| Wed 19 May 2004, 9:01 | | Results For The Six Months Ended 31 March 2004 |
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Netcare - Interim Results For The Six Months Ended 31 March 2004
Release Date: 19/05/2004 07:30:00 Code(s): NTC
Netcare - Interim Results For The Six Months Ended 31 March 2004
Network Healthcare Holdings Limited(Registration number 1996/008242/06)
(Incorporated in the Republic of South Africa)(JSE share code: NTC)
(ISIN code: ZAE000011953)
("Netcare" or "the Group")Total revenue up 20,4%Attributable earnings up
19,4%Capital distribution up 25,0%At Netcare people are our passion. "Growing
with people" embodies the Group"s core values of building meaningful
relationships with our medical professionals and staff to ensure that all our
patients get the very best and safest care.INTERIM RESULTS FOR THE SIX MONTHS
ENDED 31 MARCH 2004GROUP BALANCE SHEET
Unaudited Unaudited Audited
31 March 31 March 30 Sept
2004 2003 2003
(Rm) (Rm) (Rm)
Assets
Non-current assets
Property, plant and equipment 2 756,1 2 549,7 2 704,0
Intangible assets 173,2 95,9 169,6
Investments and loans 646,9 175,2 488,6
Deferred taxation asset 41,5 41,5 41,5
Other financial assets 478,4 322,0 426,7
Total non-current assets 4 096,1 3 184,3 3 830,4
Current assets
Inventories 301,2 268,8 376,5
Accounts receivable 1 406,5 1 198,8 1 159,9
Total current assets 1 707,7 1 467,6 1 536,4
Total assets 5 803,8 4 651,9 5 366,8
Equity and liabilities
Capital and reserves
Share capital and premium 707,3 684,1 901,7
Reserves 2 543,3 1 641,4 2 159,9
Ordinary shareholders" equity 3 250,6 2 325,5 3 061,6
Minority interest 74,0 3,0 71,8
Total shareholders" equity 3 324,6 2 328,5 3 133,4
Net interest-bearing debt 1 403,6 1 249,4 899,4
Non-current liabilities
Deferred taxation liability 289,7 226,7 268,1
Current liabilities
Accounts payable and provisions 761,5 729,6 871,1
Taxation payable 24,4 117,7 194,8
Total current liabilities 785,9 847,3 1 065,9
Total equity and liabilities 5 803,8 4 651,9 5 366,8
Net equity per share (cents) 212,7 165,0 200,0
STATEMENT OF CHANGES IN SHAREHOLDERS" EQUITY
Share Non- Distri- Un- Un-
Capital Distri- butable audited audited Audited
& butable Reserves 31 March 31 March 30 Sept
Premium Reserves 2004 2003 2003
(Rm) (Rm) (Rm)
Ordinary 901,7 164,2 1 995,7 3 061,6 2 187,7 2 187,7
shareholders"
equity at
beginning of
period
AC 133 opening 46,1 46,1
balance
adjustment
Attributable 312,0 312,0 261,2 657,1
earnings
Issue of shares 21,5 21,5 13,3 315,6
Treasury shares (78,8) (78,8) (79,8) (79,8)
acquired
Fair value 72,1 72,1 118,6
surpluses
Net capital (137,1) (137,1) (98,6) (183,1)
distributions
paid
Other movements (0,7) (0,7) (4,4) (0,6)
Ordinary 707,3 235,6 2 307,7 3 250,6 2 325,5 3 061,6
shareholders"
equity at end
of period
GROUP INCOME STATEMENT
Unaudited Unaudited Audited
31 March 31 March 30 Sept
2004 2003 % 2003
(Rm) (Rm) change (Rm)
Revenue 3 234,9 2 686,1 20,4 6 012,6
Operating profit before 594,3 500,8 18,7 1 210,4
depreciation and amortisation
("EBITDA")
Depreciation and amortisation (104,0) (87,6) (192,5)
Operating profit before 490,3 413,2 18,7 1 017,9
abnormal item ("EBIT")
Abnormal item (1) (26,9) - -
Operating profit 463,4 413,2 12,1 1 017,9
Net finance charges (54,0) (70,9) (157,6)
Profit before taxation 409,4 342,3 19,6 860,3
Taxation (103,5) (91,6) (202,5)
Profit after taxation 305,9 250,7 657,8
Attributable earnings of 8,3 12,0 0,4
