Ramsay Health Care Ltd
ASX:RHC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
37.36
56.51
|
| Price Target |
|
We'll email you a reminder when the closing price reaches AUD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Ramsay Health Care Ltd
You don't have any saved screeners yet
Good morning. It's Craig McNally, and I'm joined by Martyn Roberts. As most of you know, Ramsay has had a long association with the veteran community, and I think it's important that we remember today of all days, for those who have volunteered, sacrificed fought, and died for the freedom we enjoy today.
The purpose of today's announcement is to update you on how the business is tracking post the end of the first quarter, and that's what we committed to do at our FY '22 results released back in August.
I'll take the announcement as read and -- but before we turn to Q&A, I'll just touch briefly on some of the key points. So I'm really pleased to say that trading conditions have improved across the quarter in all markets, that was after a COVID-impacted July, and that momentum is continuing or has continued through October, and we see that continuing through the early part of November.
I would like to take the opportunity to thank our staff and our doctors, who have continued to provide the highest quality care to our patients in what has been and continues to be a complex and ever-changing environment.
So in Australia, the operating environment did improve across the quarter as the high level of COVID cases in the community in July declined. And we saw that drive an improvement in activity levels and, importantly, a reduction in the costs associated with cancellations and staff absenteeism. The estimated impact of the disruption caused by COVID in the September quarter was $57.7 million compared to $55 million in the previous corresponding period.
The costs associated with COVID declined from $38.7 million in July to $6.1 million in September, and the impact in October is expected to be lower again with staff absenteeism, getting that close to what it was pre-COVID. The momentum in the business was, however, interrupted by the additional public holiday in September for the Queen's memorial, and the impact of that was estimated to be about $7 million.
So when you look at the activity we provided you in the release, you'll see admission numbers against the previous corresponding period. But those -- it's hard to read through on that because those trends are impacted by the surgical restrictions that were imposed and lifted at various times and at different levels last year, in particular, those that affected our biggest market in Sydney.
The more relevant stats are those versus the pre-COVID levels. And here, we saw surgical admissions growing at double-digit percentages in the last 2 months. And that's despite some capacity constraints that we still have in some hospitals due to staff availability.
You'll see that day admissions, unsurprisingly, have grown at a stronger rate than overnight admissions, and that's a long-term trend. However, we are seeing better momentum in overnight surgery.
Nonsurgical admissions have been slow to come back, and that's primarily due to slower recovery in mental health and then the lag in post-surgical rehab as surgery numbers increase, and then we've seen lower maturity admissions as well. Day medical admissions, which primarily include chemotherapy and dialysis, have demonstrated high single-digit or double-digit growth over the last 4 months, with overnight admissions starting to recover now.
Mental health admissions, so our psych admissions, have been slowly improving with inpatient admissions growing faster than day admissions. And as we've talked about before, the reason for that is really a supply-driven issue. It's not the demand. It's about getting the psychiatrists back into hospital practice. And so we've got a number of initiatives that are looking at that psychiatrist engagement.
Also, and pleasingly, with the negotiations we've had with health funds over the quarter, particularly Bupa, have been positive and reflect the current inflationary environment and even negotiations we're having currently, regardless of whether the health fund agreements are expiring soon or not, are more positive to try and reflect the impact of those inflationary pressures we're seeing.
Workforce remains the biggest issue and the number of measures we've put in place to, both short term and medium term, to improve recruitment and retention, with a particular focus on the critical skills gaps that we -- around operating theaters and intensive care. We've seen positive results from those initiatives, including an expanded international recruitment program, the onboarding of our August graduate nurse cohort and then the launching of a new cadetship program with 140 cadet positions already filled.
In the U.K., the environment for our business has improved gradually over the quarter, with admissions increasing 5% over the quarter compared to the previous corresponding period, and we see, again, that momentum continuing through October. The market does have some significant cost pressures, particularly around wage inflation. And so managing that will be -- continue to be a priority for us.
In terms of the impact of COVID on the business over the quarter, it was GBP 5.7 million, which was 1 -- I think, in September itself, it was GBP 1.7 million. And we -- the big issue in the U.K. continues to be addressing the waiting list, and so our engagement with NHS England continues to work on strategies to address that.
The Elysium business reported good top line growth, reflecting the expansion in capacity that we've put in place. But again, severely impacted by labor shortages, particularly for Elysium. The -- there's a lot of health care workers and competition at that level of staff is significant because they're the lower paid end of the spectrum, and we're competing with retail and hospitality for that workforce. So that's challenging, and we're using a lot of agency staff in that business at the moment.
