Notes Chief Executives Presentation to Acurity Health Group Annual - - PDF document

Notes – Chief Executive’s Presentation to Acurity Health Group Annual Meeting – 8 August 2014 Welcome

I am pleased to echo Mr Isaac’s welcome, thank you shareholders, media, specialists, management and staff for joining us today. I hope you find the information we are sharing to be of value.

(New Slide - past year)

I have been the CEO of Acurity now for a little over a year. I therefore want to cover the results and activity which have occurred over that time. I am pleased to present a significantly improved financial performance with a 13% improvement in EBITDA to $20,202,000 and adjusted net profit increasing by 22.5% to $7,185,000. Revenue changed by 2% to $98,059,000 with most of the bottom line gains being achieved through efficiency improvements. Our investments in Grace Hospital Tauranga and EA/LA continue to perform in line with expectations. There have been significant changes within the group. We have continued to seek efficiencies by centralising some functions which now includes Finance and HR. In addition we have a change of leadership at Wakefield Hospital with Paul Quayle the COO acting in that role.

With staff members being the critical element in all of our service delivery, staff engagement surveys were carried out across the group in October last year. Royston’s demonstrated the strong culture that is in place whilst other areas showed us a number of issues that needed to be addressed. One of the issues raised by staff was a lack of clarity and visibility of our Mission, Vision and Values. These have been redeveloped, simplified and presented across the group. You may have seen them on the walls of the hospital when you arrived; we are using them to build a common sense of purpose across Acurity. A business development manager role was created in 2014; Sarah Malone is undertaking this role. Sarah’s focus is working with general practitioners to assist them refer their patients to Acurity and its specialists. Sarah has made great progress engaging GPs and specialists in professional development activities aimed at building GP to specialist relationships. Across Acurity we continue to develop the services we offer. Excitingly we launched an Electro Physiology service out of the Heart Centre at Wakefield. EP is a type of cardiology involving the electrical flows around the heart and the arrhythmias that this can cause. Wakefield is the only private EP service between Christchurch and Hamilton and this should see good growth in Cath Lab activity. The final improvement of the last year that I want to highlight is the significant improvement in KPI reporting and analysis. We now have much clearer insight into hospital activity, revenue rates and efficiency measures. This combined with a balance scorecard type of reporting means we are now focusing on core business issues in our day-to-day management.

(New slide - looking forward)

We are continuing a strong focus on the growth of Acurity. On the back of the

• pening of a fourth theatre at Royston we are developing plans that sees the hospital

continue to grow in a way that matches to demand for surgery in the Hawke’s Bay. At Grace Hospital a new day surgery unit is under construction and is expected to

• pen in the 4th quarter of 2014.

A new Cath Lab is under development at Wakefield. This will make it one of the most advanced facilities of its type in the country. This is expected to come on-line early in 2015 and will also allow enlargement of the Heart Centre. This shows strong commitment to one of Wakefield’s core businesses and we’re delighted to be working closely with the cardiologists on this. We continue to look at new services across our hospitals. The coming year will, hopefully, see the return of vascular surgery to Royston and there are some very significant service lines being developed at Wakefield and Bowen, hopefully I can report back on these next year. Finally the big question looking forward is the future of the Wakefield Hospital site. This is a topic that has consumed a lot of Board and management time. As we have previously reported the change in the seismic integrity standards for buildings flowing from the Christchurch earthquake event resulted in some of the major buildings on the Wakefield Hospital site requiring strengthening. The new building standards require the affected buildings to be brought up to standard by 2022.

On 3 August 2012 the Company announced its plans for the redevelopment of the Wakefield Hospital campus to address the seismic issues. This involved development of temporary accommodation, strengthening of some buildings and demolition of others. The total cost was expected to be between $20 million and $25 million. Subsequently management conducted a cost benefit review looking at this cost of strengthening project versus a new build hospital on the current site. Over the medium to long term the analysis showed that a new facility hospital would represent better value due to operational efficiencies and reduced disruption resulting in lower consequent revenue loss during the on-site works. The board has recognised the significant and unique strengths that Wakefield Hospital holds. The most important of these is the range of world class specialists, supported by first class nursing teams, health professionals and other personnel providing services across the full spectrum of health issues. The current Wakefield site comprising 2.2ha’s, with three street front entrances, located in close proximity to the main public hospital and less than 4km from the centre of Wellington is an excellent location. The board has resolved to approve the redevelopment of a new “next phase” Wakefield facility along with the co-commitment of our specialists and finalisation of design and cost elements. Planning has commenced on the re-development programme with a working group comprised of specialists, board representatives and management appointed to define the high level requirements prior to detailed design and cost establishment process.

