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Edited Transcript of SPI.L earnings conference call or presentation 16-Sep-19 8:30am GMT

Half Year 2019 Spire Healthcare Group PLC Earnings Presentation

London Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Spire Healthcare Group PLC earnings conference call or presentation Monday, September 16, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jitesh H. Sodha

Spire Healthcare Group plc - CFO & Executive Director

* John Forrest

Spire Healthcare Group plc - COO

* Justin J. Ash

Spire Healthcare Group plc - CEO & Executive Director

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Conference Call Participants

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* Alexander Matthew Gibson

Morgan Stanley, Research Division - Equity Analyst

* Charles Robert Weston

RBC Capital Markets, LLC, Research Division - Analyst

* David James Adlington

JP Morgan Chase & Co, Research Division - Head of Medical Technology and Services Equity Research

* Emmanuel de Figueiredo

LBV Asset Management LLP - CIO

* Graham Doyle

Liberum Capital Limited, Research Division - Research Analyst

* Miles Dixon

Peel Hunt LLP, Research Division - Analyst

* Sally Anne Taylor

Numis Securities Limited, Research Division - Director & Healthcare Analyst

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Presentation

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [1]

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So good morning, everybody, and thank you for joining us at the 2019 interim results presentation. This morning, I'm going to provide an overview of our performance over the first 6 months of 2019 before asking Jitesh Sodha, our CFO, to present the financial results. After that, I will give further detail on our performance in H1 and how that informs our strategy and expectations for the future. We'll then take a Q&A during which Jitesh and I will be joined by John Forrest, our COO, for that part of the session.

First, let me remind you of the strategy we laid out in the FY '18 results presentation. We're aiming to be the first choice for private patients, whilst remaining a key partner to the NHS and being uncompromising on clinical quality and patient safety. And we know that if we deliver on these key points then revenue, profit and cash growth will follow.

H1 '19 has been a period of positive change in our business, as we continue the work we began in 2018 to improve quality, whilst implementing new systems to drive efficiency gains. Against this backdrop, I am pleased with our performance. We have grown our private business, improved the quality of our hospitals and delivered revenue growth across all 3 payor groups, whilst reducing net bank debt.

At the FY '18 results presentation in February, we laid out our plans for the year with an overall expectation that modest revenue growth would be offset by mix and managed cost increases. Breaking that into 4 strategic pillars, I'm pleased to say that we have delivered on our commitments to date and are on track for the full year. It was a period of good performance with many positive elements, but of course, some areas for further improvement. There are clear signs of our strategic and operational initiatives bearing fruit. The impact of our full strength executive team is evident as we gain tighter control of the business and improve engagement with our clinical teams and workforce more broadly.

I am particularly pleased that we grew sales in all 3 payor groups for the first time in many periods.

In more detail, let me turn to our focus on private patients first. This income stream continues to yield over 4% growth, continuing the trend seen in H2 2018. We see this has been driven by a number of factors, all of which are supported by a decision to place patients' safety and quality of care at the heart of everything we do. PMI is our most critical payor group, representing some 50% of revenues. The record growth of 5.1% in the period is the result of our sustained program to grow share in this area.

Self-pay growth of 1.4% was less than we anticipated and our ambition, but we understand the reasons why, and can correlate this with decisions we have made. We have continued in particular to deprioritize cosmetic work with low average rate per case, low contribution and high complexity in order to focus on core clinical treatments. The corresponding mix shift effects were reduced as we go forward. We have clear evidence that our refocused digitally concentrated marketing is working well, and we will continue to invest in this in a measured evidence-based way. As a result, private outpatient inquiries and first appointments remained robust and, indeed, are strong across all payors, which is critical, given these provide the source of our future pipeline. With flat total private admissions and strong ARPC growth through improved acuity, we are delivering total private growth of 4.1%, built on solid foundations for continued performance.

Turning to the NHS. We aim to maintain share in a challenging market. Many CCGs and trust continued to restrict commissioning of core orthopedic work, but we were able to return to revenue growth in H1. Publicly available data indicates Spire is gaining share in e-referrals. We did this by selectively opening new service lines to meet the changing needs of the local commissioners in ways that fit our business.

Outpatient revenue growth of 4.9% was the highest of all 3 payor groups. In-patient and daycase submissions showed the slowing decline we guided to, but we benefited from positive revenue mix with growth in total hip and knee replacements.

Moving onto patient safety and quality of care. This is an area where we remained uncompromising. It's the right thing to do and means we are better placed to compete in the quality-focused PMI and self-pay markets. The CQC and other regulator inspection regime has intensified over recent months with a greater number of inspections and greater scrutiny, but the investments we made in 2018 placed us in a strong position to evidence the high standards of quality that we set ourselves.

So far this year, 4 of our hospitals have been rated good or equivalent, and we were delighted to receive an outstanding rating for our newest hospital, Spire Manchester. This takes the total number of outstanding hospitals in our portfolio to 5, the greatest number of outstanding ratings of any of the private providers. And our total proportion of hospitals ranked good, outstanding by the CQC or the local equivalent in Scotland and Wales to 81%.

Finally, I want to highlight our focus on delivering profit growth and generating cash from revenue growth. We plan to continue the performance trend from H1 and focus on ensuring that over time, our investments and top line growth sustain profit growth. We now have good revenue growth. We are improving our control on costs and expenditure with several savings initiatives underway, which Jitesh will talk about in more detail. This was evidenced, first of all, in reduced exceptional costs, leading to operating profit growth and good cash generation. The latter was slightly ahead of our expectations as we conserved cash to prepare for a no-deal Brexit. The net effect of revenue growth flows through, and CapEx management was a further reduction in net debt in H1, another of our commitments.

