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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning, everyone, and thank you for joining us. I'm Craig McNally, Managing Director and CEO of Ramsay Health Care, and I'm joined by Martyn Roberts, Group CFO. We've released our third quarter trading update today, given the commitment we made to keep the market updated while COVID was impacting our earnings. However, with the environment now normalizing, we would anticipate reverting back to normal half yearly reporting schedule in FY '24, so we don't intend to continue with quarterly updates. As always, we would caution against looking at quarterly results in isolation, given the different influences at play in any one quarter. In the last few months, we've seen a return to the surgical admission trends we saw in September through November last year, following slower growth in the December, January period. Non-surgical admission trends in medical, rehab and mental health are improving. Maternity volumes remain well below trend. Like all businesses, at the moment, inflationary pressures continue to impact the rate of recovery in our margins across all regions and discussions with payers around appropriate rates of reimbursement are ongoing. These discussions may result in one-off payments in addition to tariffs to address the current inflationary environment. Workforce shortages are easing, reflecting the benefits of a range of programs we have implemented, combined with the softening of the global economy, increasing the pool of lower paid non-clinical staff for some parts of the business, in particular for Elysium. However, we continued to experience staff shortages in key specialties and we are investing in targeted training programs to build our internal pool of talent. Our Commitments and investment in the development pipeline, in particular in Australia, continues despite delays caused by the approvals process and bottlenecks in the building industry. Our investment in digital and data initiatives continues to grow. As we've said consistently, we expect that the operating environment will continue to improve through the 2023 year. The adaption of the business to what we now consider to be the new normal will include the sharing of ideas across the regions on productivity initiatives and innovative ways of working. So with that, I'll ’ll now open for questions.
[Operator Instructions] Your first question comes from Lyanne Harrison from Bank of America.
Good morning, Craig. Thank you for taking my question. Can I start with the cost structure? Obviously, in the results, we saw revenue tracking up quite well. But in terms of margins, I guess, I expected to see more of an improvement into second half '23. You spoke about salary cost pressures, but can you speak a bit about employee costs as a percentage of revenue, what you saw in third quarter and what your expectations are for the final quarter of this year and then going into '24?
Sure, I'll give you some general comments, then I'll hand across to Martyn for some more detail. I think the thing to remember about the third quarter is we had indicated in February that we’ had a poor January, and so that has a negative impact on margin. So I think that's’ one of those significant things that's at play in margin recovery. But you're right. Revenue, we're seeing top line growth and so the priority for us at the moment is to continue to get back to productivity levels that we had previously, and so that is a work in progress and I think we flagged that, we didn't expect that to happen certainly this quarter but running into the fourth quarter and the end of the financial year. Martyn, do you want to pick up any of the other detail?
Yes, well, I mean we don't want to get line-by-line on a quarterly basis, but suffice to say that obviously personnel costs are our biggest cost and therefore, the margin is not back to where it was even in '21, entirely to the reasons that you’ve just said, Craig. It’s all about productivity now. The top line’ is coming back quite nicely, but it’s coming at a cost. And the biggest focus that we've been talking about for quite some time now is getting productivity levels improving and that's one of the biggest focuses of the team right now.
Just with a follow-up question. Craig, you mentioned that payer negotiations were ongoing, and you made a comment about that might be -- might include some one-off payments in addition to tariffs. Can you please provide some color on what that might look like?
I think we've seen some of that before, particularly in Santé, where we get one-off payments. We expect to see some more of those but are unable to quantify them. Other markets, there might be -- given the finalization of tariffs and so using the UK as an example, there's a base tariff that will be supplemented once the wage negotiations for the NHS is concluded. And that may involve some backpay as well. So we need to get those finalized to get some visibility. So I probably can't give you more detail than that.
Your next question comes from Saul Hadassin from Barrenjoey.