associates
Profit after taxation 314,2 262,7 658,2
including associates
Outside shareholders" (2,2) (1,5) (1,1)
interests
Attributable earnings 312,0 261,2 19,4 657,1
Earnings reconciliation
Attributable earnings 312,0 261,2 657,1
Goodwill amortised 4,4 2,3 6,9
Profit on disposal of - - (8,8)
investment
Headline earnings 316,4 263,5 20,1 655,2
Earnings per share (cents)
Headline - basic 20,7 18,3 13,1 45,9
Headline - diluted 20,0 17,2 16,3 43,8
Attributable - basic 20,4 18,1 12,7 46,0
Attributable - diluted 19,8 17,1 15,8 43,9
Note 1. The abnormal item relates to restructuring costs, cancellation of forex-
linked contracts and termination costs of the loss-making business units and
products within the Traumanet division.
SUPPLEMENTARY INFORMATIONAs the abnormal item arising in Traumanet is non
recurring, it is believed that a fairer reflection of the Group"s results would
be represented before these charges.
Headline earnings 316,4 263,5 655,2
Abnormal item net of taxation 18,8 - -
Headline earnings - excluding 335,2 263,5 27,2 655,2
abnormal item
Headline earnings per share - 21,9 18,3 19,7 45,9
excluding abnormal item
(cents)
ABRIDGED GROUP CASH FLOW STATEMENT
Unaudited Unaudited Audited
31 March 31 March 30 Sept
2004 2003 2003
(Rm) (Rm) (Rm)
Cash generated from operations 564,3 500,8 1 189,0
Working capital movements (280,9) (379,1) (310,2)
Cash generated from operating 283,4 121,7 878,8
activities
Net finance charges (54,0) (65,6) (157,6)
Taxation paid (273,9) (131,4) (153,6)
Cash (outflow)/inflow from (44,5) (75,3) 567,6
operating activities
Capital distributions paid (137,1) (98,6) (183,1)
Net cash (utilised)/retained from (181,6) (173,9) 384,5
operating activities
Net investing activities (265,3) (248,0) (680,9)
Capital expenditure (151,4) (222,0) (425,1)
Net investments and loans in (113,9) (26,0) (255,8)
businesses
Net financing activities (57,3) (75,4) 225,5
Equity movements 21,5 4,4 305,3
Share repurchases (78,8) (79,8) (79,8)
Increase in net interest-bearing (504,2) (497,3) (70,9)
debt
Net interest-bearing debt at (899,4) (752,1) (752,1)
beginning of period
Net debt assumed on acquisition of - - (76,4)
businesses
Net interest-bearing debt at end (1 403,6) (1 249,4) (899,4)
of period
KEY FINANCIAL INFORMATION
Unaudited Unaudited Audited
31 March 31 March 30 Sept
2004 2003 2003
Ordinary shares (millions)
In issue (excluding treasury 1 528,4 1 409,4 1 530,7
shares)
Weighted average number of shares 1 527,4 1 441,3 1 428,8
Diluted weighted average number of 1 578,2 1 531,8 1 496,5
shares
Distributions
Capital distributions (cents per 7,5 6,0 15,0
share)
Other salient features
EBITDA margin (%) 18,4 18,6 20,1
EBIT margin before abnormal item 15,2 15,4 16,9
(%)
Interest cover (times) 8,6 5,8 6,5
Effective taxation rate (%) 25,0 26,6 23,6
Operating profit return on net 21,7 26,4 29,2
assets (%)
Return on ordinary shareholders" 20,1 23,4 25,0
equity (%)
Debt:equity ratio (%) 42,2 53,7 28,7
Capital commitments - contracted 117,6 178,4 185,4
(Rm)
Contingent liabilities (Rm) 306,0 139,4 153,0
INTRODUCTIONDriven by the Group"s key leadership strategies of BEST AND SAFEST
PATIENT CARE; CUSTOMER INTIMACY AND OPERATIONAL EFFICIENCY, Netcare"s integrated
healthcare delivery model has proven its strategic value, enabling the Board to
report consistent growth, sound progress and solid cash generation for the six
months ended 31 March 2004.