Overall, I am satisfied that the Spire's strategic components are beginning to deliver steadily, with trends especially in private growth that we have now sustained for over a year. Of course, much remains to be done. But the platform is increasingly firm.

I want to briefly touch on purpose, our new cultural initiatives. As you will recognize, all businesses, which have long-term success are underpinned by a strong purpose and culture. This is particularly true in a healthcare business, where patient care is the essence of our service. In addition to a strong operational focus, we have, therefore, spent much of this year to finding our purpose, a process which involved the executive committee, the entire hospital senior leadership teams and the medical advisory committee chairs with input from the board. We believe it was essential to do this to ensure the whole Spire family felt engaged and ready to embody a single unifying purpose, which underpins our strategy.

Our newly defined purpose as chosen by those teams is to make a positive difference to our patients' lives through outstanding personalized care. This clearly informs a private healthcare-focused strategy, where we used the purpose to guide our operational and strategic investments, motivate and engage our teams and aiming doing so to enhance our patient experience further. The purpose will also help to provide a working environment that improves retention and recruitment in a competitive labor market for skilled staff.

I'll now hand over to Jitesh for the detailed review of our financial performance.

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [2]

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Thank you, Justin, and good morning to everyone. So I'm pleased to be reporting a good set of numbers, which are positive and in line with expectations. Whilst we are pleased, we also recognize that we still have more to do. There was good revenue growth in all our payor groups, especially in our private business and in outpatients. We were cash-generative in the period, and our bank covenant coverage is good. Operating profit was up, and EBITDA was in line with expectations. We said that we wanted this to be a year of consolidation and stabilization, and so far, we are happy with the progress that we have made. The introduction of IFRS 16 has a material impact on our numbers. This will be a transition year as we present both pre- and post-IFRS 16 numbers to ensure there is a clear understanding of the differences. With leased rental payments removed from EBITDA, we will refer to both EBITDA and operating profit. So having provided the highlights, I'll now talk you through some of the key headlines. There was a good revenue growth of 3.4%, which grew in all payor groups, especially in our private business, which grew at 4.1%, and in outpatients, which grew 4.5%.

Operating profit increased from GBP 37.2 million to GBP 51 million due to lower exceptional charges. Earnings per share increased from 0.5p to 1.8p, and I'm pleased to confirm that we will maintain our interim dividend at 1.3p per share.

Post-IFRS 16 EBITDA was GBP 96.8 million and pre-IFRS 16 GBP 63.7 million, both slightly down on prior year but in line with expectations. We were cash-generative in H1, and net bank debt has fallen from GBP 381 million this time last year to GBP 362.2 million. The net debt to EBITDA bank covenant ratio remains the same as at year-end at 3.3x against the limit of 4x.

Revenue growth. As I've already said, there was revenue growth across all of our payor groups. Nearly 70% of our revenue is from private business, and our aim is to disproportionally grow this part of our business, which we achieved in the first half.

Private revenue growth was good at 4.1% when compared to NHS, which grew at 2.5%.

PMI is 50% of our business, and we were very pleased that our progress in this segment in H1 with revenue growth at a record 5.1%.

Self-pay revenue grew 1.4%, and in self-pay, we have specifically targeted core clinical procedures rather than cosmetic and bariatric. Clinical self-pay revenue was up, whilst lower margin cosmetic and bariatric was down. This is the primary driver to lower self-pay admissions.

Looking at volumes. Total revenue growth was achieved despite a 1.3% decline in inpatient and daycare submissions. PMI inpatient and daycare submissions, which have been in decline since 2015 until Q4 of last year, grew at 0.8% rate.

NHS total revenue grew at 2.5% with inpatient daycase activity down 3.5% and average revenue per case and outpatient revenue up. The NHS volume reductions were not as severe as last year or the year before, and this was as we expected.

Growth in outpatient revenue was stronger than inpatient daycase revenue at 4.5%. Outpatient revenue growth was across all payor groups, and we have split out outpatient revenue by payor group for the first time to demonstrate this.

Overall, we are pleased with 3.4% revenue growth for H1.

At the full year results, we guided that revenue growth would be offset by mix and the full year impacts of investments. The 3.4% revenue growth was driven mostly by mix with some positive price impacts. Growth in private versus NHS and more oncology work has contributed to the positive mix impacts. And I've already mentioned the good outpatient revenue growth.

Hospital costs increased in line with our planned cost investments in patient safety and governance, and the other block includes accrued incentive payments, which have not paid out in recent years and inflationary rent increases. The main point of this slide is to introduce operating profit as a new measure. The introduction of IFRS 16 makes EBITDA less applicable as a proxy for cash. The increase in operating profit is predominantly due to reduced exceptional charges when compared to last year.

I thought it would be useful to provide some more detail on the planned cost investments and opportunities we see for the efficiencies going forward. As mentioned already and guided to last year, our costs have increased this year due to increased investments in patient safety and governance. This is helping us to increase our percentage of good and outstanding hospitals, up to 81% now, and helping to contribute to top line growth.

We have started to coordinate our procurement effect -- our procurement more effectively. In H1, our total cost of consumables has reduced as we have consolidated suppliers and standardized our products. We have introduced a share save scheme for the first time. This encourages our team members to become shareholders. We are delighted that at launch, the scheme was hugely popular and oversubscribed. Over 1,700 or nearly 1 in 5 of our team from porters to the executives are now regularly saving to buy shares.

