Wakefield Health Limited

Friday 22nd August 2008

Wakefield Health reported a 46% increase to $7.9 million in net profit from continuing operations for the year ended March with revenue up 9%, reflecting the benefits of integrating the Wakefield and Bowen hospitals in Wellington with Royston Hospital in Hastings. In June, Mark Stewart�s Masthead took a 19.3% stake while Fisher Funds Management also bought in at the same time and gained 5.7%.

ShareChat: What percentage of revenue did your DHB work account for in Wakefield�s latest financial year?

Wakefield Health chief executive Andrew Blair: The reality is it�s a small part of our work. Our focus is on private patients, but increasingly we�re seeing that the DHBs are turning to private hospitals. To put that in some context, last year DHB-derived revenue was less than 5%. Although DHB work isn�t a major source of revenue, elective surgery undertaken under contract for DHBs has contributed to the increased utilisation of our hospital facilities.

SC: Are you deliberately keeping it low?

AB: Not deliberately keeping it low, but we are cautious about becoming too reliant on it because our experience shows it�s unpredictable. We have to ensure that DHB work doesn�t impact on our private patients. Having said that, where we have capacity, we are prepared to increase the volume of work we do for DHBs, providing the price is right.

SC: Does that mean you would like long-term contracts?

AB: Greater certainty and greater volume would help us better meet the price expectations of DHBs. The experience to date has been that purchase arrangements tend to be ad hoc, spot purchasing. We need to gear up and gear down when those volumes stop. The work flows tend to revolve around the financial year of the DHBs and the pressure they come under from the Ministry of Health and the government, which is why we saw an increase in volume of that work in the second half of our financial year. Certainly, greater certainty and continuity would be beneficial to us but also to the DHBs.

SC: What would you say was a "safe" level of DHB work for Wakefield?

AB: It depends on the contractual arrangements and capacity at any particular facility. So long as our hospitals have capacity and the volume of DHB work isn�t impacting on our ability to service our core private patient market, then we will be prepared to accept increased volumes of DHB work.

SC: Will the situation change if we get a change in government?

AB: We haven�t seen the specifics of the opposition�s health policy yet but the indications are they�re prepared to make greater acknowledgement of the important role that the private sector plays. And it may be we will see them facilitating the up-take of health insurance or perhaps, in the case of the elderly, for example, making it more affordable for them to retain insurance they may already have in place. There are clear signals they would be prepared to look at public/private partnerships and we expect health wouldn�t be an exception to that.

SC: You said at the AGM Wakefield is well-placed to influence policy at the political level. Can you give me an example of this?

AB: I�m on the executive of the New Zealand Private Surgical Hospitals Association and past president of that association. Other senior members of our management team are on other national bodies that form the voice of the private sector so we do get access through those organisations to meet with and talk to government officials. We�ve got access to senior members of ACC and the Ministry of Health, but also through its scale now Wakefield also gets listened to. It�s known and respected. Through all of those means we continue to lobby where we can. It�s not just around greater utilisation of private facilities. We also contribute nationally to issues that will improve patient safety and health outcomes. We contribute to discussions around work force issues, for example. As one of the larger hospital groups we feel a responsibility to the wider sector to make that sort of contribution.

SC: What has been preventing consolidation in the private hospital sector?

AB: There has been consolidation, not only the coming together of the three Wakefield hospitals but there have been other acquisitions and joint-ventures involving the Southern Cross group of hospitals. That consolidation and change is also reflected in the fact that most of the religious and welfare organisations that were involved in owning hospitals have now exited the sector. In terms of constraints, there are still a number of regional hospitals that have very strong links to their communities through local trusts and the value of those links, I think, have dampened the motivation to join a larger nation-wide hospital group. But we believe, just as Royston identified the benefits of being part of a larger scale organisation, so will other hospitals over time. We are a very capital-intensive business and there are ever-increasing compliance issues to be dealt with. The reality is it�s very difficult for a stand-alone small-scale hospital to continue to survive without the support of being part of a larger network. In terms of other constraints, obviously the Commerce Act provides some constraint where competition is affected by consolidation or rationalisation.

SC: Surely the Commerce Act wouldn�t be a problem when you�re looking at amalgamations across different geographies?

AB: Absolutely. I was talking more generally about the sector. For example, we�ve seen the coming together of two private hospitals in Rotorua. There�s currently an application before the Commerce Commission for the amalgamation of two private hospitals in Palmerston North. We see that form of rationalisation as part of the consolidation we�ve been referring to. Clearly, there are Commerce Act implications that need to be worked through in those cases. However, there�s not expected to be any Commerce Act implications of Wakefield entering the Auckland market, for example.

SC: Does the success in integrating Wakefield and Royston help with negotiations with other prospective partners?

AB: I�m sure it does. The financial results we�ve reported since the amalgamation and integration of Bowen Hospital I think clearly demonstrate the benefits of scale. I expect other hospitals will be looking closely at that and, perhaps, coming to the realisation that joining a larger group sooner rather than later would be in their interests.

SC: Are you only looking at the Auckland market for acquisitions or mergers?

AB: No. We certainly do have a focus on Auckland because we don�t have a presence there at the moment and that�s where there�s a large population based and good population growth. But, clearly, there are other opportunities throughout the country. We�ve established some very good working relationships with other hospitals that we believe set us up well for future acquisitions or mergers when those other parties are convinced the time is right.

