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Edited Transcript of LHC.J earnings conference call or presentation 21-Nov-19 9:00am GMT

Q4 2019 Life Healthcare Group Holdings Ltd Earnings Presentation

Illovo Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Life Healthcare Group Holdings Ltd earnings conference call or presentation Thursday, November 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Pyle

Life Healthcare Group Holdings Limited - Group Strategy & IR Executive and CEO of South Africa

* Mark Chapman

Life Healthcare Group Holdings Limited - International CEO

* Pieter Phillippus van der Westhuizen

Life Healthcare Group Holdings Limited - Group CFO & Executive Director

* Shrey Balaguru Viranna

Life Healthcare Group Holdings Limited - Group CEO & Executive Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Life Healthcare Annual Results Presentation for the year ended 30th September 2019. (Operator Instructions) Please note that this is being recorded. I would now like to turn the conference over to the group CEO, Dr. Shrey Viranna. Please go ahead, sir.

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [2]

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Thank you, and good morning to all of you dialing in and listening in over the webcast. Thank you for joining us this morning. I just want to say -- I was about to say a warm welcome, but it's a bit of a cold early start for us and the leadership team in London. We're excited to be presenting it to you from here, I believe you would have loved to be home, but we get to during the course of the morning keep on reminding our colleagues in London at (inaudible) message, which at least warms our spirits.

On that note, let's kick off. We've got about an hour, as I know. So I'm going to try to go quickly through it. And between Pieter van der Westhuizen, the group CFO, and myself, we'll cover the results. So I will announce slight changes, so that it tracks accordingly as we speak. So moving on to the first slide.

So here's the overview of the results, as we've seen it at the close of the year, as the slide positions it, we're quite confident about what the team has achieved in what were incredible hard operating conditions, I think, not just in South Africa, but also in our international markets. And against that context, I think the results that you see up there, I hope you can share the kind of positive sentiment that we, as a leadership team have. Because we do feel that the results came across were strong, particularly on the revenue growth, the cash from operations, as you can see, just under 10% growth in the business. Similarly, that played through on the cash from operations of about 7.7%. The EBITDA went up at 3.5%. So again, solid growth against last year. Didn't track to the same level as the revenue growth, and I'll unpack that. A large proportion of that is actually a reinvestment into the business into growth initiatives that we feel will also sustain the margins and the return on capital in periods to come, but I'll talk to that during the morning. And our final dividend are up 6%. We have always commit to a progressive dividend of ZAR 0.53 for this half, which for the year takes us to ZAR 0.93. I think the framing on the dividend in line with the reinvestment for growth to give you a sense of how confident we are in terms of how we've done, but also looking forward into the coming periods.

The 4 points below, I think, just to touch on them important, if we look at the year, it was one -- obviously, the conclusion of the transaction around Max in India. And finally, settling of the proceeds against the debt that was related to that investment on the South African books. Very strong performance in the South African business under the leadership of Adam Pyle, especially in the projects of the market conditions. And then similarly, very good progress that we're making are now emerging -- I wouldn't say expansion into South Africa, but entry to South Africa, and I'll talk to that. So that's the framing of it.

Let's move on to the next slide. We've shared with you over the past probably 3 cycles now, a repositioning of our strategy probably about 2 -- just over 2 years ago. With a very strong dual focus, one around moving from being traditionally a hospital group within South Africa to being a much more integrated healthcare provider and really branching our team to complementary -- into new outpatient models and with the lines now with the move into diagnostics.

And then similarly, in our international business, really focusing our efforts there, particularly on the deep expertise we have in the Alliance Medical Group under the leadership of Mark Chapman, particularly diagnostic imaging. And that aligns with our outcome in terms of the transaction exit out of Max. And as you'd see in the presentation this morning, an intention to similarly exit out of Poland should the transaction market value makes sense.

The other key element there is our diversification, which is now a multiyear strategy, both in terms of geographic diversification, but also in terms of acute into non-acute as we take a view on what some of the global healthcare trends are and how this positions us again for not just stability within the business but strong future growth. And in the last, but no way least, at our core clinical outcomes, clinical excellence, a continuous focus not just on the outcomes, but on transparency of the outcomes. And as you're aware, we now publish our quality metrics at a hospital level. And then underpinned to that, which I'll talk to through the presentation, is around the use of analytics and technology to enable the previous 2 points. So we tend not speak to that, as you're aware, in its own right but as an enabler, either of our operating excellence or of our growth strategy.

Moving on to the next slide. And then just an overview on performance across the group, just to highlight, and then we'll deep dive into it. And go on. Okay. So as you've seen the slide come up in front. We are not going to talk to the slide, I'm actually going to talk to the key elements of it, while going to -- looking at it and read through it. As we said, strong top line growth across all aspects of the business, almost double digits, actually, in the complementary and healthcare service, they were double-digit growth, which is part of the diversification intention. As you can see, within the SA part of it, positive PPD growth. I'll talk to that later on, but let me just highlight this now.

When we spoke at H1, we shared with you a Q1, Q2 story with negative PPD in Q1 being turned around, thanks to some really good efforts by the leadership team in South Africa into Q2. We saw that play out into Q3 and Q4. So as much as we talk about this as an H1, H2 story, actually more Q1 but to the rest of your story and across the rest of the year, ongoing and relatively sustained positive PPD growth, which talks very well in terms of the outlook on that business. And again, the case mix change in terms of medical versus surgical moving towards more of an aged population, which naturally lends itself to a higher average length of stay and the different admission profile. So while the insured market per se within the South African business may not be growing, a profile of mix of patients still bodes well for us.

Thank you very much. Is the other challenge of doing this out in London is our U.K. team cut the call when we mention the challenges that we're experiencing on radiopharmacy. Forgive give my sense of humor this morning but Mark Chapman, our CEO, is sitting next to me. I'm sure he's tickled to death. We appreciate the efforts they're putting in to turn that around and actually acknowledging that. We have now managed to get all 4 units back on stream. So from a stability point of view, we'll have, again, a far better throughput.