Craig, are you able to comment at all about -- now you’ve obviously mentioned the improved performance that you expect to come through rest of fiscal '23. I'm just wondering, sort of phasing, and I know we shouldn't interpret a quarter, pay too much attention to it, but is it fair to assume April is sort of similarly disrupted because of Easter globally and then Anzac Day? So I'm trying to work out by how much [indiscernible].
Sorry, you're exactly right. The Easter, running into Anzac Day will see volumes lower for April.
Yes. So I guess then, it does suggest you need to have a pretty bumper May-June window to see any notion of significant improvement in operating performance and margin. I just wanted to get your sense of how much expectation is there for a significant improvement in those two months of fiscal '23?
We certainly expect May and June to be better and we’ll see volumes continue to increase. We'll have some of the -- well, we'll have sort of the pricing in all regions a lot clearer and so confident about what May and June looks like. How much of an upside to compensate for the poor months in the first half, it's hard to quantify that, Saul.
Sure. And then just my other question, just going back to France and the fall off in the cost subsidies and an implementation of the tariff coming through now. It's always been problematic for us to get a sense where that margin -- what that margin looks like in a post-COVID environment as the subsidies drop away. The margin in the quarter was particularly weak, certainly versus PCP, and so, again, just trying to work out, does the tariff, do you think, completely offset the negation of those cost subsidies? Do you think the margin performance of France will remain pressured into the last part of this fiscal year and into '24? Just some comments there, Craig, would be great.
Yes. I’ll let Martyn pick up the detail, but again I think you're right. Your observation’ is right. I’ll stand corrected, Martyn, but I think the cost subsidies we got in France in the corresponding period were much higher last year?
They were, yes.
All right. So it's just getting the line of sight on when they come and how they come. I think we’ve indicated previously they are pretty lumpy. It is difficult, but I agree we'll be under margin pressure because tariff doesn't fully -- whilst the tariff increase was pretty solid, it doesn’t fully compensate, and I think as we called out in France when we did the investor presentation there, there’ would be further discussions with government about what was going to be provided over and above that tariff increase.
Yes. I think I’ll just add to that. We've seen from quarter-to-quarter, looking at Santé's results versus the PCP on a quarter-to-quarter basis is a pretty flawed exercise because of the lumpiness of all these cost subsidies. The subsidies we got, even including the Nordics, in this quarter versus the same quarter last year were significantly reduced. We'll see what we get in the next few months.
I was going to say the issue I think is more around what -- sort of what consensus is expecting that margin to look like into the fourth quarter to get to second half forecast and that rate of recovery is obviously quite high.
Your next question comes from Dan Hurren from MST Marquee.
I’ve just been following some news out there that agency nursing rates are falling in a couple of big hospital markets outside of Australia. I was wondering if you could comment on what Ramsay is seeing for that overtime in agency nursing cost there? And any insight into the impact of improved integration for Australian operations?
Yes. Certainly -- I mean it’s been one of the priorities for us to reduce agency costs, particularly in Elysium. And so, we've been actively doing that and we're seeing positive results for that. Our agency utilization generally across the market is reducing. But it is relatively low in some markets anyway. Australia is relatively low, so not a massive change for us in terms of agency costs and agency utilization for Australia.
Your next question comes from Craig Wong-Pan from Royal Bank of Canada.
Just on the digital and data investments, the $20 million that you’ve incurred so far in Asia Pac, that’s kind of running already ahead of the $16 Million to $18 million guidance you’ve talked to previously. I just wondered, is that timing brought forward on those initiatives? Does that change the FY '24 and FY '25 numbers you had talked to previously?
Yes. I’m not sure what that guidance you’re referring to. We guided about $27 million for the full year and it'll end somewhere around that for this year. Maybe there's a bit of confusion there, sorry. It's in line with what we anticipate. It is increased on the prior year and that's mainly due to the commencement of our big digital and data strategy to combine with an increase in our cybersecurity spend as well.
Okay, I’ll just check that then.
Yes, sorry about that.