We are also accruing for the cost of variable team incentives across the group. These are geared towards improvements in both quality and financial performance and are at hospital and at group level. These have not paid out in recent years, and it's essential that our teams are rewarded for their achievement and hard work.

Going forward, we have many further opportunities to improve the efficiency of our operations. There is further scope for procurement savings through consolidated and standardized buying. We have already seen the benefit of bulk buy and standardization in capital equipment where, for instance, we purchased new endoscopy, anesthetic and MRI equipment for many of our hospitals in a coordinated, standardized way at a lower cost than we would have done had we bought them separately. The U.K. labor market remains tight. We have a large number of vacancies, which increases our use of agency staff more than we would like. This is an opportunity area for us, and we have a number of strategies in place to tackle this. We are improving the proposition for our bank teams. We have introduced weekly payroll to encourage the use of bank rather than agency, and we'll roll out further tools next year.

One small example of standardization is the successful launch of our new food menu, which is being rolled out across the state. This will raise quality standards across the group, reduce the number of suppliers, improve our control of the food supply chain and will help to reduce costs.

Over the next few years, we have identified a number of further efficiency opportunities through better processes and the use of digital technology.

Moving on to cash. We were cash positive for the period. Cash increased by GBP 10.7 million after CapEx and dividends. CapEx spend was approximately GBP 20 million as we slowed discretionary CapEx in Q1 to prepare for a no-deal Brexit. Our CapEx investments are now moving at pace, and we are not repeating that conservative approach during the current Brexit uncertainty. We now have a more coordinated approach to CapEx planning, so continue to believe that GBP 60 million to GBP 65 million will be ample for the maintenance and development of our core business, and we still expect CapEx spend to be up to our guided level of GBP 60 million to GBP 65 million in FY '19.

Working capital increased by GBP 11.8 million, and this is due to increased stocks and seasonal variations in debtors and creditors. The increase in cash has reduced our net debt -- net bank debt, and we have a solid foundation -- and we have solid financial headroom. The net debt to EBITDA bank covenant ratio was 3.3x, which is the same as at year-end. With the change to IFRS 16 and the introduction of lease liabilities to the balance sheet, net bank debt is a better reflection of our liquidity and covenant headroom than total borrowings on the balance sheet. So to summarize, we are pleased with the performance in the first half with revenue growth of 3.4%, operating profit growth, cash generation and a reduction in net bank debt. Our full year guidance remains unchanged, although we recognize there's more work to be done. We anticipate continued revenue growth offset by mix and our planned investments. So please see the technical guidance in appendix for further detail on items such as tax and financial costs.

I'll now hand over back to Justin.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [3]

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Thank you, Jitesh. So let me turn to our review of the key elements of our operations and strategy with some more details on the H1 performance and thoughts on future strategic focus for the business. This slide reminds you of the 4 key pillars of our strategy. Being first choice for private patients underpins the core part of our strategy to grow private revenues. This graph compares H1 and H2 performance for total private revenue since 2016 and clearly demonstrates the sustained positive momentum.

Let's look at the trends behind this chart in some more detail. PMI has been a major focus for us over the last 18 months. So we are delighted with the 5.1% revenue growth achieved in H1, which exceeds our expectations.

As previously communicated, Spire won 2 new contracts at the end of last year, in large part because of the progress we had made on quality, and we're now seeing those additional volumes flow through. This year, we also renewed 2 long-term pricing agreements with our largest PMI partners, AXA and Bupa, to provide a solid foundation for growth in future years. Early analysis of the impact of our recent marketing campaigns aimed at self-pay customers suggested our PMI business is also benefiting with both unprompted and prompted awareness rising in the period.

In an overall flat market, one of the most encouraging statistics, therefore, is that revenues from our existing PMI contracts grew by 3.8% ahead of our long-term trends. These marketing campaigns also continue to have a positive impact on our self-pay business, with 19% growth in self-pay inquiries and 7% growth in the first outpatient appointments in H1 '19 versus H1 '18.

We are also seeing a gradual increase in daycase mix. This is being driven mainly by growth in daycase procedures, such as ophthalmics, which grew by 7%. The pipeline for self-pay and PMI is strong, and we believe the drag effects of mix shift and changing treatment protocols, which I will describe in a minute, are transitory. If we maintain current conversion rates to treatment, then the sustained growth in inquiries in outpatients should enable a return to stronger revenue growth in self-pay in the future and continued PMI growth. To reinforce these points, you can see here the growth in outpatients' first appointments has accelerated in all payor groups for the first time since 2016 and grew 8% in total in H1. We are now highlighting this in our numbers as it supports our research that consumers are increasingly "very keen" to find out what's wrong with me? That's the question they're asking. And these trends are exciting for our long-term growth, requiring thought on our investments and direction.

Historically, outpatients was considered an adjunct to inpatients' admissions. We now believe it is a strategic arm worthy of its own focus. We're responding to this trend by directing more resources to outpatient services. For instance, we continue to invest in and upgrade our imaging department and will look to reconfigure or create new space for outpatients. The acquisition of a property in order to develop a dedicated outpatient and imaging facility adjacent to our Yale Hospital is an example of this, and it builds on the success of the similar development opened in Bushey last year.

Our Spire GP service has been in place for nearly 2 years now. GP appointments continued to grow strongly, up 40% in H1 '19 with a strong conversion of appointments to consultations and meaningful downstream revenue generation. We're also excited to announce the opening of our new OrthTeam Centre, a collaboration between Spire and a group of leading orthopedic surgeons working at our Spire Manchester Hospital. This facility will offer the latest technologies for diagnostics and rehabilitation, creating referrals into our outstanding hospitals and serving to attract the best clinicians to work with Spire. We intend to organize an analyst and investor site visit to the facility soon.