As I mentioned, part of the pressure was a combination of increased maintenance costs over time, which we rightfully doubled down on, given our priority was our client, the NHS, the service levels we wanted to maintain and have successfully done so. And so there was a short-term EBITDA pressure that came through.

The slide that should be up in front of you now, was talking to Scanmed and so I'll go on to that. As we said, reprioritizing our international focus predominantly in diagnostic imaging. And so post the Max transaction, we've now also looked at our Polish business. When we look at the opportunities within our imaging business, both within the U.K., Italy, Ireland and other parts of Europe as well as our imaging opportunities and other growth opportunities within South Africa, we recognize that the compelling opportunities there and the management focus has asked the question of us around how we would think about Poland. And as a management team, we've taken a view that while Poland is an incredibly exciting economy and healthcare provision, there is still a very positive one with a good outlook, we have decided, from a strategic point of view, to explore and exit. We still think it's a very exciting asset, but probably one better suited in other hands. Process on that is to look to market it on a fair market valuation and potential interested parties, and we'll share probably in the new year on how we're progressing on that.

Growth initiatives. And I want to take a moment and talk to this because -- and I'll frame this as a tough trading environment where the teams have done incredibly well to put the results that they have on today, particularly in terms of double-digit growth rates in imaging, the performance we've seen in terms of positive PPD growth versus the market and the kind of revenue line that we've seen of almost double digits. So against that, as we've said, we've taken about 3.2% the normalized EBITDA and reinvested it into the business. A particular focus for me is around framing the imaging opportunity within South Africa. Secondarily to that one, a slightly longer-term horizon is building out our new outpatient model. And then the third element is really around understanding how we use analytics and technology to not just support both of the growth initiatives, but also support the cooperation in terms of better CapEx management internationally, in terms of newer and more optimized nursing delivery model in South Africa. So really using analytics to underpin those 2.

But to come back to the first 2, which is outpatient and imaging. On imaging for us, we recognize the opportunity from a growth point of view is quite significant. We'll share some of the numbers in the following slides. But effectively, a current private sector market. It's about ZAR 8 billion. And even if we took our share of it, we're looking at a ZAR 2 billion to ZAR 2.5 billion top line opportunity. At the same time, there's a few fundamentally important points to mention. One is we are really well positioned as the group, given the assets we own and the skill and competency and expertise we have within Alliance, which is not just one of the longest-standing imaging businesses in Europe but one of the largest, if not the largest.

So we have bring breadth of knowledge, scale, expertise and an opportunity to bring efficiencies into the model in South Africa as well as greater effectiveness and in terms of clinical outcomes and quality.

The part that I'm excited about is the opportunity we have in front of us of collaborating and working with a select set of radiologists. And that's part of the conversations and the discussions that have been incredibly not just productive, but I think put inside of both Life Healthcare Group, but also the radiologists who we're working with an amazing opportunity to create growth for all parties concerned, while at the same time, providing high-quality and affordable diagnostic imaging services into South Africa. So something that we're really excited about and probably the single biggest opportunity for growth in the next 2 to 3 cycles.

Just to touch on LMI, and I'll cover it in detail in the following slide. The important framing here is one of the key things that's changed in the market is that Biogen a few weeks ago announced that they have a disease-modifying drug, aducanumab, I hope I pronounced it right. Mark's smiling at me, so I nailed it. What that changes is that our core product in terms of Neuraceq, which is a diagnostic product, we were evidencing the opportunity for it to show positive changes in Alzheimer's with a control group versus people who weren't diagnosed earlier. The opportunity shifts very positively when you've got a natural disease-modifying drug because it then means the likelihood of FDA approval shifts significantly. Right now, our estimation is at a top line level, that market is probably about USD 1 billion, where we'd anticipate -- I would conservatively say, assuming all these approvals happen, about 1/3 of that.

So in principle, while still we have to watch the probability of this from a potential opportunity to shift dramatically should those approvals play out. I've covered Max, I won't talk to it. Moving on to the next slide, then just bringing it back to those key elements of the strategy. We've spoken about the geo focus. This speaks to diversification. And again, you'll see year-on-year, we continue to shift both in terms of the footprint geography in South Africa still very solidly being our core. And as you can see, some deep investments coming in future cycles, particularly in imaging, but also complementary and outpatients. So while at a macro level, we talk about an insured market that's not growing. And the leadership team, we see significant growth opportunities, and we're quite excited about the South African market. While we recognize just the natural growth rate internationally are outstripping it, and so to some extent, rebalancing the geographic footprint. At the same time, a very clear and a very deliberate acute to nonacute diversification strategy, acute will always be our core and also our deep expertise but recognizing with global trends, they need to be building our diagnostic businesses, outpatient models, complementary services [so we invest in that], just given both the margin and return on capital profile, but also the growth rates, given a number of these segments are underinvested to date and represent growth for us.

On to the next one. Just an overview on operating excellence, internationally and South Africa. And I think I started to talk to this, so I'll just touch on key elements. Across both parts of the business, we continue to leverage the analytical engine and teams that we are building at the group level to support both businesses, both in terms of how we think about radiographers staffing models as well as nursing staffing models, how we think about operating excellence and how we can drive not just productivity in these businesses, but also better clinical outcomes with better use of analytics. At the same time, you'll see the thematic message on your slide around international is about deep integration. And whether that's around financial reporting, whether that's around how we're thinking about procurement and multiyear CapEx management, all around our people, creating greater opportunities, talent management, stabilizing our management teams. There's a trend around saying, we've got 14 countries and the significant opportunity under Mark's leadership to bring some of the core back-end functions and efficiencies together, while at the same time, driving greater effectiveness in terms of production, in terms of scans per machine per day, but also in terms of clinical outcomes.

