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Managing Director's Report


Year In review

The year to 31 May 2007 was a year of continued growth and improving margins with record operating performances from all businesses.

Our strategy remains to focus on those sectors of the healthcare and medical services market where there is growing demand from private paying customers. This has driven the growth of our Audiology, Dental and Radiology businesses during the 2007 financial year.

The Bay Audiology network has expanded from the initial 32 permanent and visiting clinics to 40 in New Zealand and nine clinics in Australia, and generated revenues of NZ$30.9 million. The Australian business, Bay Audio Pty Limited, started operations in December 2006 with the acquisition and opening of an initial four clinics in Queensland, which has now expanded to nine locations with more planned in coming months.

The Lumino Care Dental network grew revenues by 34 percent to over $19.7 million, expanding to 24 branches nationwide and improving its bottom-line contribution as planned. A clinical advisory board of nationally prominent Lumino dentists representing their regions has been established under the chairmanship of Allen Baker, a founder dentist with the Auckland Dental Group. A number of new dental clinics are under investigation with additional growth planned for the new financial year.

A second radiology business, Greenlane Imaging, was acquired in Auckland and joined our successful investment in Ascot Radiology, where we exercised an option to take our shareholding from 40 to 80 percent at year end. However, as we owned only 40 percent of the business for the 2007 financial year, we only accounted for 40 percent of the Net Profit After Tax. Given our new majority ownership from June 2007, the full results will be consolidated in the new financial year.

In line with our clinical partnership model, a group of long-standing associate Radiologists will be offered shareholding in the combined Ascot Greenlane Group to expand the clinical partnership of this business in coming months.

We also increased our shareholding in the Orthotic Centre from 70 to 100 percent and installed a new general manager to oversee this business’s planned expansion. Steady progress has been made and we are looking to grow our wholesale private business in the new financial year.

Our two hold-and-maintain business streams, Rehabilitation and Pathology, both delivered improved performances in the year, with higher revenues and margins.

Firstly, Aotea Pathology, our joint venture with Sonic Healthcare in Wellington, successfully merged two laboratories into one and started delivering services under the new five-year $102 million contract, without any disruption to customer services. This was a remarkable feat given that the laboratory continued to work seven days a week, 24 hours a day, while integrating 230 staff and all analytical equipment into one central facility in Wellington.

The 2007 consolidated result reflects five months of operation from Wellington Pathology and seven months from Aotea Pathology. We are happy with the ongoing core financial performance of the new company.

Our Brain Injury Rehabilitation services also successfully completed a restructure of operations under new ACC contracts and started to show pleasing improvements into the second half of the financial year. The residential services secured improved contract conditions and margins and the out-patient services, which were the focus of the restructuring efforts, have started to deliver well in the closing months of the year.

Both these business are reliant on contracts with either DHBs or ACC and as such are under a hold-and-maintain strategy as we assess their long-term performance abilities.

BUILDING THE BUSINESS

Our investment strategy is to invest in those businesses in the private medical and healthcare market, which show the potential for sustainable future growth and that meet our investment criteria.

As with all our acquisitions, we have concentrated on establishing long-term equity partnerships with the health professionals within the business we are acquiring, all of whom are leaders in their fields and all of whom have created organisations that strive for clinical excellence. These clinical partners provide the expert healthcare and medical services which our clients expect, as well as the entrepreneurial business acumen that made them financially successful. Abano adds complementary value through our compatible investment and management expertise and we apply resources, where requested and needed, to enable each of these business to reach its full potential.

Vendor clinicians are contracted to remain with their business following our investment, through equity participation and/or earn-out mechanisms including post-completion restraint periods. With clinical equity partnerships, the vendors are also incentivised to remain with the business beyond the earn-out period as long-term owners with Abano, benefiting from their efforts and their business’s growth and performance.

Our clinical partnership model results in key senior clinicians holding either equity or being rewarded in part by the performance of their businesses. We believe this is a long-term model that clearly aligns the key clinicians as co-owners with Abano shareholders.

CHALLENGES

The healthcare and medical services market offers both opportunities and challenges unique to this industry. The two challenges that most predominantly impact on the Abano business are the funding of healthcare in New Zealand, and the retention and recruitment of high-quality personnel.