As we previously mentioned, oncology is an important private specialty for Spire with significant opportunity for profitable expansion. Oncology revenues grew at 15% in H1. Whilst operating margins are lower due to the use of expensive drugs, the absolute profit is attractive. It is, of course, a vital service to our patients, and oncology is almost entirely a PMI-funded specialty. As a result, our innovation around service delivery in this field brings us closer to our key customer base. I'm therefore, delighted to announce today a partnership with GenesisCare in Bristol to provide an end-to-end private cancer care pathway. GenesisCare has agreed to acquire 2 Spire sites, the Bristol Cancer Centre and Baddow Specialist Care Centre, for GBP 12 million. Going forward, Spire will retain a 50% of the gross profits from all chemotherapy provided at the Bristol Cancer Centre and provide all diagnostic and surgical services in our Bristol Hospital. Whilst GenesisCare will provide radiotherapy services. The Baddow Specialist Care Centre was closed in 2017. We anticipate that the agreement in Bristol will form the template for future partnerships, and we've signed a memorandum of understanding with GenesisCare to work towards rolling out similar care pathways at other sites in the U.K.

In this way, we have a clear route to expand in this growing treatment area by providing an enhanced pathway for patients. We anticipate that the deal on the 2 sites will close on October 31.

Turning to the NHS. The waiting list reached a record high of 4.5 million in June. Overall, the orthopedic waiting list rose by 2,000 patients in June to 511,000, continuing the trend for a gradual increase.

Spire's e-referral growth of nearly 10% in the period suggests a positive trend going forward. NHS orthopedic referrals are also showing signs of recovery. And in both charts, you can clearly see the lag effect between e-referrals and treatment discharges. Please note, however, that ongoing mix shifts and changing national and local priorities mean we remain cautious about overextrapolating these trends. We continue to see huge geographical variation in NHS activity across the 200-plus clinical commissioning groups. Parts of the NHS still continue to imply strategies, such as rationing and triage to control costs, with some areas adopting a more aggressive approach than others. Meanwhile, we continue to work closely with local commissioners. Many are committed to finding solutions in a challenging funding environment, and Spire is ready to offer the flexibility to help. We are also launching direct-to-consumer marketing in some areas where the evidence suggests that Spire would facilitate a faster treatment pathway to remind patients of their right to choose providers.

The launch of the NHS list of treatments of low clinical value has impacted our mix which for instance, falls in arthroscopy and shoulder pain injections, whilst we have focused on growing core treatments, such as knee and hip replacements. This list had a knock-on effect in private practice, where these treatments have also fallen as consultants and Spire align our practice with latest guidance. NHS IPDC admissions were down 3.5% and keeping with our guidance of slowing decline, but outpatient revenues grew by 4.9%. The tariff increase, effective April 1, has benefited price mix growth in line with the guidance we shared at the FY '18 results. It has also allowed us to generate additional mix through selectively opening new service lines, which previously would not have been attractive to Spire.

We remain cautious about the NHS outlook, which is always subject to politicization and cost rationing. Overall though, we believe we have adapted successfully to the new environment and are making steady progress and expect further gradual improvement.

I hope you are now all familiar with our strategy to remain uncompromising on patient safety and clinical quality. The CQC has increased its frequency of unannounced inspections, each with greater scrutiny, which we welcome. Six of our sites were inspected in H1 '19, and we are pleased that the overall proportion of our sites is rated good or outstanding by the CQC, and in Wales and Scotland, has increased to 81% from 74% at the end of H1 '18. We were particularly pleased to receive an outstanding rating for Spire Manchester, which scored outstanding across 3 domains, meaning that both our new hospitals are now rated outstanding, which is a tribute to the strong local management and teams and Spire's quality processes.

We are working closely with Professor Tim Briggs on the Getting It Right First Time or GIRFT initiative on a voluntary basis with 13 Spire hospitals inspected to date and all hospitals in the pilot program scheduled to be visited by the year-end. We believe this initiative should prove an advantage for Spire with all payors, NHS, PMI and patients. This allows us to demonstrate robust governance around which interventions are appropriate in NHS and private MSK clinical practice. The Requires-Improvement rating at Spire Leads was a disappointment and strengthens our resolve to remain focused on quality improvement. We are working closely with the CQC in Leads and have already implemented all the remedial actions as we work towards a more positive reinspection in due course.

2018 was characterized by investments to improve patient safety and clinical governance. And those investments are largely complete. This has allowed us to focus on our efficiency programs, which are now gaining momentum. As Jitesh has already discussed, we have made a number of efficiency improvements this year and have also progressed on our digital strategy. The digital strategy is critical to delivering cost savings in the future. Those of you who have the chance to visit our national distribution center in Droitwich will understand the current burden of paper within our organization. An important part of the strategy is to provide tools to help our patients become self-sufficient as they take a more proactive role in their healthcare.

Spire's online consultant booking tool, which was piloted in all hospitals by the end of January, now has over 1,000 registered consultants, making Spire more accessible to patients. We are trialing our patient portal, MySpire, which allows patients to complete their registration forms online, saving time on the day of their appointment. Our Consultant App was also launched this year to allow consultants to book theater slots and review their schedules online.

Overall, we've made good progress on our digital strategy to improve efficiency and the patient and consultant experience, making a stronger start to our ongoing process of digitization. We are pleased that both Manchester and St Anthony's have accelerated profits in the first half, whilst Nottingham remains on track to breakeven by the end of the year.

