Spire Healthcare Group plc (SPI) Earnings Call Transcript

Good morning, everybody, and welcome to our full year results presentation for the year ended 31st December 2021. We've had feedback that this Zoom format does enable more people to join, but we're also very keen to see people in person again. So we are going to plan to hold a mixed in-person Zoom event September interims. Angus Prentice, our Interim Head of Investor Relations, will manage the Q&A session following this presentation. [Operator Instructions] I hope that's clear. Lastly, if you have any difficulties with the connection, please e-mail Laura Young at the address, hopefully shown on the screen. Now as you will probably know, our CFO, Jitesh Sodha, his recovery after a serious accident who sustained well cycle. We all miss him hugely, but I am pleased to say he's making good progress, although his recovery is likely to be long given the seriousness of the accident. In the meantime, Harbant Samra, our Group Financial Controller, has taken on Jitesh's responsibilities as interim CFO in his absence. Now Harbant has made a significant contribution to as far as progress in the last 3 years. And he and I have worked closely on the year-end. He will present our financial results after the introduction from me. After Harbant, I'll cover the guidance for 2022, some thoughts on our plans for the longer-term future, and there will then be time to Q&A. So you will recall, there are 4 elements to our current strategy. We are committed to being first choice for private patients with private income, our primary growth driver, whilst remaining a key partner to the NHS. We maintain a relentless focus on quality and patient safety, and we are committed to improving revenue, profit and return on capital employed and good cash generation. We achieved all improvement on all 4 of these in 2021. We delivered record levels of growth in our private business with revenue from private patients up 14.2% compared to 2019 pre-pandemic. We continue to support the NHS in tackling the pandemic and then helping tackle rising waiting list. We maintained our compromising focus on quality and patient safety, keeping our hospitals completely secure and improving our CQC ratings. And we delivered EBITDA of GBP 178.2 million. This was 10.6% up on 2020, though down on pre-pandemic levels in 2019 by GBP 11 million, having absorbed GBP 53 million of COVID-related costs. Clearly, the COVID was a burden for many companies, but the impact of Spire was a material number in the context of our profit levels and we were pleased to deliver EBITDA growth despite this. Our strategy has proved successful, and our results this year provide a strong platform for sustainable growth over the next few years. Spire was successful in being first choice for private patients in 2021. Private revenue, self-pay plus PMI, grew strongly in 2021, up by 14% versus 2019. Revenue from self-pay patients for Q2 to 4, the period where our hospitals were fully opened to private patients, was up 80% on the equivalent period in 2019, sustaining the trend we reveal to Q2 at the interims. We believe this leads to the U.K. market. Self-pay now accounts for 30% of income, higher than the NHS share of our revenue. Having invested in digital marketing, enhanced call handling and digital response, we then ran 2 campaigns as Spire's first-ever TV advertising to lean into the unprecedented demand environment. The campaign was highly successful and accelerated the growth of patient inquiries. PMI revenues continued to recover slowly in H2, although they remain below 2019 levels, they were up 40% in 2020. Our PMI worked -- work focused on higher complexity core activity, in particular orthopedics. The net result was record private growth in 8.7% versus 2019 and 20.7% related to a strong acceleration from pre-pandemic levels. Within this result, combined with NHS volume, Spire maintained, then grew market share in hips and knees, a key component of our servings mix. Turning now to our NHS work. As you will recall, in Q1, we and the rest of the sector agreed a volume-based contract with NHS England to provide support to a COVID cases peaked and pressure on the NHS mounted. We are very proud of the support we provided, which included Spire being designated as cancer hubs in 9 localities. At year-end, the number of NHS patients for whom we have provided care since the start of the pandemic stood at more than 356,000. We've built on good relationships with local commissioners and trust during the pandemic, and we have been commissioned by local systems in all areas of the country where we operate. Most of our NHS work came from the ERS system, and Spire held or slightly increased share in ERS work. Volumes were greater in some specialties, especially for orthopedics though commissioning for core services overall remained below 2019 throughout Q2 to Q4. It did begin to increase at the end of the year. Our focus on quality remains absolutely at the heart of everything we do. Our strict safety measures designed to keep our hospitals COVID secure remains in place throughout the year, allowing us to keep theaters and wards open. In H2, the CQC returned to its inspection program, which is now unannounced in most cases. 10 of our hospitals were expected during 2022. And I'm very pleased to report that all were rated good overall or the equivalent in Scotland and Wales, including 2 upgrades from required improvement. 95% of Spire sites are now rated good or outstanding. And this compares favorably with a step to average score of 89%. It is, we think, particularly noteworthy that we've established a strong lead in the domains of SAFE, 92% versus the sector of 78% and well-led 95% versus sector at 85%. This is a superb achievement by our hospital leaders and clinical teams and testament to the high standards we set ourselves. We're also delighted to welcome to the team at Clermont to our group, a site rated outstanding by the CQC, but we are not complacent. Patient safety is a daily responsibility. We also returned to our long-term facilities investment plan and invested GBP 77 million of CapEx. This included 10 replacement MRI and CT scanners, upgraded X-ray machines, new operated services and expanded carparks. The development of our offer for private patients or support for the NHS and investments in quality continue to translate into high levels of patient satisfaction, which you can see here in our H2 patient feedback against delivering our purpose. I was in particular pleased to see a 2-point improvement in a number of patients who say we made a positive difference to their lives at 85%. Turning to the headlines of our financial results. Revenue was up 20% on 2020 at 13% versus 2019, exceeding GBP 1 billion for the first time in Spire's history. EBITDA of GBP 178.2 million was up 11% year-on-year, and return on capital employed returned to 5%. The positive revenue growth with a high private mix and high ARPC above GBP 3,000 per case, significantly helped flow through. COVID was a significant headwind from a cost perspective, amounting to GBP 53 million versus prepaid dealers with a major negative impact from consultants and staff absence at short notice and high patient cancellations. In August and September, staff absence hit 12% in many weeks. However, we are a learning organization. And as the year progressed, we significantly improved our ability to replace patients canceled on lists. This was primarily due to increased pre-assessment capacity, the flexibility of electronic pre-assessment and faster testing. Similarly, our new clinical establishment model allowed us to reduce the use of agency even when absence due to Omicron rose in December. The efficiency program also helps support patient safety because of the focus on safe establishment at all times. At our half year results in September, I announced we were embarking on the next stage of our program to improve efficiency and generate GBP 15 million of savings this year. At the end of 2021, we moved to a model of 14 geographical halves with typically 3 hospitals in each, where a number of the administrative functions are delivered at hub level rather than in individual hospitals. Some savings from this reorganization flow through in the end of the year. We also focused again on strong cash management and debt reduction with the [indiscernible] and the [indiscernible] leaseback of [indiscernible], contributing to an improvement in net debt prior to our successful refinancing. And I'd like to close this section by thanking my colleagues and consultant partners once again for all their excellent work in patient care to deliver this set of results. And I'll now hand over to Harbant to review the figures in more detail.

