stripping out the rationalization of these clinics, underlying revenue declined by 6%.
EBITDA declined by 66.7% to 36 million as a result of lower activity during the pandemic, which far outweighed the benefits of the clinic rationalization. These factors impacted the margin, which declined from 15.4% to 5.9%. It's worth noting that prior to the pandemic,
Medicross was doing about 30 virtual or Tele consults a month, and this rose to about 12,800 during the height of the pandemic, it is currently at approximately 4000 per month. We announced at our interim results that we've developed together with A2D24, a telemedicine solution that allows doctors to conduct secure virtual video or voice consultations. This has been rolled out to over 3000 doctors and healthcare professionals, and I'm delighted to inform you that at this month Digital Innovation Awards sponsored by BCX, our virtual care platform was placed second to Checkers 6060 in the corporate category.
Let's take a more detailed look now at the impact of COVID-19 on our business. Since our first COVID-19 positive case, on the 9th of March, we have treated 28,016 COVID-19 positive patients, of whom 13,436 were admitted into our hospitals. Our initial assumptions, based on the guidance from the Center for Disease Control, the experience in China, Italy and elsewhere in Europe, was that up to 30% of people testing positive would require hospitalization, and of these patients some 20 to 25% would require ICU or high care.
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However, given the unprecedented amount of published research and information made available on the pandemic, we have been, fortunately, able to benefit enormously from both global and local experience. Treatment regimens have substantially improved from the early dark days of this pandemic, and this has had a significant impact on outcomes. Pleasingly our average length of stay have reduced dramatically from 22 days at the start of the pandemic, to an average of 7 days as our treatment modalities improve. Also, patients requiring hospitalization have steadily reduced to between 10 to 15%, of those testing positive.
In order to prepare and effectively deal with COVID-19 we adopted a risk adjusted abundance of caution approach, drawing from a combination of the principles of disaster management, the quadruple aim, and occupational health and safety, and also relied heavily on the guidelines and policies of the National Department of Health, the NICD, and the World Health
Organization. In order to successfully pivot our organization, we established clear command and control structures and focused on six very important factors, which we recognize were, and remain, absolutely critical in effectively managing our response. We also quickly understood that we needed to leverage off our extensive digital capabilities to be able to effectively manage the pandemic on a real time basis, and in the most efficient way. At the outset of the pandemic, no one really knew if we would have enough beds in South Africa, and so we did extensive actuarial modeling to try and plan for the various scenarios. The model we built was also dynamic and allowed us to manage daily bed capacity, using a risk stratification approach. Given our digital capabilities, we were able, on a real time 24/7 basis, to determine exact needs and requirements. With improvement treatment regimens and length of stay declining, we never exceeded our overall capacity, even though certain facilities were often completely full. At the peak of our pandemic, over a two week period in
July, it may interest you to know that we had more than 2200 COVID-19 positive patients in our hospitals, at any one stage. It became very evident that different modalities of oxygen therapy were helpful in the treatment of COVID-19, and that ventilating patients could be successfully avoided in many cases, and so ensuring we had adequate supplies of oxygen became critical. Oxygen capacity was significantly increased at most of our facilities. Again, due to our digital capabilities, we were able to monitor, on a live basis, oxygen utilization and demand per hospital and per ward, and exquisitely manage demand versus supply, something we believe will hold us in very good stead should a second wave eventuate. The availability of key drugs used in the fight against COVID-19 such as steroids, anticoagulants, antibiotics and certain anti-retroviral was also critically important.
Probably one of the most challenging aspects of this pandemic was attempting to ensure we had adequate supplies of good quality PPE. Given global demand, this proved challenging, both in terms of pricing and supply. Our fundamental principle remains never to compromise on healthcare worker safety, and so, we procured well in excess of our requirements, in case the surge lasted an extended period of time. This can be seen in our results, where we still remain with high levels of inventory. Fortunately, it is non-perishable in nature, does not
4 expire, and we expect to utilize this in the new financial year. Of course, the single most important aspect that consumed us 24 hours a day, was the safety and wellbeing of our frontline staff, managing their wellbeing and the very real existential threat that they faced on a daily basis. And the enormous anxiety and burnout that resulted from the workload proved extremely challenging, and we have learned valuable lessons in this regard. And finally, we embarked on a cash preservation strategy to ensure we could support our healthcare workers and frontline staff, and keep Netcare afloat during the pandemic. Keith will shortly elaborate in more detail regarding this.
This slide demonstrates the risk adjusted approach we assumed in tackling bed capacity for
COVID-19, by dividing all of our hospitals into three separate zones, green for COVID-19 free patients, yellow for patients undergoing investigation for COVID-19, and red for confirmed
COVID-19 positive patients. This was, and continues to be digitally modeled, and adjusted on a live basis per hospital to ensure adequate capacity planning at all times. During the height of the pandemic, we had over 80% of all of our beds dedicated to COVID-19. And, as you can see from the middle of this graph, which demonstrates our adult critical care beds, over 90% of our ICU and high care capacity was dedicated to COVID-19, at the height of the pandemic.
During the pandemic, we introduced digital screening via SMS, WhatsApp, and web URL of all of our staff, doctors, patients and contractors, to ensure no inadvertent spread of the virus, and to ensure our facilities remained safe. As you can see from this live dashboard, to date, since the 22nd of May, we've digitally screened over 5.5 million people, and we'll continue to do so. Interestingly, the tables at the bottom indicates the number of individuals denied access and the reasons for it.