So on to Ramsay Santé. Again, remembering it's July, August is their summer season so it's hard to draw a line from that across the rest of the year. But activity levels have started to improve. But, again, not unlike Australia, we've had some capacity constraints because of labor availability, and recruitment and retention activities there are, again, the priority as they are in Australia.
Revenue in the Nordics increased 19.9% on the previous corresponding period, which reflected a 9.6% increase in medical, surgical, obstetric admissions and an increase in specialty care services, which does reflect the recent acquisitions. But on a like-for-like basis, revenue increased just on 5% over the previous period.
Again, the business in Europe is affected by an inflationary environment and the higher personnel costs, including agency and interim staff costs are significant.
So that's a quick snapshot of the business. And so I think the positive message there is that as we've come out of COVID and getting into that clear air, we are seeing improvements in volume and managing the cost base accordingly then becomes a priority. So I'm confident we're heading in the right direction and happy to take any questions.
[Operator Instructions] Your first question comes from Andrew Goodsall with MST Marquee.
Just coming to France as the largest underperformer in this quarter. Obviously, it's a peak holiday season there, but the biggest impact seem to be movement in government assistance. Are you expecting any sort of flow around that? I know we've heard the hospital federation has been chasing some, and there has been something allocated. Just seems -- it seems pretty patchy at the moment on that - how that's flowed.
Yes, I think there's 2 components to that, Andrew. One is the revenue guarantee, and that's sort of -- as we've said previously, that's sort of smoothed through the year. And so that guarantee is in place until the 31st of December. And then there's lots of discussion about what happens post 31st of December, but there's no agreement on that. The other significant piece, which is where it does vary from last year, is the grants related to COVID cost recovery. And they are -- what's the best way to describe that, they're inconsistent. And so we're not sure where we're going to land in that.
So it's hard to draw a line off the first quarter. And I think as we probably said last year that as we move through the first half, we'll get a better picture. So it is around that cost -- COVID cost recovery grant.
Yes. I'd just add, at this time last year, we were a lot more -- we knew what we were getting. And so we booked some with COVID cost recoveries. And we had a little bit flow through from accruals we've made at the prior year-end. But this year, yes, it's a lot more uncertain. So there's been no accruals made for any COVID cost recoveries in France this year.
Okay. So that's a zero entry on that number. And then I guess it's a wait and see whether you...
Yes. We'll see what transpires over the next sort of quarter. Yes.
Okay. Got it. And then just a second question. Just you've talked to the October run rate, just wondering particularly around Australia, if you could just be a bit more expansive on sort of where your -- what you're seeing out there whether -- what we're seeing in the data is the revenues ahead of volume. So it sounds like more complex work getting done and with the agency or premium labor being used, just what that -- what you're still seeing in terms of margins? And whether you're sort of seeing any return to something we might have seen pre-COVID, or where you sit against those sort of pre-COVID levels?
Well, we've still got a long way to get back to pre-COVID margins. Andrew, as we've said before, the difference in indexation on the top line versus cost basis has been quite different over the last 3 to 4 years from pre-COVID levels. And as Craig alluded to, productivity levels still need to get back to sort of better than pre-COVID, and we're on our way to get there, we're certainly a lot closer than we have been probably in the last 2.5 years, probably in terms of our productivity in Australia, but we've still got to improve on that to get those margin levels through.
We called out the COVID impact in October, which obviously was a lot lower than what it was in July. So that was pleasing, but that still is there. So we -- I think, as Craig's theme was, we're definitely moving in the right direction, but it's -- we've still got a long way to go before getting back to pre-COVID margins.
Yes. And just to add a little bit more color to that. Until we get the non -- so managing labor is obviously the biggest impact on cost for us. So managing productive labor hours. So if those people are actively working with the activity so activity is increasing. Until we get the nonproductive hours and so around absentees and back to where it was pre-COVID, we're not going to get back to where we were.
Yes. And also, mix is a factor as well. So the nonsurgical -- it's obviously a higher margin than the surgical. And as you've seen in the data, that's quite -- as Craig talked about, that's quite a lag behind the surgical volumes. So we need to get that mix back up again as well.
Got it. Yes. No, I wasn't expecting to get back there, but just incrementally, whether -- with that extra volume sort of coming through a high utilization, whether you're getting a bit of leverage come back just on a straight-up basis?
Yes. Yes.
Your next question comes from David Low with JPMorgan.