Thank you, Justin. I would like to start by saying how pleased I am with Jitesh's recovery is progressing well. I'm sure you will all join me in wishing him the very best, and it is my pleasure to cover for him during his absence. Turning to the key numbers. This has been a challenging year, but one where we can be pleased with our performance. As the business was materially different in 2020, we are using 2019 as the primary comparator for this year's performance. Revenue of GBP 1.1 billion is 12.8% ahead of 2019. As anticipated at the interim results announcement, second half EBITDA was affected by the so-called pandemic. We noted at the time is that already impacted July and August, where we experienced record start absence, consultant absence a short notice and high levels of patient cancellations. After adjusting for July and August, we have delivered against our guidance of trading in line with 2019 with a full year EBITDA of GBP 178.2 million. We achieved an adjusted EBIT of GBP 81.1 million, which was GBP 16.5 million short of 2019, resulting in an overall adjusted loss before tax of GBP 7 million. Adjusting items amount to a net credit of GBP 5.9 million and largely comprised the GBP 23.5 million profit on the sale and leaseback [indiscernible] of the various one-off charges. These include costs associated with the RSA court judgment in January 2022, deal costs related with Randy's unsuccessful bid, acquisition and integration costs for Clermont plus other costs arising from the operational restructure to achieve cost efficiencies, which I'll cover later. It is important to note that the EBITDA of GBP 178.2 million reflects the impact of increased costs due to COVID of at least GBP 53 million. After adjusting for the COVID costs, the underlying margin improved by 400 basis points to 20.5% and compares against 19.3% for 2019. I will talk more about COVID costs later. Overall, as we look forward, the outlook for demand is positive. However, we must express some caution due to ongoing risks. We continue to maintain a prudent approach towards safeguarding our patients and hospitals in a changing and unpredictable COVID environment. There are also obvious workforce challenges given the inflationary pressure on wages. I would, however, note that the group is hedged against energy price increase until late 2024. We continue to invest in our hospital spending GBP 77.1 million of CapEx, which notably includes replacing MRCT machines at 10 of our sites, plus the exciting introduction of making robots at 3 hospitals. This CapEx aligns with a revised guidance of GBP 75 million to GBP 85 million given at the half year. Bad debt has fallen to GBP 224.9 million and reflects a year-end cash balance in excess of GBP 200 million after portfolio management activity. We continue to enjoy a close and supportive relationship with our banks, and we have refinanced our senior loan facility for another 4 years. The fact that we have chosen to reduce the senior loan by GBP 100 million, down to GBP 325 million is an indicator of the group's confidence in its liquidity and trading outlook. We've also achieved a great deal in terms of portfolio management. We announced the sale of Sussex site in 2021, and this will complete in March 2022. The acquisition of the Clermont business in late 2021 is an exciting addition to the Spire family, with clear integration and white space benefits. In late 2021, we completed the sale and leaseback of the Cheshire freehold. This generated before tax and fees cash of GBP 89 million and represents a very clear indicator of the significant value of the group's sizable freehold portfolio. After accounting for the sale and leaseback and a positive free cash flow of GBP 27.4 million, the bank covenant ratio has fallen to 2.3 at 2021 year-end. This is a significant improvement in 2019 and well below the limit of full. Our free cash flow of GBP 27.4 million is stated after increasing CapEx spend by over 23% to GBP 77.1 million in 2021. This free cash flow reflects the credit quality of our trade debtors, where even with significant growth in revenue, we continue to collect receivables in a timely basis. In turn, we faced a high regard on maintaining strong relationships with our suppliers, where we lead the market in terms of prompt settlement or invoices. On average, we paid within 21 days and over 97% are paid within 60 days is market leading and head of governmental guidance. Earlier, I said that we have good confidence in demand going forward. The start of the patient pathway for us is inquiries. Increased inquiries has been maintained throughout 2021 and the start to 2022 provides confidence in our outlook for demand. These are charts which we have shared previously and now show a full year outcome for 2021 for both outpatient consultations and IPDC admissions. The green line is our 2019 number. The red line is 2020, with the dramatic impact of COVID very clear, and the dark blue line is 2021. The unprecedented level of growth in self-pay is clearly visible, and we have made a solid start in 2022. We have seen a strong performance in PMI outpatient volumes from the start of the year with year-on-year growth of 48%, while admissions have now recovered to historical levels in February 2022. As you can see from the slide, despite strong recovery in PMI outpatient volumes in H2, conversion to admission