Good morning, everyone, and thanks for joining us for our FY 2023 results presentation. I'm Craig McNally, and I'm joined by Martyn Roberts, our Group Chief Financial Officer. Today, we'll provide an overview of our performance for the 12-month period, an update on our strategic direction before covering off on the outlook for the group. I'd like to start by thanking Ramsay's people and clinicians, who have delivered the results today. We've continued to focus on providing the highest quality care to our patients, creating fit-for-purpose treatment facilities for our clinicians, and supporting colleagues, public authorities, and local communities impacted by local and regional issues, including the pandemic, natural disasters, and conflict. On behalf of the board and senior management team, I'd like to recognize their fantastic performance through a period of significant change and thank them for their ongoing efforts.
Attending to the key themes coming out of the results, the EBIT increase of 14.6% was driven by stronger growth from Australia, Ramsay U.K., and Asia. It was partially offset by reductions in Ramsay Santé and Elysium. The 8.8% increase in NPAT includes materially higher financing costs and a higher effective tax rate. We are accelerating our digital and operational transformation to improve performance, patient experience, and clinical outcomes, and that's with a particular focus on Australia. We continue to invest in Australia to drive growth, and so our greenfield and brownfield development programs have been modified to reflect the current construction environment, with also an emphasis shifting to digital and data programs.
We will be targeting revenue growth by driving volume, again, above industry growth rates, and negotiating further increases in reimbursement rates to compensate for the higher cost environment. For the funding group, we're targeting leverage of less than 2.5x , and that is helped with the potential sale of Ramsay Sime Darby, but also increased earnings from the business. That's an in- you know, I'm gonna say an improvement from the current position of leverage of 3.2x . In FY 2024, we expect mid to high single digit top line growth, and transformation initiatives in place will help drive margin improvement over time. Albeit in FY 2024, margin recovery will be slowed by the inflationary cost pressures, and an increase in digital and data investment.
We're focused on continuing to improve our strong competitive position to take advantage of the positive long-term trends in healthcare. Moving to the FY 2023 result, which I've said at the operating level, reflects a gradual recovery in Australia, a strong improvement in Ramsay U.K., and that's driven by materially higher volumes and productivity improvement. Another good result from Ramsay Sime Darby, and as I said, it's partially offset by lower results from Ramsay Santé and Elysium. As you can see on this slide, EBIT margins, excluding non-recurring items, did improve from a weak third quarter. Generally, trading in July has continued to follow the improved trends experienced in the fourth quarter.
The board determined a fully frank final dividend of AUD 0.25 per share, taking the full year dividend to AUD 0.75 per share, which represents a payout ratio of 60%, which is at the bottom of our target payout ratio of 60%-70%. We believe this balances the needs of shareholders with the company's focus on reducing leverage over time. Moving to the result in Australia. The operating environment in Australia was stop-start throughout the year, with a rate of growth slower than was expected. The challenging conditions were felt across the industry, and it was pleasing to see in this week's APRA data that despite the difficulties the businesses faced, we have improved our market share of the private health insurance market over the 12 months to the end of June.
Certainly, that's more significant when we compare it to 2019. We believe this demonstrates the quality of our hospital portfolio and the outstanding care our clinicians and people provide to our patients. The less predictable environment added to the complexity of managing labor in an extremely tight market, increasing labor cost ratios to higher than normal levels at various points in time. The results have started to benefit from a range of initiatives in this area, with EBITDAR margins in the fourth quarter being 200 bits above margins in the third quarter. We completed negotiations on a number of health fund contracts during the period at rates that are more reflective of the current environment.
However, given the ongoing pressure on labor costs caused by public sector EBA results and generally higher costs, including increases in new state-based levies, things like the Mental Health levy and the COVID levy, which in the full year are in excess of AUD 11 million, we are revisiting our contracts to ensure the higher costs are encapsulated in reimbursement structures going forward. I'd just like to reiterate that to address the issues impacting the business at the current time, we have accelerated our business transformation programs, and that is an immediate priority. Just looking at trends in activity. Surgical volume growth reflected the backlog of cases due to surgical restrictions and high levels of cancellations due to COVID in the last few years. Growth was biased towards day and short-stay surgery, reflecting the lower level of complexity in the case backlog.
We believe addressing both the public and private backlog will take a few years to play through, and we are positioning to capture this volume where it makes commercial sense, particularly on the public backlog. Non-surgical volumes started to improve in the second half, with rehab and medical admissions growing strongly as activity in the community rose and following stronger surgical volumes. Psych admissions remained below trend, with overnight cases stronger than day admissions. We continue to look at a range of measures to leverage our expertise and capacity in mental health to grow volume, including the recruitment of additional psychiatrists and potentially working with the public sector on solutions to address the mental health crisis. Turning to the investment pipeline in Australia.
Spend on projects during the period was AUD 208 million. A number of smaller projects were completed in the period with an investment value of AUD 73.8 million. Given the escalation in building material costs and other issues that the building industry is facing at the current time, our development program for the next one to two years will be between AUD 250 million-AUD 300 million per annum, and targeted at the projects in the portfolio. In the out-of-hospital area, we continue to make selective investments in our new and adjacent out-of-hospital services. This strategy is designed to extend our relationship with the patient, making healthcare more seamless for them, and creates a referral channel for our hospital network.
We have progressed our digital and data strategy, which has multiple streams of work, with the initial investment focused on building our foundations, improving efficiency and productivity, and driving better outcomes for our patients, people, and doctors. This year, we invested AUD 38 million in total, of which AUD 27 million was OpEx. Further to the numbers we released at the interim result, we've now further scoped the projects for the next couple of years, and we've provided a breakdown of the spend between OpEx and CapEx on this slide. In FY 2024, we expect OpEx, net of benefits from the various programs we are rolling out, to be in the range of AUD 60 million-AUD 70 million, or approximately AUD 30 million-AUD 40 million higher than in FY 2023.
At this stage, we expect net OpEx to peak in FY 2025 at AUD 70 million-AUD 80 million, and to become an overall net benefit to the business in FY 2028. We'll obviously be trying to accelerate this timetable where possible. CapEx associated with current projects is also expected to peak in FY 2025-2026, at between AUD 70 million-AUD 80 million. A large number of projects are or I should say, a number of large projects are already underway. While additional key projects are scheduled to be launched over the next 18 months, we have also delivered multiple smaller automation projects that create immediate value for the business. This slide reflects, in broad terms, where our investment will be allocated.
There are approximately 48 projects currently underway. These focus on delivering the four multi-year strategic programs, which include Electronic Health Record, a patient hub project called the Ramsay Health Hub. That is intended to build out a full end-to-end seamless digital admission process and patient experience. A predictive insights project, which is designed to improve our capability in AI and machine learning to support improved decision making and scenario analysis. The focus of this work to date has been to deliver better clinical coding and improve theater utilization. We will provide a more detailed view of these projects at an Australian investor session we are planning in early November. Suffice to say, the investment in this area is designed to improve our competitive position and drive the growth of the business in both the immediate and long term.
