Spire Healthcare reports its results
for the six months ended 30 June 2020

London, UK, 17 September 2020, Spire Healthcare Group plc (LSE: SPI), a leading independent hospital group in the UK, today announces its interim results for the six months ended 30 June 2020.

Proud to support the NHS while maintaining strong liquidity, with net debt unchanged from Dec 2019

Summary Group results for the six months ended 30 June 2020

1.  Not meaningful

2.  EBITDA is calculated as Operating Profit, adjusted to add back depreciation, and Adjusting items, referred to hereafter as 'EBITDA'.

3   Net bank debt is defined as bank borrowings less cash and cash equivalents

Operating and financial highlights

•      Historic agreements to support the NHS during the COVID-19 pandemic with relevant cash costs covered

•      380,000 patients seen in H1 20 (H1 19: 494,000)

•      90% of sites now rated 'Good', 'Outstanding' or equivalent (up from 85% at FY19 and 81% at H1 19)

•      Working capital benefit leaves net bank debt unchanged at £330.6m (£330.0m at H2 19 and £362.2m at H1 19)

•      Agreement with lenders to amend June 2021 covenant test, and maturity of Senior Loan Facility extended by one year to July 2023

•      Dividend suspended on 1 April. Dividend policy will be reviewed when circumstances permit

•      £200m write down of goodwill primarily related to historical balances created in 2007 and 2008

Developing our business

•      Agreed Heads of Terms to vary the NHS England (NHSE) contract to protect minimum private capacity in all sites, driving positive momentum in admissions and providing firm end date of 31 December 2020 at latest

•      Over 120,000 NHS patients seen to date under the COVID-19 contract

•      Private demand increasing with monthly relevant enquiries in August above prior year

•      Total admissions in August at 95% of prior year, up from 80% in July, with mix skewed to NHS

•      Launched virtual consultations and pilot of electronic pre-operative assessments

•      Bupa Specialist Centres for breast cancer opened at Spire Bushey and Spire Little Aston on 29 July

Justin Ash, Chief Executive Officer of Spire Healthcare, said:

"The first six months of 2020 has witnessed unprecedented challenges but Spire Healthcare has been able to play a critical role during this time of national public health crisis whilst continuing to invest in its future. We are now well-positioned to continue supporting the NHS in urgently tackling growing waiting lists, while meeting the increasing demand for treatment from private patients.

"I pay tribute to all our Spire Healthcare and NHS colleagues, as well as Consultant partners, who have worked together to deliver the best possible care during the COVID-19 pandemic in meeting the needs of more than 120,000 patients. Challenges remain but I am optimistic about our future prospects with our admissions now close to the levels of last year. On the back of rising private demand and increased efficiency in our patient pathways, I firmly believe Spire Healthcare can look forward to the future with confidence in its mission to bring together the best people, dedicated to delivering the highest quality patient care in the best clinical environment."

Outlook

It is challenging to set future expectations given the current uncertainty with COVID-19. The Group will remain within the NHSE contract for most of 2020 and if current trends continue, the Board expects operating profit in H2 2020 to be at least in-line with H1 2020.  December 2020 net bank debt is expected to be in the range of £320m to £360m. There has been a return of private activity since lock down and there is significant national unmet demand for both private and NHS procedures. Subject to any significant change in the COVID environment, the Board anticipates trading returning to 2019 levels in 2021.

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

*Note: 120,000 patients seen under COVID-19 contract between 23 March and 30 August

For further information please contact:

Spire Healthcare                                                 +44 (0)20 7427 9169

Cora McCallum, Head of Investor Relations
 

Instinctif Partners                                                 +44 (0)20 7457 2020

Damian Reece
Guy Scarborough
 

Registered Office and Head Office:

Spire Healthcare Group plc
3 Dorset Rise
London
EC4Y 8EN

Registered number 09084066

About Spire Healthcare

Spire Healthcare is a leading independent hospital group in the United Kingdom, with 39 private hospitals and 8 clinics across England, Wales and Scotland.

Spire Healthcare delivered tailored, personalised care to approximately 810,000 in-patients and daycase patients in 2019, and is the leading private provider, by volume, of knee and hip operations in the United Kingdom. The Group's well located and scalable hospitals have delivered successful and award winning clinical outcomes, positioning the Group well with patients, consultants, the NHS, GPs and Private Medical Insurance ("PMI") providers. Spire treats patients through a variety of routes including PMI, Self-pay and the NHS, providing the Group with diversified access to the expected growth opportunities in the UK healthcare market, which faces significant supply challenges as a result of NHS budget constraints and increasing demand from a growing population with longer life expectancy.