I say that cautiously and humbly because in the slides to follow, you'll realize the metrics on all of those are really quite high, particularly both on production, but also in terms of the clinical and the quality measures. So we're setting the bar high for the team while they are already above almost all international benchmarks. So I want to also acknowledge the good that's being done. This is really about us just pushing and continuing to push to the next level, but starting at a very strong base.

South Africa, very similar. Our historical margin and our historical return on capital has been high, has always been high relative to pretty much most peer benchmarks on listed company benchmarks. If you then also look at our quality measures. We've always pushed to create greater transparency, not just within our hospitals, but also at an industry level. And so against that backdrop, again, of good operating performance and good clinical outcomes, we're continuing under Adam's leadership to up the ante, so to speak. So a deeper focus on a strong base around clinical excellence, around new nursing models, also around nursing effectiveness and using analytics and technology to enable that, while still looking at quality on a year-on-year basis, acknowledging that we are already above the targets that we need to be, but still pushing to move further on that.

Moving on to the next slide. And I've have spoken to a lot of this, so let me actually frame it while you read it. Within the South African context, we've historically spoken predominantly about insured market. As you can see today, we talk about this as 2 separate segments for us. The insured market which represents growth still, while we see the total number of lives may not be growing, we see segments of opportunity within that. And the uninsured market, where we anticipate it's about the same size, if not slightly bigger than the insured markets, and exploring opportunities for us to serve a cash-paying patient who would love to access affordable, high-quality healthcare.

So against the macro outlook each of us will have our own views on, we -- within the group have a very excited view around our growth opportunities within the healthcare space and the private provider. And this is really about broadening out, as we said, in terms of diversification into the non-acute spaces, particularly complementary. As you can see, and I'm sure you've all already read about 15% CAGR growth. And for us, we're continuing to invest there. You see we installed this year another 80 mental beds. We look at a few more next year.

And then imaging, as I've spoken to, and I think pretty much what's on the slide I've covered. I think the important point for us is we see it as a significant opportunity to bring efficiencies based on the skill set we have, provide high-quality diagnostics into the country, better outcomes for the patients, as a result, support government in this regard, given some of the challenges we know, I think, experienced particularly in diagnostics and oncology and if we can be supportive there. And work in a very collaborative way this next set of radiologists who started to engage with us, creating phenomenal growth for them as our partners, and at the same time, enabling them to provide greater services for their patients. A fantastic opportunity for us to partner with our radiologists and bringing imaging into South Africa at scale.

On the uninsured, which is, for us, a growth segment and effectively a new growth segment because you started with the business has been 90-plus percent within the insured market. Our new outpatient model sees growth opportunities for us there. We are already at 4 different pilot models. We've tried a big box example. We've now piloting one that's fundamentally different size and in a different socioeconomic environment. We've launched the first of our in-supermarket or in-retail, the next with one of the big retailers in South Africa. We're partnering with them and really excited about the relationship with them. And we've also piloted our first container-based model, which gives us the ability to permit and be far more nimble in terms of where these get deployed. So in effect, creating multiple modalities of building our outpatient models that are affordable, easily accessed and providing access to high-quality private healthcare. And as I mentioned, our imaging opportunity is not limited to insured markets to the private sector. And should we be invited in, we're quite excited about the opportunity to support our government in providing imaging services there like we do in Italy, Ireland, U.K., et cetera. In fact to serving government on this while at the same time, effectively serving the private sector.

Moving on then into the operational review. Forgive me, we'll take questions at the end, if that's okay. The slide that you have up in front of you, which refers to business review, its intention, while many of you are reading the numbers on it, it should bring one message across -- or rather, 2 messages across, in my mind. The first is that we talk about being diversified as an integrated provider. If you really look at this, this should come across quite stark here. This isn't a hospital group. This is a hospital group with a pretty entrenched complementary business in terms of rehabilitation, mental health, renal, oncology, while at the same time, having a phenomenal footprint in terms of occupational health, wellness, established relationships in terms of private-public partnership. So our ability to position from green, we sell you inpatient care to say you as a patient, we provide healthcare to you when you need it and in whichever format you need it. The asset base that we have under Adam's leadership is exactly constructed for that. So as we move towards more integrated care model and more (inaudible) based models of clinical care, we have all elements of provision already existing while still continuing to invest, as you can see, revenue growth intention, and recognizing that our occupancy still remain high in doing this. We're not diluting down our utilization by building out a provision base. So it's not that there's cannibalization between healthcare and complementary of acuity. That's been quite the opposite. It completely supplements the journey of actually capturing opportunities to service our patients and provide high-quality healthcare throughout their needs.

Again, moving slides how this played out in the last year in 2018 versus 2019. As I mentioned, a story of 1 versus 3 quarters rather than a story of 2 halves in terms of PPD growth. But as a net effect, positive PPD growth in the market. And this was in the organic basis. So on the acquisitive, so very good operating outcome from the team in SA, strong revenue growth. I think the important things to highlight, rather than talking to the slide, is that the operating EBITDA margin is still at around 29%, almost 30% and increased from last year to this year in terms of the financial year. As the net normalized level, you can see it's down, but the true effect of that, if these investments that we are making into the -- I don't want to say corporate costs. But into the corporate support models of analytics, our investments into our technology base, as well as the efficiency programs that were borne out of corporate office, but supporting the SA team in terms of driving procurement, new nursing models, how we think about our administrative cost. So very consciously protecting a margin that is significantly ahead of any of our peers and a peer benchmark.

That to be sober about it would stabilize the margin as an intention, I don't think we would -- we'll be misstating it to suggest that in the acute business, it would create growth. Growth will come out of the focus on complementary and diagnostic imaging. And there's a deep commitment from us as a leadership team to maintain that margin where it is today.

