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Strategic Report:

Chairman’s
Statement

“The Board remains confident that the Group’s operational performance and strategic focus will support and enhance Mediclinic’s position as an International leader in the provision of private healthcare services.”

Dr Edwin Hertzog

Non-executive Chairman

STRATEGIC DELIVERY IN A CHANGING ENVIRONMENT

During the year under review (“FY19”) our commitment to delivering high-quality, cost-effective healthcare services on a sustainable basis supported the achievement of our core strategic objective of putting Patients First. The year also brought significant regulatory changes, particularly in Switzerland, which we are adapting to but which negatively impacted our financial performance.

Navigating the regulatory changes will continue to require the Board and management team’s relentless focus in order to achieve the Group’s strategic and financial goals. Strategically, we will continue to seek improved operational efficiencies, pursue attractive growth opportunities and leverage our international scale, while also continuing to invest in employees, information and communications technology (“ICT”) and analytics. From a financial perspective, we remain focused on improving the returns of the business, generating good free cash flow and maintaining a responsible approach to leverage. Prudent capital allocation is a fundamental part of our strategy. To this end, the Board remains diligent and scrutinises all activities, aligning its output to the financial and strategic goals of the Group and delivering value to shareholders over the longer term.

“The Board remains confident that the Group’s operational performance and strategic focus will support and enhance Mediclinic’s position as an International leader in the provision of private healthcare services.”

Dr Edwin Hertzog

Non-executive Chairman

STRATEGIC DELIVERY IN A CHANGING ENVIRONMENT

During the year under review (“FY19”) our commitment to delivering high-quality, cost-effective healthcare services on a sustainable basis supported the achievement of our core strategic objective of putting Patients First. The year also brought significant regulatory changes, particularly in Switzerland, which we are adapting to but which negatively impacted our financial performance.

Navigating the regulatory changes will continue to require the Board and management team’s relentless focus in order to achieve the Group’s strategic and financial goals. Strategically, we will continue to seek improved operational efficiencies, pursue attractive growth opportunities and leverage our international scale, while also continuing to invest in employees, information and communications technology (“ICT”) and analytics. From a financial perspective, we remain focused on improving the returns of the business, generating good free cash flow and maintaining a responsible approach to leverage. Prudent capital allocation is a fundamental part of our strategy. To this end, the Board remains diligent and scrutinises all activities, aligning its output to the financial and strategic goals of the Group and delivering value to shareholders over the longer term.

OUR PEOPLE AND PATIENTS

Through my 36 years of involvement with Mediclinic, the one thing that has remained constant is the commitment of our people to support the patients that put their trust in us to deliver appropriate care. This is underpinned by our strong values and purpose of enhancing the quality of life.

We believe that diversity across Mediclinic promotes better performance and a stronger organisational culture. We invest in leadership development and training programmes at all levels of the organisation to support our goals and to ensure that Mediclinic, as an employer of choice, remains able to attract high-quality international talent. These skills, along with the governance measures in place, allow us to enhance clinical outcomes and the patient experience, both of which are fundamental to the long-term success of the Group. This culture must be instilled from the very top of the organisation and we demonstrated this successfully when Mediclinic ranked eighth out of the FTSE 100 companies in the Parker Review Committee’s Report into the Ethnic Diversity of UK Boards (“Parker Report”), issued in October 2017.

We deeply appreciate the 750 000 inpatients who chose Mediclinic as their preferred healthcare service provider during the year. As healthcare services continue to evolve, more of the care we offer is delivered in an outpatient setting. Already approximately 30% of the Group’s revenue is generated by surgical day cases and outpatient consultations and procedures. The demand for treatment in these lower acuity, convenient care settings is expected to grow and Mediclinic is positioning itself for this trend in all its operational regions.

We clearly value the important roles each stakeholder has to play in the successful delivery of our operations. One important change is the formal appointment of a designated non-executive Director with responsibilities for employee representation on the Board. Mr Danie Meintjes was selected as the most appropriate member of the Board to fulfil this responsibility given his many years of experience in human resources and his more recent engagement with our people across all divisions through his previous role as Chief Executive Officer (“CEO”). The Board strongly encourages all employees to participate in the annual Gallup® Employee Engagement Profile survey; the collated information and subsequent implementation of follow-up processes will be communicated to the Board formally. Mr Meintjes will be responsible for ensuring that the Board is informed regularly of challenges, corrective actions and progress.

