“This past year has been incomparable in its tragedy, but equally unprecedented is the extraordinary contribution made by Netcare’s healthcare workers including our nurses, doctors, paramedics, support staff and administrators on the frontline across South Africa and Lesotho. Their immense contribution in caring for and treating patients has been nothing short of remarkable.
“We are sincerely grateful and extend our gratitude to all healthcare workers across South Africa in the public and private sector who risked their lives in the fight against COVID-19. And, especially to those who, tragically, lost their lives in the process. We recognise the enormous loss of life in South Africa, and globally, from the pandemic and the profound pain it caused – our thoughts and prayers remain with their loved ones,” says Dr Richard Friedland, chief executive officer of Netcare.
- A strong start to the year offset by the impact of COVID-19 and related lockdown measures
- Despite the challenging environment, job preservation strategies implemented across the Group
- EBITDA declined to R2.1 billion
- Adjusted HEPS declined to 47.6 cents
- R474 million profit (net of taxation) on disposal of investment in UK properties and receipt of related proceeds of R778 million
- Cash resources and committed undrawn facilities of R5.6 billion as at 30 September 2020
In order to aid comparability, the commentary that follows excludes the impact of IFRS 16 and exceptional items (comprising a profit on disposal of investment in associate and a once-off non-cash share-based payment expense on the Broad-based Black Economic Empowerment ("B-BBEE") transaction), unless otherwise indicated.
Netcare's past financial year can be characterised as a year of two halves. The Group experienced strong trading during the first five months of the financial year ended 30 September 2020, which was offset by the adverse impact of COVID-19 on revenue and costs. In the second half of the year, patient days were impacted by the suspension of non-urgent surgery during Levels 5 and 4 of the lockdown and, in particular, during July 2020 when infections peaked, exacerbated by the significant fall in the number of usual seasonal flu or respiratory viral cases. Furthermore, emergency and trauma related activity fell dramatically during the initial stages of the lockdown.
As lockdown levels eased and COVID-19 admissions reduced, medically necessary and time-sensitive surgeries resumed, which led to a gradual and steady uplift in patient days. However, this was insufficient to counter the falloff in activity in the initial months of the lockdown.
As a result of the lower patient days, Group revenue declined by 12.7% to R18 843 million (2019: R21 589 million) while normalised EBITDA declined 52.4% to R2 088 million (2019: R4 388 million) and the EBITDA margin contracted to 11.1% from 20.3% in the previous year. Higher costs resulted in negative operating leverage with operating profit down 64.2% to R1 303 million (2019: R3 640 million).
It is broadly estimated that the pandemic resulted in loss of approximately R3.7 billion in revenues and R2.3 billion in EBITDA to the Group.
Dr Friedland added, “The lockdown measures have resulted in significant loss of employment across South Africa. Although our financial performance has been adversely impacted, we believe this is now a time to support our staff in Netcare who have sacrificed so much on the frontline for South Africa over the past seven months. As a result, we are adopting an intentional job preservation strategy. We also firmly believe that job preservation in South Africa is critical to successfully achieving the country’s inclusive economic growth strategy. Given our intention, we will continue to manage our cost base extremely tightly and within clearly defined targeted efficiency initiatives.”
Profit before taxation decreased by 74.1% to R837 million (2019: R3 229 million), and profit after taxation decreased by 78.1% to R515 million (2019: R2 350 million).
An after-tax profit of R474 million was realised on the disposal of the GHG PropCo 2 associate, following the sale of its UK hospital properties, while a once-off non-cash share-based payment expense of R348 million was recognised on the implementation of Netcare's B-BBEE transaction.
Adjusted headline earnings per share ("HEPS") declined 72.2% to 47.6 cents (2019: 171.2 cents).
In light of the ongoing uncertainty, Netcare's current focus on cash preservation as well as bank covenant waivers prohibiting dividend payments, the Board has decided not to declare a final dividend.
Cash flow and capital expenditure
As part of its efforts to preserve cash, the Group postponed approximately R800 million of capital expenditure ("capex") earmarked for new and current projects. Other cash preservation measures included reduction in the use of agency staff and suspension of share buy-backs and dividends this year.
Capex on critical strategic projects continued during the year, with total capex investments remaining in line with guidance at R1.0 billion. This included additional COVID-19-related capex of R156 million, expansionary projects amounting to R193 million and CareOn capex of R34 million.
As at 30 September 2020, the Group had cash resources and available committed, undrawn facilities of R5.6 billion. The Group's overall cash position was also boosted by the proceeds from the disposal of GHG PropCo 2 properties amounting to R778 million.
Group net debt (exclusive of IFRS 16 lease liabilities) increased to R6 423 million (2019: R5 114 million). The net debt to normalised EBITDA ratio of 3.1 times was above the prescribed covenants of 2.75x and the Group has secured waivers of its covenant testing for the September 2020 and March 2021 periods. EBITDA/net interest was 4.1 times, in line with the prescribed covenants.