I move on to the slide, and I think I've spoken to this already. It really was a tale, as we said, of how the year progressed from actually Q1, where we had quite significant, almost an -- not almost, we did have quite a significant negative PPD environment, which played out across everything else, as you understand as the core driver, which shifted in Q2 and then very strongly held by the team, Q3, Q4. So at an overall level, and while we ended up at 0.8%, the second half of the year was almost 2% PPD growth out of the -- the original set of beds that we added. Yes. It wasn't that we brought growth into the business.

Again, you can see how the margin profile played out. But as I said, that was about investment into the business, efficiency programs to protect future cycles as well as building out our analytics and our technology environment and stabilizing some of our IT environment. Just given the size of the business and the importance of that. If I move on to the next slide, what were talking about earlier when we spoke about some of the drivers of the growth and the outlook. And I'll talk to that in this slide and the slide that follows together, but it's driven off of a few key drivers, right? I think first off, the non-acute parts of the business have grown in a positive way, at a disproportionate way to acute and that over the long term lends itself to the diversification strategy. At the same time, our mix from surgical to medical and as many of you will appreciate, medical comes with a differentiated average length of stay, which means from a bed utilization point of view, it improves in terms of how that plays out on a revenue and on a profitability basis.

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Unidentified Company Representative, [3]

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(inaudible)

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [4]

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(inaudible)?

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Unidentified Company Representative, [5]

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(inaudible)

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [6]

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Apologies, those of you on the webcast, I was talking to the slide that I believe you are now seeing in front of you. I'll just very quickly summarize. We're basically saying what you're seeing in front of you talks to both the message around the continuing to diversify the business. And as you see, non-acute growing at quite compelling growth rates of almost 15%. While at the same time, when we look at our PPD outlook, and this is really talking to the year past, but also going forward. We're seeing the shift in mix from surgical to medical. And as I was saying to many of you, that underpins rather a more positive average length of stay profile and that links in actually with the first part of the next slide which we've moved to which is Slide 14, which is actually about while the base at a macro level in terms of insured lives may not be growing, the profile of patients we have in that, given they're national below 50 and above 50, the age mix shifts in a way that from a PPD's average length of stay and, hence, proportionate contribution of revenue more positively shifts towards us in terms of a more attractive outlook. Again, it does mean a greater disease burden, and it's never a good news for our patients, but opportunity for us to provide meaningful healthcare to them is compelling, and we'll continue to do it in a responsible and in a way that's just the outcome in their clinical metrics.

I'm sure most of you have read it, and it's quite a stark difference that you're seeing in front of you, just that between the average length of stay and the revenue per admission as you see the age profile shift. And that's part of the positive, not just on the year-on-year past, but also in terms of the outlook, with a base of insured patients that age. And similarly, with that, a shift in the oncology profile, which, again, for our patients are unfortunate, and chronic disease that comes with it, which again then shifts our admission profile. Very briefly, then as we change slides to talk on CapEx, and Peter will talk to you in far greater detail later on.

I think the key message here is that, in an absolute sense, we continue to invest significantly in our CapEx, particularly maintenance CapEx because we get our growth from that. And while year-on-year, you can see that numbers adjusting upwards, and rightfully so, as a percentage of revenue, it's proportionately coming down, which for me is incredibly important technology ongoing and an absolutely deeper investment in maintenance and capital into the business. But more importantly, the productivity of that and the return on that being compelling, which shows that we efficiently and more efficiently year-on-year [sweeping] those investments. So again, well done to the teams that are delivering that, has spoken to the growth part of it.

I move on and then get on to quality. I think every 6 months I say this, but I will continue to because I think this is such an important topic. In our heart, we are a provider of healthcare. And the most important thing around us is measuring this, setting ourselves targets to evidence to ourselves and as much to our patients that we are very positively shifting their clinical outcomes, not just their experience. I know that we run a positive experience is as important and wonderful to hear. But for me, as a doctor and the commission, at the same time, that we can hold ourselves accountable to good positive shifts in their well-being is at the heart of why we exist as a group. And so we check this, and we share this with you every 6 months. Again, you read it so I'm not going to talk to it. What I can tell you, which is not on the slide is, in 2018 and in 2019, irrespective of whether these numbers have stayed flat or improved further, they're well above our own targets. And I think that's the message, which is the team continues to push to get even better on this, even though they're continuously outperforming the targets we set. And as I said previously, as importantly is transparency. So these are published at a hospital level. I encourage all of you to go and check this. And over time, we'll continue to push to try to get this to become an industry standard, which is transparent in a visual display of actual clinical outcomes of our patients.

If I move on then to the other part of the complementary business. Healthcare services should be the slide up in front of you. Key messages, revenue growth is incredibly positive. More so than you can on the acute, and that's a conscious, as we said, investment into the non-acute business. What's as compelling, and again, kudos to that team because there was a fair bit of work that needed to be done. They are starting to positively shift the margin also and we'll see that in future cycles, and that will also improve. And they said in many, I think important to mention here the utilization levels are quite high. And we, as a management team, are discussing opportunities to serve government and support government even further, given the importance of the role we all collectively play in terms of serving the segment of society and supporting them in terms of their health and wellbeing.

Moving on to the international business. We'll jump 2 slides. You should be looking at a slide in front of you that has a number of flags there. You've seen this previously. This is Slide 19. You've seen this previously, so I'm not going to present it to you. I think the key message is to takeaway from it is that the U.K., Italy and Ireland make up the bulk of this, the U.K. not as strong, the dominant part of this is PET, within that is almost now 60% of that business. That's the real saving. But the key takeaways here would be, as we said, PET is a high-growth story, and we'll talk through it. While at the same time, when we take a long-term outlook, and we've got strong stable operating performance under Mark's leadership, and I say that beyond radiopharmacy. Our growth opportunities even within the geographies that we have with the tale of another 10 countries, is quite exciting.

Obviously, the U.S. index, it's more than just a Europe story. And so that's the way to think about this, which is strong operating performance stabilizing further because we've had 1 or 2 major pharmacy challenges. Again, framing that against most international, or if not all, international benchmarks, this team outperformed both at an operational level and on a clinical outcome level, we are pushing for greater stability because of the growth rates we see in front of us with a second-tier horizon around additional geographies. Important to differentiate it that Poland isn't just about our Scanmed, and our hospital and cath lab business, but also a diagnostic imaging center assets we have.