If we could just start with staffing and certainly, there's plenty of anecdotes out there that staffing is the challenge. Craig, what's your expectation of how quickly things can improve? How are we going with the borders coming down with the recruitment of graduates? When do you think that we can, perhaps, get back to more normalized availability of key staff?
Yes, it's a good question. Look, I think it's post Christmas. I think the increase in international recruitment is tangible, but it takes time for that to deliver and it's not the biggest component. But we are -- I mean, there's a couple of aspects to it. We're probably not seeing the departures from the sector that we thought we might. So that's slowed down. And when we look at our recruitment, our recruitment is strong. So we are in a -- we're not in an ideal position, but we're certainly in a much stronger position than we probably even thought we were going to be 12 months ago. But all these -- they all take -- they all contribute and some take longer than others.
And so the graduate nurse program, we've spoken about extensively, that will pay dividends over the next couple of years rather than this 6 months, for example. So I'm really positive about it, but I think we're into next year to get it to a more normalized position.
That's helpful. I mean I'm actually quietly pleased that you're saying next year, by which you mean after Christmas. So frankly, in the back of -- the second half of this year, you think staffing will improve materially or meaningfully?
Yes, I think it will. We're already seeing it. So -- but it's -- it will take a while to get back to where we're comfortable with it.
Okay. Just one other question then. I mean, I noticed the comments there in the briefing today that you expect gradual improvement. And I understand that and activity should pick up, and we've got to be a little cautious with seasonality. But it strikes me that the profitability could improve quite a lot more meaningfully from Q1. I mean if we look at the COVID costs in July, we look at the Queen's birthday holiday, add that back, you're at a much more reasonable -- well, much better profit level.
Is it reasonable to assume that the operating profit can improve much more quickly than revenue?
Well, improve versus what I suppose, what's the basis? So as Craig said last year, things were all over the place with lockdowns and surgical restrictions and all that kind of stuff. So -- but I think, gradually going forward, if -- as we've always said, volume is the great sort of solver for margin. So if the volume improves, and we see this lag recovery that we saw in October in nonsurgical continue to improve through, then there's no reason why that shouldn't be the case.
We had a massive COVID impact in July, and then less so in August and then less so again in September. We're keeping our eye on this current little wave that's happening. We've heard that Queensland are now recommending wearing masks in indoor settings, et cetera, et cetera. So there's always that caveat in terms of what happens. But in the absence of COVID, then, yes, gradually, we should be able to continue to keep on improving.
Yes. I think what we've said previously as well is just concentrating on getting the business back to the operating metrics that we've been good at for a long time, which we really did lose over the last couple of years as volumes come down and we maintain staff levels. So those operational efficiencies weren't anywhere near where they needed to be. And so we're just getting better at those disciplines again.
Your next question comes from Saul Hadassin with Barrenjoey.
Craig, just wondering, you gave some detail on momentum regarding overnight surgical admissions in October. Do you -- can you tell us what that growth rate was? I know you gave it for the quarter. Just wondering if it's improved in October? And the follow up to that question is, if it's still sort of low single digits, which I assume it is, what do you think all that overnight surgical work has gone? And do you think it's just sitting out there waiting to come back and, hence, you have a huge backlog of work to be done?
This is pre-COVID. Yes, I'm just clarifying that number. Short answer is, we are seeing -- well, we're seeing an improvement in overnight work. And without generalizing too much, the growth in day procedures is faster than the growth in overnight and that's been the case and it is exacerbated by the catch-up because a lot of the work that was deferred was the lower acuity work, which is a more significant proportion of day work.
So that sort of trend is what we would anticipate. Has any surgical work disappeared? I think probably some has. I think, realistically, when we were sort of looking at the early days of COVID, and what was happening with surgical restrictions and what we anticipated to come back into the system, I don't think anyone assumed that the 100% of the activity would come back. So some has been lost because people have either recovered, passed away, not accessed the system. It's just really hard to quantify what that proportion would be, Saul. So -- sorry, short answer to your question. Yes, the -- as we talk to the doctors, yes, there's backlog that still needs to be addressed.
And just following up from that part then, I guess, what capacity utilization are you running at with your current nursing availability? In other words, can you give us an estimate of what that percentage is? And that comment around improving into second half fiscal '23. Does that effectively suggest, by the end of fiscal '23, you might be back to running at the same utilization levels that you were maybe in a pre-COVID environment?
