Chief Executive Officer's joint leadership review

On behalf of Life Healthcare, welcome to our jointly presented 2020 integrated report. In a year of unparalleled challenges across financial, economic and social spheres, our experienced leadership team, supported by our passionate and resilient employees, has been instrumental in navigating and moving us forward. The collective effort of the Group has also been key to ensuring we remain future-fit and geared for growth as we continue to position ourselves as a global, people-centred, diversified healthcare organisation.

Trends impacting our business in 2020

While economic, political, regulatory and technological factors continue to transform our macro-environment, the outbreak of COVID-19 significantly changed the global socio-economic landscape and, particularly, the industry in which we operate.

We have always been proud of our management team's ability to adapt, and we continue to augment our business to remain relevant in a changing environment. The way in which we delivered care to our patients went through significant changes during the year. The prevention protocols we had in place were amplified in our response to COVID‑19. Furthermore, the additional measures that we put in place during the year have been integrated into our daily operations, and will likely remain part of how we do business going forward.

During the year, the need arose to find alternative ways to support our stakeholders, given the lockdowns we faced globally. Telehealth grew rapidly across the world as consumers had limited access to in-person consultations. The Health Professions Council of South Africa (HPCSA) telemedicine guidelines were relaxed following the announcement of the national level 5 lockdown, recognising the need to carry out essential medical services while observing social distancing requirements. To this end, in rapid response to the pandemic, our focus shifted to also provide care via digital solutions, such as our free, public COVID-19 symptom checker, as well as the development of direct doctor-to-patient virtual consultations, to support the Life EHS risk solution application for corporates and their employees.

While responding to the challenges of the past year, it has become even more apparent that we need to protect our business from possible future threats. This responsibility will remain top-of-mind, and we believe that our strategy is resilient and sufficiently agile to adapt to the various events that may influence our business.

Our 2020 year in review

As a Group, we can divide our review into two distinct periods. The business achieved strong results during the first half – building on the solid foundation and fundamentals established in prior years. We saw good progress in our efficiency programmes and the recruitment of doctors with the necessary experience. The second half of the year was dominated by the COVID-19 pandemic and the targeted, criminal cyber-attack on our IT systems in southern Africa. While the pandemic had a substantial financial impact on our business, our swift and efficient response mitigated the worst effects and our operations remain strong.

Collaboration and engagement between stakeholders across the healthcare industry are vital during times of crisis. As the COVID-19 pandemic emerged, we partnered with governments as far as possible, offering our support in the various regions where we operate. In South Africa, we reached agreement with national and provincial government departments to treat government patients at our facilities. In our international operations, we provided additional
COVID-19 support measures to national healthcare providers, further cementing these relationships. While we were prepared for the worst, it was gratifying that the levels of support envisaged did not materialise, owing to the swift action taken by the South African and other governments.

The impact of COVID-19

Our ability to effectively respond to the pandemic and provide quality care to our patients in this time was largely due to the dedication and unwavering support of all our employees and supporting doctors. We are intensely aware of our responsibility to protect our employees, and the provision of adequate personal protective equipment (PPE) for our nurses, doctors and healthcare professionals working at our hospitals and clinics was critical. Despite the global shortage of PPE, we looked at innovative ways to expand the breadth of our supply lines to secure stock for our facilities.

The general shortage of nurses and skilled healthcare professionals continues to be a challenge in the regions in which we operate. This was further exacerbated during the year by governments understandably increasing their employee levels to supply resources to public facilities in their response to the pandemic. In addition, team members who contracted COVID-19 and needed to be quarantined or isolated were unable to work and this also impacted our operations, with over 2 600 employees diagnosed and testing positive. Our employees, however, rose to the challenges of the year with commitment and dedication. We believe this is testament to the trust they have in the future of Life Healthcare, and we continue to invest in them to develop a pipeline of talent that will be able to serve our future needs.

At the end of the first half, the Group was in a strong position financially, and this, together with support from our lenders, assisted us in weathering the pandemic. As part of our response to COVID-19, we invested significant effort safeguarding the strength and flexibility of our balance sheet. Prudent capital management was a top priority, and we ensured that we could delay capital spend without any compromise to the business. We refinanced our term debt in our international operations during February 2020, and increased the committed facilities in the international operations by approximately GBP55 million, with a further optional GBP100 million facility if required. The Group increased its bank facilities to R10.2 billion since the onset of the pandemic. We believe these initiatives will ensure the financial resilience of the Group as we head into the next financial year.

To ensure Life Healthcare maintained its cash reserves, we implemented several mitigating actions and cash preservation levers across our business. These included the suspension of dividends, the reduction and deferral of capex spend, restrictions on non-critical spend and reducing temporary employee costs through increased utilisation of permanent employees.

The response to COVID-19 has called upon us all to make sacrifices. As part of this, our executive committee decided to defer their short-term incentive and, along with our non-executive directors, voluntarily donated up to 30% of their salaries and fees for up to six months to a fund that we established to benefit Life Healthcare employees impacted by COVID-19. We believe that this is a demonstration of the character of our leadership, and we are proud of their commitment to the sustainability of Life Healthcare.

Southern Africa

Our commitment to the safety and well-being of our frontline and non-frontline employees, our doctors and the patients we treat has never wavered. Since the national lockdown was announced and implemented, a multi-faceted approach has been taken to adapt operations to deal with the pandemic. COVID-19-specific operational, employee and clinical interventions were implemented with reference to guidelines issued by the national and provincial departments of health, the NICD, the WHO, as well as input from various clinical societies and medical experts. We continue to take learnings from the onset of the pandemic, position our businesses to become increasingly nimble and adaptable to cater for potential pent-up demand, as well as being prepared to continue to run our businesses with COVID-19 protocols.

