Commentary

Netcare delivered strong results in the year under review reflecting continued healthcare demand and the defensive nature of healthcare despite the global economic downturn.

Group revenue rose 6.9% to R23 232 million (2008: R21 735 million), supported by higher demand for private healthcare services in SA. The UK showed solid growth and benefited from the inclusion of newly acquired hospitals and the inclusion of Nuffield hospitals for the full 12 months.

The Group operating margin increased from 15.5% to 15.9%, largely due to strong patient volumes and efficiency improvements. The margin translated into 9.8% growth in Group operating profit to R3 700 million (2008: R3 370 million).

Results for the period include the sale of Netcare’s 50% interest in Ampath Holdings Trust (Ampath) in February 2009. Gross proceeds from the sale were R1 027 million and a profit of R588 million, after capital gains tax of R90 million, has been included in profit from discontinued operations.

Group net financial expenses reflects 6.9% lower at R2 260 million (2008: R2 427 million) as a result of the lower average exchange rate. The interest benefit arising from the Ampath proceeds, better working capital management and lower interest rates in SA also contributed to the reduction.

The effective tax rate increased to 23.9% (2008: 7.5%) mainly due to the abnormally low rate in the prior year which included a once-off tax credit of £7.5 million in the UK.

Headline earnings per share rose 27.2% to 78.2 cents (2008: 61.5 cents) with basic earnings per share up 95.0% to 123.8 cents (2008: 63.5 cents). The Group’s results were impacted by the lower average ZAR:GBP exchange rate in the period, which reduced headline earnings per share by 3.3 cents.

The final capital reduction of 22.0 cents per share (2008: 18.0 cents) brings total capital reductions for the year to 38.0 cents per share (2008: 32.0 cents), growing 18.8%.

Net debt at R26 454 million was significantly lower than the R32 589 million recorded at 30 September 2008, and was down R3 907 million from March 2009. Contributing to the lower debt level were the depreciation of the British pound against the rand, which reduced debt by R5 270 million and the net cash proceeds of R852 million from the Ampath disposal. On receiving the Ampath proceeds, the Group was able to repurchase convertible bonds with a nominal value of R95 million, as well as repay expensive bank debt.

Equity decreased by R1 718 million mainly due to unfavourable non-cash mark-to-market fair value adjustments on the UK interest rate swaps. These adverse adjustments are recognised in the cash flow hedge accounting reserve.

Cash generated by operations declined marginally to R4 640 million (2008: R4 663 million) primarily as a result of increased working capital requirements in the UK. The Group converted 94.2% (2008: 101.1%) of its EBITDA into cash.

Capital expenditure for the year was R1 272 million compared to R1 240 million in the prior year.

During the year, 436 million treasury shares held by Netpartner Investments Limited and The Netcare Trust were repurchased and cancelled.

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Divisional review

South Africa

Revenue was 13.9% higher at R11 832 million (2008: R10 385 million) driven largely by organic growth in all SA divisions.

EBITDA rose 16,0% to R2 018 million (2008: R1 739 million) and operating profit increased 18.6% to R1 662 million (2008: R1 401 million). SA’s operating performance was adversely affected by underwriting losses and higher doubtful debt provisions in Primary Care.

Cash generated by the SA operations was up 15.0% to R2 270 million (2008: R1 974 million), with the improvement coming mainly from better working capital management. Investment in capital infrastructure continued with expenditure of R747 million (2008: R687 million) including investments in hospital infrastructure and medical equipment.

The SA balance sheet strengthened with a 19.3% year-on-year reduction in net debt to R3 903 million (2008: R4 837 million). Working capital was well managed with patient debtors’ days at record low levels, while stock was kept at a minimum throughout the year. The centralisation of the creditors function also contributed to the improved working capital management.

Netcare is strongly committed to broadening access to quality healthcare in South Africa. Two new Public Private Partnership (PPP) Hospitals, Settlers Hospital in Grahamstown and Port Alfred Hospital in the Eastern Cape opened during the year. Construction of the 425-bed Lesotho Hospital PPP and refurbishment of four primary care clinics commenced in March 2009. The performance of the Universitas/Pelonomi Hospital PPP improved significantly during the year.