remained below pre-pandemic levels, and they did not recover to 2019 levels. This in part explained by the change in clinical setting as a growing number of procedures are now carried out in outpatients. The outlook for PMI remains cautiously optimistic as we expect volumes to continue to strengthen from patients that delayed treatment combined with a growing number of lives covered. This chart shows payer mix and clearly demonstrates the shift in income profile. Private revenue represents 74% of income in the last 3 quarters with self-pay 29%, it is now a larger stream of income than NHS income. This table shows metrics for our private business, both self-pay and PMI cover in the last 3 quarters of 2021 as well as a quarterly average for 2019. Due to the nature of the NHS contract in Q1 2021, it is more helpful to compare the subsequent quarters from an understanding of how the business is traded. We have already provided a summary of admission volumes on the previous charts. From this table, it is clear that the trend we highlighted at the half year towards delivering a more complex weeks of work has continued during H2. It is pleasing to note that average revenue per case has consistently been above GBP 3,000 throughout the last 3 quarters. This compares very favorably with the ARPC of GBP 2,632 for 2019. Whilst we saw a drop in premium in Q3 into the pandemic, with total private revenue dipping by GBP 10.2 million versus Q2, the trend was reversed with revenue growth of GBP 11.4 million in Q4. It is also notable that the fall in trading during July and August did not create a drag on ARPC. The EBITDA bridge showing key drivers between 2020 and 2021 performance, reaffirm some of the comments I've already made. There's been a sizable uplift private volumes coupled with increased security and higher ARPC. This has been partially offset by a fall in NHS volumes, which is consistent with expectation given that the group is fundamentally dedicated to supporting the NHS in 2020 in this response to pandemic. Total NHS revenue for 2021 amounts to GBP 315 million, is accrued evenly across the 4 quarters with no discernible impact of increasing waiting [indiscernible]. More information in NHS trading is providing the appendix. We have also seen a reduction in EBITDA as a consequence of COVID, both due to additional testing costs and the impact of the pandemic in Q3. This slide shows total COVID costs. These cost include those from absence and patient cancellations as well as other COVID costs, such as testing costs, consumables and staffing costs associated with changes to the operating model due to COVID. The other COVID cost urban was approximately 50% lower in H2 at GBP 8.6 million and largely felt due to changes in testing requirements and also as the group was able to manage down the test cost per unit. The impact of the Omicron variant is visible in December. We anticipate that most of the other COVID costs will continue to flow in 2022 as we must maintain a prudent approach to safeguarding the clinical pathway. The overall trajectory is hard to predict. Whilst restrictions in the wider economy being lifted, hospital staff cannot be expected to attend if they test positive for COVID. If the prevalence of COVID reduces as we move further into 2022, we hope that this will generate upside due to a fall in costs arising from cancellations and absence. We announced at the half year that we were rolling out an extensive program across the group, which will drive cost efficiencies of GBP 15 million in 2022. These efficiencies are linked to the deployment of our revised hub-based operating structure, which Justin ran through earlier, and digital initiatives such as electronic preoperative assessment, which has allowed for more efficient staffing model. All of this means that we anticipate total year-on-year staff costs for 2022 remaining flat. This is due to expected efficiencies offsetting increases in minimum wage, the annual inflationary uplift in salaries, the additional national insurance levy from April 2022, while still delivering increased admissions. This will lead to an improved margin and higher EBITDA. I highlighted earlier we continue to enjoy a solid working relationship with our banking group and have refinanced our existing debt, having chosen to repay GBP 100 million. The associated lending covenants are unchanged, and we have, despite tightening debt markets, achieved a new cost of funding, which is only 30 basis points higher than the previous arrangement. Over the past 3 years, we have maintained a strong focus on cash, and we have reduced net bank debt to GBP 224.9 million by 2021 year-end. After account for Clermont and the Cheshire sale leaseback, the bank leverage ratio at year-end stood at 2.3, which is well below the cap before. After this sale on leaseback, the group continues to hold 19 freehold properties. This compares to 20 leasehold hospital sites after including Clermont and the disposal of Sussex. This freehold portfolio is currently valued at over GBP 1.3 billion and provides the group with significant balance sheet strength. We'll continue to look at our portfolio and consider bolt-on acquisitions, which complement our existing network. Before handing back to Justin, I'll quickly highlight that we have included additional information for reference in the appendix. Thank you.