Yes. I think short answer to that is, yes. And it does vary across the geographies. And so we've got some hospitals that are really -- I'm going to say Victoria more than any other state, where recruitment is more difficult. So we've got some hospitals that I'll call out Warringal as one where we've got sort of permanently 2 theaters shut at the moment out of 11 theaters because we can't recruit the theater stuff there. But we've got other hospitals where we've got full complements of staff. And so we've got the capability to keep increasing volumes as those volumes come through. So it really is a site-specific almost.
Your next question comes from Steve Wheen with Jarden.
Just wondering about your commentary around staffing, particularly indicating that it is improving. And I'm just wondering how much of that is a result of the negotiations with the health funds that they're starting to be able to help compensate for some of the inflationary pressures that are coming through the staffing line?
Unrelated, I'm going to say, Steve. So the initiatives we put in place on staffing with their -- regardless of what the pricing we got back from health funds. So the -- the reality of it is, we negotiate the EBAs. And as we've talked about before, we've got some EBAs on foot and others that are coming up for negotiation. And so we anticipate what might happen with EBA negotiations, and we factor that into the pricing discussions we have with health funds. But we don't -- our ability to recruit and retain isn't affected by what the outcome of the health fund agreement is.
Yes. Got it. But from a cost perspective, has the arrangements with, say, some of the insurers actually going to help us in the back half of this year to see that leverage return to your business?
Absolutely. But the better the outcome of those health fund negotiations are, the flow through to earnings will be a direct one. And so if we continue to reflect the inflation that's in our cost base in those health fund agreements, yes, we should be better off.
Great. Second question I had was just on France. And obviously, looking at the quarter, it's certainly a quarter that you wouldn't want to try and annualize for the French business because of that seasonality effect. I'm just trying to get a feeling for what the magnitude of seasonality is in that quarter that we can sort of contemplate for the rest of the half?
Is that something that you can talk to, just to kind of help us put it into some perspective?
Steve, I mean, as we saw last year, if you recall, there was a massive difference between the 2 quarters in the half and, to some extent, as I said before, that's to do with accruals for COVID and confidence on level of getting COVID cost recoveries, et cetera. It is the lowest quarter in the year. It's been a long time since we've had a normal year, so I'd be loathe to give you a number in terms of what that seasonality looks like. But as we saw last year, I think wait until we got the half year numbers for France in particular, because it is all over the place.
Okay. Just to...
[indiscernible]
Just to try and parse that out a little bit further, the accrual process that you put through last year due to your sort of ability to see some tangible reimbursement from the French government. Was that evenly across the half? Or is it in a particular quarter that we need to be mindful of?
I don't recall, but it was certainly much more even than what we've got now. We've got zero. But yes, I couldn't tell you off the top of my head, Steve, but I don't think it was too wildly different between the quarters as far as I remember. Yes.
Your next question comes from Mathieu Chevrier with Citi.
My first one is on your agreements with private health insurers that you've renegotiated in the quarter. So for the Austrian business, do you expect that these will, over time, as the activity normalizes, allow your margins to return to pre-COVID levels?
There's lots of impact on margin, as we talked about many times. But no question that the better you do on a pricing negotiation, the more that is a tailwind to margin. Whether we get back to pre-COVID margins depends on a number of factors, volume not being the least of them.
Just on the agreements, I'll just reiterate. What has been important for us this year is to get the health fund agreements that we were negotiating and also that the agreements that we're currently on foot anyway to get them all to reflect the change in the cost environment that we see.
Understood. And then looking at France and the U.K., do you expect that your negotiations there with especially the governments will allow for some similar outcomes to be shown in terms of margins, and you expect there as well your margins to return to pre-COVID levels? I mean, over time, as the activity normalizes and you would expect the funding environment to be able to compensate for higher wage costs?
Yes. Complicated. I mean, it's not just a simple negotiation with the governments on tariff because the tariffs apply industry-wide. So it's not a Ramsay negotiation as such. And you'll see some sort of public statements made in France, which are positioning those negotiations at the moment. But what we are seeing, and to be fair to both the French and U.K. governments that they are recognizing the cost inflation in the sector and tariffs are increasing, I won't say to the level that we're all happy with, but there's certainly -- there's a recognition of particularly wage pressure, the upward pressure on wages. And there's no secret that energy costs in Europe are escalating, which has an inflationary effect on other suppliers as well.
Now we'll always push for higher tariff increases than we get anyway, but that's an ongoing exercise.
Understood. And just maybe one final one for Martyn. I don't know if you've given that D&A guidance before. I don't think you have. Could you give us a sense of where that should be relative to FY '22?
Depreciation and amortization?
