Strategic Report: Chairman’s Statement

“Our long-standing reputation as a trusted, market-leading, healthcare service provider focused on patient safety and excellent clinical performance, will continue to deliver long-term growth and returns for our shareholders.”

Dr Edwin Hertzog
Non-executive Chairman

STRATEGIC DELIVERY

During the year under review (“FY18”), we made further progress on our strategic priorities of putting Patients First, improving Group and operational efficiencies, pursuing attractive growth opportunities and leveraging our global scale, while continuing to invest in employees, information and communications technology and analytics. Mediclinic’s commitment to deliver sustainable, high-quality, cost-effective healthcare services produced a positive operational performance this year. We firmly believe this commitment supports our goal of driving continued long-term value for our shareholders. The Board continuously reviews our strategic priorities and the progress made during the year, and regularly engages with the executive directors and senior management across the Group to ensure they are focused on the delivery of these key priorities.

In October 2017, Mediclinic made an approach to Spire Healthcare Group plc (“Spire”) regarding a possible offer for the entire issued and to be issued share capital of Spire not already owned by Mediclinic. However, in November 2017, we announced that following discussions with the independent directors of Spire, an agreement could not be reached. The decision not to proceed demonstrates our disciplined approach to capital allocation, ensuring investments are in the best interests of Mediclinic shareholders. Mediclinic has every intention of remaining a supportive shareholder of Spire.

OUR PEOPLE AND PATIENTS

Mediclinic’s focus on its culture and values is a key contributor to the long-term success of the Group. The commitment of our executive directors, senior management, doctors, nurses and other staff supports Mediclinic’s core purpose of enhancing quality of life, which is at the heart of our Patients First strategy.

Competition in the public and private healthcare markets provides patients and medical professionals with a choice of healthcare service providers. We ensure we remain well positioned as a leading global healthcare service provider through our ongoing investment in our facilities, commitment to patient safety and excellent clinical performance. We deeply appreciate the more than 740 000 inpatients who chose Mediclinic as their preferred healthcare service provider during the year.

FINANCIAL PERFORMANCE

Overall, the Group remains in a strong financial position. The benefit of having a globally diversified healthcare services business was reflected in this year’s results as a weaker performance in Switzerland was offset by good delivery in Southern Africa and the Middle East. The latter was as a result of driving the turnaround of the Abu Dhabi business, with the Middle East division entering an expansionary phase that is expected to deliver an increase in revenue and operating profits over time.

During the year, the Group reported non-cash exceptional items relating to impairment charges at Hirslanden and Spire. Due to the changes in the Swiss market and regulatory environment, Hirslanden recorded a £644m impairment charge on intangible assets and property. An impairment test on Spire was carried out at 30 September 2017 resulting in an impairment charge of £109m recorded against the carrying value of the equity accounted investment. As a result of these impairment charges and other exceptional items, the reported earnings loss for the year was £492m (FY17: profit £229m).

At the Group level, in constant currency, FY18 revenue was up 3% and adjusted EBITDA was flat. However, after the translation effect of foreign currency movements, FY18 revenue was up 4% at £2 870m (FY17: £2 749m) and adjusted EBITDA increased 3% at £515m (FY17: £501m). This performance was driven by marginal revenue growth in Switzerland with a lower adjusted EBITDA margin impacted by regulatory changes including outpatient tariff reductions, modest revenue growth in Southern Africa with an improved adjusted EBITDA margin and revenues up nearly 1% in the Middle East with an improvement in the adjusted EBITDA margin of 100 basis points versus the prior year. Adjusted earnings per share (impacted by the equity-accounted share of reported profit after tax from Spire which included a number of exceptional charges) was up 1% to 30.0 pence (FY17: 29.8 pence).

CLINICAL EXCELLENCE

I am pleased to report that, during the year under review, the majority of patient safety and clinical effectiveness indicators showed improvement. In addition, many initiatives in support of clinical performance and quality improvement were launched and completed. Much of the progress can be attributed to a strong collaborative effort between the clinical services teams of the respective operating divisions and the corporate centre. Highlights from across the Group include:

Mediclinic International:

  • The restructuring and strengthening of clinical services leadership at hospital, divisional and corporate level.
  • The establishment of health technology assessment as the cornerstone to making clinical investment and process decisions.

Hirslanden:

  • Klinik Hirslanden’s stroke centre was re-accredited as the only private unit of eight across Switzerland.
  • The Bellaria Outpatient Surgery Unit (“OSU”) was successfully launched at Hirslanden Klinik Im Park, which serves as a blueprint for further outpatient facilities.

Mediclinic Southern Africa:

  • The doctors’ alignment project made good progress and will be expanded to another 23 hospitals.
  • A new Clinical Performance Committee structure was successfully implemented, including external specialist representation on the committee.

Mediclinic Middle East:

  • A stroke unit was established at Mediclinic City Hospital, which was subsequently certified by the German Stroke Society in early 2018.
  • We initiated a renal transplant programme in collaboration with the Mohammed Bin Rashid University.

REGULATORY LANDSCAPE

The healthcare industry has always operated within an evolving regulatory environment. Over the years, we have invested in recruiting and training our people to ensure we have experienced and well-informed management teams who can successfully navigate the changing regulatory landscape.