Turning to the outlook for the Australian business. Our Australian business is uniquely positioned to benefit from the underlying growth in demand for healthcare services in the future. We have ramped up a range of operational and transformational programs in three broad areas. Firstly, improved revenue management, which will include leveraging technology to streamline processes and improve consistency of coding and billing. Secondly, activity growth, which will include redesigning models of care generally, and targeting increased public work. Thirdly, operational excellence and cost efficiencies. We'll give you more detail on these programs in November. We expect the FY 2024 results to benefit from mid-single digit volume growth, combined with indexation, together with the productivity and other benefits flowing from the programs I've just spoken about.
There are factors that will slow margin improvement, including higher digital and data OpEx, the ongoing impact of inflation on costs, in particular labor costs, and the higher state taxes and levies I've just mentioned. Capping off the Asia Pacific region is our joint venture in Southeast Asia, Ramsay Sime Darby, which reported a full strong year result, reflecting growth in inpatient activity in our Malaysian hospitals. The equity accounted after-tax contribution increased 30.1% to AUD 19.9 million. I would note that RSD earnings are seasonally stronger in the first half of the financial year. Following the release of our ASX announcement in June, we have, together with our partner, Sime Darby, commenced the sale process for RSD, which has resulted in the receipt of a number of non-binding indicative offers.
We are in the process of narrowing the number of parties we'll take through to the next stage of the process. We expect to announce the outcome of the process before the AGM in late November. Turning to the U.K., Ramsay U.K., our acute hospital business, reported a very strong turnaround in performance, driven by a 14.4% increase in admissions, a higher level of acuity, and the benefits of an improved operating environment. Labor shortages are starting to ease, although the market remains tight in some areas. Inflationary pressures have peaked. The business has done a very good job of offsetting these pressures this year.
After operating in line with budget for the first 5 months of ownership, Elysium had a disappointing year, with acute labor shortages in non-clinical staff, in particular, resulting in materially higher labor costs and lower occupancy due to the difficulty in staffing facilities. The business has invested in centralizing recruitment and training facilities to fast-track onboarding and training and improve retention rates, which is proving to be successful. As a result of these initiatives, vacancy rates have started to decline, assisted by an improving labor market in the UK and a growing offshore recruitment pipeline, lowering agency costs. Labor, as a percentage of revenue, has declined to 68% in July from the FY 2023 full year ratio of 72.5%.
In accordance with the accounting standards, the carrying value of Elysium's physical sites was reviewed at year-end, resulting in a $20.5 million impairment of the carrying value of three of the sites in the 84 site portfolio. Turning to the outlook for the U.K. Ramsay U.K. is expecting mid to high single digit volume growth in FY 2024, driven again by both NHS volumes as well as private pay, that continues to grow as a segment of the market. The new hospital at Kettering, which is called Glendon Wood, has opened in the last few weeks, which is also expected to contribute to top-line growth. Elysium's focus this year will be continuing to reduce vacancy levels, replacing agency workers with permanent staff and lifting occupancy levels. Their performance is expected to improve over FY 2024.
The business has a strong relationship with the NHS, and the underlying demand for mental health services supports the medium-term outlook for the business. NHS tariffs for the year commencing the first of April 2023 were finalized in mid-August. The final tariffs for both businesses are in line with our expectations. Turning to Ramsay Santé, where after a slow start post to the Northern Hemisphere summer, activity levels did pick up with growth in both surgical and non-surgical activity, and high volumes in its allied and primary health services in the Nordic region. Support from governments in all its regions, introduced in response to COVID, declined 28% to $290 million. The MCO tariff increase for the year commencing the first of March is 5.4%, with the follow-up care and rehab tariff at 1.9%.
The business does not believe these tariffs compensate them for the cumulative impacts of inflation over the last few years. Ramsay Santé is working with the industry to ensure the French government understands where the cost challenges exist to better inform future tariff settings. The Nordic region reported a strong result, driven primarily by businesses acquired in FY 2022, including GHP, that contributed revenue of $314 million or $269 million more than in the prior period. The EBIT result had the benefit of non-recurring items of $43.1 million, including profit on asset sales of $55.3 million in total, as the business continues to optimize its portfolio. The Nordics result was impacted by a decline in COVID-related activities, such as testing, as well as lower volumes and average level of acuity at St. Göran's Hospital.
Absenteeism due to sickness and staff shortages impacted capacity utilization, although this improved in the second half of the year. Turning to the outlook. In the short term, Ramsay Santé's priorities will be to continue to implement programs to address significant inflationary cost pressures and invest in its agreement on quality of life at the workplace to address the labor shortages that remain a key issue in some areas. The French government has extended the revenue guarantee to the 31st of December 2023, with the safety net structure now reduced to 70% of any shortfall experienced, reflecting the decline in COVID cases in the community. The Nordics will be focused on the integration of recent acquisitions, the continued development of an integrated digital platform, and resolving the performance at St. G ö ran.
In the medium term, Ramsay Santé will continue to focus on its strategy to become an integrated digi-physical healthcare business, attracting and retaining patients through the delivery of a contiguous health services pathway. This will encompass investment in new services, including select investment in primary care, imaging, prevention, and outpatient, and at-home services, as well as strengthening the base hospital network and exploring new payer opportunities. As I've said, while skill shortages have eased globally, challenges remain across the healthcare workforce, notably in training and recruiting the next generation of workers, while retaining and engaging our people. The key priority areas of Ramsay's workforce strategy include providing flexible working conditions, more accessible learning and training opportunities, expanding our leadership programs, and investing in technology to simplify processes and allow our people to focus on providing high-quality care.
Through the year, we've built on our successful programs with new and expanded initiatives for local and international recruitment. I'm pleased to say that it's starting to show results. In Australia, vacancies, turnover, and time to fill are all down over the past 12 months. We are recruiting nurses locally and internationally. We're also growing our leadership capability at all levels of the business. Efforts in our U.K. acute hospital business have seen the clinical vacancy rate drop from 13% to 9% over the year, and Elysium opened a new recruitment hub in January and has onboarded more than 447 net FTEs, including 197 international healthcare workers. Our sustainability strategy is showing progress across the board, with our net-zero ambition on track to reduce Scope 1 and 2 emissions by 42% by 2030.
Our efforts to reduce emissions include a Greener Theatres campaign, and most of our hospitals are in the process of greatly reducing the use of the anesthetic gas, desflurane, in favor of gases with lower emissions. We know we can't reach our targets alone, and this year we have achieved our goal of getting at least 40% of our suppliers to complete sustainability assessments, and we are on track to reach our 2026 target of 80% of suppliers. I'll now hand you over to Martyn to run through the financials in more detail.
Thanks very much, Craig. Good morning, everyone. As Craig has outlined, the 12% increase in revenue reflects improved surgical and non-surgical activity across all regions, combined with an AUD 767 million increase in revenue from recently acquired businesses. During the period, all regions felt the impact of high inflation, particularly in labor costs, along with labor shortages in key areas which impacted capacity utilization. In addition, the first quarter of the year was impacted by the COVID. As the decision to conduct the sale process for RSD was made before the end of June, the business is now being classified as a discontinued business and an asset held for sale. The segment note in the accounts only represents continuing businesses for both this year and last year.