Yes, please.
No, we haven't given a guidance on that, no.
Your next question is a follow-up question from David Low with JPMorgan.
Craig, if I could turn to some of the press speculation that we've seen. I was just wondering if you could comment at all on the 2 issues that are out there, one that Ramsay is considering selling some of the Australian hospitals and that would have some implications for debt. And then I said yesterday, there was talk that the French hospital, the French business could be sold to a management buyout. Anything you could add on either of those topics, please?
I'm surprised it took so long in the call for that question.
I thought I should put it in there.
Thank you, David. Look, lots of speculation, yes. There's been a few articles both here in France. And really, I think that it's come -- it's originated from what were options that were being canvassed through the KKR offer process about what Santé, what Santé might look like. And I think that's continued to be fueled by investment bankers looking to broker a deal somewhere.
From our point of view, the structures that we have for the international businesses, particularly are things that the Board looks at from time to time. And we'll -- we've got our Board strategy sessions in another month or so, and we'll look at that again and think, okay, what are the options about the way we hold those businesses. But the rest of it's just speculation and sort of off the back of what were considerations that were being undertaken when we weren't sure where the KKR offer process was going to land.
So to be clear, there's no intention to exit the French European operations at this point? I mean we did see that Rothschild was...
That's absolutely correct. Absolutely correct.
There's no process going on. There's no data room being paid or things that have been written in the paper.
Yes, we're not in discussions with anybody, yes.
Okay. And sorry, just to confirm the other one. I mean I know that the Australian property, there are some challenges there with capital penalty, capital gains taxes, et cetera, but there are some properties that could be sold. And that might be useful given that debt levels are a little elevated in the current environment. Do you have any intentions on that front?
Yes. I mean we've been quite open and we've been exploring what something in that area might look like, and we continue to do that. But there's no decision to do anything at this stage.
No, it is complicated and there has to be a good reason to do that -- excuse me. It has to be a good reason to do that. But it's the right thing for us to explore that and see what it looks like.
It's just further optionality down the track.
So it's something that you consider, but it doesn't sound like it's a priority. Would that be the right way to frame it?
Yes.
Yes, I think it's fair enough, yes.
Your next question comes from Gretel Janu with Credit Suisse.
Just firstly, just continuing on from that conversation before just in terms of the balance sheet. So I understand that the covenants have been raised given the high leverage, are there any implications for your CapEx profile or dividend payment?
No. So the raise in the maximum covenant, as you would have saw previously, it was 3.5. We were at 3.3 for the 12 months to June. The next test is for the calendar year to December. And we just wanted to make sure that we had the flexibility if there was further COVID off the back of what we saw in July to make sure there wouldn't be breaching anything and rather than asking for waivers. It was a much better solution with our bankers and to cope with any other future kind of ways that might come.
Clearly, our intention is to stay within the 3.5 and probably a little bit lower if we could be, but COVID impacts are there. And so that's what we've done with the banks. It's not restricting our brownfield program. What is restricting our brownfield program is the length of time it's taking to get approvals for various different things. That does seem to be a lot slower. And also with the increases we're seeing in construction costs, we're taking the team a little bit longer to work their way through what the right developments are, can we do some value engineering to save costs on that to make sure that the business case is back up, et cetera. So that does tend to take a little bit longer, but there's no projects being canceled or canned or purposely deferred because of where our balance sheet is at.
Understood. And then just going back to staffing as well, what's happening there from an EBA perspective? And are you seeing wage pressure there?
EBA, wage pressure.
We are, no doubt. We've got EBAs that are on foot currently, but those that are being negotiated, and then we've got a couple of administrative increases that were given that sort of roll on year-on-year. But there's no question there's more upward pressure on wages.
So when do your EBAs expire or are up for next renewal?
They're staggered. So there's EBAs sort of negotiating regularly. But the big ones have been put in place in New South Wales, Victoria. We had administrative increases flow through Queensland and WA. So it's probably Queensland that's probably next up on nurses, but we have a myriad of EBAs around different staffing categories.
So you haven't seen any of those big nursing ones come through in the past quarter yet, or over the past 6 months. Is that correct?
No. Well, we had WA sort of on foot at the moment. And so that's sort of being resolved. And -- but the increases -- I mean the increases in Australia are not where we see the increases in Europe, for example. And they're not way out of -- way out of whack where we've been historically, but they're higher.
There are no further questions at this time. I'll now hand it back for closing remarks.
Okay. Thanks, everyone, for your time this morning. Have a good day. Bye.