A review of recent private hospital projects across NZ suggests that a new facility is likely to cost between $45 million to $50 million to develop. The concept design focus is on delivering a facility that will meet the private health needs of the greater Wellington region over the next 30 years. The new facility will be designed to facilitate the trends towards shorter stays, day care, efficient patient flows and design configurations to be able to better control costs to reflect the uneven flow in patient

• volumes. The design will be forward looking to accommodate the continuing

emergence of new health treatments rather than simply replicating what we already have. As the design work is yet to be undertaken and plans prepared there are no definitive cost figures available. It is currently anticipated that the facility development would be funded from our strong operating cash flows and bank facilities. The cost numbers shown above do not include the cost of replacing the current Wakefield Medical Consultant Centre. That project is likely to be undertaken in parallel with the new facility. The likely cost of a centre of the current scale is around $10 million. There are a number of ownership models which could be adopted in funding such a development. There is sufficient land at Wakefield site to enable the new facility to be built without demolishing the core elements of the current hospital. Following completion of the new facility it is intended that the current buildings be removed and the site cleared. This would create the capacity to accommodate complementary on-site health facilities or alternatively other developments or sub-division. The overall project is expected to take 4 - 6 years from design to completion.

(New slide – health insurance industry)

Finally I would like to briefly refer you to some comments in your annual report about the private health industry in NZ. First, I would like to talk about not-for-profit healthcare versus for-profit. Comment is sometimes made in our industry that not-for-profit healthcare is somehow superior somehow on the basis that people should not profit from healthcare. My experience tells me that health actually needs a balance of government and non-government, for-profit and not-for-profit to be successful. For-profit providers have improved access to capital, are incentivised to do things right the first time and also driven to be efficient. This means they often take an innovative and leading role in the health industry; this is something I believe Acurity does and can continue to do. On the

• ther side, because some providers are not-for-profit they pay no tax or dividend.

Therefore I would expect to see many charitable acts occurring or that not-for-profit care is significantly better or cheaper. Analysis shows that clinical quality outcomes are very similar between the two sectors and discussions with health insurers let us know that hospital fees are also very similar. So, unless we can see significant levels of charitable work I am left to conclude that not-for-profits are operating far less efficiently then Acurity is. I therefore believe that for-profit health care and the leadership it provides is essential to a balanced sustainable healthcare system and feel you; our shareholders should feel proud to be supporting this. My next comment is around the sustainability of funding from health care. With the aging population and increasing health costs it is clear that the taxpayer cannot afford to fund all of the healthcare that will be needed. Government policy needs to address this by encouraging additional funds being applied to healthcare, and the

most obvious way of doing this is to encourage those who are able to contribute to their own health care costs through health insurance or other health savings

• schemes. Many other countries are grappling with this and have put schemes in
• place. Our nearest neighbour, Australia has a combination of positive and punitive

incentives to ensure higher earners take out insurance early and retain it for life. With a rapid fall off in insurance levels in NZ when people turn 65 it is now time for NZ to place this firmly on the policy agenda. The successes of Kiwisaver and ACC are great models of the Kiwi way of doing things; it’s time to bring this to healthcare also.

Closing

Finally I have a number of people to thank; Firstly the admin team for organising this event and making it work so smoothly; Next, the Directors of your company. I have appreciated their support, wisdom and clarity of thinking across many issues throughout the past year. To the specialists who choose to partner with us to care for their patients, thank you for your trust and support. And finally to the staff and management across Acurity, Grace and EA/LA, it’s been a good year and I thank you all for your contribution. I will now hand back to Alan to continue the formal part of the meeting.

(New slide – formal resolutions)