There is a table in the OFR that gives you the segment earnings inclusive of RSD for a proper comparison with previously reported figures. The result includes non-recurring items, which we have given you more detail on in the OFR. The EBIT contribution this year from these items was a positive contribution of AUD 42.1 million, compared to a negative AUD 60.5 million contribution in the prior period. I would note that when you strip out the impact of these in each of the halves, EBIT in the second half of the year was only down 1.5% on the first half, reflecting more acute seasonality in Australia this year and a weaker half from Elysium.
Below the EBIT line, non-cash mark-to-market movements in both Ramsay Santé and the funding group's debt facilities made an AUD 26.8 million positive contribution this year, compared to AUD 34.1 million in the prior period. Excluding these items, net financing costs, if you exclude AASB 16 leases, increased 71.5%, reflecting higher base rates and higher average drawn debt across the period compared to the prior period. FY 2024 note, total net interest expense, including AASB 16 leases, is currently forecast to be in the range of AUD 570 million-AUD 600 million, subject to movements in base rates, of course. If a sale of RSD does occur, it is expected that the proceeds will be used to pay down drawn debt, which would reduce this range further.
Our tax rate was also higher in the year at 33.2%, compared to 29.6% in the prior period, due primarily to the non-deductibility of some interest costs in the U.K. Operating cash flow increased 79% on the prior year, reflecting an improvement in the operating environment and the change in working capital as Ramsay Santé converted French government receivables under the Revenue Guarantee Scheme to cash. Cash flow includes receipts from the sale of non-current assets and businesses of AUD 66.3 million, offset by the acquisition by Elysium of our adolescent mental health services facilities for AUD 68 million. We've included this next slide to remind people about our funding structure. The consolidated group is really made up of two entirely separate balance sheets with their own capital structures.
You've got the Ramsay Funding Group, which is basically everything except Santé, i.e., Australia, the U.K., and our equity accounted share of profit for RSD. You've got Ramsay Santé. Ramsay Santé has its own covenant-like debt facilities, which have no recourse to the funding group and are secured by assets on its own balance sheet. The funding group does not contribute capital to Ramsay Santé for working capital or CapEx needs. Indeed, Santé's acquisition last year of GHP was fully funded by their own debt facilities. Moving to leverage. On this slide, we've given you the funding group net debt and leverage ratios on an AASB 117 basis, which is the ratio that's used by banks and Fitch.
As Craig said, we finished the year with funding group leverage of 3.22x . We are targeting a ratio of less than 2.5x , which we would expect to achieve through the use of the potential proceeds from the sale of RSD and through organic growth. We've also included the consolidated group leverage, both pre and post AASB 16. As I've said, Ramsay Santé is separately self-funded by covenant light debt facility secured against their balance sheet, with no recourse back to the funding group. There are, in fact, no debt facilities provided to the consolidated group as such.
The weighted average cost of our consolidated debt has increased from 3.24%, excluding CARES at the beginning of FY 2023, to 4.73% at the end of June 2023, which is reflective of the increase in base rates over that period. At 30th of June, approximately 73% of the consolidated group debt is hedged at an average base rate of 2.57%. Turning to the funding group debt profile, post the 30th of June, we've repaid AUD 1 billion of the facilities that were due to mature in the first half of FY 2025, with new committed revolving bank loan facilities, which mature in the first half of FY 2026. These were refinanced at similar margins to the facilities they were replacing.
Over the next six months, we will commence a process to extend the tenor of each of the AUD 500 million tranches of the sustainability-linked loan, which mature in the first half of FY 2025, FY 2026, and FY 2027 by a further two years each. Facilities considered surplus to requirements will be terminated upon completion of financing activities scheduled during the next few months. Moving to CapEx in more detail. Total spend across the regions was AUD 772 million, with declines in spend by Ramsay Santé and the U.K. acute hospital business, offset by a full year of the Elysium business and higher spend in Australia. Spend in Australia was above the prior period, but below our previous forecast, due to the impact of building approval delays and other related bottlenecks.
FY 2024 spend is now expected to be in the range of AUD 890 million to just over AUD 1 billion and will include higher digital and data CapEx in Australia. I'll now hand you back to Craig for some comments on strategy and the outlook.
Thanks, Martyn. As I've said, we are well positioned to benefit from the strong industry tailwind that's driving long-term growth. I think you see that positioning, you know, sort of, manifesting in the relative performance, against peers in each of our markets. The long-term growth is, will be driven by, you know, technology and clinical developments, growing and aging populations, and the associated risk or rising incidents of chronic conditions, which is also resulting in increasing health costs for governments, as we see, rising healthcare expenditure as a proportion of GDP. That creates commercial opportunities to partner for private healthcare providers. As we leave behind the disruption of the last few years, we are recalibrating our long-term strategy and positioning in the market.
While we remain committed to our strategy of creating an integrated, digitally enabled healthcare services platform, the emphasis of our investment program will evolve with changes in the market. The priority is to continue to strengthen our core hospital business through a series of transformational programs, and by investing in a wider range of services that feed into and support the core, driving an improved outcome for patients. This will drive top line growth and an improvement in margins over time. We remain disciplined about M&A. We're not considering any material offshore acquisitions at the current time. Turning to the immediate outlook. We expect group FY 2024 earnings will reflect mid-single digit top line growth, driven by low to mid-single digit growth in activity levels, combined with high reimbursement rates, which are not currently reflective of the inflationary environment.
As we saw in FY 2023, margin recovery will be slowed by ongoing cost pressures that are not fully reflected in reimbursement structures, combined with an increase in digital and data OpEx investment, which is an important plank for our future growth. In the short term, our focus is on improving the performance of the Australian business and returning the Elysium business to a stable platform from which it can take advantage of the growth opportunities in the mental health services market. On slide 26, there's some guidance around the various metrics for FY 2024, which I'll leave you to read.
Before we open up the questions, I'd just like to reinforce that while in the short term we have to cycle through the impact of inflationary cost pressures, the quality of our portfolio, combined with our industry-leading talent, gives us great confidence that we're well positioned to take advantage of the forecast growth in demand for healthcare services. With that, I'll open up the questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel a request, please press star two. If you're on a speakerphone, please pick up the handset to ask a question. Your first question comes from David Low with JP Morgan. Please go ahead.
Thanks very much. Craig, if I could just start with a clarification. At the start of the presentation, there's a slide that says, "Top line growth, mid to high single-digit." At the outlook page, it says, "Mid-single-digit top line growth." Which one should we be using?
The mid-single digit, it's just different. Yeah.
Well, maybe I'll go on to other questions, but it will-
Yeah.
if we can get a clarification. You've talked about health fund negotiations, or you've talked about the, the rates not covering cost inflation. Can you give us a sense as to where negotiations are at now, whether you are seeing some success, whether you're confident that negotiations through this year will lead to a, a rate environment that's more in line?
You know, it's always challenging, as you know, David. Certainly the engagement with most health funds, through this year has been positive. So as we've had cycled through, negotiations that were, you know, due anyway, plus going back to the table early with most funds, there's been a positive engagement. You've, you know, you've seen, you know, other results and commentary, around the industry, but it's still not where it should be. I mean, there is some reluctance, from one or two funds, in particular, and so, you know, that'll be more challenging. But the big issue is you've seen a significant shift in margin from the provider sector to the health funds.
