Commentary

Group financial review

The Group is pleased to announce a 28.4% increase in adjusted basic headline earnings per share (HEPS) to 42.9 cents for the six months under review. If the currency impact is excluded, adjusted basic HEPS increased 32.3% to 44.2 cents.

Currency conversion had a major impact on both the half-year results and financial position of the Group. This was due to the prevailing strength of the Rand relative to the British Pound during the period. The average exchange rate used for converting income and expenditure was R12.00 to the Pound, compared to R14.73 in the comparative prior period, a change of 18.5%. The closing exchange rate used to convert assets and liabilities at 31 March 2010 was R11.03 to the Pound, compared to R13.64 at 31 March 2009, a change of 19.1%.

Despite revenue growth in both the South African and United Kingdom (UK) operations, Group revenue was down 5.0% to R11 038 million (2009: R11 619 million) due to Rand appreciation. However, the Group’s operating margin improved from 15.7% to 16.7% reflecting underlying efficiency improvements and sound financial management.

Net financial expenses decreased by R247 million to R1 005 million, a 19.7% reduction over last year. This was driven by reduced interest rates in South Africa (SA), lower average levels of debt compared to the prior period and the lower average exchange rate applicable to UK borrowing costs. The interest rate swaps are hedge accounted and fair value adjustments are recognised directly in equity to the extent that such hedging proves to be effective. Financial expenses were negatively affected by a £3.0 million non-cash charge, representing the ineffective portion of the fair value adjustment for the period.

An interim capital reduction of 19.0 cents per share (2009: 16.0 cents) has been declared, representing an 18.8% increase over the prior year.

Net debt at R24 862 million reduced from R26 454 million at 30 September 2009. This reduction was impacted by fluctuations in the closing exchange rate, which reduced debt by R1 723 million, and scheduled debt repayments in the UK, but offset by higher borrowings in SA required to fund ongoing capital and seasonal working capital requirements.

Equity decreased by R136 million from 30 September 2009. This was mainly due to a decrease in the foreign currency translation reserve, and unfavourable non-cash mark-to-market fair value adjustments on the UK interest rate swaps recognised in the cash flow hedge accounting reserve.

Cash generated by operations rose 5.9% to R1 894 million from R1 788 million in the prior comparative period primarily as a result of better cash conversion. The Group converted 78.9% (2009: 72.3%) of its EBITDA into cash.

Capital expenditure of R423 million was incurred compared to R592 million in the prior period, mainly due to the timing of capital expenditure in SA and the UK.

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Divisional review

South Africa

Revenue grew 7.1% to R6 014 million from R5 616 million, while operating profit rose 12.3% to R849 million (2009: R756 million). The operating profit margin improved from 13.5% to 14.1%. The South African operations contributed 86.5% (2009: 89.5%) to basic HEPS.

Cash generated by the SA operations of R738 million remained strong but was slightly lower than a year earlier. This was mainly due to higher working capital requirements, following an increase in The Commissioner for Occupational Injury and Disease (COID) debtors and stock levels required for the Easter holidays. Total capital expenditure was R270 million (2009: R293 million) of which R161 million was spent on replacements and R109 million on expansionary expenditure.

The construction of the 425-bed Lesotho Hospital PPP remains on track and is scheduled for completion in 2011. The first of three off-site primary care clinics was opened this month, while the other two will be opened before month-end.

This year, Netcare Education celebrates 21 years of training nursing staff. Currently over 3 500 students are being trained at its five campuses.

Netcare maintained its position as the most empowered company in the JSE’s healthcare sector and was ranked thirteenth most empowered listed company overall in the Financial Mail’s Top Empowerment Companies survey.

Netcare expresses its deepest regret at the passing away of Dr Molefi Sefularo, honourable Deputy Minister of Health.

We congratulate Malebona Precious Matsoso on her appointment as Director General for the Department of Health.

Hospitals and Emergency services

Revenue from Hospitals and Emergency services was up 9.5% to R5 336 million (2009: R4 873 million), while EBITDA rose 9.1% to R1 029 million (2009: R943 million).

The Hospital division maintained patient days off a high base with a 10.2% increase in revenue per patient day.

The number of registered beds increased from 8 766 to 8 843 during the six months under review and Netcare continued to improve its infrastructure, including the addition of a 17-bed neo-natal intensive care unit at Netcare Garden City, commissioning of a new cardiac catherisation laboratory at Netcare Linksfield, renovating a 30-bed paediatric unit at Netcare Park Lane and the refurbishment of five theatres at Netcare Milpark. A fully integrated oncology centre was opened at Netcare Clinton, specialising in intensity modulated and image guided radiation therapy. In addition, the first neuro-interventional MRI (magnetic resonance imaging) and CT (computed tomography) theatre in Africa was opened at Netcare N1 City.

Emergency services division, Netcare 911, recorded 5.3% growth in total lives under management to 7.9 million lives. The division continued to focus on improving operational efficiencies, which supported the results. Netcare 911 became SA’s first aeromedical emergency evacuation specialist to become accredited by the European Air Medical Institute (EURAMI) reflecting the high level of service excellence provided to patients.

