Life Healthcare Group

Life Healthcare's 2020 financial year was a year of vastly different halves. The Group delivered an excellent performance during H1 FY2020 but trading was significantly impacted in H2 FY2020 by the COVID-19 pandemic (the pandemic). The primary focus of the Group in H2 FY2020 was to manage the impact of the pandemic. A number of actions were taken over the period since the outbreak of the pandemic to ensure that we continued to deliver a safe environment providing quality care to our patients, protected the health, safety and job security of our employees in the short term and preserved liquidity. While there is still a high degree of uncertainty regarding the future progression of the pandemic, the Group is pleased with its response to the challenges that arose during H2 FY2020 and we are confident that the lessons learned will enable us to respond effectively to future COVID-19-related challenges.

Revenue for the year ended 30 September 2020 (year under review) decreased by 1.1% against last year and Group normalised EBITDA before the impact of IFRS 16 is 28.4% down against last year. The H2 FY2020 performance was significantly impacted by the pandemic. Normalised EBITDA was impacted to a greater extent, due to additional costs associated with the pandemic and lower activity levels, resulting in negative operational leverage.

H1 and pro forma H2 results comparison:

The H2 FY2020 attributable loss included the following items:

• Impairment of Scanmed investment of R793 million
• Deferred tax charge on the unrecognised exchange gain on a loan with Scanmed of R133 million
• Provision for additional expected credit losses of R186 million

The Group's efficiency programmes contributed R125 million in the year under review.

The Group has, however, seen a good recovery, since May 2020, in medically necessary procedures in southern Africa and the return to approximately 90% of pre-COVID-19 scan volumes in the majority of the geographies in the international operations.

The Group successfully refinanced its term debt in the international operations during March 2020 and thereby extended the debt maturities that were due in November 2020 out to 2023 and 2025. Given the significant uncertainty caused by the pandemic the Group pre-emptively negotiated amended bank covenants for the period up to 31 March 2021. In addition, banking facilities have been increased and the Group's committed undrawn bank facilities as at 30 September 2020 are R6.3 billion.

The impact of the pandemic has varied across the Group's geographic regions and business lines due to the timing of the spread of the disease and the responses of the various governments. Stakeholders are referred to the Group's detailed COVID-19 narrative contained in the trading statement released on 20 April 2020, and trading updates released on 6 March 2020 and 31 August 2020 on Stock Exchange News Services (SENS).

Pro forma information

To provide more meaningful information on the performance of the operations, the pro forma information has been included to illustrate the impact of the pandemic on the FY2020 results.

The impact of the pandemic on revenue and normalised EBITDA was estimated based on the actual performance and activities pre-COVID-19 adjusted for the full year, and deducting management's estimated unaudited results from the reported results.

Southern Africa

The southern Africa business performed well up to mid-March 2020 but saw a significant reduction in hospital admissions following the announcement of the national lockdown during March 2020. The southern African operation experienced its lowest monthly occupancy in April 2020 before recovering and peaking in July 2020 due to the high number of COVID-19 cases in that month. Occupancies decreased again in August 2020 and September 2020 as the increase in medically necessary procedures was slower than the drop-off in COVID-19 cases. The overall weighted occupancy for H2 FY2020 was 50% resulting in overall weighted occupancy for the year under review of 58.4% (2019: 69.7%). Occupancy levels have continued to improve in October 2020 and the first half of November 2020.

The estimated impact of the pandemic for the year ended 30 September 2020 on revenue and normalised EBITDA for southern Africa was R2.3 billion and R1.8 billion respectively.

International

The Alliance Medical diagnostic imaging business experienced significant reductions in volumes (approximately 60% to 65% reduction on average) from mid-March 2020 to mid-May 2020 across all its major geographies. The reduction in volumes was due to national healthcare systems prioritising urgent and emergency cases as well as country-specific self-isolation and social distancing guidelines, resulting in a significant reduction in patient referrals, increase in patient cancellations and non-attendance for appointments.