I should add that over the last 18 months, we have been extensively planning for a no-deal Brexit. Given the uncertainty around the impact of a no-deal Brexit, we cannot rule out disruption to the business as there may be some circumstances outside of our reasonable control. However, our supply chain is optimized for a period of volatility, and we're confident our planning has been robust such that at this stage, we believe any potential disruption can be minimized.

I've spoken about improving our culture to make it an even greater asset in growing our business. The development of our purpose was informed by customer insight. This can be summarized in 5 key themes of patient need: make it easy for me, recognize me, help me to understand, make me feel safe and care for me. You'll see how this in turn underpins our strategic platform and helps us grow a differentiated private business. Initial feedback on the rollout program has been very positive, and we're all excited by the momentum this is creating with our highly valued teams.

In summary, we are pleased with our progress to date but are not taking continued progress for granted. We are reiterating our full year guidance, which will be a key milestone for Spire. We continue to make good progress on quality improvement, and this is contributing to our growth. Overall, the positive changes we are making in the business will move us towards profitable growth in the future. We will remain focused on our strategy led by a clear purpose, deliver sustained and improving performance, and to make a positive difference to our patients' lives through outstanding personalized care.

Thank you very much for your attention. I'll now ask John to join us up here, and we'll move to Q&A.

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Questions and Answers

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [1]

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Sally Taylor from Numis. A couple of questions. Are you able to give us the -- you mentioned that the cool clinical growth in self-pay, excluding bariatrics and aesthetics, was strong. Are you able to give us a sense of what that look like, please, in terms of the growth?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [2]

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So specific areas, like hips and knees and ophthalmics, grew positively. So overall, if you took out the effect of cosmetics, you would have stronger self-pay growth. We're not giving a specific number because it's not a KPI that we'll be able to track over time, what we want to focus on is growing self-pay over time. I'd also point out, by the way, I think this is a key point, we had 4.1% growth in private last half. We've had 4.1% growth in private this half. Last half, we had slightly slower PMI and stronger self-pay. This time, we had strong PMI, slower self-pay. So there's obviously a mix effect that we can track here. But nonetheless, we are quite clear that the reason for self-pay being weaker is a combination of the defocus on cosmetic, but also those treatments of low clinical value because if you look at hip and knee that was growing, but arthroscopy is declining. So there's a couple of mix effects happening here. Do you want to add anything to that?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [3]

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Yes. I suppose it's an emerging market, self-pay. And there are a couple of lead indicators that we have that are quite encouraging. Justin mentioned them earlier, we saw a 19% increase in inquiries and a 7% increase in first consultations. So if you take those as lead indicators, I suggest there is a market out there. And there's a market we can tap into. John, anything to add?

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John Forrest, Spire Healthcare Group plc - COO [4]

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I think one of the strengths of Spire is the local hospital directors and their ability to sort of watch what's going on in their local market. So what we're seeing as well as they're moving out to some of the cosmetic procedures are reacting to this shift of practice around NHS commissioning for the limited clinical outcome procedures. Then we're seeing them develop new services and particularly seeing growth in spinal, which is complex and good grades for private rate. And also cardiology and cardiac services. So these things take time to develop as you've got to build the relationship with the consultants and the network to deliver it. So I'm confident there's opportunity for us to make something of that slowdown as we go forward.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [5]

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And just in terms of digitization, over the coming years, there's clearly a huge opportunity, I think both for efficiencies that are driving consumer interests. What -- have you got any sense of the scale and the investment required by Spire? And also the sort of the time horizon, please?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [6]

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Jitesh.

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [7]

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So we are not showing any specific numbers around this. But I suppose what I'd say is that the way we're tackling our digital strategy and our digital implementation is we're not creating a single transformation program with a big hits that suddenly you get in 3 years' time. We've seen those projects and how they go over the years and in many companies. We've all -- have got experience of that. Instead, our approach is a more pragmatic one. So we know what the end state look -- wants to look like, and we can see the different opportunities. We have identified 95 different opportunities. And we are tackling them in a measured way, and each project will stand on its own in terms of its benefit and how we prioritize them.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [8]

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So for instance, the next one is electronic preassessment. So the process we're taking is, work out the requirement, trial on paper, build it, launch it small, and then once it works, scale it up. So we are very, very conscious about making sure that our digitization program works stepwise, and starting with the patient portal that I mentioned is key because that's how patients link into us so then you slot in the electronic preassessment which then links on the back of that. Then after that, we'll look at the care pathway in the wards because that logs onto the back of electronic preassessment. So I think between this, we've got quite a lot of experience of doing this and make sure that we do it in a steady way.

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John Forrest, Spire Healthcare Group plc - COO [9]

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I think there's also the opportunity to continue to improve the manual on our current ways of working, whilst the digital program's running, so don't want anybody thinking we're just sitting, waiting for the digital investments come through. What we're doing with things like single-patient record and delivering one best way of working is an operational approach to prepare ourselves for digitization when it comes.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Charles Weston, RBC. A couple of questions, please. First of all on NHS trends. You showed a nice step up from second half through the first half of this year in e-referrals, specifically. We're now almost halfway through the second half. Can you give us a comment on how that is trending in the first few months of this period?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [11]