Thank you, Harbant. So before taking you through our outlook for this year and beyond, I want to provide a bit more context for the environment in which we are operating and what has changed. Now the pandemic has resulted in an unprecedented growth in waiting lists and times. According to the latest figures, 6.1 million people are awaiting treatment with 310,000 waiting more than a year and 20,000 waiting more than 2 years. IFS modeling shows that in the worst case scenario waiting list could rise to 15 million in the next 4 years. Our analysis of this model shows the NHS may need to increase elective capacity by 10% every year to get waiting list down to the 4 million they stood at pre-pandemic which were at that time also at record highs. The result of this is that the market of people who will consider using private health care in our catchment areas has expanded dramatically from just under 5 million to over 9 million people. And it's worth noting, this increase in demand is not matched by an increase in hospital capacity. This would equate to a market across the U.K. of around 15 million people, up for around 8 million previously. The ISPN, our sector association, has researched which suggests up to 50% of the population has consisted primary care. In our more targeted market of people are highly likely to be treated in a private hospital, we're seeing an increase across at groups and income brackets. Note, in particular, a shift in profile, with an increase in the market now to 55 and those with household incomes of below GBP 40,000 and between GBP 40,000 and GBP 100,000. Those who would choose private care now represent a broad range of income groups and age groups and the breadth is growing. This is a fundamental change between private hospital demand in the U.K. Considering now our 2022 guidance. I'll look first at revenue. So we plan to remain a first choice for private patients. We expect to deliver record private growth again in the coming year, primarily driven by increasing self-pay volume with continued improvement in PMI. Both trends have sustained in January and February 2022, with robust self-pay growth and PMI now touching on 2019 levels. We are, in particular, encouraged by the significantly higher level of private inquiries received early year-to-date compared to recent years. TV campaigns will feature again, and we will leverage our new hub structure to coordinate call handling, GP training and consultant support. We will remain a key partner to the NHS. In early January of this year, we were asked by NHS England to participate in the new national agreements to provide support to the NHS in light of the emergence of the Omicron variant for Q1 coming. Again, Spire has received requests for urgent and complex work from some CCGs and trusts and we expect to comfortably exceed the minimum income guarantee. We anticipate our NHS business would increase from current levels as elective recovery accelerates. We will continue to focus our NHS activity on key areas where we can add value and where margins are sustainable, especially orthopedics. Spire's NHS orthopedic volumes are now also seeing good growth versus pre-pandemic levels. We will balance increased support for the NHS and continued momentum in private patient care by increasing capacity. Expanding Saturday theater slots will play a key role in this. And overall, trading in January and February was in line with the Board's expectations. It's important to note that for the foreseeable future hospitals must maintain the same strict COVID testing and safety protocols and self-isolation rules, even as measures become relaxed in the country at large. There are also cost headwinds, especially staff costs with pressures from the new health and social care levy and compression goals by the 6.6% rise in the living wage. However, our GBP 15 million savings program should help to offset inflationary and other cost increases. And our investments in people, recruitment and development means we are well staffed to meet our operational plans at this time. Equally, there is potential for some upside as we get further into 2022 should COVID incidents abate, absence full and patient cancellation rates decline. In general, Spire continues to have many self-help opportunities to become more efficient. The successful delivery of the GBP 15 million of efficiencies is a key stage in realizing this. The GBP 15 million comprises central overhead reduction, managing clinical costs to a safe staffing establishment model and reductions in hospital administration costs. These are all facilitated by increased digitization and information provision and are on track. Overall, in 2022, we expect to see good revenue growth, continued EBITDA growth and a further increase in return on captive employed with an improvement in margins. Our cost of capital was 8.5%. We do not anticipate achieving that in 2022, but we do aim to make a material improvement again from the level of 5% in 2021. We will also continue to invest in our portfolio, facilities, equipment and IT systems totaling GBP 80 million to GBP 90 million of CapEx, represents a catch-up on