Excluding the abnormal restructuring costs ("the abnormal items") and trading
losses incurred at Traumanet ("Netcare 911") in this period, all of the Group"s
principal business units, including the International Division, made solid
contributions to Netcare"s overall results, the broad details of which are set
out below.
FINANCIAL REVIEWNetcare"s revenue for the six month period grew by 20,4% to R3
234,9 million (2003: R2 686,1 million), with the current period results
including the proportionate consolidation of Netcare Diagnostics (previous
period equity accounted). Consequently, organic growth in Group revenue amounts
to 13,7%, with revenue growth in the core hospital business amounting to 12,5%
and other businesses 17,5%.
An analysis of revenue, EBITDA and EBIT of certain of the larger business units
of Netcare is set out below. In order to provide a more meaningful analysis, the
2003 comparatives have been adjusted on a pro-forma basis to similarly reflect
the proportionate consolidation of Netcare Diagnostics.
REVENUE
Unaudited Unaudited %
31 March 31 March Increase
2004 2003
(Rm) (Rm)
Core hospital division 2 452,0 2 178,8 12,5
Other businesses 677,5 547,7 23,7
Medicross 312,3 265,6 17,6
Netcare Diagnostics 176,7 159,2 11,0
International 54,4 29,9 81,9
Other 134,1 93,0 44,2
Total excluding 3 129,5 2 726,5 14,8
Traumanet
Traumanet - trading 105,4 118,8 (11,3)
Total including 3 234,9 2 845,3 13,7
Traumanet
EBITDA
Unaudited Unaudited %
31 March 31 March Increase
2004 2003
(Rm) (Rm)
Core hospital division 527,6 458,0 15,2
Other businesses 89,8 66,9 34,2
Medicross 29,9 25,0 19,6
Netcare Diagnostics 43,5 32,1 35,5
International 6,5 3,0 116,7
Other 9,9 6,8 45,6
Total excluding 617,4 524,9 17,6
Traumanet
Traumanet - trading (23,1) 8,0
Total including 594,3 532,9 11,5
Traumanet
EBIT
Unaudited Unaudited %
31 March 31 March Increase
2004 2003
(Rm) (Rm)
Core hospital division 444,9 384,6 15,7
Other businesses 68,8 49,5 39,0
Medicross 17,9 14,4 24,3
Netcare Diagnostics 37,8 25,7 47,1
International 6,2 2,9 113,8
Other 6,9 6,5 6,2
Total excluding 513,7 434,1 18,3
Traumanet
Traumanet - trading (23,4) 4,8
- abnormal (26,9)
Total including 463,4 438,9 5,6
Traumanet and abnormal
item
Overall EBITDA margins declined to 18,4% (2003 pro-forma: 18,7%), with the
decline driven primarily by the trading performance at Traumanet. Excluding
Traumanet, overall EBITDA margins increased to 19,7% (2003: 19,3%).
Headline EPS grew by 19,7% to 21,9 cents (2003: 18,3 cents), with disclosed
headline EPS growth amounting to 13,1% (after accounting for abnormal non-
recurring items).