The impact of COVID-19 on our frontline staff was significant, and this slide demonstrates the true cost of fighting the pandemic, 13% of our staff contracted COVID-19, either from a community acquired source or hospital acquired. The living conditions of many of our staff, and their mode of transport, often presented significant challenges in terms of safe social distancing. Tragically 20 of our staff, and 9 nurses, and 9 of our doctors passed away as a result of COVID-19. We again pause here to remember and to honor our fallen heroes.
So what can we, and what have we learned from COVID-19. There are so many lessons emerging from our experiences during the pandemic. But I really want to highlight four fundamental ones, which bear mentioning. If there is one positive to take out of the pandemic, it is that the importance of worker and health care worker safety, cannot be overemphasized. For South Africa as a whole, I believe the pandemic and the rapid nature of its spread, have reminded all of us as to the importance of robust occupational health and safety standards, and practices. Again, we have now fully digitized all of our training and occupational health and safety processes, and records. COVID-19 threatened to dehumanize us all, and in particular, our health care workers. Patients and loved ones could not see each other, caregivers were hidden in masks and spacesuits, and the level of anxiety this all
5 created was often debilitating. It was a stark reminder to all of us to find different ways of communicating with patients and their loved ones, and allowing digital FaceTime on iPads, or mobile cores to bridge the gap. Whilst we did not allow visitors, we certainly allowed family to visit for compassionate or end of life situations. Thirdly, COVID-19 emphasized the critical imperative of accelerating the digitization of as much as possible to allow real time remote management and command and control. Despite putting many of our larger digital projects on hold during this period, we focused on digitizing key processes, as already mentioned, around bed management, oxygen capacity and demand, track and trace, occupational health and safety, virtual consultations, screening of healthcare visitors and others.
And finally, COVID-19 exposed the real fault lines in our health care system. In a seminal editorial in the Lancet medical journal, on the 25th of September this year, the Lancet quoted the work of Professor Merrill Singer, a medical anthropologist out of Connecticut, who coined the phrase syndemic in the 1990s. A syndemic or synergistic epidemic is the impact of two or more epidemics or disease clusters, which exacerbates the prognosis and burden of disease.
In terms of COVID-19, we've all simply viewed the cause of this crisis as an infectious disease, and as a result, most of our interventions have been focused on stopping viral transmissions.
However, the story is not so simple, and as I said, COVID-19 has exposed many fault lines.
And there are in fact, two categories of diseases interacting with specific populations. The first is infections with a SARS COVID-19 virus, and an array of non-communicable diseases, such as hypertension, diabetes, asthma, obesity, and cardiovascular disease. And unfortunately, in addition, these are aggregating against the background of social and economic disparity that exacerbates the adverse effects. And this, ladies and gentlemen, is exactly what we experienced during the pandemic. The majority of our patients had existing comorbidities, often poorly controlled and managed, which exacerbated their condition and worsen their outcome. And the lesson for us all is clear, unless we adequately control and improve our management of non-communicable diseases, COVID-19 will not be the last pandemic or syndemic, to attack our planet. In South Africa, prior to COVID-19, 57.8% of all deaths were attributable to non-communicable diseases. Within Netcare, our strategy is perfectly aligned to addressing this very issue, and I will touch on this briefly, later. I'm going to now hand over to Keith Gibson 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 of the business landscape, and our operational performance, let's now turn our attention to the group financial results for the 2020 financial year. 2020 has been one of the most extraordinary periods in Netcare’s 23 year history. The emergence of the coronavirus, or COVID-19 in South Africa in March of this year, resulted in FY 2020 being a year of two halves. For the first five months of the first half, it was largely business as usual. However, the
6 theme of the second half was weathering the COVID-19 storm. The additional costs of operating in pandemic circumstances more than offset the cost savings achieved in the first half, and this in combination with declining activity resulted in negative operating leverage with the reduction in EBITDA exceeding the decline in revenue, because of components of fixed costs in the base. However, Netcare statement of financial position remains strong, and debt levels are manageable, largely due to the success of our cash preservation measures, and also aided by the receipt of 778 million rands of proceeds from the sale of the UK properties owned by GHG PropCo 2, and at the financial year end Netcare had cash and committed undrawn banking facilities of 5.6 billion rands available to the group.
And then, in a year of great change, we also adopted IFRS, 16 and FY 2020, and we applied the modified approach, meaning that there's been no restatement of the prior year's results.
And we've therefore provided additional disclosure to aid compatibility in year on year performance, which I'll come to shortly. As has already been highlighted, COVID-19 had a devastating financial impact on Netcare, and it's difficult, if not impossible, to definitively quantify COVID full financial impact on the business. And to do so does require certain estimations and assumptions to be made in order to paint a picture of what might have been if COVID-19 never happened. However, we have broadly estimated that the negative impact on revenue is in the order of 3.7 billion rands, with a negative knock on effect of 2.3 billion rands to EBITDA. Within this, most of which is attributable to the loss of regular activity within our facilities, the cost of keeping patients’ nurses, doctors, contractors and staff members safe during the pandemic amounted to approximately 300 million rands, and this was mostly spent on personal protective equipment, staff costs, screening, training and sanitizing. In addition to these extra costs, our income also reduced, in the form of low rentals received from doctors’ rooms, imaging and diagnostics, coffee shops and retail pharmacies. Less patients and restrictions on visitors also led to reduced parking income. We invested 156 million rands in additional COVID-19 related Capex, to enhance the readiness of our ICU and high care facilities, in the form of additional ventilators, specialized air filters, ultraviolet light disinfection, robots and oxygen capacity amongst others. And our working capital was affected by approximately 700 million rands, mainly attributed to the need to build up adequate PPE drugs and consumables to withstand the demands of the pandemic, bearing in mind that we had to do so, in a time of constrained global supply and uncertain lead times.