Netcare employs 20 581 people in SA, and was ranked fifth in the Large Companies category of the 2009 Deloitte Best Company to Work For Survey.

We maintained our AA rating from Empowerdex, equivalent to Level 3 compliance in terms of the Department of Trade and Industry (dti) Codes of Good Practice for Broad-Based Black Economic Empowerment which demonstrates our ongoing commitment to transformation. Netcare was also recognised for clear leadership on environmental issues in the South African private healthcare market by attaining 14th place on the Carbon Disclosure Project (CDP) Carbon Leadership Index.

Hospitals and Emergency services

The Hospital division delivered strong results underpinned by increases in patient day growth of 4.9%. Average occupancy, including weekends, rose from 65.4% to 67.0%.

Netcare trained more than 3 800 learners in the year, in line with our commitment to skills development in SA and specifically to address the shortage of skilled nursing, pharmacy and paramedic personnel.

Netcare continued to invest in current infrastructure to meet rising demand. During the year, additional beds were added to our existing facilities, taking total beds to 8 766. This included the addition of 16 general ward beds at Netcare Akasia Hospital, 10 high-care (HC) beds at Netcare Kuilsrivier Hospital and six trauma ICU beds at Netcare Sunninghill Hospital. An oncology and day ward was built at Netcare Kingsway Hospital and a trauma unit at Netcare Greenacres Hospital. In addition, an extensive upgrade of ICU, HC and the pharmacy at Netcare Greenacres Hospital was also completed. The number of beds is expected to increase by 204 to 8 970 beds next year.

Emergency services division, Netcare 911, recorded 15.1% growth in total lives under management to 7.5 million lives.

Primary Care

The Primary Care division posted disappointing results, adversely impacted by, inter alia, issues in the prior year and changes to its organisational structure.

Revenue rose 10.8% to R1 513 million (R1 365 million) aided by a 10.7% increase in the Reference Price List (RPL), additional Medicross clinics and expanding the managed care and risk management services. Prime Cure’s managed care lives grew 10.3% to 246 205 lives. The division reported an EBITDA loss of R24 million (2008: R4 million profit).

As communicated previously, the division continues its remedial programme to address risk matters and underperformance. It is expected to break even for the 2010 financial year.

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United Kingdom

Netcare owns a 50.1% stake in General Healthcare Group (GHG) which has hospitals operating under the BMI brand name, in addition to an NHS outsourcing division known as Netcare UK.

GHG delivered strong results against the backdrop of the prevailing recessionary climate within the UK economy. During the year GHG has been successful in introducing new services to many of its hospitals and growing its geographic presence. The Woodlands Hospital in Darlington and City Medical consulting suites were acquired in October 2008, and Fitzroy Square Hospital in London was purchased in April 2009. In addition, the integration of the seven hospitals acquired from Nuffield in February 2008 was completed. Almost 90% of the UK population now lives less than an hour from a BMI facility and GHG’s extended scale and national coverage are beginning to yield real customer and business benefits.

Demand for private healthcare facilities has remained relatively strong despite the economic environment. Overall caseload in the UK grew 7.8% year-on-year, reflecting both organic growth and the acquisitions noted above. There was a shift in the business mix with good growth in NHS patients, offsetting some declines in the self-pay market. Private Medical Insurance (PMI) patients remained at a stable level on a same site basis. The NHS is expected to remain a key partner now that the national Choose and Book (C&B) programme has been introduced, allowing the public, through their GPs, to select private facilities directly for their treatment. The demographics of an ageing population and lifestyle diseases are also expected to support growth in private caseload over the longer term.

Revenue from the UK operations was up 7.6% to £831.5 million (2008: £772.6 million). Due to the lower average exchange rates during the year, rand denominated revenue increased marginally by 0.4% to R11 400 million (2008: R11 350 million).

