2013 Annual Report

Once again, Abano has delivered a record result, with improvements at Revenue, EBITDA and NPAT for the 2013 financial year.

Reported revenue was a record $207.0 million and Net Profit After Tax (NPAT) was $2.8 million, up 75% on the previous year. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of $27.7 million was up 8% on last year.

The revenue and EBITDA results reflect the divestment of the brain injury rehabilitation business in June 2012 at the start of the financial year, resulting in no further earnings contributions from this business. The Australian dental business, Dental Partners, also continued to roll out the change in the basis for contracting dentists, which in effect means revenue is now recognised after the payment of dentists’ commissions.

Gross revenues which include the audiology group1 and Australian dental revenues before payment of dentists’ commissions increased 9% to $257.8 million (FY12: $236.7 million), primarily driven by increasing dental group gross revenues which were up 18% on FY12.

Underlying earnings2, excluding non cash items required to be expensed under the International Financial Reporting Standards (IFRS), the one off gain from the sale of the Company’s brain injury rehabilitation business and a review of Bay International’s goodwill and tax losses, were $28.6 million at EBITDA giving an underlying NPAT of $4.5 million, up 50% on FY12.

The positive FY13 result was delivered despite the ongoing soft economic environment in New Zealand and a downturn in the Australian economy and consumer confidence, particularly in the second half year. While healthcare overall is relatively shielded from changing economic headwinds, some privately funded healthcare services can be impacted.

1 Abano holds a 50% share in Bay International and therefore the results for the Bay group are equity accounted and not included in the reported revenue and EBITDA results.

2 More information on gross revenue and underlying earnings which are non-GAAP financial measures and are not prepared in accordance with NZ IFRS, is available on the Abano website at www.abano.co.nz/underlyingearnings.


Revenue Generation

At 69% of total gross revenue, dental remains our primary revenue generator. We expect this to continue as we grow our dental networks, primarily through acquisition but also through organic growth and capitalising on existing capacity. Our national marketing campaign in New Zealand continues to be successful in driving new patient visits and bookings, and we are looking at options for a similar national branding strategy in Australia. We are also looking at gaining further synergies in material and laboratory purchasing power across the two 100% owned dental businesses.

We are starting to see improvements in revenue from our radiology business as demand for our new modalities increases. The new clinic at the Millennium Institute is now open and while it will incur initial start up losses, revenues and returns are expected to increase in the medium term.

While showing good revenue growth, particularly in Australia, audiology remains in a development phase, with breakeven at EBITDA expected in FY16.

Our pathology and orthotics businesses continue to deliver solid, consistent cashflows. The current opportunities for revenue growth are limited within the fixed price contracting environment in which these businesses operate. We continue to look for additional opportunities, particularly in orthotics, to reduce the reliance of this business on publicly funded contracts.

In June 2012, we announced the sale of the brain injury rehabilitation business. The organisation operated in a fixed price, non-fee for service, publicly funded environment and was outside Abano’s core strategy to focus on businesses in the private healthcare market, which offer scale and the opportunity to add value. The business was sold for a gain on sale of $1.6 million and proceeds were applied to the reduction of debt and to support the Company’s continued growth.

Regional Growth

Although New Zealand is still an important market for us, we are deriving an increasingly larger proportion of our revenue from Australia and Asia. Offshore gross revenues now account for 52% of total Group revenue, with a faster growth rate than domestic revenues. Of this offshore amount, 96% was generated in the Australian market.

The sheer size of the markets and populations in Australia and Asia mean significantly more potential for growth than in New Zealand. Healthcare spend per person in Australia is also higher than in New Zealand. Therefore, we expect the percentage of revenue generated offshore to continue to grow.

While revenue earned offshore is retained and reinvested in the country of origin, exchange variances at balance date are not crystallised. However, we must still report each business‘ earnings in New Zealand dollars. The high New Zealand dollar compared to the Australian dollar over the past few months does not impact the underlying businesses, but has impacted on our reported earnings.

Outlook

Abano has a proven strategy and business model. We invest into businesses in the healthcare market, where we see the potential for growth and we work alongside the clinical founders to add value and realise opportunities.

We have very successful and growing businesses in dental and radiology, excellent performers in orthotics and pathology, and targeted investments into audiology.

We will continue to build on our success in the 2014 financial year. While we expect the economy, particularly in Australia, to remain soft, we have experience and strategies in place to ensure our businesses are well positioned to navigate these challenging conditions.

Our dental acquisition programme will continue in Australia and New Zealand, and we have a deep pipeline of acquisitions and a new A$30 million funding facility in place to support our growth strategy. In the first two months of the financial year we have acquired three large practices, providing $7.4 million in additional annualised gross revenues, with a number of additional acquisitions lined up for the next few months.

In radiology, we are looking to build on the investments we have made in the past few years, with an increased focus on marketing to referrers and driving demand for our new modalities.

In line with our strategy to focus on the private healthcare market, we will continue to identify and assess opportunities to reduce the reliance of our orthotics business on DHB contracts.

The DHB contract under which Aotea Pathology operates is due to expire at the end of October 2014 and management are working closely with funders to ensure this vital and very professional service continues to benefit the Wellington communities. The local DHBs are looking at various options for service provision and integration across the region and our teams are working closely with them to assist with this project. The business will also continue to innovate and sustain margins through the development and application of new technology such as the ongoing roll out of an electronic test ordering system.

We will continue to build on our recent strong performance in audiology in Australia and nurture our emerging networks in Asia.

Overall, we expect FY14 to be a positive year of results and further growth for Abano.

Focus for 2014 Financial Year

Continued acquisition and investment into trans-Tasman dental sector and realising more synergies of scale

Consolidate and build revenue streams in radiology

Targeted development of audiology offer in Australia and focus on markets demonstrating initial success and potential in South East Asia

Maximise existing capacity and identify opportunities for organic growth in all businesses

Identify and drive revenues from privately funded sources

Continue to engage with policy makers and funders to ensure the services we offer are targeted to their needs and those of their communities