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MANAGING DIRECTOR’S REPORT

YEAR IN REVIEW

Alan ClarkeIt has been a record year for Abano with strong performances across all sectors as individual businesses have focused on cost efficiencies, improved margins and continued growth.

As we move into the second phase of our growth strategy,the expansion of our dental and audiology networks and the increased offering from our radiology business continue to be a key management focus.

Abano’s growth during 2008 was in line with our strategic plan and has continued into the new 2009 financial year with a number of important acquisitions and market entry initiatives achieved in the first few months.


Abano Audiology

Abano has majority shareholdings in two audiology businesses, Bay Audiology in New Zealand and Bay Audio in Australia, which together generated NZ$43.6 million in revenue during 2008.

Bay Audio in Australia, in its first full year of operation, provided a full year’s contribution and grew rapidly from four clinics at start up in early 2007 to 57 permanent and satellite clinics in August 2008.

The strategic acquisition of Queensland-based King Hearing from Siemens Hearing Instruments in June 2008 is the first acquisition to be enabled through Abano’s global partnership agreement with this highly respected hearing device manufacturer.

Bay Audio in Australia has taken over the Siemens retail chain consisting of four permanent and 23 satellite clinics. This provides Siemens with the opportunity to access the Bay network and audiology retail expertise to grow their market share. For Abano and Bay, there is the mitigation of risk in entering new markets.

In New Zealand, acquisitions and the opening of new audiology clinics during the 2008 year, in addition to the acquisition of Dunedin Hearing since year end, have seen the total Bay Audiology network grow to 58 permanent and satellite clinics.

Dunedin Hearing Ltd, a long standing and respected South Island audiology chain with six clinics across Dunedin and Central Otago, joined the group in August 2008. In line with Abano’s partnership philosophy, the founding clinician in Dunedin Hearing, Anthony Rowcroft, along with Simon Melville from Bay’s existing Cromwell clinic, will collectively hold a 15 percent shareholding of a new entity, Bay South Ltd, with merged operations throughout the lower South Island.

Abano Dental

Abano’s dental sector demonstrated significant growth in both revenues and operating profit in the last financial year, with revenues of $27.2 million. With investments in both the New Zealand market through Lumino The Dentists and also with the announced entry into the Australian dental market through a new partnership, Dental Partners, the dental sector will be a strong contributor in the new financial year.

New Zealand based Lumino The Dentists, expanded in line with the previously announced increased target, with nine successful acquisitions during the financial year.

Eight to ten acquisitions are expected in the 2009 financial year in New Zealand, with two practices already acquired in the first two months - Dental Designs dental laboratory and Manly Dental Care.

Dental Designs is a dental laboratory specialising in making high end ceramic crowns and veneers for placement by cosmetic dentists. Dental laboratories area vital component of the sector, providing a key service for dentists. Vertical integration of selected dental laboratories will enable Lumino The Dentists to capture a greater share of the margin generated from high value dental treatments.

Following these acquisitions and the consolidation of several smaller clinics during the year, the total New Zealand dental network now has 35 clinics nationwide as at August 2008.

Abano also entered the Australian dental market in June 2008 through a partnership with Dental Partners, with the initial acquisition of eight practices in Queensland, New South Wales and one cornerstone practice in Melbourne, with forecast annualised revenues of over A$15 million. Up to 10 additional practices are expected to be added to the Australian network by the end of the 2009 financial year. Dental Partners is expected to provide a positive operating NPAT contribution in the current financial year and is a carefully planned and low risk entry into the substantial Australian dental market.

Abano Diagnostic

Abano has investments in two separate areas of the diagnostic sector – radiology and community pathology – providing $33.7 million in revenue. The Radiology business offers significant growth potential and investment into leading edge technology and equipment will continue into the new year. The pathology business is a Hold and Maintain business stream with a focus on cost efficiencies and maintaining margins under the existing fixed price five year term contract to the Capital and Coast and Hutt Valley DHBs.

Radiology

Ascot Radiology now operates on three sites in Auckland.

The original Ascot Hospital site offers a new 3T MRI (3Tesla Magnetic Resonance Imaging) installed in August, a 64 slice CT (Computed Tomography), specialising in cardiac studies, 3D and 4D ultrasounds and digital xray modalities.

In the new Ascot Central clinical building, Ascot Radiology has recently opened a multi-million dollar, purpose built facility with a second 3T MRI, digital mammography and 4D ultrasound modalities. It offers general radiology services as well as leading edge breast imaging as part of a new specialist care clinic in association with Breast Associates, a group of leading breast surgeons.

The Greenlane Imaging clinic offers a specialist 16 slice CT service primarily covering cardio-thorasic examinations for public and private patients at Greenlane Hospital.

In line with our partnership philosophy, during the year five new equity partners were introduced into the radiology business, reducing Abano’s shareholding to 73 percent and increasing the spectrum of expertise in the practice.

Pathology

Aotea Pathology, our joint venture with Sonic Healthcare in which Abano has a 55 percent shareholding, continued operating under the five year DHB contract for the greater Wellington and Hutt Valley region.

During the year, new collection and courier networks were established, the base laboratory was re-equipped and rebuilt to be a modern, leading edge automated facility and accreditation was achieved from the industry inspection body as well as implementing the DHB policy of charging patients for testing where the request is from a specialist in private practice.

Our focus is now on renewing the contract with the local DHBs which expires in October 2011. We hope to demonstrate that the service, which has been offered for over 75 years, is exemplary and that the refitted laboratory is now the leading automated facility in New Zealand and an integrated and important part of this region’s community and medical service.