Cautionary statement

This preliminary announcement contains certain forward-looking statements relating to the business of Spire Healthcare Group plc (the "Company") and its subsidiaries (collectively, the "Group"), including with respect to the progress, timing and completion of the Group's development, the Group's ability to treat, attract, and retain patients and customers, its ability to engage consultants and GPs and to operate its business and increase referrals, the integration of prior acquisitions, the Group's estimates for future performance and its estimates regarding anticipated operating results, future revenue, capital requirements, shareholder structure and financing. In addition, even if the Group's actual results or development are consistent with the forward-looking statements contained in this preliminary announcement, those results or developments may not be indicative of the Group's results or developments in the future. In some cases, you can identify forward-looking statements by words such as "could," "should," "may," "expects," "aims," "targets," "anticipates," "believes," "intends," "estimates," or similar words. These forward-looking statements are based largely on the Group's current expectations as of the date of this preliminary announcement and are subject to a number of known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievement expressed or implied by these forward-looking statements. In particular, the Group's expectations could be affected by, among other things, uncertainties involved in the integration of acquisitions or new developments, changes in legislation or the regulatory regime governing healthcare in the UK, poor performance by consultants who practice at our facilities, unexpected regulatory actions or suspensions, competition in general, the impact of global economic changes, and the Group's ability to obtain or maintain accreditation or approval for its facilities or service lines. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements made in this preliminary announcement will in fact be realised and no representation or warranty is given as to the completeness or accuracy of the forward-looking statements contained in this preliminary announcement.

The Group is providing the information in this preliminary announcement as of this date, and we disclaim any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Analyst and investor meeting

There will be an analyst and investor meeting today at 11am via Zoom webinar. Please register in advance through this link: https://spirehealthcare.zoom.us/webinar/register/WN_qi9CBCXqQJWgKxTlw-9elw

Operating Review

Performance

The first half of 2020 has been focused on the Company's response to the COVID-19 pandemic. Spire Healthcare, together with the rest of the independent hospital sector, agreed to support the NHS's efforts to tackle the pandemic. This unprecedented agreement ensured sufficient UK healthcare infrastructure to meet COVID-19 demand and continue time-critical services to vulnerable patients, whilst also maintaining Spire Healthcare's liquidity, protecting the employment of the Group's colleagues and maintaining engagement with Consultants.

COVID-19 response and activity

The COVID-19 pandemic required Spire Healthcare to react quickly and remain adaptable to a frequently changing operating environment, as clinical regulations and policies evolved. These developments necessitated structural changes to managerial engagement, communication and reporting, which led to all 39 Spire hospitals becoming more aligned operationally and working more efficiently as one organisation. This new way of working should ensure a more streamlined decision making and communications process throughout the Group going forwards.

NHS activity

Spire Healthcare is proud of the role it is playing to partner with the NHS and ensure vital healthcare services are maintained. Net revenues from the COVID-19 contracts in England, Scotland and Wales totalled £133.7m in H1 20, leading to total NHS revenue of £200.4m (H1 19: £143.7m). As of 30 August the Company has seen over 120,000 NHS patients under the COVID-19 contract. Over 49,300 NHS patients were admitted for treatment including 18,800 for urgent cancer care. In certain regions the local NHS Trust transferred whole service lines, such as chemotherapy or cystic fibrosis, to the local Spire hospital, and in other areas Spire provided colleagues and equipment such as ventilators to support the provision of care in the local NHS hospital. This collective response to the COVID-19 pandemic has strengthened Spire Healthcare's relationship with the NHS, both at a local and national level, and the Company has received significant positive feedback from Consultants, colleagues and patients.

Colleagues and Consultants

Spire Healthcare worked hard to support its colleagues during the COVID-19 pandemic. The contract with the NHS protected the employment of all clinical colleagues whilst, where appropriate, administrative colleagues were retrained and redeployed to perform a range of vital roles. Some colleagues volunteered to work in the Nightingale hospitals and, whilst a maximum of 39 colleagues were furloughed at any point in time, no one experienced a reduction in salary as Spire Healthcare topped up the Government contribution. We have, in addition, announced an exceptional financial COVID-19 gift to all our colleagues not on a bonus scheme, to thank them for their contribution. This will be paid in December 2020 and will not be funded by the NHS.

As a result of these efforts, and despite the challenging environment, colleagues have reported feeling increasingly engaged and confident in the future of the Group, as evidenced by the results of a colleague survey in July. 80% of all colleagues reported that they were proud to work for Spire Healthcare. For three months at the start of the NHS COVID-19 contract, Garry Watts, Justin Ash and Jitesh Sodha agreed a 20% salary reduction, and an equivalent sum of money will be donated to the NHS Charities Together.

The COVID-19 pandemic significantly impacted the Consultants who have practising privileges at Spire Healthcare, with minimal private activity possible during the peak of the pandemic. Spire Healthcare ensured regular communication with this important stakeholder group and expanded its internal communications team to include a Head of Consultant Communications.

NHS contract variations

On 15 May, NHS England (NHSE) triggered the de-escalation phase of the contract with the independent sector, allowing Spire Healthcare to undertake elective work for both NHSE and private payors, at the discretion of the local Trust. A Heads of Terms for a variation to the NHSE contract, announced on 13 August, guarantees a minimum capacity for private activity in each of the 35 Spire Healthcare hospitals in England. NHSE will continue to cover cash costs, in line with the original contract. In return, Spire Healthcare has committed to a minimum private rebate (a deduction from the NHSE-reimbursed costs commensurate with the amount of private care provided), with additional incentives agreed for exceeding that minimum rebate.

Spire Healthcare has implemented safe patient pathways in each of its hospitals and is confident these will not materially restrict capacity. The Group is committed to offering elective care to as many patients as possible, both NHS and private, and to supporting our Consultant partners to rebuild their practices as quickly as possible. Total admissions across all Spire Healthcare sites are now running at 95% of prior year capacity on a monthly basis.