The increase, however, in scan volumes across all Alliance Medical businesses, since the gradual easing of lockdowns in Europe from May 2020, has been encouraging. The scan volumes in our PET-CT centres in the United Kingdom (UK) are ahead of the prior year (1.8%), with these scan volumes increasing by 5.2% for Q4 FY2020 compared to Q4 FY2019, demonstrating the robustness of our molecular imaging offering. Scan volumes have continued to improve with total scan volumes for October 2020, up 7.0% against October 2019.

Within our Alliance Medical business, we delivered a number of services to support governments in their response to the pandemic, such as COVID-19 testing in Italy and the delivery of a dedicated mobile CT service for up to 16 units in England, which continues into FY2021. This contributed positively at a revenue level to compensate for the reduction in scan volumes.

The estimated net impact of the pandemic for the year ended 30 September 2020 on revenue and normalised EBITDA for our international operations was R437 million (GBP21 million) and R291 million (GBP14 million) respectively. The impact of the pandemic was reduced as a result of the benefit received due to the additional services to governments to support their COVID-19 responses.

The Group's operational response to the pandemic included:

In southern Africa

• Established COVID-19 committees across the organisation with representation from internal leadership and management teams as well as various medical specialities, and where possible, leveraging scarce expertise across the hospitals to drive consistent best practice
• Implemented strict access control and entrance screening for all people entering our facilities
• Focused on the sourcing of personal protective equipment (PPE) and implementation of standards and protocols across all facilities, including the implementation of universal masking
• Implemented a dynamic forecasting model that the hospitals are using for logistical, capacity and staff planning including, where practical, designation of COVID-19 and non-COVID-19 teams and areas
• Restricted the number of visitors in our facilities
• Extensive workforce management, including redeployment of permanent employees and reduction in the use of agencies
• Representation on various national and provincial structures as well as participating in the Business Unity for South Africa initiatives in order to ensure broader alignment
• COVID-19 testing of patients before admission
• Daily monitoring of symptoms of all employees and doctors
• Random COVID-19 testing of hospital employees and doctors
• Developed facility response plans covering:
  • Staggered admission times
  • The split of facilities between COVID-19 and non-COVID-19 patients
  • Bed capacity management to ensure social distancing
  • Appropriate protocols in theatre covering utilisation, cleaning and social distancing
  • Revised PPE protocols
  • Employee rotation
• Incorporated guidelines from various medical societies and considered international best practice in the adopted approach

Internationally

• Established processes for the rapid deployment of employees to manage fluctuation in demand of sites as the need arises
• Trained employees in different modalities in the scanning business to enable redeployment where the need arises
• Introduced restricted opening hours and limited site closures in all regions where needed
• Prepared sites and employees for an increase in scanning demand post-lockdown
• Introduced screening and treatment protocols in all facilities to manage in a COVID-19 environment
• Reviewed post-COVID-19 opportunities including permanent changes to practices, continuation of new clinical services, and revised customer and supplier relationships

This operational response is continuously monitored and adapted in response to the changing environment as the pandemic progresses.

Life Healthcare has also introduced cash preservation levers to manage liquidity. This was done through continuous cash forecasting, adapting and implementing operational controls, limiting capital expenditure without compromising patient safety, suspending discretionary operational expenses, suspending dividends and deferring management bonuses.

Southern Africa

Southern Africa includes hospitals and complementary services, healthcare services and corporate.

Revenue for the southern African operations for the year under review decreased by 6.6% to R17.2 billion (2019: R18.5 billion) and normalised EBITDA pre-IFRS 16 decreased by 35.5% to R2.8 billion (2019: R4.4 billion).

The main operating segment, hospitals and complementary services, did well to manage the pandemic. The overall weighted occupancy for the year decreased to 58.4% (2019: 69.7%).