So we would exit half the Scanmed assets should that transaction be something we choose to support. While at the same time, keep a foothold important for diagnostic imaging.

Moving on in the slides. Just very quickly, I'm going to try to pick up the pace. As you can see, PET's got high growth, 16% as I mentioned. While at the same time, we still -- not to talk down the rest of the business, supporting almost 9% growth across the more traditional modalities. So when you really look at it, very positive growth in terms of volume. And obviously, an important technology, as I change slides, because this will jump out at you. So let me start off by just getting to the crux of it. That volume growth is offset by the reality of tariff pressure in the markets that we're in. In almost all parts of the world, we see margin pressure as a consequence of every year, every 2 years, a slight downward adjustment in tariffs. That is not a new, new story to us. That is part of doing business in these parts of the world. And so for us, part of our growth story is to offset that with the likes of these PET contracts, which are 10 years, fixed pricing or 7 plus 3 in the case of PET 2. Fixed pricing with an ability as we drive efficiency and throughput to that to shift the margin profile for the whole group as a consequence, which is why the size of PET within the U.K. business and its growth gives you a sense of how over time this margin profile will change.

That said, I don't want to talk it up when there's a slide in front of you that's showing a 24.9% to a 22.6% downward movement in the EBITDA margin. So I'm going to take a moment and just talk to that.

As you can see, significant drag off it is the bit that I've mentioned, which is a pricing pressure. At the same time, maintenance into the business, need to increase capacity, expanding into a few new modalities within existing environments, which provides us new growth segments in the future, which are necessary, but fully acknowledging some of the margin pressure in the traditional part of direct imaging. I've mentioned the radiopharmacy supply challenges around taking down one of the 3 or one of the 4 sites, so operating 3 of the 4 sites because we prioritize our service level agreement over the cost structures in the short term. And given that 16% growth rate, we need to change our refurbishment profile.

As we've mentioned in the past, Dinnington comes online next year. That adds 50% more capacity. I'll say that again, it adds 50% more capacity. Not only does it stabilize this whole system. That said, Mark's team has already got all 4 environments up and stable. So it just adds additional buffer, while at the same time, creating the space for us to grow and grow also including new modalities of provision like SPECT in addition to PET, which we don't have in the U.K. today. So exciting as we look forward while fully acknowledging short-term operational pressure.

I think while I frame it that way, I think I would pause and reflect though that margin isn't necessarily an unhealthy one. So I just want to acknowledge that, that's done well. I think I've spoken -- I've moved the slide. It should say Slide 22. It should have the overview on PET in front of you. I think I've spoken to all of this. I'm not going to repeat it, other than to frame for you what the growth rate looks like. And I'll just go over the last 4 years alone how the MRI, which is effectively PET, has now become 16% of the business. And the importance of that framing is the reality of how it stabilizes our overall tariff profile, given the long-term pricing stability that comes with those contracts versus the DI parts of the business, and that positions us well as an asset especially in -- not just in the markets that we're in but versus any other of our competitors or our peers, rather. I've moved on to this slide, which is 23, around DI. I've spoken to it. I think the only point to make here because I've spoken about the tariff pressure is that we are consciously moving towards longer-term, more established contracts and relationships. So you'll see that split has gone from a 56%, 44% to 64% of the business now sitting in long-term, more stable contracts. The trade-off though, strategically around stability for the business, is an element of pricing differentiation in our spot pricing versus the longer-term contracts but we take a view as the leadership team that absolutely is a better investment on our part and to move away over time from the more mobile day-to-day contracts towards the longer-term one.

Moving on. There's a slide in front of you called future proofing. This talks to the refurbishment I've mentioned that, at times, we've had to bring down one of the 4 and operate 3 of the 4 cyclotron sites in order to address future maintenance as well as a few challenges we have had in terms of operational uptime and productivity, all linked to again this message of priority one is our service level agreement, our customer well-being. And thank you also for ensuring the right clinical outcomes that we're supporting the NHS on just given the importance of diagnostic imaging, particularly in the clinical environments that we support especially with a focus on cancer.

I've spoken about the capacity, Dinnington, all of that. So from 2020 onwards, we should see even greater buffer in the system. And from now going forward, we should see a lightening of that increased costs that we've had to put into the system, which added about -- like we said, 1.2% margin pressure in the short term. And we'll see that revert into next year.

Very briefly, Italy and Ireland. Important points to hit on here is 10% share of revenue growth in Italy and almost 20% in Ireland. I think those leadership teams continue to be better. I think Mark and I will have a chat about making the budgets even tougher for them because clearly, whatever we set, they outperformed. And those are markets we're excited about. I think Italy and Ireland would be an even more compelling growth story if it weren't for what PET is doing in the U.K. in terms of the growth rates that it's delivering against. It's just been phenomenal. Growth initiatives. Sorry, I thought I'd get to pause there and Pieter will take over. But we can just quickly cover this. I've spoken to this already, so I'm not going to reposition. You'll see a slide in front of you, which is imaging in South Africa. I think the key message is here the big opportunity within the private sector. We have deep, deep expertise, knowledge. We have an opportunity with our leadership from the Alliance business to come and bring operating efficiencies into the country, in doing so support our partners in terms of the radiologist practices that we are moving forward with, create significant growth and wealth for this. And at the same time, shifting the quality outcomes, the provision of care and a better overall service for those who get to engage with us in the South African context in the private sector, while at the same time, fully acknowledging a desire on our part to help support government should they need, given our experience serving governments on diagnostic imaging internationally. I think really important just to mention is point 4 of this, which is the model that we see is incredibly accretive in terms of return on capital. So when we take a step back and look at the overall SA business, what we've shared with you about acute, keeping the return on capital profile and the margin where it is, you'll appreciate our almost on a double-digit basis over the next 2 to 3 years. This plays out very positively for us and for the radiologists that we are partnering with. So we're both excited, not just for us as a group, but also for the opportunities we create for them.