SC: Would the company even consider a greenfields development?

AB: Yes. Probably the Auckland market is the most likely location for that, if we were to do it. We�ve said we�re looking at a number of options in the Auckland region and a greenfields development is one of those options. There are, however, clear risks in developing a new hospital from scratch and we�re mindful of them. But there are also clear benefits in that you have the opportunity to provide the absolute leading edge technology and quality of facilities. That�s very attractive in attracting and retaining the support of consultants. That support is vital to the success of our hospitals. It is a consideration, not necessarily ranking higher than others.

SC: What are the causes of the delay in redeveloping Bowen Hospital?

AB: They revolve around resource consent issues. We�re now at a point where we believe we�ve satisfactorily resolved them and we expect to have a hearing of our application within the next few weeks. We have strong support from the local residents in the community that Bowen has been part of for the last 30 years and expect the resource consent application will be successful and will allow us to get on with the upgrade.

SC: When do you now expect work to begin?

AB: We expect to be able to start building within six months of getting the resource consent. That will allow for final design work to be completed, tendering, awarding of the contracts and the building consent processes. A start date for construction now is most likely to be early calendar 2009.

SC: Once work starts, how long do you expect each of stage one and stage two to take?

AB: Stage one we�re advised will have a construction period of around 12 months. We need to do more work in terms of finalising the scale and timing of stage two before we have more information available on that.

SC: How much further scope is there to expand your existing hospitals?

AB: If we take Wakefield first, we will be commissioning a seventh operating theatre there later this year. We�ve just completed a total evaluation of the development opportunities for the entire Wakefield campus. That shows there�s scope for further expansion when that�s justified. At Bowen, moving to five new operating theatres from three at the moment will completely occupy the available site, but that�s quite a significant increase in capacity. We expect we will meet demand in that part of Wellington for a number of years. At Royston hospital in Hastings, we increased from two to three operating theatres in 2006 and still have excess capacity available. Also at Royston, we�re fortunate that we have available to us land for future development adjacent to the hospital where we could expand existing services or develop other complementary services.

SC: Why does Wakefield have a policy of paying premium wage rates rather than just meeting the market?

AB: There�s a well-recognised shortage of experienced, well-qualified nurses and anaesthetic technicians, for example, nationally and internationally. Workforce issues generally are seen as a major constraint in the health sector. Particularly in larger centres, we�re competing for nurses and our experience has been that by offering premium pay rates we�re able to attract and retain very high quality staff and limit staff turnover, which is a very costly event. But even beyond those competitive issues, our hospitals have always acknowledged that our staff are our most valuable resource and we�ve chosen to acknowledge that and provide them with excellent working conditions in other ways, not just premium wage rates. It�s been a successful policy and it�s one we intend to continue.

SC: Why is the dividend payout ratio so low and is there scope to raise it?

AB: We aim to pay out around 40 cents in every dollar. The dividend we paid this year was a 17% increase on last year. But, in terms of the payout ratio, we believe that�s still a prudent level. We want to ensure we continue to be in a position to maintain the quality of our facilities and have the means to grow the company as the opportunities we talked about earlier become available to us. It is, of course, always a balancing act between how much is paid out to shareholders as dividends and how much is retained to grow shareholder value.

SC: Why do you think so many New Zealanders are signing up for health insurance, particularly when we�re in recession?

AB: The figures released by the Health Funds Association, which represents health insurers, earlier this year indicated that the number of New Zealanders with health insurance was at an all-time high with 1.4 million and that that was increasing rapidly. I haven�t seen more recent figures and I wouldn�t be surprised if we see an easing off of that as economic conditions tightened. But, I think increasingly, New Zealanders are realising that if they want choice and they want timely access to health care, they need to take greater responsibility themselves and they need alternative means of funding it other than relying on centrally funded services. The daily news of constraints and challenges in our public hospitals serves as a timely reminder to all New Zealanders that they need to be providing in some way, probably through health insurance, to contribute personally to what they need or are likely to need. Unfortunately, past government actions, such as the imposition of Fringe Benefit Tax on workplace health insurance schemes, have impacted on the uptake and maintenance of health insurance.

SC: You were Royston�s CEO for 10 years before the Wakefield merger. How did you get into hospital management in the first place?

AB: My career had given me a wide range of general management skills. There was a fortunate co-incidence of timing. I had chosen to relocate my family from Wellington to Hawkes Bay at the same time as Royston was embarking on significant change from being a not-for-profit hospital with senior nurse management to a more commercial model with professional management. I was fortunate to enter the health sector at a time when I could make a real difference to a hospital business and lead it from what was in effect a "cottage hospital" to now being part of one of New Zealand�s largest private hospital groups. The core general management disciplines around finance, people, property, marketing and compliance � I had been managing one of the large law firms � they�re very transportable to hospital management. Probably the key skill that�s helped me in the hospital sector has been relationship management. In the private sector, relationships with our specialist consultants are one of the most important success drivers. It�s very much a team effort and developing, leading and motivating those teams and every member of the team, no matter what their role in the hospital is. I absolutely love my job. I�m passionate about it. I think in part it�s because I�m in an industry where there�s some caring and compassion in the services we provide but where we have to maintain strong commercial disciplines as well if we�re going to be in a position to continue to provide those services.

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