Turning to the group statement of profit or loss for the year ended 30 September 2020, and I remind you that the FY 2020 results are reported on IFRS 16 basis, while the FY 2019 numbers have not been restated. Revenue amounted to 18.8 billion rands compared to 21.6 billion rands for the prior year, and decreased by 12.7%. EBITDA for the year amounted to almost 2.6 billion rands, and declined by 41.7%. Now this variance is flattered by the exclusion of rental charges in FY 2020, under IFRS 16 accounting, and also included an EBITDA for the current year of CareOn cost of 15 million rands, data enablement costs of 22 million
7 rands, and new business development costs of 63 million rands. Group EBITDA margin dropped by 670 basis points, from 20.3% to 13.6%, with the negative impact of COVID-19 more than offsetting the benefits, of no longer reflecting rental charges under IFRS 16.
Operating profit decreased by 61.7%, to almost 1.4 billion rands. Other nett financial expenses increased from 486 million rands to 522 million rands, as a result of higher average debt levels, or be it at 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 IFRS 16, which amounted to 371 million rands for the year.
Consequently, profit before tax reduced by 82.8% to 556 million rounds. The group's tax charge amounted to 243 million rands, and profit after tax, before exceptional items, amounted to 313 million rands, significantly down on usual levels of profitability. We have two exceptional items in the current year. Firstly, we recognize a profit of 474 million rands after tax, arising from the disposal of our investment in GHG. PropCo 2, following the sale of the UK properties, and Netcare’s related share of the disposal proceeds of 778 million rands was received shortly before the year end. Secondly, and unchanged from our half year reporting, there is a one off non-cash share based payment expense, or IFRS 2 charge, relating to our triple BEE ownership transaction of 348 million rands. The triple BEE transaction was implemented in October 2019, and it benefits over 20,000 Netcare employees of whom 80% are black and 65% are black women, and this results in a bottom line profit for the year of 439 million rands.
In order to assist with the obstacles to direct year on year compatibility that IFRS 16 has introduced, in this slide, we set out to reconciliation, in which we strip out the accounting effects of IFRS 16 arriving at an underlying result, which provides a better understanding of the real performance of the group. As you can see the EBITDA line benefits from 470 million rands of rental expense, which is no longer recognized under IFRS 16 accounting, and this is offset by additional depreciation charges of 380 million rands on the right of use asset recognized under IFRS 16, resulting in a nett benefit of 90 million rands at the operating profit line. We then recognize an interest charge of 371 million rands on the lease liability.
And all of the above results in a negative impact from adopting IFRS 16 on the group's results of 281 million rands before tax, and 202 million rands on an after tax basis. Therefore, the group results presented on an underlying basis reflect the following, a revenue decline of
12.7% to 18.8 billion rands, a reduction in EBITDA of 52.4% to just under 2.1 billion rands, an operating profit decrease of 64.2% to 1.3 billion rands, a profit after tax before exceptional items of 515 million rands, and the final bottom line profits of 641 million rands.
Next we move on to headline earnings per share. HEPS has decreased from 165.9 cents per share in the prior year to a current year loss per share of 3.6 cents. The bulk of the reduction is attributable to the impact of COVID-19 on trading across the last seven months of the year.
Other notable factors influencing the decline are the once off non-cash share based payment
8 expense, now triple B transaction, which reduced HEPS by 26 cents, and the adoption of IFRS
16, which reduced HEPS by 15.1 cents. Now we also present an adjusted HEPS figure in which we strip out exceptional and unsustainable items, as this is the primary measure used by management to assess performance, and group adjusted HEPS amounts to 32.5 cents and is decreased by 81% against 2019. However, this is not directly comparable as the current year results are reported on IFRS 16 basis and the comparative numbers have not been restated.
So excluding the impact of IFRS 16, adjusted HEPS equates to 47.6 cents for 2020, reflecting a slightly lower decline of 72.2% against the prior year.
Moving on to the group statement of financial position, we see the total assets as at 30
September 2020 amounted to 25 point 9 billion rands, increasing from 21.4 billion rands at
September 2019. Of the increased 3.8 billion rands is attributable to the recognition of a right of use asset on our leases, raised under IFRS 16 accounting, and this is offset by the corresponding recognition of lease liabilities, with a carrying balance of 4 billion rands at 30
September 2020. Capex expenditure in the year amounted to 1 billion rands, of which 193 million rands relates to expansionary projects, and 34 million rands was invested in our
CareOn digitization project. In order to preserve cash, we elected to defer and uncommitted new capital projects totaling approximately 800 million rands, and as I've already mentioned, we also invested 156 million rands of Capex in preparing our facilities for COVID-19.
Working capital has been well managed, although we are carrying higher levels of inventory at the year end, as a result of the need to prioritize the procurement of additional inventory reserves, and especially personal protective equipment, drugs and consumables at a time of scarce global supply. Total shareholders’ equity decreased from 10.2 billion rands to 9.8 billion rands. The reduction is a consequence of lower profits, and it also includes our share buyback program, whereby we bought back and cancelled 12.7 million Netcare shares, for
251 million rands in November and December 2019.