Abano Rehabilitation

Abano has businesses in both Orthotics and Brain Injury Rehabilitation, both of which are Hold and Maintain business streams.

Orthotics

The Orthotics Centre showed consistent performance during the year. A new three year contract with the Waikato DHB was successfully renewed, and a new chief executive for Orthotics Centre was appointed in June 2008.

Brain Injury Rehabilitation

Abano Rehabilitation provides both community and residential services and showed greatly improved performance due to cost efficiencies, increased bed numbers and a wider service offering.

Significant changes to ACC residential contracts are in progress, with a move to early treatment for people with moderate to severe brain injury and an increasing demand for seamless transition of brain injured clients from residential to community based services. With 109 residential beds and the ability to add further beds if required, along with an expanding community services team, Abano Rehabilitation is well placed to take advantage of this ongoing change.

After two years of restructuring, the business is now delivering profitable services and improved margins across all of its activities. This is a credit to the general manager and her dedicated team of professionals.

Building the business

Abano is a specialist operator in the private segment of the healthcare and medical services market.

As the demand for healthcare and medical services continues to outstrip the Government’s funding ability, private payment from individuals or through private health insurance becomes an increasing necessity.

Over the past three years we have focused our growth strategy on identifying and entering those sectors with strong private payment revenue streams and the potential for profitable future growth.

We have consolidated our focus in the past twelve months, and now have excellent growth businesses in Audiology, Dental and Radiology, along with Hold and Maintain business streams in Pathology, Rehabilitation and Orthotics.

Moving forward, we will be continuing to invest in our growth businesses, building on the strong platforms we have in place in New Zealand and more recently, for Audiology and Dental in Australia.

In Dental, this continues to be through the acquisition of high quality, professional dental practices, run by reputable and well respected dentists and clinicians. In Audiology, our growth is based on both the opening of new Greenfield sites as well as the strategic acquisition of selected clinics. The Radiology business will continue to expand on the services it offers, through continued investment in leading edge technology and equipment.

Our partnership philosophy remains an essential ingredient in our growth strategy, mitigating our risks as we enter new markets and ensuring the retention of the high quality clinical founders who continue to work with us to grow their business and provide additional shareholder value.

This partnership philosophy extends from the clinical founders of small, private practices, through to partnerships with global businesses, like Siemens, who offer synergy and opportunities for growth into new markets whilst mitigating our risk and underpinning success.

People development

The healthcare and medical services industry is built on the dedicated clinicians, scientists, management teams and support staff who are committed to providing professional, quality care and treatment to all people.

At Abano, we recognise the essential part our 1,000 plus staff play in the ongoing growth and success of our businesses. Our staff are, and will always be, the backbone of our company. We are in the business of providing healthcare and medical services to people across Australasia and we pride ourselves on the high standards of care that each of our businesses strives to achieve.

From the administration, accounts and management staff in the support offices through to the receptionists, nurses, assistants, technicians, scientists and clinical specialists in our facilities, each and every person is an important part of how we are perceived and the reputations our businesses uphold.

One of the key challenges facing the healthcare sector is the recruitment and retention of excellent staff. 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 our businesses, and a continuing focus on the professional and clinical development of all staff.

We actively recruit staff from both New Zealand and overseas, combating wage pressure from the higher salaries offered offshore, with attractive working conditions and a more appealing New Zealand lifestyle.

There are a number of individual human resource initiatives in each business and we have profiled these in this annual report, within each Sector Review, as we believe they are an essential contributor to the ongoing success of our company.

The future

Since the 1990’s healthcare expenditure in New Zealand has increased rapidly year on year, with the expectation that this trend will only increase. Approximately $12.2 billion is now spent on healthcare annually with a growing percentage coming from the private health sector as public health funding is unable to keep up with demand, increasing claim payments from private health insurers and expensive new technologies.

In an effort to curb ever growing expenditure, public healthcare providers are taking an increasingly aggressive approach with respect to costs and efficiencies. Private providers are routinely submitted to contract review and competitive tenders by DHBs.

Over the past few years, we have significantly reduced our exposure to the public sector, increasing our privately sourced revenue from 25 percent in 2001 to 45 percent at the end of the 2008 year.

Abano is well positioned to benefit from the growing private healthcare market, with market leading businesses in audiology, dental and radiology, all services which have strong private income streams.

The company is now entering a second and strong growth phase in an attractive sector. During the next twelve months, we will be investing in and growing those businesses which we have identified as cornerstones in our group – Audiology and Dental in both New Zealand and Australia, and Radiology in New Zealand.

We will also be focused on providing leading and innovative services and maintaining margins, particularly in our Rehabilitation and Pathology business streams.

Our clinical partnership philosophy and more recently, agreements with leading healthcare manufacturers, provide us with a strong growth platform and the ability to extend our businesses into new markets while mitigating expansion risks. We look forward to announcing further acquisitions and practice openings in the coming months.

The deteriorating economic climate in New Zealand means that growth opportunities here will be affected in the near term. Our services, while relatively sheltered from economic turbulence, still have some discretionary element and all our teams are focused on ensuring that our patients and clients can still access our products and services to meet their healthcare needs. Our focus for the new financial year remains to meet and exceed the expectations of our shareholders, patients, clients and staff.

Thank you.

Alan Clarke Signature

 






Alan Clarke
Managing Director

 

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