Supporting our country
"Netcare has been privileged," commented Dr Friedland "to play a role in supporting our country through the COVID-19 pandemic. As a leading South African healthcare provider, the pandemic had a material negative impact on our performance, however, the pandemic proved the Group's resilience and agility with the primary offering of consistent, high quality care maintained. This occurred while we simultaneously adapted the operating model to respond to these unprecedented circumstances.”
In particular, the last seven months of FY2020 was one of the most extraordinary periods in the Group's 23-year history. Since Netcare's first case on 9 March 2020, the Group has treated 28 016 COVID-19 patients of whom 13 436 were admitted to our hospitals. Of those admitted during the period, 25% were treated in high care or intensive care units. We currently have 312 COVID-19 patients in our hospitals.
HOSPITAL AND EMERGENCY SERVICES
Revenue for the segment declined by 12.7% to R18 250 million (2019: R20 904 million).
As previously reported, for the six months ended 31 March 2020 total patient days declined by 2.6%, which comprised a 3.2% decline in acute hospital patient days, offset by growth of 2.9% from Akeso Clinics. From March 2020, activity in our hospitals was impacted by the various lockdown alert levels as well as the internal measures taken to balance capacity and demand for COVID-19 beds, especially in our critical care units.
The responsible resumption of medically necessary and time-sensitive surgery recommenced at the beginning of May 2020 in line with the easing of lockdown levels. Following the further easing of the lockdown in June 2020 to Level 3, hospitalisation of COVID-19 patients increased, as well as admissions of trauma patients and patients requiring urgent surgery. However, during the height of the pandemic in July 2020, we temporarily suspended elective surgery on a case-by-case basis where critical bed capacity was constrained. August and September 2020 were transitional months characterised by the further easing of the national lockdown to Level 2, but offset to some degree by public and school holidays, and a reduction in COVID-19 admissions.
As such total patient days for the full financial year declined by 19.8%, comprising a 19.6% decline in acute hospital patient days and a 21.2% decline in Akeso patient days. In the first five months of the financial year, our average full week acute hospital occupancy amounted to 62.5% and 67.7% on weekdays. However, full week occupancy levels ended the year at 52.5% (2019: 66.0%), with weekday occupancies of 56.2% compared to 71.6% in the prior year. Acute revenue per patient day increased by 8.7%, primarily as a result of a higher mix of more severe admissions.
In line with the acute business, trading activity in Akeso was adversely impacted in the second half and overall occupancy for the year was 55.0% (2019: 71.6%).
The average length of stay for COVID-19 patients requiring admission at the start of the pandemic was 22 days and has now declined to approximately seven days. The blended overall average length of stay for COVID-19 patients was 10.4 days. Overall, we have seen an increase in the total average length of stay at 4.27 days compared with 3.88 days in FY2019.
Primary Care revenue decreased by 12.8% to R611 million (2019: R701 million) due to a sharp reduction in patient visits in the second half of FY2020, along with the rationalisation of seven previously loss-making Medicross clinics. The underlying revenue decline (excluding rationalised clinics) amounted to 6.0%. There has been a steady improvement in activity levels since the severe COVID-19 impact experienced in April 2020, and the division turned EBITDA positive from June 2020.
Globally, the delivery of healthcare is increasingly being transformed by the digitisation of processes and clinical records as well as the intelligent application of data. The COVID-19 pandemic has heightened awareness and demand for access to clinical data across the globe. Netcare's core focus on digital enablement and data analytics was a critical enabler during the pandemic.
Dr Friedland said, "While the short-term operating environment remains unclear, our long-term strategy remains relevant. The strategy appropriately accounts for external trends and shifts in consumer behaviour underpinned by the goal of achieving a sustainable competitive advantage by providing person-centred health and care that is digitally enabled and data-driven".
Digitisation and data enablement
In September 2020, we successfully resumed certain key strategic projects and various person-centred health and care initiatives to enhance our business, particularly the Group-wide digitisation strategy and the core CareOn project. The Group has spent R120 million to date on digitisation initiatives across its entire ecosystem and plans to spend a further R335 million (including CareOn) over the next two years in completing a Group-wide digital transformation.
The CareOn project aims to implement fully mobile digitised patient and clinical records and its design and development was completed during August 2019. The pilot at Netcare Milpark Hospital was successfully launched on 1 September 2019 and further roll-out was postponed due to COVID-19. As the Western Cape recovered sooner from the surge, roll-out to three hospitals in the Western Cape was initiated in September 2020.
Dr Friedland said, "We still anticipate a successful roll out across our entire network of hospitals by the end of 2022. Notably, despite a slight delay, the project remains well within budget. The total capex spend on this project is expected to be R369 million over 10 years, with R34 million being incurred in FY2020".