Overall, our southern African operations' revenue decreased by 6.6% to R17.2 billion (2019: R18.5 billion), with our hospital division contributing R15.9 billion and our healthcare services division R1.3 billion. Normalised EBITDA pre-IFRS 16 decreased by 35.5% to R2.8 billion (2019: R4.4 billion) and normalised EBITDA margin pre-IFRS 16 decreased to 16.5% (2019: 23.8%). Total PPDs decreased by 15.7%, while overall occupancy at 58.4%. H2 has arguably been the most challenging time in the history of Life Healthcare. The month of April was the lowest point in terms of performance, with an occupancy level at approximately 40% largely as a result of all elective surgeries stopped during level 5 of the national lockdown. Despite this, the business performance was at breakeven point at an EBITDA level for the month of April, which reflects the resilience and strength of our business.

Our southern African growth initiatives are aimed at broadening Life Healthcare's exposure across the healthcare continuum, expanding our range of complementary services through entering and expanding diagnostic imaging services in South Africa. We will continue investing in data analytics and innovation. While we have made good progress in some aspects, the timing of implementation has been impacted due to the uncertainty of the impact of the pandemic, as well as the impact of the cyber-attack on the data analytics initiatives.

For more information on our southern Africa performance, southern Africa performance review.

International

While our international business felt the effects of the pandemic quite early on, the businesses have recovered well across geographies and have now reached approximately 90% of pre-COVID-19 levels. PET-CT, specifically in the UK, has proved more robust with volumes exceeding pre-COVID-19 levels.

Alliance Medical's revenue grew by 12.6% to R6.3 billion (2019: R5.6 billion). Normalised EBITDA pre-IFRS 16 decreased by 5.5% to R1.2 billion (2019: R1.3 billion) and normalised EBITDA margin decreased to 18.8% (2019: 22.4%). Our refurbishment of cyclotrons continued during the year, and we completed vital upgrades to Preston, which will ease radiopharmacy supply challenges. In the UK, we are now contracted to provide approximately 70% of the National Health Service (NHS) PET-CT services. UK PET-CT scans increased overall by 1.8% and continued strong recovery through quarter four, increasing by 5.2% in comparison with the same time last year. We believe that we are well positioned to continue supporting the UK NHS waiting lists that have been impacted by the pandemic and its resultant demand requirements for diagnostic and molecular imaging.

LMI delivered an exceptional performance having set a goal and producing a positive normalised EBITDA for the 2020 financial year despite experiencing a drop of more than 70% in volumes at one stage during the year.

Scanmed performed ahead of expectations despite the difficult operating environment, with revenue increasing by 13.8% to R1.5 billion and normalised EBITDA pre-IFRS 16 increasing by 44.3% to R140 million. A disposal agreement was signed on 24 November 2020 for an enterprise value of PLN340 million consisting of debt of PLN141 million and equity of PLN199 million. The Group will use the full proceeds to reduce debt levels.

For more information on our international performance, refer to international performance review.

Outlook

While COVID-19 will remain part of our foreseeable future, we believe the Group is in a strong position to manage the challenge. We have delivered over the past period but believe that there is further work to be done. More than this, however, our portfolio of investments over the past few years has positioned us to capture demand opportunities as they emerge after the pandemic. Life Healthcare offers a unique value proposition, one driven by a diversified non-acute integrated portfolio of assets across southern Africa, the UK and western Europe.

Our LMI business is well-positioned to capture market share in the event of a disease modifying drug being developed. We are anticipating good progress in 2021 in advancing our South African diagnostic imaging growth initiative, further enhanced by leveraging Alliance Medical's technology, systems and international expertise in the provision and broad access to high-quality, affordable diagnostic imaging services across South Africa. Our continued focus will be on ensuring continued delivery on clinical excellence of our employees, doctors and patients while ensuring flexibility, and safeguarding our financial position. A diverse and inclusive culture continues being a key priority.

We believe that the foundation that we have built will enable delivery and execution of our strategy in realising future growth.

Appreciation

This year has been unprecedented in the challenges that have come our way. Our resilience, passion and care in the way our teams have responded to the crisis truly showed the commitment and loyalty of our employees. We are extremely grateful to everyone at Life Healthcare for their dedication and could not be prouder to be part of this incredible team.

Our employees, in particular, have led the fight against the pandemic, embodying the values we hold dear. We are enormously proud of the professionalism, passion and compassion shown by our employees – to each other, the community and especially to our patients. A special thanks goes to our nursing teams who went above and beyond caring for our patients, many of whom were isolated from their families and friends over this time.

To our frontline workers who lost their lives to the virus, our heartfelt gratitude for your commitment and sacrifice, and our condolences go out to your families and friends. At its heart, COVID-19 is a health crisis, and any loss of life remains one life too many. The health and safety of our patients, visitors, employees and our communities remains our top priority.

A crisis of this scale highlights the importance of collaboration. We would like to thank our suppliers for their support as we swiftly developed plans to ensure our facilities and teams had the necessary equipment to respond to the emerging threat. We are grateful to have been able to collaborate and assist the governments in the regions where we operate in responses to the pandemic.

To our investors and funders, thank you for your continued support. A particular thank you to our banks, whose support we were able to rely on continuously. We believe that these partnerships are what build a successful, resilient organisation.

We would also like to thank the Board for their unfailing commitment to helping us weather this crisis – their experience, expertise and support is invaluable, enabling the management team to lead the Company responsibly and successfully through the worst of the difficulties.

Peter Wharton-Hood

Chief Executive Officer

Pieter van der Westhuizen

Chief Financial Officer