As we usually do, let's take a more in depth look at our debt position. Gross debt amounted to 7.9 billion rands at 30 September 2020, offset by cash balances of almost 1.5 billion rands.
Therefore, nett debt totaled 6.4 billion rands at the year end, increasing by 1.3 billion rands since September 2019, as lower activity levels resulted in less cash generation. The leverage of the business increased with nett debt to EBITDA coverage moving up to 3.1 times, on a pre-IFRS 16 basis. This is above our banking covenants, which require this metric to be below
2.75 times, but this has been addressed by proactively obtaining a waiver of the September
2020 covenant test. And as a precaution, we've also secured a waiver of the March 2021 covenant test. The cost of debt has decreased by 220 basis points from 8.6% to 6.4%, as a result of reductions in borrowing rates during the year. Currently, approximately 40% of the group's debt has fixed interest rates, which is achieved with the aid of interest rate swaps.
Nett interest paid increased slightly to 504 million rands, from 484 million rands in 2019.
However total interest paid increases by a further 371 million rands in the current year, after
9 including the interest of lease liabilities introduced by IFRS 16. Interest cover has dropped to
2.6 times as a result of our lower trading performance. And finally, a reminder that in March
2020, GCR reaffirm Netcares long term credit rating of double A minus, and our short term rating of A1plus.
Moving on to our debt facilities, and given the pressures introduced by COVID-19, and the need to secure access to liquidity, I'm going to focus on committed banking facilities. At the yearend Netcare had cash balances of almost 1.5 billion rands on hand, as well as committed but undrawn debt facilities of 4.2 billion rands at its disposal, and we therefore have access to resources of 5.6 billion rands in the aggregate, from which to fund our future needs. In addition to the securing of additional facilities, we are maintaining a prudent approach to liquidity management by continuing with a number of cash preservation initiatives, which include the tight control of costs, managing Capex spend in terms of asset like strategy, and the decision not to pay an interim or final dividend. Our debt maturity profile is appropriately staggered with only 391 million rands, maturing in H1 and 715 million rands maturing in H2 of 2021. The Business is therefore well placed to withstand the uncertainties of the year ahead.
Next, I'd like to talk you through our disciplined approach to the allocation and distribution of capital. Now within Netcare our ambition is to allocate and distribute capital according to
World Class disciplines, while maintaining an optimal capital structure. This is not something new. It's a framework that we've implemented over the last number of years and we continue to refine and embed it into our culture. The advent of COVID-19 has driven a need to make decisions more quickly and having this framework in place has proved beneficial. We applied decision analysis to capital investments and distribution scenarios with outcomes being based on the expected nett present value, and the ability to increase future economic profits. We recognize the weakness of single point forecasts and we therefore quantify risks and opportunities by performing robust sensitivity analysis of key performance drivers, which are guided by both rich statistical evidence from operating a large network of hospitals and healthcare facilities over a long period of time, and the expert opinions of management and where appropriate, outside specialists.
So let's step through Netcares’ approach to managing the capital cycle, and beginning with strategy. Strategy involves the search for new business opportunities and the consideration of alternatives that are always aligned to the broader group strategy. And by way of example, this would include the identification and selection of our group wide digital strategy, as well as new business lines and services being added to the Netcare ecosystem. Decision models assist us in evaluating and selecting strategies and investments with the highest expected
NPV. And this would apply to decisions to invest in capacities such as new hospital builds, as well as decisions to disinvest where returns don't meet our hurdles, such as the disposal of underperforming facilities. And in past years, we've demonstrated that we are prepared to
10 take the difficult decisions and exit or dispose of underperforming assets. If we make sound capital investment decisions, then our economic profit should grow. And we measure our performance by monitoring return on invested capital and economic profits, recognizing that the only way to increase Netcares’ intrinsic value is to grow economic profits, which will result in attractive long term cash flows. And so in this regard, we've implemented ROIC and economic profit at hospital level, to ensure that our facilities are appropriately focused on driving behaviors that will ultimately increase long term cash generation. And finally, we use decision analysis to help determine the optimal capital structure and payout policies. If we don't have sufficient positive NPV investments within the business, we distribute surplus cash back to shareholders. And we demonstrated our commitment to this policy in 2018, and
2019, and the overarching principle is that we adopt a conservative approach. In prior years when financial market participants wanted Netcare to gear up, we did so responsibly. We ran scenarios incorporating past volatility and profitability, and we decided on a capital structure that could withstand economic shocks and this policy placed us in good stead during the pandemic.
We can note from this next slide depicting cash flow return investments, that the general trend over the past five years for the healthcare facilities, both globally and in South Africa, has been downward, and this is also largely true for Netcare where the environment has been challenging due to downward pressure on tariffs, along with the emergence of low cost networks, while cost pressures such as a shortage of nurses, and the rapidly rising electricity and utility costs, place further pressure on margins. Now, we actively seek to mitigate these pressures, and by way of example, our sustainability strategy has led us to invest in a substantial solar fleets to counter the rising costs of electricity, as well as reducing our dependence on its unreliable supply. And despite the declining sector trend, Netcare has generated impressive CFROI that exceeds the cost of capital to the extent that we categorized as a best in class top quartile performer globally, also delivering returns well above our South African counterparts. 2020 has obviously been a very difficult year because of COVID-19, and capital discipline and operational excellence are critical to restoring and maintaining profitability.
Now within the business, we use CFROI, ROIC and economic profit to measure performance.