The Company is now seeing strong demand from private patients. Relevant enquiries have rebounded strongly since late April and are now above the level seen last year. These enquiries are driving a subsequent recovery in outpatient consultations and admissions, albeit with some time lag. For example, in recent trading, private outpatient consultations were down only 5% versus the same period last year with private admissions continue to build and are now only 23% behind the same period last year. Private revenue in July was double that of June, with 20% growth in August (versus July).

The contract between Spire Murrayfield and NHS Scotland will terminate at the end of September. Spire Healthcare is working with the NHS in Wales to agree a variation in the contracts with Spire Yale and Spire Cardiff which will protect a minimum capacity for private activity in line with that agreed in England.

Digital efficiency programmes

The pandemic has provided a platform to accelerate the delivery of certain digital efficiency programmes. In early March, Spire Healthcare secured licences to facilitate virtual patient consultations, with nearly 20,000 consultations taking place in H1 20. A further 16,000 virtual consultations were conducted in July and August. The Group also hosted virtual training and events for General Practitioners enabling Spire Healthcare to reach and engage with the local medical community thereby protecting and developing an important source of patient referrals.

The introduction of electronic pre-operative assessment (ePOA) was prioritised and is now in pilot in three Spire Healthcare sites (Spire Nottingham, Spire Hartswood and Spire Leicester). Full implementation of ePOA across all sites is expected to start by end H2 20, which should significantly reduce the use of paper within Spire Healthcare whilst facilitating a better patient experience and shorter processing time, freeing up nursing time and hospital consulting rooms.

Significant progress has been made on the development of a new pricing system which will allow central control and optimisation of self-pay pricing across the group. This should be delivered in early 2021.

The Company also launched two new platforms to improve the HR function. The first, Florence, is a new Oracle-based people management platform which consolidates four existing HR systems (HR, payroll and two recruitment systems) into one. This development will significantly reduce the paper and administrative burden within HR whilst providing greater control and transparency in payroll.

The second, Ryalto, is an app for Spire Healthcare colleagues, which provides access to news and information about the business, enabling a greater sense of connection to the company, particularly for hospital-based colleagues who are not able to access email whilst at work. This Cloud-based system will also allow managers to book bank and/or temporary workers and will link to the Group's payroll systems.

Revenue and cash position

2020 started well with revenues up 3% in January and February, including 9% growth in self-pay. However admissions and revenues declined from mid-March as the COVID-19 pandemic impacted the country; Consultants, particularly anaesthetists, were diverted to the NHS and shielding resulted in lower colleague availability and fewer patients. With the vast majority of private elective surgery suspended from 1 April, Group revenues declined 18% to £401.9m in H1 20. As a result of the agreements with the NHS in England, Wales and Scotland, which made Spire Healthcare facilities and colleagues available to the NHS, a comparison of revenue by payor or location (inpatient, daycase or outpatient) is not meaningful.

The Group has received relevant cash cost recovery for its services from 30 March, including operating costs, overheads, use of assets, rent and interest less a rebate for any private elective care provided. These contracts, with payments in advance, combined with a tightly controlled capex programme and the suspension of the final dividend (which was announced on 1 April), have resulted in virtually no change in cash and equivalents on the balance sheet (£90.9m in H1 20 versus £90.8m at FY19). Consequently net debt is largely unchanged at £330.6m (£330.0m at end December 2019 and £362.2m at H1 19).

Spire Healthcare currently has a Senior Loan Facility of £425m and an undrawn Revolving Credit Facility (RCF) of £100m. The maturity date of the Senior Loan Facility has been extended by one year to July 2023. The RCF will remain at £100m until July 2022 and £87m thereafter until July 2023. The Group has reached agreement with its lenders to provide the necessary financial flexibility to continue to support the NHS for a longer period than was initially envisaged. In addition to the covenant waivers already announced and agreed for June 2020 and December 2020, a further covenant waiver of the net debt / EBITDA ratio and interest cover test for June 2021 has been agreed. A new liquidity measure will take effect as a consequence of this arrangement. This test requires cash and cash equivalents, including headroom under undrawn committed facilities, to remain above £50m. For December 2021 the agreement allows for a maximum net debt / EBITDA ratio of 6x if this measure has not already dipped below 4x.

In line with IFRS requirements the Company performs a review of the value of carrying goodwill every reporting period. The current view of the market in the medium and long term remains substantially unchanged from the last review. In assessing the carrying value of the historical goodwill balance, the Group has recognised the effect current financial market conditions have had on the cost of capital which is used to discount future cash flows to their current value; accordingly Spire has taken a one-off non-cash charge in the period to reduce historical goodwill from £517.8m to £317.8m. This historical goodwill relates primarily to the original acquisition of hospitals to create Spire Healthcare in 2007 and 2008 and the impairment charge of £200m has been treated as an Adjusting item.

Patient safety and clinical quality

Six CQC inspection reports were published during H1 20, all rated 'Good' including three upgrades from 'Requires Improvement' for Spire London East, Spire Hartswood and Spire Leeds. Consequently, 90% of Spire Healthcare sites are now rated 'Good', 'Outstanding' or equivalent in Scotland and Wales, up from 85% at FY19.

