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LIFE HEALTHCARE GROUP HOLDINGS LIMITED - Further trading statement and COVID-19 update

Release Date: 20/04/2020 07:10
Code(s): LHC     PDF:  
Wrap Text
Further trading statement and COVID-19 update

(Incorporated in the Republic of South Africa)
(Registration number: 2003/002733/06)
ISIN: ZAE000145892
Share Code: LHC
("Life Healthcare" or "the Group" or "the Company")


The Company is currently finalising its financial results for the six months ended 31 March 2020 (current
period), which are expected to be released on SENS on or about 11 May 2020.

COVID-19 Pandemic
The COVID-19 pandemic (the pandemic) had a significant impact on the trading operations in the Group
in quarter two of this financial year. Due to the diverse geographical locations of the Group’s operations,
the timing of the spread of the virus within these locations and the responses of the respective
governments, the impact has been varied across the regions.

Southern Africa COVID-19 update
The Group has since the onset of pandemic remained committed to preparing for and prioritising the
safety and well-being of our frontline and non-frontline employees, our doctors and the patients we
treat, and mitigating the risks to the business. Since the national lockdown was announced and
implemented, a multi-faceted approach has been taken to adapt operations to deal with the pandemic.
COVID-19 specific operational, staffing and clinical interventions have been implemented with
reference to guidelines issued by the National and/or Provincial Departments of Health, the National
Institute of Communicable Diseases (NICD), the World Health Organisation (WHO) and input from
various clinical societies and medical experts.

The provision of adequate personal protective equipment (PPE) for our staff, doctors and allied
professionals working at our hospitals is of critical importance. The breadth of supply lines for PPE has
been expanded in order to secure stock availability for our hospitals. This includes collaborative efforts
within the industry as well as within the Business for South Africa initiative. Currently, sufficient supply
of PPE has been delivered or is in the process of being delivered. Guidelines governing the adoption
and utilisation of PPE have been issued to all our facilities. Universal masking has also been
implemented in order to reduce transmission risk and, as part of this, we are also addressing the need
for masking our staff when not at work. Additional pharmaceutical stock has also been ordered to treat
COVID-19 patients.

    -    Staff and doctors are establishing separate teams and consulting structures in order to limit the
         potential impact and spread of COVID-19
    -    COVID-19 committees have been established at all hospitals in order to deal with clinical and
         operational matters. These committees include representatives of our supporting doctors,
         emergency units, radiology, pathology units and management.
    -    Measures, backed by policies and procedure guidelines, have been implemented to manage
         the workforce over this period. These measures include, amongst others:
             - Hygiene and social distancing
             - Permits to travel to work during lockdown
             - Adapted leave policies, including sick leave, quarantine and isolation
             - Travel policies
             - Work-from-home principles
             - Freeze on non-essential recruitment
             - Redeployments between units and hospitals
             - Infection Prevention Specialists at hospitals are driving the training and compliance to
               infection prevention protocols
             - Flu vaccines for all staff and supporting doctors
             - A number of initiatives focusing on increasing healthcare worker capacity
             - A communication campaign to all staff
             - Extensive guidelines covering screening, clinical care, infection prevention, PPE usage
               for COVID-19 patients have been developed and staff training continues across all

Facilities management:
    -    Entrances have been reduced and screening protocols have been implemented across all
    -    Visiting patients has been suspended, with limited approved exceptions in the case of critical
         patients, paediatric patients and confinements.
    -    Seventeen retail pharmacies have been temporarily closed
    -    An operational model has been created for all hospitals. This model derives inputs from the
         primary forecasting model that informs our financial and sustainability analyses and is an
         important tool that will help inform hospital planning.
    -    Hospital wards have been designated for COVID-19 and non COVID-19 patients in order to
         isolate and limit risk of transmission
    -    The acute hospital business consists of:
              - 49 facilities
              - 8,037 beds
              - 1,035 High care/ICU beds
              - 682 universal ventilators (includes additional units ordered)
              - 366 anaesthetic machines/portable ventilators
    -    Detailed 'surge' plans have been prepared by all facilities within the Group guidelines, covering:
              - reconfiguration of existing wards within different surge scenarios;
              - patient flow (split between COVID-19 and non-COVID-19);
              - staff planning;
              - doctor capacity; and
              - A&E triage & patient flow/isolation;