ROIC is our preferred metric because it's less complicated to calculate, which requires fewer adjustments, and it's easier to communicate, both internally to our managers, and to external shareholders. It's also a key driver of economic profits, which ultimately results in economic value creation. We do understand how ROIC can be distorted, especially when comparing old hospitals against new ones, or by failing to invest in assets over time. And we manage our business for the long term and our targets are set for the medium term, and therefore failing to invest in maintaining our facilities would negatively impact our ability to compete effectively as a trusted healthcare provider, and ultimately would be detrimental to ROIC.
And therefore we continuously strive to find the right balance. CFROI removes this distortion
11 and some others because it's based on gross assets, and its inflation adjusted, and for these reasons, its ideal for benchmarking and it acts as an assurance metric, and also, many fund managers use it. We monitor it at the executive level, but we use ROIC for managing our business on a daily basis. The measures are very highly correlated and therefore we have confidence that driving ROIC and economic profit, will result in value creation. Now comparing Netcares’ ROIC to the aggregate to the SA healthcare sector, our returns are at the top of the range. Once again, FY 2020 has been an anomaly, but the graph on the right hand side demonstrates the factors accounting for this, and from a low reported ROIC of
5.6%. If we exclude the impact of IFRS 16, ROIC improves by 1.1%. The estimated impact of
COVID-19 has brought ROIC down by a large 12.4%, and then if we also adjust for the central costs relating to care on, data enablement, and new business development, ROIC reconciles to a respectable 19.6%.
Turning to major Capex planned for FY 2021, we've been deliberate in curtailing Capex to high growth areas, and the continued development of our IT platform. We've set out on the slide a few projects that will receive Capex investments in FY 2021, the largest project, at 400 million rands, is the ongoing construction of our new Alberton Hospital. This facility is a replacement of our current Netcare Union and Clinton hospitals, and it will have 427 beds, and it’s scheduled for opening in February 2022. The new Akeso Richards Bay facility, with 36 beds is due for completion by the end of FY 2021, and it will utilize 30 million rands of Capex.
Akeso is also developing a new 72 bed facility in Port Elizabeth, on which we will spend 40 million rands in FY 2021, and the facility is scheduled to open in September of 2022. And we also progress our IT focus strategy, with a further 30 million rands earmarked for the Careon digitization project, and 70 million rands been allocated to a full upgrade of our in hospital Wi
Fi, and firewalls. And finally, I just like to extend my thanks and gratitude to our finance staff across the group, who've adapted very quickly and efficiently to different ways of working in order to ensure ongoing quality reporting. And they've done so without disruption or delay to our timetables, which is no small feat. And I'll now hand you back to Richard, who will take us through what lies ahead for Netcare in FY 2021 and beyond.
RICHARD FRIEDLAND
Thank you, Keith. Let's now focus on the year ahead. Just a quick recap of our strategy, the fundamental aim of our strategy is to create a competitive sustainable advantage for
Netcare. Our strategy builds on three global healthcare mega trends of customer centricity, digitization, and data, and combines, and leverages off our unique and evolving ecosystem of assets and services. This allows us to ultimately provide person centered health and care that is digitally enabled and data driven across our ecosystem. We believe this will result in optimizing seamless, and integrated care across the full continuum of health and care. And as
I mentioned earlier in the presentation, when introducing the concept of a syndemic, we require an aligned and joined up approach to tackling and preventing illness, and not the
12 current siloed and isolated, episodic approach. Our strategy will also allow us to achieve a person centered approach to the redesign of health and care delivery, also allow us to empower patients with their digital records for life, allowing them to assume co- responsibility for their health and care, and be able to better inform and improve clinical decisions and outcomes through rich data analytics. We firmly believe that our strategy will over time deliver above market growth, enhanced returns, and as you've just seen, a very well differentiated care offering. And importantly, all of the projects and investments which underpin this, and allow us to operationalize the strategy, will have to pass our own internal,
Netcare litmus test of having to meet at least one of these criteria of being able to grow, allow us to grow above market, enhance our returns, or assist in differentiating our care offering.
Our digitalization drive and enhancing data analytic capabilities are a critical element of this strategy, and the next few slides provide an update of where we are in this journey. All digitization programs across Netcare were put on hold in March during the COVID-19 pandemic, but fortunately, no penalties were incurred. As discussed and demonstrated previously, if anything COVID-19 has confirmed the relevance of our strategy. All of our projects across the divisions remain within budget. The total capital cost across Netcare for the entire program, over 10 years, is R602 million. And we have spent R120 million to date, with a further R335 million planned over the next two years. Looking at our rollout of Netcare electronic records in more detail, in terms of our hospital digitization, or CareOn program.
This is probably one of the most enormous and transformational undertakings we have ever carried out in the history of Netcare. The rollout was moved from Gauteng to the Western
Cape due to its earlier recovery from COVID-19. It's been successfully rolled out to general wards in three Western Cape hospitals. We expect the full rollout in all of our hospitals to be completed, sorry, the rollout in these three hospitals to be completed by April 2021, and we will resume in the Gauteng in April 2021. We expect the full rollout of our hospitals to be completed by the end of 2022. In terms of our primary care digitization program, the rollout of Health One electronic records was completed in nine clinics prior to the pandemic and the remainder of clinics will be completed in June of 2022. Akesos’ electronic health care record rollout will be completed in April of 2022, and finally for national renal care, the rollout will be completed by September 2021.