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So we're not commenting on the second half. But of course, NHS data is publicly available. So you can look at -- I don't know if July numbers are currently available, are they? I don't know if they are online. But our expectation of what will happen is exactly what I said, e-referrals will convert slowly to admissions. You've got to remember a couple of things we've done. One is we've opened new services. So ENT, for instance, which tends to have a lower conversion rate than, for instance, orthopedics. And secondly, the conversion rates in orthopedics is slightly impacted by treatments of low clinical value. So overall trend that we expect, and I think as you look at the numbers coming through, you'll see, will also be offset by those slight differences in conversion. Hence, we're anticipating an increasingly slow decline, but don't overextrapolate the trends. Is that a fair of describing it? That's what is going on. That's why it's always quite difficult to extrapolate.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [12]

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And my second question follows on from what Sally was asking about with regard to the forward-looking indicators you mentioned with regard to self-pay in 19% inquiries and a strong outpatient growth. You mentioned that the conversion to inpatient would be lower. But then you mentioned some ophthalmic procedures, presumably of daycase. So if you look at conversion to inpatient and daycase together, should those be lower than usual or lower than we've seen historically? How should we be thinking about that and why?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [13]

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That's quite complex and mix question.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [14]

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Yes. So we're just thinking. So I suppose the answer is we've got trends, which have increased. So ophthalmics conversion is higher and is going up, okay, and that's growing. Orthopedic conversion has come down somewhat, but that's a 1-year trend because that's treatments of lower clinical value, okay? Cosmetics has a very high conversion, more than 50%, we've deemphasized it. So I suppose the answer is, we've had a somewhat reduced conversion rate that should stabilize as the mix effect rolls out. I think that's the way to think about it. I'm trying to think forward somewhat.

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [15]

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Yes. And there's also learning about what's going on in the consulting rooms in outpatients and really putting a focus into the outpatient area that perhaps we haven't had before. And using the tools locally to track and monitor conversion and make sure that we're getting the throughput that we want and optimize the use of the outpatient rooms as well.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [16]

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And then just a point of clarification, I suppose, on the PMI side. You mentioned orthopedics is growing 15%. Can you share with us what the proportion of revenues are from oncology? I see Jitesh shaking his head. And well, at all, can you give us a flavor of -- is that the lion share of the growth in PMI, is it just a fraction? Is it more than 100%?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [17]

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So orthopedics is a material component of our PMI, but our PMI is much more than that. I think we have tried to share more data this time than we have ever before, really. We split out daycase and inpatient by payor group, which we haven't done before, and we split out outpatient by payor group as well. So we are trying to share more information where we can. But yes, we're not going to split that out for you, specifically. But it is a majority.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [18]

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But generally, to try and answer the broad question, oncology -- it was oncology that grew by 15%. But there is meaningful growth elsewhere. So it doesn't account for all the growth, if that's the question. It's definitely not the case.

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Alexander Matthew Gibson, Morgan Stanley, Research Division - Equity Analyst [19]

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It's Alex Gibson, Morgan Stanley. I have 2 questions, many on the market. Could you talk about the current capacity in the private sector? And do you believe there'll still be further fallout in capacity or have things stabilized? And that's both in terms of the market. And for you, do you think your current capacity is in line with what you'd expect going forward?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [20]

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Okay. So we have the view that there is still too much capacity. And the -- a lot of the capacity is in smaller hospitals, less so for us because our average revenue per hospital is relatively high. And therefore, our expectation is there has been some closing of hospitals, some of them are being close to us, which has been a benefit, it's a small benefit overall. And our expectation that we don't have sight of this is that we'll lead to more closures because it's really tough to run small hospitals, particularly if you want to comply with all of the latest quality guidance. So we still expect there to be more capacity contraction. For us, all our sites, nothing will get to breakeven or profitable, and our sites are bigger. So that's not a particular issue for us. If you look at theater capacity, we're always balancing theater capacity because you have to look at your peak day as well as over the whole week, okay? But overall, we have got good capacity that we can use. And the area that we're looking at to expand capacity, as I mentioned, is outpatients because we're generating a really strong pipeline that's creating demand for diagnostics and daycase stroke outpatient's treatment. And we've got some sites where we need to increase capacity. Hence, Yale, others where we don't. So actually, what we're starting to think of is the 2 types of capacity. There's theater stroke bed, where overall we're in a good position, and we have scale. And there's outpatient, where in some places, we've got lots of room for growth. And in others, we're starting to invest a bit more to increase that capacity so we can deal with the pipeline. Does that answer the question?

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Alexander Matthew Gibson, Morgan Stanley, Research Division - Equity Analyst [21]

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Yes. Definitely. And just following up on the outpatient expansion. Is the investment made in outpatient going to be within the GBP 60 million, GBP 65 million target that you have?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [22]

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Yes, yes. And we had quite tight CapEx process, which these guys run. Do you want to talk about that?

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John Forrest, Spire Healthcare Group plc - COO [23]

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Well, I've -- we've, I suppose, introduced more of a formal capital planning process. We're undergoing a 5-year state review to get a proper measured idea of what the go-forward requirements are in terms of maintaining the asset that we have and investing in the core hospitals. We have a capital committee structure that now meets monthly to manage both the current spend and plan ahead into the forward 5 years, which is a new way of working.

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Alexander Matthew Gibson, Morgan Stanley, Research Division - Equity Analyst [24]

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Okay. And my second question is on the press releases and the CMA commentary on a new investigation into the private sector about anticompetitive behavior. If you can make any comments on that, that'd be helpful. But also what confidence do you have that there are no improper incentives within your system? There's been discussion around consultants being given shares in Spire. What proportion of your consultants do that, if any? That'd be helpful for us to have confidence this won't be an impact.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [25]

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So to the latter point, we have strong systems. We understand the CMA rules. We track it carefully. I think you'll find our reporting on this is the most transparent in the sector. So we're really on that. That's the first thing. I think there was a press report about consultants owning shares where we're a public market. So nobody gets given shares, but they're free to buy them, and that's the nature of our business. And as regards to CMA investigations, those aren't things that people can comment on while they are underway. So we wouldn't do that either.