Following the announcement in 2019 that Bupa UK and Spire Healthcare were partnering to launch two new Bupa Specialist Centres for breast cancer, the Company is pleased to confirm that the first customers have been able to access the service from July, in preparation for a full launch later this year. The services are located at Spire Bushey and Spire Little Aston hospitals and provide Bupa members with market leading speed of access to a comprehensive multi-disciplinary diagnostic clinic, and if required, treatment.

Senior appointments

Spire Healthcare is pleased to announce the appointment of Professor Clifford Shearman (Cliff) as an independent Non-Executive Director with effect from 1 October 2020. He will also join the Clinical Governance and Safety Committee from 1 January 2021.

This appointment will increase the number of Board members with clinical experience to four, strengthening Spire Healthcare's clinical governance and reflecting the Group's commitment to patient safety and clinical quality. Professor Shearman was a consultant vascular surgeon for 26 years and is currently Vice President of the Royal College of Surgeons. Professor Shearman is also non-executive director at the Royal Bournemouth and Christchurch NHS Foundation Trust.

Dr. Catherine Cale will join Spire Healthcare as Group Medical Director on 26 October 2020 following the decision to retire by the current interim Medical Director, Fergus Macpherson. Catherine has served on Boards as Medical Director in three organisations, each in different parts of the health sector, most recently with Hillingdon Hospitals NHS Foundation Trust in London. Catherine worked alongside Professor Tim Briggs as Clinical Ambassador for the Getting It Right First Time (GIRFT) initiative in London until February 2019, and maintains strong links with the programme. Catherine trained in Paediatric Immunology and Infectious Diseases and is a Fellow of the Royal College of Pathology.

To further strengthen the central medical support for hospitals and Consultants, Spire Healthcare is implementing a regional structure with a Medical Director for each of the three geographical business units (North, Central and South), in addition to the existing Assistant Medical Director and Responsible Officer. The investment in this structure is expected to provide increased medical governance and representation throughout the business, reinforcing the Group's commitment to patient safety and clinical quality.

Gillian Fairfield was appointed Group General Counsel on 1 September. Gillian is a senior lawyer with over 20 years of experience in corporate law, regulatory, finance, and governance and has worked with listed companies across a number of sectors. Gillian has also previously worked as a partner in the corporate division of international law firm Herbert Smith Freehills LLP. and has served as non-executive director and committee member of Lonmin plc, a FTSE-listed public company. In 2016, Gillian was named Client Partner of the year at the British Legal Awards.

Outlook

The cancellation of elective procedures during the peak of the COVID-19 pandemic has resulted in significant demand in both the NHS and private sector. The NHS England contract variation will provide a phased transition back to a more balanced business with a definitive end date of 31 December 2020 at latest. Spire Healthcare expects to participate in the tender for NHS waiting list work and expects greater visibility from this payor in 2021 as a result.

It is challenging to set future expectations given the current uncertainty with COVID-19. The Group will remain within the NHSE contract for most of 2020 and if current trends continue, the Board expects operating profit in H2 2020 to be at least in-line with H1 2020.  December 2020 net bank debt is expected to be in the range of £320m to £360m.

On a post IFRS 16 basis in 2020, the Board anticipates depreciation and amortisation in the range of £92m to £96m with capex of around £50m and net financing costs in the range of £82m to £87m. The effective corporate tax rate is expected to be negligible for the full year.

There has been a return of private activity since lock down and there is significant national unmet demand for both private and NHS procedures. Subject to any significant change in the COVID environment, the Board anticipates trading returning to 2019 levels in 2021.

Financial review

Selected financial information

1.    EBITDA is calculated as Operating Profit, adjusted to add back depreciation, and Adjusting items, referred to hereafter as 'EBITDA'. See page 8 for further information.

2     Net bank debt defined as bank borrowings less cash and cash equivalents

Revenue

Group revenues declined 18% to £401.9m (H1 19: £491.6m) due to suspension of most private activity during the NHS COVID-19 contract. NHS revenue of £200.4m includes £133.7m revenue from the COVID-19 contract, net of rebates for private activity. The NHS COVID-19 contract is reimbursed on a cost recovery basis and therefore the detail of revenue by location (inpatient, day case or outpatient) is not available.

Revenue by location and payor

Cost of sales and gross profit

The COVID-19 pandemic and subsequent contract with the NHS, which recognises revenue on a cost recovery basis, in addition to the different mix of work undertaken in H1 20, distorts both the cost profile and its proportion of revenue. Comparisons with prior periods are therefore not meaningful.

Gross margin for the first six months of 2020 is 49.0% compared to 2019 levels of 46.9%. Cost of sales decreased in the period by £56.0 million, or 21.4%, to £205.1 million (2019: £261.1 million) on revenues that decreased by 18.2%. This is due to the reduced private activity during the COVID-19 pandemic, and therefore reduced agency and bank staff requirements.

Cost of sales is broken down, and presented as a percentage of relevant revenue, as follows:

Hospital operating profit margin (gross profit less indirect hospital costs) was 23.8% compared to 26.3% in June 2019.