No, that’s okay. And then Ramsay Santé noted some -- will be launching some costs control measures to mitigate some of the costs they're seeing now. Could you talk about how quickly those might come through and, I guess, the sort of -- the kind of overall timeframe for that to be implemented?
It's over the course of the next 12 months, so there's a big program going on right now that they've kicked off. It's a bit early to say how much they might be and over what time, but there is a big project going on at the moment across all the hospitals and the head office.
And just to clarify, that's only just started today, they've just started to kind of...
They've been reducing costs year in, year out, so I think they're just reiterating that they're doing another cost program now. You always find new areas to cut costs every time you look.
Your next question comes from David Stanton from Jefferies.
Looking from my end, it looks like there was, and I know we shouldn't look at it on a quarter-by-quarter basis, but there has been quite a slowdown in EBIT in Australia. Can we talk to that? Is it a function? I'd ’d just like to sort of tease out a little bit why that is. I mean just from the top of my head, you've talked about increased personnel costs. But also mental health continues to be a laggard in terms of growth and that has historically been reasonably high margin. What else am I sort of missing here that's led to that sort of lower EBIT?
Well, Martyn, you can pick up, but I'd probably point to a really poor January to start the quarter.
Yes, that's what I would have said as well, that's the other thing. And looking at it sequentially from Q2 to Q3 is not really the right way to look. I mean Q2 is normally a very strong quarter. Q3 -- January already kind of depletes Q3, but it was a really, really poor January that we had with all the surgeons and doctors taking extended leave in January, which we've already called out, so that was the main reason.
Understood, and simply put for me and following up on a previous question from Saul, you won't know whether you get cost recovery in France until towards the end of the financial year and you may get it and you may not, as simple as that?
Yes, I think so, absolutely. We'd tell you if we could.
Yes. But as we said, when we were all together in Paris, the tariff's been announced at 5.4%. That doesn't’ really compensate us for the two years of inflation that we’ve experienced. We were compensated in the last period by some one-off payments, but obviously they're not in the base tariff. So that's why the industry is going back again. I think we talked about this when we were with Pascal, going back again to see what else we can get. Now whether that translates into another tariff increase or whether it's one-off subsidies, again, we just don't know yet.
Okay, and final quick one from me. I note that you’ve talked, and again Lyanne has asked this, regarding a one-off payment. You’ve talked about France, you’ve talked about the UK, sort of a supplement. What about Australia? Could you see yourself getting a one-off payment there?
It depends. Well, nothing material, to be honest. I think the negotiations with the health funds have sort of progressed and sometimes if you've got a retrospective, then you might get it in a sort of spreading of the indexation or you might get a lump sum payment, but nothing material, no.
Your next question comes from David Low from JPMorgan.
Martyn, Craig, you’ve commented on January being very poor, so -- I mean I know you’re not going to want to break it down month-by-month, but how is the actual relative to your expectation? I mean did you come out of the quarter -- by the time you hit March, it had caught up with what you'd expected, better or worse, any thoughts?
I can take that, if you like. Certainly, it was better than January and, yes, we don't want to get into month-by-month P&L release, which we're trying to get off the quarterly. But look, it's not where we would like it to be. We've still got some improvements to go and that's what we -- Craig and I both alluded to is the focus on productivity. Top line’ is going well. We’ve still got some capacity constraint with theatre nurses that we can't recruit, so some theatres aren’t running at full capacity. So there's still some top line that we would like to get more of, if we could supply it. And then from a productivity perspective, that's a real focus of the business right now. And we're not where we would like to be, but there's lots of work and activity trying to get there.
Okay, thank you for that. Can I just -- you said you want to get away from quarterly’s. Are we done? Is this the last quarterly or do you -- what has prompted you -- what's driving that?