Healthcare Funding Like all OECD countries, the demand for healthcare and medical services is growing in line with our ageing population and outstripping the Government’s ability to provide adequate funding to meet patient expectations.

This has led to tighter margins in the public contracting sector and a more unstable environment for those businesses that are reliant on Government funding. Our investment philosophy is to focus on those businesses providing services for the private segment of the healthcare market, and we have consciously focused on reducing our dependence on Government-funded services.

In those businesses in which we still have some reliance on Government funding, such as pathology and rehabilitation, we will continue to work closely with Government bodies to ensure continuity and appropriate margins can be maintained for our services.

On an annualised basis, private revenues have increased from 25 percent in 2003 to 45 percent in 2007, up from 42 percent last year. Our reliance on Government funding from the Ministry of Health and the DHBs has decreased from 57 percent to 28 percent at the same time, an improvement from 33 percent last year.

Key initiatives which have been undertaken in the past 12 months to ensure a stronger balance of private revenue include:

  • A planned reduction in the level of exposure to the pathology market, with the establishment of Aotea Pathology with Sonic Healthcare (of which Abano holds 55 percent) and the sale of a second pathology laboratory, Nelson Diagnostics, following the loss of the Nelson community pathology contract.
  • Introduction of patient charges for private specialist patients in Wellington and a focus on commercial revenue through commercial testing and research.
  • A focus on private revenue in the Orthotics sector, with the creation of a new sales and marketing plan and dedicated personnel to target this market.
  • Expansion of the Audiology, Dental and Radiology businesses – all areas with high levels of private paying customers and significant opportunity for growth.

The majority of Abano’s Government-funded revenue now comes from the pathology sector, which is one of the few healthcare services still predominantly publicly funded. We have reduced our involvement in this sector through a joint venture with Sonic Healthcare, one of the world’s largest pathology operators, and by securing a five-year, fixed-price $102 million exclusive DHB contract in the Wellington, Hutt Valley and Kapiti regions.

Excluding pathology, Abano’s DHB/MOH derived revenue has reduced to just under 12 percent of total Group income, an improvement on last year’s 16 percent, as new businesses with high and growing private income streams are acquired.

Staff recruitment and retention Competition for experienced clinical and support staff has continued to increase, with DHB-funded pay increases in the public sector leading to wage pressures. In addition to this, the turmoil created by recent DHB contracting processes with private providers, combined with the higher salaries offered overseas, has resulted in many clinical staff heading offshore.

Recruitment and retention of high-quality staff is a key management focus across all our businesses, and we have a number of strategies and practices in place to ensure each Abano business is seen as an attractive and rewarding employment opportunity.

This includes an investment structure that recognises the unique role key clinicians play in the financial success of the business and places them as partners with us in the medical and healthcare services that they deliver and we jointly own.

There is also a continuing focus on the professional clinical and business development of all key staff through Continuing Medical Education (CME) programmes in all disciplines and through specialist targeted courses, such as the successful Prime Practice Management course in our Dental network. This aims to improve our Dentists’ clinical services to their patients, enhancing the patients’ dental experience and treatment, the Dentists’ direct financial reward and the practices’ profitability.

THE FUTURE

Abano’s businesses are now in a strong position for future growth.

We are continually reviewing our portfolio to ensure we have the best mix of businesses to meet future demands from our customers. Where opportunities exist, we will add businesses to our portfolio that complement our existing investments, provide market leadership and achieve our vision to be a leading operator and investor in healthcare and medical services.

We remain committed to the belief that a co-investment partnership model with key clinicians in businesses that have a strong focus on private payment for healthcare and medical services is the right strategy for Abano.

In 2008, we will continue to drive growth through acquisition and organic expansion of our businesses. We expect to see shareholder returns continue to improve as the performance of each of our businesses is enhanced by our established investment model and our operational and management infrastructure.

We are on track to becoming a world-class operator in the healthcare and medical services market, and we are determined to meet and exceed the expectations of our patients, clients and our shareholders.

I thank you for your continued support.

Alan Clarke
Managing Director