Cash flowThe solid Group cash generation was evidenced by a 132,9% increase in
cash generated from operating activities. Cash inflows were applied
substantially towards seasonal working capital changes of R280,9 million (2003:
R379,1 million), concentrated tax payments of R273,9 million (2003: R131,4
million), share repurchases of R78,8 million (2003: R79,8 million), capital
expenditure of R151,4 million (2003: R222,0 million) and other investments of
R113,9 million (2003: R26,0 million). Having completed major upgrades and
extensions, the capital expenditure requirements have declined to R151,4m (2003:
R222,0 million), a level more likely to approximate the base for the six month
period going forward. The increase in net investments and loans in businesses
relates primarily to bridging finance provided for the Bloemfontein Public
Private Partnership, Community Hospital Group and other ventures. Despite these
factors, the debt:equity ratio reduced to 42,2% (2003: 53,7%). Interest charges
reduced to R54,0 million (2003: R70,9 million) reflecting, inter alia, the
reduced interest rate environment. Interest cover amounted to a healthy 8,6
times (2003: 5,8 times).
Accounting Policies and JSE Securities Exchange RequirementsThe interim
financial statements comply with South African Statements of Generally Accepted
Accounting Practice and are in accordance with accounting standard AC127. Save
as disclosed in this interim report, the accounting policies are consistent with
those for the year ended 30 September 2003.
The interim announcement has been prepared in accordance with the listing
requirements of the JSE Securities Exchange South Africa.
Netcare TrustShareholders are referred to the SENS announcement dated 29 April
2004 relating to the Netcare Trust ("the Trust"). As the transaction relating
thereto was concluded after 31 March 2004, it had no impact on the results for
this interim six-month period, but should have a positive effect on future
earnings per share.
OPERATIONAL REVIEW Profitability improved throughout the Group with the
exception of Traumanet, where remedial action has been taken to resolve the
operational issues identified in 2003.
All other divisions performed well during the six month period to 31 March 2004
despite general industry pressure arising from lower inflation, the impact of a
strengthening Rand and anticipated regulatory uncertainties affecting the entire
healthcare industry.
CORE HOSPITAL NETWORK
Despite the industry challenges, the seasonal trading period and lower pharmacy
inflation, the core hospital division continued to gain market share and
recorded strong organic growth in revenue of 12,5% in the period under review.
EBITDA margin improved to 21,5% (2003: 21,0%) due to continued improvements in
efficiencies flowing from the Group"s focus on cost management. Alternative re-
imbursive models accounted for approximately 41% of hospital billings during the
period.
The most significant comparable changes in the key activity indicators are:-
Admissions increased by 3,6%; - Patient days up by 1,8%;- Maternity cases
improved by over 3,6%.
During the period, a net 27 specialists relocated their practices to Netcare
facilities. The establishment of Physician Advisory Boards at each hospital
combined with Netcare"s service excellence program continues to ensure the
highest standards possible.
The Goldcare Winners Program designed to deliver best patient care continues to
differentiate Netcare as a leader in quality healthcare delivery. Patient
satisfaction indices increased to 92,7%.
SUPPLY CHAINTraumanet As referred to in the Group"s results for the year ended
30 September 2003, stringent remedial and re-engineering actions were being
carried out at Netcare 911 to adapt to the significant growth in membership
levels, indigent patient activity, sub-optimal tariffs and management issues.
During the six-month period under review abnormal restructuring costs,
cancellation of forex-linked contracts and the termination costs relating to
loss-making services and products previously offered by Traumanet resulted in a
once-off charge of R26,9m being recorded in this period. In addition, the
interim trading performance continued to bear the significant operating costs of
providing emergency services to indigent patients. Even though this service to
indigent patients forms part of Netcare"s corporate and social commitment,
alternatives are being explored to manage this offering more effectively.
The newly-appointed management team has made significant progress in re-
engineering the business towards achieving break-even during the 2005 financial
year. Netcare 911 continues to deliver a world class service to all South
Africans irrespective of their financial status.
Netcare Healthcare United Kingdom ("UK")The Group has gained experience with the
completion of four waiting list initiatives over the past two years and has
commenced with its first five year contract to perform 44 000 cataract surgery
procedures using mobile facilities for the National Health Service ("NHS").
Negotiations continue for the second five-year contract relating to the
provision of surgical procedures (orthopaedic, general, and ear, nose and
throat) to be performed at the Greater Manchester Surgical Centre.