This year, we saw a significant change in outpatients’ tariffs and procedures in Switzerland that impacted the financial performance of the division. We continued to engage in the Health Market Inquiry (“HMI”) and National Healthcare Insurance (“NHI”) review process in South Africa, and we have been preparing for a new Diagnostic Related Group (“DRG”) reimbursement model in Dubai. Globally, there is a continued focus on the affordability of healthcare. Mediclinic seeks to address this through its strategic priority of improving efficiencies. Outmigration of care is an approach that aims to reduce the cost of certain, low acuity healthcare services and procedures. Mediclinic is aligning with this approach, as it is fundamental to the long-term sustainable delivery of healthcare.

BOARD CHANGES AND GOVERNANCE

The Board announced the appointment of Dr Ronnie van der Merwe as the Company’s new CEO in November 2017. The appointment is effective on 1 June 2018.

Danie Meintjes joined the Group in 1985 as the Hospital Manager of Mediclinic Sandton in Johannesburg. He became a member of the Group Executive Committee in 1995, mainly responsible for human resources matters. From 2006, he was instrumental in establishing the Company’s Dubai operations over a four-year period, before his appointment as CEO of Mediclinic International Limited in 2010. Danie has played an instrumental role in the development of Mediclinic and the implementation of our strategy. I would personally like to thank Danie for more than 30 years’ service to the Group which has seen the Company grow from a small operator in South Africa to a diversified global healthcare services provider, listed on the London Stock Exchange, with operating divisions located across three continents and over 31 500 employees. Subject to Danie’s re-election as a director of the Company at the AGM, he will continue as an executive director until 31 July 2018 and as a non-executive director with effect from 1 August 2018. Danie’s continued involvement as a non-executive director was approved by the Board on 23 May 2018 as it was considered to be in the best interests of the Group, its shareholders and other stakeholders in view of the wealth of knowledge and experience he has gained in different capacities during his service at Mediclinic.

Ronnie is one of Mediclinic’s most experienced senior executives. He trained and practised as an anaesthesiologist before joining Mediclinic in 1999 and became a member of the Group’s Executive Committee in 2008. He established and developed the Clinical Information, Advanced Analytics, Health Information Management and Clinical Services functions at Mediclinic, and has been Group Chief Clinical Officer since 2007. He was appointed as a director of Mediclinic International Limited in 2010 up to the combination of the businesses of the Company (then Al Noor Hospitals Group plc) and Mediclinic International Limited. The Board was unanimous in its support for Ronnie and believes that his extensive knowledge of Mediclinic’s operations and his strong track record of driving enhancements, especially in the quality and effectiveness of our clinical services, will serve the Company well going forward.

I am pleased to announce that this year the Board made two independent non-executive director appointments that further strengthened the Board’s clinical governance and global healthcare experience.

On 3 October 2017, Dr Felicity Harvey joined the Board. Her thorough knowledge of and experience in the healthcare sector, which includes a number of senior roles in the UK Department of Health, will be a valuable addition to the Board. On 1 April 2018, Dr Harvey became Chairman of the Clinical Performance and Sustainability Committee.

On 1 November 2017, Dr Muhadditha Al Hashimi joined the Board. Her extensive experience and knowledge of the healthcare and higher education sectors in the UAE, together with her strategic and tactical expertise in operations and fiscal management, provide a further positive dynamic to the Board and, from 1 April 2018, the Clinical Performance and Sustainability Committee.

Since their appointments to the Board, Drs Harvey and Al Hashimi have already made important contributions. I look forward to working closely with them over the coming years.

On 29 March 2018, we announced that Ms Nandi Mandela and Prof Dr Robert Leu will retire as non-executive directors of the Company, and as members of all relevant Board committees, at the conclusion of the 2018 AGM. I would like to thank them for their commitment and valued contributions to the Board and the Group over many years.

Over the past 40 years, we have faced dramatic cultural and demographic changes, both in the UK and globally. The Parker Review in the UK looks to formally address this issue by analysing the progress being made in the areas of diversity, equality and inclusion. I am pleased to report that Mediclinic ranked eighth out of the FTSE 100 companies in the 2017 Parker Review analysis of ethnic diversity in UK Boards. Mediclinic fully recognises that to remain competitive in a global market, and to ensure we attract and retain the best talent, our culture and values must continue to align with our diverse employee base.

SHAREHOLDER RETURNS

For FY18, the Board recommends a final dividend of 4.70 pence per share which, together with the interim dividend of 3.20 pence per share, results in the total dividend maintained for the year at 7.90 pence per share (FY17: 7.90 pence per share). This represents a 26% pay-out ratio to adjusted earnings per share, in line with the Group’s policy of 25% to 30%.

LOOKING AHEAD

Mediclinic has more than 30 years’ experience of providing private healthcare in a sector where the demand for services continues to grow. Regulation will always play an important role in the industry, and the affordability of healthcare will remain a focus for all stakeholders. The Board is confident that our long-standing reputation as a trusted, market-leading, healthcare service provider focused on patient safety and excellent clinical performance, will continue to deliver long-term growth and returns for our shareholders.

APPRECIATING YOUR CONTINUED SUPPORT

As ever, I want to express my sincere thanks to everyone who contributed to Mediclinic’s performance, including our executive directors, senior management, doctors, nurses and other staff. In particular, the support of patients and medical professionals is absolutely vital to the long-term sustainability of our business, and we deeply appreciate that they have chosen Mediclinic as their preferred healthcare service partner.

Finally, I would like to extend a special thank you to all our shareholders for their confidence in Mediclinic.

Dr Edwin Hertzog
Non-executive Chairman

23 May 2018