Since the design and development of Careon in 2018 we've introduced a number of features, which are firsts in the South African market and indeed on the continent. Digital or electronic e-scripting was approved by the South African Pharmacy Council in August of this year. It's a first for South Africa and establishes the new industry standard for e-scripting. We've also achieved the highest level of medication safety in South Africa. All prescriptions are now checked against IBM’s Watson health, micro medics for any interactions between medication, duplicate medication, and medication allergies that patients may have. We have enabled a voice to text notes dictation, and handwriting recognition, using Siri on any iPad,
13 users can dictate all of their notes. The iPads also offer handwriting recognition. All orders and investigations are now requested electronically through something we call computerized physician order entry. All results are also automatically and electronically returned via Careon and this is a critical feature that allows seamless integration between all healthcare workers.
The picture on the right is a very recent one taken last week, in one of our wards in the
Western Cape. As a result of COVID-19, training of doctors and nurses now takes place online through Netcares’ e-learning platform insight. This allows nurses and clinicians the ability to complete training from the comfort of their homes. We've also now achieved a fully paperless environment, including all nursing, doctors and clinician documentation, and patient information. The solution is fully mobile and able to run off an iPad with remote access. This is a capability ladies and gentlemen, offered only by literally a handful of hospitals in the world. The picture on the right hand side is one of our doctors from N 1 city hospital in the Cape, checking on her patients in the early hours of the morning from the comfort of her home.
Despite these disruptions of COVID-19 we've been hard at work at enhancing our ecosystem, through a number of new strategic initiatives, some of which we are able to announce today.
Netcares’ innovative healthcare solutions business, which now operates under the Netcare
Plus brand is a newly established division, which has been set up to enhance access to affordable private health care, particularly for those that are employed, but uninsured. Even though South Africa has approximately 8.9 million people who belong to a medical scheme, there's a large part of South Africa that is currently employed, but do not have adequate health care cover in their household. This market is typically described as the middle income segment of South Africa. According to the Bureau of market research, this segment represents a third of South African households, and accounts for as much as half of the total household expenditure in South Africa. Netcare Plus was specifically created to provide affordable health care solutions that will help this market segment access private health care.
We've partnered with FNB and developed Primary Health Care vouchers for GP consults and virtual care, which are available both on the e-bucks platform as well as our own website,
Netcare.co.za. The vouchers can be redeemed at over 1000 GP’s across the country using the Netcare ecosystem and the Netcare plus trusted partner network. The vouchers have been priced to maximize affordability and to allow employers to purchase care on behalf of their workforce, and we plan to expand our offering to optometry and dentistry solutions in the coming year.
We've also launched the selection of prepaid procedures, a product that for a single price includes all costs related to the procedure, including specialist costs. This enables people not on a medical aid an affordable way to receive necessary care for elective surgery. Our first procedure was launched with ophthalmologists for the removal of cataracts. We plan to launch pre-paid procedures for urology, ENT, and orthopedics’. And in addition to this, we have found that affordability is still a barrier to people receiving the necessary treatment in
14 this market, and as such, we will repackaging these procedures with a credit facility over time, so that people can receive treatment as and when they need it. Many of our patients have indicated that it's often difficult to access the appropriate doctor or specialist. And so earlier this month, after a two year pilot, we launched Netcare appointment, aimed at providing a convenience and free national service to access health care professionals. It provides access to extensive network of health care professionals at Netcare hospitals, medic cross medical and dental centers and Akeso Mental health facilities. There are no membership or fees, and it provides also on request, access to doctors who charge scheme contracted rates, and thus avoids any excess charges or extra fees.
Employee wellness is extremely important to us and forms a critical and comprehensive
Occupational Health and Safety service. We are absolutely delighted to have acquired a 40% stake in ICAS, South Africa's leading provider of employee wellness solutions, effective March
2020. ICAS provides a comprehensive range of employee health and wellness programs, as well as absence, in capacity, and disability management. It's the leading provider in South
Africa, with over 600 clients covering over 700,000 lives, and importantly, is a level 1 triple
BEE provider. A key pillar of our strategy is accelerating transformation in Netcare and our broader society and driving sustainability of our environment. Despite the challenging year we've had, we continue to make significant progress across accelerating transformation, both within Netcare and society as a whole, and this is evidenced by the improved results in each of the pillars of our transformation strategy. The racial and gender profile of our workforce is becoming more aligned with a national economically active population. Our workforce profile has become more diverse, particularly at a leadership level. And we met and exceeded our numerical objectives set out in the Netcare Employment Equity Plan for the past five years. Because we had met the numerical objectives set out in our Employment Equity Plan, we set ourselves stretched targets, most of which have been achieved. Given the prevailing high youth unemployment in our country, we have continued to invest in skills development, and employment creation for youth, through the youth employment services, or Yes program. We have 865 youths currently enrolled on various internships, and learnerships, with a 97% permanent employment conversion rate for those who have successfully completed training. We also have another 516 youths who will be commencing training in
2021. Thus, we've met and exceeded our commitment of training 1000 youths over a five year period ending in 2023. The procurement statistics on this slide show our continued focus on supporting inclusive economic growth, with evidence improvements in our procurement spend on triple BEE compliant suppliers, and sustained growth in procurement spend on black owned, and black woman suppliers.