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Graham Doyle, Liberum Capital Limited, Research Division - Research Analyst [26]

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It's Graham Doyle from Liberum. Just on the PMI growth of -- 5% is, obviously, quite impressive. I think you showed a slide there where it was sort of 3.5% for sort of like-for-like contracts. So what's the other 1.5% or so in terms of new contracts or new business? What specifically is that?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [27]

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So it's 3.8% for like-for-like, and the balance is that we won access to new networks with Aviva, in particular, at the end of last year. So that has brought us new referrals that we wouldn't previously have had.

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Graham Doyle, Liberum Capital Limited, Research Division - Research Analyst [28]

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Is that sort of still in the ramp-up phase? So it's not necessarily just the one-off impact this year that may still benefit next year in terms of growth.

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [29]

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So we won those contracts in Q4 of last year. So we would expect the comparatives through Q3 to be positive. And then obviously from Q4, they'll be more sort of steady state type of comparisons.

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Graham Doyle, Liberum Capital Limited, Research Division - Research Analyst [30]

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And to the like-for-like growth, has there been any competitor response to that? Or is it a factor of what's happened with your competitors to strive in that, do you think?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [31]

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It's quite hard to give a factual answer to that, to be honest. We know what we've done, yes. We know that marketing is helping to drive it. So we've looked at when we market and then we can see the rise in PMI outpatient, and we can tell how much of that is existing contracts versus how much is the Aviva contracts. We've got already good statistics that show us we are driving people to use their policies with us. Very hard for us to say what competitive response there that has been or might be unless you've got any?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [32]

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And the only other factor we haven't -- we can't measure it, specifically, is the impact of CQC quality ratings within the algorithms that the insurers use. So as we improve, the theory is we should see more share.

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Graham Doyle, Liberum Capital Limited, Research Division - Research Analyst [33]

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Okay. Because presumably, you've been taking lots of measures over the last sort of 4 or 5 years in PMI. But this is the first real sort of spike in growth. So is it -- do you think it is a combination of that plus DTC then that's driving it? In terms of things that you guys are doing, that's different from the past, is that the investment in direct-to-consumer plus quality? Or are there other things that we're not seeing or you're not talking about?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [34]

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So there's a number of components. One is, working with the insurers to understand their needs, making sure our consultants are appropriately listed with them, compliant with their policies. So that's a piece of it, that's the groundwork piece. Winning new contracts, getting access to new networks, we've made good progress but that was underpinned by our quality. The marketing piece, which is bringing more patients to us, which, of course, then encourages consultants to bring us more of their time. So this is sort of a virtuous circle going on there. And talking to consultants, new consultants and existing consultants, so we're in a process of going around the country, having dinners with new consultants, leading consultants, explaining to them what's happening. On top, what the hospital is doing. So there's a piece of getting consultants to hear the good news, which also creates a positive benefit. So this is a business-to-business, business-to-consultant, business-to-consumer area. And we've had actions in place on each one. So to put in other way, it's not a coincidence if it's growing. And the reason I highlight the 3.8% is that all the other groundwork on top of winning new contracts. Anything you want to add, John?

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John Forrest, Spire Healthcare Group plc - COO [35]

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No.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [36]

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Miles from Peel Hunt. Just on the operating margins, if I can, and the quality agenda. So largely, the operating margins have come down or in FY '18, it came down to about 6% in parallel with the quality agenda. There was some improvement this morning on the first half by 40 basis points or so. Are all of the areas for the efficiency improvements outside of the areas that you invested with the quality agenda?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [37]

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Sorry, I didn't quite understand the last part of your question?

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [38]

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So the areas you've identified for efficiency improvement moving forward, are they all discrete from the areas you invested for the quality agenda?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [39]

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I'm trying to work out how to answer that question. So the efficiency improvement areas are discreet opportunities. We see there's opportunities in a number of different areas. I think I said that our agency spend is more than we'd like. And certainly through workforce and better management of our workforce, we think we can -- we see some opportunities there. And then there are the operation groups that John will talk about and digital as well. Each of those are discrete. Now some of them overlap with their clinical quality areas. So if we improve electronic preassessment, for instance, that's an area where we can improve our clinical quality as well as drive efficiency through that process. So there are areas. And...

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [40]

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Nothing. That covers it.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [41]

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So it's not as though there'd been some large spends on building certain approaches to clinical quality, which you're going to stop moving forward. That's going to continue to go in the same direction. It'd be flat?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [42]

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So if I take the question differently, we're not running back on clinical quality, we're leading into it. When we did it, it became clear what we needed to do and we invested. So one of the biggest areas of investment was preassessment, as it happens, which is why we talk about electronic preassessments. So stage one is to make sure you got the right skill mix to do preassessments in the way that we think and evidence suggest is the right way of doing it, which broadly, by the way, means, many more face-to-face appointments, that's the simple way of thinking about it. Face-to-face appointments today involve a lot of paperwork. The MySpire portal takes out the first bit of that paperwork, which is -- some of the data is already filled out before that face-to-face appointment. The second piece of the electronic preassessment, potentially there's a number of things, it does some triage, so it makes it slightly easier to decide whether to do it face-to-face. And it makes it much easier to do the face-to-face because it does a triage within the questionnaire as to where to go with the questions. All of which goes to you remain absolutely committed to quality. You use digital systems to leverage. This is a very skilled area preassessment as well as the skilled nurses and assistants, you leverage their time, and overall, you increase your capacity and you make the patient experience better. And actually, in the medium term, you have algorithms, which make you even more accurate in predicting potential issues. So commitment to quality remains the same. Net effect is more efficiency over time and better quality. And our one key message is, we are not trying to run at these things so that we destabilize what we're doing, we're doing it in a measured way. Does that answer the question? There's absolutely -- we cannot row back. We don't intend to row back. But we can move from here to slowly make it more -- to make it both smarter and more efficient.