Life Healthcare has adopted the guidelines released by the South African Society of Anaesthesiologists
(SASA) in respect of elective surgeries. These guidelines request the admitting clinicians to only
conduct emergency surgeries. This has resulted in a significant decline in surgical volumes throughout
our facilities. Medical volumes and emergency cases have also been impacted by the national
lockdown. Average occupancies are currently around 40%. The negative volume impact manifested
from mid-March and has continued into April 2020.

Although difficult to adapt to volume reductions of such magnitude, the hospital business has reduced
the utilisation of agency staff, redeployed theatre staff and has also requested staff to utilise leave. The
utilisation of leave has also been implemented to ensure staff are sufficiently rested for the expected
COVID-19 surge. The Group has temporarily closed seven surgical facilities and has redeployed the
permanent staff of these facilities.

The Group is in continuous engagement with both national and provincial government departments in
order to collaborate and ensure an effective response to the pandemic. A process to establish pricing
for the treatment of State patients is currently underway.

Through the Hospital Association of South Africa (HASA) and Business Unity South Africa (BUSA) the
Group is participating in the Business for South Africa initiatives aimed at health interventions and is
co-ordinating information sharing, including, amongst other metrics, consolidated views of bed
availability, COVID-19 positive patients, and Persons Under Investigation (PUI) numbers.

International operations COVID-19 update
Our international businesses operate across multiple geographies – mainly in United Kingdom (UK),
Italy, Republic of Ireland, Spain, Germany, United States of America, the Netherlands, Poland and
Scandinavia. During the pandemic, government measures have varied from country to country with
healthcare systems adopting different responses according to local healthcare policy. Our international
teams have all maintained adherence to country specific government and health policy guidelines within
an over-arching framework of best practice principles that have been set by the Group.

Our Alliance Medical Group (AMG) diagnostic imaging business has experienced significant reductions
in volumes (circa 65% reduction on average) across all major geographies as national healthcare
systems have prioritised urgent and emergency cases. In addition, country specific self-isolation and
social distancing guidelines have also resulted in significant increases in patient cancellations and non-
attendance for appointments. As a result, restricted opening hours and limited site closures have been
introduced in all regions and are being managed flexibly as events evolve.

Each country has introduced specific patient and staff safety measures in line with local government
guidance. Such measures include:

    Patient-facing environments
        - Telephone patient pre-screening practices
        - COVID-19 specific patient literature
        - Introduction of physical screening where appropriate
        - Restrictions on high risk procedures / patients
        - Implementation of revised personal protection measures for staff
        - Restrictions on patient numbers on site
        - Restrictions on patient visitors

    Non-patient-facing environments
        - Restrictions on all international and local travel.
        - Restrictions on face-to-face meetings both internally and externally.
        - Working-from-home introduced for all non-essential, non-patient-facing staff.

Of particular importance is the provision of adequate PPE for our teams. The provision of PPE has
been a high priority with additional or improved supplier management practices now in place across all

Each country has taken steps to protect revenue streams, reduce costs and preserve cash within our
international business. In many cases, this has involved working in partnership with national health
providers to support their pandemic responses or taking advantage of government support schemes.

For example, in the UK, agreement has been reached with the National Health Service (NHS) that
secures average revenue payments for the national PET-CT contract for March and April, protecting
both revenues and employment for this essential clinical service. Similar average revenue agreements
are also under discussion with NHS Trusts in respect of individual diagnostic imaging contracts. In
Poland, our Scanmed business has also reached agreement with the national Narodowy Fundusz
Zdrowia (NFZ) service to continue to receive average revenue levels for lump sum contracts during the

In addition, a new contract has been secured with the UK NHS to provide CT scanners and staff in
support of the government’s COVID-19 response. This has involved the completion of a complex
contracting process, identification and allocation of additional CT imaging equipment, training
radiographers in specialist CT skills and the introduction of new, flexible 24/7 shift patterns. The new
service was mobilised at the new, temporary NHS Nightingale hospital in London in the week
commencing 13 April. Beyond the UK, additional CT imaging support has been introduced in Italy,
Germany and the Netherlands.