the lower spend in 2020. And I want to touch on the worrying international situation at development in Ukraine. Obviously, the situation is constantly changing, but our view at present is that the impact on our business is likely to be limited. Our business is hedged against the impact of energy volatility. The impact of foreseeable wage increases is factored into our plans. We have not seen any change in our demand profile since the crisis escalated, with continued high demand to self-pay, and we're able to take on more NHS work. We also have strong contingency and business continuity plans, which we have reviewed. Importantly, we are providing support to colleagues whose families themselves are affected, and we're working with the trade associate IHM to see if the sector can provide any appropriate support to affected families. We'll update the market if necessary, as the international situation evokes. So in summary, we entered 2022 with confidence. That we have the plans in place for strong growth in 2022 and beyond on the back of a good 2021. Now a key element of our future strategy will be to leverage our positive ESG impact. This slide shows a number of the initiatives we embarked on, and I'd like to highlight a few. On the environment, we were the first independent sector provider to commit to becoming carbon neutral by 2030. And in October, we moved to source all of our electricity from renewable sources. We have a network of carbon champions, driving local carbon reduction initiatives as well as a comprehensive waste management policy. On our social impact, we're addressing the workforce challenge by launching what we believe to be the biggest nurse apprentice program, run by any single organizations in the country and definitely the biggest in our sector. 165 new nurse apprentices who joined our new program in the summer, and overall 5% of our headcounts are apprentices. We were delighted to win the Nursing Times Award the best workplace for learning and development for larger employers in the autumn. On governance, our ward-to-board model is now firmly established, and we led the sector in putting in place free [indiscernible] guided on all sites, and I talked through the progress we're making on quality. We'll elaborate our ESG strategy in compliance with new standards at our Capital Markets Day. As I indicated earlier, demand is growing at unprecedented levels. And in the worst-case scenario, waiting this could reach 15 million people by late 2025. Our first response is, of course, to double down on the strategy of driving capacity and returns in our core business. The themes here will remain the same, with a focus on first choice for private patients remaining a partner to the NHS and waiting this reduction, increasing capacity and driving improved returns and returns on capital employed from digitization, efficiencies and self-help programs. But we want to move beyond this. It is clear that our hospitals in the NHS independent sector will not be able to meet the level of demand through traditional facilities. New ways of treating people closer to home and with greater use of technology will be necessary and are already appearing. And in order to meet that need, we intend to expand carefully our offering over time and provide a more integrated health care service. We know that demand to diagnosis and day care is growing rapidly. We're already expanding existing capacity presence this year, we will turn our shorter Edinburgh daycare unit into a full overnight facility. We'll also build an outreach diagnostic center next to our Yale site in North Wales. In the period ahead, we will also seek sites to the trial a new concept, which we are currently calling Spark clinics, providing diagnostic services and outpatient treatments in our stand-alone facilities. We could be located near existing hospitals or launched in new geographies. In terms of providing services at or close to home, this year, we will be mainly a discovery mode but we do target our first new service launch later in 2022. This will be in the field of long-term condition management to support patients who need regular interventions to keep them well rather than just a single episode to diagnostics or treatment. Spire will be trialing a private subscription service for type 2 diabetes patients, offering a service which enables remote digital monitoring of their condition, support by regular virtual checkups with a specialist nurse and an annual review with a GP. Underpinning all developments would, of course, be a continuation of our focus on quality and uncompromising approach to patent safety, a strength, which we will leverage in new development and services. We plan to hold a Capital Markets Day in June, which we will say more about our evolving strategy, the exciting opportunities before us as well as our approach to ESG. I look forward to seeing you then. But returning to today's results, I'm now happy to welcome John Forrest, our Group Chief Operating Officer; and Peter Corfield, our Group Commercial Officer, to help answer questions, and we will open the floor to those questions. Thank you for listening.