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David James Adlington, JP Morgan Chase & Co, Research Division - Head of Medical Technology and Services Equity Research [43]

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David Adlington from JPMorgan. Just on the wage inflation, maybe you can just talk to what like-for-like wage inflation you're seeing? And what are the trends in your agency costs?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [44]

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So we haven't split out -- we certainly aren't commenting on wage inflation, but we are seeing a tight market. And it's something that we're quite close to. Agency cost is an opportunity area. I suppose the one figure that we do share with you is clinical cost as a percentage of revenue. And if you look at that, that's roughly stable to slightly increasing. But we think that, that's an opportunity area for us going forward. John, do you want to talk about that?

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John Forrest, Spire Healthcare Group plc - COO [45]

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I think we've already done quite a lot of work, we're reestablishing our relationships with the agency providers, looking at efficiency within that area. There's work to be done in the near future on how we develop our own bank themes. So we have a relationship with bank workers who are independent, but they are much different. Since the resource is more efficient, a better way to start and over a longer-term relationship with the hospital and the team. So our primary focus in the second half will be in that development of the bank relationship to offset the need for relying on agency, while also developing our overseas nurses recruitment program. And by the end of this month, we'll have, I think, it's 56 Filipino nurses on our books as permanent employees, working their way towards that pin, which will alleviate substantially the recruitment gap that we've got, which is in part what's driving the agency costs.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [46]

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And then I'll just add to that. Ultimately, the key thing is retention because we've a very skilled colleague base in our hospitals. If we benchmark reward overall, when it comes to salary and wages, we benchmark pretty well overall. We did a lot of talking to both potential new recruits and those in our business, and it looked like we benchmarked low on holiday entitlements compared to the NHS in particular. So we've announced today that next year, a day we call the Spire Day is become a statutory holiday for them, and another day in addition. So we've added 2 days' holiday, which really targets retention and recruitment sort of thinking in a quite granular way, how we can get to the very root cause of not using agency, which isn't just recruitment. It's making sure we have strong retention. So that's one of the ways we deal with the issue you've just raised.

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Emmanuel de Figueiredo, LBV Asset Management LLP - CIO [47]

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Emmanuel from LBV Asset management. Just a question on net debt and working capital, please. If you can help us, what should we expect for year-end? If you don't want to give us a figure, is it reasonable to assume that we'll see a bit more of deleverage? And is the working capital anyway affected by Brexit? I mean have you beefed up inventories? And how much would it be?

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [48]

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So our plan for the full year is cash generation. And I do expect further cash improvement in the second half, not least because we have GBP 12 million of cash coming from the deal that we've just done with GenesisCare. And also, if you look at our working capital, there is a timing effect where our working capital increases in the first half and decreases in the second half. And that's something that we saw last year as well, especially in our debtors. So I'll certainly see an improvement there. The second part of your question was around stocks and Brexit. We -- we're absolutely focused on making sure that our -- as parts of our Brexit planning that our supply chain is optimized and that we have the right level of stock for the activities that we need to cover. There's a limit to what we can do, clearly, because we only have a certain amount of space. But we do -- we will make sure that we're properly optimized. We're not stockpiling because we can't. We just don't have the space for that. But you will have seen that our stock levels increased at the half year by just over GBP 2 million.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [49]

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And probably won't increase much from there, we're pretty optimized. And actually, the half year and going into now, these were our busiest periods. So part of that is just getting ready to busy periods.

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Jitesh H. Sodha, Spire Healthcare Group plc - CFO & Executive Director [50]

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Business as usual.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [51]

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So I think the answer to that is you won't see a big effect from there. Any more questions? No? No more questions.

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Unidentified Company Representative, [52]

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I have brought emails with me.

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [53]

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Okay. Should never ask 3 times.

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Unidentified Company Representative, [54]

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How does Spire prepare to meet growing demand for digital consultations? Are you making investments to offer services such as (inaudible)?

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Justin J. Ash, Spire Healthcare Group plc - CEO & Executive Director [55]

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So I'll take that one. We are looking very carefully at that market. So the first thing I would say is, the thing which we -- which differentiates us is our Spire GP is offering the sort that GP appointments aren't really used to get. So 25 minutes to half an hour undivided attention of a person and quick appointments, and we think that's our key growth area. So it's a differentiation from online. Separate, we are looking closely as a potential to partner because you can see how digital could complement that, and it's thinking about. So the answer is, yes, although we're not in a position to say we have a digital solution there. We just want to reflect on how does that fits with the prime -- fit the primary thing we're doing, which is giving people the opportunity to just sit down with a GP for half an hour, and you can tell by the 40% growth, so that's working pretty well. So we think we can continue to grow that just on an ongoing basis. But yes, we're very mindful of the digital side and we're looking at it closely. So unless that gave some an opportunity to think of another question, can I thank you very much for coming along. Thank you for your attention. And I'm sure we'll meet some or all of you in upcoming [projects]. Thank you.