I've spoken to the next slide, effectively giving you a sense of the patient experience versus what the international benchmarks are, the clinical quality standards versus what the international benchmarks are. You can see as much as we talk about continuing to push and deliver more, we are already well above most of those benchmarks. To give you a sense of scale, the Alliance group does MRI and CT to a level that's almost 900,000 scans a year, which is more than the South African private market. So that's the depth of knowledge and ability plus operational efficiency and competencies that we'll hopefully bring to bear in the coming cycles. And similarly, the knowledge that we've learned around PET to actually shift clinical outcomes. I think importantly, especially for the radiologists that we're partnering with, we have some deep strategic collaborations, academic and otherwise, that hopefully, we can leverage on and enable them as clinicians to bring even better clinical outcomes for their patients. So a really exciting opportunity for us and the South African radiology community.

LMI, I've talked to it. I've mentioned to you, Neuraceq, which is our radioisotope that's used for diagnostic purposes. Apart from now, while we've been doing 2 trials that have evidence that earlier diagnosis using Neuraceq versus a control group still results in positive outcomes in Alzheimer's. It's a harder actuarial sell, as you will appreciate. And so the aducanumab drug that's been brought to market by Biogen and should they get approval by the FDA for it being disease modifying, i.e., for those of you -- what's that simplified, it can be used as a treatment drug, and we have a drug that can be used as a diagnostic drug. Their ability to get approval enables our ability to then get funding. And as you can see, the market opportunity is massive in terms of -- sorry, I said US dollar billion earlier, it's euro. I guess in today's market, there or thereabouts. And for us, that completely shifts as we anticipated the overall outlook in terms of profitability and value creation through Life Molecular Imaging. That said, again, cautions a probability, which is we have to wait for all of these approvals. But versus 6 months ago, this is a fundamentally more positive step forward and it's incredibly exciting for us. At the same time, the team has still taken a view with this business unit within our world will still self-fund by the end of this financial period. So just want to make that -- or rather share that with each of you on the call, so that you're not thinking that this is something we're putting deep amounts of money into to realize that.

End of this financial year, it will be self-funding while at the same time, an even more positive outlook on what would be a triple-digit euro million opportunity for us should it play out as we hope.

I've spoken about the outpatient model. So please jump slides. You'll start to see it come up on your screen. I've spoken about 3 to 4 new models that we're testing from a large size that's about 250 to 300 squares down to one that's almost 35, 40 square meters through to a containerized model through to where we're now building in partnership with one of the largest retailers in the country around it in retail or in supermarket environment. We're quite excited about these opportunities. The caliber of institutions that we're partnering with, which allows us to very rapidly take this to scale once from an analytical point of view, we are comfortable that the clinical outcomes, the patient experience and the overall profitability of this resonates for us. And this, again, if you step back from it is about providing a service into a completely new consumer segment that we don't serve today. So again, it represents growth for us into a South African market, where we recognize that an insured level, we may not be seeing it. So very excited about what proportion of these 11 million to 13 million lives we can provide high-quality health care to. As an additional comment, fully acknowledging given the regulatory changes in South Africa that are coming with NHI, et cetera, we are incredibly well positioned to support government as they roll out a model that's primary health care-based with an outpatient provision environment that we have. So we'll build this because it makes good business sense for us and accesses a new growth segment while at the same time, we really need to support the government when NHI rollout happens. It's a very exciting times for Adam and the team in terms of the nonacute part of the business on top of what is already a special acute part of the business.

I get to pause and drink a sip of water. I'm going to hand over to Pieter van der Westhuizen, our Group CFO.

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Pieter Phillippus van der Westhuizen, Life Healthcare Group Holdings Limited - Group CFO & Executive Director [7]

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Thank you, Shrey. I think Shrey discussed quite in detail the operation, so I'm going to mainly focus on the financial implications of some of the matters that he discussed. But first, I want to pause on Slide 32. Just as a summary highlights of the financial performance for the current financial year. We had strong revenue growth and driven largely by the operations in South Africa, with good volume growth and a positive case mix in terms of revenue coming through, and then also supported in initiatives by the PET-CT operations in the U.K. with great volume growth.

Normalized EBITDA is up 3.5%. Included in the numbers for the current financial year is investments into capacity programs where we put additional people on the ground. We think that it can support our efficiency programs and in addition to that, we've established programs and we've had to expense those costs in the current financial year, and that's to the tune of ZAR 124 million that's included in EBITDA.

In addition to that, what Shrey discussed earlier, is the short-term implications of the ratio of radioisotope delivery issues that we have and the impact of GBP 3.5 million converted into rands, which is about ZAR 65 million.

We had exceptional good cash collections in Q4 this year. And we think that we're getting at ZAR 5.9 billion of cash generated from operations. Taking to that into consideration as well as for earnings for the year, the Board has declared the final dividend of ZAR 0.53 per share, up 6% on the prior year's final dividend.

Okay. Now to Slide 33. Looking at the income statement. We think that we have discussed the top line in terms of revenue, strong growth, normalized EBITDA of 3.5%; margins, down from 23.6% to 22.3%, because of the implications of those specific issues that I've highlighted. And the recent one-off implication of the Max Healthcare transaction at a profit level of roughly about ZAR 1 billion coming through at the earnings level. And in this, also an impairment on the Poland operations related to one specific asset due to regulatory changes on nursing and minimum nursing salary costs that helped us too in favor of one asset of ZAR 124 million. Total for the year, earnings are up to ZAR 2.6 billion, roughly 63% up against last year.