[Operator Instructions] So the first question comes from Kane Slutzkin at Numis.

And Angus, it might be an idea just to drop the slide so I don't think we need them there.

And then the 1 second -- there we go.

Can you hear me?

Hi, Kane.

Congrats on the good results. Just a couple of questions. With the drop towards self-pay in the market, I'm just wondering what sort of competition you are seeing in the markets? I mean, is there a sort of fight for consultants on this basis? Is there despite for self-pay patients and effectively, does that sort of put any pressure on sort of upward pressure on wages? Then just on the private inquiries, obviously, some good momentum there and will continue good momentum. And I guess that is a good leading indicator for conversion. But I think I may have asked you this last time, but could you share some color on how does that conversion sort of -- what is that conversion to private work actually being? Can you actually quantify that amount? I mean is it something one could model? And then just finally, on returns. I mean, obviously, with ROCE, you below cost of capital, you're trying to get that up. And obviously, the components of that is obviously margin expansion and asset turnover. And I think the margin side of the equation is quite intuitive. But could you just give some additional color on how you expect to sort of get more out of your status of the use? Am I correct in saying it's sort of the use of technology, maybe expanding along the sort of continuum of care? Yes, so any color on that would be great?

Okay. So the first question about the sort of competition that we face in, so Peter, do you want to talk about that?

Yes. I mean the competition is certainly increasing. I mean at the end of the day, clearly, our competitors are out there advertising as well as us. Specifically about competition for consultants. And clearly, it's a key part of our strategy to make sure that we work with the best consultants to ensure we create the best environment for them. I guess in terms of ultimately, though, the competition, Justin alluded to, the growth in the marketplace. I mean there is a significant growth in the number of patients out there seeking private care. And actually, therefore, I'm not seeing anything that would indicate to me that the competition would slow down the growth that we're seeing at the moment. I mean certainly in place January and February as Justin alluded to, is absolutely in line with where we would expect it to be.

And I'd just add to that, Kane, but I'm always an advocate of increased competition in markets because it expands the market. This is a growing market. We've maintained that position for 4 years. We've been preparing for market to switch to self-pay before COVID. And the more the competitors market, the more it grows the pie. We do know, by the way, that when we market, it helps the market growth. So the answer is we're not seeing it. I think the fact that we are probably leading is appealing to our consultants. I think our consultants are very pleased with our self-pay growth, and they do like to favor it. So I wouldn't be worried if I saw more competition. I like it because I think there's plenty to go around, but it doesn't seem to be affecting us. So turning to your question of Return of Capital Employed, I'll give an over you and that maybe hand it to the others. So yes, I mean, the math is relatively simple, as you know. We're being disciplined about the capital we deploy much more so than perhaps in the past. And we make sure some of it, of course, is replacement capital. But we're also investing. I've talked about [indiscernible] and in places where we're very, very focused on the fact it will yield a good return. So our base capital employment is more effective. And then essentially, our model now is to be efficient so that we grow faster than our cost base, which will then deliver the margin improvements and the EBITDA growth, which increases return on capital. On your specific question, John, do you want to talk a little bit about how the efficiencies are driving through to the bottom line now of the business?