Paid patient days (PPDs) for the year decreased by 15.7% (2019: +0.8%) with PPDs for H2 FY2020 declining by 30.5% (H1 FY2020: +0.2%). The revenue per PPD for the year increased by 8.9% from FY2019. The higher than expected increase is due to a change in case mix as well as an increased proportion of higher acuity patients being admitted to hospital. The increase in revenue per PPD is made up of a 4.4% tariff increase and a 4.5% positive change in case mix.

The healthcare services segment was less affected with revenue for the year up 6.9% to R1 346 million (2019 R1 259 million) and normalised EBITDA pre-IFRS 16 down 9.5% to R134 million (2019: R148 million).

Normalised EBITDA pre-IFRS 16, for the southern African operations, decreased by 35.5% with a normalised EBITDA margin pre-IFRS 16 of 16.5% for the year (2019: 23.8%). As a large percentage of costs are fixed, the decline in activities due to the pandemic had a direct impact on the normalised EBITDA margin. The pandemic also resulted in additional costs incurred of approximately R244 million. The normalised EBITDA margin excluding the estimated pandemic impact was 23.7%.

The southern African operations were a victim of a criminal cyber-attack in June 2020. In response, the Group immediately took its systems offline and switched to manual processes and procedures. Although the care of patients was not impacted, the Group was unable to issue bills for a period of around 45 days. This billing backlog was resolved by end August 2020 and most of the outstanding accounts were collected by end September 2020. The direct costs of the restoration of the information technology (IT) infrastructure amounted to R64 million.

The Group had excellent patient quality scores, with pleasing improvements shown in the healthcare associated infection (HAI) rate and the patient safety adverse event rate.

International

International comprises diagnostic services (Alliance Medical) and healthcare services (Scanmed) with operations across Europe and the UK.

Revenue in diagnostic services increased by 12.6% to R6.3 billion (2019: R5.6 billion). This increase was driven by the good growth of the volumes within our PET-CT centres (1.8 %) in the UK, along with additional services to support governments' responses to the pandemic and the weakening of the rand against the pound sterling and the euro. Revenue in diagnostic services was negatively impacted by the pandemic, from February 2020 but more acutely between mid-March 2020 and mid-May 2020 with scan volumes dropping by an average 60% to 65% against pre-COVID-19 levels. Up to the end of February 2020, revenue in pound sterling was 8.4% ahead of the prior period. However, due to the impact of the pandemic, revenue in pound sterling for the year ended 30 September 2020 only increased by 0.3% compared to the prior year. The Alliance Medical operations showed good recovery in diagnostic scan volumes from June 2020 with Q4 FY2020 scan volumes up 0.2% against Q4 FY2019.

Within our UK business, our fourth cyclotron site in Preston was reopened in March 2020 after a period of closure for refurbishment. By having four sites operational again, we were able to meet demand, providing a more reliable PET-CT service. The fifth site, Dinnington, is going through its final accreditation and should be able to produce commercially from Q1 FY2021. This will further enhance our reliability of isotope production.

PET-CT scan volumes were impacted less severely than other modalities during the initial pandemic surge between mid-March 2020 and mid-May 2020. The full-year volume growth in our PET-CT scan centres in the UK was 1.8%, with Q4 FY2020 showing growth of 5.2% against Q4 FY2019.

Normalised EBITDA pre-IFRS 16 for diagnostic services was R1.2 billion (2019: R1.3 billion).

The normalised EBITDA margin pre-IFRS 16 for Alliance Medical of 18.8% (2019: 22.4%) was negatively impacted by the pandemic.

The normalised EBITDA margin, excluding the estimated pandemic impact, net of the benefit received due to the additional services to governments to support their COVID-19 response alongside cost-saving initiatives, was 21.9%.

Healthcare services' revenue for the year under review increased by 13.8% to R1 535 million (2019: R1 349 million). The normalised EBITDA margin pre-IFRS 16 increased to 9.1% (2019: 7.2%). The pandemic had a minimal financial impact on Scanmed during the year under review.