When, you know, and we've certainly outperformed the rest of the industry, the commentary on, on the industry and from our competitors is very much that, you know, that there's a tipping point where the health funds have got to come to the party. You know, it's important, and we will be at the forefront of that. You know, we, we can't let the current trajectory continue for the industry, irrespective of what our position in that is.
David, it's Martyn here. Maybe you, maybe you're cross-referencing our Australian outlook, which has mid-single-digit volume growth, and then our group outlook, which has low to mid-single-digit volume growth. That's because Ramsay Santé is forecasting low-single-digit volume growth, if that makes sense. Maybe that's where the confusion is.
Yeah, I think one of the early slides does seem to be talking about the group. It says mid to high, and then the outlook says mid. It's fine. We'll, we'll, we'll work through that one.
Yeah.
I got one other topic, if I could. Just on the NHS tariff and, particularly with the Elysium business.
Yeah.
I'm trying to understand that what, what we saw in the June quarter, you know, is that reflective of a higher tariff? Are we confident that the Elysium business can move back into a, a profitable contribution in FY 2024?
I'll answer the second part first. Absolutely, yes. Yes, the Elysium business will continue to improve. It had a reasonable start to FY 2023. It had a poor middle of FY 2023, the second and third quarters particularly, and then a much stronger recovery in FY 2024, and we anticipate that will continue to be the case. The full increase in tariff, so it has, the Elysium just doesn't have one tariff negotiation. It's got a, you know, two or three main positions. Not, well, like, as you get into the back end of FY 2024, the last quarter, they are reflected at the tail of that, but not fully reflected. Then there's just a, you know, probably a very marginal level.
There's still the resolution of the doctors' dispute with the NHS that will then have a small flow-on effect still to come.
All right. Thank you very much for that. I'll get back in the queue.
Welcome.
Your next question comes from Lyanne Harrison with Bank of America. Please go ahead.
Yeah. Good morning, Craig. Good morning, Martyn. Can I start with labor? Obviously, you said labor markets are improving, you know, in terms of your overall business, are there more mark-- you know, there's some markets that are more challenged than others and, and, you know, any particular skill sets, obviously, you call that Elysium and non-clinical, can you provide some color on some of the other markets as well?
Yeah. At a sort of macro level, not from, you know, sort of country to country necessarily, it's more within, within geography. Regional areas are more challenged.
Mm-hmm.
That's always been the case. They're more challenged in particular, you know, skilled areas, whether it be operating theater nurses or intensive care nurses, and that remains the case. That was, that's, that's sort of a, an issue that's been around the industry for a while, certainly exacerbated by COVID, but certainly in a, a much better position. You know, we've talked previously about some of the longer term strategies that we're putting in place to grow our own more, so not relying on the industry to deliver everything for us. As we, and, and I think we said as we, lifted things like the graduate nurse program in Australia, that would be, you know, at least two years to deliver for us. That's still the case.
We're into the second year of that increased grad nurse cohort. Whilst the, you know, just recognizing, whilst the labor issue is not as critical as it might have been foreseen to be through COVID, it's still an issue that will face the industry going forward. So.
Mm-hmm.
you know, we've got to be, continually looking at how we recruit and retain staff, how we develop our own staff, how we target, you know, specific skills, how we use those skills at the top of their license. All those issues are still at play.
Okay. And, you know, how should we think about if we try to quantify that a little bit? How should we think about it in terms of how much is that labor constraint restricting capacity or, or resulting in underutilization of capacity? How can we expand? How much can Ramsay expand capacity if, if that labor was available?
It's, it's moved through that period where it, it was a real impact on capacity.
Mm-hmm.
to now it's at the margins. You know, it's-
Okay.
In terms of capacity restriction, we don't think of it like that. There are sort of pockets from time to time that you've got to address, but that's, that's sort of normal business.
Okay. Just one more, coming back to David's comments about growth in different markets. You know, France, you called out being low single digit growth or volume growth in 2024. What are the key challenges that you're seeing in that market?
Oh, I'm gonna say it's no different to any of the other markets. Certainly, labor challenges, pricing, and sort of...
Mm-hmm.
the impacts on inflation in all markets mean that you've got to, you know, sort of deal with the pricing issue, as I called out in the presentation. You know, Ramsay Santé, we still believe that despite the 5.4% tariff increase, that wasn't sufficient to catch up on the last, the inflationary environment for the last couple of years. That's an ongoing exercise, and, you know, industry negotiations and our, and our own negotiations with government will continue on that. I mean, it's, I think, like all markets, it's how to recognize that the cost base has risen and is rising, and then to have that reflected in pricing.
Okay, thank you. I'll leave it there.
No, I was gonna say, sorry, just, just on France, one of the challenges, it's a bit of a different structure than Australia is in that staffing recruitment in the specialized areas. You know, pharmacists is, is a particular challenge that we see more so in France than we do in other markets.
Thank you.
The next question comes from Andrew Goodsall with MST Marquee. Please go ahead.
Hi, good morning, and thanks for taking my questions. Just sticking with France for a moment. Obviously, the margins there are still poor and declining. We, what we're finding from a, a forecasting point of view, it's very hard to separate the interplay between subsidies and the underlying trading.
Yeah
just trying to get a sense of, you know, I guess, where we are in that cycle, you know, where the subsidies, I guess, sort of revert back to, you know, immaterial and underlying trading steps up. I don't think we saw it in the first fourth quarter. Do you think we're sort of, or could you characterize what that looks like in your view and when that might take place?
Yeah, Andrew, sorry, your line's a bit scratchy, but I think I got the question. Yeah, look, the fourth quarter was relatively subsidy-free, let's say, and we were trading off the new tariff that had come in from earlier in the year. It's probably the more reflective of where, where the kind of margin and business is at going forward than certainly any of the previous quarters, which I agree, were lumpy and all over the place. I think as Craig has said, the idea is to try and get those subsidies baked into tariff rather than the one-off sort of lump sums that we get. Because, A, it does make it very unpredictable, and B, it obviously doesn't stick in the base, so you just have to keep doing it over and over and over again.
That's really the key negotiation that Pascal is leading for the industry.
That's terrific. just Elysium, obviously, you're expecting a FY 2024 turnaround. Just trying to get a sense whether that's a more, more back-end loaded in terms of your progress there.
Well, I mean, it will increase over the year, no doubt, but as we come out of Q4 for FY 2023, we certainly saw improvement that was tangible. That continued through July. You know, we expect that performance to increase from now.
Would you put that July performance, just in terms of getting in positive EBIT territory, would that be still not there yet, but maybe second half?
No, it's positive EBIT.
Yeah, positive EBIT now. Yeah.
Okay. Okay, excellent. And then just finally, Australia looks like it's going well. When we listen to the insurers, they're still talking a tough story on claims. I think Medibank's out there today saying, sort of 2.6 or something like that in terms of their forecast. nib was a bit higher, I think. But just, yeah, I guess, you know, where are you in some of those major negotiations? And, you know, is the 2.6 wrong, or do you need to tough it out more with them?
We don't intend to tough it out any longer than we have to.
Tough it out, I was gonna say punch it out. Maybe that's a better way to put it.