COVID-19 accelerated the need for telemedicine which enables clinicians to continue providing care and virtual consultations to patients without exposing themselves, their patients and staff to avoidable risks. In a post COVID-19 world, the adoption of telemedicine is likely to grow, and to this end, Netcare has developed an innovative telemedicine solution, Netcare VirtualCare, which is accessible through any modern web browser. It allows for a dial-in option for patients who don't have access to data and facilitates integration into the electronic health record systems being rolled out. The solution was deployed in Medicross in May 2020, to our hospital specialists in June 2020 and to Akeso and Netcare Occupational Health in July 2020. Netcare VirtualCare was awarded second place in the BCX Digital Innovation awards for 2020.
Promoting access to healthcare
In order to promote healthcare access, affordability and inclusion, Netcare has established an Innovative Products division, NetcarePlus, aimed at developing healthcare solutions focused on solving for the needs of households that are employed but do not have adequate healthcare cover. We aim to provide certainty of care in an innovative way by utilising the Netcare ecosystem, as well as a newly created NetcarePlus Trusted Partner network. The launch of our NetcarePlus primary care vouchers in August 2020 has enhanced our reach into this segment of the market, and we expect to launch further innovative healthcare products and solutions during FY2021.
Expanding the Netcare ecosystem
We have also launched Netcare appointmed™‚ on a national basis, which is a convenient medical booking service designed to assist with the booking of medical appointments. In addition, we have acquired a 40% stake in ICAS, a behavioural risk management company that provides a suite of mental health, work-life and wellness services to organisations and their employees on a large scale.
In line with global trends, a relaxation of lockdown measures and COVID-19 fatigue may result in a second wave of infections. The sudden rise in cases in the Eastern Cape is a sober reminder of this. However, our experience of bed demand during the initial surge and reduced lengths of stay due to more effective treatment modalities, suggest that any potential second wave should not place hospital capacity under constraint.
Our digital systems, policies and procedures and changes in ways of working should also allow us to continue to operate our facilities without major disruption through a potential second wave. Netcare's preparations position the business well to deal with the impact of further outbreaks and the business has sufficient bed and oxygen capacity, adequate medication and PPE availability, appropriate doctor and nursing staff resources as well as access to funding. As a result, whilst the demand for, and provision of, healthcare services will remain fluid over the next few months, we do not foresee wide-scale suspension of elective surgery and activity over the short term.
Nevertheless, over the next six months, hospital occupancy and margins may be impacted by changes in volume and case-mix. This will be determined by the timing and pattern of the COVID-19 recovery, as well as increased costs of risk mitigation measures that are essential in delivering healthcare in these circumstances.
In September 2020, we saw the most robust non-COVID-19 activity since the start of the pandemic. A month-on-month increase of 10.8% was reported in acute hospital patient days in October 2020. We continue to see a steady improvement in average acute occupancy levels. Our current average weekday occupancy is trending at approximately 57.0%.
We have seen significant improvement in the performance in Akeso since September 2020, and occupancy is currently at 66.0%.
We expect further improvement in activity levels across the first half of FY2021, with patient volumes stabilising at more normalised levels into the second half. In line with improving occupancy levels, we expect EBITDA margins to improve off a low base.
Capital expenditure for FY2021 of R1.2 billion is anticipated, including spend of approximately R400 million on the Netcare New Alberton Hospital, R30 million on CareOn, R70 million to upgrade our hospital Wi-Fi and firewall systems, as well as R30 million on the new 36-bed Akeso facility in Richards Bay due to open towards the end of FY2021. An estimated R40 million will be invested during FY2021 in the new 72-bed Akeso facility in Port Elizabeth, which will be completed in September 2022.
Netcare's strategy to deliver a sustainable competitive advantage is firmly back on track and the business will continue to manage its capital structure and allocation decisions in line with its established framework.
NOTES TO JOURNALISTS
Netcare (JSE: NTC) operates the largest private hospital, primary healthcare, emergency medical services and renal care networks in South Africa. In addition to its world-class acute private hospital services in SA, Netcare provides:
- cancer services including radiosurgery, radiotherapy, chemotherapy, bone marrow transplant and robotic-assisted surgery;
- primary healthcare services through Medicross;
- emergency medical services through Netcare 911;
- occupational health and employee wellness services through Netcare Occupational Health;
- mental health and psychiatric services through Akeso; and
- renal dialysis through National Renal Care (NRC).
Netcare also has the distinction of being a leading private trainer of emergency medical and nursing personnel in the country.
Netcare's core value is care. From this value flow four others, namely dignity, participation, truth and passion. We work hard to entrench these values in every action, decision and intervention we take with our patients, their families, our colleagues and communities.
For more information visit www.netcare.co.za.
Issued by: MNA on behalf of Netcare Limited
Contact: Martina Nicholson, Graeme Swinney or Meggan Saville
Telephone: (011) 469 3016
Email: [email protected], [email protected] or [email protected]