Other operating costs

Other operating costs for the six months ended 30 June 2020 increased by £207.2 million or 115.4% to £386.7 million (H1 2019: £179.5 million), mainly due to a one-off impairment to goodwill of £200m. Excluding Adjusting Items, other operating costs have increased by £2.9 million, or 1.6% to £182.0 million (H1 2019: £179.1 million).

The increase in other operating costs is mainly driven by increased professional fees; staff costs and depreciation, offset by a reduction in marketing spend and travel costs.

Operating margin for the six months ended 30 June 2020 is (47.2%), down from 10.4% in H1 2019. Excluding adjusting items, operating margin is 3.7%, down from 10.5% at H1 2019.

EBITDA

EBITDA for the Group has decreased by 36.4% in the period from £96.8 million to £61.6 million for H1 2020. The decrease is driven by a fall in revenue following restrictions over private activity during the NHS COVID-19 contract, which is partially offset by decreased cost of sales, namely direct costs and medical fees.

Share-based payments

During the period, grants were made to Executive Directors and members of the executive management team under the Company's Long Term Incentive Plan. For the six months ended 30 June 2020, the charge to the income statement is £0.8 million (H1 2019: £0.3 million), or £0.9 million inclusive of National Insurance (H1 2019: £0.4 million).

Adjusting items

In the period, the Group has settled with the Competition and Marketing Authority (CMA) as disclosed in the RNS announcement released on 1 July 2020. Professional costs in respect of the investigation have also been recognised. The total cost recognised in the period is £1.4m. In addition, following the release of the Paterson Public Inquiry in February 2020, the Group has incurred, and provided for costs of £3.2m in ensuring the recommended actions from the report are fully adhered to. In the prior period, aborted hospitals costs relate to the potential development in Milton Keynes where the decision was taken to not proceed.

Goodwill

At 31 December 2019, the Group reported a goodwill balance of £517.8m. This balance was primarily created following transactions which occurred in 2007 and 2008. It is the Group's policy to assess the carrying value of goodwill at each reporting period end. This assessment is based on the recoverable amount of goodwill with reference to its estimated value-in-use (VIU). The VIU calculation is based on management's forecast of future cash flows. The results of the calculation are highly sensitive to the discount rate applied to the cash flows, as well the long term view of sectoral growth in the outer years.

Except for the current year, where there have been unprecedented challenges, Spire's confidence in its assessment of its hospitals prospects for generating future revenues and net cash flows remains largely unchanged. In assessing the carrying value of the historical goodwill balance, the Group has recognised the effect current financial market conditions have had on the cost of capital which is used to discount future cash flows to current value; accordingly the Group has taken a one-off, non-cash, charge in the period to reduce historical goodwill from £517.8m to £317.8m‎. This impairment charge of £200m has been treated as an Adjusting Item.

Net finance costs

Net finance costs increased by 0.2% to £41.5 million (H1 2019: £41.4 million) as a result of an incremental increase in lease costs and higher borrowing costs resulting from fees for a minor amendment to the Senior Loan Facility (see notes 16-18 for further detail).

Taxation

The taxation charge for the six months ended 30 June 2020 is £1.8 million (H1 2019: £2.5 million). This consists of a £nil (H1 2019: £1.3 million) charge for corporation tax and a charge of £1.8 million (H1 2019: £1.2 million) for deferred tax. The deferred tax charge includes a one off charge of £6.1m as a result of the deferred tax assets and liabilities being revalued from 17% to 19% following the Government's cancellation of the reduction in the corporation tax which was due to take place on 1 April 2020.

Profit after taxation

The loss after taxation for the six months ended 30 June 2020 was £233.1 million (H1 2019: Profit £7.1 million)

Non-GAAP financial measures

We have provided below financial information that has not been prepared in accordance with IFRS. We use these non-GAAP financial measures internally in analysing our financial results and believe they are useful to investors, as a supplement to IFRS measures, in evaluating our ongoing operational performance. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in comparing our financial results with other companies in the industry, many of which present similar non-GAAP financial measures to investors.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with IFRS. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable IFRS financial measures provided in the financial statements table in the press release.

The following information includes references to Adjusted financial information. This has been produced for illustrative purposes and does not represent the Group's actual statutory earnings.

EBITDA

¹ EBITDA on a pre-IFRS 16 basis has been provided to aid comparability in the early years of adoption of the new IFRS 16 standard (adopted on 1 January 2019).

Adjusted EBIT

Adjusted profit after tax and adjusted earnings per share

Adjustments have been made to remove the impact of a number of non-recurring items.

¹ Reported tax charge for the period adjusted for the tax effect of Adjusting items

Cash flow analysis for the period

Operating cash flows before Adjusting items

The cash inflow from adjusted operating activities was £73.2 million, which constitutes a cash conversion rate from £61.6 million EBITDA of 118.8% (H1 2019: 88.1% conversion of £96.8 million EBITDA). The net cash inflow from movements in working capital in the period was £13.2 million (H1 2019: £11.8 million outflow).

Investing and financing cash flows

Net cash used in investing activities for the period was £28.1 million (H1 2019: £21.3 million). Cash outflow for the purchase of plant, property and equipment in the period totalled £28.1 million (H1 2019: £21.5 million), which included theatre refurbishments in Liverpool, a new MRI in Southampton and a new CT at St Anthony's.