Our international teams have used government support schemes where they have been introduced and
it is appropriate to do so. The provisions of such schemes include deferred insurance contributions,
deferred tax opportunities, preferential business loans and employment protection funds. Such
schemes are being utilised in the majority of our international operations with staff lay-off support
particularly being accessed in the UK, Ireland and Italy where government supported temporary staff
lay-offs will be introduced.

Operational performance

Shareholders are advised that the Group’s revenue, normalised EBITDA, earnings per share (EPS),
headline earnings per share (HEPS) and normalised earnings per share (NEPS) for the six-months
ended 31 March 2020 are expected to vary, as per tables below, from those reported for the period
ended 31 March 2019 (prior period).

       Measure              Reported              Expected                   Change            Note
                            31 March            31 March 2020

 Revenue                    R12 399m      R12 950m to R13 365m           +4.4% to +7.8%         1
  Southern Africa            R8 847m        R9 300m to R9 500m           +5.1% to +7.4%         2
  International              R3 406m        R3 500m to R3 700m           +2.8% to +8.6%         3
  Growth initiatives           R146m            R150m to R165m          +2.7% to +13.0%         4

 Normalised EBITDA
 (before the impact of       R2 733m        R2 752m to R2 865m           +0.7% to +4.8%         1
 IFRS 16)*                                                          
  Southern Africa            R2 104m        R2 170m to R2 230m           +3.1% to +6.0%         2
  International                R670m            R620m to R680m           -7.5% to +1.5%         3
  Growth initiatives           -R41m            -R38m to –R45m           -9.8% to +7.3%         4

 Impact of IFRS 16 on
 normalised EBITDA         No impact            R110m to R120m

* Life Healthcare defines normalised EBITDA as operating profit before depreciation on property, plant
and equipment, amortisation of intangible assets and non-trading related costs and income.
The Group adopted IFRS 16 on 1 October 2019 and elected the modified retrospective approach, with
no restatement to comparative information. The impact of IFRS 16 on normalised EBITDA has been
excluded from the current period for comparative purposes.

1. Group

   The Group delivered good results for the six months ended 31 March 2020, despite the outbreak
   of the pandemic. Revenue is expected to increase by between 4.4% and 7.8% (2019: R12 399
   million) over the prior period and normalised EBITDA before IFRS 16 is expected to increase by
   between 0.7% and 4.8% (2019: R2 733 million).

   Due to the diverse geographical locations of the Group’s operations, the timing of the spread of the
   virus and the responses of the respective governments, the impact has been varied across the
   regions. The estimated impact of the pandemic for the period to 31 March 2020 is lower revenue
   of approximately R240 million, normalised EBITDA before IFRS 16 is lower by approximately R160
   million and earnings have been negatively impacted by approximately R140 million.

   The normalised EBITDA margin before IFRS 16 for the current period is expected to decline to
   approximately 21.2% (2019: 22.0%), mainly due to:

       -   continued supply challenges within our radio-pharmacy production unit in the UK, resulting
           in increased costs of approximately R35 million; and
       -   the pandemic impacting trading activities in the second quarter and increased costs
           associated with the pandemic.

   Excluding the items listed above, the margin would be more or less in line with the prior period, at
   approximately 22%.

   The Group implemented IFRS16 with effect from 1 October 2019 and this is expected to have a
   positive impact on the normalised EBITDA of approximately R115 million, an increase in net debt
   of around R1.3 billion as at 31 March 2020, but an immaterial net impact on earnings.

2. Southern Africa

   Southern Africa includes hospitals and complementary services, healthcare services and

   Revenue is expected to increase by between 5.1% to 7.4% (2019: R8 847 million) for the period
   with the southern Africa business negatively impacted by the pandemic in the last few weeks of
   March 2020. Paid patient day (PPD) growth for the six month period was c.0.2% (2019: -0.3%)
   with revenue per PPD increasing by c.5.8% (2019: 5.9%). For the period ended February 2020,
   PPD growth was c.2.0% up on the prior year driven by good growth within the acute hospitals,
   mental health and acute rehabilitation businesses.