Yes. I mean -- thanks -- the focus really is the one we've been talking to you about over the last couple of years, which is trying to make sure that we're maximizing the utilization of our capacity and taking out the costs and unnecessary tasks and digitizing the processes and removing paper. But what's really exciting is bringing together new tools like our new staffing efficiency and establishment tool that supports state staffing that allows us to interrogate on a daily and wireless basis our staffing levels, allowing us to reduce, for example, the use of agency. We're looking at the utilization of our assets and moving activity into the minor ops for ambulatory care setting, a much more efficient environment in which to deliver great patient care when you don't need a full fee environment. And there are other similar activities along the way, helping us try and make sure that we're underpinning real sustained long-term margin improvement. And we're really starting to see the benefit of that, Justin.

Yes, thanks. And I think the way I think about it is 4 years ago, our results were something which we experienced at the end of the month. And then increasingly, we're able to determine what business goes into our business and how we manage capacity. I think we're more than halfway in that journey, but the excitement thing is we still have more we can do. On your question on conversion, we don't give out those numbers, but Peter knows on a daily basis what that is. But if you want to sort of figure it out, you look at the slides that Harbant's given you because you can pretty much see the relationship between outpatients inquiries and growth in admissions. And those lines, as you can see, are pretty correlated. There will be a slight widening of the pattern as we advertise more because theoretically, the funnel or people coming in may be slightly less likely to convert to treatment. Although it's surprising that, that gap hasn't been bigger, to be honest, despite the fact we've massively increased our pool. So does that answer those questions, Kane?

Yes.

Thanks, Kane, for your question. Next question comes from David Adlington.

But maybe just the first 2. Just in terms of your self-pay, I noticed that your average revenue per case has gone from about 2,900 to 3,700 since 2019. I just wondered how much of that was down to price increases versus mix? And moving on from that, where do you see pricing evolving from here? And then sort of associated with that, you're seeing cost inflation as well. Maybe you could just give a little bit more color in terms of -- you talked about margin expansion. But in terms of the quantum or range that we should be thinking about for this year depending on sort of worst case and best case scenario, particularly with respect to those COVID costs?

Okay. Great. Thanks, David. I'll pass the first question to Peter and the second question to Harbant. So Peter?

First question, the key driver is definitely the mix. So we've seen a strong growth in orthopedics and self-pay that has driven up that average revenue per case. However, I've already trailed the new pricing engine that we've been putting in place. That's now live. That gives me the ability to obviously reflect inflationary increases, but also I'm in a process now of tidying up my pricing to make sure that we've got optimized pricing in each of our chosen markets. That means that I'm making pricing changes at about 100 a week at the moment. So -- and I've got a portfolio of around 17,000 price points. So I have a sophisticated tool. I am optimizing that to make sure that we get the right price in place to hold our margin. But the main driver for that price -- the average revenue case as in mix. We've seen really good strong orthopedic growth in self-pay.

Thanks, Peter. And I'd just add, you may remember that 2 or 3 years ago when our self-pay was negative for while, we were unburdening ourselves on lower ARPC cosmetic work. And having done that, that's one of the reasons why Peter can give the answer he gives because we cleared our theaters and our sales process to focus on high ARPC high-margin work. How cost inflation?

Okay. So clearly, like any business, we are exposed to inflation to an extent. We have built that into our plans. There are some elements, which are as Justin mentioned earlier, we're completely hedged against energy price increases until October 2024. At the moment, in terms of salary increases, et cetera, we clearly envisage precious building on that front, which is why it's clearly very important that the GBP 15 million of the savings I referenced earlier, are landed because that will clearly give us some offset. In terms of other opportunities around margin expansion, we spoke earlier about the fact that our current cost base includes COVID costs. So there will be some opportunity in terms of upside there. I mentioned that part of our COVID costs have really started to drop in the second half of last year. However, that particular element that I referenced in the presentation, will continue to flow into 2022. The bigger opportunity and that clearly is uncertain is the best it relates to cancellations in absence. So if that starts to drop then include there's some upside in terms of margin on EBITDA.

Thanks, Harbant. I might just add also that we have an outstanding supply chain division leader who has been working away for the last 18 months on price reductions in all of our key areas and is also providing good insulation at the moment against inflation because it just keeps on delivering savings. A lot of this is coming from consolidated things like processes and consumables, so there's a process behind it. But I feel very confident about that team's ability to help protect us against inflation, notwithstanding our statement that there are inflationary pressures. David, does that answer your questions?