Scanmed had a good performance in the year under review, with an improvement on the prior year, as some of its facilities were designated as non-COVID-19 facilities and provided elective treatments to patients from other government facilities. The Group restarted the Scanmed disposal process during September 2020, and received an offer during November 2020 to dispose of its Polish operation. The offer is lower than the carrying value of Scanmed at 30 September 2020. With the receipt of the offer, it is considered prudent and appropriate to impair the carrying value at 30 September 2020 to reflect the value of the offer. The impairment for the year under review relating to Scanmed is R793 million. The disposal of Scanmed is in line with the Group's previously communicated strategy. The Group is in negotiations regarding the offer and is expecting to finalise the disposal of Scanmed after successful conclusion of the related agreements. The disposal will be subject, inter alia, to regulatory approvals in Poland and it is anticipated that the proceeds will be used to reduce debt levels.

Growth initiatives

Growth initiatives comprise the development of a new outpatient business model, the development of the imaging services opportunity, the investment in data analytics, and clinical quality products in South Africa and product development internationally.

The Group has made good progress with its imaging services opportunity in South Africa but delays were experienced in the execution of its first few transactions due to the pandemic. The acquisition process has restarted and the Group hopes to conclude the transactions in H1 FY2021.

The outpatient business model continues to evolve and we have two standalone clinics, and four retail clinics in partnership with a large retailer. The management team has successfully developed a COVID-19 symptom checker, as well as a telemedicine tool with the ability to offer direct-to-patient doctor virtual consultations.

LMI, our primary international growth initiative, had a strong performance and contributed revenue of R319 million (2019: R268 million) and a normalised EBITDA pre-IFRS 16 loss of R7 million (2019: profit of R18 million). The loss in the year under review included a non-trading foreign exchange loss of R8 million (2019: profit: R30 million). Excluding this item the normalised EBITDA for 2020 was R1 million (2019: loss of R12 million) achieving its objective of breaking even in 2020 at normalised EBITDA level.

The Group is in a strong financial position with net debt to normalised EBITDA as at 30 September 2020 at 2.96 times (2019: 1.96 times).

The Group negotiated amended bank covenants for the periods ended 30 September 2020 (net debt to normalised EBITDA of 4.0 times) and ending 31 March 2021 (net debt to normalised EBITDA of 4.5 times) due to the uncertainty of the pandemic. The Group agreed not to pay dividends without lender approval as part of the covenants amendment terms. The Group was well within its original bank covenant for net debt to normalised EBITDA of 3.50 times as at 30 September 2020.

The Group has implemented additional structures and processes to forecast, monitor and mitigate liquidity risks.

The refinancing of the term debt in the international operations has increased the committed facilities by approximately GBP55 million.

The Group's available undrawn bank facilities as at 30 September 2020 amounted to R6.3 billion.

To ensure the Group has sufficient cash reserves, in addition to securing additional bank facilities, management has implemented a number of mitigating actions and cash preservation levers across the Group's operations. These levers include the reduction and deferral of capital expenditure (capex) projects, suspending the interim and final dividend, placed an interim embargo on noncritical spend, reduced temporary employee costs through increased utilisation of permanent employees, negotiated extended payment terms with suppliers, and utilised government incentive programmes, as far as possible. The Group's executive team has also agreed to defer their short-term incentives.

Group revenue decreased by 1.1% to R25.4 billion (2019: 25.7 billion) consisting of a 6.6% decrease in southern African revenue to R17.2 billion (2019: R18.5 billion), a 12.6% increase in international revenue to R7.8 billion (2019: R6.9 billion) and R336 million revenue contribution from growth initiatives (2019: R269 million).

Normalised EBITDA pre-IFRS 16 decreased by 28.4% to R4.1 billion (2019: R5.7 billion).

Normalised EBITDA was negatively impacted by the pandemic and related costs.