That's definitely our intent, as Craig said at the start. Why we did it in the first place was due to the massive volatility of earnings due to COVID. We're now coming out the back end of COVID and, as we've said in our outlook statement, we're expecting more normalized conditions in FY '24. We’ll still report every six months, don't worry, David. But we really don't see the need to get into a running commentary on our results as we’ve had, which was appropriate during COVID. I don't think it's really appropriate if we get back to normalized environment.
Okay. Just a couple of other quick ones. Mental health continues to be a laggard. What are your expectations? What are the trends we're seeing there? I think -- if you look at the last update, your commentary was that you had been able to recruit to some degree. I mean is there signs of improvement? Do you expect it's still 12 months away from getting better?
Yes. Now there are certainly signs of improvement but I think it's a 12-month process at least. Just got to build up these new psychiatrists that are coming on board, build up -- help build up their practices, et cetera, so it just doesn't turn on immediately.
Okay. And then just last question, I mean going back harping onto what Dave and Saul asked about. So without subsidies, that margin in the March quarter, March is not a seasonally weak quarter in the Northern Hemisphere, I mean is that a reasonable expectation for the rest of the year?
No, I'd say, look, things tend to smooth a bit more over the six-month period, so I wouldn't be taking any quarterly numbers result there as a proxy.
But without additional subsidy payments, if they don't come, clearly margins look like they're going to be weaker than same time last year when there were subsidies.
That is a factually correct statement, yes. Correct, yes.
Feel free to add to it if you'd like.
Your next question comes from Mathieu Chevrier from Citi.
Just had a question on -- could you give us a sense of the sort of volumes you're seeing from the public sector currently in Australia? And how do you expect that to evolve in the next year or two?
Well, I think as we have called out previously, not material for us. They certainly continue to increase, there's no question about that. They do increase off a low base, but as we move forward, I still expect them to not be material in terms of the overall volume of the business.
Understood. And then do you think there still is a backlog or should we expect some sort of normal level of surgery activity growth from here on?
No, I think there still is a backlog. We -- the industry certainly hasn't done enough to address the work that wasn't done over the last couple of years. I think what we are seeing is, and I don't think this is a necessarily good or bad thing, but the doctors practicing, that work/life balance is still there, so nobody is -- nobody -- generally I won't say nothing, but it sort of applies to everybody, but generally doctors aren't sort of overworking to address backlog and so they're operating at a comfortable level. And so -- and we see that reflected in less after-hours work, less weekend work. But sort of the better utilization of the standard times Monday to Friday.
Yes. And maybe just one last one on Elysium. So you flagged that. You potentially are going to have a look at that come year-end. I mean it hasn't been that long since you've made the decision to acquire the company, so what's the major change there relative to what you were expecting 18 months ago?
Yes, no, I think we have been pretty clear on that in the last couple of releases in terms of the additional cost base, particularly around agency staff for health care workers. That has been the single most significant thing in the performance of Elysium. We are still seeing sort of volume growth. There's still a lot of unmet demand. We have called out in February that we saw recruitment numbers coming up, so we are onboarding people. But it is singularly around agency costs.
Yes, but that should resolve itself over time and you know...
Yes, look, it's up to us to get the cost base right, which we are confident we will do over time. The fact that top line is growing and there is still demand for the services, certainly, is a positive.
Your next question comes from Steve Wheen from Jarden.
I just wanted to ask about Australia. If we look at first half, the EBITDA margin was 15% and when we sort of split out what you've just done for the nine months, for the third quarter you've done 12.2%. And I get it, you had a bad January, but the commentary was always that if margins are at bottom, then it will improve from here. Can we expect the second half to kind of get back to that first half margin level, if not above it?
Well, look, we haven't provided guidance for the full year, Steve. So I'm not going to answer that directly, but what we have said is, it has improved since January and it should continue to improve through the rest of this half.
Right. So -- I mean -- but you did say after the interim that you would be improving from the interim. So it doesn't -- you know, I don't want to overstate the three months if January was so bad, but I just am curious as to how we can keep saying that it will improve when you could end up with the second half being lower than the first half.