FINANCIAL PERFORMANCE

Overall, the Group remains in a strong financial position. Challenging market and regulatory environments in all three divisions were reflected in the Group’s overall financial performance.

At the Group level, in constant currency, FY19 revenue was up 4% and adjusted earnings before interest, tax, depreciation and amortisation (“EBITDA”) was down 2%. However, after the translation effect of foreign currency movements, FY19 revenue was up 2% at £2 932m (FY18: £2 876m) and adjusted EBITDA decreased 4% at £493m (FY18: £515m). This performance was driven by marginal revenue growth in Switzerland with a lower adjusted EBITDA margin impacted by regulatory changes including tariff reductions and the outmigration of care partly offset by ongoing cost management and efficiency savings. In Southern Africa, there was modest revenue growth with a stable adjusted EBITDA margin driven by a continued focus on cost management and efficiencies during a period of low volume growth. The Middle East experienced mid-single digit revenue growth with a stable adjusted EBITDA margin irrespective of the start-up losses associated with the new Mediclinic Parkview Hospital in Dubai. Adjusted earnings per share (“EPS”) for the Group was down 10% to 26.9 pence (FY18: 30.0 pence).

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 £241m (FY18: £644m) impairment charge on intangible assets and property. An impairment test on Spire was carried out, which resulted in an impairment charge of £164m (FY18: £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 £151m (FY18: loss of £492m).

DELIVERING CLINICAL EXCELLENCE

I am pleased to report that during the year under review, the majority of patient safety and clinical effectiveness indicators showed improvement. Much of the progress can be attributed to a strong collaborative effort between the clinical services teams of the respective divisions and the corporate centre. Highlights from across the Group included:

At Group level:

  • Integration of the Ward-to-Board accountability continued in order to strengthen clinical service leadership across the Group, with a successful pilot project completed in Southern Africa.
  • A Patient Safety Committee was established to standardise and enhance collaboration across the Group.
  • An initiative commenced to coordinate collaboration of nursing services across divisions.
  • A clinical adverse event and clinical risk management solution suitable for the Group was sourced.

Hirslanden:

  • As part of the HIT2020 project, Hirslanden progressed with its goal of rolling out an electronic health record (“EHR”) and patient data management system (“PDMS”).
  • Fast-track orthopaedics was established in three hospitals and rollout is planned at a further two hospitals.
  • Following the successful opening last year of the first dedicated day case clinic at Bellaria in Zürich, the division opened its second unit at the train station at St. Anna in Lucerne.

Mediclinic Southern Africa:

  • Infection rates were further reduced through the implementation of a comprehensive infection prevention and control strategy.
  • The first phase of the national stroke management implementation plan was completed.
  • As part of theatre management workshops, improved employment methodology was rolled out to align employee competencies and tasks with theatre slates and utilisation.

Mediclinic Middle East:

  • Rollout of an EHR commenced at one hospital and one clinic and will continue during the coming year.
  • The Department of Health in Abu Dhabi approved research licences for all Mediclinic hospitals in the region with 29 active projects, 45% of which are conducted in collaboration with Mohammed Bin Rashid University of Medicine and Health Sciences (“MBRUHS”) student research.
  • Mediclinic City Hospital entered into an agreement for a paediatric residency training programme between MBRUHS and Al Jalila Hospital.

REGULATORY LANDSCAPE

The affordability of healthcare remains an overarching focus of governments, regulators, insurers and patients. As healthcare is a unique sector where the demand for services is predicted to continue growing, it is entirely appropriate that the cost of healthcare services should be monitored against the clinical quality and patient experience that providers deliver. That is why we believe in the need to deliver sustainable integrated healthcare services that offer value to all stakeholders. Different care settings are required to align with the migration of care. Across Mediclinic, we have employed a variety of different approaches for this which will continue to evolve over time. 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 significant regulatory changes in Switzerland impacted the financial performance of the division. These included the national outpatient tariff (“TARMED”) reductions effective from 1 January 2018 and the outmigration of certain medical treatments from an inpatient to an outpatient tariff, which has gradually occurred in cantons across Switzerland for the past 18–24 months, with official national implementation from 1 January 2019. Hirslanden continues to adapt its business model to address the current trends in inpatient and outpatient activity driven by the recent regulatory changes while maintaining excellent clinical performance.