Year on year our growth in enterprise and supplier development also reaffirms our commitment to supporting entrepreneurship and employment creation, by supporting the inclusion and development of small businesses in our supply chain. In line with our strategy, we also aim to become a global healthcare leader in sustainability. And we set ourselves a,
15 set out to achieve a 30% decrease in energy intensity, over 10 years. We're on track and have achieved a 21% decrease after seven years. We're currently updating our targets in line with our new 10 year strategy, and the results that have been achieved through a number of initiatives outlined below, in terms of energy waste and water, demonstrate the enormous transformational process we have been through during the past seven years. And as can be seen from this, we have rolled out one of the largest sustainability programs on the African continent, and have received as a result, several local and international awards. Also, a key pillar of our strategy is providing consistency of care, and ensuring we can benchmark that care against both local and international standards and parameters. In 2019, we published 37 clinical measures on our website, and will publish an additional 35 in December of this year, bringing the total to 72 total clinical measures across six divisions. They're all available on the
URL indicated here, and I urge you, ladies and gentlemen, to peruse these outcomes and measures. They are divided into the noted three categories of Person Centered health and care, best practice, and safest care, and cover all six of the divisions listed, and the outcomes listed here on the right hand side.
Finally, let's turn our attention to our guidance for the 2021 financial year. I'd like to make some important introductory comments. Firstly, I think we all recognize that COVID-19 will remain a threat to our society until an effective vaccine is available. And the current surge in the Eastern Cape is a very sober reminder of the potential of a second wave, and so the importance of maintaining non- pharmaceutical measures and avoiding COVID-19 fatigue remains critical. We're very confident that our digital systems, policies and procedures, and the changes in ways of working should allow us to continue normal operations through a potential second wave. In addition, the reduced length of stay and reduction of those requiring hospitalization should not place capacity under pressure. All of the six critical areas I refer to earlier in the presentation are well controlled, and we have safely and sustainably been able to recommence other services and elective surgery. And so, in terms of our guidance, notwithstanding the short term vicissitudes we have experienced, our strategy to deliver a sustainable competitive advantage is firmly back on track. Our performance may however, be tempered by a weak macroeconomic outlook and the threat of a second wave.
But as we have hopefully demonstrated, we are better placed to deal with a potential second wave. We are expecting volumes to recover into the second half or H2 of the new financial year. And importantly, given the massive loss of employment in South Africa, and particularly what our staff have sacrificed over the past seven months, we are embarking on a job preservation strategy. Clearly it will go hand in hand with extremely tight cost control and a very strong commitment to maintaining and driving efficiencies. We do expect our margins to improve off a low base, and we estimate our capital expenditure for the new year to be in the order of 1.2 billion rands, and finally, ladies and gentlemen, we reaffirm our commitment to drive our capital management matrix. Ladies and gentlemen, that concludes our presentation, and we welcome any questions. Thank you.
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FACILITATOR
Okay, we have a few questions. The first one is from Victoria Lambert, from Bank of America.
The question is, could you please provide an update and info on recent network discussions with medical aids, such as what tariffs have been secured, any notable changes we should be aware of.
RICHARD FRIEDLAND
Thank you very much. I'm going to ask our head of strategy and fund the policy health policy,
Melanie Da Costa to take that question.
MELANIE DA COSTA
Good morning, there are a couple of changes in networks for 2021. But primarily on the positive all in all for Netcare, the most significant of which is the Polmed network that was instituted two years ago, that will now be opened up to any willing provider for 2021. Just a reminder, that the marine option that was applicable here, the Polmed Marine option with about 375,000 lives, that is about 3.8% of medical scheme membership, and hence, it has got quite a bit of an impact on Netcare, if we consider the fall in patient days in 2019 versus
2018, recovery of 70% of that means that we could expect an additional 25,000 patient days on the Polmed network. Other than that, there's some small changes to the Discovery networks, they haven't been signed and sealed so rather not get into specific details, but we would expect to have some greater participation in the Delta network in particular. We've also had some increased participation across the Momentum group networks.
FACILITATOR
So the next question is also from Victoria Lambert from Bank of America. The question is, are there any Netcare hospitals that are currently closed in the Eastern Cape.
RICHARD FRIEDLAND
It’ll take that question. Thank you very, very much. Both our hospitals in the Eastern Cape are fully operational and we are increasing capacity to be able to treat COVID-19 patients, we have well over 150 COVID-19 positive patients at the moment. We have also deployed further staff down to and nurses and paramedics, down to the Eastern Cape to assist. But the hospitals are fully operational and none of them are closed.
FACILITATOR
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Okay, so the next question is from Gerhard. His question is, what management view is regarding the growth of health care providers within South Africa, any offshore investments being considered,
RICHARD FRIEDLAND
I'll take that as well. We remain absolutely focused on the South African market. As you can see, we have a very well developed strategy that we believe will deliver a competitive advantage that will allow us to grow above market, enhance our returns, and deliver a very significantly differentiated product. We have absolutely no aspirations plans, or plans, to look at anything outside of the South African borders at this stage, and for the foreseeable future.
FACILITATOR
The next question is from Teneko Mapando from AON investment Management. His question is, with regards to the electronic medical records and digitization projects, what initiatives has Netcare implemented or is planning to implement to protect patient data and reduce private or security risks.
RICHARD FRIEDLAND
Thank you, I think that's a very pertinent and excellent question. And I want to assure all of our shareholders and those listening, that we absolutely complied with the POPIA regulations. And as well, the entire platform is GDPR compliant, and that is, meets the very high standards of the European Union, one could almost call that POPIA on steroids. So we're extremely careful and cautious in terms of adhering to all of the available legislation and regulations, and ensuring that patient data is always protected.
FACILITATOR
The next question is from Jacous Haasbrook, from Centaur Asset Management. He asks, could you please give us some color on the expected profile for working capital normalization.
RICHARD FRIEDLAND
Hand that over to Keith.