Net cash used in financing activities for the period was £47.4 million (H1 2019: £55.0 million), including lease and bank interest paid of £36.8 million (H1 2019: £35.9 million) and £10.6 million (H1 2019: £9.1 million) of lease principal payments. The prior period also included a dividend paid to shareholders of £10.0 million. The final dividend for 2019 was cancelled and therefore not paid in the current period as a result of the uncertainty caused by the COVID-19 pandemic.

Borrowings

At 30 June 2020, the Group has bank borrowings of £421.5 million (December 2019: £420.8 million, June 2019: £420.6 million), drawn under facilities which was due to mature in July 2022, but will now mature in July 2023 (following the agreement detailed below).

During the period, the Group agreed a covenant waiver for the assessment periods as at 30 June 2020 and 31 December 2020 as a result of the COVID-19 uncertainty. Since the balance sheet date, the Group has entered into an additional agreement which covers the next covenant test in June 2021, and obtained an extension in maturity of its Senior Loan Facility by one year, such that it matures in July 2023. Further information is provided in the Going Concern section in note 2.

The Group has an undrawn revolving loan facility, which is limited to £100.0 million until July 2022 and thereafter reduces to a limit of £87m until maturity in July 2023.

As at 30 June 2020, lease liabilities were £740.3 million (December 2019: £745.3m). Refer to note 17 for more detail.

Dividend

As a result of the COVID-19 uncertainty and agreement with Lenders for a covenant waiver, the Board will not be proposing an interim dividend.

Related party transactions

There were no significant related party transactions during the period under review.

Risk Management and Internal Control

Material Change to the Group's risk profile from the COVID-19 pandemic

The risk profile of the Group changed significantly with the onset of the COVID-19 pandemic and has continued to change throughout the period March 2020 to date. As disclosed in the 2019 Annual Report and Accounts, the Group's hospitals could be subject to requisition by HM Government in a national crisis. In the circumstances, as announced by the Group on 21 March 2020, the Group, with other private healthcare providers, agreed to provide all of its facilities and staff to be at the disposal of the NHSE in return for the NHSE covering the cash costs of the Group. This represented a completely new business model and method of operation for the Group.

In order to manage many new and immediate risks, e.g. securing supplies of protective personal equipment, from early March 2020, the Board and Executive Committee set up a crisis management command structure with Gold, Silver and Bronze Commands at national, regional and local level. The crisis command structure initially met seven days a week. As the pandemic progressed and the Group passed from immediate crisis response to embedding news ways of operating, the crisis command reduced its meetings steadily from daily to twice a week. The Group returned to a "business as usual" command structure, but utilising some of the efficiencies it learnt from the crisis, from the 7 September 2020.

The Clinical Governance and Safety Committee, a Board Sub-Committee, changed its meeting schedule from quarterly to monthly, and the Safety, Quality and Risk Committee, comprising Executive Committee members continued to meet monthly.

The level of risk reporting increased in line with the increased governance oversight. The Clinical Governance & Safety Committee and the Safety, Quality and Risk Committee received updated risk reports at each meeting setting out the material corporate risks that the Group needed to manage, and how the Executive Committee was managing them.  As the situation changed at pace, there were material changes to the risk profile of the Group at almost every meeting.

The Executive Committee and the Board, taking into consideration the rapidly changing risk profile, have reviewed the Principal Risks of the Group. The profile has changed, although as the Group has now begun to undertake private healthcare work again, all of the Principal Risks reported in the 2019 Annual Report and Accounts remain relevant to the Group. The principal risks updated in this report, and included in the 2019 Annual Report and Accounts remain in place until the year end 2020 as required by the DTR requirements.

Material Changes to the Group's Principal Risks reported in the 2019 Annual Report and Accounts

COVID-19 - a new Principal Risk

The Board considers that the COVID-19 virus represents an on-going material risk to the Group.  A second wave of infections in the autumn or winter of 2020-2021 could affect the Group's ability to continue its private healthcare activities if elective procedures are largely unable to continue as occurred from March 2020 - May 2020, or patient confidence falls. This could have a material impact on the Group's profitability and cash generation. Foreseeable scenarios from a second wave of COVID-19 infections have been modelled as part of the going concern and viability testing, see the Directors' responsibility statement.

The material mitigation against a second wave of COVID-19 infections is the NHSE contract. As set out in the Group's announcement on 13 August 2020, NHSE and independent hospital providers agreed terms for the variation of the NHSE Contract. The variation will allow Spire Healthcare to undertake a phased transition back to normal business, by providing NHS elective care to reduce waiting lists, whilst increasing private activity in its 35 English hospitals. The NHSE Contract, and subsequent variation, is expected to remain in place until at least the end of October 2020 but will have a definitive expiry date at the end of December 2020 at latest.

The most significant variation is to guarantee that a certain minimum capacity in each hospital will be made available for privately funded patients (PMI and self-pay). NHSE will continue to cover cash costs, in line with the original contract. In return, Spire Healthcare, along with other private providers, will commit to a minimum private rebate (a deduction from the NHSE reimbursed costs commensurate with the amount of private care provided), with additional incentives agreed for the private providers for exceeding that minimum rebate subject to delivering NHSE activity.