Well, look, I can only reiterate what we've said already. January was very poor and our expectation is that it continues to improve beyond there.
Okay. And where does that improvement come from in the margin?
It comes from volumes.
The top line is growing.
Yes.
The top line is growing, so we'll be getting some leverage.
Yes, so it comes from leverage and improved productivity.
Yes, okay. All right. And so again on Elysium, that's -- I mean I'm trying to reconcile the result for that with the commentary from your Investor Day. They were talking at the time back in March of very, very strong occupancy, if not full occupancy, and their competitors sort of walking away from this business -- Walking away from this type of activity, so leaving Elysium to do it all. Has the staffing issue just got so -- like has that deteriorated further since March?
No, no. Well, a couple of points there. I don't think all competitors Are walking away and leaving it all to Elysium. I think that's an overstatement. But the staffing issue is improving. We certainly still have capacity restrictions because of unavailability of staff, but it's getting better. As we called out, the recruitment process and onboarding process is well underway for a significant cohort of staff. So no, it's improving.
Okay, but it's actually going -- in the quarter, it's getting worse. Like it's gone into losses at the EBIT line?
Yes. Q3 was slightly better than Q2, but it's -- the other uncertainty that we've got is around tariff, so we have had significant wage inflation and the tariff that would be applicable from the 1st of April has not been determined yet. The NHS have been waiting to see where they land with the salaries, et cetera. We may not know that number for quite some time, so that's going to be quite an important factor as well. We're in pretty intense negotiations with the NHS to make sure we get something that's more reflective of the cost environment we're in.
Yes. And the expectation around that tariff, which obviously applies to the rest of UK business as well, is that whatever...
No, no, no...
Two different tariffs, yes.
They're not the same. They're two different negotiations, Steve.
Yes, yes.
Okay. But the same component is missing from both tariffs, right? The EBA agreement...
[indiscernible] Neither of them will be determined until they sort all that out with the strikes and everything. Yes.
Yes, okay, but the expectation is that whatever they agree on the EBA, it's going to be sort of covered for within the tariff or is that...
Yes, that's -- yes. The short answer is yes. Certainly, the tariff for Ramsay UK, which applies right across the acute care system, that needs to be nailed down. And it will apply differently because the staffing mix on the mental health side is a bit different, so it won't just be the same number.
Yes, yes, no, I got that. So the UK business, ex Elysium, obviously Improving quite nicely. Is that largely just because the NHS is starting to direct much more volume? Or is that more around PHI or self-pay type work that you're picking up?
It's all -- we are picking up particularly PMI. Self-pay is reasonably flat at the moment. PMI and NHS volume, yes. But then NHS is the biggest component of our business, so seeing that volume start to flow through over the last couple of months has certainly been encouraging.
Your next question comes from Dan Hurren from MST Marquee.
I was actually just going to ask about the Elysium tariff which you just touched on, but just more broadly on Elysium -- you mentioned a 12-month timeframe for turnaround in mental health, but could we talk about what needs to happen and the potential timeframes to get back to the EBIT position at the time of acquisition and a favorable tariff outcome? How far will that go to achieving it?
Martyn, you can answer it, but it goes a long way to achieving it. Tariff outcome and agency costs, they're the two significant levers.
And do you have an expectation of when that tariff decision will be made?
Look, it's hard to know, simply because there's a couple of different discussions. We've got the tariff outcome from NHS Wales, so that's done. And just the finalization of nurse wage increases for the NHS is sort of a trigger for tariff being finalized. Now there was sort of some encouraging news overnight in terms of nurses agreeing to the 5% increase, but we've heard that before and then industrial action has continued, so nobody is really confident about where that finishes.
Right, and last question. In the industry, there is some expectation or perhaps hope that you might get not just sort of more of a reset on mental health price in the UK with a recognition that it's a tough job and needs to be paid significantly more. Is that -- do you get that sense or is that just wishful thinking on the part of the industry?