EBITDA rose 8.9% to £213.1 million (2008: £195.7 million) and operating profit grew 14.9% to £147.9 million (2008: £128.7 million). However, due to exchange rate fluctuations, Rand denominated EBITDA of R2 919 million (2008: R2 885 million) represents a year-on-year increase of 1.2%, while operating profit was 3.5% higher at R2 048 million (2008: R1 979 million). Restructuring and retrenchment costs of R71 million (£5.2 million) were incurred compared to R97 million (£6.6 million) in the prior year. These costs relate to structural changes to the business, which have reduced its cost base. Profit after tax was £16.0 million (R237 million), an increase of 44.1%.

Capital expenditure including intangible assets amounted to R653 million (£46.5 million) compared to R689 million (£51.2 million) in 2008 as GHG continued to invest in its hospital infrastructure, including a major refurbishment of reception areas and wards, the acquisition of leading edge scanning and imaging equipment, and the implementation of business-enabling IT systems.

Net debt increased by £7 million to £1 887 million (2008: £1 880 million) and was impacted by higher working capital arising from both the underlying growth in the business and the increased NHS caseload, at longer payment cycles. Cash collection remains a key focus to limit the impact of this industry-wide shift. GHG continued to meet its financial covenants and has sufficient headroom for the remaining debt term. The debt relating to the UK is without recourse to the SA operations.

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Outlook

Netcare is wholly committed to working with the SA and UK governments both to meet increasing demand for, and improve access to, quality healthcare.

The global debate on affordable and equitable healthcare delivery and reform continues to evolve. Whilst demand for healthcare services in both the Group’s markets is expected to increase due to a higher burden of disease, particularly in SA, and an ageing population particularly in the UK, regulatory pressure to provide greater access and reduce pricing is inevitable. Given the capital intensive nature of delivering tertiary healthcare, it is important that consensus on pricing which allows for an adequate return on capital and routine replacement of existing infrastructure is reached.

In SA, through our Primary Care network, Netcare is well positioned to assist government in meeting the healthcare-related Millennium Development Goals for 2015. In addition, Netcare welcomes the establishment of the National Health Insurance (NHI) Advisory Committee to the Minister of Health and we remain committed to working with the Department of Health in addressing the challenges outlined in the Department’s 10 Point Plan.

In the UK, recessionary pressures are expected to subdue the growth of PMI and self-pay spending on private healthcare in the short term, but this is likely to be largely offset by growth in NHS activity. However, the underlying fundamentals of the UK private healthcare sector remain intact, with NHS budgetary pressures likely to further increase demand for private facilities. GHG is well positioned to make progress in the current market and increasingly well positioned to benefit from a future economic upturn.

Board and management changes

Vaughan Firman was appointed Chief Financial Officer of the Netcare Group and Financial Director of Netcare Limited from 12 February 2009, following the resignation of Peter Nelson on 5 December 2008.

On 20 July 2009, it was announced that Ingrid Davis resigned as Director effective 31 December 2009. The Board thanks Ingrid sincerely for her very significant contribution to Netcare over the last 15 years.

Joel Wolpert will be retiring as Group Company Secretary with effect from 1 December 2009. The Board expresses its wholehearted appreciation for his contribution to the Group over the last 16 years. The Board has appointed Bert Kok as Group Company Secretary with effect from 1 December 2009.

Audit opinion of the independent auditors

These condensed financial statements have been extracted from the Group audited annual financial statements on which Grant Thornton have issued an unqualified audit report. This report is available for inspection at the Company’s registered office.

Declaration of capital reduction number 21

In accordance with the authority given to the directors by way of an ordinary resolution passed on 30 January 2009, the Board of Directors declared on Thursday, 19 November 2009 a final capital reduction (number 21) out of share premium of 22.0 cents per ordinary share, payable on Monday 25 January 2010, to shareholders recorded in the register of the Company as at Friday, 22 January 2010. In terms of Article 54.12 of the Company’s Articles of Association, all capital reductions with a value of R5,00 or less will be donated to a registered charity approved by the directors of the Company

In compliance with the requirements of Strate, the following dates are applicable:

Share certificates may not be dematerialised nor rematerialised between Friday, 15 January 2010 and Friday, 22 January 2010, both days inclusive.

On behalf of the Board

Sandton
20 November 2009

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