Having made progress in establishing a platform in the UK, Netcare was invited
to participate in the joint expansion and development of Hospitais Privados de
Portugal S.G.P.S. ("HPP"), a Portuguese private hospital group. Shareholders are
referred to the announcement made on 5 March 2004 for further information in
this regard. Following the launch by the Portuguese Government of 10 Public
Private Partnerships, Netcare is currently involved with HPP in preparing its
submission for the first of these tenders.
In addition to the aforementioned, Netcare is exploring the expansion of certain
of its ancillary healthcare enterprises in the UK.
ADMINISTRATION, LOGISTICAL AND SUPPORT SERVICESNetcare"s core competency in
providing administrative, logistical and support services to a range of
healthcare providers is evidenced by the performance of some of the Group"s
ancillary business units reflected below.
MedicrossMedicross presented a solid performance by generating a 17,6% increase
in Revenue to R312,3 million (2003: R265,6 million) and a 24,3% increase in EBIT
to R17,9 million (2003: R14,4 million). Patient visits grew by 3,3% to 1,2
million for the period, with dispensed prescriptions rising by 13,4%. The use of
generics has increased to over 42,7% during the period. An encouraging indicator
relating to the Medicross managed operations is the fact that the average cost
per script declined by 4,4% versus the prior period which is recognised as the
lowest in the industry.
Netcare DiagnosticsThis division comprises the Group"s interests in diagnostics
and imaging administration and management services. Emanating from the
assumption of joint control of Ampath in the second half of last year, the
stronger rand, reduced equipment rentals and the expansion of logistical
services in general, the activity and efficiencies experienced by the business
units falling within Netcare Diagnostics has resulted in EBITDA increasing by
35,5% to R43,5 million (Pro forma 2003: R32,1 million). Market share gains by
Ampath were evidenced by a 1,9% increase in average requisitions per day as
against the comparable prior period.
New healthcare mining initiativeThe recently announced business initiative with
Harmony Gold Mining Company Limited provides for a further expansion of these
services to other industry players who can extract meaningful value by
outsourcing their non-core healthcare services to Netcare.
NETPARTNERThe participation in the establishment of Netpartner in 2003 is
proving to be one of the Group"s more important strategic events as the dynamics
of the healthcare sector presents meaningful opportunities.
The alignment of interests in developing alternative re-imbursive models for the
provision of affordable quality healthcare is going to be key in addressing some
of the opportunities in growing the medically insured population and providing
comprehensive healthcare options to Government, funders and corporates, all with
the objective of providing BETTER CARE TO MORE PEOPLE.
The recently launched Eclipse Medical Aid Scheme has selected Netpartner as its
designated service provider. In addition, Netpartner is at advanced stages with
other Medical Schemes for the launch of similar products and has presented a
proposal for Statemed.
It is envisaged that a listing will be sought on the JSE Securities Exchange
South Africa ("JSE") Alternative Exchange ("AltX") during the second half of
2004, subject to the requisite Netpartner board approvals being obtained and
Netpartner meeting the Listings Requirements.
BLACK ECONOMIC EMPOWERMENT ("BEE")Netcare is sensitive to and cognisant of the
transformation required in the healthcare industry.
The various initiatives by the Group in support of this goal include:
the introduction in 1997, via equity participation and board representation, of
the investment arm of Kopano Ke Matla and the South African Medical and Dental
Practitioners Association;
the joint investment, funding, provision of services and skills transfer to
Community Healthcare Holdings ("CHH"), a 100% black owned healthcare investment
company which has interests in seven private hospitals in Gauteng, Free State
and the Western Cape Provinces;
the facilitation, funding and involvement with CHH and local BEE partners in the
Bloemfontein Public Private Partnership ("PPP") at Universitas and Pelonomi
Hospitals;
that the current share ownership in Netcare includes shareholders from numerous
previously disadvantaged communities ("PDCs") and several broad-based BEE and
community institutions that currently control, directly or indirectly,
approximately 15% of Netcare"s issued share capital;
that Netcare"s staff share option scheme incorporates all employees across the
organisation (the majority being from PDCs);
that the shareholder profile of Netpartner comprises 32% of its shareholders
being from PDCs (representing 17,5% of its issued shares);
the significant corporate and social commitments and contributions made by the
Group annually to a broad range of communities and charities;
the training of approximately 2 000 medical graduates annually;
the submission of more than 38 proposals to Government for PPP related services.