   Normalised EBITDA before IFRS 16 is expected to grow by between 3.1% to 6.0% (2019: R2 104
   million) with the normalised EBITDA margin before IFRS 16 expected to be between 23.3% and
   23.5% (2019: 23.8%). Efficiency programmes launched at the end of 2019 financial year had a
   positive contribution but the normalised EBITDA margin was impacted by the pandemic, particularly
   with regard to the decrease in admissions and the increase in costs preparing for the pandemic.
   The pandemic diluted the normalised EBITDA margin by approximately 0.4%.

   The Group made good progress with its patient quality scores, improving the healthcare associated
   infection (HAI) rate, the patient safety adverse event rate and the employee adverse event rate.
   The patient experience measures remained on par with the prior year.

3. International

   International revenue includes revenue from AMG and Scanmed in Poland.

   Revenue is expected to increase by between 2.8% and 8.6% (2019: R3 406 million). This increase
   was driven by the strong growth in PET-CT scan volumes (approximately 14%) in the UK, the
   acquisition of scanning facilities in December 2018 within the UK (contributing R16 million) and the
   weakening of the rand against the pound sterling and the euro.

   Within our UK business, our fourth cyclotron site, in Preston, was re-opened in March 2020. By
   having four sites operational again, we have excess capacity over current demand, providing a
   more reliable PET-CT service. The fifth site, Dinnington, is expected to become operational later
   this year and this will enhance our delivery.

   The International business volumes are down by approximately 65% for the month of March 2020
   due to the pandemic, with Italy being the worst impacted region. The growth in PET-CT scan
   volumes in the UK was approximately 14% for the six month period, and for the month of March
   the growth was only around 4%. All of this down turn is ascribed to the pandemic. We have
   experienced continued low volumes in April 2020.

   Normalised EBITDA before IFRS 16 is expected to be between R620 million and R680 million
   (2019: R670 million).

   The normalised EBITDA margin before IFRS 16 for AMG is expected to be between 19.0% and
   19.5% (2019: 22.9%), impacted by the pandemic and increased costs related to the continued
   supply challenges within our radio-pharmacy production. These two items impacted the normalised
   EBITDA margin by approximately 3%, of which approximately 2% is attributed to the impact of the

   The normalised EBITDA margin before IFRS 16 for Scanmed is expected to be between 10.4%
   and 11.0% (2019: 6.3%), on the back of operational efficiencies and backdated NFZ pricing
   increases. The pandemic had a minimal impact on Scanmed for the period under review.

   The Group has decided to delay the process of potentially disposing of Scanmed due to the
   uncertainty and market volatility brought on by the pandemic. The process is expected to restart
   towards the latter part of 2020, dependent on market conditions at that point in time.

4. Growth initiatives

   The growth initiatives are aimed at broadening Life Healthcare’s exposure across the healthcare
   continuum, and include, in southern Africa, expanding the new outpatient model business,
   developing the imaging opportunity, investing in data analytics and clinical quality products. Good
   progress has been made regarding the development of the diagnostic opportunity, however, the
   Group has now delayed the process due to the uncertainty of the impact and timing of the pandemic.
   Life Molecular Imaging (formerly Piramal Imaging) is our primary international growth initiative, and
   performed better than expected during the current period, due to higher sales volumes prior to the
   onset of the pandemic.

   The impact of these initiatives at normalised EBITDA level before IFRS 16 is an expected loss of
   between R40 million and R50 million.


              Measure                     Reported            Expected                  Change
                                        31 March 2019       31 March 2020
     Shares in issue (million)                  1 467               1 467
     Weighted average number of
     shares (million) (approx.)                 1 456               1 455                -0.1%

     EPS (cps)                                   24.5         50.0 – 55.0   +104.1% to +124.5%
     HEPS (cps)                                  26.9         50.0 – 55.0    +85.9% to +104.5%
     NEPS (cps)                                  49.1         52.0 – 58.0      +5.9% to +18.1%

   EPS, HEPS and NEPS for the period ended 31 March 2020 includes the impact of IFRS 16 of
   approximately 0.5cps negative impact (2019: no impact).