Going now to slide -- next slide, Slide 34. We've had to have a benefit of currency movements, the rand during the period weakened about 4%. On this slide, you can see what the implications have been if it has been reflected on constant currency. Revenues increased by 8.1% and normalized EBITDA by 2.5%. Also want to highlight the corporate costs. It's down against last year in total, we had ZAR 455 million net income compared to this year's ZAR 321 million, and it's mainly driven by the increased costs on the operational programs that's included in the cost line.

And as I said earlier, it's about ZAR 124 million. If one strips that out, effectively, the corporate cost is in line with the prior year.

Going to the next slide. In terms of the Max Healthcare transaction, as Shrey said, we concluded the transaction in the current year, and it was concluded towards the end of Q3. Effectively, we utilized the full proceeds to repay debt so we have the interest saving for the last quarter, and that will flow through in the next financial year, roughly about ZAR 200 million of interest savings for full year.

Turning to Slide 36. In terms of earnings per share. Said earlier, earnings per share up 62.4% to ZAR 176 impacted by the profit on disposal of Max, mainly, and in some of the payments. Once you strip that out, we've got an earnings per share that is down against last year, and that's because one cannot strip out the hedging contract that we took out, when we take the cash flow on the next transaction of ZAR 400 million, roughly. I think when one strips that out and we normalize the earnings per share, normalized earnings per share is up at 5.6%, and this is measure that we as a management team use as the key measure in terms of what earnings per share effect has gone up when you strip out the one-off type items. And that's also what we use from a Board perspective to evaluate what the dividend should be at for the full year.

So let's move to balance sheet on Slide 37. I want to highlight that we've effectively utilized the proceeds on Max to repay debt, so net debt to EBITDA is at 1.96. So it means that we will -- be well-positioned for our investment opportunities that we see in imaging in South Africa. And then in addition to that, we are in the process of refinancing some of our international debt that we would like to conclude by the end of March next year. You'll see in the short term, we've got roughly ZAR 2.6 billion that needs to be repaid in the next 12 months, mainly related to international operations.

Turning to Slide 38. We have discussed previously the good cash flow that we've been able to generate through the management of working capital. We had 103% of EBITDA, as you can see on the graph. And in terms of the target, we want to be about 95%. So we're well above that target at 103%. In terms of net cash flow after CapEx, investments and disposals, you can see we've done very well, above 100%. It's mainly because of the proceeds from the Max transaction. A measurement we use internally will be the free cash flow before transaction costs and I prefer to be below about 5% to ZAR 2.3 billion. That's a number that we will utilize effectively to look at investments for growth as well as what we think will be utilized for dividend repayments.

And then on Slide 39. Discussed earlier in terms of final dividend of ZAR 0.53, bringing a total dividend for the year at ZAR 0.93, and that's up 5.7% against the prior year on a full year basis. And it's in line with our policy where we want to pay a progressive dividend taking into account the underlying earnings, as well as looking at whether cash flow has been generated by organizations, but taking into consideration also investment opportunities that we see in this period.

And just lastly, in terms of a financial unit. In terms of IFRS 16 will be implemented from the 1st of October 2019. So effectively for 2020 financial year, the finance team has completed the work. At an earnings level, it is roughly between ZAR 25 million to ZAR 40 million, so it's a decrease of profits. It's not material at a net debt and at a net asset basis at about ZAR 1 billion. It will increase net debt-to-EBITDA from 1.96 to 2.05 roughly. We are in discussions with our funders to make sure that we did the dispensation in terms of how this is treated going forward in terms of the major moves of currency.

Now handing you back to Shrey just for the outlook for the 2020 financial year.

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [8]

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Thank you, Pieter. So just to quickly cover that, and then we'll go into questions. I think we've covered most of the growth stories so really just from the outlook in terms of how we're thinking about the effect of that and the operating environment playing out. It's Slide 42, group overview outlook for FY '20. So is a very quick summary.

On the South Africa business, we anticipate PPDs would be flat with the shift in our network agreements. Similarly, as I've said in -- and I've made the point a few times this morning. We, as a management team, are committing to keeping the EBITDA margins stable. And that's through the investments we've made this year in operating efficiencies and the costs we've incurred to do that. And so that will stabilize us into future periods, not just the next period. Continuing to invest not just on the maintenance side, but also growth from a CapEx point of view. And both in terms of complementary and in terms of acute brownfield beds and particularly look for more renal opportunities.

Internationally, this will be about operating stability and then growth on the back of operating stability. So completing our refurbishment, I've spoken at length about the radiopharmacy challenges we've seen this year. The stability Mark's team has now brought to it and how Dinnington will create greater buffer beyond that. We should see the EBITDA margin as a consequence of the one-offs of this year, the wash-out of the PET pre-investment and the increased cost at ZAR 3.5 million that we incurred additionally for to ensure the SLA was met and would play out. And so the combination of the PET growth rate and the one-offs adjusted on the EBITDA. Spoken about PET and we'll let you know how we progress on the disposal of the Scanmed part of the assets in Poland.

Growth, I've spoken to, so I'm not going to cover it other than to say the 3 there, talked to the first 2 arrivals, which is imaging in the next 12 to 24 to 36 months. And as I said, probably the single biggest opportunity for us as a group and for the radiologists that we partner with in South Africa. I've spoken about outpatients around the future yet to follow by building it out from now. The scale of the opportunity is a completely new market segment in addition to our traditionally insured one, while at the same time, building out a product set that allows us to support government under NHI intentions. And then LMI, a more positive shift in the outcome with a still a cautious view on probability, given an external dependency on FDA approval and other. So overall, strong operating performance that we see to a very positive outlook, again, in terms of keeping the core where it is great operational stability, additional efficiencies to stabilize albeit margins and some exciting growth opportunities, both in South Africa and internationally. So that's a wrap, so let's jump across to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So at this stage, it seems that we have no questions on the conference. Is there any questions from the webcast?