Just to reiterate the comments I just made, that, you know, that the health funds need to recognize, and I think you're seeing some of that come from a number of health funds. They're recognizing that the cost base for hospitals has increased. You know, the environment for negotiating agreements is different. When you get to the table, things can be a little different. You know, we don't intend to sit back and just live with what we have. You know, we have to, absolutely determined to get the health fund benefits at the level that reflect what's happened to the cost base.
Now, you know, what, how that, how that transpires, as I said, there are some health funds who are very, very engaged in recognizing how to address that issue, there are one or two who aren't.
Okay, final one, it's probably a bit of detail, but with the sort of back and forth around Prostheses List reform, I know hospitals have not been happy with, where that's landed. Just, yeah, your, your quick thoughts on that?
Yeah, look, it's still a consultation process. Certainly, there's two aspects to it, really. There's just the reduction in prosthetic price, which is essentially a pass-through, has a benefit for health insurers in terms, lowering the claims they pay for prosthesis. The biggest, you know, sort of the, the biggest impact is on the suppliers and sellers about, you know, what's happening to pricing. Ours is essentially as a pass-through, as we've talked about many times. Then you've got the change in the structure, and so what happens with the, the general misc category? There's a negotiation around that.
The real issue there, and I've been really clear about it before, is if it, if it then becomes a bundled payment and is not included, included in the Prostheses List itself, then that's a negotiation with the health funds, and, and we will absolutely, seek recovery of that. We're in a better position than most, to, to get that. I understand that. You know, there's a lot of lobbying going on from all, parts of the, the system on the, that consultation process.
Yep.
it's still yet to land, but, we will, we will make sure that, for, for our business, you know, whatever the, the change in structure is, the pricing reflects that.
Thank you. Thanks very much.
Your next question comes from Sean Laaman with Morgan Stanley. Please go ahead.
Good morning, Craig. Good, good morning, Martyn. Hope you're both well.
Yes, Sean.
Craig, I'm just wondering how you think the government thinks about the current situation. We've got the insurers, you know, reporting, give or take, high-teen gross margins, high-single-digit net margins. I guess there's some inherent inefficiencies gained from the pandemic in those margins, such as more rehab and psych in the home or cheaper or psych or alternate care. Then I expect that sort of claims come back and start to erode those margins somewhat. Do you think moving forward, that the government will potentially move away from permitting sort of sub 3% sort of price increases and think more single-digit at the risk of sort of disrupting participation in the overall system?
Do you think sort of better indexation essentially has to flow down from the fairly generous margins that the insurers are reporting today?
Oh, there's a challenging question. Thanks, Sean. What do I think? Certainly insurers are living the life at the moment. I, I think one of the challenges for government, and this, this is a much, you know, sort of deeper issue, is that the federal government and the federal Department of Health are only legislate around health insurance. There's no private hospital, you know, sector of the Health Department, so they've just introduced, and to their credit, they've introduced a new role to be a, you know, sort of a liaison as much as anything else, I think, on the private sector.
The private hospital sector needs to, and it happens every change of government, every change of minister, needs to make sure that we're educating government about what the issues are, are around, around healthcare and what's happening in the system. 'Cause they can get a very distorted view if they're just looking at the, you know, their own legislative controls. So that's the first piece. In answer to your question about where do I think government will land on, you know, sort of capping premium increases, I'm not sure, but I think there is a, a, a general recognition that, you know, keeping them below 3% in this inflationary environment is going to be really difficult.
Where that, where that lands, I'm not sure, but there are many other sort of reform issues that, that need to be considered as well. You know, we went through years of getting to the Gold, Silver, and Bronze banding structure. That hasn't been successful because all you're seeing is health funds having strategies to push people down into Silver and Bronze where they don't have to pay things. And Gold, Gold policies increasing at much higher rates as part of that strategy. I, I think there's lots of, you know, opportunity to engage on, you know, sort of reform.
Absolutely, and my previous point was, that the margin shift from the provider side of the industry, and I'll talk our own book, but the industry's book really, we're the people who take the risk of providing services and employing workforce and are under the most pressure from the inflationary environment, particularly around, around workforce. The margin shift from the provider side to the insurer side is something that, you know, we can't, we can't continue with.
Sure. Thank you, Craig. I appreciate that answer. You called out good growth in day hospitals, I think today. Do you think there's sort of more an opportunity for Ramsay to, to build more day hospitals or sort of standalone ambulatory surgical centers, as they call them in the U.S.?
Short answer is no, and I'll, I'll use an example. I'll, I'll use a couple of examples, really. I've, I've said for many years that the economics around developing new capacity in the standalone day surgery or short stay surgery environment are really difficult. Now, we picked up, Orange Private Hospital, which was a new build in the last couple of years, you know, with, you know, driven by property developers, as it often is, who then get, you know, operators to pick up the, the, the lease build going forward. That, that business went bust in two years. It, it fell into our lap, lap. It works for us because somebody else has taken the pain on the investment. We can then integrate that with our, our private hospital in, in Orange.
You'll see, you'll-- you haven't seen a lot of new capacity built in, there's been the odd ones, but you haven't seen a lot of new capacity built in that sector because it's, the, the economics don't work. And so then you have to look at what does work. There, there's certainly a shift, you know, to day surgery, and it's, it's been much greater in the last couple of years than it, the trend was previously, and that's partly, you know, I'm gonna say mostly COVID driven, because what we're not seeing is we're not seeing things that, you know, materially were done as an inpatient shifting to being done as a day patient. We are seeing more things that were always done as day patients, being done as day patients.
We need to be, we need to, to get better at, at being convenient, being efficient in providing those services, and that's part, that's been part of our strategy for a couple of years. When I look at our increase in market share in day surgery compared to the increase in market share for the standalone day surgical sector, you know, we're still grabbing market share over and above those. You know, we can point to Medibank's no gap sort of growth from, I think today's announcement was 600 procedures to 2,300 procedures. That's about 0.4% of our surgical activity. It's probably about 0.1% of the surgical activity in the sector. It's, it's just not an issue.
Sure. One final one, Craig, how reliant are you on graduate nurses? You know, are they a material portion of the overall nurse base every year, and-
Yeah.
Has there been any sort of restrictions to intake, you know, as a result of the pandemic, so, so, young nurses not wanting to actually enroll in the program because of whatever reason across the pandemic?
Overall, I'll pick up the first part of your question. Out of about 17,000, 18,000 nursing staff we have in Australia, we've, we took an intake of 800 grad nurses last year. That'll be the same again this year. In our system, over a two-year grad nurse cycle, we'll have 1,500 odd grad nurses out of, you know, 18,000 nursing staff. That's the sort of proportion. We've been able to, to fill those grad nurse cohorts. We haven't seen that people aren't coming into them because there's an aversion to nursing or, or the pandemic's had a, an influence on that. You know, you've got to look at those things over the longer term as well, not take a, the data point from, you know, this year or next year.
Awesome. Thanks, Craig. That's all I have.
Before we move on, just to clarify David's earlier question, you should take the outlook from our outlook slide, which is mid-single digit top line growth. That's, that's our outlook for top line growth, just to clarify.
The next question comes from David Stanton with Jefferies. Please go ahead.