The Group had strong working capital management despite the challenging environment in which the Group operated. The cash generated from operations amounted to R4.6 billion, and represented 111% of normalised EBITDA pre-IFRS 16 (2019: 103%).

During the financial year under review, the Group invested approximately R2.0 billion (2019: R2.3 billion), comprised mainly of capital projects of R2.0 billion (2019: R2.1 billion) and a new acquisition (net of cash acquired) by Alliance Medical of R6.0 million. The maintenance capital expenditure (capex) for the year was R1.2 billion (2019: R1.2 billion).

EPS decreased by more than 100% to -6.4 cps (2019: 176.4 cps). The impairment of R793 million relating to Scanmed reduced EPS by 54.5 cps.

HEPS decreased by 45.1% to 48.7 cps (2019: 88.7 cps). NEPS, which excludes non-trading-related items listed below, decreased by 47.6% to 61.0 cps (2019: 116.4 cps). The presentation of normalised earnings is a non-IFRS measure.

EPS, HEPS and NEPS for the year ended 30 September 2020 include the impact of IFRS 16 (2019: no impact).

Earnings in the prior year included a non-recurring profit on the disposal of our equity investment in Max Healthcare (net profit on the disposal in FY2019 of 68.5 cps). The earnings in the year under review have been positively impacted (+9.3 cps) by the reduction in post-tax interest cost of R135 million as a result of the repayment of debt in Q4 FY2019, following the disposal.

Dr Shrey Viranna resigned from the Company and the board with effect from 17 January 2020. Peter Wharton-Hood was appointed as Group Chief Executive effective 1 September 2020.

Dr Victor Litlhakanyane was appointed to the board from 15 April 2020 and as Chairman-designate from 27 July 2020.

The board of directors has decided, considering the current trading conditions and in order to preserve cash, not to pay a final dividend for the year. This position will be reviewed in the new financial year.

In southern Africa, we expect underlying activities to continue to improve resulting in higher occupancies. The business is preparing for a potential COVID-19 second wave but we are confident that the lessons learned will enable us to respond effectively to future COVID-19-related challenges. Capex for the year is expected at approximately R1.7 billion. We will continue to focus on improving clinical quality and driving our operational efficiency programmes.

Diagnostic services will continue to drive efficiencies in the "new normal" of lower scanner utilisation due to COVID-19 protocols. Dinnington, our fifth cyclotron site in the UK, should be able to produce commercially from Q1 FY2021 which will further enhance our reliability of isotope production. Capex for the year is expected at approximately R0.9 billion.

The Group aims to conclude on its disposal of Scanmed.

The Group will invest further into growth initiatives:

• Executing on initial South Africa imaging transactions
• Increasing its operational capacity in the LMI business

Management teams have taken steps to protect revenue streams, reduce costs and preserve cash in all the countries we operate in and will focus on bringing operations to full capacity as quickly as possible as the pandemic develops.

The pandemic introduces a high degree of uncertainty surrounding the impact on activity levels and the timing of the return to previous trading environments, therefore it is not possible to provide guidance for the next six months.

Shareholders are advised that the investor presentation for the year ended 30 September 2020 is published on Life Healthcare's website (www.lifehealthcare.co.za).

Our ability to effectively respond to the pandemic and provide quality care to our patients in this time of crisis is largely due to the dedication and unwavering support of our employees and our doctors. The Company wishes to acknowledge your invaluable contribution and to sincerely thank them.

Worldwide 12 May 2020 was International Nurses Day. This carries additional significance as 2020 is also the World Health Organization's year of the nurse. Nurses across the world have been at the forefront of looking after patients during the pandemic and we would like to thank them for their valuable role and sacrifice in these times. Their contribution to society is immense and we thank them for it.

Approved by the board of directors on 18 November 2020 and signed on its behalf:

• Mustaq Brey
  Chairman

• Peter Wharton-Hood
  Group Chief Executive

• Pieter van der Westhuizen
  Group Chief Financial Officer