   EPS, HEPS and NEPS were mainly impacted by factors listed below, in addition to the trading items
       - Positive impact on earnings due to the reduction of post-tax interest cost of approximately
         R90 million as a result of the repayment of debt in Q4 FY2019, following the disposal of
         our investment in Max Healthcare (Max disposal) and the inclusion of an option contract
         hedge loss (R256 million, net of tax) on the Max disposal in the corresponding prior period,
         that is non-recurring. This resulted in an increase in EPS and HEPS of approximately 23.8

        - The results for the current period also include:
               - an increase in contingent consideration, relating to past acquisitions in international
                 operations of approximately R66 million; off-set by
               - a gain on derecognition of a finance lease asset and liability (as a result of acquiring
                 a leased property in South Africa) of approximately R54 million, net of tax.

Capital risk management, liquidity and dividend policy
The Group continuously updates its cashflow forecasts in these challenging times. These forecasts take
into consideration known factors as well as a number of key assumptions regarding the evolution of the
pandemic and model a base case and a bear case that is used to manage liquidity requirements. The
Group has significant headroom on its bank covenants and is expected to be within its covenants for
the next reporting period based upon current forecasts. As it is not feasible to accurately forecast longer
term the Group is engaging with its lenders for dispensation on the measurement of covenants.

The Group refinanced its term debt in the international operations during March 2020 and this has
extended the debt maturities that were due in November 2020 out to 2023 and 2025. This refinance
also increased the committed facilities in the international operations by approximately GBP55 million.
In the southern Africa operations the Group increased its bank facilities by R750 million and is in the
process to extend these facilities by a further R2 500 million. The available undrawn facilities as at 31
March amounted to R4 billion.

To ensure the Group has sufficient cash reserves, in addition to securing additional bank facilities,
management has implemented a number of mitigating actions and cash preservation levers across the
Group’s operations. These levers include the reduction and deferral of capex projects, placing an
interim embargo on non-critical spend, reducing temporary staff costs through increased utilisation of
permanent staff, the Group Executive team has agreed to suspend their short term incentive,
negotiating extended payment terms with suppliers, negotiating rent payment holidays with landlords,
and utilising government incentive programmes, as far as possible.

The Company’s current dividend policy is to pay a progressive dividend. In the current environment
however, the Board has taken the prudent decision not to pay an interim dividend in order to preserve
cash during this uncertain time. This position will be reviewed for the full year.

Charitable donations
The acting Group CEO, Southern Africa CEO and the International CEO are voluntarily donating up to
30% of their salaries for the next three to six months to a combination of the Solidarity Fund and Funds
established for the benefit of Life Healthcare employees impacted by COVID-19. Similarly, the
remainder of Group Executive team are voluntarily contributing up to 30% of their salaries for the next
three months to these Funds. The non-executive directors of the Board are voluntarily donating 30% of
their fees for the next three months to a combination of the Solidarity Fund, Life Healthcare staff funds
or to the benefit of local charities which share the Solidarity Fund’s aims.

Life Healthcare expects the impact of the pandemic to be more severe in H2 FY2020 and this also
introduces significant forecast risk. Life Healthcare has therefore decided to withdraw its FY2020 full
year guidance. The Group will provide periodic updates to shareholders on any material developments
related to the pandemic.

Thank you
Our ability to effectively respond to the pandemic and provide quality care to our patients in this time of
crisis is largely due to the dedication and unwavering support of all our staff, including our doctors and
nurses. The Company takes this opportunity to acknowledge your invaluable contribution and to thank
you sincerely.

The financial information on which this trading statement is based represents the Group’s latest financial
estimates and has not been reviewed and reported on by Life Healthcare’s external auditors.

20 April 2020

RAND MERCHANT BANK (A division of FirstRand Bank Limited)

Date: 20-04-2020 07:10:00
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