Morning, team, and thanks very much for, for taking my questions. I, I wonder if I could get your commentary just in the face of what Martyn just said there. Can you talk to utilization in 2024, FY 2024 to date, i-in your Australian-based business hospitals? How, how is utilization compared to, say, I don't know, 12 months ago?
Well, I'll let Martyn maybe talk about the details. What we've seen in terms of volume, we, we, we are continuing to see volume increases, albeit, not in, not in maternity services. They are still declining, but in every other subsector of the way we look at, at case mix, we've seen volume increases, certainly in July, but generally, FY 2023. Some have been great, and others, surgical activity, obviously. I mean, rehab gets called out. Our rehab growth is really strong, and particularly into July. You know, medical patients are, you know, nonsurgical patients, you know, stronger in the second half than they were in the first half, again, strong through July. Australian volumes for July, just continuing that, that trend coming out of Q4.
Understood. So it's fair to say that, you, you know, your bigger your bigger base hospitals are, are nice and full compared to, say, you know, even 12 months ago?
I think, well, then we get into utilization with that. They've got more activity going through them, no doubt. We're also getting, I mean, we're getting better, as we always do. You always think you've sort of hit a ceiling on productivity and how efficient you're using capacity, you always find ways to keep improving that. Part of that is related to the transformation projects we've got going on in particular, the digital and data work. I sort of called out some of the automation projects, so some of those have shown some immediate success that give us some more efficiency and get our people focused on the right things. I used the... I probably used it at the half.
whilst we're doing more surgical procedures and looking at the Australian context, we're not doing as many after-hours lists. We're not doing as much in the evenings and one, on the weekends. We're still processing more work. We're getting better utilization through the, you know, the, the, the main part of the, the week. You know, so that, that, that aspect, I think we see that in other things like, you know, cath labs and, and probably beds is the lesser of those.
Understood. And you mentioned, at least for me, something reasonably new, that you wanted to do more public work in Australia, in your private hospitals, particularly in surgery, and I think you said psych as well. You know, bottom line, is that lower margin than straight private work, please?
No, we recut. It was through the COVID period, we have recut those agreements. They are now, you know, commercial arrangements that we have with the states, we'll only do it on that basis. We, we do recognize that, you know, the public volumes will increase for us. They're still, they're still low in the scheme of things in terms of the overall proportion of the work we get. You know, public volumes are still, at best, mid-single digits, probably a bit lower than that. Public volumes in our private facilities, not in our public facilities. Not like the Joondalu ps of the world. It will increase but increase off a low base.
Understood. Last one from me. Martyn, wouldn't want you to feel left out. You, you talked to a, to a, an overall interest expense number for, for 2025. You know, can you talk to how that'll hopefully decrease into... Sorry, for 2024.
2024.
Yeah, correct. Sorry. Can you talk to how that hopefully will, will change and hopefully go down into 2025, or should we be thinking sort of the same kind of number? What are the puts and takes for 2025, I guess?
First you got the, the biggest part of that is AASB 16 leases. You know, if we're, if we're getting new facilities, et cetera, over time, then that will have an impact. Certainly one of, one of the reasons why it was slightly higher than what we guided for FY 2023 was Ramsay Santé reduced the, the threshold for their AASB 16 lease accounting, so we had a bit of a kinda jump there in their AASB 16 lease number. In terms of finance costs, I think as we called out, 73% of FY 2024's interest is fixed at the rates we've given you.
Beyond FY 2025, the balance there is, yes, you've got slightly less amount of hedging for FY 2025 than that, but at reasonable levels, it is relatively locked in at the, at the amounts we've got currently. The benefit of having as much hedging as we've had over the last probably 12-18 months is probably been paying lower interest than we would have done if we hadn't hedged it. Clearly, the, the, the, the, the, that support, the take of that is that because you hedge, you may not benefit from as much from rates when they go down, when they come. If they do start coming down in FY 2025, we will get a small benefit from that, but we'll also be running off the fixed rates that we've got now.
To that extent, it sounds like it's, you know, we should be looking at, at 25, to- in line with 24. Is that unreasonable?
Well, we haven't given guidance on FY 2025 interest. It's a long way away, so.
Yep. Thank you very much.
Bye then.
The next question comes from Mathieu Chevrier with Citi. Please go ahead.
Good morning. Thanks for taking my question. My first one was just on the, the kind of inflation or indexation, sorry, adjustments, we should be expecting in Australia in, in FY 2024.
Oh, we never, we never say what price indexation will be, other than to say that, you know, we're gonna continue to, to push it to recover margin and reflect the impacts of the inflationary environment, and that's the, the cumulative impact of the, of the inflationary environment.
Okay. On the volume, I mean, mid-single digit volume, that's probably in line with the kind of volumes you were seeing pre-pandemic. Do you think there's, you know, we're gonna see higher growth eventually, or, do you think that we're seeing that already?
Oh, look, I think you what you see, you, you take a longer term perspective, and you look at, you know, the way that demand will increase as demographics change and the, the rates of intervention for, for different demographic groups impact overall healthcare demand, and no doubt it, it increases. You then look at how you service that, and so we've talked a, a long time about, you know, the rates of growth for non-hospital services, for the less acute services, will probably grow at a higher rate than the more acute services. So, and we have to look at how we provide that whole range of services, how we integrate them. I, I think it's sort of reflective of what we see in the, the medium term.
Yeah, I'll just add. In Australia, we've said mid-single digit volume growth. I think for the group, we've said low to mid-single digit, because we see lower than that growth in activity, certainly in France, which is a very big market for us. In Australia, part of that mid-single digit volume growth is a catch-up from the impact of COVID in July and August last year, where volumes were restricted with that last big wave of COVID, then you've got a certain amount of capacity that we've added on as well. Certainly industry growth wasn't mid-single digit volume growth pre-COVID at all.
It reflects our, our strategy and expectation that we will continue to grow above the industry growth.
Exactly. Yeah.
Yeah. Understood. Then, just on France, I mean, you, you got a payment of about EUR 45 million there for inflation. Do you think that will repeat in FY 2024?
I think, as, as we said before, that's some intense lobbying going on to try and get that, but we'd rather get that built into the tariff rather than these one-off payments, which you just have to, to your point, keep re- keep getting year on year if you wanna keep up with the inflation, when it's not a very productive way of going about business. I mean, to a certain extent, the 5.4% tariff increase we had in France at the start of the year was some way to go towards that. But we don't think that's reflective of the last two years' inflation, and that's why the industry's going back to try and get some more.
We'd rather it come through tariffs. If it, if it did come through a one-off COVID payment, of course, we'd take it, but we're really trying to get that billing for tariff.
Great. Thanks very much. The next question comes from Saul Hadassin with Barrenjoey. Please go ahead.
Morning, Craig. Morning, Martyn. Thanks for taking my question. Just, just 1 for you, Craig. In the outlook commentary, you referenced trends that have emerged through COVID and this modification of your sort of your approach to, to CapEx. I'm just keen to explore that a bit more. You mentioned earlier on in the Q&A about, you know, high growth in day surgery that's been evident for quite some time. So what do you mean by trends that have emerged? Is this a reflection of, of sort of slower recovery in overnight case mix? Is it, is it psych? You know, is mental health not gonna come back anywhere near where it was in terms of inpatient admissions? Just some context would be great for that commentary.