Netcare will continue to add purposefully and meaningfully to the lives of PDCs
both in terms of sustainable employment equity and investment participation,
with the overall objective of ensuring that these initiatives are in the best
interests of all Netcare stakeholders.
INDUSTRY REVIEWThe amendments to the Pharmacy Act have received widespread media
coverage in recent weeks. The proposition that the increase in medical aid costs
are substantially provider-driven is a misguided assertion to mitigate the
flawed third party payor fee-for-service re-imbursive model.
Importantly, in a recent survey by a reputable monitoring agency, South Africa"s
private healthcare sector ranks in the top five in the world for healthcare
performance and quality of outcomes.
At this time of uncertainty, Netcare is committed to working with Government to
find sustainable solutions to the healthcare issues being contemplated. These
solutions are possible through open consultation with all stakeholders and would
entail developing policies and innovative solutions to reduce the burden on the
State sector by making quality healthcare more affordable to all South Africans.
Notably, this could include innovative models which have been developed by the
Group and adopted by the NHS in particular, as well as being considered by other
foreign health departments in general.
PROSPECTSDespite the insecurity created by the regulatory environment, the
Group"s national networks, services and facilities are well positioned to
respond, where necessary, to the changing legislation and dynamics of the
industry by innovatively adapting its various business models.
The restoration of Traumanet"s profitability bodes well for 2005, while
Netpartner and Netcare International present good growth prospects for the
future. Importantly, a meaningful increase in the medically insured population
through, inter alia, the introduction of Statemed and joint ventures with the
mining sector is likely to be achieved through the development and
implementation of cost-effective alternative re-imbursement models.
In the absence of any unforeseen circumstances, the Board is confident that the
Group will continue to grow earnings for the balance of the financial year.
CAPITAL DISTRIBUTIONIn accordance with the authority given to the Board of
Directors by way of an ordinary resolution passed on 23 January 2004, the Board
of Directors has declared an interim capital distribution (number 10), out of
share premium of 7,5 cents per ordinary share (2003: 6,0 cents per share),
payable to shareholders recorded in the register of the Company on Friday 16
July 2004. This represents an increase of 25,0% over the prior period.
In compliance with the requirements of STRATE the following dates are
applicable:
2004
Last date to trade "CUM" the capital distribution ("LDT") Friday 9 July
Trading commences "EX" the capital distribution Monday 12 July
Record date Friday 16 July
Date of payment Monday 19 July
Share certificates may not be dematerialised nor rematerialised between Monday
12 July 2004 and Friday, 16 July 2004, both dates inclusive.
By order of the BoardMichael I Sacks Dr Jack Shevel
SandtonChairman Chief Executive Officer 17 May 2004
REGISTERED OFFICE: 76 Maude Street, Cnr West Street, Sandton 2196 (Private Bag
X34, Benmore 2010)
TRANSFER SECRETARIES: Ultra Registrars (Pty) Limited, 11 Diagonal Street
Johannesburg 2001, (PO Box 4844, Johannesburg 2000)
EXECUTIVE DIRECTORS: MI Sacks (Chairman) ? Dr J Shevel (Chief Executive Officer)
? Dr RH Friedland (Chief Operating Officer) ? SR Favish (Chief Financial
Officer) ? Dr RH Bush ? IM Davis ? Dr I Kadish ? PJ Lindeque ? Dr C Rossolimos ?
N Weltman
NON-EXECUTIVE DIRECTORS: Dr APH Jammine* ? JM Kahn* ? HR Levin ? Dr JA van
Rooyen
COMPANY SECRETARY: J Wolpert
SPONSOR: Merrill Lynch South Africa (Pty) Limited
(* Independent)