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KEITH GIBSON
Thanks very much. I think really that's a question which relates to our inventory consumption, we would certainly expect to consume our surplus inventory over the course of the next year.
That is something which will be determined by how COVID behaves during FY 2021. Were we to go into a surge or a situation similar to what we experienced in June or July of this year, we will utilize that stock very quickly because our consumption rates will increase. However in an environment similar to what we're currently experiencing, we would expect to utilize that fully within the 2021 year.
FACILITATOR
Okay, this next question is from Isaf Mohammed from AON Investment Management.
Richard and team, thanks for the well delivered presentation, can you give us an indication of the total Careon digitization cost or investment.
RICHARD FRIEDLAND
Yes, the total CareOn digitization costs, in other words, for the hospital division per se are
369 million rands over a 10 year period.
FACILITATOR
Okay, the second question is, what is the annual efficiency savings or return on the investment or payback in years.
RICHARD FRIEDLAND
We haven't revealed the exact efficiency gains per year. But what I can tell you is that, based on the initial business case that we've put forward, and there's nothing to suggest that we're not on track with that, we will more than adequately meet our targeted hurdle return rate on
CareOn.
FACILITATOR
Okay, the final question is has the CareOn digital costs been written off in the income statement. If not, what has been capitalized cost on the balance sheets.
RICHARD FRIEDLAND
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I'll take that. Yes there are two components of CareOn, is the portion that we expense because it doesn't meet the accounting criteria for capitalization. And as we've disclosed, that has amounted to 15 million rands through to the income statement. And in terms of what we've capitalized to the balance sheet, in the current year it equates to 34 million rands.
FACILITATOR
Question is from Warren Riley from Bataleur Capital. Warrens’ question is, do you have any metrics that could provide a sense of backlog of electables across the group.
RICHARD FRIEDLAND
I'm going to ask Jacques du Plessis our Managing Director of the hospital division to take that question.
JACQUES DU PLESSIS
Good morning, ladies and gentlemen. Certainly we've seen that true elective surgeries is in the region of about 30% of our total admissions that was before COVID. That has certainly dropped down by about a third. At the moment we have seen that our admissions from our emergency department, though, has increased to about 20% of all those patients seen, but obviously it's still on a lower base. And as Richard as indicated earlier on, in November, we are basically on about 86% of our patient days seen in November 2019. Exactly how many elective surgeries are out there and unfortunately, how many of those patients passed away, that remains to be seen in the future months to come. But there is certainly a recurrence of those elective surgery coming back to the hospitals, slowly but surely.
FACILITATOR
The next question is from Gomotso. The question reads as follows it was widely hoped that
COVID-19 would improve communication and collaboration between private hospital groups like yourselves, and the government, that would hopefully bode well for further collaboration in a pending NHI environment. Would you say that this is true for Netcare.
MELANIE DA COSTA
Thanks for the question, Gomotso. I think by and large, the statement you've made holds true. I think there was great collaboration and engagement over the last couple of months, and it varied from, you know, data collection, due to engagement on the exact capacity available in the health system, all the way down to agreeing, you know, tariffs and SLA's for
20 the treatment of state patients. It definitely cemented the relationships, and, you know, we would be expecting to continue those engagements, you know, as we lead into the NHI, but also as perhaps state considers, you know, backlogs in their own elective surgeries in the months to come. Thank you.
FACILITATOR
Okay, our final question is from Gerhard. He asks, regarding the CareOn offering, how’s it ensured diagnosis by healthcare professionals are accurate.
RICHARD FRIEDLAND
Well, you know, CareOn itself can't ensure that the diagnosis is accurate, that is an input by clinicians, health care workers, and specialists. But what it can do is very accurately record on a real time basis, all of the various data inputs, and the patient observations, and it can also allow a seamless integration of communication between the various specialists. So they can see exactly what their colleagues are requesting, what they've done on a real time basis, we can see all of the nursing notes, we can see all of the bloods and the various diagnostic tests that have been ordered, as well as the results there of. What it can ensure is absolute, and the highest levels of medication safety, because every time a medication is prescribed, it goes through IBM Watson's micro medic system, which checks and international database of any potential drug interaction, or any allergy, or even an incorrect dose, and I think this absolutely enhances the safety of the patient. The other beauty of the system, which is often difficult to realize unless one's worked in a hospital, is that one doesn't have to be at the bed side in order to understand what's going on with the patient, and there gives you an immediacy of action. In other words, if a patient starts deteriorating, you can be in your consulting room, you can be in theater, you can be at home, you can be at a restaurant, you're able to be notified and alerted to that, and act upon it, immediately, in a very accurate way. And again, because it's digital, it provides a complete audit trail. I could go on for several hours, I realize it's been a long presentation. So I'll stop there.
FACILITATOR
Okay, we have one more question that has just come through, Wally from ABAX asks, what is the current revenue per patient day relative to the prior period, i.e., if volumes are at 86%, where is revenue.
RICHARD FRIEDLAND
Jacques would you like to take that question.
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JACQUES DU PLESSIS
Thank you, Richard. Volumes in terms of revenue is also in line with that 86% of recovery.
Clearly, we still have a high number of COVID cases, and also more serious cases and our
ICUs’ are still well utilized. Average revenue per patient day, and for the past period, nett revenue, was increased by 8.7%.
RICHARD FRIEDLAND
Ladies and gentlemen, that concludes our presentation and I want to personally thank you.
We recognize it's been a long presentation and thank you very much for your attendance this morning.
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