Well, it's not all related to COVID. Getting down into the detail of that, certainly from the construction industry side, we're, you know, we're just seeing that our ability to, to spend that brownfield CapEx being constrained, so that, you know, there's a bit of a slowdown in that. In that, you know, we always look at what we think the longer term growth rates will be, and so what capacity do we need to put in place, hence, we're still investing in brownfield. We've got the, you know, the greenfield coming on Northern Hospital. In terms of trends in activity, you know, still, you know, there's a lot of unserviced mental health patients there, and that's a supply, you know, issue more than a demand issue.
As we get, you know, sort of different models of care and, you know, sort of the recruitment activity for psychiatrists continues to grow, and where we've been able to, to increase the, the number of psychiatrists that admit to the hospitals, we've seen growth in, in inpatient activity. I think mental health, you know, much more complicated subsector of healthcare, but still very fragmented. For our mental health businesses, how we, how we integrate, you know, the inpatient acute services with day programs, with, you know, sort of the outpatient psychology piece, that's a still a longer term trend. We still see growth in mental health, absolutely. I'm, I'm not sure the other trends you're referring to.
Well, I guess specifically-
I was gonna say, the bit I missed, which is the key piece, when we look at brownfields, you know, we've had a trend away from inpatient bed capacity, for example. That will continue to be the case with more of that spend being on sort of, engine room stuff. The digital and data, you know, sort of spend will increase and become a big, bigger proportion of our Australian CapEx. We've still got that CapEx in the other markets as well. That sort of reflects, you know, the, the ambitions, not just because of COVID. COVID accelerated some of this obviously, but our ambitions about how we position the business to, to provide better patient experience, to engage with clinicians more, to provide better clinical outcomes by using our data more effectively.
All those things we just need to, to up the ante on. You know, the things that we've been doing, you know, and when we look at, the transformation programs we've, we've got in place around revenue management and cost efficiency and driving volumes through better engagement, they're all things we've done in the past, and we've done well in, in their own context. Lifting, you know, the focus, the amount of resources and investment we put into accelerating those programs is probably the key message out of that. Sorry, you were gonna say something else?
Oh, no, it's okay. That's fine. Thanks, Craig.
Okay.
The next question comes from Steven Wheen with Jarden. Please go ahead.
Yeah. Good morning, Craig and Martyn. Just wanted to understand whether or not you've been able to, with the being caught out, I guess, by surgeon behavior in January and, and perhaps April as well, whether you've been able to pass any of the risk back onto them to actually stop them from canceling their theater lists at such late notice? I mean, it seems to, they have a free option over that activity, so just wondering if you've been able to change, some of the behavior there by putting some, some risk back onto them.
No, we haven't put any risk back onto them, and I'm, I'm, I don't want to be seen as a front, but it's the paper story with the doctors. What we've, what we've seen, and we certainly called out, you know, sort of in the, the first half, and, you know, we, we saw it in January, you know, sort of increased leave from doctors. They've, they've smashed me since then about saying that. But what we've, what we've seen is, you know, and it, it isn't just doctors. You know, we saw an increase in leave as, as the whole, you know, economy and the opportunity to travel opened up again. I'll go through sort of what we've experienced for some of the markets that are ahead of that.
You know, we had a, a similar sort of profile in Europe, and that settled back down to what is now a norm- normal practice. Fully anticipate that to, to be the case in the Australian context. I, I think over- overlaying that also, you've just got a, you know, a sort of a, a change in perspectives about work-life balance between all, you know, sectors of community. That, that was sort of accelerated through COVID. You know, the industry has always said, in the future, we'll need more doctors to service, you know, similar volumes. That, that will still be the case. Doctor recruitment is critical.
I wouldn't, I wouldn't say we're, we're, we're ever going to be in a position where we're, we're trying to, to penalize doctors or get, get doctors to take risks. What we have to do, and sort of what we, we did, to an increasing extent in the U.K., as cancellation rates, you know, sort of, rose significantly there, is just have processes so we identify that as quickly as we can, that we've got some mechanisms to backfill as quickly as we can, and just utilize that, that capacity and, and resource better, and I think that has been the case.
I wanted to, Martyn, one for you, to make some clarifications around the interest. It's not entirely clear to me why that interest cost is so much higher than, I guess, the top end, even of what you've guided to three months ago.
Yeah.
you did mention something about the lease-
Yeah.
was that the only reason?
No, there was a couple, couple things. It was mainly Ramsay Santé. They've got some ineffective. Getting accounting stuff now. They've got some ineffective hedges in their business, so you do get a bit of variability in their mark-to-market, some of their swaps. That didn't come in to the number that we forecasted at, at the, at the third quarter, so that was an impact. Then also, I said they, they reduced the threshold of the amount that they would do double AASB 16 lease accounting on, across their leases. That did move some of their cost line from rent down into depreciation, and then, and therefore, double AASB 16 lease interest.
There were a couple of items there that were a bit unforeseen when we were at the third quarter.
Okay. From the point of view of, the covenants that you've, you've had, given a bit of a grace period on, the costs associated with that, and maybe even any additional costs from, I guess, attempting to do the, the bond. I'm just trying to understand, is, is there elements of that interest expense-
No
... that, that might not be there, going forward? Finally, have you included any expectation in your FY 2024 interest guidance around the proceeds from the sale of Sime Darby?
Yeah. The answer to the last question is no. I think as I called out in my speech, clearly, if we do sell Ramsay Sime Darby, we'll use that to pay down debt, and that will significantly change our, our interest line. No, that's not in that guidance. In terms of the additional costs, so of from being above the 3.5x limit, that we were at in December, it's a permanent increase in our covenant to 4x .
It, and the restriction on that is if we are between 3.5-4, it was an extra 10 basis points on our interest, so pretty minimal, additional interest cost, and clearly ending the year at 3.2, that will have only applied to the last six months, that won't apply to this financial year. Then the cost of setting up the AMTN and EMTN program were immaterial in the whole scheme of things.
Okay. One final one. Just back on Ramsay Santé and, I guess your commentary around the, the subsidies. Are you basically saying that the revenue guarantee, just whilst it's been extended to 31st of December, is really of no benefit to you, given the reduction in the safety net?
Sorry, just say that again?
I'm just trying to understand, is the revenue guarantee helping you in, in the first half of 2024, or are you back at levels where you actually don't need the revenue guarantee, and it's just the underlying business that's, that's actually driving your results?
Obviously, I mean, the cute answer is it depends on the amount of activity we have in the first half of FY 2024, but I think in FY 2023, we only claimed EUR 89 million for the revenue guarantee, and that would have probably been more in the first half than the second half. As activity starts to improve, clearly we, we, we require less and less of it. It is a slightly reduced guarantee as well. With this, you know, you only get 70% of the gap. Yeah, I think the reason why we're not anticipating it, it extending beyond the end of December is by virtue of the fact that we're probably gonna be in a position where it's gonna end up being immaterial amounts anyway, and so-
Yeah
there's no point in the government having it there in, in any case.
I think the, the nuance of that is it's a facility-by-facility assessment, so some hospitals might be a little slower in ramp-up, so they, they might be a little bit, but Martyn's right, that, by the time we get to 31 December, we're certainly positive about where the, the overall recovery in the business is to be able to not, not be reliant on it at all.