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Adam Pyle, Life Healthcare Group Holdings Limited - Group Strategy & IR Executive and CEO of South Africa [2]

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All right. We have -- this is Adam Pyle here. We received a few questions, which I will just read to my colleagues. The first question comes in with regards in terms of primary care with the expansion and our radiology intentions, are we confident that the authorities will allow us to provide service in a meaningful market share in terms of outpatient radiology and imaging?

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [3]

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Adam, if I can, let me take that. It's Shrey. I think it was needed to be answered on 2 very different levels because I think the regulatory environment are different in both. And currently today, primary care provision exists in the private and the public sector. So there is no regulatory reason that we shouldn't. In fact, other hospital groups have actually got well-established primary care provision models, actually. And this is us probably entering with a far more technology advanced and a very good cost position, but actually, it's not a new concept. If anything, all of the future regulation, if you read what's been published on any time talks to primary care being the foundation of our health care system. So actually, this would be very well aligned. On the radiology side, I know there have been some questions, and let me just openly speak about it, raised in the media and otherwise by certain interested parties. Let me say that around concerns about this, we have long before entering the market gotten significant and relatively senior legal opinion in the view to make sure that there isn't any concern. And I think beyond staying well within the regulatory environment, we're actually very confident that this meets all of the current requirements. But at the same time, ticks a lot of the needs that the country has in terms of great efficiency and bringing in those kind of elements to it. So is it a regulatory concern, do we anticipate that parties or interested parties who may see this as a debt to their own kind of wealth creation object. I wouldn't be surprised. But I think both for ourselves and for the radiologists that we are partnering with, it's a phenomenal opportunity and it's one that's worth the debate should it arise, but we have no concerns.

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Adam Pyle, Life Healthcare Group Holdings Limited - Group Strategy & IR Executive and CEO of South Africa [4]

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A question in terms of trends, one of our competitors has recent announced a secured anchor status with Genesis which could possibly restrict hospital network and has likely included it in the contract. If not, what portion of volumes are we expecting to lose? If Life is not in the network, the network which is currently a (inaudible) network, which has (inaudible). This is a retender on the existing network which could incorporate also all set by (inaudible). So I wouldn't call it a new restricted hospital, it's an ongoing existing part of the existing contracts. We are not an anchor tenant of that contract. We do have a number of hospitals. We still have discussions with (inaudible) whether there are any additional hospitals. And from a Life perspective, we will look to pull those volumes from other areas.

Another question comes in regarding the -- given the mix increase further towards medical cases can we see 1% effect of mix of revenue from PPD in H2?

So what we have seen with the general shift towards medical has happened over the last 5 to 6 years. What we have seen this year is an increase in the acuity of our cases that have paid off. So we have seen a longer period of time for our cases, we opened a new (inaudible) in (inaudible) in November last year. We've seen an increase in our asset cases. And that would explain the additional 1% effect on top of our 4% tariff increase.

Just the last question is, could these cost efficiencies that you've spoken about, will these cost efficiencies offset the pressure from the 0% PPD growth guided to maintain our margins. And this is absolutely yes. That's the direction we're going. We realize there's some more steady growth. And therefore, we do have to become more efficient. And the initiatives we are undertaking now to ensure that we can become more efficient and put ourselves in a position where we can maintain our margins in an environment of 0% PPD curve.

Other questions coming regarding -- can we give some guidance about increased diagnostic imaging and outpatient whether it impacts the group margin

in terms of going forward, so the impact in terms of the radiology business and on high chances, what impact it will have on group margins going forward.

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Pieter Phillippus van der Westhuizen, Life Healthcare Group Holdings Limited - Group CFO & Executive Director [5]

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It depends in terms of how quickly we access those markets. So typically, the outpatient models see margins at below 10% at EBITDA level. So as that will grow, it will have a negative impact on EBITDA margin. But it is an exciting business because from a return on capital perspective, it is extremely accretive. And because it's got high return of capital, it is low capital investment in Q1. The opposite is on the radiology. Radiology, we would see will be accretive at the EBITDA margin level. But from a return on capital perspective, it is likely to have a lower return on capital because we will effectively will be acquiring these businesses, we do see long-term massive opportunity in this because it is accretive in terms of return that we were looking at from that way, but it will have a positive impact right now.

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Adam Pyle, Life Healthcare Group Holdings Limited - Group Strategy & IR Executive and CEO of South Africa [6]

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A question for Mark. Just about when does the cyclotron in respect to Dinnington begin to operate effectively for some [royal accounts]?

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Mark Chapman, Life Healthcare Group Holdings Limited - International CEO [7]

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Yes. So the Dinnington should open May or June 2020. So we expect that to be fully operational for H2. It's just some context, it can take -- well, our technical portfolios are performing with cyclotron. So it's not something that happens overnight.

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Adam Pyle, Life Healthcare Group Holdings Limited - Group Strategy & IR Executive and CEO of South Africa [8]

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And then finally, from Robyn Collins, which is what probability do we attach to getting our 1/3 of the European EUR 1 billion global Neuraceq opportunity? And what is the expected time frame?

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [9]

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So and I thought every time I reference that, I was very clear, but we shouldn't be making assumptions in terms of how we would think about the probability just given while it's incredibly positive news, it is a subject of significant external dependency in terms of FDA approval, that I think it's way too early to -- if we obviously, it is possible for me to kind of say, yes, but I think it will possibly change. I think if we hear anything further, we absolutely will share it. We just wanted to share some good early news.

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Adam Pyle, Life Healthcare Group Holdings Limited - Group Strategy & IR Executive and CEO of South Africa [10]

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And I think in terms of there are a number of other questions but I think we'll address them to go on. Those are all the questions we received on email. From us, thanks very much all for listening in and contributing. And Mark?

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Mark Chapman, Life Healthcare Group Holdings Limited - International CEO [11]

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Thanks very much, ladies and gentlemen.

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Shrey Balaguru Viranna, Life Healthcare Group Holdings Limited - Group CEO & Executive Director [12]

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Thanks, everybody.

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Operator [13]

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Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.