Well, it depends on how you define reset, but certainly I think there's a recognition of the importance of mental health in our sector at the moment and a recognition of the cost pressures that it is under, so we certainly expect tariff increases for that to be higher than they are for the acute business. Whether it's a reset or not depends on the way you determine that I think.
Your next question comes from David Low from JPMorgan.
Just a couple of follow-ups. Just with the Wales tariff, can you remind us what it was, the increase? And do you expect the NHS to be in that vicinity?
It was circa 9%. I just don't have the absolute. Low 9s, I think, was where Wales landed. We're negotiating with the NHS and we would certainly hope for it to be ballpark in that region, but we will wait to see what the outcome is.
Well, would that be sufficient to get margin -- I mean putting agency aside as an ongoing issue, would that be sufficient to bring you back to where margins were pre-acquisition?
It would be very helpful, obviously, but in isolation, margin won't get back unless we address the agency cost issue.
Okay. Just a couple of others. So we've heard January domestically was pretty ugly. Can we confirm that, that was a loss-making month?
No, it wasn't.
Okay.
It wasn't very much, but it wasn't loss-making.
Okay. Just going back to France. So first quarter doesn't include a tariff, doesn't include -- sorry, includes a tariff for the month of March and doesn't include any subsidies. When we think about the June quarter, you will have the full benefit of the 5.4% tariff.
Yes.
So therefore naturally we should expect an improvement sequentially, and then subsidies is up in the air as it might come, might not. Is that the right way to think about it?
Yes.
So it should be better just because you get the tariff benefit for...
Should be. We will see, yes.
Yes. Yes, no.
[Operator Instructions] Your next question comes from Daniel Downes from Goldman Sachs.
It's Chris Cooper on for Dan. So Martyn, you've referenced productivity quite a few times on this call. Clearly, it really is a very key focus for the team at this stage. I guess, can you help contextualize that for us in some sort of quantifiable way? How much of a deficit are you dealing with in sort of nonproductive hours versus fiscal '19 or some sort of, I guess, pre-COVID sort of comp? Is it sort of getting better or worse over the last 12 months or so and just by how much? I'm just trying to, I guess, square these comments away against Craig's, who was sort of saying that you guys are having some challenges getting the doctors who are not necessarily overworking to address the backlog, fewer after-hours work, sort of less weekend work, et cetera.
Yes, well, certainly having sort of doctors working through into the night helps productivity, that's for sure. I mean the main metric we look at is the productive hours per inpatient day. And so that has been very lumpy over COVID, as you would imagine. And one of the key sort of targets we've got in sight, if you like, is where we were at pre-COVID in FY '19. We've got close in previous months, but with the deterioration in volumes in December/January, that's kind of moved away again, and it's starting to head back in the right direction now but we're still not back to where we were even in FY '19. And I think as we have said before from a -- everyone is very focused on margin percentages. We have had those sort of three lost years in terms of revenue indexation being below cost inflation and so that has squeezed the margin. To offset that, we would have had to have had three years of productivity improvement since FY '19, and we are still not even back to where we were in FY '19. It's just one of those things in terms of three years of focus on patients and staff and doctor safety, now getting those rhythms and work processes back in place again to get ourselves back into that kind of level of productivity. It was moving in the right direction pre-Christmas. It's then sort of gone backwards again and it is now moving in the right direction again.
Yes. And I think as we have called out previously, it was going to take a while to get that to the level where we think it should be. So it wasn't just an immediate fixing it.
And so in terms of your sort of preferred metric then of productive hours per patient day, I mean are we sort of 10% below, 15% below fiscal 2019? Can you just give us some degree of context there?
It's not that...
No, it's within 5%.
Yes.
Okay.
Yes, but every percent is massive dollars.
Yes. I agree.
Yes.
There are no further questions at this time. I will now hand back to Mr. McNally for closing remarks.
Okay. Thank you. Thank you everyone for joining. Have a good day. Bye.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.