Got it. Okay, thanks very much.
Volumes are increasing, it's not as though-
Mm.
... we're in a static position there.
Yeah. Okay. Thanks, Craig. Thanks, Martyn.
You're welcome.
Next question comes from Chris Cooper with Goldman Sachs. Please go ahead.
Morning. Thank you. Craig, a clarification on your outlook commentary, that where you described margins, is that the recovery will be slowed. Can I, can I just confirm we should interpret that to mean you do expect margins to expand in each region, but perhaps at a, at a lower rate than you expected this time last year?
Oh, we certainly expect. I'll, I'll let Martyn do the nuance. We certainly expect underlying trading margin to increase as, you know, volumes increase, as we get, you know, so the productivity and transformation programs moving through. There will be some dampeners on, on that. The digital and data spend in Australia, for example, is, you know, doesn't, doesn't have a benefit in FY 2024. It's a, so it will have a, it's a, you know, headwind to, to margin. The inflationary environment and working through the process and the cycle of getting increases from our payers doesn't translate from, from day one of FY 2024, so you've got that still as a headwind to margin. There's certainly initiatives that we're undertaking that, that, you know, underlying margin continues to grow.
As, as we've said previously, you know, that's a multi-year, sort of target for us to, to get margins, to where we think they need to be.
Yeah, when we talk about margin recovery, we do anticipate group margins from year-on-year should improve. The biggest one being Elysium, of course, where we would expect to go from virtually zero margin for the year, if you add back non-recurring items, to a more profitable position similar to where it had been before. If you look at the Q4 run rates, I think, you know, there, if you look at Australia, I think as Craig said, any benefits we might get from volume growth will be offset by data and digital costs. In Ramsay U.K., they had a really good Quarter Four, it's probably reflective of where we would see things going forward. Ramsay Santé had a unaffected, as I said before, kind of margin.
Their Q1 is always very low, though, when they're all on holidays. I wouldn't take that as a run rate for the whole year, but, but it's not a bad run rate to look at.
Okay, so your commentary there, Martyn, on Australia specifically. The fourth quarter run rate, you mentioned, you know, you expect volume growth to continue to help in fiscal 2024, of course, but that'll be offset by the additional cost investment. You, you're suggesting sort of margins in Australia should be flattish in 2024, but you see upside in the UK driven by Elysium?
Yeah. That's not what I said, but the first part of what I said was what I said.
Understand. Okay, thank you. While I've got you, can I just get an update on labor productivity across the business? I know your preferred metric is productive hours per inpatient day, when you were speaking to us in May, you indicated you were seeing a level around about 5% lower than pre-COVID. Can I just get an update on that? Have you seen any progress there in the final quarter and into fiscal 2024?
Yeah. Well, productivity back then would have probably been the reverse. It would have been higher than or worse than pre-COVID, let's say. Certainly the last couple of months, the team have got that back down to kind of pre-COVID levels. So we're seeing some good activity there. That's a large result of some of the cost improvement initiatives that we've called out in the release. There's been some very focused activity on looking hospital by hospital, at where the roles we need and the hours we need, and so that is bearing some fruit. I would say we're probably back around pre-COVID levels now. That's the objective for the rest of the year as well, so we need to keep focused on it.
Got it. Final one on, on interest expense, Martyn. You mentioned the sale of the JV, if it goes ahead, would be used to pay down debt directly. You also said just now that would significantly change the interest expense line. Could you just give us some sensitivities there on, on what significant means in that context?
I'll let you try and work that out. I'm not gonna give away what we think we're gonna get for the sale of the business, and it's not done yet, so that might be a bit, bit preliminary to start talking about that.
Okay. Thanks a lot.
The next question comes from David Bailey with Macquarie. Please go ahead.
Yeah, thanks. Just following on from Chris, Chris's question, for the group for 2024, do you expect EBITDA margins to improve or contract?
We haven't given guidance on, on, on margins. What we've said is that margin recovery will be curtailed in FY 2024 by inflationary impacts and the, and the cost on digital and data.
Fair enough. Digital benefits coming through in 2028. Thinking about Elysium, do you expect to meet your Return on Invested Capital hurdle for that business? If so, when and what are the moving parts to get there?
Well, the if you remember, our investment hurdles for acquisitions are a Return on Invested Capital of 10% in year five. That's a long way away. Certainly, that was what we signed off on, on the business plan. Clearly, we've had a bump in the road. First six months we were bang on track of our business case, which obviously would have been extrapolated out to hit that target. We've had this short period where we've been really hampered through recruitment of people and therefore occupancy. Certainly the plan is to get that back up and firing over the next couple of years. We're still early days yet, and the target for that metric is in year five.
just in terms of some structural changes, do you think there's been a structural change in rehab, as the 1st question? And then in terms of specialist behavior, do you think that some of the more established specialists are looking for more, you know, just maybe want fewer hours, and then the younger guys coming through are wanting more, more of a work-life balance? Is that a, is that a headwind going forward?
Okay, I'll take the first first piece on rehab. No, as I indicated before, our rehab is recovering strongly. I mean, you get back to a more fundamental sort of analysis of rehab. Rehab isn't just rehab. So, when we've talked over a number of years about changing the case mix in our rehab to be less dependent on those mobile orthopedic patients who, you know, were admitted to, to inpatient programs, and some doctors and other doctors didn't admit them.
We have got much less reliance on orthopedics in our rehab businesses generally, but also particularly on those mobile, you know, orthopedic patients, which then is an in, you know, the corollary of that is, you know, we're increasing other areas of rehab, whether it's cancer rehab, neuro rehab, prehab, all of those things. Rehab is getting more acute, the case, you know, the acuity of our rehab patients is increasing. We're seeing strong growth in rehab, and I, I, you know, and we've said before, we think that will be the case into the future as the population ages and, and you get more musculoskeletal deterioration.
You know, I've never subscribed to, and I still don't subscribe to other people's theories about rehab is in decline. On doctor behavior, I think I've called out before, you know, you, doctors are no different from everyone else in society. There's more work, work-life balance comes into to, you know, new generations of the workforce. Doctors are the same, as a sector, and as a sort of healthcare sector, generally across all countries, you know, training more people is gonna be important, and so workforce of the future, about whether that's doctors or nurses or allied health professionals or others, you know, there's a lot of work goes into trying to project that. I wouldn't, I wouldn't isolate the doctors.
Thanks.
You're welcome.
There are no further questions at this time. I'll now hand it back to Craig for closing remarks.
Okay, thanks everybody for your time. The message I want to leave you with is, you know, recovery is continuing. We are seeing volume growth. We've got a range of initiatives in terms of the way we run our business, and so the transformation agenda moving forward, we have upped the ante on that. You'll, you know, you'll see us talk about that a lot more, and I, I've sort of flagged that in November, we'll do a much more detailed presentation of where digital and data is as a component of that. We're very focused on leverage, our ambition to be, you know, sort of have that Funding Group leverage at below 2.5x is a very real one.
I, you know, I'll leave you with the, you know, the, the message that things are improving, and we want to you know, see that improvement accelerate, through FY 2024 and beyond. Again, thanks for your time. Bye.