Private activity has been building steadily since the de-escalation phase of the NHSE Contract was triggered on 15 May 2020. Spire Healthcare has implemented safe patient pathways in each of its hospitals, compliant with current guidance, and is confident these will not materially restrict capacity. The Group is committed to offering elective care to as many patients as possible, both NHS and private, and to supporting our Consultant partners to rebuild their practices as quickly as possible.

Spire Healthcare is aware that the NHSE has issued termination notices to a certain number of other independent providers' sites, predominantly in Central London, with these sites exiting the NHSE Contract on 8 September 2020. All of Spire Healthcare's sites in England remain in the NHSE Contract with total admissions currently running at c.95% of the Group's prior year activity on a monthly basis.

The cancellation of elective procedures during the peak of the COVID-19 pandemic has resulted in significant pent-up demand in both the NHS and private sector. The NHS England contract variation provides a phased transition back to business as usual with a definitive end date of 31 December 2020 at latest. Spire Healthcare expects to participate in the tender for NHS waiting list work and expects greater visibility from this payor in 2021 as a result.

UK-EU trade negotiations - change in imminence

As reported in the 2019 Interim Financial Statements, the Group faced uncertainty if HM Government was unable to agree a Withdrawal Agreement and Transition period with the EU. As HM Government did agree a Withdrawal Agreement and Transition Period, there has been no impact to date to the Group's supply chain due to leaving the EU. The Transition Period will end on 31 December 2020. HM Government is currently negotiating a future trading agreement with the EU. If HM Government is unable to conclude a trade agreement with the EU then the Group may face disruption to its supply chain from 1 January 2021. The Executive Committee has re-established its planning committee for this eventuality and is putting in place similar mitigations as it had in both October 2019 and January 2020, but adjusted for changes in its operations because of the COVID-19 pandemic. The key areas of our business that we expect would be impacted remain supply chain, employees and increased costs, as follows:

 Supply Chain

The Group buys directly from UK suppliers, but around 80% of the goods that we use to operate our hospitals come into the UK, from or via the EU.

Our supply chain currently operates on short ordering times and low inventories.  Irrespective of whether there is a long term UK-EU trade deal in place or not, it is reasonable to expect that that the UK and/or the EU will require some additional checks on EU imports into the UK.  If there are border checks that cause delays or shortages due to other supply chain factors, then our supply chain may be disrupted.

Employees

Each Spire Healthcare employee is a highly valued member of our organisation. While fewer than 6% of our employees are EU citizens, we are encouraging them to stay in the UK and are supporting them to register with the EU Settlement Scheme.  However, the new single immigration system that will apply from 1 January 2021 may reduce the number of candidates able to work in the UK.  We will continue to recruit the highest calibre of candidates from the EU and elsewhere, in line with our current recruitment processes.

Increased costs

If there is not a long term UK-EU trade deal in place, or if a long-term UK-EU trade deal is not a free trade deal, it is reasonable to anticipate that EU imports will be subject to customs charges and tariffs and/or quotas.  

Mitigation

We will continue to work closely with our key suppliers during 2020 and keep our detailed contingency planning updated to mitigate the impact to our business following 31 December 2020.

We believe we are taking all reasonable steps to ensure that disruption to our patients and other stakeholders is kept to a minimum. However, given the uncertainties around the content of and impact from any long term UK-EU trade deal, we cannot rule out disruption to the business after 31 December 2020 as there may be some circumstances outside of our reasonable control.

Macroeconomic Risk - change in inherent risk level

Historically, approximately 70% of the Group's revenue has been dependent on private patients having PMI, paid by their employer or paid by the individual, or being able to afford its services (Self-pay).

In an economic downturn, the numbers of insured individual's falls with the level of employment and individuals have reduced real income to fund insurance or Self-pay for procedures. This would have an adverse effect on the Group's business, the results of its operations and prospects.

With the UK economy moving into recession and the imminent ending of HM Government's furlough scheme, this risk increases in likelihood. However, it is not a certainty that there will be a material impact on the potential customer base of the Group, who tend to be older and in economic sectors not as affected by HM Government's restrictions on socialising. The Board is monitoring activity levels closely. Enquiries for Spire Healthcare services from private patients are exceeding levels seen historically, although there is inevitably a level of backlog from the cessation of elective procedures in the spring of 2020. In addition, NHSE has published its intent to procure capacity in 2021 from the private sector to tackle its waiting lists. It is the Board's intention to participate in that procurement process.

Cyber Security - change in inherent risk level

As widely reported in the media, the Board is aware through regular communication with HM Government agencies that the threat level from malicious actors to healthcare organisations increased with the COVID-19 Pandemic. The Audit & Risk Committee had additional reports from the Chief Information Officer and Internal Audit during this period of the Pandemic on the resilience of the cyber security controls in the Group. The Board, through the Audit & Risk Committee, will continue to monitor the resilience of the Group's cyber security controls.

The Principal Risks fall under the following categories:

Emerging risks

The Executive Committee had considered longer term potential risks emerging prior to the COVID-19 pandemic. The planned Board consideration of emerging risks has had to be postponed because of the COVID-19 pandemic, this will be addressed by the Executive Committee and Board in the last quarter of 2020.