BOARD CHANGES AND GOVERNANCE

The Board announced the appointment of Dr Ronnie van der Merwe as the Company’s new CEO in November 2017, following the planned retirement of Mr Meintjes. The appointment became effective on 1 June 2018.

Dr Van der Merwe’s achievements during the year under review to further enhance strong team alignment at the executive management level and focus the divisions on the need to deliver cost-effective quality healthcare services, which expand more across the continuum of care, were evident in the operational performance of the business. After qualifying and practising as an anaesthesiologist, Dr Van der Merwe joined Mediclinic in 1999 and has been a member of the Group’s Executive Committee since 2008. He established the Clinical Information, Advanced Analytics, Health Information Management and Clinical Services functions at Mediclinic and has been Group Chief Clinical Officer since 2007. I believe Dr Van der Merwe’s in-depth knowledge of the healthcare sector and long history with the Company put Mediclinic in a strong position to deliver on its operational performance and strategic priorities.

I am pleased to announce that this year the Board made one independent non-executive Director appointment that further strengthens the Board’s clinical governance and global healthcare experience.

Dr Anja Oswald was appointed as an independent non-executive Director and member of the Remuneration Committee and Nomination Committee on 25 July 2018. Qualified as an orthopaedic surgeon along with an MBA degree, she is currently the CEO of Klinik Sonnenhalde, a well-established private clinic for psychiatry and psychotherapy with inpatients, day-care clinics and outpatients in Riehen, Switzerland. She is also President of the Association of Private Hospitals in Basel, as well as a board member of Integrierte Psychiatrie Winterthur in Canton Zürich and of the Alliance for a Free Health Care System in Switzerland. Prior to this, she was Head of Medical and Pharmaceutical Services and Deputy Medical Officer in the Department of Health of the Cantonal Government in Basel and a member of various cantonal, regional and national committees.

I was very pleased to welcome Dr René Toua to the Group Executive Committee. She replaced Dr Van der Merwe as Chief Clinical Officer and has been an integral part of Mediclinic’s successful clinical team in Stellenbosch. We all wish her well in her new role. Additionally, Mr Daniel Liedtke was appointed as the new CEO of Hirslanden in January 2019 and I welcome him to the Group Executive Committee.

Mr Desmond Smith will retire as an independent non-executive Director and as Senior Independent Director with effect from the conclusion of the annual general meeting on 24 July 2019. Mr Smith will be succeeded as Senior Independent Director and as Chairperson of the Audit and Risk Committee from that date by Mr Alan Grieve.

Various other changes were made to Board committee memberships: Mr Trevor Petersen stepped down as a member of the Nomination Committee, with Dr Felicity Harvey appointed as a new committee member. Mr Meintjes stepped down as a member of the Clinical Performance and Sustainability Committee, with Mr Seamus Keating and Dr Van der Merwe appointed as new committee members. Mr Seamus Keating stepped down as a member of the Investment Committee, with Dr Van der Merwe appointed as a new committee member.

DIVIDEND

For FY19, 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 (FY18: 7.9 pence per share). This represents a 29% pay-out ratio to adjusted earnings per share, in line with the Group’s policy of 25–30%.

LOOKING AHEAD

The global healthcare industry continues to evolve with the affordability of healthcare remaining the primary focus of governments, regulators, insurers and patients. Mediclinic has always been aware of this and will continue to move promptly and decisively to adapt to changes in the healthcare landscape. The Board remains confident that the Group’s operational performance and strategic focus will support and enhance Mediclinic’s position as an international leader in the provision of private healthcare services.

APPRECIATING YOUR CONTINUED SUPPORT

It is those people who play an instrumental role in the day-to-day delivery of our business who I once again wish to thank. It is your dedication, drive and continued focus on our clients that ensure we remain a healthcare partner of choice across all our divisions. To our patients and supporting medical professionals, we deeply appreciate that you have chosen Mediclinic as your preferred healthcare service partner. We will continue to work tirelessly to ensure that our clinical performance and customer experience exceed your expectations.

Finally, I would like to thank our valued shareholders for their continued trust and support.

We enter the new financial year with confidence in our ability to retain our leading market positions that will deliver sustainable long-term shareholder value.

Dr Edwin Hertzog
Non-executive Chairman
22 May 2019

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