It does. I just have a follow-up one, Justin, that's right. Just in terms of your NHS work. Once we get to this time next year, just wondering do you have a feel for your percentage of NHS work this year?

Good question. Well, I said before, and I still think it's the case that the percentage is likely to nudge upwards from where it is. Now we are also increasing capacity. So that affects the percentage. But in absolute numbers, I expect it to nudge upwards. We are seeing more engagement. We are being selective, and it's prefer that NHS has been selective. But I suspect number will nudge up a bit. I forget it's about 23%, 24% at the moment. I would think it would go up would be my expectation balanced by the fact that will set those constructively and creatively to help create more capacity. But I think that will be the direction of travel, David.

Thanks, David. Next question is from Grace Lee at Jefferies.

Can you hear me?

Yes.

Yes.

Okay. Yes. I've got 2 questions. One, in relation to your portfolio management, what are you planning for FY '22 in terms of types of transaction that you're currently thinking, whether you're thinking -- you mentioned continued bolt-on acquisitions, but are you thinking about potential continued outlet sales and continue that sales of lease back transactions that you've done this year? I'm thinking that especially in a wider context shift towards that sort of outpatient setting deliveries. So I'm curious to hear your thoughts on that. And what will be the purpose of the proceeds from that? Is that mainly due for your debt reduction is my number one question? And the second question is about you mentioned the pen replacement MRI and [indiscernible] scan is? Can you share with us which vendors you went for and how you're thinking about for the CapEx upgrade this year?

Great questions. Thank you. So the first one, there is -- when it comes to bolt-ons first, there's a degree of opportunity around this. Things -- it tends to come up. It's a relatively limited pool of hospitals out there. But we do keep -- you saw the Claremont. It's the right site, which fits into our whitespace geographic opportunities comes along at the right price because we were disciplined on multiple and will remain so. And we'll continue to be interested in that. We're not limited to bolt-ons as a way to develop the portfolio. And that's why I started talking about diagnostic outpatient treatment centers. Because we think this could be a low capital, high return way of expanding our portfolio with essentially 2 thoughts in mind, one which we've done already, which is we built a relatively close to our hospitals. This takes pressure out of theatres in those hospitals. It takes pressure from consulting rooms and essentially allows us to expand capacity and whether it's diagnosing increasing more patients. And then more ambitiously to move into geographies where we're not currently so that we can start tapping into demand. And those could be quite an important vehicle for us. I'll talk more about that at Capital Markets Day. But this year, it's about identifying and trying that. We've been clear that our portfolio has to work in terms of terms. Every portfolio has a tail, all our hospitals profitable and well-run great teams. But we always look at what should we do with the tail? Sussex was one of those decisions, and we'll be celebrating the contributions of that great team as it goes over to NHS. And we remain alive to portfolio management on an ongoing basis. And you've also seen that if we think it's prudent and appropriate, that we will sell a freehold. We did that with Cheshire, we're not seeing that as a wholesaler. We heard at the right time when it's appropriate. In terms of the use of cash from that, Harbant, would you like to comment on -- I'm sure we won't make any commitments to it, but your thoughts about that?

So I almost press the one question almost exited. Yes. So as Justin is saying, there's no commitment in terms of us potentially more portfolio management. Clearly, if the opportunity arises and we generate more cash, then it may well be we consider further pay down of debt or we may consider other options in terms of investment. We talked earlier about our desire in terms of capital as well, CapEx investment. So at the moment, we've got GBP 80 million to GBP 90 million, which we're currently planning on spending this year, like last year, some of that small element will be lease finance and maybe some options in terms of how we fund that particular port.

Turning to your question about which suppliers we partner with? So we don't announce that because obviously, it's a very competitive market. What I can say, talking again about our supply chain team, we do have leading suppliers of MRI, CT, endoscopy, et cetera. We tend to ask consultants which brand they prefer. We're looking to consolidate with 1 or 2 suppliers, we'd like to get a bit of competitive tension and we're getting material reductions in capital spend by doing that as well as enhancing quality. So we've got a sophisticated partnering program but I wouldn't feel comfortable mentioning the names, although we appreciate our partnership with them. Grace, does that answer your questions?

Next question is from Charles Weston at RBC.

Can you hear me, okay?

Charles.