Directors' responsibility statement

Going Concern

As detailed in the Financial Review at 30 June 2020, the Group has cash of £90.9m and access to a further £100m through a committed and undrawn credit facility.

Given the economic uncertainty arising from the COVID-19 pandemic, during April 2020 the Group announced that it had cancelled its final dividend for the financial year ended 31 December 2019. In addition to this, the Group also took the decision to defer certain capital investment which was planned in 2020, in order to strengthen its liquidity position.   The Group has not had to undertake any further action in regard of maintaining its liquidity.

Under the terms of the existing Senior Loan Facility, which was due to mature in July 2022, the Group must adhere to certain banking covenants which are linked to its liquidity and trading performance. As was announced in March and April 2020:

•       The Group agreed to support the NHS during the COVID-19 pandemic, which resulted in certain cash costs being covered; and

•       Its lenders agreed to waive the covenant testing required under the Company's Senior Facility Agreement for the two forthcoming scheduled test periods on 30 June and 31 December 2020.

The Group confirmed in a further update in August 2020 that it had agreed Heads of Terms for the variation of the NHSE Contract. The variation will allow Spire Healthcare to undertake a phased transition back to normal business, by providing NHS elective care to reduce waiting lists, whilst increasing private activity in its 35 English hospitals. The NHSE Contract, and subsequent variation, is expected to remain in place until at least the end of October 2020 but will have a definitive expiry date of the end of December 2020 at latest. The agreements with the NHSE provide Spire Healthcare with liquidity and a greater degree of certainty as the Group is paid weekly in advance.

The Group has reached agreement with its lenders to provide the necessary financial flexibility to continue to support the NHS for a longer period than was initially envisaged. In addition to the covenant waivers already announced and agreed for June 2020 and December 2020, since the balance sheet date, a further covenant waiver of the net debt / EBITDA ratio and interest cover test for June 2021 has been agreed. A new liquidity measure will take effect as a consequence of this arrangement. This test requires cash and cash equivalents, including headroom under undrawn committed facilities, to remain above £50m. For December 2021 the agreement allows for a maximum net debt / EBITDA ratio of 6x if this measure has not already reduced below 4x. Spire Healthcare currently has a Senior Loan Facility of £425m and an undrawn Revolving Credit Facility (RCF) of £100m. The maturity date of the Senior Loan Facility has also been extended by one year to July 2023. The RCF will remain at £100m until July 2022 and £87m thereafter until July 2023.

Notwithstanding the above, given the economic uncertainty of the COVID-19 pandemic, the Group has modelled for a number of scenarios in its assessment of going concern, covering both the risk of a National or extensive Regional lockdowns in late 2020 and early 2021.

Under the most severe COVID-19 scenario that has been modelled for, it is plausible that a breach of the revised banking covenants could occur at 31 December 2021 without management's mitigating actions, which include but are not limited to increasing liquidity through the introduction of constraints over capital management or the sale and leaseback of a property owned by the Group

Further detail on COVID-19 is provided in the Risk management and internal control section.

Other specific scenarios covered by our testing were as follows:

•       The downside modelling of a number of risks which result in a decline in earnings arising from issues connected with the UK/ EU trade negotiations, a general economic downturn or competitor action;

•       A key hospital is subject to permanent or temporary suspension of trade, for example, due to a major fire or regulatory matter;

•       The Group is subject to temporary suspension of trade, with a temporary adverse impact on revenue, for example, as a result of regulatory action or a successful cyber-attack on key business systems; and

•       The business is subject to significant uninsured losses arising from medical malpractice, negligence or similar claims.

This review included the following key assumptions:

•       No change in capital structure given the Group extended its existing Senior Finance Facility and revolving credit facility to mature in July 2023.

•       The government will not change its existing policy towards utilising private provision of healthcare services to supplement the NHS.

The Group has undertaken extensive activity to identify plausible risks which may arise and the available mitigating actions. Further information on the plausible risks is provided in the Risk management and internal control section.  It is not possible for the Directors' assessment to cover every potential eventuality. However, based   on the current assessment of the likelihood of these risks arising, together with their assessment of the planned mitigating actions being successful, the Directors have concluded it is appropriate to prepare the accounts on a going concern basis.  

Directors' responsibility statement continued

Each of the Directors confirms that, to the best of their knowledge: 

•      The preliminary financial information, which has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS'), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company on a consolidated and individual basis; and 

•    The preliminary announcement includes a fair summary of the development and performance of the business and the position of the Company on a consolidated and individual basis, together with a description of the principal risks that it faces, as required by:

•       DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the six months of the current financial year and their impact on the condensed consolidated interim financial information and a description of the principal risks for the remaining six months of the year; and

•       DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially impacted the financial position or performance of the Group during the period and any material changes in the related party transactions described in the Group's Annual Report and Accounts for the year ended 31 December 2019.

By order of the Board

Justin Ash                                            Jitesh Sodha

Chief Executive Officer                      Chief Financial Officer

16 September 2020

Independent review report to the members of Spire Healthcare Group plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Consolidated interim income statement, Consolidated interim statement of comprehensive income, Consolidated interim statement of changes in equity, Consolidated interim balance sheet, Consolidated interim statement of cash flows and related notes 1 to 22. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London

16 September 2020