Primary care

The division achieved a significant turnaround, following a strategic review of the managed care business and resultant termination of loss making contracts. Revenue decreased 8.7% to R678 million (2009: R743 million) primarily due to a contraction in managed care lives in Prime Cure, which reduced 28.4% to 172 000 lives. Medicross is rolling out a new practice management system which should enhance its overall efficiencies.

Operating loss decreased significantly to R5 million compared to R25 million in the prior period. The performance was bolstered by improved operational efficiencies and internal controls.

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United Kingdom

Netcare owns a 50.1% stake in General Healthcare Group (GHG), which operates a national network of private hospitals across the UK under the BMI brand name.

GHG delivered a solid performance underpinned by continued demand for private healthcare facilities despite the recessionary environment, record unemployment rates and little to no inflation. The business continues to benefit from ongoing investment in extending its breadth of services and its geographic presence.

Overall caseload in the UK grew 5.6% year-on-year, reflecting both organic growth and the integration of the prior year acquisitions of Fitzroy Square, Woodlands Hospital and City Medical consulting suites, as well as the addition of the Kingston private patient unit in the period.

Private Medical Insurance (PMI) patient volumes remained stable on a same site basis, excluding a decline resulting from the exceptionally severe weather conditions experienced in January. The shift in business mix emanating from 2009 continued, with strong growth in NHS patients offsetting lower numbers of self-pay patients. Pleasingly, the self-pay market is showing early signs of recovery. The NHS Choose and Book (C&B) programme, which allows the public, through their GPs, to select private facilities directly for their treatment has been well received and uptake has been encouraging. Future demand under this initiative should entrench the private healthcare sector as a key partner to the NHS in ensuring the delivery of the UK’s national healthcare needs.

Revenue from UK operations for the six months rose 2.8% to £418.7 million (2009: £407.4 million).

EBITDA was up 4.7% to £110.9 million (2009: £105.9 million) and operating profit 9.4% higher at £79.2 million (2009: £72.4 million). The performance reflected the benefits of ongoing efficiency improvements and standardisation, coupled with stringent cost control, which underpinned margins.

The results were boosted by a non-recurring capital benefit of £3.7 million relating to a gain on the bargain purchase of assets under a business combination. Non-recurring expenses, comprising mostly restructuring and retrenchment costs, of £2.1 million were incurred (2009: £3.5 million). Profit after tax amounted to £15.3 million, an increase of 188.7% over the prior period.

Capital expenditure including intangible assets amounted to £14.3 million compared to £25.3 million in 2009. GHG continued to invest in its hospital infrastructure to ensure that its patients and consultants have access to leading-edge medical equipment and facilities.

Net debt reduced by £14 million to £1 873 million (September 2009: £1 887 million). Working capital increased by £13 million since the 2009 year-end due to underlying business growth and the increased NHS caseload at longer payment cycles. Cash collection remains a key focus to manage the impact on resources of this industry-wide shift in business mix. 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.

As per the SENS announcement on 8 December 2009, Netcare’s partners in GHG, in accordance with the terms of the Partnership Agreement, informed Netcare of their desire to pursue an Initial Public Offering (IPO) of the GHG Operating Company (OpCo) on the London Stock Exchange (LSE). Whilst preparation for the IPO has progressed well, given prevailing market conditions, a final decision as to the IPO and its timing has yet to be made. Shareholders will be updated as and when the position changes.

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Outlook

Barring any unforeseen circumstances, and particularly given the general financial soundness of medical aid funds and the strong underlying demand for private healthcare, the outlook for SA remains stable and positive. The prospects of healthcare reform facilitating greater healthcare access and care for all South Africans is seen as an imperative and viewed positively in terms of the Group’s wide range of healthcare services on offer.

Over and above the capital expenditure planned for the year of R800 million in SA, the Board has approved an additional R670 million to be invested over the next three years on capital projects. These include the new Waterfall Hospital in Midrand, Gauteng, 12 large projects that will add 295 new beds, a refurbishment of 238 beds, three new theatres, 30 doctors consulting rooms and 21 smaller projects.

Recessionary pressures in the UK economy are expected to limit the growth of PMI and self-pay spending on private healthcare in the short term. However, the growth in NHS activity should provide sufficient offset. The demographics of an ageing population and increasing incidence of lifestyle diseases are expected to support growth in private caseload over the longer term. The underlying fundamentals of the UK private healthcare sector remain sound, with NHS budgetary pressures likely to increase demand for private facilities further. The scale and quality of GHG’s facilities, infrastructure, consultant network and management team position the company well to succeed in the current market and to benefit from the compelling prospects for private healthcare in the UK.

Board changes

Andile Ngcaba resigned as a non-executive director effective 7 April 2010. The Board expresses its gratitude and appreciation to Andile for his significant contribution to Netcare over his term of office.

Declaration of capital reduction number 22

In accordance with the authority given to the directors by way of an ordinary resolution passed on 29 January 2010, the Board of Directors declared on Thursday, 13 May 2010 an interim capital reduction (number 22) out of share premium of 19.0 cents per ordinary share, payable on Monday, 26 July 2010, to shareholders recorded in the register of the Company as at Friday, 23 July 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.

Share certificates may not be dematerialised nor rematerialised between Monday, 19 July 2010 and Friday, 23 July 2010, both days inclusive.

On behalf of the Board

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